The Governor of the Croatian National Bank, Željko Rohatinski, in an interview with the Slovenian “Bančni vestnik,” estimated that the decline of Croatia’s GDP this year will be around two percent.
He assessed the upcoming results in the consolidation of public finances as crucial, and if the Government fails in its efforts, he says that seeking a new stand-by arrangement with the IMF may have no alternative. Although it is expected that the previous decline in economic activity will slow down in the second half of 2010, it is estimated that the decline in gross domestic product for the entire year will amount to about 2 percent. This further exacerbates certain problems, especially in the fiscal sphere, Rohatinski said in a comprehensive interview for the October issue of the Slovenian monthly, which the HNB publishes on its website. When asked about the burden of principal and interest repayments to foreign creditors, which amounts to a high 13 billion euros this year, the possibilities of refinancing, and whether Croatia will conclude a stand-by arrangement with the IMF, he stated that there is currently no objective need for such funds. "Just as Croatia never used the loans approved under stand-by arrangements with the IMF after 1997, there is also no objective need for such funds now," he said.
Previous arrangements, he explained, primarily aimed to strengthen the external credibility of the Government and the HNB, or the perception of financial markets regarding responsible economic policy, as they also represented a certain “weight” for undertaking unpopular measures in the country. "This time, after the financial system successfully withstood the first shock of the crisis and enabled the state to borrow as needed in the domestic market, Croatian authorities assessed that they can maintain the credibility of their economic policy without arrangements with the Fund. Relatively successful bond issues in the foreign market at the end of last year and during this year have confirmed this to some extent. However, previous success does not guarantee that it will be so in the future. The upcoming results in the consolidation of public finances will play a key role in this. If the Government fails in its efforts, seeking a new stand-by arrangement may have no alternative," Rohatinski said.
He believes that, generally speaking, the public sector in Croatia reacted slowly and tepidly to the emergence of the crisis. In his assessment, it is certain that the deficit of the consolidated broadly defined general government in 2010 will exceed 6 percent of GDP, both due to the shortfall in planned revenues and due to pronounced political problems related to attempts to reduce certain ‘rights’ of budgetary fund users. Thus, he notes, the unfavorable situation continues, which in the sphere of the current budget deficit, accumulated public debt, and overall increased financing needs is significantly determined by the hypertrophy of public services, irrationalities in the operations of public enterprises, the unsustainability of existing pension and health insurance systems, and problems in the systems of incentives and subsidies. According to the governor of the Croatian central bank, this is a consequence of the previous postponement of necessary reforms which, of course, have their economic, social, and political costs, making them risky, especially in an election year. Thus, public debt reaches a level of about 50 percent of GDP, which is not high compared to the average of EU countries, but is concerning given the dynamics of its growth, high tax pressure, exposure to currency risk, and the need for future primary surpluses to stabilize that debt under conditions of relatively low economic growth, warns Rohatinski.
