Documnt of

The World Bank

FOR OMCIAL USE ONLY

Report No. 14088-HR

MEMORANDUM OF THE PRESIDENT

OF THE

INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT

TO THE

EXECUTIVE DIRECTORS

ON A

COUNTRY ASSISTANCE STRATEGY

OF THE

WORLD BANK GROUP

FOR

THE REPUBLIC OF CROATIA

APRIL 4, 1995

Country Department IIEurope and Central Asia Region

This document has a restricted distribution and may be used by recipients only in the performance oftheir official duties. Its contents may not otherwise be disclosed without World Bank authorization.

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Date of Last Country Assistance Strategy

N.A.

Currency Equivalents

(averages)

1993 1994 Jan. 1995USSI = Kunas (KN) 3.58 6.13 5.56

Weights and Measures

Metric System

Abbreviations and Acronyms

ASAL Agricultural Sector Adjustment LoanCEM Country Economic MemorandumCMEA Council on Mutual Economic AssistanceDFI Direct Foreign InvestmentEBRD European Bank for Reconstruction and DevelopmentEFSAL Enterprise and Financial Sector Adjustment LoanEIB European Investment BankEU European UnionFIAS Foreign Investment Advisory Service (in IFC)GDP Gross Domestic ProductGOC Government of CroatiaHDZ Croatian Democratic PartyHEP Croatia Electric Power CompanyHPT Croatia Post and Telecommunications CompanyHZ Croatian RailwaysIDF Institutional Development FundIFC International Finance CorporationIMF International Monetary FundINA Industrija Nafte (a large public enterprise for oil and gas)METAP Mediterranean Environmental Technical Assistance ProgramMIGA Multilateral Investment Guarantee AgencyNBY National Bank of YugoslaviaNGO Non-governmental OrganizationPSAL Public Sector Adjustment LoanRBH Republic of Bosnia and HerzegovinaSFRY Socialist Federal Republic of YugoslaviaUNPA United Nations Protected AreaUSSR Union of Soviet Socialist RepublicsVAT Value Added Tax

Fiscal Year

January 1 - December 31

FOR OFFICIAL USE ONLY

REPUBLIC OF CROATIA

COUNTRY ASSISTANCE STRATEGY

TABLE OF CONTENTS

Page

I. Introduction and Summary . ...................................... 1

II. Background and Recent Performance . ................................ 2

A. Political Background ....................................... 2B. Economic Performance . .................................... 3

III. Challenges, Economic Prospects and the Reform Agenda .......... . 6

A. Challenges and Medium-Term Economic Prospects ................... 6B. The Reform Agenda . .................................... 10C. The External Environment ................................. 15

IV. The Bank Group's Country Assistance Strategy ........... .............. 16

A. Lending Instruments and the Base Case Scenario ...... ............. 17B. Alternative Lending Scenarios . .............................. 21C. Creditworthiness and Exposure ............................... 21D. Other Bank Group Activities . .............................. 22E. Cooperation with Other Institutions .......... ................. 23F. Risks ................................... 23

V. Agenda for Board Consideration .24

ANNEXES:

1. Bank Group Fact Sheet2. Poverty and Social Development Indicators3. Key Economic Indicators4. Key Exposure Indicators5. Status of Bank Group Operations6. Technical Annex

Map: IBRD No. 26774

This document has a restricted distribution and may be used by recipients only in the perfornance of theirofficial duties. Its contents may not otherwise be disclosed without World Bank authorization.

I

MEMORANDUM OF THE PRESIDENT OF THEINTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT

TO THE EXECUTIVE DIRECTORS ON ACOUNTRY ASSISTANCE STRATEGY

OF THE WORLD BANK GROUPFOR THE REPUBLIC OF CROATIA

I. INTRODUCTION AND SUMMARY

1. Three years after the break-up of the Yugoslav Federation, Croatia is starting to overcome themultiple shocks experienced at the time of its independence: loss of markets both within the formerYugoslavia and in the CMEA, extensive destruction of its capital stock during the war, sharp outputdecline and inherited inflation. Despite these formidable odds, impressive results have been attained instabilizing the economy, and growth resumed in 1994, albeit by a modest 1.5 percent. Croatia has nowbegun the deeper structural reforms that are needed to sustain stabilization and growth. However, thereare still many difficulties: about one-fourth of the territory remains in dispute, including one-fourth ofthe arable land, some major gas and oil fieids and large sections of the rail and highway network. Theeconomic and political burden of lost productive capacity and of displaced people and refugees is thussignificant. And, the circumstances in neighboring Bosnia and Herzegovina lend continuing uncertaintyto the regional situation.

2. Nonetheless, Croatia has excellent potential for economic growth, if ongoing economic challengesare successfully met and if the territorial problems can be settled in a peaceful way. Its favorableendowments include a close integration with the economies of Western Europe, an economic system thatis relatively market based -- positive legacies from the former Yugoslavia -- and a well-educated workforce. These factors, in the context of a stable regional situation should enable Croatia to establish itselfas a small, but relatively prosperous economy, and a contributor to stability in the region.

3. To safeguard achievements to date, Croatia now needs to accelerate the implementation ofstructural reforms. The three-pronged Government strategy calls for public finance reform, private sectordevelopment and infrastructure rehabilitation. Public expenditures are to be reconfigured to make roomfor outlays directed towards restructuring and growth-enhancing investments. Private sector-led growthwill be promoted through accelerated privatization and financial sector reforms, and a more supportivelegal and tax environment. The rehabilitation of infrastructure -- to redress war damage and years ofdeferred investment -- should complement these structural policy reforms. The Bank could make animportant contribution in helping Croatia implement this strategy and bringing the economic reformprogram to fruition, thereby enabling Croatia to join the other growing and increasingly prosperouscentral European economies closely associated with the European Union.

4. Dialogue and collaboration with Croatia have been extremely good since independence, reflectingCroatia's commitment to the rapid transformation of its economy. However, the Bank's approach hasnecessarily been cautious given the difficult situation in the region. Although a macroeconomic dialoguewas established and a reconstruction project was defined soon after independence, further progress in thedevelopment of a lending program was interrupted for about one year due to security concerns. Followingimprovements in the region associated with the Washington agreements of March, 1994, an EmergencyReconstruction Loan was approved in June 1994 and a Health Loan in February 1995.

5. Building on the in-depth discussions covering macroeconomic and sectoral issues over the last twoyears, the Bank now envisions a broad-based assistance effort that would support Croatia's ambitiousreforn program. A relatively large work program is proposed, although the actual amount and pace oflending will have to be carefully tailored to the evolving regional situation and to progress on the reformfront. The most desirable lending program would focus on helping Croatia during the critical period

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ahead in meeting the upfront costs ofstructural reforms and financing Box 1: Croatia: a Snapshotreconstruction as well as deferred Economy: Croatia was the second richest of the formerinvestments. Subsequently, lending would republics of Yugoslavia. Its 1994 per capita income wasbe maintained at more modest levels, as the US$2500, down from US$3350 before the war. The structure ofbacklog of deferred investment is made up, output is similar to that of an industrial market economy, withgrowth resumes, and Croatia regains fuller mnanufacturing accounting for only 30% of GDP (majoraccess to international financial markets. subsectors include shipyards, textiles, oil and chemicals, andOn the structural side, the Bank's lending agroindustries), agriculture for 10%, and services for 60%.

program proposes a series of quick- Population: Based on the 1991 census, Croatia's population isdisbursing policy loans supporting the about 4.78 million. After increasing at an average rate of 0.4%

per year during the last decade, population growth is expected toreform of Croatia's enterprise and banking taper off in the coming years. The population is aging: less thansector -- including key institutional 20% of the population is less than 15 years old, compared todeficiencies hampering the development of 27 % some 40 years ago; 13 % are older than 64 years, comparedthe private sector; reform of public to 7% 40 years ago. Population is evenly spread among regionsfinances; and reform of the agricultural with a density of 84.6 habitants per km2.sector. Investment projects would focus on Employment: Croatia has a well-educated labor force whichinfrastructure, environment and energy. currently stands at about 1.5 million; 46% are women. The

unemployment rate has increased substantially in recent years and

6 . The situation is not without risks, has now reached 13% of the total labor force.

Serious territorial tensions exist within External sector: Imports and exports of goods and services totalCroatia and in the region, and the Bank's about 100% of GDP, making Croatia one of the most openeconomies in Central Europe. With a total coasdine of 5,700 kmprogram could be jeopardized if either on the Adriatic sea, Croatia has considerable potential for furtherwere to intensify. However, the Croatian development of tourism and related services. Beforeauthorities have so far consistently independence, tourism was the key contributor to a structuraldemonstrated their restraint and surplus in the balance of services (equivalent to 10% of GDP)commitment to negotiated solutions. A which more than offset trade deficits (34% of GDP) and helped

generate current account surpluses (6-7% of GDP). This patterndeparture from these prudent policies was disrupted by the war, which caused tourism receipts to dropwould entail increasingly high costs on the by 90%. Although some recovery has taken place (to 40% ofeconomic front, making such a previous levels, in 1994), it is now expected to slow downdevelopment unlikely, although not because key tourism areas (southern Dalmatia) are still exposedimpossible. The Bank, therefore, will have to potential hostilities in neighboring Bosnia.to continue to exercise caution --monitoring the situation closely and ensuring our programs contribute as much as possible to an overallatmosphere of progress and cooperation in the region and commitment to a peaceful and prosperousfuture.

II. BACKGROUND AND RECENT PERFORMANCE

A. Political Background

7. Croatia declared independence from the former Socialist Federal Republic of Yugoslavia (SFRY)in June, 1991. Hostilities erupted almost immediately over portions of Croatia that had large Serbpopulations, as local Serb leaders, supported by the Yugoslav National Army, fought to control areassuch as Eastern Slavonia and the "Krajina"', representing about a quarter of Croatia's territory. Theseareas, still under secessionist Serb control, include nearly one-fourth of the two million hectares normally

Eastern Slavonia is adjacent to the eastern border of Croatia with the Republic of Yugoslavia and the"Krajina" is adjacent to the north-western border of Bosnia with Croatia.

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under cultivation, some major gas and oil fields, and large sections of major highways and railways.Although they were designated as U.N. Protected Areas (UNPAs) in January 1992, limited hostilitiesnonetheless took place around these territories within Croatia until March 1994, when a cease-fire wasconcluded with the Croat Serb leaders in these areas, ending hostilities within Croatia itself. Also inMarch, the "Washington Agreements" effectively ended hostilities between Croatian and Bosnian forces,and provided for a federation of Croat, Muslim and other "loyalist" Bosnians within the Republic ofBosnia and Herzegovina (RBH), as well as for a confederation agreement between Croatia and Bosnia.

8. Despite these improvements, serious tensions persist within Croatia and within the region. Apermanent solution to the de facto division of Croatia's territory has yet to be reached, and there iscontinuing political pressure to regain territorial control and resettle residents displaced from the occupiedareas during the war. However, Croatia has shown remarkable restraint and prudence over the UNPAsissue, trying to reach a negotiated solution with Croatian Serbs.2 Zagreb has also avoided majorinvolvement in the Bosnian conflict since March 1994, although the efforts to "activate" the new Bosnianfederation agreed in Washington have so far been insufficient, leading to ongoing difficulties, particularlyin Mostar and Herzegovina, where considerable tensions persist. The situation has improved moreradically in central Bosnia where concrete examples of peaceful cooperation have been evident in recentmonths.

9. Internally, President Franjo Tudjman was elected by Parliament in 1990 and re-elected in thedirect presidential election of August 1992 for a term of five years. Politics is dominated by his CroatianDemocratic Party (HDZ), which holds the majority in both the House of Representatives and the Houseof Counties (138 and 68 members, respectively). The second strongest Social-Liberal party holds 16seats in each House. Eight other parties and a significant number of independent candidates hold theremaining seats. Certain minorities are entitled to representation in the lower House, and the law callsfor proportional representation of minorities constituting more than 8 percent of the total population,allowing several Serb candidates to be appointed as representatives following the 1992 elections. Politicalprocesses in Croatia are evolving. The development of a fully stable and democratic society is mademore difficult by the regional environment and the unsettled issue of Croatia's territorial integrity.

B. Economic Performance

10. Pre-independence performance and legacy. The former Yugoslavia left a mixed legacy for itssuccessor states. Among its achievements, the Yugoslav economic system was far more market-orientedthan those of the planned economies of central Europe and the former USSR. Under the 'socialownership' system, ownership belonged to society at large, and enterprises were managed in adecentralized fashion and were free to make most pricing and investment decisions. The foreign traderegime was liberal, with the few quantitative restrictions occurring mainly in agriculture, low tariffs, andno trading monopolies. Competition between socially-owned enterprises was encouraged, and tradebetween Yugoslavia and western Europe took place largely on market terms. Under this system, fromits early years until 1980, Yugoslavia realized growth rates of 4.5 percent p.a. on average, resulting ina five-fold increase of GDP between 1950 and 1980. However, as in other soviet-influenced economies,this was extensive growth, associated with very high investment ratios averaging 25 percent of GDP, andwas financed by substantial external borrowing.

2 Efforts to agree on "economic reintegration" have been going on for some time under the auspices of theUSA, Russia, UN, and the European Union. An agreement signed on December 2, 1994 allows for re-commissioning of some infrastructure in the UNPAs and the continuation of negotiations regarding the return ofrefugees and displaced persons, pensions, and the opening of additional highway and railway sections.

- 4 -

11. Although the Yugoslav system avoided some of the worst excesses of bureaucratic planning,social ownership resulted in poor investment decisions and had the additional weakness of encouragingchronic wage pressures. While its weaknesses were masked as long as external financing was availableand economic growth took place, the 1980s' debt crisis highlighted the vulnerability of the Yugoslaveconomy and the system's major shortcoming: the lack of discipline of capital markets and privateowners. The scarcity of foreign financing caused investment, and therefore economic growth, to fallprecipitously and enterprises began to generate widespread losses. These losses were in turn financedby the banks which were owned by the enterprises themselves, and monetized by the National Bank ofYugoslavia (NBY), resulting in loss of monetary control and inflation. The successive stabilizationprograms launched in the late 1980s were unsuccessful, as they failed to break the web linking the State,banks and enterprises. The loss of political control following the death of Tito and the resultingprogressive dissolution of the Yugoslav Federation led ultimately to the refusal of the republics to financethe federal budget, to open recourse to monetary financing, and to the hyperinflation which Croatiainherited at independence.

12. The circumstances of Croatia's independence, the war and the dissolution of the former SFRY,worsened the economic decline that had begun under the federation. War inflicted considerable damage,estimated at several billions of dollars, on the country's infrastructure. Particularly hard hit were roadsand railways, telecommunications, energy, housing, and agriculture. The dissolution of the Yugoslavfederation disrupted trade among the republics, resulting in a loss of markets and the interruption of keysupply flows. And the war caused tourism revenues, a major source of foreign exchange beforeindependence, to fall to 10 percent of their 1990 levels. As a result of these supply and demand shocks,Croatia experienced a decline of about 30 percent in GDP between 1991 and 1993, with the industrialsector declining by over 50 percent.

13. Post-independence crisis management. In addition to the ongoing recession, seriousmacroeconomic imbalances had developed by the end of 1991. The first post-independence deficit in1991, although officially equivalent to 5 percent of GDP, was actually far higher with arrears and thequasi-fiscal losses of the enterprise sector taken into account, and caused inflation to accelerate to monthlylevels of 20 percent. The current account deficit, about 5 percent of GDP, became alarming in theabsence of any foreign exchange reserves -- which had been kept by NBY in Belgrade -- and of externalfinancing which had dried up as a result of the difficulties in allocating the former Yugoslavia's foreigndebt among Republics, and Croatia's subsequent suspension of debt service.

14. The Government had to resort to crisis management, focussing on rebuilding reserves while tryingto offset the inflationary effect of foreign exchange purchases by tightening credit and fiscal policies. Itwas successful on the external front. Thanks to the generation of unexpected current account surplusesin 1992 and 1993, foreign exchange reserves amounting to 2.6 months of imports were accumulated bythe end of 1993.3 The inflationary impact of the reserves inflow was partly sterilized and partly offsetby the reduction of the consolidated Government deficit to about 4 percent of GDP in 1992, and to halfthat in 1993, through tight cash management. However, the enterprise sector losses continued to forcemonetary creation, in spite of the Government's attempts to enforce restrictive incomes policies.Inflationary expectations, fuelled by widespread foreign currency indexation in the economy, helped boostinflation to monthly levels of 30 percent during the second half of 1993.

3 These temporary surpluses occurred in part as a result of some recovery in tourism activity, but weremostly due to exceptionally high levels of remittances from abroad -- the contribution of the large community ofCroatian expatriates to the war and reconstruction effort. Modest current account deficits are projected for 1995and beyond. The external balance remains vulnerable to changing remittance and service income flows.

