Republic of Croatia and the IMF
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The International Monetary Fund (IMF) approved a three-year credit for Croatia equivalent to SDR 353.16 million (about US$486 million) under the Extended Fund Facility (EFF)1 to support the government’s medium-term economic reform program for 1997-1999. Of the total approved, credits equivalent to SDR 115.12 million (about US$158 million) will be available to Croatia in 1997.
Croatia began the transition to a market economy with high and rising rates of inflation, economic disruption owing to the breakup of the former Socialist Federal Republic of Yugoslavia, and the unsettled regional security situation. In spite of difficult circumstances, Croatia began implementing a stabilization program in October 1993, which was supported by the IMF through a stand-by credit and the Systemic Transformation Facility (STF). Fiscal and monetary control were broadly restored; and, fostered by the successful implementation of an exchange rate based approach to stabilization, inflation was brought down from over 1,000 percent to industrial country levels with essentially no loss in output. International reserves have increased to more comfortable levels and rapid progress has been made in normalizing external relations. Structural reform, which had slowed in 1994 and 1995, was reinvigorated in 1996. New privatization and bankruptcy laws were passed, and key measures were taken to improve the functioning of the banking system and to develop financial markets. Some of these were taken as prior actions to the program that is being supported by the three-year extended arrangement.
Medium-Term Strategy and the 1997 Program
Two key policy challenges for Croatia are to consolidate the stabilization gains made so far, while providing for postwar reconstruction and social needs, and to rigorously implement structural reform that will foster an externally competitive market economy. The program relies on appropriately restrained monetary, credit, and government wage policies to keep financial discipline tight, while continuing with the stable exchange rate policy that has served Croatia well. The structural reform, reconstruction, and social needs will nevertheless impose substantial demands on fiscal resources in circumstances where the external current account deficit is large, but its size appears to be overestimated in the official statistics. Judgement and careful prioritizing will continue to be essential in designing and respecting budgetary limits that are consistent with a viable path for the balance of payments over the course of the program and beyond. Throughout the program, improved statistical systems are expected to improve economic monitoring and assessment, and Croatia has already subscribed to the special data dissemination standard (SDDS) of the IMF.
Consistent with the medium-term framework, the 1997 program targets real GDP growth of 5.5 percent, inflation of 3.5 percent and an increase in reserve cover to almost three months of imported goods and nonfactor services. The deficit of the consolidated central government is to be limited to three percent of GDP. A deficit of this size supports substantial public investment in economic reforms and an adequate social safety net, while aiming to maintain prudent public sector debt dynamics and avoiding domestic bank financing of the deficit.
Building on Croatia’s earlier strong actions, the program contains a rigorous agenda of structural reforms. These include actions on (i) restructuring and privatizing large state-owned enterprises and banks, with a view toward improving corporate governance and breaking the intricate linkages between commercial banks and state-owned enterprises that have hampered the transition to fully market-based commercial relations; (ii) improving fiscal management and its institutions while scaling back the state’s role in economic activity and reducing the tax burden; (iii) developing financial markets, which should also contribute to more efficient monetary control; and (iv) reducing trade distortions. Ongoing structural reform throughout the program is designed to promote improved productivity and profitability and thereby foster the increase in private saving needed to underpin adjustment in the external sector.
Addressing Social Needs
The government’s program aims to provide for continuing postwar reconstruction needs as well as higher overall expenditures for capital and net lending more generally. It also targets an increase in expenditures for the social safety net. The bulk of the increase in social expenditures is war-related, designed to help war invalids and participants, the families of war victims, and refugees from other republics of the former Socialist Federal Republic of Yugoslavia.
The Challenge Ahead
As prospects for regional peace have improved, there have also been mounting pressures resulting from expectations of higher living standards and social benefits. These pressures make it all the more important to be able to balance appropriately the many fiscal pressures that emerge, and maintain a prudent policy stance during the program. Though the large external current account deficit has been reduced, it has not been eliminated, and thus will present a continuous challenge.
Croatia joined the IMF on December 14, 1992, and its quota2 is SDR 261.6 million (about US$360 million). Its outstanding use of IMF financing currently totals SDR 145 million (about US$200 million).
1 The EFF is an IMF financing facility that supports medium-term programs that seek to overcome balance of payments difficulties stemming from macroeconomic imbalances and structural problems. The repayment terms are 10 years with a 4 ½-year grace period, and the interest rate, adjusted weekly, is about 4.2 percent.
2 A member’s quota in the IMF determines, in particular, the amount of its subscription, its voting weight, its access to IMF financing, and its share in the allocation of SDRs.
IMF EXTERNAL RELATIONS DEPARTMENT