NEW FINANCE MINISTER TALKS FISCAL DISCIPLINE

UNCLAS ZAGREB 000280

SIPDIS


SENSITIVE

USAID FOR E&E/A CONVERY

E.O. 12958: N/A
TAGS: EFIN ECON PREL HR
SUBJECT: NEW FINANCE MINISTER TALKS FISCAL DISCIPLINE

Sensitive but Unclassified -- please protect accordingly.

Summary
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1. (SBU) The Ambassador met new Finance Minister Ivan Suker
February 10. Suker declared the government's intention to
negotiate a new Standby Arrangement with the IMF --
apparently EU pressure caused the government to overcome
earlier misgivings about another SBA. Such an agreement
would mean crafting a restrictive budget. Suker emphasized
fiscal discipline first, tax cuts second. The Ambassador
reviewed various USG assistance projects and asked for more
feedback to make them more effective. Suker, a former mayor,
emphasized the importance of strong financing mechanisms at
the local level. End Summary.

"Dedicated to new Standby Arrangement"
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2. (SBU) Suker began the February 10 meeting with the
Ambassador by noting that he was embroiled in tough
negotiations with various ministries in an attempt to put a
budget together (the government has until the end of March to
put together its first budget -- it is currently operating on
a provisional budget passed by the last government). He
believed that this first budget would demonstrate to the
international community and to the financial markets the HDZ
government's seriousness.


3. (SBU) Suker highlighted the government's intention to
pursue a Standby Arrangement with a target budget deficit of
4.5-4.8 percent of GDP (this would be far above the 3.8
percent the last government agreed with the IMF for this
year). He argued that the last government had "achieved" a
budget deficit of 4.8 percent -- far below the target of 6.7
percent -- in 2002 only by failing to fulfill commitments.
While the figures are not yet official (or even public),the
previous government had NOT met its 4.5 percent target for
2003; he believed the figure was 5.8 percent. Thus, 4.5-4.8
percent this year would represent real discipline. "We will
need to say 'no' to a lot of spending." The Ambassador noted
that he had just met with the Minister of Transportation, who
had a lot of ambitious -- and expensive -- projects.
Preparing for NATO would also not be a cheap endeavor.

Tax Cuts to Wait
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4. (SBU) Suker also said that tax reform could come only
after deficit reduction. Suker did not even mention one of
the HDZ's most important campaign promises -- VAT reduction
-- but rather stressed the importance of lowering the cost of
labor (i.e., payroll taxes) to stimulate employment.


5. (SBU) Suker highlighted the need to bring order to
government finances -- he would begin by sorting out the
Treasury function in the Ministry. Transparency would also
be a focus.

Leadership Needed to Make Assistance Work
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6. (SBU) The Ambassador explained that, in the last
government, the Mission had found the Ministry often
unresponsive. Given the appointment of so many evidently
competent people to the Ministry, we looked forward to a
better relationship, particularly in implementing our
assistance programs. Many of our programs were designed to
achieve just what the Minister had identified as his
principle goal -- getting a grip on finances. Much of our
assistance to the Ministry was coming to an end in September.
To maximize its effectiveness, we wished to work closely
with Ministry, especially in the areas of continuing to
implement a new financial information management system and
the area of fiscal decentralization.


7. (SBU) Suker noted that as a mayor until the end of last
year, he had seen how localities should not and could not
rely on the central government. He remarked on the need to
simplify and streamline the patchwork of taxes and fees and
to improve the management of infrastructure -- areas where
U.S. assistance can help.

Comment
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8. (SBU) Suker -- an ex-mayor and tax collector -- sounded
the right notes on the need for fiscal discipline. He may

find the IMF a good stick with which to beat his fellow
ministers, as he tries to ratchet down the deficit. However,
the IMF will likely demand, at least as a starting position,
more ambitious deficit reduction than that contemplated by
the government --- we understand in the neighborhood of 4.0
percent. Meanwhile, the pensioners are getting restless, the
Ministry of Defense needs to invest in NATO preparedness, and
the ambitious Minister of Transportation has plans for roads,
bridges, railroads and a new Coast Guard. It is unclear to
us that Suker has the political weight to push back against
more politically influential ministers. Only the interest of
the EU in Croatia continuing with an SBA has brought the
government this far; at some point the government will have
to balance constituencies against IMF and EU pressure.
FRANK


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