| Press Release: IMF Approves 14-month, US$146 Million Stand-By Credit for Croatia
Republic of Croatia and the IMF
Country's Policy Intentions Documents
Free Email Notification
Republic of Croatia—Letter
of Intent, Memorandum of Economic and Financial Policies
Mr. Horst Köhler
Dear Mr. Köhler:
1. The Croatian authorities have prepared an economic and financial program for 2003 that aims at maintaining macroeconomic stability and strengthening the foundations for high economic growth in the runup to parliamentary elections that must be held by March 2004. To achieve these objectives, the program relies on fiscal adjustment and structural reform (including further privatization) in the context of a broadly stable exchange rate. In support of our program, we herewith request a stand-by arrangement in an amount of SDR 105.88 million (29 percent of quota) to be made available over a 14-month period ending in March 2004.
2. The implementation of our program, which is described in the attached Memorandum of Economic and Financial Policies (MEFP), will be monitored through quantitative performance criteria and indicative targets in the fiscal, monetary, and external sectors. In this regard, the MEFP proposes performance criteria for end-March and end-June 2003 and indicative targets for the second half of 2003. Program implementation will also be monitored through one structural performance criterion and five structural benchmarks, all of which are listed in Annex II of the MEFP. The quantitative performance criteria are described in greater detail in Annexes III-VIII.
3. We believe that the policies and measures set forth in the MEFP are sufficient to attain the objectives of our economic program. However, we will take any further measures that may be needed toward this end. We will consult periodically with the Fund, in accordance with the Fund's policies on such consultations, about the progress being made in implementing the economic program described in the MEFP, and in advance of any revisions to the policies covered by the MEFP. We will provide the Fund with such information as it requests on policy implementation and achievement of program objectives. In any event, there will be two reviews during the period of the requested arrangement, scheduled to take place by May 15, 2003 and November 15, 2003, in order to (i) set the quantitative performance criteria for September 30 and December 31, 2003 (at the time of the first review) and (ii) assess progress in implementing the program and reach understandings on any additional measures that may be needed to achieve its objectives.
4. In view of Croatia's comfortable international reserves position and easy access to international capital markets, we have recently repurchased the entire amount of Fund credit outstanding and we do not intend to make the purchases under the requested arrangement that will become available upon its approval and after observance of its performance criteria and completion of its reviews.
Memorandum of Economic and Financial Policies
1. The government and the Croatian National Bank (CNB) have cooperated in the design and adoption of a fiscal and monetary program for 2003, with supporting structural measures, to maintain macroeconomic stability and promote higher rates of economic growth. Our program aims at reducing the fiscal deficit and the government expenditure ratio and at stabilizing the public debt ratio after many years of uninterrupted increases. However, we realize that further fiscal consolidation is required beyond the current program period to attain long-term fiscal sustainability. Our program for 2003 is described in Section II below.
I. The Expected Economic Outcome in 2002
2. Despite a weak external environment, economic growth is likely to have accelerated to 4 percent in 2002 (Annex I). Private consumption, a good tourist season, and strongly rising investment, partly as a result of an ambitious highway construction program, have contributed to this favorable outcome. Inflation has abated further, aided by heightened competition in the retail sector, a broadly stable exchange rate, and the absence of wage pressures. We expect retail prices to rise by 2½ percent on average in 2002. Meanwhile, revised import data indicate that the external current account deficit is likely to decline from 3.8 percent of GDP in 2001 to 3.6 percent in 2002. Notwithstanding the higher than previously reported imports, gross official international reserves are likely to have risen to more than 5 months of imports of goods and nonfactor services by end-2002 as the CNB intervened repeatedly to stem currency appreciation pressures. Despite stepped-up public investment, the general government deficit is expected to be reduced from 6.8 percent of GDP in 2001 to 6.2 percent of GDP in 2002. Both the deficit and economic growth could, however, turn out to be somewhat smaller if the fourth-quarter acceleration in the execution of highway construction were to fall short of expectations.
II. The Economic Program for 2003
3. Our program for 2003 consists of the general government budget, which is part of a three-year fiscal framework covering 2003-05, a monetary program, and a number of supporting structural measures that are described in Section II D below.
