©1997 international monetary fund€¦ · 1. quarterly gdp at constant 1990 prices 2. gross...

©1997 International Monetary Fund

May 1997

IMF Staff Country Report No. 97/35

Croatia—Selected Issues and Statistical Appendix

This selected issues and statistical appendix on Croatia was prepared by a staff team of theInternational Monetary Fund as background documentation for the periodic consultation withthis member country. As such, the views expressed in this document are those of the staffteam and do not necessarily reflect the views of the Government of Croatia or the ExecutiveBoard of the IMF.

Copies of this report are available to the public from

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©International Monetary Fund. Not for Redistribution

INTERNATIONAL MONET ARY FUND

CROATIA

Selected Issues and Statistical Appendix

Prepared by Sonal Desai, Thomas Dorsey1, Robert A. Feldman, Christian Schiller,HeliodoroTemprano- Arroyo (all EU1) and Christian Mulder (PDR)

Approved by the European I Department

February 24, 1997

Contents

Preface

I. The Balance of Payments in Croatia: Recent Developments, DataInterpretation Problems, and Sustainability AnalysisA. Introduction and OverviewB How to Interpret the BOP DataC BOP Sustainability

Attachment: Estimation of the Permanent and Transitory PartsOf Net Foreign Exchange Inflows

II An Analysis of the Behavior of Monetary Aggregates in CroatiaA. IntroductionB Money Demand: Theoretical Motivation and Empirical EstimatesC. Concluding Remarks

Attachment: Alternative Specifications for M4 Demand

Ill Ownership, Competition, and Efficiency in the Croatian Banking SectorA IntroductionB. Competitive Structure and Financial Differences Among

Croatian BanksC. Relationships Between Profitability, Efficiency, Competition,

and OwnershipD. Empirical Examination of Competition, Scale Economies,

and Efficiency

Page

S

667

16

25

2626283638

4141

4?

48

49

lMr. Dorsey transferred to PDR in November 1996.


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E. Concluding Remarks

AnnexesI. Summary of the Croatian Exchange and Trade SystemII. Summary of the Croatian Pension System: Current Features

and Issues for ReformIII. Summary of the Croatian Tax System

ChartsAnnex II

1. Croatia: Old Age Dependency Ratio and Contribution Rate

Text TablesI. 1 . Difference Between ITRS and Customs Data on Trade in

Comparison with total Errors and Omissions. 19940-19962. Main Foreign Currency Flows, 1995-963. Impact of Alternative Allocations of Foreign Exchange Flows

on the External Current Account, 1995, 1996 HI4. Baseline Medium-Term Balance of Payments, 1995-20015. Alternative Medium-Term Balance of Payments Scenarios, 1996-20016. Regression Results for Non-Tourist Inflows

II. 1. Growth Rates of Monetary Aggregates

m. 1. Banking System Assets by Ownership and Region:end-1991 through end-1995

2. Number of Banks by Ownership and Region:end-1991 through end-1995

3. Capital and Employee Productivity at end-19944. Banking System Cost/Asset Ratios and Interest Rate Spreads

by Market Type, Age, and Ownership in 19955. 1994 Interest and Return on Assets Indicators6. Determinants of Profitability Dependent Variable: Profits/Assets7. Determinants of Profitability Dependent Variable: Profits/Capital8. Determinants of Non-Interest and Administrative Expenses9. Determinants of Interest Rate Spreads

(Dependent variable: interest rate spread)10. Determinants of 1995 Asset Growth

(Relative to the Average of end-1994 and end-1995 assets)

Annex n1. Percentage of the Population Over Sixtv

58

60

6579

70

913

162223

25a

27

.44

4445

4747515254

56

57

69


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Statistical Appendix1. Quarterly GDP at Constant 1990 Prices2. Gross Domestic Product at Current Prices

3. Gross Domestic Product at Constant 1994 Prices4. Gross Domestic Product Deflators5. Trends in Industrial Production6. Mining and Industry - Indices of Production, Stocks,

Consumption, Employees, and Productivity7. Agricultural Production8. Tourism Data - Overnight Stays9 Number of Nights Spent According to Accommodation10 Nights Spent by Tourists According to Country1 1 Composition of Employment12 Trends in Employment and Unemployment13 Trends in Wage Bills and Nonwage Compensation14 Trends in Average Monthly Net Wages and Salaries15 Average Gross Monthly Pay per Employee16. Indices of Nominal Net Wages and Salaries per Employee17. Indices of Real Net Wages and Salaries per Employee18. Health Insurance of Workers19. Child Care Supplements20. Disability and Retirement Insurance21. Price Developments22. Retail Inflation Rates23. Indices of Prices24. Electro-Energy Balance Sheet25. Energy Balance Sheet26. National Public Enterprises27. Number of Enterprises in the Economic Sector

and Number of Legal Entities Undergoing Bankruptcy28. Number of Employees in Enterprises Undergoing

Bankruptcy29. Government Employment30. Budgetary Central Government Revenues31. Budgetary Central Government Expenditures

and Net Lending32. Budgetary Central Government Expenditure by Function33. Consolidated Fiscal Accounts34. Monetary Survey35. Monetary Authorities Balance Sheet36. Deposit Money Banks' Accounts37. Interest Rates of the National Bank of Croatia

8586

878889

90919293949596979899

100101102103104105106107108109110

Ill

112113114

115116117118119120121


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38. Deposit Money Bank Interest Rates - DomesticCurrency Rates

39. Deposit Money Bank Interest Rates - ForeignCurrency Rates

40. Balance of Payments41. Merchandise Exports and Imports, 1993-9642. Composition of Exports (SITC)43. Composition of Imports (SITC)44. Exports by Destination45. Imports by Origin46. Exchange Rates and International Reserves47. External Debt Stock and Principal Repayments

122

123124125126127128129130131


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PREFACE

Preceding the statistical appendix, this background document starts with three papers and thencontains three summary annexes.

In Chapter I, the first paper deals with the data interpretation problems in the Croatian balanceof payments and discusses in detail the overestimation of the size of the external currentaccount deficit in the official statistics. The papa* reflects the staffs discussions with theauthorities over the past year, and it has therefore been in the works for a while. It alsoresponds to comments from Executive Directors during the Executive Board's considerationof the last Article IV consultation.

In Chapter n, the second paper tries for the first time to examine the behavior of the monetaryaggregates in Croatian using econometric methods. The inherent problems encountered inestimating correctly the behavior of the demand for money comes out clearly from theanalysis. Because of these problems, it would have been difficult to pursue a money-basedapproach to stabilization policy. The analysis also .provides empirical support for the notionthat "dollarization" in the sense of the currency substitution literature is not a major concern,notwithstanding the large share of broad money held in the form of foreign currency deposits.

In Chapter m, the structure and performance of the banking sector is analyzed, including theeffects of competition and ownership structure on profitability and interest rate spreads so far.It would appear from this analysis that more would be required in the banking sector than thenew entrants and privatization experienced so far to bring about a reduction in interest ratespreads (and by implication interest rates on lending). Bank rehabilitation efforts and entry byforeign banks that are only now starting to enter the Croatian market are hopeful avenues. Anearlier version of this paper was prepared in June 1996, as part of a larger study with authorsfrom the National Bank of Croatia for the Second Dubrovnik Conference on Economies inTransition, which focussed on capital markets and banking sector reform in these economies.

