GOVERNMENT ADOPTS DRAFT MEMORANDUM ON STAND-BY ARRANGEMENT

ZAGREB, Dec 12 (Hina) - Restrictions in salary outlays, a decrease in the number of Defence Ministry employees by 12,000 next year, the continuation of the privatisation process, and the decision on a strategic partner for the Ina oil company by the end of next March, the privatisation of the Croatian Postal Bank in phases, the adoption of a number of laws, including a new Labour Law, are only some commitments which the Croatian government has listed in a document related to a new stand-by arrangement with the International Monetary Fund (IMF). #L# At Thursday's session, the government adopted a draft memorandum on economic and financial policy, whose contents have been harmonised with the IMF Mission. The parliament is scheduled to debate on the document at next week's extraordinary session. The government should make a final decision about whether there will be a new stand-by arrangement at the beginning of next year, while the IMF Board of Directors will make a decision on February 3. The new arrangement would be valid for 14 months, until March 2004. It would provide the Croatian government with USD140 million, but the government has stated in a letter of intent, which it is sending to IMF leaders along with the memorandum, that it did not intend to draw the funds. In the document, the government has stated that its goal was further stepping up of economic growth, and that it expected GDP to increase by 4.2 percent in 2003. The aim of the programme is a further lessening of the fiscal deficit and the share of the state's expenditure in GDP, as well as the stabilisation of the share of public debt in GDP after its continued growth during the past several years. In line with the recently adopted government budget for 2003 and budgets of 53 biggest local units, the state deficit will decrease from this year's 6.2 percent to five percent of next year's GDP. This deficit was sufficient for the share of debts in GDP to be stabilised at an estimated level of 57.5 percent of GDP at the end of the year. The draft memorandum elaborates on changes to tax laws which will become effective on January 1, 2003, and states that the government does not intend to introduce any other measures in the tax or benefits systems. The government "will not decrease the 22 percent rate of the Value Added Tax, nor will it allow the spreading of the zero rate or exemption from paying the VAT," the draft states. The memorandum says that the key to success of the fiscal programme is in a restrictive salary policy and a decrease in the number of employees whose salaries come from the government budget. The government has decided to maintain the same salary base as this year (4,232.43 kuna), and the same coefficients, except for those for salaries of teachers in primary and high schools. The draft states that funds for increasing the number of employees in the justice system, education and Finance Ministry have been secured, but that a significant decrease in net employment will be achieved through the reform of the defence sector. "Starting with the lay-offs of some 5,000 employees in the defence sector in the first quarter of 2003, the government intends to lessen the number of employees in the Defence Ministry by about 12,000 in 2003," the document says. In line with Croatia's firm opting for development, capital outlays, especially for highways, continue to rise, and will increase their share in GDP to 6.8 percent. Next year, these outlays should amount to almost 12.8 billion kuna, which will be 9.4 percent higher than this year. The government has also stated that its plan of financing the budget for next year relies less on revenues from the privatisation of companies, but more on internal debts. Foreign debt should be halved next year, and the draft announces that beside paying off the second instalment of the SAL loan (USD100 million), the government will issue eurobonds of EUR500 million in next year's first quarter, while bonds will be issued on the Japanese market in the middle of 2003. In order for the level of debt to stabilise, the IMF has accentuated the need for government guarantees not to increase. The guarantees will make up for 14.7 of GDP at the end of this year. As far as structural reforms are concerned, the draft cites a reform of the financial sector, reforms of public companies, privatisation, and a reform of the production and labour market. In the draft memorandum, the government has underlined its determination to sell almost all public companies and keep a minority of shares in only a few of them. By the end of next year, the Croatian Privatisation Fund is expected to halve its portfolio which currently numbers some 1,100 companies. Outside of the portfolio, the government is continuing the reorganisation and privatisation of most large state-owned companies. The government stresses that there will not be an additional extension for the submission of binding offers for the purchase of 25 plus one share of the Ina oil company, due in mid- January, and announces that a decision on the offers will be made by the end of March. The document also states that the privatisation of power plants will be possible in 2004, while the power distribution infrastructure and JANAF pipeline will not be privatised. Regarding the Croatia osiguranje insurance company, the government says it is planning to sell 30 percent of the company through the Zagreb Stock Exchange. In the second quarter of 2003, seven percent of Croatian Telecom (HT) shares will be sold to HT employees. The government has also decided to privatise the Croatian Postal Bank in phases. It has also announced new laws on companies, market race and labour. EUR1 = 7.45 kuna (hina) lml sb