-5 -

15. From hyperinflation to stabilization. Figure-1Building on the early successes in figure-c

MoIwtslInEkjtioh & 3RcI hl2 Bahnccaccumulating some foreign exchange reserves,and encouraged by consultations with the IMF 50 40.0X

and the World Bank, the authorities embarkedon a comprehensive stabilization program in 45 0r0%

early October 1993. To eradicate inflationary a30.0expectations, the program introduced a X 40foreign exchange nominal anchor (following C 35 20.0oa preemptive devaluation of 20 percent),supported by tight incomes and fiscal policies. t 30 1 AFor nine months, the wage bill of state and _

socialized enterprises was set by decree based 25

on ex-ante target inflation rates, to avoid 20 e.o.building past inflation into wage settlements;the zero fiscal deficit target was enforced on 15 -10.OX

a monthly basis. This stabilization strategy Dnc 91 Sep2 Spproved very effective: the real exchange rateappreciated, back to its pre-devaluation levels; |nfltion rate -- Real M2

inflation was curbed immediately after thepolicy package was announced (see Figure 1);and the price level actually declined between November 1993 and December 1994 (minus 2 percentcumulative). Although the structural problems and the quasi-fiscal losses in the enterprise sector had notbeen addressed in depth, stabilization was possible despite a rapidly growing money supply because acredible exchange rate anchor led to an increase in real money demand and a rapid remonetization of theeconomy: real dinar money increased by about 100 percent4 in the nine months to July 1994, from about15 to 27 percent of GDP, while inflation was slightly negative (see Figure 1).

16. The initial key to success was the credibility of the exchange rate anchor, backed by the tightfiscal stance, which broke inflationary expectations. The ensuing real appreciation created a 'virtuouscircle': given the openness of the economy, the real appreciation had a major moderating impact on thedomestic price level. It led to significant positive income as well as terms of trade effects, bothincreasing real disposable household incomes. Export performance was not significantly affected (Table1). This configuration of outcomes led to one of the rare cases where stabilization could get popularsupport -- the exchange rate-induced increase in real income offset some of the impact that the austerityprogram would otherwise have had. Building on the stabilization program, perhaps the most successfulanti-inflation program in the whole ECA region, Croatia introduced a new currency, the Kuna, on May30, 1994. It was also able to agree with the IMF on a Stand-by Agreement (together with a drawingfrom the Systemic Transformation Facility) covering a period of eighteen months, which was approvedon October 14, 1994. Croatia had been fully in compliance with all agreed IMF targets until recently,when it failed to reach agreement with Paris club creditors on an arrears clearance program by end 1994.The first review under the stand-by arrangement is expected to be concluded at the Executive Boardmeeting of April 10, 1995. With agreement of official bilateral creditors at the Paris Club meeting ofMarch 21, 1995, there are no known obstacles to conclusion of the review, and the restoration ofcompliance under the prograrn.

4 Mostly on account of purchases of foreign exchange.

Table 1: Economic Performance (1991-1994)

1991 1992 1993 1994

Real GDP Change -15.1 -12.8 -3.2 1.5Real Wage Change (avg) -21.4 -50.0 -9.1 35.6CPI Inflation (eop) 250.0 937.7 1151.1 -3.0General Government Balance (% GDP) -4.9 -3.6 -1.8 -0.3Current Account Balance (% GDP) -5.1 7.2 2.4 1.5Gross Reserves (months of imports of GNFS) 0.5 1.4 2.6 4.1Real broad money change (domestic) n.a. -34.7 -28.2 116.9Broad money velocity (GDP/av.m2) 4.1 6.1 10.1 7.5Exports (US$ million) 3,292 4,597 3,904 4.260

III. CHALLENGES, ECONOMIC PROSPECTS, AND THE REFORM AGENDA

17. Stabilization is, of course, only the first step to economic recovery. Croatia emerges from threeyears of recession and anti-inflationary policies with serious challenges ahead. Once a relativelyprosperous middle-income economy, Croatia saw its GDP fall by some 30 percent to its mid-70s levelsbetween 1991-1993. The economy is only now beginning to recover in 1994, growing at a modest 1.5percent. Households have also directly suffered. Fiscal efforts led taxes and social contributions toincrease from about 35 percent to 49 percent of GDP between 1992 and 1994.5 This, together withfalling output, caused household real disposable incomes to fall by more than 50 percent in the 1991-1993period. Price stabilization, for the first time in many years, and the income effect attributable to theappreciation of the real exchange rate helped convince the population to accept wage moderation in 1994.But this happy configuration has almost run its course, and growth must now resume rapidly ifstabilization is to remain socially acceptable. The medium-term scenario foresees that annual inflationcould be kept within a 3-5 percent range, and the economy could resume a sustained growth path withinthe next two years, provided key structural actions are rapidly undertaken by the Government. Suchactions are therefore at the core of the ongoing reform agenda.

A. Challenges and Medium-Term Economic Prospects

18. Consolidating stabilization. Although Croatia's stabilization program has been successful in theshort term, the main potential source of inflation -- the structural problem of the banking and enterprisesectors -- has not yet been eradicated. Since 1991, the Government has been seeking to harden budgetconstraints through enterprise privatization. These efforts have been relatively successful for small- andmedium-size units, because of a heavy emphasis on employee and management buy-outs. But the largestenterprises, accounting for some two-thirds of total assets and employment, are still in State hands (para.34). They are the main contributors to the losses recorded by the enterprise sector which reached some5 percent of GDP in 1994. The main reason behind these losses is the insufficient adjustment ofemployment levels in these enterprises to the decline in output, resulting in a sharp productivity drop over

5 This increase was partly the result of the effects of rapidly declining inflation on tax revenues -- the so-called Tanzi effect -- and in part reflected the resumption of Croatia's fiscal performance at historical levels,following the restoration of peace and the successful stabilization.

the already low 1990 levels.6 These losses continue to be partly financed by the banking sector, thereform of which has yet to begin in eamest.

19. Two factors helped cushion the inflationary potential of the lack of enterprise adjustment, andmade stabilization possible: the sharp decline of real wages during 1991-92, and the stabilization-inducedincrease in real money demand and the resulting remonetization that allowed the banking system tofinance enterprise losses in a way that was -- temporarily -- compatible with the stabilization objectives.But this cannot continue much longer. Real wages have been increasing regularly since the beginningof 1993, and unit labor costs are almost back to their 1990 levels. And the slow-down of remonetization,since the end of 1994, will bring back to the fore the old policy dilemma, i.e., the conflict betweenfinancing the build-up of foreign exchange reserves, the needs of the private sector, or the losses in theeconomy, with the risk of reigniting inflation.

20. The persistence of microeconomic imbalances has been factored into the design of short-termmacroeconomic policies under the IMF stand-by arrangement. To maintain external competitiveness, theauthorities will aim to prevent an appreciation of the foreign exchange rate. This could lead them toabsorb the excess foreign exchange supply, which would be consistent witlh the objective of building upreserves,' but would reduce the room available for credit expansion to the enterprise sector or forfinancing the Government. The program therefore aims at keeping the budget deficit close to zero (oran amount for which external financing is available). And, within total credit, the net exposure ofselected loss-makers to the banking system will be capped, thus helping harden budget constraints in thestate-owned enterprise sector and freeing resources for the private sector.

21. Recovery of investment and output. Growth has resumed in 1994, and is expected to accelerateto about 3 percent in 1995. Although significantly under-used production capacities may allow someinitial recovery of output, a major investment effort will be rapidly needed for such growth to besustained. Regardless of the war, such an effort would have been needed to make up for the precipitousdrop in fixed capital formation during the 1980s, from some 30 percent to 13-14 percent of GDP, torehabilitate and upgrade infrastructure, and to modernize many outdated enterprise facilities. The waronly compounded this situation, destroying equipment and infrastructure, and further depressing savingsand investment flows. Under our medium-term scenario, investment would therefore increasesignificantly from 14 percent to about 19 percent of GDP. The initial push would come from thereconstruction of infrastructure, and would be financed mostly by the Government, but also by the publicinfrastructure enterprises. Investment in production capacity would increase at a more modest paceinitially, and would then take over as enterprise restructuring and privatization unfolds. Such investmentlevels are relatively modest by the standards of middle-income, fast-growing economies, and may needto increase at a later stage. In Croatia's current context, however, they are considered acceptable, giventhat increased use of existing capacities will help for some time, and because most of the effort must befinanced out of domestic savings, given limited external financing.

22. Three factors will combine to limit the contribution of external inflows to Croatia's investmenteffort in the near future. First, apart from the international financial institutions, lending has ceased

6 Employment in the industrial sector decreased by 30% during 1991-93, but mostly because of exogenousfactors -- such as natural attrition, the departure of Serb workers, and enrollments in the army. This decline failedto keep pace with that of industrial production (about 50%). Moreover, it is estimated that enterprises were alreadyover-staffed by 15-20% even before the 1991-93 recession.

7 As one of the performance criteria under the IMF program, the Central Bank's reserves are to increaseby a minimum of US$260 million in 1995, or by 0.7 months of imports.

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following Croatia's suspension of debt service andthe protracted discussions on the allocation of Box2: Croatia's External Debtformer Yugoslavia's external debt (see Box 2). Following the dissolution of former Yugoslavia, theNew financing from bilateral and other sources debt contracted by identifiable borrowers waswould likely resume following the normalization allocated to each Republic (US$2.6 billion in thewith Paris Club creditors -- and at a later stage case of Croatia). The balance of the debt, whichwith London Club creditors8 , and has been could not be immediately allocated, amounts tofactored into our base scenario. New approximately US$3 billion, of which US$1 billiondisbursements would initially be more than offset to Paris Club creditors and US$1.2 to London Clubby increased debt service on account of arrears creditors.and unallocated debt (Table 2), but in 1997bilateral credit would pick up significantly. These The Paris Club has proposed a division of theprojections, agreed with the IMF, are unallocated debt based on the shares assumed byconservative. A real breakthrough in the political successor Republics in the Yugoslavia quota with thesituation could lead to a much greater inflow from IMF, i.e., 28.49% for Croatia. Croatia agreed toprivate creditors in the late 1990s. Second this principle during the summer of 1994, and isC now in the process of negotiating a reschedulingbecause of the political uncertainty within Croatia with the Paris Club (February, 1995).and in the region, direct foreign investment (DFI)is not projected to resume as fast as it could London Club creditors have not accepted the IMFotherwise. DFI flows came to a halt in 1991-92, key principle and have sought to require that Croatiapicked up somewhat in 1993 (US$75 million), and - like Slovenia - take up a higher proportion ofare projected to progressively reach more former Yugoslavia's unallocated debt, using as ansignificant, but still modest, levels of US$300 argument the 'joint and several liability' clausemillion per annum over the medium term. And signed by all former Republics.third, Croatia needs to continue to build up itsforeign exchange reserves because of the openness Discussions on debt allocation are complicated byof its economy and the nature of its exchange rate the lack of progress on a symmetrical issue: the

poliy. Uder ur bse acroscenrio,reseves foreign exchange reserves of former Yugoslaviawouldcy incere ourbase fr m a2.6rto scenabiou 5o s o (about US$3.4 billion) have been kept by the new

Republic of Yugoslavia after the dissolution of theimports, a level comparable to that achieved by former Federation, and their status is still beingmost countries of the region, which translates into discussed in the framework of the Internationalan additional annual financing need of US$350- Conference on Former Yugoslavia in Geneva.400 million. These three factors mean that thecapital inflows assumed under the base casecombine to allow only moderate current account deficits less than 1 percent of GDP, over the comingyears.

23. The external constraint means that domestic savings will have to increase significantly, by about4 percent of GDP over the next 4-5 years. They would have to come from two main sources. First, areduction of the losses currently incurred by the enterprise sector could reduce their aggregate dissavingsby 2-3 percent of GDP. This requires the rapid resolution of the enterprise losses and banking systemproblems. Public sector savings, which need to increase by about 2 percent of GDP, will have to begenerated mostly on the expenditure side by reducing public consumption and transfers, since, to reducedistortions, high tax rates need to be contained, or even slightly reduced (paras 28 - 30). Taking intoaccount the need to accommodate deferred expenditures, such as the cost of enterprise and bankrestructuring, the Government will therefore be able to contribute to the savings effort only through major

s Negotiations with London club creditors are more arduous -- as in the case of Slovenia -- because ofthe 'joint and several liability' clause signed by all former republics.

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cuts in its current spending and transfer programs, as spelled out in more detail under 'Reforning PublicFinance', below.

Table 2: Croatia - Capital Inflows (1995-1999)

In US S Million 1995 1996 1997 1998 1999

LT capital inflows (net disbursements) 281.3 412.3 388.2 305.5 333.1

Multilateral creditors 356.8 186.9 51.6 32.0 52.6

olw IBRD 172.4 117.9 61.4 50.6 69.6

o/w IMF 146.2 -7.0 -98.2 -96.1 -72.1

o/w EBRD/EU 67.0 95.0 100.0' 100.0' 100.0'

Official bilateral creditors -40.6h 52.4 71.0 96.8 146.1

Private creditors -134.9 -77.0 -34.4c -123.3 -165.6

Foreign direct investmnent 100.0 250.0 300.0 300.0 300.0a. estimated; b. Paris Club rescheduling expected to take place; c. London Club reschedul-ng to take place.

24. Under this base macroeconomic scenario, Croatia would be able to sustain an annual growth rateof 5 percent in the medium term. This may appear ambitious, but it would only allow Croatia to recoverabout 90 percent of its pre-independence GDP by the end of the decade, i.e., a level of GDP per capitaequivalent to US$3,100, assuming a constant real exchange rate. The expansionary trend of the publicsector would have been reversed, with the Government reducing its share in GDP by about 2 percent,but providing a larger contribution to the investment effort than at present. And private consumptionwould have been allowed some much-needed recovery, an increase of about 20 percent, despite its declineas a proportion of GDP (Table 3).

Alternative Scenarios and Risks

25. There are two other scenarios that could unfold. A first 'policy failure' scenario couldmaterialize if the Government failed to rapidly implement reforms, for example, in the enterprise andbanking sector. Some growth could initially take place, based on the good performance of the privatesector, and under-utilized capacity. But the increasing financing requirements of loss-making enterprisesand their monetization would no longer be consistent with macroeconomic stability. Investment wouldbe constrained by the lack of savings and high real interest rates, and Croatia would revert to the formerYugoslavia's disease: simultaneous inflation and stagnation.

26. A second "politicalfailure' scenario could result from unfavorable developments on the politicaland military fronts. A resumption of hostilities, either on a larger scale in Bosnia, or in Croatia'sUNPAs, could have three distinct or overlapping sets of economic consequences. First, the increase inmilitary expenditure would probably result, at least in the short-term, in a fiscal deficit and inflationarypressures. A return to inflation, even at low levels, could cause a reversal of expectations and a declinein money demand, and lead the country into a new inflationary spiral. Second, major hostilities couldresult in the destruction of key infrastructure or enterprise facilities, and cause a supply-shock-inducedoutput decline. And third, the psychological impact of hostilities could affect tourism activity, andtranslate into a large current account deficit that would probably have to be financed through a decreaseof foreign exchange reserves. In any case, much of the past years' achievements would be reversed,macroeconomic management would suffer from a loss of hard-won credibility, and the costs of the nextstabilization attempt would be considerably higher.

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Table 3: A Medium-Term Growth Scenario

1994 1995 1996 1997 1998 1999

GDP Growth Rate 1.8 2.8 4.5 5.0 5.0 5.0Inflation (eop) -3.0 3.0 3.0 3.0 3.0 3.0

Percent of current GDP:Total Investment 14.2 15.6 17.7 18.7 18.8 19.1

Non-Government Investment 11.9 12.2 13.2 14.3 14.6 15.1Government Investment 2.3 3.4 4.5 4.4 4.2 4.0

Domestic Savings 13.5 14.5 16.6 17.9 18.5 19.0Non-Government Savings 11.6 11.6 13.4 14.2 15.0 15.5Government Savings 1.9 2.9 3.2 3.7 3.5 3.5

Resource Balance 0.7 1.1 1.1 0.8 0.3 0.1

Source: World Bank estimates.

B. The Reform Agenda

27. The Valentic Government, which came to office in February 1993, has demonstrated its capacityto gather political support. particularly when it came to enforcing the tight fiscal and incomes policiesthat underpinned the success of the stabilization plan. The Prime Minister and his team are convincedthat the initial achievements could easily be reversed, if not followed rapidly by the implementation ofthe key structural reforms discussed earlier. The Government is preparing to launch, in 1995, a multi-year reform and investment program that would lay the basis for a strong and sustained recovery inCroatia. The program revolves around three major themes: reforming public finance; fostering privatesector-led growth; and rebuilding and upgrading infrastructure.