The authorities were keenly interested in these three subjects. The content of the papersinformed well the policy discussions as the main findings of the papers could be drawn ceven while work was in progress.

on

The three annexes contain the usual summaries of the tax system and the exchange and tradesystem. In addition, an annex on Croatia's pension system summarizes both the operations ofthe current system and issues for reform. Reform would seem to be unavoidable, although themost serious pressures from demographic trends are unlikely to arise until the next decade.Care will need to be taken to ensure that the transition costs incurred by the budget because ofmoving from a pay-as-you-go to a funded pension system are manageable.


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L THE BALANCE OF PAYMENTS IN CROATIA: RECENT DEVELOPMENTS,DATA INTERPRETATIONPROBLEMS, AND SUSTAINABIUTY ANALYSIS2

A. Introduction and Overview

1. This chapter aims to shed some light on balance of payments (BOP) data problems andtrends with a view to helping better interpret and analyze external sector developments and toevaluate against this background external sustainability.

2. Important conclusions from the first part of the chapter are that: 0) the size of thecurrent account deficit—which surged from near balance in 1994 to over 10 percent of GDPin 1995 before declining to about 7 percent in 1996—has likely been overestimated in theofficial statistics by significant margins; and (ii) errors and omissions, which jumped to8 percent of GDP in 1995, are likely to have peaked in that year.

3. Two main reasons are offered for the overestimation of the current account deficit.The first is that part of errors and omissions have likely reflected sustainable current earnings.It is estimated that this factor contributed at least 1V£ percentage points of GDP to theoverstatement of the current account deficit in 1995. The second reason is that most of theforeign exchange inflows of unknown origin have been recorded as capital inflows when moreof these inflows should in fact have been registered as current receipts. It is estimated that thiscould have resulted in biasing upward the 1995 current account deficit by aboutll/2 percentage points of GDP, although the extent of overestimation could be as high as3 percentage points of GDP.3 This overestimation is likely to continue until data from acomprehensive package of surveys become available to replace those on unidentified foreignexchange inflows in the compilation of the BOP.

4. The main identified components of errors and omissions are expected to declinerapidly due to a mixture of exogenous developments (such as increased use of the bankingsystem for remittances and a diminution of unregistered trade credit) and statisticalimprovements (especially regarding the measurement of foreign direct investment (FDI). Thedecline in errors and omissions as shown in the most recent available data (through September1996) is in line with these expectations. Declining errors and omissions on account ofimproved measurement of current earnings will tend to reduce the corresponding overestimateof the current account deficit.

5. The key conclusion of the second part of the chapter is that reasonably plausiblemedium-term projections and various alternative scenarios point to a sustainable balance ofpayments in Croatia, notwithstanding the high current account deficit and negative export

Prepared by Christian Mulder.

Estimates for the first half of 1996 indicate somewhat higher numbers.


-7 -

growth registered in the official statistics in 1996. In addition to the overestimation of thecurrent account deficit, this conclusion mainly reflects favorable prospects in the tourismsector, which should more than offset any expansion in the trade deficit.4 It is also importantto note that export performance in 1996 was, for several special reasons, significantly betterthan the data on face value would indicate. The various alternative scenarios suggest that theBOP could remain manageable in the presence of adverse shocks, including resumption oflimited regional hostilities that would severely impact tourism and private capital inflows.

6. The rest of the chapter is organized as follows. The first part discusses the main datainterpretation problems related to errors and omissions and the arbitrary allocation of foreignexchange inflows. The second part focuses on interpreting important recent developments andprospects in key BOP components and presents alternative external sector scenarios.

B. How to Interpret the BOP Data5

7. The extraordinary size of net errors and omissions makes the Croatian BOP unusuallyhard to interpret. From a relatively modest US$0.1 billion in 1994, errors and omissionsincreased sharply in 1995 to reach US$1.3 billion, equivalent to about 20 percent of importsor 8 percent of GDP. This increase coincided with a sharp deterioration in the officially-recorded current account from near balance in 1994 to a deficit of over 10 percent of GDP in1995, and therefore served to "finance" a large part of the recorded current account deficit inthe latter year. Significant problems also arise in interpreting the BOP because of thesomewhat arbitrary approach to assigning the large flows of foreign exchange cash and checkssold and deposited by residents to various categories of the current and capital accounts forpurposes of estimating line items. Gross inflows into these foreign currency accountsamounted to about US$4 billion in 1995, with net inflows totaling about US$0.8 billion.

Errors and omissions

8. An important data source for the BOP is the International Transactions ReportingSystem (TTRS). Transactions involving international payments are recorded comprehensivelyby all banks and compiled in the ITRS. If the ITRS were the only data source used, errors and

4Some of the financing for higher imports of consumer durables and investment goods in 1995and for sustaining them in 1996 appeared to be in errors and omissions and resulted from adrawdown of foreign savings held abroad. As declines in this form of capital inflows could beexpected to be associated with an offsetting decline in imports, there may also be aself-correcting element to BOP adjustment.

5This section builds on the "Report on the Balance of Payments Statistics Mission, February15-29, 1996" by Ricardo Puig and Elizabeth Sumar (June 3,1996) and on "Republic ofCroatia Balance of Payments Compilation Manual/' draft version and non-official translation(April 5, 1996).


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omissions would by definition not arise because the balance sheets of banks must always be inbalance. However, the balance of payments relies on other sources of information for anumber of important categories, notably for trade, transportation, and short-term credit.

9. As shown in Table 1, the discrepancy in net import data between (i) payments datafrom the ITRS and (ii) the customs data compiled by the Central Bureau of Statistics (CBS)and used for the BOP, coincides markedly with the direction of movement in errors andomissions in the period 1994-1996. Note that the difference reported by the two sources inexport data has gradually narrowed, but ballooned in import data by about US$1.2 billion in1995. The substantially higher imports from customs data than from payments data point tounrecorded import financing as one of the main reasons for errors and omissions.6 Suchsources of finance that are inadequately captured with existing statistical systems couldinclude unregistered trade credit, unregistered foreign direct investment, and underreportedworkers' remittances (including income earned abroad that is not repatriated but instead usedto pay for imports by drawing down balances held abroad). Accordingly, four main potentialsources of errors and omissions have been identified and are discussed below.

• Unrecorded trade financing in the form of delayed payments for imports and tradecredit wUh a maturity of under 3 months

10. In view of security risks, trading partners often required advanced payments forexports to Croatia in its early years (1992-94). When the situation normalized, exportersgradually allowed the usual practice of requiring payment within a short period (mainly 30days) after receipt of the product. To provide an indication of the significance of thesedevelopments, one month of delayed payments for imports amounts to US$625 million oftrade credit. A rough estimate based on parameters derived from surveys is that unrecorded

6Customs data are quite comprehensive and appear to be well recorded-with the exception ofsmall scale trade-and thus the main source of errors and omissions relating to the use ofcustoms data must be sought in the financing of imports. One indication of the sizableunderestimation of small scale exports is that the number of passenger cars entering Croatiafar exceeds the number of cars exiting (CBS, transportation and communications survey).


