Yesterday evening, our time, the Executive Board of the International Monetary Fund completed the second review of the economic performance of the Republic of Croatia under the 14-month Stand-By Arrangement, approved early in February this year. Under this arrangement, SDR 105.9 million (around USD 151 million) were made available to the Republic of Croatia. However, the Croatian Government decided that the country would not draw the available financing but considered the arrangement necessary for ensuring international recognition of the correctness of the Croatian economic and monetary policies.

In completing the second review, the Executive Board granted the request of the Republic of Croatia for waivers for the non-observance of four quantitative performance criteria relating to the consolidated central government budget, central government arrears, net usable international reserves and net domestic assets of the Croatian National Bank.
In her conclusive remarks, cited in the IMF Press Release, following the Executive Board discussion, Anne Krueger, First Deputy Managing Director and Acting Chair, said that Croatia continued to enjoy robust economic growth, price stability, and rising international reserves and that since the first stand-by review, real GDP growth had been higher and retail price inflation lower than expected. However, she added, in light of the still-wide external current account deficit, the authorities have to pursue prudent macroeconomic policies, in addition to further structural reforms, to sustain this good economic performance and to this end, they need to continue efforts at fiscal consolidation and maintaining a tight monetary policy, within an appropriately reformed monetary control framework.

Adding that the government was on a path to achieve its general government deficit target in 2003 and that it had that far resisted pressures during the election campaign to raise spending, she warned that, 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, she said.

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

It was observed that the current account deficit had begun to decline due to an excellent tourist season and the credit slowdown, as a result of CNB measures. In the period ahead, it was noted, the central bank is committed to monitoring current account developments carefully and take additional measures if the deficit does not come down as expected. It was also stated that "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."

Anne Krueger also remarked that the partial privatisation of the state-owned oil company represented a welcome step forward toward inducing greater efficiency in the productive sector. She concluded by saying that "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 privatisation of public enterprises in order to sustain high rates of economic growth and further advance the prospects of Croatia's EU accession."

The most recent documents in connection with the performance under this stand-by arrangement will be available in Croatian on the CNB web site: www.hnb.hr. as soon as their translation is completed.