Statement by the IMF Staff Representative on the Republic of Croatia

This paper examines the Croatia’s Request for a Stand-By Arrangement (SBA). Despite a disappointing merchandise trade performance, strong exports of services and private transfers have helped restrain the current account deficit. The authorities' program for 2003 constitutes a major step toward long-term fiscal sustainability and higher economic growth. The authorities recognize that more needs to be done in the future to boost the population’s standard of living and put Croatia on a firm path of real convergence with the European Union. The IMF staff supports the authorities’ request for a SBA.

Abstract

This paper examines the Croatia’s Request for a Stand-By Arrangement (SBA). Despite a disappointing merchandise trade performance, strong exports of services and private transfers have helped restrain the current account deficit. The authorities' program for 2003 constitutes a major step toward long-term fiscal sustainability and higher economic growth. The authorities recognize that more needs to be done in the future to boost the population’s standard of living and put Croatia on a firm path of real convergence with the European Union. The IMF staff supports the authorities’ request for a SBA.

This statement provides information that has become available since the issuance of the staff report on “Republic of Croatia—Request for Stand-By Arrangement.” The new information does not change the thrust of the staff appraisal in that report.

1. As noted in the staff report on “Republic of Croatia—Request for Stand-By Arrangement,” five prior actions remained to be completed before Board consideration of Croatia’s stand-by request. On January 15, the Ministry of Finance provided consolidated budget data for the 53 largest local governments consistent with the fiscal program stipulated in the Memorandum of Economic and Financial Policies (MEFP). On January 17, the government opened three binding offers for 25 percent plus one share in the oil company (INA). On January 23, the government submitted to parliament a new budget law that satisfies the conditions specified in paragraph 16 of the MEFP and a labor law that satisfies the conditions specified in paragraph 24 of the MEFP. On January 24, the government issued a decree that limits the issuance of new guarantees to the amount by which old guarantees are amortized or expiring and reserves the right to issue guarantees to the Ministry of Finance. All prior actions have thus been completed.

2. Economic indicators suggest unexpected strength of economic activity. Real GDP grew by 6.5 percent year on year in the third quarter of 2002, bringing annual growth during the first nine months of the year to 5 percent. Investment and private consumption were particularly buoyant while external demand was weaker than expected. Retail sales volume recorded annual growth of 10.9 percent in November and industrial production grew by 8.1 percent year on year in December, raising its annual growth rate to 5.4 percent. Real GDP growth is thus likely to have exceeded the staffs projection of 4 percent in 2002.

3. The twelve-month rate of retail price inflation increased from 2.0 percent in November to 2.3 percent in December, while the core rate of inflation increased from 1 percent to 1.2 percent. On average, headline inflation fell from 4.9 percent in 2001 to 2.2 percent in 2002, while core inflation declined from 3.6 percent to 1.1 percent. On January 7, the CNB sold €75 million of foreign exchange to stem the seasonal depreciation of the kuna, which has remained stable against the euro since then.

4. The twelve-month rate of broad money growth continued to decelerate from 28 percent in September to 20 percent in November. However, the strong growth of bank credit to the private sector continued: while year-on-year growth of business lending declined from 22 percent in September to 21 percent in November, consumer credit accelerated further from 36 percent in September to 40 percent in November. Also, bank lending is increasingly being financed by foreign borrowing. In this situation, the CNB announced measures on January 15 to curb credit growth. Banks whose placements grow by more than 4 percent by end-March, 8 percent by end-June, 12 percent by end-September, and 16 percent by end-December 2003 will be obliged to buy CNB bills bearing interest of 0.5 percent for twice the amount of their excess credit expansion.

5. Croatia’s EMBI stripped spread has remained at around 120–130 basis points since early December, while spreads for the EMBI global composite stayed in the range of 650-700 basis points. Although down by 16 percent from its peak on May 20, 2002, the Croatian stock market index (CROBEX) was virtually unchanged from a year ago on January 27.

Republic of Croatia: Request for Stand-By Arrangement
Author: International Monetary Fund