Table 1. Croatia: Diflference Between ITRS and Customs Data on Trade in Comparison with Total Errors and Omissions, 1994-1996(In millions of U. S. Dollars)

ITRSExports Imports

QI94QH94Qm94QIV94

Total 1994

QI95QII95QHI95QIV95

Total 1995

QI96QH96

594687771786

2,838

848938925987

3,698

950982

620795

1,0591,0583,532

1,0841,1821,2181,1464,630

1,1631,113

CustomsExports Imports

627932

1,3641,3374,260

1,1661,1991,1771,0904,633

1,0821,080

7291,1221,4321,9465,229

1,7351,9781,9061,8917,510

1,6621,893

Exports

33245593552

1,423

318261252104935

13298

DifferenceImports

109327373888

1,698

651795688745

2,880

499780

Total

7782

-220337275

333535435641

1,945

367682

Errors dudOmissions

-17-14-157289101

387340231343

1,301

387340

Sources: Customs Office and National Bank of Croatia


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trade credit increased by US$300 million in 1995 and a further US$100 million in 1996, andthus contributed these amounts to errors and omissions.7 8

• Underestimation of FDI

11. An improved ITRS was introduced on July 1, 1996, which has provided more accuratedata and has indicated that FDI has been underestimated. For July, August, and September1996 (the first three months for which improved data are available), FDI is reported to havebeen US$138 million, compared with US$111 million for the first six months of 1996 andUS$81 million for 199S. While the high inflows in the first half of 1996 are in line withexpectations (reflecting the flotation of shares in Pliva and Zagrebacka Banka on the LondonStock Exchange),9 the surge under the improved ITRS suggests, along with anecdotalevidence, that there have been large numbers of small-scale FDI transactions which werepreviously misreported or underreported.

• Payments made from foreign accounts, using hoarded cash, and from unreportedforeign earnings

12. There is ample evidence that Croatians hold large savings abroad. A1994 survey ofAustrian banks put these savings at about US$2 billion in Austria alone. Hoarding hadreportedly become widespread during the period of hyperinflation. Foreign earnings that donot flow though the banking system also appear very sizable. Noteworthy in this respect is thesurge in workers' remittances in 1996 by an estimated US$230 million (or 1% percentagepoints of 1995 GDP) which cannot be explained by an increase in the number of foreignworkers, and therefore points to increased use of the banking system for formerly nonreportedcash remittances. These pools of money may constitute important sources of funds to financeimports for which payments are not registered.10 In so far as such imports are measured by

7A survey conducted for the first eight months of 1995 indicated an average payment delay ofabout 30 days for imports that accounted for over two thirds of total imports. A repeat surveyfor the first six months of 1996 indicated a further increase in the share of imports for whichdelayed payment was allowed to 72 percent in the first quarter of 1996 and to 75 percent inthe second quarter of that year.

8 The amount of trade credit extended for less than three months, which is not registered withthe National Bank of Croatia and thus not part of the reported short-term financing, is alsoestimated to have increased rapidly—broadly in line with the increase in trade credit extendedfor three months or more but less than one year.

*Pliva is a large pharmaceutical concern; Zagrebacka Banka is a large commercial bank.

10With retail margins in Croatia still relatively high, import taxes substantive, and distances(continued...)


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customs officials, this could explain a substantial part of the residual errors and omissions.This explanation is in line with the surge in errors and omissions in 1995, which saw anincreased demand for consumer durables and investment goods following an improvement inthe economic and security outlook and enhanced confidence that the government and thebanks would ensure that frozen foreign exchange savings accounts held in Croatia would beprotected.11

• Advance payments for exports

13. It is likely that payments for exports have been advanced as confidence in Croatia'sability to deliver contracted exports has increased in line with the unproved security situation.This could explain why payments for exports have grown more rapidly than actual exports.Especially in the shipbuilding sector, advance payments play an important role and contributeto positive errors and omissions when orders result in advance payments that outpace actualexports. Thus, for example, customs records in the first half of 1996 show exports ofUS$101 million. With payments in the first half more in line with annual exports ofUS$400 million—consistent with the customs data stowing exports of ships of aboutUS$200 million in the second half of the year—this factor may have contributed aboutUS$100 million to errors and omissions in the first half of 1996.

14. In sum, these four sources of errors and omissions all point to underestimation ofcapital inflows. In addition, evidence suggestive of unreported foreign earnings used tofinance recorded imports points to an underestimation of current inflows, perhaps on the orderof ll/2 percent of GDP in 1995 because of unrecorded workers' remittances alone.Importantly, it is not expected that errors and omissions will continue at the pace registered in1995 and the first half of 1996. According to survey results, the float from delayed importpayments and the stock of credit with an under three-month maturity appears to have reacheda more normal size, implying that these sources of finance can now be expected to staybroadly in line with imports and therefore contribute only about US$50 million annually tofuture errors and omissions. The earlier improvements and the results from an EDI survey tobe introduced in the first quarter of 1997 should also help to significantly reduce errors andomissions from underreported FDI. In addition, the payments for imports from foreign savingaccounts will decline to the extent that this source of fimds is being depleted and that thedemand to restore stocks of durable consumer and investment goods has been satisfied.Finally, workers' remittances through the banking system seem to be replacing previouslyunderreported remittances in cash. Data for the third quarter of 1996 and estimates for the

10(...continued)short, there is substantial cross-border shopping. About 55,000 cars crossed the variousborders per day in 1995, carrying a total of about 28 million passengers round-trip (6 timesthe population).

11 Foreign currency savings accounts were frozen in 1992.


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remainder of the year already suggest that errors and omissions will continue to decline fromthe very high level recorded in 1995.

15. If errors and omissions nevertheless persist at a high level and in line with a continuedlarge difference between registered payments for and actual imports, the source of unrecordedpayments is likely to be a more continuous one, such as import financing from workers'remittances and small scale exports that go unrecorded. Additional survey work in these areaswould need to be undertaken.

Foreign Currency Inflows

16. In addition to the issue of errors and omissions, the other key factor that complicatesthe interpretation of the Croatian BOP concerns the arbitrary allocation in the presentmethodology of large foreign currency inflows and outflows in the form of cash and checkssold to/bought from and deposited at/taken out of Croatian banks (Table 2). The primarysource of inflows consists of deposits in the foreign exchange accounts of residents, followedby purchases of cash and checks from residents, remittances from abroad to resident accounts,and purchases of cash and checks from nonresidents. The gross inflows, at a sizableUS$2.8 billion in the first half of 1996, exceeded export earnings over this period. Foreigncurrency outflows were also large, with cash and check withdrawals the main item, followedby purchases of foreign currency and travelers' checks, for a total of US$1.9 billion over thesame period. Nevertheless, the net flows were quite significant: annualized about 11 percentofGDP.