Reforming Public Finance

28. The costs of Table 4: General Government Revenues and Expenditures*rehabilitation and In % of GDP 1991 1992 1993 1994damage repairassociated with the General Government Revenues 33.3 32.9 33.2 43.3war, including the General Government Expenditures 38.2 36.5 34.9 43.6massive burden of Capital Expenditure 0.8 1.6 1.6 2.3refugees, and the Current Expenditure 37.4 34.9 33.3 41.3need to develop anew Pensions 10.8 7.7 7.9 8.4the institutions of Defense 5.3 7.2 7.8 9.2

govenunent in a General Public Services 5.3 4.1 4.3 9.2governmnent m a Health 7.9 8.2 6.4 7.4newly independent Economic Subsidies 2.9 3.2 2.9 1.3c o u n t r y, h a v e Social Safety Net, Refugees 2.0 2.4 2.0 2.6resulted in a Education 3.2 2.0 2.0 2.5considerable increase Bank/Enterprise Restructuring 0.0 0.0 0.0 0.7i n p u b I i c Fiscal Balance 4.9 -3.6 -1.8 -0.3

expenditures, which central government only; totals may not add due to rounding.reached about 45percent of GDP in1994 (see Table 4). But more fundamentally, this increasing burden also brought about a serious

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deterioration of the structure of government finances. On the expenditure side, defense, previously afederal responsibility, now absorbs over 9 percent of GDP; support to refugees and displaced persons,2-3 percent of GDP; and the cost of general State functions (the additional costs of formerly federalpublic administration, a new layer of local Government, foreign embassies, etc), increased to more than9 percent of GDP. Despite increased tax revenues, these new priorities constrained the growth or ledto drastic reductions in some important expenditure areas: the level of public investment (2.3 percent ofGDP in 1994) is still very low in view of the existing needs; expenditures on education are relatively low;and pension expenditure decreased by 2 percent of GDP between 1991-94. Other expenditures such asthe cost of bank and enterprise rehabilitation, were simply deferred. Some of these choices are notsustainable because they mortgage future growth (e.g., investment spending and outlays for bank andenterprise restructuring) or entail social inequities. For instance, the real value of pensions fell across-the-board as a result of inflation, causing major hardship for some, even while the overall systemdependency ratio remained high because of generous eligibility criteria. On the other hand, theGovernment must be given credit for establishing a well-targeted 'social safety net' system in the formof cash and in-kind support to those below the poverty line, that mitigates the impact of wage and pensionreductions.

29. The estimated range for urgently needed "catch up" expenditures to support reforms andundergird future growth is from 5 to 8 percent of GDP. For example, investment should increase by 2-3percent of GDP to cover the cost of infrastructure rehabilitation deferred and some formerly federallyfinanced investments; and enterprise and bank restructuring should cost another 2-3 percent of GDPduring the initial years, over and above what is already being spent.

30. On the financing side, there is no room for increasing the burden of tax rates. The bulk of therevenue rebound during the past three years has been generated through unreformed, distorting taxes thatare a holdover of the earlier system. Although the Government did introduce a new personal income taxand a corporate tax in 1994 and has made substantial progress towards enforcing tax compliance, it stillderives two-thirds of its revenues from a cascading sales tax (15 percent of GDP), high payroll taxes --over 50 percent of wages -- that distort labor incentives and import duties that militate against exports(3.5 percent of GDP). However, a modest revenue increase can be anticipated from a series ofefficiency- and compliance-enhancing tax and tax administration reforms. The Government plans tocontinue modernizing the tax system, including: (i) the introduction of a VAT to replace sales taxes,expected to take place in early 1996; (ii) further progress in tax administration, improving tax complianceand capturing grey market activities; and possibly (iii) the substitution of direct taxes (personal andcorporate) for some of the existing payroll taxes as part of the consolidation of the financing of the healthsystem within the general budget currently under consideration. Together these steps should contributesome 1-1.5 percent of GDP (Table 5). In addition, the government intends to mobilize a hitherto untappedresource, i.e, direct sales of selected high-value enterprises (or parts thereof) to domestic or foreigninvestors (para. 37). Privatization revenues are not expected to be significant since the government'schoice of privatization tracks emphasizes speed, rather than revenues, per se. Nonetheless, privatizationproceeds, estimated at some 0.5-1 percent of GDP, as a non-recurrent resource, would be suitable tocover future one-time outlays or actual liabilities (foreign debt, or the cost of bank rehabilitation), or tofinance part of the reconstruction effort.

31. On the expenditure side, the Government's fiscal strategy is ambitious and calls for reducingthe role of government, and making room for growth-enhancing outlays within a reduced expenditureceiling. Three sets of actions are planned. First, key structural reforms are planned to ensure the long-term sustainability of previous expenditure reductions achieved through tight cash controls: thereorganization of the delivery and financing of health services has already begun; the elimination of wage-indexation of pensions, already carried out, and the reform of pension entitlements would allow pensionexpenditures to be maintained at their current levels, a relatively modest 8.4 percent of GDP. Second,

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the Government will place special emphasis onaccommodating, within the limited spendingenvelope, deferred investment outlays that have a Table 5strong potential for fostering economic recovery. Financing investments and the % GDPThese include investment expenditures for incremental costs of Reformreconstruction and infrastructure modernization,and the costs of enterprise and bank restructuring, Additional Investments/ Expenditures 5 - 8each likely to cost an additional 2-3 percent of associated with reformsGDP per annum during the initial years. Public 1.5enterprises will also contribute to investment Better Tax Compliance 1.0 -finance. And third, the Government will reduce Privatization Revenues 0.5 - 1.0other current expenditures by the equivalent of 3- l4 percent of GDP. Considering the recent Current Expenditure Cuts, including 3.0 - 4.5reductions in many spending programs, including defenseeconomic subsidies, the Government will seek Incremental Foreign Financing 0.5 - 1.0most of the required savings in two areas, generaladministration, and defense expenditure. Inparticular, the stabilization of regional tensionsassumed under the base case should facilitate a reduction in defense expenditures from their recent build-up (Table 4). In this case, foreign financing could complement Croatia's domestic spending and revenueadjustments to ensure the financing of the essential reforms is vouchsafed.

32. This fiscal adjustment is ambitious, but is deemed feasible, and is consistent with Croatia's IMF-supported stabilization program. However, the exact level and phasing of the needed outlays will dependon available resources: the balancing item, and the source for any necessary adjustments, will likely bea delay in financing the deferred investment backlog, as the government is committed to ensuring thecosts of bank and enterprise restructuring will be met.

Encouraging Private Sector-led Growth

33. In the former Yugoslavia, the private sector was permitted to play a sizable role alongside thesocially-owned enterprises, especially in small scale agriculture, retailing and tourism. This private sectorpresence in the economy was significantly reinforced after Croatia's independence, as the authorities madefurther progress towards the privatization of the socially-owned sector. As a result, the private sectortoday generates about 45 percent of GDP, and is bringing a substantial contribution to the currentrecovery. The former Yugoslavia's relatively undistorted incentive framework, inherited by Croatia, hasprovided a favorable environment, as compared to other countries in the region. Indeed, the maindistortion to the incentive system derives from the absence of clear owners in socially-owned enterprises,and the singular Yugoslav system of enterprise-owned banks. The Government intends to build on thedynamism of the private sector to foster growth. Its agenda calls for accelerating privatization in theenterprise sector, strengthening banks, and promoting a conducive environment for private sector growth.

34. Privatization Policies. Under the p ivatization strategy developed immediately following Croatia'sindependence, socially-owned enterprises were divided into two groups. The large infrastructure andutilities companies came under direct State ownership with the designation of 'public enterprises'. Theseenterprises are 10 in number and account for about 10 percent of GDP. They include: INA, the biggestCroatian enterprise, a large oil conglomerate, diversified in chemical products, tourism, and otheractivities; HEP, the electricity company; HZ, the railways company; HPT, the post andtelecommunications company; and others in the forestry, shipping, broadcasting, publishing, and watersectors. The second group included the socially-owned enterprises (SOEs). These were targeted forprivatization under the Law on Ownership Transformation (1991). About 2,000 of 2,900 SOEs -- 70

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percent of the initial number and about 50 percent of SOE assets -- were partly or totally privatized byend-1994, through a bottom-up, voluntary approach which often resulted in management or employeebuy-outs. Another 350 were commercialized, allowing the Government to regain direct ownership andmanage their sale. By mid-1995, there are to be no SOEs left: 80 percent of them, or about 2,400, willbe privatized, and the other 500 will be commercialized. These last 500 are the largest and most capital-intensive, and also include the most troubled of the initial stock of socially-owned enterprises. As aresult, they are ill-suited for the 'decentralized' privatization methods emphasized by Croatia so far, andthe pace of privatization has recently slowed down. The only other sale method being used, auctioningoff through the Stock Exchange, has not proved effective because the floor price of enterprises has oftenbeen set too high, and Croatian capital markets are underdeveloped.

35. Initially, the privatization program did not include public enterprises, which had traditionally beensubject to loose Government control. Never profitable, public enterprises incurred heavy cash lossesduring 1991-92 as a consequence of damage and loss of traffic resulting from the war. Beginning in1993, the authorities dramatically reinforced their monitoring and control of public enterprises,establishing an ad hoc structure reporting directly to the Government. Losses were reduced through cashcontrols and tariff increases.

36. The Government is now determined to accelerate privatization and to expand its scope to thepublic enterprise sector. It is developing a new privatization strategy under which the sale of allremaining formerly socially-owned enterprises (about 500) would be completed within a two yeartimeframe, using for the first time a multi-track approach: mass privatization, direct sales to domestic orforeign investors, and improvements to existing methods, including, allowing market-clearing auctionprices, and for trade deals, prices below initial valuations.

37. The Government will carry out by mid-1995, a 'mapping' of privatization, distinguishing betweenthose enterprises most attractive for immediate trade deals and public offerings (e.g., tourism, hotels),those to undergo mass-privatization (larger enterprises, including part of the capital of public enterprises),and those (particularly the remaining small and medium enterprises) to be privatized through improvedexisting methods. Companies temporarily set aside for trade deals that remain unsold after 12 monthswould revert to other privatization tracks. Conglomerates would be broken up and particular programsdeveloped as needed in some subsectors, for example the large tourism industry, which represents asignificant portion of the remaining state-owned assets. The government's preferred model for massprivatization would seek to ensure effective governance of privatized enterprises through investmentfunds. In addition, some 10-20 percent of privatizable assets will be earmarked for a politically sensitivetarget population -- those displaced by the war. This package of privatization methods is not likely togenerate the very substantial privatization revenues that, e.g., Hungary's emphasis on direct sales hasdone, but will nonetheless serve to supplement budgetary resources and help to finance one time reformrelated outlays.

38. The Government is also preparing the privatization of the public enterprise sector. Following thecommercialization of all public enterprises in 1993-94, the Government aims to move ahead with thedivestiture of their non-core assets, including real estate, which is expected to be completed by mid-1996.The sale of their core assets will take place within a 2-3 year timeframe, starting in early 1996, once aregulatory framework for the private provision of public services has been established.

39. Rehabilitation and privatization of problem banks. The objective of private sector-led growthrequires not only the acceleration of privatization, but well-functioning financial intermediaries. A largepart of the banking system's problems lies in the losses incurred by its main borrowers. Thus addressingthe capital adequacy and incentive issues in the banking sector jointly with the problems in the enterprisesector is key. The Government is preparing a comprehensive reform of the banking system that would

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address both its incentive and ownership structure and its financial soundness. The Government'sprogram is designed to place the banking system under a sound incentive framework that will avoid therecurrence of the present problems and enable it to channel new flows of resources to a wider base ofsounder borrowers, at a lower intermediation cost. Four sets of actions are planned. First, the five mosttroubled banks, accounting for about 50 percent of the banking system's assets will be taken over by agovernment restructuring agency, which will seek their liquidation or privatization. To make theirprivatization feasible, a preliminary balance-sheet clean-up will be carried out, as a result of which thebanks will be substantially downsized, exposures to large problem borrowers will be carved out, andprocedures established for the work-out of problem loans. The reforms will effectively sever the tiesbetween banks and their enterprise-owners. In addition, the legal and regulatory framework for bankswill be strengthened. New bank supervision standards will be implemented with the aim inter alia ofeliminating the past widespread related-party lending practices endemic to the forrner Yugoslav enterprise-owned banking system.

40. In addition, capital market infrastructure will be developed to promote financial deepening andto reinforce competition within the financial system. Measures are already underway to set up a modernregulatory framework for capital markets and to modernize the stock market, both of which are neededto facilitate the planned mass privatization program and the entry of institutional investors.

41. Private sector development is also key in the agriculture sector. Croatia's agricultural economyremained stagnant during the 1980s, reflecting the general decline suffered by the SFRY economy. Animportant factor was the inequitable allocation of resources between the socially-owned enterprises in theagriculture sector, (the agro-kombinats), and private family farmers, with nearly all support going to theformer. Other factors contributing to inefficiencies included over-capacity in agro-industry and highdomestic market protection, resulting in inefficient and high-cost production. Croatia's agriculture policyhas, however, been moving steadily towards the model followed in more liberal market economies. Allconsumer prices have been decontrolled. Interest subsidies have been almost completely discontinued aspart of the stabilization program, and agriculture's call on the budget has been reduced from over US$225million in 1990 to US$90 million in 1994. Moderate levels of support for farmers are, however, stillprovided through the trade regime, and some quotas remain, in particular those on sugar, wheat, maizeand some agricultural inputs.

42. Through its "Agricultural Strategy Statement" of December 1994, the Government has made aclear commitment to promoting the development of private farmning within the framework of a market-driven economy. The objective of Government's agricultural policy is to promote efficiency inproduction and marketing, and to ensure the competitiveness of the sector in world markets. This wouldbe achieved by further reducing and restructuring the direct budget support to agriculture production toeven more modest levels, replacing all import quotas with tariffs, and reducing tariffs under the WorldTrade Organization's developing country regime. Policy actions will also include changes in land andasset ownership through the privatization of agro-koombinats and the 20 percent of land that still remainssocially owned (80 percent of all land in Croatia is already in private hands.) The privatization ofpublicly-owned agroprocessing enterprises is also envisaged, although the timetables have not yet beenfirmly established. Other aspects of the government's program include improving rural financial services;development of farm support services; and restructuring of the agricultural pension fund.

43. Supporting environmentforprivate sector development. The Government is aware that the growthpotential of an expanded private sector will not materialize until a supporting environment similar to thatof the market economies is established. To reach this objective, further reforms are needed in the legalframework, tax structure, and the financial system. First, and already under way, is the reform of thelegislative framework and of the judicial system. A major problem under the social ownership systemhad been the inefficiency of exit mechanisms and the enterprises' difficulties in laying off workers without

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long notice and costly severance benefits. Thus, the Government's priorities are to enact a newBankruptcy Law and a Law on Labor Relations, facilitating lay-offs in the case of economic redundancy.Second, tax reformn will be continued, with a view to broadening the tax base, reducing tax rates,strengthening the tax administration to improve compliance, and replacing distorting taxes with moreneutral ones.

Rebuilding and Upgrading Infrastructure

44. In the infrastructure sector, Croatia must not only deal with war damage, but catch up on yearsof low investment levels and adapt its infrastructure to the requirements of a changed and growingeconomy, increasingly integrated with Western markets. Transport demand patterns are changingsignificantly: there will be a shift away from rail transport towards road transport, better suited to the newindustrial structure and a deregulated transport environment. And, Croatia will become less transportintensive in the future, approaching Western European levels. The Government is developing a medium-term investment planning framework for transport and is formulating a plan for ports to increase theirefficiency. In the power sector, although a decrease in demand in recent years helped the system toadjust to loss of power supply from sources in Serbia, Bosnia and Herzegovina, and the UNPAs, newinvestment will be needed to upgrade and rehabilitate facilities, to provide for expected future increasesin demand and to meet more stringent environmental standards.

45. The requirements in the infrastructure sector are large. Within the planned increase in budgetaryinvestment outlays, the Government will emphasize selectivity along two priority lines. The first priorityis the reestablishment of interrupted comnmunications links within Croatia proper (roads, railways, power)and the reconstruction of housing units in order to allow the resettlement of displaced households.Beyond the immediate reconstruction efforts, the backlog in rehabilitation and modernization ofinfrastructure needs to be addressed to increase domestic productivity and competitiveness in Westemmarkets. The Government is committed to providing financing for infrastructure out of the generalbudget, at least in the early years. Given the magnitude of the effort required, however, special attentionwill be paid to leveraging the State's contribution through private investor resources and promotingprivate-public partnerships in the future, as and when conditions make it possible to attract suchfinancing.