4. In line with our overarching objective of increasing employment and raising the standard of living of the population, our program seeks a further acceleration of economic growth. Despite the dim prospects for the world economy and in particular for our principal export markets in Germany and Italy, we are projecting real GDP to grow by 4.2 percent in 2003. With the foreign contribution about neutral, virtually all of this growth is likely to come from domestic demand. Private consumption and investment are expected to contribute almost 4½ percentage points to growth, while the government sector's contribution to aggregate demand will be negative despite continued growth in public investment, reflecting strict control of public consumption.
5. In the absence of severe external price shocks (oil prices are now fully passed through to consumers) and with a broadly stable exchange rate, we envisage average retail price inflation to remain below 3½ percent in 2003. Keen competition and lower import tariffs should keep goods prices virtually constant, while services prices are likely to continue rising at an annual rate of 5-10 percent due to lower productivity growth and occasional adjustments of administered prices. This rather sanguine view is underpinned by recent core inflation rates of around 1 percent, producer price inflation that is barely positive, and the absence of significant wage pressures.
6. Our external sector objectives are to maintain the external current account deficit at close to 3½ percent of GDP and to keep the gross official international reserve cover of imports of goods and nonfactor services at above 5 months. The improved regional security situation and better access to foreign markets facilitate the pursuit of these objectives. With a broadly stable exchange rate, their achievement relies primarily on fiscal adjustment, wage restraint, and structural reforms. Under our program, inward direct foreign investment is expected to be large enough to ensure the targeted international reserves buildup while lowering the external debt ratio.
B. Fiscal Policy
7. The principal aim of the government's fiscal program for 2003 is the stabilization of the general government debt ratio after many years of uninterrupted increases. In line with this objective, the recently adopted 2003 budgets of the central and local governments reduce the general government deficit from an expected 6.2 percent of GDP in 2002 to 5 percent of GDP in 2003. Parliamentary approval of a central government budget and provision of consolidated budget data for the 53 largest local governments that are consistent with the 2003 general government deficit target are a prior action. With a modest amount of privatization receipts (see paragraph 10 below) and no net increase in guarantees (see paragraph 12 below), a deficit of this size is expected to be sufficient to stabilize the debt ratio at its estimated end-2002 level of 57.5 percent of GDP. Although the program represents an adjustment effort of 1.4 percent of GDP (including 0.2 percentage points due to the full-year cost of the introduction of the privately administered mandatory second pillar of the pension insurance system in 2002), the government realizes that additional fiscal consolidation is required in the future to compensate for the eventual disappearance of privatization receipts and to reduce the burden of government debt, whose servicing already requires 2.5 percent of GDP in interest payments (almost as much as the budget for primary and secondary education).
8. The 2003 budget's revenue projection incorporates the following changes to the tax and social contributions system:
The legislation for all these changes (and a few additional ones with only minor revenue effects) has been adopted by parliament and will take effect on January 1, 2003 (prior action). Apart from import tariff reductions under international agreements, the government will not introduce any other changes to the tax and social contributions system. Reflecting in part the full-year effect of the cost of introducing the second pension pillar in 2002, the general government's revenue to GDP ratio is projected to decline by 0.4 percent of GDP despite the expected small increase in net revenue collections resulting from the above-specified measures.
9. The small decline in the revenue ratio adds to the need for expenditure restraint to achieve the deficit reduction target. As the table below shows, restraint on expenditure
for wages, goods and services, and subsidies and other current transfers more than accounts for the 1.5 percentage point reduction in the expenditure ratio required to reduce the fiscal deficit to 5 percent of GDP in 2003, thus creating room for higher spending of interest, capital investment and net lending. Key to the success of the fiscal program is a firm wage and employment reduction policy that guarantees adherence to the budgeted wage bill. To this effect, the government has decided to keep the basic monthly wage unchanged at HrK 4,232.43 in 2003. Wage coefficients, which are multiplied with the basic wage to determine actual wages paid, will also remain unchanged except that some 0.1 percent of GDP has been allocated to raise the coefficients of primary and secondary schoolteachers. All central government workers will be entitled to a vacation bonus budgeted at 0.1 percent of GDP, but year-end bonuses will be granted only to the extent that sufficient room is created through net employment reduction. While funds have been provided to expand employment in the judicial and education systems and the Ministry of Finance, a substantial net employment reduction is expected to be achieved as a result of the implementation of the defense sector reform. Starting with some 5,000 layoffs in the first quarter of 2003, the government intends to reduce employment in the Ministry of Defense by some 12,000 in 2003. In accordance with this plan, severance payments, the cost of retraining programs, and wage costs for those re-employed as reservists have been included in the budget. The government will monitor closely the quarterly central government wage bills and will consult with the Fund to ensure achievement of its fiscal deficit target should their budgeted amount be exceeded. While direct subsidies to the railways and the shipyards have been increased, the increased share of all subsidies in terms of GDP is more than offset by lower pension and health related transfers, whose growth is slowed by the phased introduction of the 1999 first-pillar reform and various past and new health reform measures. In addition, savings of a little more than 0.1 percent of GDP result from the replacement of special court-mandated payments under the recently expired small pension law by a lower, permanent payment stream. In line with the government's strong commitment to development, capital expenditure (particularly for highways) continues to expand, raising its ratio to GDP to 6.8 percent. Notwithstanding its overall restraint, the 2003 budget includes 0.4 percent of GDP in expenditure for education and judicial reforms, research and development, and transfers to restructure state agricultural enterprises.
