News Brief No. 01/110

News Brief: IMF Completes First Review of Stand-by Arrangement with Croatia

November 5, 2001

The Executive Board of the International Monetary Fund (IMF) today completed the first review of Croatia's performance under the 14-month stand-by arrangement. The arrangement for SDR 200 million (about US$254 million), which was approved on March 19, 2001, is being treated by the authorities as precautionary.

Following the discussion of the Executive Board, Anne Krueger, First Deputy Managing Director and Acting Chair, said:

"The Croatian authorities are likely to either meet or exceed the original growth, inflation and international reserves objectives under their program for 2001. The weakening of the external contribution to growth is compensated by a stronger expansion of private domestic demand, as both consumption and investment are growing faster than anticipated. The authorities' reform program, improved access to foreign markets, and the strengthened regional security situation have contributed to this strengthening of macroeconomic performance.

"Durable expenditure reductions are critical to achieving and maintaining fiscal sustainability. The authorities are in the process of reducing public wages and employment from unsustainable levels. Although there have been some delays and tradeoffs have had to be accepted in discussions with social partners, the authorities are to be commended for having implemented a bold and significant reduction in the wage bill of the consolidated central government. Recently adopted reforms to rationalize and reduce social transfers will also make an important contribution to fiscal strengthening.

"The authorities have reaffirmed their commitment to reduce this year's fiscal deficit. To this end, they have revised the budget by cutting spending on goods and nonwage services, subsidies, and investment. Adverse market conditions and delays in privatization have, however, forced changes in their financing plan which will slow the decline in the government debt ratio this year.

"The Croatian National Bank will continue to pursue price stability as its primary objective. While a broadly stable exchange rate remains important for achieving this objective, the CNB is committed to maintain strict control of domestic liquidity to support the disinflation process. Efforts will continue to develop the domestic financial market, and improve the effectiveness and widen the range of monetary policy instruments.

"Structural reforms will continue, including the restructuring and privatization of public enterprises and remaining state-owned banks. These reforms will contribute to improved efficiency and growth, as well as to strengthening the fiscal position," Ms. Krueger said.