Auditors issued a qualified opinion on the report on the execution of the state budget

The State Audit Office has issued a qualified opinion on the report on the execution of the state budget for 2022, and submitted its report on this, along with eight others on the conducted financial audits, to the Croatian Parliament on Wednesday.

The qualified opinion on the Annual Report on the Execution of the State Budget for 2022 was expressed, among other things, due to shortcomings in recording business events (bond premiums, exchange rate differences, and certain revenues) that affected the reported data.

In addition, it was determined that several subordinate acts, i.e., implementing regulations that the Ministry of Finance was supposed to adopt by the end of June 2022 at the time of the audit publication (April 2023), are still in development. These regulations will, as they state, more closely regulate certain areas related to budget planning and execution, budget accounting, reporting on budget execution, and financial reporting of the budget and budget users.

Their adoption is a prerequisite for implementing several recommendations of the Office, given in previous audits of annual reports on the execution of the state budget, emphasized the State Audit Office.

Risk to the budget if funds from the Solidarity Fund are not fully utilized

Auditors also warned of the risk to the state budget in the upcoming period if the aid funds from the European Union Solidarity Fund for earthquake damage recovery are not fully utilized by the deadline for use.

The deadline for using funds for earthquake damage recovery from March and December 2020 is June 30, 2023, with more than one billion euros (7.5 billion kuna) available, and by the end of April 2023, funds amounting to 658 million euros or 65.7 percent had been spent.

The State Audit Office also drew attention to the facts regarding the recording of business events arising from the settlement concluded between the Republic of Croatia and HŽ Cargo d.o.o., which established, among other things, that HŽ Cargo has certain material-legal claims against the Republic of Croatia arising from the division of the company HŽ – Croatian Railways d.o.o. in 2006.

The settlement on behalf of the Republic of Croatia is being conducted from the positions of the Ministry of Finance and the Ministry of the Sea, Transport and Infrastructure. The mentioned ministries need to harmonize the method of recording business events arising from the settlement, in order to comprehensively record the effects of the settlement.

Attention was also drawn to the significant amount of expenses for compensation for damages and interest according to the ruling in the arbitration procedure before the International Centre for Settlement of Investment Disputes, which was initiated by MOL Hungarian Oil and Gas Company PLC against Croatia in 2013. According to the ruling, Croatia is obliged to compensate MOL for damages of 183.9 million US dollars, increased by default interest calculated from April 1, 2014, until the day of payment, and to cover the costs of the arbitration procedure amounting to 1.1 million dollars. By the end of 2022, expenses for part of the costs of the arbitration procedure amounting to 1.4 million kuna had been incurred, while compensation for damages to MOL and default interest as well as the remaining costs of the arbitration procedure at the time of the audit (April 2023) had not been settled.

The audit also pointed out the risk to the state budget regarding the granting of state guarantees to entrepreneurs in difficulty. Potential liabilities based on granted active guarantees were stated at 51.8 billion kuna, which is an increase of 7.5 percent or 3.6 billion kuna compared to the state reported at the end of 2021, due to more utilized loans secured by guarantees, compared to guarantees that were repaid and canceled. The final maturity date of the guarantees is 2040.

For all identified irregularities and shortcomings, 19 orders and recommendations were issued, the implementation of which would contribute to increasing the transparency of the use of budget funds, the Office stated.

Otherwise, total revenues of the state budget for 2022 amounted to 171.7 billion kuna, total expenditures 175.1 billion kuna, and the deficit amounts to 3.3 billion kuna. The state budget debt at the end of 2022 amounted to 300.8 billion kuna, which is an increase of 6.3 billion kuna or 2.1 percent compared to 2021.

The main cause of the increase in debt is borrowing due to lower revenues compared to state budget expenditures, the rise in foreign currency exchange rates, and the inclusion in the records of state budget debt obligations based on loans and borrowings in the total amount of 366.3 million kuna, based on the settlement from December 2022 between the Republic of Croatia and HŽ Cargo for restructuring purposes.

In 2022, 11 guarantees were issued in the total amount of 8.8 billion kuna, so at the end of 2022, total state guarantees amounted to 51.8 billion kuna. With total guarantees as potential liabilities, the overall state budget debt amounts to 352.6 billion kuna, reported the state auditors.

Unqualified opinion for the Ministry of Economy and Sustainable Development

The Office also submitted eight reports on the conducted financial audit to the Croatian Parliament on Wednesday, for three users of the state budget (Institute of Social Sciences Ivo Pilar, Ministry of Economy and Sustainable Development, and the Central State Office for the Development of the Digital Society) and five local units (the cities of Popovača and Slatina, the municipalities of Čavle, Ližnjan-Lisignano, and Žumberak).

For users of the state budget, the audit covered financial statements and operations for 2021, whereby the Institute of Social Sciences Ivo Pilar and the Ministry of Economy and Sustainable Development received unqualified opinions for financial statements and compliance of operations, while the Central State Office for the Development of the Digital Society received qualified opinions.

For identified irregularities and shortcomings, a total of 18 orders and ten recommendations were issued to users of the state budget.