C. The External Environment

46. Croatia has traditionally beenan open economy: beforeandependence, econortpls m portseof Table 6: Croatia - Direction of External Trade (1993)independence, export plus imports of(in percent of total)goods and services totalled about 100percent of GDP, with about 60 Exports Importspercent of exports of goods directed European Union 53.5 48.2to industrial countries (See Table 6). Olw Germany 22.9 21.2Croatia typically ran a trade deficit Italy 21.2 18.9

(3-4 percent of GDP), that was more OLher Industrial Countries 8.3 15.0than offset by a large surplus in the Former Yugoslav Republics 24.7 16.6balance of services (over 10 percent Former CMEA Countries 8.6 11.0of GDP), predominantly generated by Other 4.9 9.1tourism activities. The war and the Total 100.0 100.0dissolution of former SFRY broughtabout some durable changes to thesepatterns. The current account underour base macro scenario is expected to swing from the surpluses of the pre-war years into modest but

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sustainable deficits: it remains vulnerable since tourism activity will take years to fully recover its pre-warlevels and the assistance of the Croatian community abroad, which translated into high levels ofremittances in 1991-92, is expected to subside as Croatia's situation is increasingly perceived as 'normal'.

47. To support growth and maintain external balance, Croatia is emphasizing a strategy of opennessand integration with Western Europe. The trade regime is fairly liberal, with quantitative restrictionsapplying to only a few products in the agricultural sector, very low tariffs and no trading monopolies.Given the orientation of trade patterns and relative openness, Croatia will benefit from the Europeanrecovery, including the growth that is now evident in central Europe. However, the still-unresolved debtissue and the regional conflict further south remain negative influences. Private sector flows are virtuallynon-existent, excepting for a modest amount of direct investment, and Croatia's access to financialassistance from the international community also remains limited: financial support is currently providedprimarily by the World Bank, the IMF, and the EBRD. Bilaterals mostly provide technical andhumanitarian assistance. And financial support from the EU, including new lending by EIB, is expectedto take some time to materialize.

IV. THE BANK GROUP'S COUNTRY ASSISTANCE STRATEGY

48. Although the Bank began to establish a macroeconomic dialogue and to assist Croatia in definingan emergency reconstruction project fairly soon after independence, active cooperation was interruptedfor about one year due to security concerns. The March 1994 cease-fire, and the Washington agreementsbetween Croatia and Bosnia (para 7), allowed the Bank to adopt a more active stance, leading to theBoard's approval of the Emergency Reconstruction Project (Ln. 3670-HR)9 , the first loan to the Republicof Croatia, in June 1994 and the Health Project in February 1995.

49. The Bank will remain cautious in moving ahead with an assistance program, carefully monitoringthe regional situation, which is still a cause for concern. However, in the absence of a majordeterioration in the region's geo-political situation, and on the basis of GOC's efforts over the last yearto maintain and further its rapidly imnproving standing with the international community, as well as itsprogress on a difficult economic reform program, the time appears to be right for major international andbilateral efforts to assist Croatia.

50. We can now take advantage of the excellent dialogue that has already been established, both onthe economic front and in several major sectors, to implement a broad-based strategy that assists Croatiain bringing its economic reform program to fruition, and establishing itself as a small, but relativelyprosperous part of the European economy, and a contributor to stability in the region. Our assistanceprogram would support the main areas of emphasis in the Government's strategy, and provide financialresources when they are most needed. At this critical stage of Croatia's transition from stabilizationtoward sustained growth, and considering the remaining constraints on external financing, strong supportfrom the Bank can play a critical role, not only in terms of lending, but also in the form of policy work.Assistance would subsequently be scaled down and become quite selective in later years.

9 The loan provides funds for reconstruction, primarily of war-damaged infrastructure and agricultural assets,but also for some housing and community facilities. The project is in the early stages of implementation; 68% ofdisbursement under the project is expected to take place by the third quarter of 1995. The security concerns alsoprompted some safeguards in project design regarding the geographical location of investments to be financed underthe project.

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51. The Bank's support, coordinated with EBRD's assistance, together with Croatia's own efforts andthe humanitarian efforts of many bilaterals and NGOs, have assisted Croatia to the point where most ofthe priority reconstruction work in the Government-controlled parts of the country has been assuredfinancing'". The Government is now able to focus its attention on its strategy for putting the economyon a private-sector led growth path. Our work program mirrors the main themes of the Government'sstrategy, making use of both investment and adjustment lending, as well as a range of other instruments,including focussed and analytic economic work. A Country Economic Memorandum (CEM) would bediscussed with the authorities in FY96.

A. Lending Instruments and the Base Case Scenario

52. Our base case lending scenario assumes continued macro-economic stability, good progress oneconomic reform and, on the political front, no major hostilities involving Croatian defense forces inCroatia or in Bosnia, but continued uncertainties and potential instability in the region. Because of theheavy resource needs due to the war and economic restructuring, and the initial "backlog", or gap, inBank financing, the base case incorporates a major work effort by the Bank to give impetus to reformsand support a major investment effort. Implicit in the base case is the assumption that financial flowsfrom other creditors, in particular bilateral and multi-lateral sources, would resume in the medium term(Table 2), allowing Bank net lending to decrease progressively.

53. Lending levels would be around US$200 million during FY95-96, and level off to US$100-150million during FY97-98 as Croatia reaches a sustainable growth path, resolves its debt problem, regainsfuller access to international financial markets, and as financing from other official flows comes onstream. The precise base case lending composition and volume would be determined by specific triggersattached to individual lending operations; the triggers that anchor the proposed base case lending programare described below. The base case reflects both the strength and timing of the Government's reformefforts, as well as the expected results of these efforts during the projection period, but is tempered withcaution because of the territorial and regional uncertainties (Table 7).

54. In most of the sectors where the Bank plans to assist, reforms have already begun and progresshas been sufficient for the Bank to consider a serious program of cooperation with the Government.Important benchmarks or triggers for the base case level of lending to materialize include, in the financialand enterprise sectors, government takeover of key troubled banks, privatization of an initial tranche ofthe formerly socially owned enterprises and agreements on containing public enterprise losses to 1.5percent of GDP in 1995. We would also expect to see, in the agricultural sector, some privatization ofagro-kombinats, and in public finance, the major reconfiguration of public expenditures needed to financethe incremental costs of reforms and deferred investments.

55. Our support to GOC's program would incorporate a mix of adjustment and investment operations.Adjustment lending would account for about half the lending projected for the first, and possibly thesecond, year -- in line with the need to mitigate the "up-front" costs of the reforms and in line withCroatia's balance of payments needs. It would address the remaining distortions in the incentiveframework (in the bank/enterprise sector and in agriculture) and boost the private sector presence in theeconomy to a critical mass. The program would become increasingly concentrated on investment lendingthereafter, addressing the accumulated investment backlog and underpinning growth. Investmentoperations would, as a rule, focus on key institutional deficiencies, particularly those hampering private

10 Within the reconstruction project supported by the Bank, some funds can be made available forreconstruction in the areas where the Government currently does not have full access, including the UNPA zones,should this become feasible during the project's implementation period.

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sector development. Both kinds of lending instruments would support the Government's strategicobjectives: (i) reforming public finance; (ii) encouraging private sector growth; and (iii) rebuilding andupgrading infrastructure (see Table 7 for details).

Reforming Public Finance

56. Public finance reform will be an early and strong area of focus for the Bank, because of itscentral importance for ensuring monetary stability, resuming key public investment, and supportingprivate sector growth. It will be the main theme of the first CEM for Croatia, planned for FY96. Thepreparation of the CEM could provide a basis for a major operation in the public finance area, a PublicSector Adjustment Loan (PSAL). The PSAL would support a major change in the role of the state,reform of expenditure programs, including outright reductions in current expenditures, provision forgrowth-enhancing investment outlays and structural reforms where they are needed to sustain reducedspending, e.g., in the pension area. On the tax side, the PSAL could assist GOC in completing the taxsystem reform, particularly with the establishment of a value added tax in early 1996 and theimprovement of tax administration and tax compliance. The triggers for this operation would include,in addition to a satisfactory macroeconomic framework, indication of the Government's willingness toreassess major spending programs, including some sensitive and hard-to-cut areas such as defense.

57. Although the PSAL would be our main assistance vehicle, the Bank would stand ready to engagein smaller, free-standing investment operations supporting public sector modernization, where they wouldallow the Bank to provide timely support to well-designed programs at the policy-making stage. TheHealth Project, approved by the Board in February 1995, is an example. Relatively modest in size, anddesigned to be implemented quickly, it effectively supports GOC's effort to reorganize the financing andthe delivery of health services, thus making previous expenditure reductions more sustainable.Considering the investment needs of the sector, good performance under this project could trigger afollow-up operation.

58. The Bank would also assist in various other ways in developing a more efficient and marketresponsive state administration. For example, we are currently assisting Croatia in improving theregulatory framework for public investment through an Institutional Development Fund (IDF) grant forthe preparation and implementation of a public procurement law.

Encouraging Private Sector-led Growth

59. Our support to GOC's efforts to foster private-sector growth would include both adjustment andinvestment operations. Adjustment lending would be used to address the remaining distortions in theincentive framework and to support the continuation of privatization. Investment operations would as arule focus on key institutional deficiencies, particularly those hampering private sector development.

60. The Government's strong conmmitment to accelerating enterprise privatization, enforcing a hardbudget constraint and strengthening and rehabilitating the banking system has allowed us to make goodprogress towards designing an Enterprise and Financial Sector Adjustment Loan (EFSAL), which couldbe presented to the Board next fiscal year. Board presentation would be subject to enactment of the lawembodying the new enterprise privatization strategy, and the effective takeover of the key problem banksby the State as a prerequisite to their privatization.

61. Several investment operations have been identified that complement the adjustment program. ACapital Markets Development Project would support privatization and attract foreign investors, by settingup a modern centralized securities registry and strengthening private contractual savings institutions, suchas insurance companies and pension funds. Preparation of this project would depend on the enactment

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of appropriate legislation, specifically a new Securities Law and a new Law on Investment Funds. In thefinancial sector, a credit line directed to private enterprises, the Investment Recovery Project, could helpjump-start the financing of the new cycle of private investment anticipated as a result of the financial andenterprise reforms. It would be triggered by initial progress with banking system reform, and strongevidence of unsatisfied private sector demand together with continued macro stability. In case ofcontinuing need and satisfactory implementation, it could be followed by a repeat operation. In theemployment area, the Bank could help mitigate the consequences of restructuring-induced unemploymentby supporting labor market flexibility. An Employment and Training Project, focussing on adult trainingand job placement policies, would be phased with progress toward EFSAL implementation, including theenactment of a new Labor Relations Law facilitating layoffs for economic redundancy.

62. In agriculture, a first Bank-supported operation to foster private sector growth, the FarmerSupport Services Project, modest in size, would help provide private farmers with key services, and assistthe Ministry of Agriculture and Forestry in strengthening its capacity to formulate policy. Individualcomponents under this project would be contingent on progress made in liberalizing remaining restrictionson imports (maize, sugar and agricultural inputs), increased competition in veterinarian services, andother farm input-related policies. Building on the progress made under this operation, we expect toprepare an Agriculture Sector Adjustment Loan (ASAL), supporting the implementation of theGovernment's new strategy statement, especially its privatization and land reform components and theremoval of remaining trade-regime distortions. Proceeding with the ASAL would be subject to sector-wide progress with privatization, including agro-kombinats, agroprocessing enterprises, and land.

Rebuilding and Upgrading Infrastructure

63. Together with assisting the Government in reconstructing war-damaged infrastructure (includingreconstruction in the economic reintegration of the UNPAs, when and if this becomes feasible), animportant priority is to "catch up" on overdue investment rehabilitation and upgrading which have beenshortchanged as a consequence of the constrained fiscal situation of recent years. The public sector wouldinitially play a predominant role in financing these activities because of current domestic conditions andthe external environment. However, the Bank would stand ready to attract private capital for investmentin revenue-generating infrastructure, including through the use of the Bank's guarantee facility. AlthoughCroatia's external financial situation would not make this feasible in the short-term, prospects for suchprojects would improve towards the end of the projected lending period.

64. The proposed Highways Project, by financing a time-slice of GOC's investment program, willaddress overdue rehabilitation priorities and also assist in some works to improve traffic flow (e.g., theSplit bypass). Given the size of the rehabilitation and/or maintenance backlog, satisfactoryimplementation of the project could trigger a similar follow-up operation. While there is no immediatecapacity problem on the highways, traffic volumes would be monitored to ensure that, as road transportof goods and tourism flows increase, the necessary expansion works are planned and undertaken. Theproject also includes studies of the railways sector and the main Adriatic port, Rijeka, with a view todefining appropriate assistance for the restructuring of these sectors, including (particularly for the port)recommendations on increasing the scope for private participation in investment and operation.

65. The railways study to be carried out under the Highways Project will identify a program todrastically downsize and reorient the operations of Croatian Railways (HZ), thereby improving itsfinancial performance and reducing its reliance on subsidies to cover operating expenditure. The programis expected to lend itself to Bank financing for a Railways Project, which would be triggered by theGovernment's adoption of study recommendations, as well as adequate progress in reducing railwaysubsidies, according to an agreement reached under the Highways Project.

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66. In the energy sector, rehabilitation of old equipment will be needed to increase efficiency andenhance capacity in order to meet expected increases in demand. To this end, the Croatia Electric PowerCompany (Hrvatska Elektroprivreda--HEP) is giving priority to rehabilitation through conversion of agingpower and heat installations. As a rehabilitation priority, the Bank would support a proposed Zagreb EastCombined-Cycle Power and Heat Project. This project is fully consistent with the Government's strategyfor the sector, particularly the expansion of natural gas use and progress towards meeting EUenvironmental standards. This project could be followed by an operation addressing the sector needs ata broader level, which would be triggered by satisfactory developments towards the demonopolizationand privatization of HEP.

Areas of Special Bank Emphasis

67. Poverty. While Croatia's income level and social policies would not normally indicate theexistence of sizeable pockets of poverty, the needs of refugees and displaced persons have created anabnormal situation, and are of particular concern. The Govermment, with substantial help from theinternational community and several NGOs, appears to be coping as well as can be expected with thisdifficult, and it is to be hoped - temporary - burden. And the Bank's Emergency Reconstruction projectis contributing to the return of displaced people to their homes after the war and to the restoration ofagricultural assets in rural areas. The Health project will also ease the situation to some extent, but apermanent improvement can only come about with resolution of the territorial problems within Croatiaand the region. It will probably be appropriate to attempt a comprehensive Poverty Assessment sometimein calendar year 1996, when we hope that the political situation will have been clarified, andrepresentative data can be obtained.

68. With respect to future projects, the Employment and Training loan would support the labor-shedding process while assisting those most affected by enterprise down-sizing. The PSAL, byrestructuring pension finances and tightening eligibility criteria, would free resources for a more equitableprovision of pension benefits. The proposed Farmer Support project would target the large number ofprivate farmers who were excluded from access to government support services for agriculture under theprevious system. Many of these farmers are among the rural poor. Our interventions would also aimat helping poorer farmers and potential rural microentrepreneurs gain access to credit through thedevelopment of grass-roots savings and loans associations.

69. The environment, important throughout Eastern Europe, has a special dimension in Croatia as itis closely linked to the performance of the tourism sector. The Bank had embarked on several projectsalong the coast, before independence, with the objectives of improving water supply and environmentalconditions in support of tourism, particularly waste water disposal in coastal towns. The only projectunder implementation, the Istria Water Supply and Sewerage project, addresses a major constraint tofuture tourism activities. Two other projects addressing severe environmental conditions in coastal areas,the Rijeka Bay and the Split and Kvarner Bay areas, were under preparation, with the participation of theEuropean Investment Bank (EIB), at the time of independence from SFRY, and are being reexamined byGOC. The Bank would be willing to provide support to these projects, based on their compatibility with-- and the completion of -- the Strategy for Tourism currently prepared by the ministry of EconomicDevelopment, and with the preferences and objectives of local governments. The Bank is also supportingan ongoing study under the Mediterranean Environment Technical Assistance Programme (METAP). ACoastal Forest Reconstruction and Protection Project to assist the Government in reforestation of forestareas destroyed by war and fire damage, and in improving future fire management, is underconsideration. It would be part of a longer-term program to restore and maintain favorable ecologicalconditions in coastal areas in support of tourism. The Bank would also be willing to support projectsto upgrade urban water supply and sewerage facilities, provided they meet environmental and cost-recovery standards.

