AMBASSADOR'S MEETING WITH FINANCE MINISTER SUKER

UNCLAS SECTION 01 OF 02 ZAGREB 000086 SIPDIS SENSITIVE DEPARTMENT FOR EUR/SCE AND EEB/IFD (LAITINEN) E.O. 12958: N/A TAGS: PREL ECON PGOV HR SUBJECT: AMBASSADOR'S MEETING WITH FINANCE MINISTER SUKER REF: A. ZAGREB 0066 ¶B. ZAGREB 52 ZAGREB 00000086 001.2 OF 002 ¶1. (SBU) SUMMARY: Finance Minister Ivan Suker is relatively upbeat about Croatia's economic prospects, feeling that the government has managed its fiscal situation fairly well. While acknowledging that some further reforms, such as improving labor participation rates, are needed, he appears unwilling to accept that Croatia's economy is a high cost and high tax environment that remains unfriendly to investment. END SUMMARY. ¶2. (SBU) In a February 5 meeting with the Ambassador, Finance Minister Suker was relatively upbeat about Croatia's economic situation. He said the financial crisis had been "less painful" for Croatia than for many European countries, in large part because Croatian banks had not been overexposed, and had been able to maintain liquidity. He also argued that the government had successfully responded to the crisis and managed to keep the fiscal deficit under control with a series of budget revisions in 2009. The GoC had been prepared to cut costs, particularly by controlling the government payroll. But when faced with union resistance, the government had accepted an across-the-board "crisis tax" as a means of keeping the deficit relatively low. Suker noted his success in selling a bond issue in autumn 2009 as evidence that Croatia's macro-economic management was maintaining international confidence. Having completed these tasks, the government was now rolling out measures to boost growth and inject more liquidity into the markets, particularly via a new "bailout fund" for firms negatively affected by the crisis (ref A). ¶3. (SBU) The Ambassador congratulated Minister Suker on his success in raising funds via the bond issue and meeting Croatia's immediate financing requirements. He expressed concern, however, about the sustainability of Croatia's economic performance. Croatia's business environment and investment climate are not friendly. Taxes, social contributions, and parafiscal fees are high, and not always predictable, particularly those imposed at the local level. Permits and other procedures take too long. Labor regulations are inflexible, and costs too high. Croatia's ranking of 107 out of 180 in the World Bank's "Doing Business" report was a indicator of the need to enact more reforms. ¶4. (SBU) Suker responded that he did not see the situation so bleakly. He claimed that Croatia was a relatively low tax economy, with no capital gains tax, and with income taxes topping out at 45 percent, but only 2000 taxpayers in the entire country reached that level. He acknowledged that further reforms, such as encouraging longer working lives and lowering pension costs, were still needed, but noted that two years ago Croatia had been among the World Bank's "Top Ten Reformers." The Ambassador replied that, regardless of the tax figures, it was a fact that American companies regarded Croatia as one of the costliest business environments in Europe. ¶5. (SBU) Given that there were still tough reforms ahead for Croatia, the Ambassador inquired whether the government thought it could reach agreement with the opposition on key measures, especially given the main SDP opposition party's recent declaration that it was prepared to cooperate with the government (ref B). Suker noted that the SDP had supported the bailout fund proposals, at least in general principles. But he was not optimistic that any greater degree of cooperation was likely. ¶6. (SBU) The Ambassador also raised the issue of a possible arrangement with the IMF. Many needed reforms, such as pension reform, reduction of the state payroll, or privatization of the state's stake in companies, would seem to be easier if there were additional financing available, such as might be found in an IMF deal. Suker said he was strongly opposed to an IMF deal. "We know what we need to do," he said. "We don't need the IMF to tell us. We can make the tough decisions for ourselves." Furthermore, he added, as an EU candidate country, Croatia is more vulnerable to the political consequences of an IMF deal. Despite the fact that several EU members have gone to the IMF during the crisis, he feared that if Croatia sought an IMF arrangement, then some EU Member States who are lukewarm on enlargement would argue that Croatia should not be admitted "until we can manage our economy on our own." ¶7. (SBU) COMMENT: Suker had a genuinely pro-American attitude, thanking the Ambassador several times during the ZAGREB 00000086 002.2 OF 002 meeting for the help the U.S. has given to Croatia on getting into NATO and in trying to resolve EU accession issues, such as ICTY cooperation and the border dispute with Slovenia. Therefore, he took no offense at the Ambassador's pointed critique of Croatia's economic policies. But he was not giving much credence to the criticisms. At least in the short term, he is so focused on meeting his deficit and borrowing targets, that he has no vision (or perhaps understanding) of how to achieve the more fundamental changes needed to create conditions for organic economic growth. To get this message through will require a coordinated effort with other major economic partners, something Post will strive to develop further over the coming months. END COMMENT. FOLEY