17. As the origin of and underlying reason for most of these inflows is not well known,they are somewhat arbitrarily allocated under the methodology currently used to construct theBOP: about a quarter of the cash, check, and deposit inflows from residents are allocated tocurrent services (travel credits or tourist earnings), and the rest to capital inflows. Remittancesfrom abroad to residents' accounts and cash and checks purchased from nonresidents are follytreated as current earnings. Circumstantial information and some survey evidence supports thenotion that the sizable net inflows reflect in particular the five sources discussed below.


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Table2. Main Foreign Currency Flows, 1995-96

ITRS Description Allocation to current Amounts in millions ofcode account in official dollars

methodology

1995 I-VI1996

78 1 Forex remittances from abroad

701 Forex cadi and checks soldby residents to banks 25% tourism 1061 480

797 Deposits of forex cash to forexaccounts of residents 25% tourism 2955 1930

700 Forex cash and travel checkssale to residents 25% tourism -746 -345

897 Forex cash/check withdrawals fromforex accounts of residents 20% tourism -2426 -1519

Memorandum item:796 Purchased forex and checks

from nonresidents 100% tourism 391 147

Source: National Bank of Croatia

• Nonresident spending in foreign currency

18. Nonresidents (notably embassies, aid agencies, UNPROFOR, UNHCR and IFOR andtheir stationed personnel) undertake part of their expenditure in foreign currency cash, whichis likely to show up in foreign currency deposits or foreign currency sales by residents.Expenditure by the U.N. alone is estimated to have been US$180 million in 1995, withamounts declining sharply in 1996. Preliminary data on changes in the stocks of nonresidentaccounts for 1996 indicate annual payments of about $600 million, many of which wereprobably for goods and services but were reflected in the capital account in the officialstatistics.12

12The balance of payments would greatly benefit if payments made from non-resident accountsto residents accounts and cash withdrawals by nonresidents were more accurately measuredand recorded under service inflows. Refining procedures to this effect should be relativelystraightforward and be accorded a high priority.

to resident forex accunts 100% workers remit tances 486 343


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• Tourist earnings

19. Based on overnight stays and survey data on tourist expenditure—which unfortunatelyis confined to the main tourist season and the traditional tourist resorts—overall expenditure isestimated to have been about US$700 million in 1994, falling to US$444 million in 1995 andrising again to about US$859 million in 1996.

• Unidentified export and transportation earnings

20. With the open borders, notably to Bosnia and Herzegovina, it is likely that Croatiancitizens earn substantial sums in unrecorded trade with this area. The main incentive toundenreport export earnings is the significant income taxes in Croatia. The current BOPmethodology also underestimates the earnings potential of the transport sector. At present,about 10,000 transport companies operate in Croatia, of which only about 100 are captured inthe present transportation survey. Very crude estimates indicate that this sector generatesUS$200 million more in service earnings than reported.

• Workers'remittances in cash

21. Croatia has a very large expatriate community, and workers often bring part of theirearnings home in the form of cash during holidays, or more frequently for daily or weeklycommuters. Some of the seasonality (notably during the Easter, Christmas, and summerseasons) in sales of cash by nonresidents and deposits of foreign exchange by residents is dueto this factor. Workers' remittances through the banking system have increased rapidly fromUS$243 million in the first half 1995 to US$343 million in the first half of 1996. This trend isexpected to continue, with the result that there should be a further reduction in (unrecorded)remittances in cash.

• Repatriation of foreign savings

22. Finally, as discussed above, there is ample evidence that suggests that Croatians holdlarge amounts of savings abroad, including evidence from a survey of Austrian banks. Part ofthese savings may be repatriated because of the slightly more favorable terms offered inCroatia. Total foreign currency deposits in Croatia (including declining frozen foreignexchange deposits) increased at a very rapid pace, by about US$0.7 billion in 1995 and


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US$0.8 billion in 1996, with banks placing about two-thirds of the increment with foreignbanks.13 M

23. The current BOP methodology records foreign currency inflows (summarized inTable 2) by treating 75 percent of the foreign exchange cadi and checks purchased fromresidents (TTRS No. 701) and 75 percent of deposits into foreign currency accounts ofresidents (TTRS no. 797) as a capital account item (i.e., as "other capital inflows'"). Theremaining 25 percent of these receipts are treated as travel credits or tourism inflows. Foreignexchange remittances to resident accounts (TTRS no. 781) are fully treated as currenttransfers. Similarly, on the debit side, 75 percent of the foreign exchange sales (TTRS no. 700)and 80 percent of the foreign exchange withdrawals (TTRS no. 897) are treated as capitalaccount items (that is, "other capital outflows"). The remaining 25 percent and 20 percentrespectively, are treated as travel debits or tourism outflows.

24. There would appear to be two main problems with this methodology. First, the netinflows recorded as tourism receipts clearly reflect inflows other than those from touristearnings. This issue came rather to the forefront in 1995, which was a poor year for tourismwith a virtual halving in overnight stays by foreigners, although official statistics show a mere11 percent decline in net tourism receipts. Secondly, the fixed percentages have a significantimpact on the size of the officially-reported current account deficit, but make it very arbitrary.As Table 3 indicates, if all cash and check remittances (TTRS No. 701 and 797 on the creditside and 700 and 897 on the debit side) were regarded as current account items, the deficitwould be about 3 percentage points of GDP smaller in 1995, and nearly 4 percent of GDP(annualized) smaller in the first half of 1996. With the trend in these cash and check itemsshowing a gradual increase, they would appear to reflect mostly sustainable current earnings,rather than a finite repatriation of foreign-held savings in which case a hump or bell-shapedpattern would be expected.15

13The sizable and mostly regulated net foreign assets of the banking system provides animportant cushion against not only short-term outflows, but also against diminished inflowsfrom the repatriation of savings held abroad.

14Croatians residing abroad for over 1 year are still usually registered as residents. A moreexact registration for banking purposes would be helpful in order to assess appropriately therisks associated with the build-up of large short-torn non-resident deposits. This is especiallyrelevant because the community of foreign Croatians is large and relatively well to do.

Notwithstanding some concentration in the summer and holiday seasons and a downturnduring "Operation Storm" in the late summer of 1995, the monthly pattern of foreign currencyinflows has been is remarkably stable. This also suggests substantial continuity in these flows,which could be explained by a constant earnings stream, rather than one-off events.


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25. Estimates have been made (see attachment) to derive the trend part of the flows as away of estimating the relative size of current earnings in the overall foreign exchange inflows.The results indicate that a larger part of inflows should be classified as current flows than inthe methodology now used and imply that the current account defidt in 1995 is overestimatedby about 1V4 percent of GDP on this account

TableS. Impact of Alternative Allocations of Foreign Exchange Flowscm the External Current Account, 1995,1996 HI

_ 1996HI

Inclusion of resident cash and deposits items in the current account in the (In millions of dollars)following proportions: I/

50 percent 90 6075 percent 301 197

100 percent 512 333Inclusion of resident cash and deposits items in the current account in the (In percent of period GDP)following proportions: I/

50 percent 0.5 0.775 percent 1.8 2.3

100 percent 3.1 3.8

I/ The allocation under the existing BOP methodology is 20-25 percent The allocation is tothe category tourism (credits and debits).

