IMF ASSESSES ECONOMIC POLICY IN CROATIA: COMMENDATIONS & CRITICISM

( Editorial: --> 0214 ) ZAGREB, July 28 (Hina) - An assessment of the monetary and fiscal policy in Croatia, which the International Monetary Fund (IMF) issued as a statement in Washington and Zagreb, notes a series of positive achievements, but also expresses concern about some manifestations which call for early and decisive corrective action by Croatia's central bank and government. The IMF noted that the real gross domestic product (GDP) in 1997 continued a 6.5 per cent growth, which was in keeping with an average growth rate in the last four years. The annual inflation rate stayed below 4 per cent, despite an increase in nominal wages of about 15 per cent, a considerable increase in consumer credits and cuts in personal income taxes. Price stability was achieved thanks to a strong import increase, 17 per cent in US dollar terms or 32.5 per cent in kuna terms. At the same time, Croatia's merchandise export more or less stagnated, and the foreign trade deficit accounted for almost 27 per cent of the GDP. A 30 per cent increase in tourist earnings in dollar terms could not prevent the deficit on the balance of current accounts from rising from 4.5 to 12.5 per cent of the GDP. This current account deficit, and in considerably lesser measure the strengthening of official foreign reserves, was financed by a strong increase in external debt which in 1997 rose from 23.4 to 33 per cent of the GDP. Much foreign borrowing was contracted by large state-owned enterprises, commercial banks and the government. In its assessment, the IMF Executive Board commended Croatian authorities for stabilisation efforts based on keeping a firm kuna exchange rate, and welcomed the efforts to advance structural reforms, especially in the rehabilitation of state-owned banks and the continuation of voucher privatisation. Many IMF Executive Board members expressed "serious concern about the unsustainably large current account deficit in 1997", and also criticised the rapid growth in wages and bank credits, the poor overall results of state enterprise performance and an expansionary fiscal policy. The directors were also concerned about the difficulties in the banking sector and the slowness in implementing structural reforms. Commending the measures the authorities had taken so far, the directors believed that more decisive measures were needed, "including macroeconomic adjustment and acceleration of public enterprise restraint and restructuring, and banking sector reform". As regards fiscal policy, the directors supported the already taken measures aimed at limiting borrowings in the state-owned enterprise sector. They believed the best way to improve corporate governance was faster privatisation, "particularly when it involved strategic investors". The IMF directors also urged limiting wages, especially in the budgetary sector. Commenting on recent stresses in the banking sector, the IMF advised the authorities to close down unviable banks. "(...) providing liquidity to unviable banks would be inconsistent with overall monetary and external objectives, as well as with sound banking principles". The directors believed the monetary policy needed to be further tightened to make the exchange rate of the kuna fluctuate within narrow bounds. The IMF directors welcomed the preparation of a new banking law and urged the authorities to accelerate its introduction. It is necessary to strengthen the independence and authority of supervisory and regulatory bodies, to urgently further improve the implementation of solvency and monetary policy regulations. The directors also noted the various measures already taken by the Croatian authorities in this respect. A paper the Croatian National Bank (HNB) published to accompany the above quoted statement emphasised that Croatian authorities had agreed to publish the breakdown in an attempt to make its economic policy as transparent as possible. The HNB recalled that the IMF mission visited Croatia in March and that the statistical data referred to 1997. In the meantime "a series of additional measures" have been undertaken, including capital restriction, increased control and supervision of banks, budgetary balancing, etc., the HNB said, all to the effect of improving some unfavourable movements indicated in the IMF statement and maintaining macroeconomic stability in the country. (hina) ha jn 281409 MET jul 98