News Brief No. 02/26

News Brief: IMF Completes Second Review of Croatia Under Stand-By Credit

March 29, 2002

The Executive Board of the International Monetary Fund (IMF) today completed the second review of Croatia's performance under the 14-month stand-by credit. The arrangement for SDR 200 million (about US$249 million), which was approved on March 19, 2001, is being treated by the Croatian authorities as precautionary (see Press Release No. 01/10).

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

"The Executive Board completed the second and final review under the Stand-By Arrangement with Croatia, welcoming the favorable macroeconomic developments in 2001 as well as the success of the authorities in the implementation of their policies.

"Prospects for 2002 are generally favorable, with continued steady growth in economic activity, relatively low inflation, and a further reduction in the deficit of the consolidated central government. As the introduction of the second pillar of pension reform will entail substantial revenue losses for the budget, the program relies on restraint of all primary expenditure categories. In implementing the budget, it will be important to resist pressures to increase wages or subsidies beyond budgeted levels.

"Although most of the recent deposit inflows in connection with the euro conversion seem to be permanent, supervisory activity should prevent a lowering of credit standards by banks and monetary policy should watch liquidity conditions carefully and act as necessary to preserve the objective of maintaining low inflation.

"Good progress has been made on structural reforms, including a retrenchment in employment in the government and defense sectors, and, through continuing privatization, the establishment of a competitive and stable banking system. Privatization is to be pursued more resolutely in 2002, and the authorities are committed to using any privatization receipts above the targeted amount to reduce government indebtedness," Ms. Krueger said.