26. A fundamental solution for these statistical problems would be to replace the data onthe foreign exchange flows by estimates based on survey information on the five main itemsidentified above, with the information on overall foreign exchange flows functioning as acheck on overall accuracy. As a first step, and in line with recommendations by the Fund'sStatistics Department, a more extensive tourism survey and extended transportation surveyswill be undertaken, starting in early 1997. These will be used to provide more accurateestimates for tourism and transport income. Simultaneously, and making use of ITRS andbanking sector information, more accurate estimates of non-resident expenditure bynon-tourists need to be made, and improved criteria for non-resident accounts need to bedeveloped. However, before more comprehensive information becomes available, it will bedifficult to abandon foreign exchange flows as the core source of data.

C. BOP Sustainability

27. Medium-term projections for the BOP point to external Sustainability. A first keyreason is the solid prospect for growing tourist income since income from this source atpresent is still only a fraction of past income. A second key reason is that performance and


-17-

prospects of the export sector are better than they appear on the basis of U.S. dollar-denominated customs data for 1996. Finally, as noted above, the current account deficit islikely to have been overestimated by a substantial margin. This is reflected in a relativelymodest debt build-up. And while the debt-to-GDP and debt service ratios are projected toincrease again during the reconstruction phase, they do so after a recent decline and they areexpected to remain well within reasonable bounds in the baseline outlook. Thus, externalsustainability when evaluated in the context of the overall BOP, and not the trade sectoralone, appears good. Following a brief discussion of the prospects for the main balance ofpayments categories (trade, tourism, current transfers, and capital flows), various scenariosindicate that Croatia's BOP is manageable in the presence of adverse shocks.

Merchandise trade

28. Export performance in 1996 was disappointing, with exports as measured by customsdata declining by 2.6 percent in U.S. dollar terms. Several special factors contributed to thisperformance. First, the valuation effects of exchange rate movements, which tended to reduceexport growth substantially when measured in the U.S. currency. The deutsche mark is a morerepresentative unit of account for Croatian trade, and exports measured on that basis actuallyincreased by 2.4 percent. Second, export shipments through customs have been substantiallyweaker than payments received for exports, with export payments rising by 8 percent in thefirst half of 1996 over the same period in 1995, in contrast to an 8 percent decline forcustoms-cleared exports. About one third of this difference reflects advance payments forships, whose export in 1997 will therefore rise considerably. The remainder could reflect thesubstantive decline in reexports of processed goods observed in the data.16 As there is noindication in the price data that profit margins have declined, re-exports may very well pick upin 1997. The relatively poor export performance in 1996 also reflected the slow growth inCroatia's export markets. According to data from the WHO, Croatia's export marketexpanded by only l.S percent in terms of U.S. dollars in 1996.17

29. It is anticipated that export performance will pick up over time, supported by thepositive effects of structural reforms on competitiveness. In addition, the growth in Croatia'sexport market is expected to pick up significantly in 1997, reaching 6.6 percent based on

16 The customs office collects data on imports for processing, as well as data on thecorresponding reexports. While imports for processing were unchanged, reexports fell by3.5 percentage points of overall exports in the first ten months of 1996 compared to 1995.

17 This figure is based on the export-weighted growth of imports of goods and services incountries that account for at least 95 percent of Croatia's trade.


-18-

WEO data. Exports should be raised further in 1997 by growing re-exports as well as theorders-indicated rise in exports of ships.18

30. Despite buoyant economic growth, imports increased only moderately in 1996,although growth was higher when imports are measured in deutsche mark instead ofU.S. dollars. Imports of investment goods rose by IS percent, while imports of intermediateand consumer goods combined inched ahead at about 2 percent. A key explanation behind themoderate import growth appears to be that the surge in imports experienced in 1995 (whenimports jumped by 44 percent) satisfied at least part of the demand for replenishing stocks ofretail and durable goods. This explanation is consistent with the observed decline in 1996 inshort-term trade financing associated with stock building, and the decline in errors andomissions in the first nine months of the year which may have been associated with lowerimports for consumer durables financed by drawing down savings held abroad.

31. Over the medium term, imports are assumed to resume growth in line with nominalGDP, with an elasticity modestly above unity. Meanwhile, export growth, which is assumed tobe two percentage points below import growth in 1997, picks up only modestly thereafter,thus allowing for a widening trade deficit in the medium-term baseline projections.

Tourism

32. After a dismal and disappointing performance for tourism in 1995 following theshelling of Zagreb and the coast, and "Operation Storm" in late summer, tourism nearlydoubled in 1996 to 16.5 million overnight stays by foreign tourists. This number is still a farcry from the pre-war peak of 60 million overnight stays and, with its renowned coast,Croatia's potential tourism growth is surely substantial. The baseline projection is forCroatia's tourism to grow at a rate which declines from about 30 percent in 1996 to 15percent in 1997 and afterward, reaching about 80 percent of its former size over a period of 5years. The upside potential mainly comes from the possibility of attracting more high-payingtourists; the downside risk steins from too-slow restructuring of partly state-owned touristcompanies, and regional security difficulties.

Private and government transfers

33. At ll/2 percent of GDP in 1995, Croatia received a relatively large inflow ofGovernment transfers for a country with its per capita income. The main reason is cosmetic: inthe official BOP classification, about sixty percent of the Government transfers in 1995 were

"The restructuring of several industries (for example, finished textiles, textile fabrics, steel,and paper products) may also have had a negative effect on exports in 1996. Thisrestructuring was partly in response to increased competition from the lifting of the economicembargo against the Republic of Yugoslavia, and the performance of these exports in 1997 ismore uncertain.


-19-

actualty pension payments received by Croatian residents who had worked abroad and whichshould thus be classified as private transfers. With the Croatian work force in other countriessubstantial and relatively old, such pensions are likely to continue to grow. In line with thetrend, growth in real terms is projected at 5 percent. This contrasts sharply with the outlookfor genuine government transfers, to aid the reconstruction of Croatia and to deal with therefugee problems. These transfers have diminished rapidly in 1996, and are expected to dry upafter the reintegration of Eastern Slavonia has been completed, now scheduled for 1997.

34. The bulk of overall transfers consists of workers' remittances, which have beenincreasing rapidly and may continue to do so as a result of an improved banking network andconfidence in the Croatia banking system. With unemployment high, with ongoingrestructuring and the lay-offs it implies, and wages in several neighboring countries a multipleof those in Croatia, there is added reason to believe that the number of Croatians workingabroad and their remittances will continue growing. Conservatively, the overall real growth isprojected at a rate of 2 percent, giving very little weight to the unknown impact of a possiblefurther increase in the use of the banking system to remit earnings.

Prospects for capital flows

35. Until recently, Croatia's access to international capital markets was very limited. Up to1995, disbursements of medium- and long-term loans net of scheduled amortization werenegative. Access then improved rapidly, but initially only with both the government andcommercial banks taking loans from foreign banks at relatively short maturities (up to2 years). The assessment of an investment grade rating for Croatia by three rating agencies(Moody's, Standard & Poor, and IBCA) in January 1997 paved the way for borrowing atmore desirable maturities. Indeed, in February 1997, Croatia was able to tap the eurobondmarket with an oversubscribed issue of US$300 million in 5-year bonds, and a favorablespread of 80 basis points over comparable U.S. Treasury securities.

