Press Release: IMF Executive Board Completes First Review of Croatia's Stand-By Arrangement

September 14, 2005

The Executive Board of the International Monetary Fund (IMF) completed the first review under an SDR 97 million (about US$142.8 million) Stand-By Arrangement for the Republic of Croatia, approved on August 4, 2004 for 20 months (see Press Release No. 04/170). The authorities are treating the arrangement as precautionary.

In completing the review, the Executive Board also granted waivers for the nonobservance of the end-December 2004 quantitative performance criteria on the deficit of the consolidated general government and general government arrears.

Following the Executive Board's discussion of the Republic of Croatia, Ms. Anne O. Krueger, First Deputy Managing Director and Acting Chair, stated:

"Following the approval of the Stand-By Arrangement in August 2004, policy implementation was broadly in line with the program through end-2004, in a context of solid economic growth and low inflation. The resumption of fiscal consolidation efforts contributed significantly to the improvement in the external accounts last year, although the external debt-to-GDP ratio needs to be brought down. Policy implementation faltered in early 2005, but the Croatian authorities have taken appropriate corrective measures in recent months, including on the structural front.

"It will be essential for the authorities to adhere to the revised fiscal deficit target for 2005. Although the fiscal adjustment this year will now be less ambitious than originally planned, its achievement together with the accelerated structural agenda will leave Croatia's medium-term targets still within reach. Looking forward, the authorities now have the task of preparing a budget for 2006 that both builds on permanent structural measures and helps offset the macroeconomic impact of repayments of state liabilities to pensioners, which are expected to begin next year. While details of the pension repayments remain to be resolved, their impact could be considerable, and-excluding the measured costs of the repayments-could warrant a tighter fiscal policy stance in 2006 than currently envisaged.

"The authorities' structural agenda is demanding. The politically difficult change in the pension indexation formula was essential for the long-run sustainability of the public pension system; and the introduction of administrative fees in the health sector is an important first step in the effort to address directly a hitherto chronic fiscal concern. Looking forward, it is critical that the authorities follow through on the reforms now being prepared in the areas of health care, state aid and subsidies, and public administration. Other fundamental reforms remain to be elaborated, including the restructuring of the steel and shipyard industries.

"The Croatian National Bank (CNB) should remain vigilant in its monetary policy and banking supervision. The CNB has been successfully striking a difficult balance between maintaining exchange rate stability and responding promptly to increases in bank external borrowing, while addressing the attendant prudential risks. The CNB will need to continue enhancing its monitoring of the rest of the financial system and to co-operate closely with the new nonbank supervisor scheduled to begin operations next year," Ms. Krueger said.


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