Press Release No. 03/191

Press Release: IMF Completes Second Review and Grants Waivers Under Stand-By Arrangement with the Republic of Croatia

November 12, 2003

The Executive Board of the International Monetary Fund (IMF) today completed the second review of the Republic of Croatia's economic performance under the 14-month Stand-By Arrangement.

In completing the review, the Executive Board granted the Republic of Croatia's request for waivers for the non-observance of four quantitative performance criteria relating to the consolidated central government budget, central government arrears, and net usable international reserves and net domestic assets of the Croatian National Bank.

The Stand-By Arrangement amounting to SDR 105.9 million (about US$151 million) was approved on February 3, 2003 (see Press Release No. 03/13). The Croatian authorities continue to treat the Stand-By Arrangement as precautionary and do not intend to draw the available financing.

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

"Croatia continues to enjoy robust economic growth, price stability, and rising international reserves. Since the first stand-by review, real GDP growth has been higher and retail price inflation lower than expected. However, in light of the still-wide external current account deficit, the authorities must pursue prudent macroeconomic policies, in addition to further structural reforms, to sustain this good economic performance. To this end, the authorities need to continue efforts at fiscal consolidation and maintaining a tight monetary policy, within an appropriately reformed monetary control framework.

"The government is on a path to achieve its general government deficit target in 2003. It has so far resisted pressures during the election campaign to raise spending. Going forward, the government needs to continue expenditure restraint and maintain its revenue effort to reduce the deficit further in the medium term. Progress in achieving external sustainability will be a key factor in deciding the needed size of the fiscal adjustment in 2004.

"To support the central bank's monetary policy, the government is encouraged to meet more of its financing requirements in the domestic market. Apart from a lower deficit and higher privatization receipts, stabilizing the public debt ratio (broadly defined to include direct debt and guarantees) requires a stricter implementation of the guidelines on extending government guarantees.

"The current account deficit has begun to decline due to an excellent tourist season and the credit slowdown reflecting the central bank's administrative measures and tightened reserve requirements. In the period ahead, the central bank is committed to monitoring current account developments carefully and take additional measures if the deficit does not come down as expected. The central bank remains committed to preventing a renewed acceleration of credit expansion. It intends to eliminate the administrative credit ceilings at the start of 2004 and is willing to consider replacing them with a more orthodox monetary policy framework in the course of 2004 by developing traditional open market operations. The authorities have made commendable progress in strengthening financial supervision, though they need to ensure effective implementation and reinforcement of reforms in this area.

"The partial privatization of the state-owned oil company represents a welcome step toward inducing greater efficiency in the productive sector. Following the adoption of a vast array of reform legislation in bankruptcy and other fields, the authorities need to focus their attention on implementing these reforms, and on the restructuring and privatization of public enterprises in order to sustain high rates of economic growth and further advance the prospects of Croatia's EU accession," Ms. Krueger said.