36. With access thus established, the overall size of foreign borrowing from privatemarkets over the medium term should be primarily driven by the demand for foreign loans bythe Government and the banking sector, provided the overall borrowing stays withinreasonable limits, the macroeconomic and political situation remains stable, and the regionalsituation peaceful. Thus, following the successful Eurodollar bond issue, recourse to theinternational capital markets is set to increase markedly in 1997, with the budget deficitfinanced entirely through foreign loans (including those from the IBRD). This is projected tocontinue for a number of years, when reconstruction demands are still high. However, itwould be desirable if foreign borrowing tapered off over the medium term in order to avoid asignificant increase in the external debt burden.

37. Regarding other sources of foreign inflows, the prospects for FDI are also good. Forexample, discussions for major investments in oil and gas exploration are well underway,while plans for large scale investment in infrastructure (notably roads) have been developed.In addition there is further scope for portfolio investment in several large


-20-

enterprises—however, at this juncture, data on portfolio investment are not separatelyrecorded.

38. With the pipeline of approved loans, especially from the EBRD and IBRD increasing,the scope for multilateral lending, including through fast disbursing structural adjustmentcredits, is set to increase further. The increase may taper off, however, once the need foradjustment credits diminishes. Suppliers' credits, guaranteed and non-guaranteed, alsoincreased rapidly in 1995 and especially 1996 and have become an important source offinancing. This latter source is not likely to fall as long as imports are growing and regionalsecurity risks remain within acceptable limits.

Sustainability analysis

39. In line with the prospects highlighted above, the baseline medium-term outlook ispresented in Table 4. This outlook assumes an unchanged method of compiling the BOP, andprojects a marked decline in the current account deficit over the medium term to about3 percent of GDP by the year 2001. While the baseline allows for a further deterioration in thetrade balance in absolute terms, this is more than offset by a growing service sector, notablyon account of tourism. Errors and omissions are conservatively projected to fall to zero in1997 (and stay there), and this drop is assumed to have only a minimal impact on eithercurrent earnings or imports. At the same time, net non-loan inflows are expected tomoderate.19 Reflecting these trends and those in other capital flows discussed above,financing is expected to shift from net non-loan claims to FDI and net medium- and long-termloan disbursements. The emphasis is initially on loans and gradually shifts to FDI.

40. In the baseline scenario, the ratio of total external debt to GDP peaks at about30 percent, a figure well within a sustainable range. The debt service ratio is projected toincrease to about 12 percent in 2001, as the average maturity is seen to decline withrescheduled Paris and London Club obligations being refinanced with loans of a shorter

"One of the most difficult and largest items to project in the Croatian BOP is the foreigninflows in the form of cash and deposits by residents, which under current methodology areallocated to both tourism earnings (25 percent) and other sector non-loan inflows(75 percent). The impact on the overall BOP is, however, diminished by the large fraction ofdeposits which is redeposited abroad by banks. It is assumed in the baseline projection that thegross inflows remain broadly unchanged—thus the growth in tourism is only driven by theincrease in nonresident inflows, in line with overnight stays as discussed above, and not by anincrease in resident flows—but that net inflows decline as the percentage which banksredeposit abroad is conservatively projected to increase somewhat from the already high levelestimated for 1996. It should be noted that an equivalent effect for the overall BOP can resultif gross inflows decline and banks do not increase the percentage redeposited abroad.


-21-

maturity.20 With exports of goods and non-factor services amounting to just over 40 percentof GDP, a stable debt service ratio of IS percent would be achieved if the average maturity ofloans were 5 years.

41. It is clear that there are substantial upside and downside risks in Croatia'smedium-term balance of payments outlook. At the same time, there are a number of factorsthat cushion the impact of these risks. The downside risks relate to the speed in the responseof the export and tourism sector to structural reforms and regional security. The upside risksinclude the considerable potential for tourism and uncertainties regarding the assumed drop tozero in errors and omissions since they may turn out to continue to be positive. The foreignexchange flows in the form of cash and deposits by residents pose both an upside anddownside risk, which the baseline tries to evenly balance. An important cushion is the reserveposition banks maintain abroad.

42. Below, two alternative scenarios are developed to illustrate the downside risk(Table 5). The first scenario features a delayed pick-up of export growth to 4 percent in 1997,climbing only gradually to the projected growth rate of 8 percent in 2001. This is offset in thescenario by a modest reduction in imports of on average 1% percentage points during thecoming 4 years. This reduction in imports is less than half the envisaged build-up in reservesover these years and the situation would be quite manageable through appropriate demandmanagement. To ensure the eventual pick up of export growth there would be need for asignificant strengthening of enterprise restructuring and labor market adjustment.

43. A second alternative scenario assumes a resumption of hostilities in the region, withthe negative impact falling primarily on tourism and capital inflows. With tourism revenuesfalling back to the low levels experienced in 199S, gross inflows of loans drying up, netnon-loan inflows unchanged, foreign direct investment Ming back to about US$250 million,short-term trade financing declining, a substantial adjustment in the economy would berequired. The budget deficit would need to be scaled back drastically in the absence offoreign financing. Imports would have to fall by about 18 percent before resuming growth tokeep reserves unchanged from their 1996 level. However, imports would still remain about22 percent above the levels observed in 1994. The required drastic adjustment in importswould come about mainly because of reduced income induced by lower tourism income andhigher taxes (and possibly exchange rate adjustment). While the import compression underthis scenario is manageable, moderation in foreign borrowing and prudence regarding thematurity structure of the foreign borrowing—notably the avoidance of short maturities—remains advisable as long as a scenario of regional insecurities can not be ruled out.

20The debt service ratio projection is rather sensitive to the maturity structure assumed fornew loans, especially the percentage of short-term loans.


- 22 -

Table 4. Baseline Medium-Term Balance of Payments, 1995-2001(In millions of U.S. Dollars)

Merchandise trade balance

Exports (f. o.b.)(in percent change)

Imports (c.i.f. )(in percent change)

Services and transfers

TransportationTourismOther servicesInterest income (scheduled, net) 11Government transfersPrivate transfers

Current account balance

Capital account

Foreign direct investmentMedium and long term loansNet non-loan claimsNet short-term lending

Errors and omissions

Overall balance

Gross reserves (US$m) (- = increase)Arrears (+ = increase)Exceptional financing

Memorandum items:Current account as percent of GDPGross reserves (US$m)Reserves in months of imports

of goods and nonfinancial servicesOutstanding debt (US$m) I/ 21Debt/GDP ratio 11 21Debt service paid/exports of goods

and nonfinancial services 21GDP(US$m)Exchange rate (end of period)

1995

-2877

4633(8.7)

-7510(43.6)

1165

60813

-260-94280366

-1712

491

81-137

50497

1300

78

-49031598

-10.31895

2.3380222.0

8.2166305.316

1996Est.