10. The financing plan of the 2003 budget relies less on privatization receipts and more on domestic borrowing than in the past. Privatization receipts of the general government are conservatively budgeted at 1.2 percent of GDP (see paragraph 22 below). Any receipts in excess of budgeted amounts will be used to reduce borrowing. However, any shortfalls in receipts will be offset by an equivalent reduction of government expenditure so as to ensure achievement of the debt ratio stabilization objective. To alleviate the appreciation pressure on the exchange rate, help develop the domestic capital market, and provide financial assets to the private pension funds collecting second-pillar contributions, the government intends to rely more than in the past on domestic borrowing. Under the CNB's monetary program (see paragraph 14 below), there is room for bank credit to the general government of 1.3 percent of GDP. The nonbank sector is expected to be provided with liquidity equivalent to 0.3 percent of GDP from the virtual elimination of remaining central government arrears and it is expected to absorb government paper equivalent to 1.2 percent of GDP, mostly to satisfy the statutory investment needs of the pension funds. Given foreign debt repayment obligations of only 1.6 percent of GDP (due to the absence of bullet bond repayments in 2003), the gross foreign borrowing requirement of the government of 3.1 percent of GDP is less than half of its 2002 level1. Apart from project disbursements and the second tranche of the World Bank's Structural Adjustment Loan (SAL), this borrowing will be arranged by the Ministry of Finance, starting with a Euro bond issue of €500 million in the first quarter of 2003, to be followed by a Samurai bond in mid-2003.
11. Observance of the government's fiscal program will be monitored by performance criteria on the central and general government deficits and the change of the stock of central government arrears (Annex III) as well as on net changes in the stock of short-term external debt and on the contracting or guaranteeing of new nonconcessional external debt with a maturity of more than one year of the general government, CNB, and HBOR (including a subceiling on such debt in the 1-5 maturity range; Annex IV). To ensure adequate room for credit to the nongovernment sector, the general government's net borrowing from domestic banks will be monitored on the basis of indicative targets (Annex V). Finally, local government arrears, which amounted to 0.2 percent of GDP at end-September 2002, will be monitored quarterly by the Ministry of Finance. As a result of a larger share in personal income tax collections, the local governments are expected to achieve a small surplus in 2003, and their own privatization receipts would be sufficient to reduce or even eliminate existing arrears.
12. As agreed under the World Bank's SAL, the government is developing criteria for issuing government guarantees. To prevent the growth of indirect government debt, which is estimated to rise to 14.7 percent of GDP by end-2002, and achieve the programmed stabilization of the government debt ratio, the Ministry of Finance will issue new loan guarantees only to the extent that room is created by the amortization or expiration of existing ones. No other government body is authorized to enter into financial commitments on behalf of the Republic of Croatia. A government decree to this effect will be issued soon (prior action).
C. Monetary and Exchange Rate Policy
13. The programmed fiscal adjustment and reduced government reliance on external borrowing will greatly facilitate the conduct of monetary policy. As conditions are not yet appropriate for inflation targeting, the CNB intends to pursue its price stability mandate under the new central bank law by continuing to maintain the exchange rate of the kuna broadly stable against the euro. This said, the CNB is prepared to allow sufficient exchange rate variability from time to time to discourage one-way currency bets and it advises economic agents not to incur unhedged foreign exchange positions.
