MINISTER AND CENTRAL BANK HEAD ON DEBTS, CURRENCY RATE

ZAGREB, Aug 13 (Hina) - Finance Minister Mato Crkvenac said Wednesday that Croatia's public debt was within acceptable margins. Croatian National Bank (HNB) governor Zeljko Rohatinski, on the other hand, warned about the high foreign debt of nearly US$19 billion, and stressed that the debt problem should not be simplified. #L# "Whoever the agent of the debt is, it is the country's debt and the whole country will have to pay it back," Rohatinski told a news conference at the Finance Ministry with Crkvenac at his side. Crkvenac said the ministry had prepared a draft decision on temporary financing in the first quarter of next year, according to which government expenditure in the said period would be 18.7 billion kuna. Overall budgetary expenditure this year amounts to 78 billion kuna. Replies to all European Commission's questions regarding fiscal and monetary policy will be completed in the next day or two, he added. The state debt, including internal and foreign debts, the debts of institutions such as the Croatian Bank for Reconstruction of development, public companies, local units and state guarantees, totalled 50.8 percent of GDP at the end of June. Next year, its share in GDP will not be higher than 52 percent, Crkvenac said, recalling the standard by which the 60 percent share of the state debt in GDP was acceptable. Rohatinski said that Croatia's overall foreign debt had reached 68 percent of GDP, or US$18.6 billion, and warned that an increase should not be allowed. He declined to comment on Crkvenac's statement that the state debt was at an acceptable level, but did say the issue should not be simplified. In the first six months of this year, the overall foreign debt increased by $3.2 billion, and after counting out the effect of the depreciation of the dollar, the increase is $2.1 billion. Of the said increase, $654 million was generated by the state, $659 million by banks and $785 million by other sectors. "One could say that banks and business enterprises have become more indebted than the state. This is, however, just one side of the medal," Rohatinski said. He explained that banks were covering debts with loans to citizens, companies and the state, while their foreign debts were frequently secured by state collateral. Rohatinski particularly warned about the problem of a higher deficit of the balance of payment current accounts from 3.7 percent of GDP in 2001 to 7.1 percent last year. The primary goal of the country's economy policy is to reduce the deficit to around 5.5 percent of GDP this year. Other goals include prevention of an increase in the share of foreign debt in GDP, which currently stands at 68 percent, a further decrease of fiscal deficit to 4.6 percent of GDP, and keeping state guarantees at the current level, the governor said. A solution to the problem is to create a national export programme, he said. Rohatinski recalled that early this year the central bank had introduced measures to restrict loan expansion and that in talks with the International Monetary Fund (IMF) it had voiced readiness to undertake other measures should these prove ineffective. Bank loans to the non-financial sector increased by 7.9 percent in the first seven months of this year, money supply grew by 11.2 percent and net domestic assets by 12.2 percent. "An increase in all monetary aggregates has been halved in comparison to last year," Rohatinski said, adding that he did not know whether this would be enough to realise goals pertaining to the balance of payments. The central bank will take preventive measures before the IMF Mission arrives in Croatia, he said. He believes that the kuna exchange rate will remain at the current level without the HNB intervening on the foreign exchange market, and that autumn would not see the usual depreciation pressures either. The unusual low rate of depreciation of the kuna during the tourist season can be explained by the situation on the foreign exchange market and overall liquidity, as well as the availability of foreign currency on the banking market, he said. Another factor, he added, is continued strong demand for foreign currency by companies. Rohatinski announced an extraordinary session of the central bank council for late August when he will suggest that banks' compulsory foreign currency reserves increase from 25 percent to 35 percent. If this is not sufficient, the rate of banks' required reserves may be increased from 19 to 22 percent and if this proves to be insufficient, there will be restrictions in capital transactions, such as the introduction of interest-free deposits for all foreign debts of banks amounting to 30 percent of the debts, he said. (EUR1 = 7.55 kuna) (hina) lml