-3277

4511(-2.6)

-7788(3.7)

2013

1181313-186-50222596

-1263

1054

28731040949

595

386

-418-14051436

-7.22313

2.6412422.7

10.1174315.535

1997

-3662

4827(7.0)

-8489(9.0)

2359

1271611-208-18215632

-1303

1544

33794123136

0

241

-4000

159

-6.92713

2.9512124.6

9.418898

1998

-3955

5213(8.0)

-9168(8.0)

2713

1371960-225-34209666

-1242

1461

38786877

130

0

219

-3600

141

-6.13073

3.0598927.2

8.520415

1999Projections

-4271

5630(8.0)

-9901(S.O)

3122

1482323-243-36227702

-1149

1401

437827

-4142

0

252

-3660

114

-5.23439

3.1681629.0

8.522053

2000

-4613

6080(8.0)

-10693(8.0)

3611

1592777-263-50248740

-1002

1369

487774-46154

0

367

-37306

-4.23812

3.2759030.2

10.523823

2001

-4982

6567(8.0)

-11549(8.0)

4110

1723223-284-50269779

-872

1289

537643-56165

0

417

-3800

-37

-3.44192

3.3823330.7

11.925735

Sources: Croatian authorities and staff estimates.

I/ Does not include debt that was excluded from London Club agreement, and claims on international reserves of theformer Socialist Federal Republic of Yugoslavia.

21 Excludes short-term trade related debt.


- 23 -

Table 5. Alternative Medium-Term Balance of Payments Scenarios, 1996-2001(In millions of U.S. Dollars)

1996Est

1997 1998 1999 2000Projections

2001

Scenario ISlower export growth

Exports in percent changeImports in percent changeCurrent account as percent of GDPReserves in months of imports

of goods and nonfinancial servicesOutstanding debt (US$m) I/ 21Debt/GDP ratio II21Debt service paid/exports of goods

and nonfinancial services 2/

Scenario HRegional secutrity problems

Exports in percent changeImports in percent changeCurrent account as percent of GDPReserves in months of imports

of goods and nonfinancial servicesOutstanding debt (USSm) I/ 21Debt/GDP ratio II21Debt service paid/exports of goods

and nonfinancial services 21

-2.63.7-7.2

2.7412422.7

4.06.8-6.8

2.7512124.6

5.06.1-6.0

3.0598927.2

6.06.8-5.1

3.1681629.0

7.07.4-4.2

3.3759030.2

8.08.1-3.4

3.4823330.7

10.1 9.6 8.8 8.9 11.1

10.1 9.6 7.6 5.2 5.1


I/ Does not include debt that was excluded from London Club agreement, and claims oninternational reserves of the former Socialist Federal Republic of Yugoslavia.

21 Excludes short-term trade related debt.

12.6

-2.63.7-7.2

3.3412422.7

8.0-18.00.9

3.3370020.9

8.09.30.4

3.2329617.1

8.08.80.1

3.1303314.3

8.06.20.5

3.1271812.1

8.07.80.4

2.9242810.0

4.2

Scenario HIErrors and omissions continue to be largeExports in percent changeImports in percent changeCurrent account as percent of GDPReserves in months of imports

of goods and nonfinancial servicesOutstanding debt (US$m) I/ 21Debt/GDP ratio 11 21Debt service paid/exports of goods


Baseline outlookExports in percent changeImports in percent changeCurrent account as percent of GDPReserves in months of imports

of goods and nonfinancial servicesOutstanding debt (US$m) I/ 21Debt/GDP ratio It 21Debt service paid/exports of goods


-2.63.7

-7.2

2.6412422.7

10.1

-2.63.7

-7.2

2.6412422.7

10.1

7.010.9-7.6

2.6512124.6

9.4

7.09.0

-6.9

2.6512124.6

9.4

8.07.9

-6.7

3.0598927.2

8.5

8.08.0

-6.1

2.9598927.2

8.5

8.07.9

-5.8

3.3681629.0

8.5

8.08.0

-5.2

3.0681629.0

8.5

8.07.9

-4.7

3.6759030.2

10.5

8.08.0

-4.2

3.1759030.2

10.5

8.07.9

-3.8

3.8823330.7

11.9

8.08.0

-3.4

3.2823330.7

11.9


-24-

44. A third scenario illustrates the upside risk that errors and omissions do not fall to zeroby assuming this item will continue at about US$300 million annually and reflect in large partunrecorded current earnings. Higher errors and omissions on this latter account would implyincome levels that are higher than envisaged in the baseline outlook, and thus also implysomewhat higher-than-projected imports. Assuming a high average propensity to import withroughly half of the initial impact leaking out, this would lead to an additional reserve build-upof about US$150 million annually. Alternatively, the program of impon liberalization could beaccelerated.


ATTACHMENT

Estimation of the Permanent and Transitory Parts of Net Foreign Exchange Inflows

45. For the estimation below, a series of "non- tourism inflows" has been constructedwhich consists of monthly foreign exchange inflows in the form of resident cash and deposits,and non-resident sales of foreign currency minus an estimate of tourism inflows. This estimateof tourism inflows is constructed by multiplying the number of overnight stays of foreigntourists with an estimate of their expenditure based on survey information from 1994, andadjusted for the movement in the price level. It is assumed that expenditure by the first100,000 stays—a minimum registered in virtually every month and outside the standard touristseason—is double the expenditure indicated by the survey. The motivation for this adjustmentis that the survey evidence relates mainly to normal tourists, whereas the year round numberreflects high expenditure businessmen, and U.N. and other officials.

46. The inflows show a relatively steady trend except for the period from late May toAugust of 1995, when the shelling of Zagreb and the coast occurred and "Operation Storm"was initiated. This is confirmed by regressing the non-tourism inflows on a combination oflinear and non-linear trends, and a dummy for "Operation Storm" (Table 6). The trendcomponent is, on average, US$69 million higher in the first half of 1996 compared with thewhole of 1995. Similar specifications explain about 70 to 80 percent of the variation in theinflows. Such a percentage of the non-tourism inflows could be regarded as reflecting flows ofa permanent nature, notably current earnings.

47. On this basis, it can be calculated that about 50 percent of cash and check purchasedfrom and deposited by residents could represent current earnings that are over and above theshare of inflows identified in the existing methodology for compiling current earnings in theBOP. Thus, about 75 percent of such flows should be registered as current earnings. Asindicated in Table 3, this would entail an overestimation of the current deficit of aboutl!/2 percent of GDP in 1995, and 2 percent in 1996 on this account.

-25-


- 25a -

Table 6. Regression Results for Non-Tourist Inflows

Coefficients Standard t RatioError

Intercept"Operation storm"lime trend1/Ln trendI/time trendI/time trend squared

-2237.8-50.021.1

7504.8-9721.41196.7

14291415

43595462612

-1.57-3.481.431.72

-1.781.96

Dependent variable: Non-tourist inflowsRegression period: January 1995, through June 1996.Regresion method: Ordinary Least SquaresRegression Statistics:R square 0.63Adjusted R square 0.48Standard error 27.79Observations 18Source: staff estimates


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n. AN ANALYSIS or THE BEHAVIOR OF MONETARY AGGREGATES IN CROATIA21

A. Introduction

48. The monetary aggregates in Croatia have grown enormously in the period sinceend-1993 (Table 1). Nevertheless, inflation has stayed below 4 percent and the exchange ratehas been fairly stable, trading between 3.5 and 3.8 kuna per deutsche mark since then. Anadditional point of interest is the high share of foreign currency in Croatian broad money, withforeign currency inflows so far showing only slight signs of abating. At first glance this highshare of foreign currency might suggest that some form of "currency substitution" is takingplace in Croatia. In fact, foreign currency appears to be held mainly as an asset (albeit an assetwhose value has been depreciating over most of the period considered here), in anenvironment where there are few other options available for portfolio diversification.

