VZCZCXRO5697
RR RUEHAST
DE RUEHVB #0757/01 1720712
ZNR UUUUU ZZH
R 210712Z JUN 06
FM AMEMBASSY ZAGREB
TO RUEHC/SECSTATE WASHDC 6319
INFO RUEHZL/EUROPEAN POLITICAL COLLECTIVE
RUEATRS/DEPT OF TREASURY WASHDC

UNCLAS SECTION 01 OF 02 ZAGREB 000757 
 
SIPDIS 
 
SENSITIVE 
 
SIPDIS 
 
STATE FOR EB/IFD/OMA 
EUR/SCE 
 
E.O. 12958: N/A 
TAGS: ECON EFIN HR
SUBJECT: IMF VIEWS END OF CROATIA PROGRAM 
 
ZAGREB 00000757  001.2 OF 002 
 
 
SENSITIVE BUT UNCLASSIFIED; NOT FOR INTERNET 
 
¶1.  (SBU) Summary:  IMF Resident Rep Athanasios 
Vamvakidis told Econ Off June 13 that the Fund is 
likely to conclude its work in Croatia when its 
current Stand-By Arrangement ends later this year. 
Although frustrated by the slow pace of economic 
reform in Croatia, particularly privatization, the 
IMF is satisfied with the GOC's progress in fiscal 
consolidation.  Vamvakidis said the GOC is set to 
revise its 2006 deficit projections down in a 
supplemental budget later this summer, a first for 
Croatia.  However, it may be premature to pop the 
champagne corks to toast the GOC's economic 
epiphany.  The IMF has generally been very 
accommodating with Croatia's budgetary anomalies. 
The World Bank and others are concerned that 
mounting arrears in healthcare and a pending payment 
to pensioners amounting to 1 percent of GDP, both of 
which have been treated as "off budget" could come 
back to bite.  This is particularly the case of the 
pension repayment, which the GOC had intended to 
offset with privatization receipts, but may have to 
borrow to cover.  End Summary. 
 
¶2.  (SBU) Econ Off met with IMF Resident Rep 
Athanasios Vamvakidis on June 13 for a readout on 
the recently-concluded IMF mission to Croatia to 
review progress on the Stand-By Arrangement. 
Croatia's current Arrangement with the Fund, which 
has always been considered precautionary and never 
used, is set to end on November 15, 2006.  Although 
no decision has yet been made, Vamvakidis said that 
he does not expect the GOC to request another 
agreement.  However, he did not exclude the 
possibility that the European Commission would lobby 
for another agreement with Croatia as a means of 
ensuring greater fiscal probity as Croatia 
negotiates its eventual EU accession. 
 
¶3.  (SBU) Vamvakidis said the IMF team came away 
with mixed views on Croatia's progress.  On the one 
hand, the GOC's fiscal management has been fairly 
solid and generally in line with its commitments to 
the Fund.  In fact, with faster than expected GDP 
growth this year and growing VAT receipts, the IMF 
expects the GOC to revise its projected 2006 deficit 
down when it issues a supplemental budget later this 
year.  The expectation is that the new deficit 
target will be 3 percent of GDP, as opposed to the 
3.3 percent agreed with the IMF for this year.  If 
realized, this would mark a significant improvement 
in the country's finances from the 4.2 percent 
deficit registered in 2005 and the 6.3 percent 
deficit of 2003.  Indeed, this would be the first 
time ever that any Croatian government lowered its 
projected deficit mid-year and, in fact, the first 
time it did not increase. 
 
¶4.  (SBU) However, while the Fund is happy with 
fiscal progress, it noted a lack of momentum 
elsewhere, particularly in health reform and 
privatization.  The Croatian parliament has yet to 
pass even the watered-down health reform measures 
that the government proposed earlier in the year, 
none of which will go nearly far enough to staunch 
the red ink.  Likewise, despite a year of promises 
of impending privatizations, there has been no 
significant privatization in Croatia for the last 
two years. 
 
¶5.  (SBU) The World Bank office in Zagreb is much 
less sanguine about the progress of economic reform 
than the IMF and is concerned that "off budget" 
accounting of health care arrears and the pending 
pension repayment mask a poorer fiscal situation 
than either the IMF or GOC care to portray. 
Proposed healthcare reforms show little prospect of 
staunching the flow of red ink and deeper reforms 
that the GOC has promised to undertake if needed 
appear improbable, particularly with elections set 
for 2007.  The GOC intended to cover the pension 
repayment by selling its remaining stakes in 
telephone company Hrvatski Telekom and the state oil 
company INA.  However, both of these have been 
delayed again, which means that the government will 
have to borrow to pay the pensioners, effectively 
 
ZAGREB 00000757  002.2 OF 002 
 
 
moving this expenditure "on budget." 
 
¶6.  (SBU)  When pressed on concerns raised by the 
World Bank, Vamvakidis acknowledged that progress on 
reform is less than the IMF hoped for, but that 
nevertheless the GOC has improved its fiscal 
position with a growing economy and modest 
inflation.  The IMF will make its last review of the 
Stand By in September.  According to, Vamvakidis its 
message to the GOC was that it needs to present 
credible timelines for privatization or risk 
derailing the Stand By prematurely. 
 
¶7.  (SBU) Given that this is not the first time the 
IFIs have vowed to stand firm and that the IMF is 
likely winding down its presence in Croatia, it is 
questionable how much weight this demand will carry. 
More important to the GOC right now is the EU. 
Since Croatia will not be able to negotiate the 
competition and industrial policy chapters of the EU 
Acquis without further steps on privatization, this 
gives more hope that the promises will actually be 
realized this time around.  Finally, if the GOC 
manages to bring its deficit down to 3 percent and 
keep it there through election season in 2007 
without international pressure, this will be a 
strong message that, at least in fiscal management, 
Croatia is demonstrating responsible leadership. 
 
 
FRANK