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B. Alternative Lending Scenarios

70. Bank lending volumes could be affected by economic or territorial/political circumstances --giving rise to two downside scenarios: economic policy reversals could substantially reduce our lendinglevels; political events could effectively freeze our support. Altermatively, a high case is also possible.

71. Economic performance. The first low case scenario incorporates a Bank response to a resurgenceof macroeconomic instability associated with wage and price inflation, a suspension of IMF programs,and a slowdown in the critical reforms that underpin the base case lending scenario: failure to move aheadwith privatization of formerly socially owned enterprises, public enterprise restructuring, and the takeoverof banks. This would prevent adjustment lending as well as the family of loans providing financing toenterprises and the planned operations in support of private sector development. In this low case, wewould anticipate the loss of three proposed adjustment operations, and most likely, the two investmentoperations supporting investment recovery, and power privatization: The lending program under thisscenario, would focus on financing much-needed infrastructure development, investments in the socialsectors, and needed environmental operations. Under this lower scenario, lending would be reduced toabout half of the base case level. Finally, failure to meet the triggers for any individual operation couldpreclude lending in one or more sectors.

72. Major hostilities and regional turmoil. The second downside scenario incorporates a substantialworsening of the territorial tensions either within Croatia or in the region. It is clear that such aworsening would lead us to put our lending program on hold again, quite independently of the mechanismwhich would have led to such a worsening. A just and lasting peace will require the cooperation of allparties, and any one party can unfortunately launch a renewed round of hostilities. A serious threat ofthat sort would obviously make future processing of Bank operations impossible, even though the originof the problem may have little to do with Croatia's own policies.

73. Regional Improvements. On the other hand, a successful settlement of the territorial issues andthe beginning of a lasting peace could trigger a high scenario. Such a scenario would not be significantlyhigher in terms of the number of projects, or in terms of overall lending levels -- perhaps only 10 percenthigher over the next four years, with some additional lending for rehabilitation of major infrastructure,and/or for reconstruction assistance in the UNPA zones. But the main difference from the base casescenario would be in the timing or size of the operations that the Bank would finance -- the programcould be accelerated, with several of the investment operations initiated sooner or larger in scope, orgeographical scale. Implicit in this high case scenario is that, under these peaceful circumstances,additional sources of finance, including private finance, would become more plentiful than in the basecase, permitting the Bank's share in capital inflows to be lower in the outer years of the projection periodthan under the base case scenario.

C. Creditworthiness and Exposure

74. Croatia's indebtedness and debt service obligations are sustainable, and would remain so underthe base case macroeconomic scenario. Based on Croatia's assumed growth path, the debt to GDP ratiowould decrease gradually from a quite moderate 27-28 percent of GDP at end-1994 to 21 percent in1999. Debt service would increase following agreement with the Paris and London Clubs from 3 to 4percent of GDP, and from 6 to 8-9 percent of exports. These levels are based on a debt stock of US$3.9billion, which assumes the division of all "unallocated debt" according to the IMF formula -- i.e., a 28.49percent share for Croatia. This formula has not been accepted by commnercial creditors (see Box 2).However, even if the final allocation is somewhat higher, this is not likely to have a major impact on thedebt indicators, particularly if some of Croatia's claims on ex-Yugoslavia's reserves eventually areaccepted.

- 22 -

75. Consistent with our assistance strategy, Bank exposure would increase in absolute amounts andin relative terms because of the initial "push" in lending, which would not be matched in full by otherdonors or lenders. However, exposure would remain within reasonable limits: IBRD debt service as ashare of total debt service would reach 10 percent by 1997, but would subsequently decline as the net newfinancing by bilateral and guaranteed creditors assumed in the base case comes on stream. Bank debtservice as a share of exports and other exposure indicators also remain well within Bank exposureguidelines (Annex 4). To date, Croatia's payment performance has been consistently good; even duringthe war and following independence when Croatia's reserves were very low, remaining current with theBank was a priority.

Table 7: Lending FY96-98

Proposed Bank Work ProgramPolicy Objective Priorities Base Case Lending Economic and

Sector Work

Reforming Public Ensure monetary * Public Sector Adjustment Loan * CountryFinance stability, resume growth- * Health II Economic

enhancing investment, Memorandumand unleash privatesector forces. * Selected

policy notesEncouraging Address remaining * Enterprise/Financial Sector Adjustment Loan focused onPrivate Sector-led distortions in the * Capital Markets Infrastructure issues ofGrowth incentive framework, * Private Farmers Support particular

restructure banks, and 0 Agriculture Sector Adjustment Loan concernboost private sector * Employment and Trainingpresence in the economy * Investment Recovery * Povertyto a critical mass. Assessment

Rebuilding and Assist the Government 0 TransportUpgrading in reconstructing war- * Zagreb Combined Cycle PowerInfrastructure damnaged infrastructure, * Rijeka and Split Environment

"catch up" on overdue * Energy Privatizationrehabilitation and capital 0 Urban Water Supplyupgrading. * Forestry

D. Other Bank Group Activities

76. IFC's loans in Croatia, which were made before the break-up of Yugoslavia, were fully repaidin 1992. Croatia joined IFC as one of the successors to SFRY's membership in early 1993, but becauseof the political situation, IFC did not begin to look actively for new projects until mid-1994. Twopromotional missions have visited Croatia since then and have identified some prospective investments,which are currently at preliminary stages of development. In addition, discussions have taken place withCroatian financial institutions in connection with the establishment of an investment bank and lines ofcredit, both of which would provide assistance to the small and medium sized private sector companiesin Croatia, which are the most active developers of new investrnent proposals. In the longer term, IFCalso expects to play an active role in financing the rehabilitation and modernization of the tourist industry,especially on the Dalmatian Coast.

- 23 -

77. A team from the Foreign Investment Advisory Service (FIAS), a joint venture of the World Bankand IFC, has just completed a study of the foreign direct investment (FDI) environment in Croatia. Theaim of the study was to determine the need for investment promotion activities and to recommend aninstitutional framework for these activities. The team concluded that: (i) although some of the necessarylegislation is in place (e.g. the Company Law became effective January 1, 1995), other critical pieces oflegislation (e.g. labor law, anti-monopoly law, and de-nationalization law) are still under preparation; (ii)some areas require further policy intervention (e.g. wage structure); and, (iii) there is a need for acentralized investment promotion function. Initially this promotion function should focus on coordinatinginvestment information, providing some investor services, and carrying out limited investment generationactivities, with a focus on investors in privatized companies, and developing a coherent investmentpromotion short-to medium-term strategy in the context of the existing territorial situation.

78. Croatia became a member of MIGA in March, 1993. Three investors have registered projects(in tourism, manufacturing, and infrastructure) with MIGA, but no guarantees have been issued.

E. Cooperation with other institutions

79. Croatia became a member of the European Bank for Reconstruction and Development (EBRD)on April 15, 1993 and a country strategy paper was approved by its Board on April 20, 1993. The Bankhas been taking the lead in economic reform-related lending, and coordinating its sectoral assistanceprogram with EBRD. EBRD is financing a project to upgrade Croatia's air navigation system, andcofinancing the Highways project (para. 64) with the Bank. Its financing for these two projects isUS$70m equivalent. EBRD is currently working on a power reconstruction project, and developing anagricultural credit operation (we are discussing the complementarities of this operation with our proposedFarmers Support Project). We have also had very preliminary discussions on the environment sector (theRijeka project was designed for cofinancing with EBRD).

80. Bilateral aid is still very limited; however, some technical assistance has become available. Japanprovided its first grant funds for technical assistance in mid-1994, and continues to provide funds forpreparation of several Bank projects. A few other bilaterals are also providing advice and technicalassistance (Germany, Austria, and Italy). The Bank is coordinating its work on economic reforms,particularly in the financial sector, with the US Agency for International Development (USAID) whichis expected to provide technical assistance for preparation of the EFSAL and the Capital MarketsInfrastructure Project. In general, aid potential seems set to increase. Croatia has recently beenconsidered for assistance under the Phare Program of the European Union (EU), and funding under theprogram is expected to be available before the summer of 1995. The next step would be a Trade andCooperation Agreement, which would also open up new lending from the European Investment Bank;however, this has not yet been initiated and is likely to take a longer time.

F. Risks

81. It has to be recognized that serious tensions still exist within Croatia and in the region whichcould lead to situations that would derail our assistance. And, the Bank's proposed lending programimplies a major commitment of resources in the early years. Two types of consideration lead us tobelieve that Croatia's situation is now stable enough. to justify the proposed assistance program. TheCroatian authorities have shown prudence and restraint with respect to both the difficult situation withinCroatia and the ongoing crisis in Bosnia and Herzegovina. A departure from this prudent stance wouldhave a high cost for the Government in terms of loss of assistance, jeopardizing the hard-won initialsuccesses of stabilization and recovery. Conversely, successful international cooperation is without anydoubt a factor that strengthens the prospects for durable peace. In addition, the degree of governmentcommitment to reform, the achievements to date, and the status of our dialogue combine to offer a

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window of opportunity for exceptionally effective Bank support at the very critical "post-stabilization"phase of Croatia's recovery.

V. AGENDA FOR BOARD CONSIDERATION

82. The members of the Board may wish to address the following topics in the course of theirdiscussion:

* The importance given within the Bank's assistance strategy to the three main areas of emphasis -public finance reform, private sector development and infrastructure finance.

* The risks inherent in the Bank's strategy and the judgement that the proposed base case lendingprogram is justified and would in fact contribute to stability in the region.

Lewis T. PrestonPresident

by Sven Sandstrom

Washington, D.C.April 4, 1995

Attachments

Annex I

CROATIA - Bank Group Fact Sheet, FY94-98

IBRD Lending Program, FY94-98

Past 1/ Current PlannedCategory FY94 FY95 FY96 FY97 FY98

Commitments (US$m) 128.0 220.0 170.0 150.0 150.0Sector (%)

Agriculture, Forestry and Environment 30.0 25.0 10.0Financial & private sector 45.0 15.0 25.0 15.0Energy 20.0 15.0Infrastructure 35.0 30.0 15.0 25.0Public Sector Mgt & Human Resources 20.0 25.0 15.0 35.0Other (war reconstruction) 100.0

TOTAL 100Q0 100 0 100Q 0 100 0 1000

Lending instrument (%)Adjustment Loans 100.0 45.0 25.0 15.0 15.0Specific investment loans and others 55.0 75.0 85.0 85.0

TOTAL 100Q0 1000 1000 100Q0 100Q0

Disbursements (US$m) 1 69 158 122 70Adjustment loans 50 64 18Specific investment loans and others 1 69 108 58 52

Repayments (US$m) 26 27 16 16 16Interest (US$m) 8 7 7 7 7

1/ As of December 31, 1992 (when the former SFRY's loans were apportioned), the amount of loans fully disbursed but

not yet fully repaid totalled US$359 million. Only one loan committed prior to this date, Istria Water Supply (for US$28

million, committed in FY89), has a remaining undisbursed balance (of US$17.2 million, as of December 31, 1994).

Annex 2

Croatia page 1

Most Sameregqlefcnoearrq Nc1LefosiongIeyea - 'twi .WAWp Lmff- kigker

VIn of catiue & CANsl midk- IncomeIndicator rS1970-75 198045 1987-92 Asia icemcn P

Priority Poverty IndicatorsPOVERTYUpper povaty line lomcalr. ..

Hdooum Index % of pop.Lavw poveny line Ioc ur.. .. ..cmHeadcount Index % of pop.

GNP per capita USS .. .. 3,370

SHORT TERM INCOME INDICATORSUnkilled urban wages local um.

midled wuul wa.e.Rm tems of trade

comapce Index 1987-100 ..

Lower inoomeFoot

RuralSOCLU INDICATORSPublic expenditre on bac social services % of GDP _ .. .. .. ..

Gross erwollment raiosPrimwy % scbool e pop. .. .. .. .. .. 107MaleFemale

MortalityInfant mortality perdthou. ive birdi .. 18.5 11.7 30.0 45.0 40.0Under 5 mortlity .. .. 14.4 38.0 59.0 51.0

ImmunizationMeales % up roup .. .. .. .. .. 32.0DP'T .. .. .. .. .. 73.8

Child malnutrition (under-5)Life expectancyToal yes .. 69 73 70 63 69Female advantage .. 9.0 7.7 S.6 6.4 6.3

Toal fertility ratc births perwom .. - 1.7 2.2 3.1 2.9M al mwtalty fle per 100,O000 elbie s .. b.. 5s

Supplementary Poverty IndicatorsExpenditures on socW security % of total asp. .. .. .. .

Social ecuity coverge % e. artIve pop. .. .. ..

Access to safe water total % of pop. .. .. .. .. .. S5.6Urban .. .. .. .. 943Rural ' .. .. .. .. .. 73.0

Acemss to health cem

Population growth rate GNP per capita growth rte Development diamoondb6+ iv )(annual avenge, p )aa t)

104 Life expectancy

4S

2 0. _ __ __ __ Gf p G ross0 ~~~~~~~~per iprimmy

capita ~~~enrollmnt

-10 Access to safe %altr1970-75 1930-15 1987-92 1970-75 19S0-5 1937-92

Cro ada Croatia- Lower-middle-income I %vcr-midd1c-in&vmne

a. See the technical notes, p389. b. The developmenA diamond, based on four key indicators s iws thlc vetruc klvcl of de%cloptnent in the Nmumrempared with its incote group. See the inrduction.

Annex 2page 2

CroatiaMost Sam reio4ncoe group Nc*

Latestingle year rec kurope LZe,- IgherUti of estinte & Cenco nide- Lncen

indacaoter me 1970-75 198045 1987-92 Asia Iconm gop

Resources and ExpendituresHUMAN RESOURCESPopulaon (mre-1992) thousands 4,514 4,657 4,739 495,241 942,547 477,960Age dependency ratio ratio .. .. 0.50 0.56 0.66 0.64Urban %ofpop. .. .. .. 63.3 57.0 71.7Populaion growth rate nnual % 0.4 0.3 0.0 0.5 1.4 1.6Urban .. .. .. .. 4.8 2.5

labor force (15-64) thousands .. .. .. .. .. 181,414Agriculture % of labor force .. ..IndustryFemale .. .. .. 46 36 29Females per 100 males

Urban numberRural

NATURAL RESOURCESArea thou. sq. kmn .. .. 56.54 24,165.06 40,697.37 21,836.02Density pop. per sq. kmn .. . S4.7 20.4 22.8 21.5Agriculturl land % of land area .. .. .. .. 41.7Change in agricultural land annual % .. .. .. ..Agriculturai land under irrigation % .. .. .. .. .. 9.3Forests and woodland thou. sq. km .. .. ..Deforestation (net) annual % .. .. ..

INCOMEHousehold incomeShare of top 20% of households % of income .. .. ..Share of bottom 40% of householdsShare of bottom 20% of households

EXPENDITUREFood %ofGDP .. .. ..StaplesMeat, fish, milk, cheese, eggs

Cereal inports thou. metric tonnes .. .. 34 45,972 74,924 49,174Food aid in cereals .. .. .. 1,639 4,054 232Food production per capita 197 -100 .. .. .. .. .. 109Fertilier consumption kg/ha .. .. .. .. .. 68.8Share of agriculture in GDP % of GDP .. .. .. .. .. 8.1Housing % of GDP .. .. ..Aveage household size persons per household .. .. ..

UTrban 'Fixed investrnent housing % of GDP .. .. ..

Fuel and power % of GDP .. .. ..

Energy consumption per capita kg of oil equiv. .. .. .. 3,190 1,882 1,649Households with electricityUrban % of households .. .. ..

RurlTranmport and communication % of GDP .. .. ..

Fixed investment: transport equipmentTotal road length thou. kn

][NVESTMENT IN HUMAN CAPITALHealthPopulation per physician persons 378 ..

Population per nursePopulaton per hospital bed . 134 516 335Oral rehydyration therapy (under-5) % of cases 54

EducadtoaGross enrollment ratioSecondary % of school-age pop. 53Fenale

Pupil-teacher ratio: primary pupils per teacher 26 25PupilDteacher ratio: secondaryPupils reaching grade 4 % of cohort 71Repeater rate: primary % of total enroll 11lilitacy % of pop. (age 15+) 14Female %of fm. (age 15+) 17

Newspaper circulation per thou. pop. 100 117World Bank intemational Ecnomics leparnent, April 1994

Annex 3March 1995

Page I of 3

CROATIA: Key Economic IndicatorsActual Estimated Projected

Indicator 1991 1992 1993 1994 1995 1996 1997

National accounts (% GDP atcurrent market prices)

Gross domestic product 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%Agriculture 10.3% 13.2% 13.3% 13.7% ... ... ...Industry 29.7% 26.9% 34.8% 36.5% ... ... ...Services 60.0% 59.9% 51.9% 49.8% ... ... ...

