The mission is leaving Croatia with the very strong impression of the government and the Croatian National Bank (HNB) being in full control of and fully concentrated on the Croatian economy, IMF mission chief Dimitri Demekas said at a press conference in Zagreb on Thursday at the end of a 10-day visit during which IMF officials conducted the second review of a stand-by arrangement.
The arrangement expires at the beginning of next year, and in March 2006 the mission will make recommendations regarding the possible extension of the existing arrangement for a greater part of next year.
Based on what will be happening in the coming weeks and months regarding the reform of the health system and the shipbuilding sector, we will decide whether or not we will support extension of the arrangement, Demekas said.
We share the view that the Croatian economy has been functioning well this year and that prospects for 2006 are mainly good. The Gross Domestic Product growth rate this year and the next will be around four per cent while the inflation rate will be around three per cent, he said.
As for possible risks, our shared opinion is that there are initial signs of a financial imbalance, he added, citing increasing foreign borrowing by banks. He assessed that bank loans to households and businesses would increase by 21 billion kuna in 2005, as against 18 billion in 2004.
The IMF mission chief supported the measures by the HNB aimed at reducing the foreign debt and the decision by the government to repay the debt to pensioners, warning about possible risks of repayment of that debt.
The debt repayment begins in mid-2006, it concerns great sums of money and could have a negative impact on macroeconomic trends, the balance of payment and could result in an increase in spending and imports, he said, adding that the government's strategy for next year should alleviate those risks.
Demekas supported the government's ambitious goal of reducing the 2006 budget deficit to 3.3 per cent of GDP, describing it as appropriate and realistic.
He also supported the government's efforts to accelerate structural reforms in three main areas -- privatisation, health reform and shipbuilding reform.