14. The CNB's monetary program for 2003 aims at maintaining inflation at below 3½ percent, an objective that is considered compatible with both its mandate and broad exchange rate stability. Economic growth and the preservation of confidence in the pre- electoral period are expected to attract sufficient resources to the banking system to allow the unsterilized purchase of US$350 million in international reserves and credit to the government of 1.3 percent of GDP, leaving 6.7 percent of GDP of credit for the nongovernment sector. The implied slowdown of credit expansion from an estimated 29.8 percent in 2002 to a programmed 13.7 percent in 2003 should be facilitated by increased margins for self-financing out of rising profits, the payment of almost all remaining central government arrears, and easy access to foreign borrowing by export-oriented enterprises. Should, however, credit growth fail to slow down soon, the CNB will undertake adequate measures, including the introduction of higher provisioning requirements on banks with excessive credit growth. There are no indications yet of deteriorating loan portfolios, and the CNB has made banks aware of its concerns and is using its supervision to examine the quality of loan portfolios and enforce existing provisioning standards. In terms of monetary policy, the CNB does not see room for reducing reserve requirements, and it stands ready to resist any further reduction in market interest rates during the program period. The pending adoption of a new foreign exchange law (see paragraph 19 below) is expected to provide it greater latitude to make monetary policy more effective.
15. The implementation of the CNB's monetary program will be monitored through performance criteria on the net usable international reserves and net domestic assets of the CNB (Annexes VI and VII). Should base money demand be weaker than assumed in the CNB's program, the CNB will tighten credit sufficiently to ensure that its international reserves targets are observed. If, however, base money growth turns out to be stronger than assumed, the CNB will consult with the Fund to determine if the inflation outlook justifies easing the limits on net domestic assets. To ensure that the envisaged room for credit expansion to the nongovernmental sector is not pre-empted by public enterprise borrowing, we have established indicative limits on net domestic bank borrowing by nine large state enterprises (Annex VIII).
D. Structural Reforms
Fiscal sector reforms
16. The new budget law, which will be submitted to parliament in early January 2003 (prior action), requires the submission of an updated three-year budgetary framework with each annual budget, the presentation of all budget data on a consolidated general government basis, and the regular publication of these data. It also strengthens the enforcement of penalties for overspending budget units. This law is expected to be approved by end-March 2003 (structural benchmark). The government is now preparing criteria for issuing guarantees, to be completed by end-March 2003 (structural performance criterion). These are likely to set a minimum social rate of return, to be assessed by the Ministry of Finance, for activities to be covered by the guarantee; restrict the extension of guarantees to private sector companies without government participation; and subject guarantees to the 60 percent of GDP ceiling for the general government debt ratio proposed in the new budget law.
17. Four new funds and agencies have been created under the 2003 budget (the environmental protection fund, the agency for small and medium-sized enterprises, the agency for investment and export promotion, and the state aid agency). Like the fund for regional development and the fund for employment and growth, they have been included transparently in the state budget. The government does not intend to create any new funds or agencies during 2003.
18. The Ministry of Finance needs to strengthen its debt management, macroeconomic analysis, and treasury departments and improve cooperation with the CNB in the areas of policy coordination and data reconciliation. To this effect, the ministry intends to hire suitably qualified staff and reorganize its operations as appropriate during 2003. Technical assistance will be received shortly through the EU CARDS program and, perhaps, from the Fund to enhance debt management capacity, including the monitoring of arrears. Debt management will avail itself of the capabilities of the existing SAP treasury system. Better use of that system will also be made by the treasury for budget preparation and execution and the monitoring of arrears. Technical assistance has already been received, and may be required again, from the Fund to produce high-quality, timely general government data at an appropriate frequency under both the GFS 1986 and GFS 2001 methodologies. In line with the technical assistance recommendations, quarterly and annual general government (with local governments limited to the 53 largest units) data will be compiled from accounting data collected directly from general government units. Finally, a task force comprising staff from the Ministry of Finance, the Croatian Bureau of Statistics (CBS), and the CNB will be formed to reconcile fiscal statistics of the general government. The government will request that the Fund place a resident fiscal advisor in the Ministry of Finance to assist in these reforms. To assess its practices and procedures, the government has decided to request a fiscal ROSC to be prepared by the Fund.
Financial sector reforms
19. A new foreign exchange law is expected to be approved by parliament in late January 2003. It will be consistent with EU standards and with Article VIII of the Fund's articles of agreement and empower the CNB to introduce temporary restrictions on short-term capital inflows. It will also require that foreign securities eligible for outward portfolio investment by residents must satisfy minimum ratings from international rating agencies.