Total Consumption 97.8% 85.1% 87.4% 86.5% 85.5% 83.4% 82.1%

Gross Domestic Fixed Investment 10.3% 10.2% 13.7% 14.2Ne 15.6% 17.7% 18.7%

Government Investment 0.8% 1.6% 1.6% 2.3% 3.4% 4.5% 4.4%

Private Investment (includesincrease in stocks) 9.5% 8.6% 12.1% 11.9% 12.2% 13.2% 14.3%

Exports (GNFS) 81.1% 58.5% 48.9% 47.4% 48.0% 49.6% 50.8%

Imports (GNFS) 89.3% 53.8% 50.0% 48.2% 49.1% 50.7% 51.6%

Gross Domestic Savings 2.2% 14.9% 12.6% 13.5% 14.5% 16.6% 17.9%

Gross National Savings 0.6% 17.5% 16.1% 15.8% 15.8% 17.4% 18.0%

Memorandum Items

Gross Domestic Product (US$million at current prices) 5673.5 10314.0 11688.3 13459.7 14230.9 15139.0 16309.2

Gross Natonal Product Per Capita(US$. Atlas method) ... 3046.4 2545.1 2694.0

Real Annual Growth Rates (%calculated from 1993 prices

Grdss Domestic Product at marketprices -15.1% -12.8% -3.2% 1.8% 2.8% 4.5% 5.0%Gross Domestic Income ... ... ... 0.5% 2.3% 4.7% 5.4%

Real Annual Per Capita GrowthRates(% calculated from 1993prices)

Gross Domestic Product at marketprices -15.1% -12.8% -3.2% 1.8% 2.8% 4.5% 5.0%

Total Consumption -29.9% -24.2% -0.6% -1.4% 0.8% 2.1% 3.7%

Private Consumption -40.2% -26.0% -0.2% -7.7% 0.6% 2.5% 4.4%

(Continued)

Annex 3CROATIA: Key Economic Indicators March 1995

(Continued) Page 2 of 3

Actual Estimated ProjectedIndicaior 1991 1992 1993 1994 1995 1996 1997

Balance of Payments(USSm)

Exports (GNFS) 4604.0 6029.0 5711.0 6383.1 6835.1 7502.7 8285.9

Merchandise f.o.b. 3292.0 4597.5 3903.1 4260.3 4490.8 4925.3 5435.3

Imports (GNFS) 5067.0 5547.6 5840.0 6487.1 6992.4 7671.9 8408.3

Merchandise f.o.b. 3828.3 4460.7 4666.4 4710.1 5149.2 5670.4 6239.5

Resource balance -463.0 481.4 -129.0 -104.0 -157.2 -169.2 -122.4

Net current transfers(including official currenttransfers) 11.0 434.9 548.5 410.2 270.5 214.9 119.4

Current account balance(after official capital grants) -553.0 743.7 278.0 207.0 23.4 -56.6 -122.2

Net private foreign directinvestments 0.0 13.0 71.5 100.0 100.0 250.0 300.0

Long-term loans (net) ... ... -203.0 -277.3 35.0 169.4 185.4

Official ... ... -91.4 -17.3 316.1 239.3 122.6

Private 1/ ... ... -111.6 -260.0 -281.1 -70.0 62.8

Other capital (net includingerrors and omissions) ... ... 283.1 631.9 92.0 65.0 65.0

Change in reserves 0.0 -468.2 -680.6 -871.7 -342.2 -487.7 -428.2

Memorandum Items

Resource Balance (% ofGDP at current marketprices) -8.2% 4.7% -1.1% -0.8% -1.1 % -1.1% -0.8%

Real annual growth rates(1993 prices)

Merchandise exports(f.o.b.) ... ... ... 7.2% 3.6% 7.1% 6.4%

Primary ... ... ... 14.7% 2.3% 8.5% 8.2%

Manufactures ... ... ... -1.9% 5.4% 5.3% 3.8%

Merchandise Imports (c.i.f ... ... ... 6.6% 5.3% 8.2% 7.2%

Public Finance (% of GDPat current market prices)

Current Revenues 15.0% 20.1% 20.9% 26.0% 26.7% 26.7% 26.5%

CurrentExpenditures 18.7% 19.0% 20.1% 25.1% 25.5% 24.9% 23.7%

1/ Includes gap fill borrowing.

(Continued)

Annex 3

CROATIA: Key Economic Indicators March 1995(Continued) Page 3 of 3

Actual Estimated ProjectedIndicator 1991 1992 1993 1994 1995 1996 1997

Current Account Surplus(+) or Deficit (-) -4.5% -0.2% -0.5% -0.4% -0.6% -1.2% -0.7%

Capital expenditure 0.8% 1.6% 1.6% 2.3% 3.4% 4.5% 4.4%

Foreign financing ... ... 0.0% 0.0% 0.0% 0.0% 0.0%

Monetary Indicators

M3/GDP at current marketprices21 ... 43.3% 32.1% 23.5% 23.8% 24.4% 24.3%

Growth of M3 (%) ... 682.6% 1034.9% 44.8% 7.2% 10.0% 7.7%

Private sector credit growth/total credit growth (%) ... ... ... ...

Price Indices (1993=100)

Merchandise Export PriceIndex ... ... 100.0% 101.8% 103.6% 106.1% 110.0%

Merchandise Import PriceIndex ... ... 100.0% 107.3% 110.6% 112.6% 116.1%

Merchandise Terms ofTrade Index ... ... 100.0 96.0 95.0 95.4 95.6

Real Exchange Rate(US$/LCU) ... ... 1.00 1.10 1.11 1.11 1.11

Real Interest Rates ... ... ... ... ...

Consumer Price Index (%growth rate) 122.6% 664.0% 1517.0% 98.0% ...

GDP Deflator (% growthrate) 75.0% 634.7% 1484.6% 94.0% 2.9% 3.0% 2.7%

2/ Includes domesic and foreign currency deposits.

Annex 4

CROATIA: Key Exposure Indicators March 1995Page 1 of 1

Actual Estimated ProjectedIndicator 1991 1992 1993 1994 1995 1996 1997

Total Debt Outstanding andDisbursed (TDO) (US$m) 0.0 2679.0 3347.1 3680.7 3870.9 4058.2 3913.0

Net disbursements (US$m) 0.0 0.0 46.7 260.3 208.1 162.4 87.2

Total Debt Service(TDS)(US$m) ... ... 311.4 415.4 475.1 488.7 570.8

Debt & Debt ServiceIndicators (%)

TDO/XGS 0.0% 41.0% 53.5% 54.4% 53.8% 51.6% 45.3%

TDO/ GDP ... 26.0% 28.6% 27.3% 27.2% 26.8% 24.0%

TDS/XGS 2.7% 2.4% 5.0% 6.1% 6.6% 6.2% 6.6%

IBRD exposure indicators (%)

IBRD DS/public DS ... ... 12.3% 7.1% 6.4% 8.5% 9.7%

Preferred creditor DS / pu ... ... 23.9% 10.2% 12.4% 19.6% 36.9%

IBRD DS/XGS 0.0% 0.0% 0.5% 0.4% 0.3% 0.4% 0.5%

Share of IBRD portfolio ... ... ... ... ...

IFC (US$m)

Loans........

Equity and quasi-equity ... ... ... ... ...

MIGA

MIGA guarantees (US$m) ... ... ... ... ...

Status of Bank Group Operations in CroatiaStatement of IBRD Loans

(as of January 31, 1995)

Amount in USSmillion Undisbursed Last ARPP Rating(Less Cancellations) relative to

appraisalLoan No. Fiscal Year Borrower Project Loan Undisbursed projection Development Implementation

(US$million) Objectives Progress

Fully disbursed loans benefitting entities located in Croatia * 359.0 0 0Of Which: SALs. SECALs and Program Loans

Loans under Disbursement:

3069-0 1989 Istarski Vod. Buzet Istria Water Supply 28.0 17.2 0 S SProject

3760-0 1994 Republic of Emergency 128.0 119.7 101.0 -- HSCroatia Reconstruction Project

515.0 136.9 101.0

Total Disbursed 17R I

of which repaid 299.4Total now held by IBRD 215.6

Amount sold 0.1of which repaid 0.1Total Undisbursed 136.9

NR= Not RatedHS=Highly Satisfactory; S=Satisfactory; U=Unsatisfactory; HU=Highly Unsatisfactory x

* Represents Croatia's portion of loans made to the former Yugoslavia which were not fully repaid as of December 31, 1992.

Technical AnnexCROATIA - NATIONAL ACCOUNTS Table 1

Page 1 of 4

*----------Actual ---------.stimate --------------------Projection----------------------

1991 1992 1993 1994 1995 1996 1997 1998 1999 2003

A. In Current Prices (mil LCUs)

GDP at market prices 425.5 2726.0 41S14.0 82579.3 57310.9 93977.1 101340.2 109067.4 117389.3 157507.7

Net indirect taxes 33.8 285.S 5718.6 14640.5 15919.4 17337.5 18636.5 19948.4 21177.0 27321.3

GDP at factor cost 391.7 2440.5 36095.4 6793S.9 71391.5 76639.3 82703.8 89119.0 96212.3 130186.4

Agriculture 40.2 322.6 4808.6 9321.7 9839.2 10413.1 10961.6 11516.5 12099.6 14742.1

Yrwh,stry 116.4 6SS.8 12552.6 24803.8 26288.8 28640.7 30863.6 33193.3 35699.0 48344.1

of which -mufacturing 87.5 551.9 10578.9 20933.6 22186.9 24166.5 26060.0 28047.1 30185.6 41081.1

Services 235.1 1462.2 18734.2 33806.3 35263.5 37585.5 40875.6 44409.2 48413.7 67100.1

Resource Balance -34.7 127.2 -461.5 -638.1 -964.7 -1050.5 -760.5 -373.6 -147.1 S62.6

Exports ({GS) 345.3 1593.5 20430.7 39162.4 41935.5 46573.6 5148S.9 56470.8 61321.3 83264.1

Imports (GNPS) 380.0 1466.2 20592.2 39800.5 42900.1 47624.2 52246.4 56844.4 61468.4 82701.5

Total expenditures 460.2 25S98.8 42275.5 83217.4 S8275.6 95027.7 102100.7 109441.0 117536.4 156945.1

Consumption expenditures 416.3 2319.5 36546.4 71467.7 74646.5 78369.6 83165.6 88904.0 95110.8 127431.6

Govern _nt 61.5 391.6 6060.7 15685.6 16467.3 17042.2 17648.2 18793.7 19886.9 25946.3

Private 354.7 1927.8 30485.7 55782.1 5S8179.2 61327.4 65517.3 70110.4 75223.9 101485.3

Orose Domestic Investment 44.0 279.3 5729.1 11749.7 13629.1 1665S8.0 18935 2 20537.0 22425.5 29513.4

Governeent 3.3 44.5 661.3 1895.4 2954.8 4220.6 4466.8 4605.8 4740.2 5020.3

Private 40.6 234.8 5067.8 9854.2 10674.3 12437.4 14468.4 15931.2 17685.3 24493.1

Total fixed investment 46.3 279.3 5729.1 11749.7 13629.1 1665S.0 18935.2 20537.0 22425.5 29513.4

Total investment in stocks -2.3 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Domestic saving 9.2 406.5 5267.6 11111.6 12664.4 15607.5 18174.7 20163.4 22278.5 30076.1

* Net factor incom (NTY) -7.6 -45.6 -506.4 -608.2 -551.2 -635.4 -740.8 -1144.4 -1300.4 -1851.1

* Net current transfers (MC) 0.5 114.9 1962.4 2516.6 1659.4 1334.3 741.9 738.4 552.0 428.9

National saving 2.S 475.8 6723.6 13020.0 13772.6 16306.4 18175.5 19757.4 21530.0 25653.9

Gross National Product 417.9 2680.4 41307.6 81971.1 86759.7 93341.7 100599.5 107923.0 116088.9 155656.6

Gross Nat'l Disposable Income 415. 2795.3 43270.0 84487.7 83419.1 94676.1 101341.4 108661.4 116640.9 156085.5

B. Shares of GDP (current prices)

Gross domestic product 100.0% 100.Ot 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%

Nat indirect taxes 7.9t 10.5% 13.7% 17.7% 18.2% 18.4% 18.4% 18.3% 18.0t 17.3%

Agriculture value added 9.4% 11.5% 11.5% 11.3t 11.3% 11.1% 10.8t 10.6t 10.3% 9.4%

Industry value added 27.4% 24.1t 30.0% 30.0% 30.1t 30.5 30.5t 30.4% 30.40 30.7%

of which manufacturing 20.6% 20.2t 25.3% 25.3% 25.4% 25.7% 25.7t 25.7% 25.70 26.1%

Services value added SS.3t 53.6t 44.8% 40.9t 40.4% 40.0t 40.3t 40.74 41.2% 42.60

Resource Balance (X-N) -8.2% 4.7* -1.1% -0.3% -1.1% -1.1% -0.8t -0.3% -0.1 0.4%

Exports (GMIS) 81.1% 58.5% 48.9% 47.4* 48.0% 49.6% 50.8% 51.8% 52.2% 52.9%

Imports IGWS) 89.3% 53.8% 50.0% 48.2% 49.1% 50.7% 51.6% 52.1% 52.4% 52.5%

Total expenditure 108.2t 95.3% 101.1t 100.8% 101.1% 101.1% 100.8t 100.3% 100.1% 99.6%

Governeent consumption 14.5% 14.4% 14.5% 19.0t 15.9% 1.1% 17.4% 17.2% 16.9% 16.5t

Private cnomuption 83.4% 70.7% 72.9% 67.5% 66.6% 65.3% 64.7% 64.3% 64.1% 64.4%

Government investment 0.6% 1.6% 1.6% 2.3% 3.4% 4.5r 4.4% 4:2% 4.0% 3.2t

Private investment 9.5% 8.6% 12.1% 11.9% 12.2% 13.2t 14.3% 14.6% 15.1% 15.6%

Gross domestic saving 2.2% 14.9% 12.6% 13.5% 14.5% 16.6% 17.9% 1S.5% 19.0% 19.1%

Technical Annex

CROATIA - NATIONAL ACCOUNTS Table 1

Page 2 of 4

----------Actual------ Estimate - ---------------Projection----------------------

1991 1992 1993 1994 . 199S 1996 1997 1998 1999 2003

Groms national moving 0.6% 17.5V 16.1V 15.8% 15.8% 17.4% 17.9% 18.1% 18.3% 18.2%

emorandLi items:

GDP deflator XX change) 75.0% 634.7% 1484.6% 94.0% 2.9g 3.0% 2.7% 2.5 2.5% 2.5%

Consuzur price index 1% ch nge) 123.1% 664.4% 1517.1% 97.0t .. .. .. ..

Total GDP (Iillion current USM) 5673.5 10314.0 11683.3 13459.7 14230.9 15139.0 16309.2 17552.3 18892.1 25274.5

Ccnveruion factor used (LCU/USS) 0.1 0.3 3.6 6.1 6.1 6.2 6.2 6.2 6.2 6.2

Per capita gross national product .. 3046.4 2545.1 2694.0 .. .. ..

