Finance Minister Ivan Suker and PAL Team Leader, Satu Kahkonen, signed the Agreed Minutes of Negotiations. The approval of the loan by the World Bank"s Board of Executive Directors is expected in May 2007 after the remaining actions have been completed.
Successful integration with the European Union requires intensive structural and institutional reforms. PAL2, the second in a series of reform loans to the Croatian government, aims at supporting the government in that effort.
The reform program supported by the PAL series is the centrepiece of the World Bank"s assistance to Croatia in 2005-2008. The reform program supported focuses on:
Improving the investment climate through privatization of state-owned companies, improving financial discipline of public enterprises, reducing costs of doing business, and strengthening the judiciary;
Strengthening governance in public administration by rationalizing, depoliticizing and improving efficiency of public administration and improving public expenditure management;
Enhancing fiscal sustainability of sector programs by addressing health financing, rationalizing and improving targeting of social benefits, improving fiscal and social sustainability of the pension system and improving fiscal sustainability of railways operations.
By successfully completing the talks on PAL2 Croatia has confirmed its maturity in shaping not only economic policies, but also structural reforms, Suker said.
The Ministry of Finance will, with the cooperation of other state administration bodies that will implement the reforms in their area of competence, continue with fiscal consolidation in 2007 and also ensure that the liabilities from the State budget to all budget beneficiaries are paid on time, Suker said.
"The reforms supported by the overall PAL program have been ambitious and challenging. Their implementation has called and continues calling for commitment, coordination, and perseverance from many Government bodies. Therefore, I want to commend the Government of Croatia for its efforts to keep the implementation of these difficult reforms on track even during the election year," said Anand Seth, World Bank Director for Croatia, Romania and Bulgaria.
Since the start of the PAL program in mid 2004, the government has made significant progress in implementing reforms in the said areas, the statement said.
State shares in more than 630 companies have been sold, subsidies to companies have been reduced from 2.78 percent in late 2005 to 2.44 percent of GDP in late 2006, which reduced corporate sector reliance on the tax payers' money;
The backlog of court cases was cut by 30 percent (from 1.64 million to 1.15 million) and indicators of judicial performance show improvement, resulting in a more effective and accountable judiciary system;
The public sector wage bill reduced by about one percentage point of GDP, legislation governing the civil service modernized, thus ensuring depoliticization and professionalization of the state;
To improve budget execution, the Treasury Single Account coverage has been widened to cover and consolidate bank accounts of all line ministries and extra-budgetary funds into it. Internal audit and control system has been established providing more control and insight over how the tax payers" money is being spent;
The strategy for social benefit reform, which is in the final stages of endorsement, targets an increase in the share of means-tested benefits and simplification of benefits administration, and will help the most disadvantaged members of society to receive better assistance;
The ratio between operational spending and revenues of Croatian Railways down by over 50 percentage points (from 243% at the end of 2004 to 190% at the end of 2006), thus allowing for a reduction of operating subsidies to railways by 0.7 percentage points of GDP, making Croatian Railways operations more sustainable and less costly for the state.