20. Seven bylaws (on classification of claims, calculation of capital-asset ratios, supervision methodology, auditing decision, consolidated supervision, management of liquidity risk, and operation of subsidiaries) to implement the new banking law have been prepared by the CNB and will be issued by end-2002 for application from January 1, 2004 at the latest. Options will be included in the calculation of net open foreign exchange positions for regulatory purposes; the pertinent CNB regulation will be issued by end-June 2003 (structural benchmark) and implemented by end-September 2003 (structural benchmark).
Public enterprise reform and privatization
21. The government remains committed to divesting virtually all public enterprises and to keep a minority share in only some of them. The privatization fund (HFP) expects to reduce its pooled portfolio of some 1,100 companies to about one half by end-2003. Sales of minority shares are being conducted against privatization vouchers at the Varaždin exchange and by auction at the Zagreb exchange, while majority shares are sold by public tender. Apart from retiring privatization vouchers, these sales are not expected to result in significant cash revenues for their owners (HFP, the deposit insurance agency—DAB, and the pension fund).
22. Outside HFP's portfolio, the government continues to pursue the restructuring and privatization of most large state enterprises. Binding offers for 25 percent plus one share of the oil and gas company (INA) are expected to be received by January 22, 2003, a deadline that will not be further extended (prior action). The government will decide on the bids received by end-March 2003 (structural benchmark), and the resulting privatization proceeds are expected in the second quarter of 2003. The electricity company (HEP) will complete its unbundling into separate power generation, transmission, and distribution companies during 2003, for possible privatization of power plants in 2004. Like other distribution infrastructure, the JANAF pipeline will not be privatized. After two failed attempts, the government has given up on selling a majority share in the insurance company (CO) by public tender. Instead, it plans to sell 30 percent of the company in 2003 on the Zagreb stock exchange. Finally, 7 percent of shares in the telecommunications company (HT) will be sold to its employees in the second quarter of 2003.
23. The government has decided to make the postal bank (HPB) acquire Croatia Banka, for which no buyer has been found. The financial performance of HPB has improved considerably after a capital increase, the sale of its nonperforming portfolio to HFP, and restructuring and cost cutting measures. The bank is now well capitalized and profitable. Nonetheless, the government does not believe that it should own a commercial bank and has therefore decided to privatize it in stages, first by selling 25 percent to the IFC in 2003 and then by selling at least another 26 percent to a strategic investor in 2004. The preparation of a privatization plan satisfying these requirements by end-March 2003 is a structural benchmark under the program, which will be monitored in consultation with the IFC.
Product and labor market reforms
24. To enhance the functioning of markets and encourage the growth of employment, the government is preparing new company, competition, and labor laws. The company law is expected to be submitted to parliament by end-2002 for approval by end-March 2003. The competition and labor laws are expected to receive parliamentary approval by end-February 2003. Government approval of a draft labor law that:
is a prior action under our program. Finally, a new bankruptcy law aimed at accelerating bankruptcy procedures and allowing payouts to creditors before the completion of all procedures is expected to be approved by end-March 2003.
25. Aided by additional funding under the 2003 budget, judicial reform will proceed, e.g., by encouraging out-of-court procedures and using single judges instead of panels of judges to settle and adjudicate commercial disputes.
26. Our CEFTA membership takes effect on March 1, 2003. A free trade agreement with the Federal Republic of Yugoslavia was initialed in November 2002 and is expected to come into effect soon. Other free trade agreements are being negotiated with Estonia, Latvia, and Moldova. While CEFTA has agreed to apply the Pan European Rules of Cumulation of Origin immediately, the government is still negotiating with the EU on the application of this agreement to Croatia's exports. Under our program, we will not impose or intensify restrictions on the making of payments and transfers for current international transactions, introduce or modify multiple currency practices, conclude bilateral payments agreements that are inconsistent with Article VIII of the Fund's articles of agreement, or impose or intensify import restrictions for balance of payments purposes, nor will we accumulate external payments arrears (to be monitored on a continuous basis).
