ZAGREB, May 10, 2011 - Minister of Finance, H.E. Martina Dalić and the World Bank’s Country Manager for Croatia, Hongjoo Hahm, signed today a Loan Agreement in the amount of EUR150 million (USD$213 million equivalent) for the Economic Recovery Development Policy Loan to the Republic of Croatia. The loan is the first in a series of two loans aimed at supporting the Government of Croatia’s efforts in accelerating sustainable economic recovery over a two-year period.
Specifically, the loan supports reforms in two broad areas. The first area focuses on fiscal consolidation efforts through expenditure-based adjustments in public administration, health, pensions, and social welfare areas. These efforts have led to improvements in the management of public spending and have strengthened the medium-term sustainability of public finances, with the goal of preserving macroeconomic stability.
Second, the loan supports the development of a dynamic private sector by improving the business environment and reducing state involvement in the corporate sector. Croatian authorities have already taken measures to enhance labor market flexibility, reduce administrative and regulatory barriers for businesses, and speed up privatization of state-owned companies.
Key Expected Results from the Programmatic
Economic Recovery Development Policy Loan
- General Government spending reduced from 43.2 percent of GDP in 2010 to 40.9 percent of GDP in 2012;
- General Government wage bill reduced from 10.7 percent of GDP in 2010 to 9.9 percent of GDP in 2012;
- Total public health spending reduced from 6.9 percent of GDP in 2010 to 6.2 percent of GDP in 2012;
- Social benefit spending reduced from 2.6 percent of GDP in 2010 to 2.3 percent of GDP in 2012;
- Pension spending reduced from 10.5 percent of GDP in 2010 to 9.7 percent of GDP in 2012;
- Labor force participation rate (15-64) increased from 62.4 percent in 2009 to 64 percent in 2012;
- Institutions score (from Global Competitiveness Index) increased from 3.6 in 2010-2011 to 3.9 in 2012;
- Private sector share in GDP increased from 70 percent in 2009 to 75 percent in 2012;
- Research and development spending increased from 0.8 percent of GDP in 2009 to 1.1 percent in 2012.
‘We are pleased that the Croatian authorities are moving forward with the implementation of the Economic Recovery Program and that important reforms to promote sustainability of public finances are under way,’ said Hongjoo Hahm, World Bank Country Manager for Croatia. ‘At the same time, we encourage the authorities to accelerate reforms, since deepening reforms before entering the European Union will maximize the benefits that Croatia derives from membership.'
‘Cooperation with the World Bank (International Bank for Reconstruction and Development) is of exceptional importance and we value the Bank’s support from the very beginning of this cooperation. It remains so today, when Croatia is at the doorstep of the European Union. By approving this new loan, the World Bank has confirmed its support for the Government’s Economic Recovery Program adopted in 2010 with the aim to support recovery and mitigate the social impact of the global financial crisis. We believe that this development loan will provide the appropriate tool for the Bank’s support in addressing our medium term policy and institutional reform’, said Martina Dalić, Minister of Finance of the Republic of Croatia.
Some of the measures taken by the Government to
speed up economic recovery
- Through the enactment of the Law on Fiscal Responsibility, fiscal policy will be made more credible, transparent and sustainable;
- Increased efficiency of health spending is being achieved through the launch of hospital network rationalization, reduction of drug costs and streamlining of co-payment exemptions;
- The social welfare system is becoming more efficient through the adoption of the new Social Welfare Act aimed at consolidating benefits and improving targeting of social benefits, so social programs reach those most in need;
- The fiscal and social sustainability of the pensions system is being improved by the reduction of privileged pensions by 10 percent, the equalization of the retirement age for men and women at 65 and increased penalties for early retirement;
- Public administration will be made more accountable through strengthened performance appraisal system;
- Administrative and regulatory barriers to businesses are being reduced through speedier enforcement of commercial disputes resolution;
- Authorities are also in the process of reducing involvement in the enterprise sector through privatization of state-owned enterprises and strengthened institutional framework for management of state property.
The loan is the first in a series of two Development Policy Loans approved at 6-month EURIBOR for EUR plus a fixed spread (which would currently translate into an interest rate of about 2.5 percent) with a 15-year bullet repayment pattern.
Since joining the World Bank in 1993, Croatia has benefited from financial and technical assistance, policy advice, and analytical services provided by the global development institution. To date, the World Bank has supported 46 operations amounting to around US$ 3 billion, and approved 52 grants with a total value of US$ 70 million.