(Atlas ethod: in Constant OS$)

(continued on next page l

Technical AnnexTable 1

CROATIA - NATIONAL ACCOUNTS Page 3 of 4

* -- Actual----------Bstimate *--------------------Projection---------------------

1991 1992 1993 1994 1995 1996 1997 1998 1999 2003

C. In Constant 1993 Prices

GDP at market prices 49537.0 43196.3 41814.0 42566.1 43737.3 45705.4 47990.7 50390.2 52912.2 64313.2

GDP at factor coat 45602.1 38672.2 36095.4 35696.8 36208.3 37635.5 39312.3 41317.4 43422.9 53161.6

Agriculture 5493.3 4662.6 4808.6 4808.6 4928.8 5064.4 5191.0 5320.8 5453.8 6019.9

Industry 14835.0 13102.4 12552.6 127S5.5 13169.0 13929.3 14615.8 15335.6 16091.0 19741.3

of which manufacturing 12150.6 11198.8 10578.9 10790.5 11114.2 11753.3 12341.0 12958.0 13605.9 16775.5

Services 25273.8 20907.3 15734.2 18102.7 18110.4 18641.9 19505.6 20661.0 21873.1 27400.3

Resource Balance -4042.6 2016.1 -461.5 189.2 231.9 151.4 136:8 219.1 105.2 113.6

Exports (GNFS) 40199.1 25250.1 20430.7 22344.7 23527.4 25273.2 27012.1 28687.5 30147.3 36934.0

Imports (GWFS) 44241.7 23234.1 20892.2 22155.5 23295.5 25121.7 26825.3 28468.4 30042.2 36820.5

Total expenditures 53579.6 41180.2 42275.5 42377.4 43505.4 45554.0 47803.9 50171.2 52807.0 64204.6

Consumption expenditures 48460.3 36754.7 36546.4 36044.6 36323.5 37075.6 38445.7 40285.0 42293.5 51726.9

Government 7164.1 6205.9 6060.7 7911.0 8013.1 8062.4 8158.4 8516.0 8843.2 10532.1

Private 41296.2 30548.8 30485.7 23133.6 28310.4 29013.2 30287.3 31769.0 33450.2 41194.8

Gross Domestic Investment 5119.3 4425.5 5729.1 6332.9 7181.9 8478.4 9358.2 9886.2 10513.6 12477.7

Government - 389.8 704.7 661.3 1021.6 1557.0 2148.2 2207.6 2217.2 2222.3 2122.5

Private S000.0 3721.1 5067.8 5311.3 5624.1 6330.2 7150.6 7669.0 8291.2 10355.2

Total fixed investmeht 5389.8 4425.8 5729.1 6332.9 7181.9 8478.4 9353.2 9386.2 10513.6 12477.7

Total investment in stocks -270.5 -0.3 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Terms of trade (TT) effect 0.0 0.0 0.0 -544.4 -755.7 -705.6 -577.3 -406.2 -177.1 136.9

Gross domestic income 49537.0 43196.3 41814.0 42022.3 42981.6 44999.8 47413.5 49984.1 52735.2 64455.1

Domestic saving (TT adjusted) 1076.7 6441.6 5267.6 5977.7 6655.0 7924.2 8967.7 9699.1 10441.7 12728.2

D. Annual growth rates (1993 prices)

GDP at market prices -1S.1% -12.8S -3.2% 1.8% 2.8* 4.5% 5.0% S.0% 5.0% S.0%

Agriculture -10.2% -15.1e 3.1% 0.0% 2.5% 2.8% 2.5% 2.5% 2.5% 2.5%

Industry -25.4% -11.7% -4.2% 1.9% 3.0% 5.3% 4.9% 4.9% 4.9% 5.4%

[of which manufacturing] -26.1% -7.8* -S.S 2.0% 3.0% 5.3% 5.0% 5.0% 5.0% S.S

Services -6.4% -17.3% -10.4% -3.4% 0.0% 2.9% 4.6% 5.9% S.9% 5.7%

Exports (GNFS) -36.8% -37.2% -19.1% 9.4% 5.3% 7.4% 6.9% 6.2% 5.1% S.9%

Imports (GNYS) -46.2% -47.5 -10.1% 6.0% 5.1% 7.8% 6.8% 6.1% 5.5% S.1%

Total expenditures -8.2% -23.1% 2.7% 0.2% 2.7% 4.7% 4.9% 5.0% 5.31 4.5S

Consumption -29.9% -24.2% -0.6% -1.4% 9.3% 2.1% 3.7% 4.8% 5.0% 4.4%

Investment 147.6% -13.6 29.5% 10.5% 13.4% 13.11 10.4% 5.6* 6.3% 5.3%

Gross dometic incom -15.1% -12.8% -3.2* O.S 2.3% 4.7% 5.4% 5.4% S.Sr S.0%

Gross domestic savings 110.0% 498.3% -18.2% 13.5% 11.4% 19.0% 13.2% 8.2% 7.74 7.7%

Per capita growth rates:

Per capita GDP (mp) -1S.1% -12.8% -3.2% 1.8% 2.8% 4.5% S.0% 5.0% S.0% S.0%

Per capita total consumption -29.9% -24.2% -0.6* -1.4% 8.83 2.1% 3.7% 4.8% 5.0% 4.4%

Per capita private consumption -40.2% -26.0% -0.2% -7.7% 0.6* 2.5% 4.4% 4.94 5.3% 4.2%

Technical AnnexTable 1

CROATIA - NATIONAL ACCOUNTS Page 4 of 4

____ -Actual--------- +atimate ---------------------Projection---------------------

1991 1992 1993 1994 1995 1996 1997 1998 1999 2003

Actual Estimated Projected

X. Period Average Indicators 19$4-89 19S9-94 1994-99

Marginal national saving rate 32.4

Incre intal capital-output ratio 4.0

Import elasticity 1.4

Technical Annex

CROATIA - EXPORTS AND IMPORTS Page 1 of 2

* --- Actual---------.Nstimate ---------------------Projection----------------------

1991 1992 1993 1994 1995 1996 1997 1991 1995 2003

A. Value in current prices (USS all.)

Total merchandise exports (fob) a/ 3292.1 4597.5 3903.1 4260.3 4490.8 4925.3 S435.3 5944.2 6452.8 8416.0

Primary products 1630.7 2397.5 2148.6 2455.0 2594.9 2893.7 3272.0 3643.0 4026.5 5446.3

Textile Industry 646.3 648.7 734.9 803.6 856.5 939.9 1024.1 1110.6 1197.6 1600.5

Food and Timber 237.7 283.9 342.1 377.1 406.1 44S.6 456.0 524.5 56S.6 754.5

Chgmical and Petroleum S4.1 1024.4 909.3 914.4 949.5 1079.4 1240.2 1419.5 1623.3 2232.7

Ship Building 362.5 440.6 162.3 392.9 382.9 428.6 521.7 58.3 640.3 660.5

Manufactured good. 1451.9 2172.3 1747.5 1765.2 1658.4 2023.4 2154.0 2291.1 2415.0 2952.4

Other goods 9.5 27.7 6.7 7.1 7.5 5.2 9.2 10.1 11.0 15.2

Total mearchandise imports (cif) 3825.6 4460.7 4666.3 5230.6 565S.7 6231.6 6S56.7 7456.3 6101.1 10899.3

Food 397.6 520.1 394.4 500.2 560.4 602.2 660.2 720.6 776.3 1016.6

Other consumer goods 615.5 615.6 773.6 850.4 699.9 962.5 1072.0 1164.7 1253.4 1726.8

POL end other energy 677.1 453.1 475.9 500.4 S34.9 590.2 646.7 710.5 773.3 1023.0

Intermediate goods (n.e.i.) 1656.5 2404.0 2273.6 2490.1 2647.4 2956.2 3303.2 3665.3 4021.6 5670.9

Primary products 195.7 262.8 175.7 193.2 210.1 229.4 2S2.6 276.6 304.0 40S.6

Manufactured goods 145S.1 2141.1 2096.1 2292.0 2437.1 2726.8 3050.7 3391.6 3717.6 5262.3

Capital goods 451.3 465.0 745.6 689.3 1017.4 1100.6 1172.5 1222.2 1276.6 1462.0

S. Value in constant 1993 prices (USS a11.)

Total merchandine xports (fob) .. .. 3903.1 41t5.0 4334.3 4642.9 4940.1 5210.0 5449.5 6403.9

Textile Industry .. .. 734.9 760.2 619.3 663.2 937.9 992.3 1043.S 1266.9

Hood and Timber .. .. 342.1 366.1 363.4 418.7 445.1 460.7 493.0 59S.1

chemical and Petroleum .. .. 909.3 935.6 946.9 1029.2 1093.2 1127.4 1239.8 1501.9

Ship Building .. .. 162.3 331.5 366.2 402.9 477.3 S25.6 S55.2 582.2

.anufacturem .. .. 1747.6 1713.5 1806.3 1901.2 1972.7 2047.0 2105.1 2340.6

other exports .. .. 6.7 6.9 7.2 7.7 *.4 9.0 9.6 12.1

Total merchandise importe (cif) .. .. 4666.3 4973.2 5237.1 5669.0 6077.5 6472.9 6336.2 8412.4

Food .. .. 394.4 362.4 348.3 382.5 436.6 496.2 556.5 724.3

Other consumer goods .. .. 773.6 525.6 660.3 923.1 9*1.7 1040.6 1092.5 1369.0

POL and other energy .. .. 475.9 512.6 533.4 562.6 574.4 5S4.2 590.5 603.2

Intermediate goods n.e.i. .. .. 2273.3 2409.1 2521.5 2766.5 3010.9 3259.8 3463.9 4471.9

Primary products .. .. 175.7 133.9 190.4 204.4 217.1 229.5 243.4 300.0

Manufactured goods .. .. 2093.1 2225.2 2331.1 2562.1 2793.8 3030.3 3240.5 4171.9

Cap}tal goods .. .. 745.6 t63.4 973.1 1034.1 1073.t 10S2.0 1112.5 1159.0

Memorandum items

Export voluMe groth rate .. .. .. 7.2% 3.6C 7.1% 6.4% 5.5% 4.6% 4.1%

Import volume growth rate .. .. .. 6.6% 5.4 8.26 7.26 6.S S.C 5.26

C. Price Indices (1993 - 100)

Merchandise exports .. .. 100.0 101.6 103.6 106.1 110.0 114.1 115.4 131.4

Merchandise imports .. .. 100.0 105.2 106.1 109.9 112.3 115.7 115.5 129.6

Merchandise terms of trade .. .. 1.0 1.0 0.9 1.0 1.0 1.0 1.0 1.0

D. Mon-factor Services

(indices base 1993 - 100)

Bxports of NPS - vol-r indax .. .. 100.0 114.0 124.0 134.0 144.4 155.4 164.7 216.5

Exports of NFS - price index .. .. 100.0 103.0 104.5 106.4 109.2 111.9 114.7 126.1

Technical AnnexCROATIA - EXPORTS AND IMPORTS Table 2

Page 2 of 2

*----------Actual----------Eatiuate *--------___-_____-_ Projection---------------------

1991 1992 1993 1994 1995 1996 1997 1998 1999 2003

Imports of NPS - volume iidex 100.0 103.9 109.6 115.3 121.1 126.5 133.0 160.2

Imports of NFS - price index 100.0 103.0 104.S 106.4 109.2 111.9 114.7 126.1

*/ Pro 1992, total exporta include exports to former Yugoslavia.

Technical AnnexCROATIA - BALANCE OF PAYMENTS Table 3

[in millions of USS at current prices) Page 1 of 2

- Actual------ Stimate ---------------------Projection----------------------

1992 1993 1994 1995 1996 1997 1998 1999 2003

Total exports of GNrS 6029.0 5711.0 6383.1 6835.1 7502.7 8285.9 90S8.2 9668.8 13361.0

Merchandise (fob) 4597.5 3903.1 4260.3 4490.8 4925.3 5435.3 5944.2 6452.8 8416.0

Non-factor services 1431.5 1807.9 2122.8 2344.3 2577.4 2850.7 3144.0 341S.9 4945.0

Total imports of GNFS 5547.6 5840.0 6487.1 6992.4 7671.9 8408.3 9148.3 9892.4 13270.7

Merchandise (POB) 4460.7 4666.4 4710.1 5149.2 5670.4 6239.5 6812.0 7372.0 10027.3

Non-factor services 1086.9 1173.6 1777.0 1843.2 2001.5 2168.8 2336.3 2520.4 3243.4

Resource balace 481.4 -129.0 -104.0 -157.2 -169.2 -122.4 -60.1 -23.7 90.3

Net factor income -172.6 -141.5 -99.1 -89.8 -102.4 -119.2 -184.2 -209.3 -297.0

Factor receipts 49.0 111.6 80.5 120.6 155.8 16S.8 206.1 219.6 272.6

Factor payments 221.6 253.1 179.7 210.5 25S8.2 308.0 390.2 428.9 569.6

Interest (scheduled) 217.0 238.6 160.4 184.8 225.5 255.3 316.5 325.2 353.4

Total interest paid (bop) .. 161.6 87.3 146.8 200.5 255.3 316.5 325.2 353.4

Due but not paid .. 77.0 73.1 38.0 25.0 0.0 0.0 0.0 0.0

Other factor payments 4.6 14.5 19.2 25.7 32.7 52.7 73.7 103.7 216.2

Current transfers 434.9 548.5 410.2 270.5 214.9 119.4 118.9 88.8 68.8

Current Receipts 550.8 794.5 592.6 500.9 475.9 . 405.9 405.9 375.9 355.9

of which workers remittances 507.0 540.8 378.6 355.9 3SS.9 355.9 355.9 355.9 355.9

Current Payments -115.9 -246.0 -182.4 -230.4 -260.9 -286.5 -287.0 -287.0 -287.0

o.w. Net official current transfer 43.8 248.2 204.1 134.6 109.1 38.5 38.0 S.0 -12.0

Current Account Balance 743.7 278.0 207.0 23.4 -56.6 -122.2 -125.5 -144.1 -137.9

LaM Term capital flows

official capital grants 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Private investment (net) 13.0 71.5 100.0 100.0 250.0 300.0 300.0 300.0 3S0.0

Direct foreign investments 13.0 71.5 100.0 100.0 2S0.0 300.0 300.0 300.0 350.0

Portfolio investments 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Net long-term borrowing 0.0 -203.0 -277.3 35.0 169.4 185.4 100.6 105.2 -77.1

Disbursement 0.0 153.6 0.0 317.7 406.4 402.7 525.3 542.3 523.5

Repayments due 0.0 367.6 277.3 282.7 237.0 217.3 424.7 437.1 600.5

Actual Repayments .. 193.6 140.3 228.8 202.0 217.3 424.7 437.1 600.5

Due but not paid .. 174.0 137.0 53.9 3S.0 0.0 0.0 0.0 0.0

Other long-term inflows (not) 0.0 -11.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Adjust. to scheduled debt service 0.0 251.0 210.1 91.9 60.0 0.0 0.0 0.0 0.0

with repe ct to Interest .. 77.0 73.1 38.0 25.0 0.0 0.0 0.0 0.0

with reepect to Principal .. 174.0 137.0 53.9 35.0 0.0 0.0 0.0 0.0

Other capital flown .. 263.1 631.9 92.0 65.0 65.0 6S.0 65.0 75.0

Net short-term capital . 110.4 430.9 27.0 0.0 0.0 0.0 0.0 0.0

Capital flows n.-. .. 79.7 120.0 65.0 65.0 65.0 65.0 65.0 75.0

Errors and omissions .. 93.0 81.0 0.0 0.0 0.0 0.0 0.0 0.0

(- indicatoe increase in assets]Changes in not intern l reserves -468.2 -680.6 -871.7 -342.2 -487.7 -428.2 -340.1 -326.1 -210.0

Central Bank -446.0 -788.9 -298.4 -480.7 -330.0 -244.0 -254.0 -210.0

Deposit Money Banks -210.6 -189.5 -190.0 0.0 0.0 0.0 0.0 0.0

Technical Annex

CROATIA - BALANCE OF PAYMENTS Table 3Page 2 of 2

[in millionr of uS$ at current prices]

- Actua ------Bstimate ---------------------Projection---------------------4

1992 1993 1994 1995 1996 1997 1996 1999 2003

Het IMP Credits 0.0 -24.0 106.7 146.2 -7.0 -9t.2 -96.1 -72.1 0.0

Me orandum items:

Total Gross Reserves(Excl.fMP) o.w: 669.1 1325.3 2303.7 2792.1 3272.8 3602.8 3846.6 4100.8 4985.6

Total reserves minue gold 669.1 1325.3 2303.7 2792.1 3272.8 3602.6 3846.8 4100.8 4965.6

Gold fat year end London price) 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Total Gross Res. in Ionths Imports 1.4 2.6 4.1 4.7 5.0 5.0 4.8 4.6 4.3

Zxchenge Rates

Annual average hLCU/USS) 0.264 3.577 6.135 6.135 6.208 6.214 6.214 6.214 6.232

At end-year (LCO/USS$ 0.8 6.6 6.1 6.2 6.2 . 6.2 6.2 6.2 6.2

Index real avg. X-rate (1993 - 11 .. 1.0 0.9 0.9 0.9 0.9 0.9 0.9 0.9

- indicates appriciation)

Current account balance as t GDP 7.2% 2.4% 1.5% 0.2% -0.4% -0.7% -0.7% -0.8% -0.S

Technical Annex

CROATIA - EXTERNAL DEBT STOCKS AND FLOWS Page 1 of 3

Actual ----------------------------- Projection-----------------------------

1993 1994 1995 1996 1997 1998 1999 2003

A. Gross Disburzements

Public and publically guaranteed S9.5 0.0 317.7 396.5 386.5 S04.1 530.2 S23.5

Official multilateral 5.4 0.0 252.7 224.2 172.6 167.0 189.3 55.9

of which IDA 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

of which IWOX 0.8 0.0 185.5 129.0 72.7 67.1 89.3 26.1

Official bilateral 0.0 0.0 65.0 150.0 170.0 235.0 255.0 34S.0

Private creditors (guaranteed) 51.4 0.0 0.0 22.5 43.9 52.1 56.0 122.5

of which bonds 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Private creditors non-guaranteed 63.5 0.0 0.0 9.6 16.2 21.2 12.1 0.0