I. Limits on the Cumulative Deficits of the Consolidated
The above listed ceilings on the cumulative deficit of the consolidated central government cover: (i) central government operations, that is, the central government budget (the Office of the President, the parliament, the government, the constitutional court, all ministries, other independent state administration and judicial bodies); (ii) existing central budgetary funds (health, pension, employment, water management, employment and growth, regional development, and environmental protection funds) and agencies (the agencies for state aid, for investment and export promotion, and for small and medium-sized enterprises); and (iii) the highway (HAC) and road (HC) construction and maintenance agencies, the privatization fund (HFP), and the bank rehabilitation and deposit insurance agency (DAB). In addition to (i) - (iii), the consolidated general government comprises (iv) the 53 largest local governments (20 counties, Zagreb, and 32 other cities). The government will not establish new budgetary or extrabudgetary funds or agencies during the program period, but any such funds or agencies would be covered by the ceilings. The ceilings do not include the operations of the Croatian Bank for Reconstruction and Development (HBOR). HBOR's deficit in 2003 is projected to be HRK 1,803 million and will be monitored separately under the program.
The above listed ceilings will be reduced by the amount by which the cumulative quarterly privatization receipts of the consolidated central and general governments (as defined above) fall short of the amounts indicated.
The limits on the deficits of the consolidated central and general governments will be adjusted downward to offset the net effect of any reduction in interest payments attributable to rescheduling of existing government debt.
For purposes of the program, the deficits of the consolidated central and general governments will be defined on a modified accrual basis, i.e., all expenditure should be on a "payment due" basis. The cost for recapitalizing banks and public enterprises, and payouts of insured deposits will be considered as "above the line." The following will be considered as "below the line": privatization receipts, net change of arrears, inssuance and payment of promissory notes issued by the Ministry of Finance and the Health Fund, the collection of tax arrears, bonds issued for financing the recapitalization of banks and public enterprises or payouts of insured deposits, redemption of government bonds tendered by the CNB in connection with bank resolution, and any release of foreign-held blocked foreign assets of the former SFRY to the government. Purchases and sales of general government securities in the secondary market do not finance the general government deficit and must therefore be excluded from the data reported to the Fund. For bank financing, this includes secondary market transactions with domestic nonbanks and nonresidents. For domestic nonbanks, this includes such transactions with domestic banks and nonresidents.
For purposes of program monitoring, all financing flows in foreign currency will be converted at the following average exchange rates (in HrK per unit of foreign currency):
Fiscal performance will be monitored monthly at the consolidated central government level and tested quarterly at the consolidated central or general government level. As local governments still need to adjust to more frequent than semi-annual reporting, performance will be tested at the central government level at end-March and end-September 2003 and at the general government level at end-June and end-December 2003. The pertinent data will be provided in all cases in GFS 1986 classification within 30 days from the end of the month. The monthly monitoring will be based on the narrow consolidation of the central government (i.e., excluding HAC, HC, DAB, HFP, and HBOR) and separate monthly reports from HAC, HC, DAB, and HFP. Unlike the monthly monitoring, which relies on a variety of sources, the quarterly testing is based on accounting data (classified on the basis of the new chart of accounts) with direct links to GFS 2001, except for HAC, HC, DAB, and HFP, which must be converted to GFS 1986 separately.
Cumulative quarterly performance will be assessed from above the line and below the line, whichever is larger.
II. Limits on the Cumulative Changes of the Stock of Central Government Arrears
Arrears include (i) all payments overdue according to their original or modified terms; and (ii) any promissory notes issued by the Ministry of Finance and the central budgetary funds. Arrears comprise both domestic and external payments arrears. The stock of arrears will be provided monthly to the Fund by the Ministry of Finance within 30 days.
III. Indicative Limits on the Consolidated Central Government Wage Bill
The cumulative wage bills exclude employers' contributions to social security. These limits do not constitute performance criteria. If wage payments exceed these limits the government will consult with the Fund on the timely adoption of measures to ensure observance of the cumulative deficit limits specified in Section I above.
