Hot Spots: Croatia.(Brief Article)(Statistical Data Included)

The agreement Zagreb signed with the International Monetary Fund earlier this year calls for fiscal and wage restraint as well as accelerated privatization, market liberalization, and reforms of the costly state-run health and pension systems. It maintains that, with such policies, Croatia will achieve sustained economic growth of 4 percent or more, a reduction in inflation from 7.5 percent in 2000 to 4.5 percent and a stable exchange rate for the kuna.

These would be excellent results for a country that, under its present reformist leadership, is trying hard to move closer to the European Union. However, there is still a ways to go. Real GDP growth slowed to 2.4 percent (year-on-year) in the final quarter of 2000 from 4.1 percent in July-September. It wound up at 3.7 percent for last year as a whole, and we expect, based on current trends, a gain of only about 3.0 percent for all of 2001.

Unemployment has remained painfully high--reported at 22.5 percent of the labor force for April. If reforms are pushed with any vigor at all in the months ahead, there will be further lay offs from overstaffed public enterprises and the civil service, and the scope for a marked decline in the jobless rate will be minimal. Retail price inflation was 6.8 percent (y/y) in April, up from 6.0 percent in March and from 5.6 percent in April 2000. This was before the onset of the peak tourist season when prices usually rise more than during the rest of the year. We expect monetary erosion to be at least 6.0-6.5 percent for all of 2001.

The Central Bank has not yet announced full, detailed external accounts figures for 2000, but it appears that--despite the high cost of importing oil--the current-account BoP deficit was considerably smaller than the 5.0 percent of GDP originally forecast. By CB estimates, the gap may have been only about 3 percent of GDP. The shortfall was 1,522.6 million USD in 1999. By our reckoning, it was only 531.1 million USD in 2000. Responsible for the improvement was mainly a larger than expected surplus in services--principally tourism.

Some deterioration in the external accounts must be expected this year. The foreign trade deficit increased to 1,292 million USD in January-April from 820 million USD in the first four months of 2000. But the development will not seriously threaten Croatia's international liquidity position. Official international monetary reserves were reported at 5,922.5 million USD as of end-April, up from 4,757.2 million USD a year earlier. In March, Zagreb concluded a standby pact with the IMF worth 255 million USD over 14 months. It has 51 million USD available for an immediate drawdown, if desired. It appears, though, that the government has no plans to borrow from the facility and regards it merely as precautionary.

The kuna has been hitting three-year highs near 7.34 against the euro. This has prompted representatives of exporters and the pivotal tourist industry to complain that the kuna's strength is hurting their business. Many ordinary Croatians are concerned as well, since the kuna's appreciation leads to a depreciation of their hard-currency ...