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IMF APPROVES NEW STAND-BY LOAN ARRANGEMENT FOR CROATIA

WASHINGTON/ZAGREB, Aug 6 (Hina) - The International Monetary Fund's(IMF) Executive Committee has approved a US$141 million stand-by loanarrangement for Croatia for a 20-month period, the IMF said in astatement on Friday.
WASHINGTON/ZAGREB, Aug 6 (Hina) - The International Monetary Fund's (IMF) Executive Committee has approved a US$141 million stand-by loan arrangement for Croatia for a 20-month period, the IMF said in a statement on Friday.

The IMF Executive Committee has concluded Article IV of consultations with Croatia and granted the Croatian government's request for a new arrangement, the statement said, adding that Croatia intended to treat the new deal as a precaution and did not plan to withdraw the approved funds.

Croatia has been recording a fast growth and low inflation rate since the mid-1990s which, however, has resulted in a higher external imbalance, notably in the last several years, said the statement.

The public and private external debt now exceeds 75 percent of GDP, which is much higher than the average in other countries of Central and East Europe and in all other developing markets, the statement said. It added the chronically poor control over public companies and agencies, together with the growth of last year's pre-election spending, which overstepped the previous stand-by arrangement, were the main causes of the external imbalance.

Recognising the risk magnitude, the new government and the central bank have designed a programme for 2004-05 aimed at halting the growth of Croatia's external debt. The programme focuses on the renewal of fiscal adjustment efforts which were discontinued last year, and includes government financing on the domestic market and an appropriately stricter monetary policy.

The IMF Executive Committee applauds the programme, notably its accent on transparency in the fiscal policy, the elimination of extrabudgetary activities, and the improvement of control over public spending and public debt management.

According to the statement, reducing external vulnerability, securing fiscal sustainability and preparing for a successful and swift admission to the EU will require great efforts also beyond the period covered by the new stand-by arrangement.

Also according to the statement, critical points in the coming years will be the continuation of fiscal adjustment so as to reduce the budgetary deficit to below three percent of GDP, as defined by the Maastricht accord, the rationalisation of public spending through the reduction of subsidies and state support to a level that is appropriate for a modern market economy and is compatible with EU membership, and structural reforms aimed at reducing the state's role in the economy.

Constant caution will be called for in the financial sector with a view to making sure that the rapid loan growth of recent years does not undermine the quality of the balance of banks' assets, the statement said, adding that the IMF would continue to support Croatia's efforts in this field.

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