Ceilings on the
Net Changes of the Stock of Short-Term External Public and
For program purposes, the term "debt" has the meaning set forth in point No. 9 of the Guidelines on Performance Criteria with Respect to Foreign Debt (Decision No. 12274-(00/85), adopted August 24, 2000), which reads as follows: "(a) For the purposes of this guideline, the term "debt" will be understood to mean a current, i.e., not contingent, liability, created under a contractual arrangement through the provision of value in the form of assets (including currency) or services, and which requires the obligor to make one or more payments in the form of assets (including currency) or services, at some future points in time; these payments will discharge the principal and/or interest liabilities under the contract. Debts can take a number of forms, the primary ones being as follows: (i) loans, i.e., advances of money to obligor by the lender made on the basis of an undertaking that the obligor will repay the funds in the future (including deposits, bonds, debentures, commercial loans, and buyers' credits) and temporary exchanges of assets that are equivalent to fully collateralized loans under which the obligor is required to repay the funds and usually pay interest, by repurchasing the collateral from the buyer in the future (such as repurchase agreements and official swap arrangements); (ii) suppliers' credits, i.e., contracts where the supplier permits the obligor to defer payments until some time after the date on which the goods are delivered or services are provided; and (iii) leases, i.e., arrangements under which property is provided which the lessee has the right to use one or more specified period(s) of time that are usually shorter than the total expected service life of the property, while the lessor retains the title to the property. For the purpose of the guideline, the debt is the present value (at the inception of the lease) of all lease payments expected to be made during the period of the agreement excluding those payments that cover the operation, repair or maintenance of the property. (b) Under the definition of debt set out in point 9(a) above, arrears, penalties, and judicially awarded damages arising from the failure to make payment under a contractual obligation that constitutes debt are debt. Failure to make payment on an obligation that is not considered debt under this definition (e.g., payment on delivery) will not give rise to debt." However, for the time being lease contracts will not be covered by the ceilings. A reporting system for lease contracts is currently being set up by the Ministry of Finance. Once completed, leases will be included in the debt contracting ceilings.
The short-term debt limits refer to the cumulative net changes in public sector debt disbursed and outstanding with an original maturity of up to and including one year. These limits do not apply to normal import-related credits and nonresident deposits in state-owned banks (HPB, HBOR).
For medium- and long-term external debt, the performance criterion applies not only to debt as defined in point No. 9 of the Guidelines on Performance Criteria with Respect to Foreign Debt, but also to commitments contracted or guaranteed for which value has not been received.
The ceilings on medium- and long-term external debt apply to the contracting or guaranteeing of new noncessional external debt with an original maturity of more than one year, and, within this limit, with an original maturity of more than one year and less than 5 years. Concessional loans are defined as those with a grant element of at least 35 percent, using currency-specific discount rates based on the six-month average commercial interest rates reported by the OECD (CIRRs) for loans with maturities of less than 15 years, and on the 10-year average CIRRs for loans with maturities of 15 years and more.
The ceilings on medium- and long-term public debt (but not the subceilings) will be raised by the amount by which the government retires existing debt before its scheduled maturity.
The public sector comprises the consolidated general government as defined in Annex III Section I, the CNB, and HBOR. Excluded from the limits are HPB, the public enterprises, performance guarantees on the construction of ships (for no more than the value of advance payments), and changes in indebtedness resulting from refinancing and rescheduling, including the capitalization of interest in arrears.
The above limits also do not apply to guarantees by the general government for suppliers' credits related to imports for constructing ships during the period until delivery of the ships takes place. In case of orders for multiple ships, the import related credits could take the form of revolving external credit lines. To monitor such guarantees, data on the guarantees extended for ship building, including performance guarantees or bonds, and the payments and deliveries for ships built with these guarantees will be supplied on a quarterly basis.
Debt falling within the limits shall be valued in U.S. dollars at the average exchange rates indicated in Annex III.
Information on the contracting and guaranteeing of new debt falling both inside and outside the the limits will be reported monthly to the Fund within 30 days by the CNB.
Limits on the Cumulative Changes in the Net Credit
The quarterly limits are cumulative. The consolidated general government is as defined in Annex III, Section I.
For program purposes, net credit of the banking system to the consolidated general government is defined as all claims of the banking system on the consolidated general government (excluding HBOR) less all deposits of the consolidated general government (excluding HBOR) with the banking system.
Data on banking system claims on and liabilities to the consolidated general government are taken from the balance sheets of the banks and the CNB, and will be provided monthly to the Fund by the CNB within 30 days.
Foreign currency flows derived from stocks at December 31, 2002 and the most recent quarter tested shall be valued at the average exchange rates of the quarter in question, indicated in Annex III.
Floors under the Cumulative Changes in the
For purposes of the program, net usable international reserves of the Croatian National Bank (CNB) are defined as the U.S. dollar value of gross foreign assets minus reserve assets held against foreign currency deposits by domestic banks and against CNB foreign exchange bills minus gross foreign liabilities minus off-balance sheet foreign currency obligations.
