Identifier
Created
Classification
Origin
09ZAGREB126
2009-03-09 10:32:00
UNCLASSIFIED
Embassy Zagreb
Cable title:  

NEW BUDGET TOPS GOC'S SET OF ANTI-RECESSION

Tags:  ECON EFIN PGOV HR 
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DE RUEHVB #0126/01 0681032
ZNR UUUUU ZZH
P 091032Z MAR 09
FM AMEMBASSY ZAGREB
TO RUEHC/SECSTATE WASHDC PRIORITY 9059
INFO RUEHZL/EUROPEAN POLITICAL COLLECTIVE PRIORITY
RUEATRS/DEPT OF TREASURY WASHDC PRIORITY
UNCLAS SECTION 01 OF 02 ZAGREB 000126 

SIPDIS

DEPARTMENT FOR EUR/SCE, EUR/ERA, TREASURY FOR INTERNATIONAL
AFFAIRS LARRY NORTON

E.O. 12958: N/A
TAGS: ECON EFIN PGOV HR
SUBJECT: NEW BUDGET TOPS GOC'S SET OF ANTI-RECESSION
MEASURES

UNCLAS SECTION 01 OF 02 ZAGREB 000126

SIPDIS

DEPARTMENT FOR EUR/SCE, EUR/ERA, TREASURY FOR INTERNATIONAL
AFFAIRS LARRY NORTON

E.O. 12958: N/A
TAGS: ECON EFIN PGOV HR
SUBJECT: NEW BUDGET TOPS GOC'S SET OF ANTI-RECESSION
MEASURES


1. Summary: On February 26, PM Sanader announced a set of ten
anti-recession measures the government will pursue. The first
measure will be to cut budget expenditures by HRK 1-3 billion
($175-526 million). Other measures will increase support for
exporters, small and medium size enterprises (SMEs),tourism,
and agriculture. To promote foreign investment, the
government aims to improve coordination among agencies and
local governments and speed up licensing processes. Given the
fiscal and monetary constraints, the proposed measures seem
generally sound, although without better control of costs and
expenditures, the other measures announced may prove to be
cosmetic. End summary.


2. On February 26, PM Sanader announced a set of ten
anti-recession measures the government will pursue. On March
2, the ambassador attended a meeting held by Minister of
Finance Ivan Suker, along with state secretaries from the
Ministries of Economy and Foreign Affairs, to discuss the
measures with ambassadors from NATO and EU countries. Suker
began his presentation with a summary of the impacts of the
economic crisis on Croatia thus far. He said Croatia survived
the first blow of the crisis but nonetheless has seen a
slowdown in most economic activity indicators. He noted the
pronounced effects on the real economy, including a
deceleration of domestic consumption, investments, imports
and exports.


3. As the first step in basic budget reform, the prime
minister has asked all ministers to submit cost-cutting plans
by the middle of next week. Suker said they are working to
rebalance the budget and plan to finish the revision by the
end of March. Some opposition leaders have called for an
expenditure reduction of HRK 12 billion ($2.1 billion) or
more to ensure a zero deficit. In response, PM Sanader said
in a March 2 radio interview that the budget cuts will amount
to HRK 1-3 billion ($175-526 million),noting that the budget
revision is just one of a set of measures to counter the
recession.


4. To ease costs for the private sector, certain state
institutions, such as the Chamber of Economy, will reduce the
mandatory fees they charge. The state will also seek to
improve cash flow and payment of financial obligations of

public enterprises, and thus assist the private sector. To
increase support for exporters, small and medium size
enterprises (SMEs),tourism, and agriculture, the GOC will
secure additional funding for the Croatian Bank for
Reconstruction and Development (HBOR). Regarding the critical
tourism sector, Suker told the ambassadors that bookings for
2009 look good so far, but all the same, the Ministry of
Tourism will develop a new action plan to increase promotion
and competitiveness in the sector. Measures aimed at helping
individuals include subsidizing interest on loans for
first-time property buyers, prevailing on banks to lower
interest rates, and securing funds to support socially
vulnerable groups.


5. To create more favorable conditions for foreign direct
investment (FDI),the government would introduce an "express
line" for issuing all licenses within 45 days for FDIs above
EUR 10 million, though Suker added that this would apply only
to investments already included in local district plans.
Suker also commented on another of the measures:
strengthening control over imports. Assuring the ambassadors
that this would not amount to protectionism, he said the GOC
will only seek to better enforce existing laws, such as those
for quality control and safety.


6. The largest trade unions and the Croatian Employers
Association (HUP) reacted mostly positively to the
announcement of the measures. Union representatives told the
press the measures could be more comprehensive, particularly
those intended to maintain living standards. HUP's general
director told the press he welcomed the government's
awareness that it had to take action and that all players in
the economy must be involved. He commented, however, that the
measures were really a set of general messages requiring
further elaboration and immediate implementation.
Representatives of the opposition Social Democratic Party
(SDP) and Croatian People's Party (HNS) were more critical.
They told the press adoption of the measures was four months
overdue. One representative expressed skepticism Minister
Suker would be able to find HRK 3 billion to cut from the
budget, while others said the proposed cuts were too small
and called for cuts of HRK 7-12 billion ($1.2-2.1 billion)
instead.


7. Comment: Except for the efforts to bring down costs in

ZAGREB 00000126 002 OF 002


the ministries, many of the measures announced seem cosmetic.
It is not apparent whether they will actually promote
financial stability. For example, although important, it
remains unclear how reducing fees companies pay to business
promotion agencies or reducing payment times from state
industries will address the big picture challenges of costs
and revenues faced by the private sector. The key measure -
reducing expenditures - will face important hurdles as well.
Despite significant political effort, the government could
not balance the budget several months ago when Croatia's 2009
GDP growth projection was a now seemingly lofty two percent.
But the government must achieve a more realistic budget. To
paraphrase a prominent local economist, if the government
does not take action to promote financial stability, then
Croatia will have to bring in the IMF, which will implement
what the government failed to achieve: fiscal consolidation.
BRADTKE