Press Release No. 95/20

The International Monetary Fund (IMF) has approved a second drawing for Croatia equivalent to SDR 65.4 million (about $ 103 million) under the systemic transformation facility (STF) to support the Government's 1995 program of macroeconomic stabilization and structural reform. The first disbursement under the STF, also SDR 65.4 million, was approved on October 14, 1994, together with a stand-by arrangement for an additional SDR 65.4 million (see Press Release No. 94/72).

Background

Following a cumulative decline of more than 30 percent in Croatia's real GDP during 1991-93, and the risk of hyperinflation, the authorities' IMF-supported stabilization program achieved considerable success in 1994. Economic activity began to recover, inflation was sharply reduced, the emerging private sector grew significantly, although much of the economy remains dominated by large state-owned enterprises, and both the overall budget and the external current account registered surpluses in 1994. In spite of the significant progress that has been made, the situation remains fragile because of the slow implementation of planned structural reforms and uncertainties connected to the security situation in the region.

The 1995 Program

The program for 1995 is based on a pickup in real GDP growth and an annual inflation target of 2.6 percent. The overall budget for 1995 is programmed to move to a deficit of 0.5 percent of GDP. Expenditures for the year will increase compared to the 1994 outturn as a result of higher wage and salary payments, lending for reconstruction projects, military spending, and slightly higher provisions for expenditures related to the social safety net. The increases in spending will be offset by higher revenues resulting from taxes on goods and services, and from asset sales. A tight monetary policy will be followed, based on using the exchange rate as the main source of financial discipline, combined with a cautious expansion of domestic credit.

Structural Reforms

A crucial element of Croatia's program is the imposition of financial discipline on enterprises that are still state owned. In January 1995, a Ministry of Privatization was established, which is expected to give a new impetus to restructuring these enterprises. The authorities are also committed to a program of structural reform in the banking sector, where some progress has already been made.

Croatia succeeded on December 14, 1992 to the membership of the former Socialist Federal Republic of Yugoslavia. Its quota¹ is SDR 261.6 million (about $411 million), and its outstanding use of IMF credit currently totals SDR 85 million (about $133 million).

Croatia: Selected Economic Indicators   1993 1994* 1995**   (percent change) Real GDP growth –3.2 1.8 4.5 Consumer pricesa 1,149.2 –3.0 2.6     (percent of GDP) External current account 2.5 1.5 0.1 Central budget overall balance -- 0.6 –0.5 Sources: Croatian authorities; and IMF staff estimates. a. Dec./Dec. annual increase. *Estimated. **Program. 1. 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.