For purposes of the program, gross foreign assets shall be defined as monetary gold, holdings of SDRs, any reserve position in the IMF, and holdings of foreign exchange in convertible currencies by the CNB. Any return to the CNB of blocked foreign assets that are not part of CNB foreign assets as of December 31, 2002 will be added to the reserve floor. Reserves that are pledged, frozen or used as collateral shall be excluded from the gross foreign assets. In particular, any reserve assets pledged to secure government debt will be excluded from the reserves definition.
For purposes of the program, reserve liabilities shall be defined as all liabilities of the CNB to non-residents—excluding deposits into the special accounts for external debt servicing—with an original maturity of up to and including one year, as well as liabilities arising from IMF purchases and bridge loans from the BIS, irrespective of their maturity. For purposes of the program, reserve liabilities shall also include guarantees provided by the CNB backed by reserves as collateral.
The net forward position of the CNB is defined as the difference between the face value of foreign currency-denominated CNB off-balance sheet claims on nonresidents (forwards, swaps, options, and futures market contracts) and foreign currency obligations to both residents and nonresidents. This position amounted to US$0 million on December 31, 2002. For program purposes, only the off-balance sheet obligations will be deducted from the CNB's net international reserves position. These liabilities amounted to US$0 million on December 31, 2002.
Cumulative flows in U.S. dollars will be measured by applying the average exchange rates of the most recent quarter, as indicated in Annex III, to the stock of reserves of December 31, 2002 and the end of the quarter in question.
For purposes of the program, the end-of-quarter net usable international reserves of the CNB (including their end-2002 stock) are calculated as the arithmetic average of 21 observations centered on the last business day of each quarter.
The limits will be monitored from data on the accounts of the CNB supplied monthly to the Fund by the CNB within 15 days of the last business day included in the observations.
Limits on the Cumulative Changes in the Net Domestic
The net domestic assets of the Croatian National Bank (CNB) are defined as the difference between the base money and the net usable international reserves of the CNB (as defined for program purposes in Annex VI), both expressed in local currency at program exchange rates (see Annex III). Base money is defined as currency outside banks, vault cash of banks, giro and required reserve deposit of banks in domestic currency, and deposit money held at the CNB.
The above listed ceilings shall be adjusted for changes in the required reserves in domestic currency, as follows:
The adjustor applies only to the changes on account of administrative decisions that were not foreseen in the monetary program.
If base money demand exceeds its projections, the CNB will consult with the Fund to determine whether these limits can be exceeded without jeopardizing the authorities' inflation target. The projected stocks of base money are as follows:
For purposes of the program, the net domestic assets of the CNB and the monetary base at the end of each quarter (including their end-2002 stock) will be calculated as the arithmetic average of 21 observations centered on the last business day of the quarter.
The limits will be monitored from data on the accounts of the CNB supplied monthly to the Fund by the CNB within 15 days of the last business day included in the observations.
Indicative Limits on the Cumulative Increases in the Net Credit of the Banking System to Selected Public Enterprises
The above listed indicative aggregate limits cover the 9 enterprises listed below. Net credit is defined as the sum of all short-term and long-term bank claims in local and foreign currency on these enterprises by banks resident in Croatia plus the amount of credit guaranteed by Croatian banks from domestic nonbank and foreign sources, less the sum of these enterprises' total deposits in local and foreign currency with such banks. Credit guaranteed by the government or resulting from the calling of performance guarantees will be excluded from the ceilings to the extent that it is not already reflected in the balance sheets of the banks.
The 9 enterprises are as follows:
Enterprises on the above list that are privatized with more than 50 percent in the course of the arrangement will be removed from the limits and the limits will be adjusted downward by the amount of the net credit outstanding to those enterprises at the end of the month preceding privatization. Whenever changes in accounting practices or the set of enterprises reporting to the CNB result in changes in the data series, the Fund will be notified and provided one quarter of data calculated with both the old and new definitions and an offsetting adjustment will be made to the limits. The limits will be adjusted by the amount of any bank or enterprise rehabilitation that writes off or removes these assets and liabilities from the banking system or any debt-equity swaps that convert bank debt into equity in the enterprises. Information regarding such debt-equity swaps will be provided by the Ministry of Economy if and when they occur.
The above indicative limits will be cumulative and will be monitored on the basis of the average quarterly exchange rates (as listed in Annex III) from data collected monthly by the Ministry of Finance (ORESE) and supplied to the Fund within 30 days.
1In addition, a short-term loan to bridge a brief delay in privatization receipts will add 0.5 percent of GDP to both disbursements and amortization.