Total LT loan diabureenenta 153.6 0.0 317.7 406.4 402.7 525.3 542.3 523.5

Short-term credit (net) 110.4 430.9 27.0 0.0 0.0 0.0 0.0 0.0

Drawings from IMF 0.0 115.4 153.S 19.2 0.0 0.0 0.0 0.0

Total disburseamentm (LT*ST+DYW) 264.0 546.3 498.4 425.6 402.7 525.3 542.3 523.5

B. Amortization

Public and publically guaranteed 160.6 245.6 260.3 225.3 210.0 419.1 430.9 5S5.1

Official multilateral 75.5 45.9 42.2 30.3 22.5 39.9 64.5 129.9

of which MDA 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

of which IRDU 24.6 19.1 13.1 11.1 11.3 16.4 19.7 66.5

Official bilateral 0.0 78.1 105.6 97.6 99.0 185.2 133.9 240.3

Private creditors (guaranteed) 54.8 121.6 113.0 97.4 56.2 191.0 227.4 214.9

of which bonda 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Private creditors non-guaranteed 33.0 31.7 21.9 11.7 7.3 5.6 6.2 15.4

Total LT loan Repayment. 193.6 277.3 252.7 237.0 217.3 424.7 437.1 600.5

Repurchamee from IW 24.0 8.7 7.6 26.2 98.2 96.1 72.1 0.0

Total repmyments 217.6 286.0 290.3 263.2 315.5 520.8 S09.2 600.5

C. not Diabursem.nts

Public and publically guaranteed -70.5 -245.6 56.9 171.5 176.5 S5.0 99.4 -61.7

Official multilateral -67.4 -45.9 210.5 193.9 149.6 127.1 124.7 -74.0

of which IDA 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

of which IBRD -23.5 -19.1 172.4 117.9 61.4 50.6 69.6 -40.7

Official bilateral 0.0 -76.1 -40.6 52.4 71.0 96.3 146.1 104.7

Private creditor, (guaranteed) -3.4 -121.6 -113.0 -74.9 -44.3 -133.9 -171.5 -92.4

of which bonda 0.0 0.0 0.0 0.0 *0.0 0.0 0.0 0.0

Private creditor, non-guaranteed 30.8 -31.7 -21.9 -2.1 5.9 15.6 5.9 -15.4

Total LT loan net diebureemente -40.0 -277.3 35.0 169.4 185.4 100.6 105.2 -77.1

Short-term credit (net) 110.4 430.9 27.0 0.0 0.0 0.0 0.0 0.0

Net credit from IMF -24.0 106.7 146.2 -7.0 -95.2 -96.1 -72.1 0.0

Total net diab. (LT+ST+IMP) 46.4 260.3 20S.1 162.4 87.2 4.5 33.1 -77.1

D. Interest and Charges

Public and Publically Guaranteed 78.4 113.5 129.6 165.0 *201.4 267.6 252.3 315.0

Official multilateral 24.3 20.5 27.1 42.1 54.9 66.7 76.7 79.9

of which IDA 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

of which I3QD 4.9 6.3 11.9 22.3 28.6 32.6 37.0 4S.4

Official bilateral 33.3 33.9 50.6 S0.5 85.7 96.7 110.0 163.6

Private creditors /guaranteed) 20.5 S9.4 51.9 45.5 60.6 104.2 9S.6 71.6

of which bonds 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Technical AnnexTable 4

CROATIA - EXTERNAL DEBT STOCKS AND FLOWS Page 2 of 3

Actual +-----------------------------Projection-----------------------------

1993 1994 1995 1996 1997 1998 1999 2003

Private creditorm non-guaranteed 5.8 13.1 8.7 5.8 4.5 5.0 5.7 3.4

Total interest on LT loans 84.2 126.9 138.3 173.9 206.0 272.6 288.0 318.4

Interest on short-term credit 6.0 0.0 30.7 34.0 35.5 36.0 35.0 35.0

Interest on 1fU dravings 3.6 2.5 15.8 17.6 13.8 7.9 2.2 0.0

Total interest (LT+ST+I1W) b/ 93.8 129.4 184.8 225.5 255.3 316.5 325.2 353.4

*/ For 1993, figures are actual and for 1994 onward. figures are on due basis.

b/ Due to the ongoing process of external debt consolidation, discrepancies exist between BOP and Debt table.

Technical AnnexTable 5

CROATIA - PUBLIC FINANCE Page 1 of 2

- Actual ----- -etimate +---------------------Projection---------------------

1991 1992 1993 1994 199S 1996 1997 1998 1999 2003

Government budget (mil LCs)

Total current revenues 63.8 547.0 8742.6 21484.3 23336.0 2S123.0 26830.4 28717.9 30576.9 33952.5

Direct taxes 24.6 86.3 1000.S 3921.7 4654.9 5068.7 5479.0 5902.4 6358.2 8071.6

Indirect taxee 38.2 415.8 6893.4 17175.7 15195.6 19594.2 20977.4 22413.4 23506.5 30405.4

On domestic goods end services 33.2 316.3 S663.2 14346.6 15097.3 16424.3 17544.0 18701.6 19793.7 25405.4

On international trade S.0 99.4 1230.2 2829.1 3098.3 3169.9 3433.4 3711.7 4012.9 S000.0

Non-tax receipts 1.0 45.0 348.7 386.9 485.5 460.1 424.0 402.2 412.2 472.5

Total currant expenditures 79.8 517.8 8407.9 20765.0 22232.4 23403.8 24056.3 25626.1 27133.2 34697.5

Interest on external debt 0.0 0.0 4.8 236.2 303.4 706.2 690.9 392.4 1041.7 1260.7

Interest on domeatic debt 0.3 20.7 207.3 1167.7 1119.0 1153.2 937.0 837.6 737.6 673.0

Transfers to private sector .. .. 21.3 60.7 63.7 67.7 71.2 74.7 74.7 74.9

Transfers to other NPS .. .. 93.9 1032.6 2002.8 2133.1 2368.6 2562.8 2762.7 3655.3

Subsidies 12.2 57.3 1174.8 2535.2 2276.2 2256.4 2341.0 2464.9 2629.5 3037.2

Consumption 61.S 391.6 6060.7 15655.6 16467.3 17042.2 17645.2 18793.7 19386.9 25946.3

Wages and salariem .. .. .. .. .. .. ..

Other consumptio .. .. .. .. .. .. ..

Budgetary savings -16.0 29.2 334.7 716.3 1103.6 1714.2 2323.6 3091.0 3443.8 4255.0

Capital revenues 0.0 10.0 99.7 3S0.0 1367.0 1340.0 950.0 750.0 650.0 0.0

Total capital expenditures 3.3 44.5 661.3 1895.4 2954.3 4220.6 4466.8 4605.5 4740.2 5020.3

Capital trensfers 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Budgetary fixed inveatuent 3.3 44.5 661.3 1395.4 2954.9 4220.6 4466.8 4605.0 4740.2 5020.3

overall balance (- * deficit) -19.3 -5.2 -226.3 -329.1 -454.2 -1166.4 -693.2 -764.0 -646.4 -765.3

Sources of financing 19.3 5.2 226.8 329.1 484.2 1166.4 693.2 764.0 646.4 765.3

Official capital grants 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

External borrowing (net) .. .. 0.0 512.4 2530.6 3269.7 2000.6 1753.7 1173.1 339.9

monetary system credit .. .. 4693.6 -425.8 -1953.7 -2103.3 -1307.4 -989.7 -526.7 375.4

Other domestic financing .. .. -4466.7 -57.5 -92.7 0.0 0.0 0.0 0.0 0.0

Share of GDP at current price.

Current revenue. 15.0% 20.1% 20.9% 26.0% 26.7% 26.7t 26.5% 26.3% 2C.0% 24.7%

Current expenditures 16.7t 19.0% 20.1% 25.1% 25.5% 24.9t 23.7% 23.5t 23.1% 22.0%

Budgetary savings -3.t% 1.1% 0.5% 0.9% 1n% 1.3% 2.8% 2.8% 2.9% 2.7%

Capital revenu e 0.0% 0.4% 0.2% 1.0% 1.6% 1.4% 0.9t 0.7% 0.6% 0.0%

Capital expenditures 0.O% 1.6% 1.6t 2.3% 3.4% 4.5% 4.4t 4.2% 4.0% 3.2%

Overall balance (- - deficit) -4.5% -0.2% -0.5% -0.4% -0.6t -1.2% -0.7t -0.7% -0.6t -O.St

Otfieial capital grants 0.0 0.0 0.Ot 0.0 0.0% 0.0 0.0 0.0 0.0Ot 0.0O

External borrowing (net) .. .. 0.0% 1.0t 2.9% 3.5t 2.0% 1.6% 1.0t 0.2%

Monetary sy.tem credit .. .. 11.2% -0.5% -2.2% -2.2% -1.3% -0.9% -0.4% 0.2%

Other doseatic financing .. .. -10.7% -0.1 -0.1% 0.0% 0.0% 0.0% 0.0% 0.0

Government Debt (DOD at and of the year)

External debt in millions of LCUs .. .. 765.1 2462.1 6112.6 10127.1 3675.5 10432.2 11611.0 12517.5

External debt in millions of US .. .. 116.6 401.4 1103.9 1630.6 1396.7 1678.9 1567.7 2056.3

Technical AnnexTable 4

CROATIA - EXTERNAL DEBT STOCKS AND FLOWS Page 3 of 3

Actual ------------------ Projection-----------------------------

1993 1994 199S 1996 1997 1996 1999 2003

Z. External Debt (DOD)

Public and publically guaranteed 2305.3 20S9.7 2406.6 2578.0 3096.5 3181.6 3280.9 3419.7

Official multilateral 299.0 253.1 463.6 657.5 807.4 934.4 1059.2 1006.S

of which IDA 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

of which IBRD 88.8 69.7 242.1 359.9 421.3 472.0 541.5 581.3

Official bilateral 666.2 588.1 837.5 t89.9 960.9 1057.8 1203.9 1711.5

Private creditorm (guaranteed) 1340.1 1218.5 1105.5 1030.6 1328.3 1189.4 1017.9 701.5

of which bonds 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Private creditors non-guaranteed 105.4 73.7 51.8 49.7 58.6 74.2 80.1 29.8

Total LT DOD 2410.7 2133.4 2458.4 2627.7 3155.1 3255.8 3361.0 3449.S

Short-term debt a/ 284.0 788.0 797.1 822.1 589.7 S89.7 589.7 589.7

Uee of DIO credit 20.4 127.3 273.5 266.4 168.2 72.1 0.0 0.0

Uballocated debt b/ 632.0 632.0 342.0 342.0 0.0 0.0 0.0 0.0

Total DOD (ST+LT*IMF) of which: 3347.1 3680.7 3870.9 4055.2 3913.0 3917.5 3950.6 4039:1

of which total arreare (Prin/Int) 690.5 900.6 436.6 496.6 0.0 0.0 0.0 0.0

P. Debt & Debt Burden Indicators

Total debt mervice (mil USS) per DRS 311.4 41S.4 475.1 4S8.7 570.8 837.3 S34.4 953.9

Interest (LT+ST.IMF) 93.8 129.4 184.8 225.5 255.3 316.5 325.2 353.4

Principal (LT+IDU) 217.6 286.0 290.3 263.2 315.S 520.8 S09.2 600.5

For total DOD and total debt mervice (T3):

DOD / exports (ZGFS+.R) ratio 53.5% 54.4% 53.8% 51.6C 45.3% 41.5% 3S.6% 29.40

DOD / GDP ratio 28.64 27.3k 27.2% 26.St 24.0t 22.3% 20.9% 16.0o

TDS / exports IGNFS+IR) ratio 5.0t 6.1% 6.6% 6.2% 6.6% 8.9% 8.2% 7.0%

IBRD exposure indicatorm:

IBRD DS / public loan DS 12.3% 7.lk 6.4% 8.5 9.7% 7.1% 8.0% 12.5t

Preferred creditor DS / public DS 23.9% 10.2t 12.4t 19.6% 36.9% 22.3% 10.4% 12.5t

IBRD DS / exports (QWPS+WR) 0.5% 0.4t 0.3% 0.4% 0.5% 0.5% 0.6% 0.8%

Country share in IBkD portfolio .. .. .. .. ..

a/ Includes Interest not-paid leoa interest reschduled.

b/ Strictly World Bank estimater.

Technical Annex

CROATIA - MONETARY SURVEY Table 6Page 1 of 1

Actual Eetim3te -------------------- Projection----------------_---

1993 1994 199S 1996 1997 1996 1999 2003

A. End-of-year stock

Met Foreign Asteta -309.7 5tt2.2 tt63.1 12665.t 15977.8 18715.7 21180.4 28340.2

Domeetic credit 41265.0 38722.6 35221.t 32065.6 29299.9 27476.8 26193.7 27662.8

To Oovernment (NFPS( 19566.7 17216.1 14335.3 11544.5 9669.0 8243.0 7334.2 691S.7

Government budget 19S66.7 17216.1 14335.3 11544.5 9669.0 6243.0 7334.2 6915.7

Other non-fin'l public sector 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

To rest of the economy 21681.3 21506.5 20586.6 20524.0 19630.9 19233.6 16659.5 20747.1

Private sector 21651.3 21506.5 20686.6 20524.0 19630.9 19233.5 165S9.5 20747.1

Other financial institutions 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Total assets - liabilities 40956.3 44604.5 44085.0 44734.6 45277.7 46192.5 47374.1 56003.0

Money and quasimoney a/ 27046.3 31529.2 30909.8 31449.5 31982.1 32996.9 34063.1 42279.4

Other liabilities (net) 13912.0 13075.6 13175.2 13255.2 13295.6 13295.6 13310.9 13723.6

B. Factore accounting for

mn etary expansion (as t U4M)

Net foreign assets -1.1% 16.7% 2t.78 40.3% 50.0t 56.98 62.2% 67.0%

Credit to government (NFPS) 72.48 54.6% 46.4% 36.7% 30.2% 25.1% 21.5% 16.48

credit to rest of the economy 60.2% 65.28 67.68 65.38 61.4t 5S.S% 55.48 49.1%

Other liabilities (neet (-) -SI.48 -41.58 -42.6% -42.2* -41.6% -40.4% -39.18 -32.5%

Total increase M2 100.0% 100.0% 100.0% 100.0% 100.0% 100.08 100.0% 100.0%

C. memorandum items

Net international reserves

(in millions of US$]

Flow during the year -660.6 -571.7 -342.2 -467.7 -428.2 -340.1 -326.1 -210.0

Stock at end-of-year 1325.3 2303.7 2792.1 3272.8 3602.5 3546.6 4100.5 4965.8

D. Money, Credit and Prices

K2 / GDP 64.7% 38.2% 35.4% 33.5% 31.6% 30.28 29.0% 26.5%

Annual growth rate M2 736.98 16.6% -2.08 1.7% 1.7% 2.9% 3.5% 6.38

Annual growth private credit

Increase in private credit as 8 136.1% 98.7% 100.3t 312.48 -150.6% 126.1% 28.0% 209.5%

of increase in domestic credit

a/ Broadest defination of money, including frozen foreign exchange deposits.

Technical AnnexTable 5

CROATIA - PUBLIC FINANCE Page 2 of 2

----- Actual---------.atimate --------------------- Projection----------------------

1991 1992 1993 1994 1995 1996 1997 1995 1999 2003

Dabt to wonetary systm (LCV .i1 .. .. 19566.7 17216.1 14335.3 11544.8 9669.0 8243.0 7334.2 6915.7

Other domestic debt (LCU nil) .. .. 2693.8 2636.3 2543.5 2543.5 2543.5 2543.5 2543.5 2543.5

Total govermrent debt (LCU nil) .. .. 23045.6 22315.1 23691.4 24215.4 20891.0 21218.8 21488.8 22277.0

Total government debt an percent GDP .. .. 55.1% 27.0% 27.1% 25.8% 20.6C 19.5% 1C.3% 14.1%

Tax burden i-dicatorm (%)

Direct t4exa / GDP S.C% 3.2% 2.4% 4.7% 5.3% 5.4% 5.4% 5.4% 5.4% 5.1%

Indir. taxes on donmatic Gas / GDP 7.5% 11.6% 13.5% 17.4% 17.3% 17.5% 17.3% 17.1% 16.9% 16.1%

Indir. taxes don GaS / priv. conmhm. 9.4% 16.4% 1.6% 25.7% 25.93 26.8% 26.5% 26.7% 26.3% 25.0%

Taxes int'l trade / march. imports 1.7% 8.4% 7.4% C.8% *.9% 8.2% 5.1% 5.0% 6.0% 7.4%

IBRD 26774

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