49. In an effort to understand better the behavior of various monetary aggregates inCroatia, and to investigate their usefulness as intermediate targets for program purposes, thispaper estimates various money demand functions. The main conclusion is that the monetaryaggregates have not grown in a way that is predicted by standard theories of money demandwith respect to the effects of changes in economic activity (the scale variable) or theopportunity cost of holding money (the interest rate). Demand equations with these variablesdo not appear to be satisfactory because of two main findings. First, although estimates of theelasticity of demand for real money balances with respect to activity are roughly consistentwith evidence for other industrial countries, in general the results with respect to the interestrate elasticity are of the wrong sign—that is, the estimated demand for money is positivelycorrelated with the opportunity cost of holding it. Second, deviations of estimated moneydemand from actual observations are highly serially correlated. This suggests that some other,perhaps unobservable, factor is driving movement in money demand.

50. A possible explanation, consistent with both findings, is that a substantial andsustained remonetization has been, and appears to still be, taking place in Croatia in the wakeof decades of high and hyper-inflationary conditions. In such a situation, money demand couldrise without a drop in the interest rate or a rise in the level of economic activity, resulting inspurious estimates of the output and interest rate elasticities. With poorly estimated andunderstood money demand, the usefulness of the corresponding monetary aggregates asintermediate targets is severely diminished.

51. The extremely short time period for which consistent data series are availableunfortunately limits the econometric procedures which can reasonably be applied andnecessitates the use of parsimonious time series models with fairly strong restrictions on the

21Prepared by Sonal Desai.


Table 1. Croatia: Growth rates of monetary aggregates

1994 1995 1996

(percent change on an end-of-period basis, unless otherwise indicated)

Monetary aggregates II 21Reserve moneyNarrow money (Ml)Kuna-denominated broad money (M2)Foreign currency denominated depositsBroad money (M4)

110112876274

4325206140

1728334942

Memorandum items

Retail price inflationExchange rate (Kuna/DM, end-of-period level)Percentage share of foreign currency in M4

-3.03.632

51

3.83.710

58

3.43.560

60

Sources: National Bank of Croatia

I/ Reserve money consists of the reserves of the National Bank of Croatia and currency.Narrow money (Ml) consists of kuna-denominated demand deposits and currency.Kuna-denominated broad money (M2) consists of Ml plus kuna-denominated time and savings deposits (quasi money).Broad money (M4) consists of M2 plus foreign currency denominated quasi money. Required reserves against

foreign currency deposits are held abroad.21 Data for 1996 are for the first 11 months of the year.


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lag structure.22 Thus, this paper does not pursue the error-correction approach, which hasbeen a popular model in the empirical money demand literature since it identifies both thelong-run and short-run dynamics of money demand. On a priori grounds, it would bereasonable to expect that a long-run trend, as opposed to a cycle, could not be isolated withonly two and a half years of data. In addition, application of this model requires that astationary error term be obtained, but this was only the case in the empirical work undertakenwhen the parameters of the long-run money demand function were theoretically implausible.

52. In the second part to this paper, the sensitivity of the shares of various components inbroad money (A/4) to interest rate differentials is investigated directly and the results indicatethat some fraction of their variation can be explained by changes in the relevant interest ratedifferentials. The findings do, however, also throw into question the validity of includingforeign currency-denominated deposits in a measure of broad money. Including such depositswould be reasonable if they were a close substitute for similar deposits denominated in kuna.If this were the case, then the share of kuna deposits in M4 would be highly responsive to theinterest rate differential between kuna- and foreign currency-denominated deposits, lit fact thisis not the case, suggesting that foreign currency deposits may be held primarily for assetdiversification.

B. Money Demand: Theoretical Motivation and Empirical Estimates

53. The demand for real money balances is often modeled as a function of: (i) somemeasure of economic activity or a scale variable; (ii) the nominal interest rate or some measureof the opportunity cost of holding money; and (iii) exogenous shocks to money demand.When money balances bear no interest, the opportunity cost of holding money is given by thenominal interest rate on an alternative asset, say bonds.23

54. In Croatia, there are several factors which complicate the interest rate part of thestory. First, almost all deposits are interest bearing, so only the opportunity cost of holdingcurrency can be correctly modeled as a function of just nominal interest rates on other assetsand activity. The opportunity cost of holding demand deposits is the differential between theinterest rate on a less liquid asset, say savings deposits, and the interest rate on checkingaccounts. The opportunity cost of holding time or savings deposits, similarly, is the differentialbetween the interest rate on those deposits and an even less liquid asset. In addition, a largefraction of the broad money aggregate is held in foreign currency, bearing different interestrates than kuna holdings. To compare these interest rates, those on foreign currency depositsmust be converted into ex ante kuna interest rates. This involves computing expected

22Monthly data is available for all series starting in June 1994 and ending in November 1996.

^Such an approach is often motivated by the Baumol-Tobin model of the transactions demandfor money.


-29-

exchange rate changes against a basket which reflects the currency composition of the foreignexchange deposits.

55. An even more fundamental question to be interpreted in the context of the empiricalresults is whether the foreign currency component of what is called broad money in Croatiashould be regarded as money at all, given that the characteristics of this component may bemore like those of a financial asset. Even though foreign currency deposits satisfy the store ofvalue role of money, the transactions role is far less certain. However, foreign currencydeposits are only marginally less liquid than similar kuna-denominated deposits and they canbe easily converted to liquid kuna, if desired.

56. Broad money (M4) is divided into four components for empirical analysis:(i) currency (C); (ii) demand deposits (Z2D); (iii) kuna-denominated savings and time depositsor kuna quasi-money (£/)); and, (iv) foreign exchange time and savings deposits, or foreigncurrency-denominated quasi-money, (£D). The empirical analysis itself is divided in twoparts: (a) an estimation of the money demand functions for three of the monetary aggregates;and (b) an estimation of the how the components of broad money demand are individuallyaffected by interest rate differentials.

Estimating the demand for M4

57. Starting with the broadest monetary aggregate (M4), the basic model is:

58. The 6's are weights, computed as the respective shares of each component of broadmoney in the total; ic , iD , iK , and iF are the interest rates on currency (trivially 0), demanddeposits, kuna-denominated time and savings deposits, and foreign currency-denominatedtime and savings deposits respectively.

59. The opportunity cost of holding M4 instead of some alternative asset is measuredusing the return differential against the interest rate on borrowed funds (ix, the bank lendingrate) as the return on the alternate asset. This is justified in two ways: (i) the fact that themarket for bonds and other financial instruments is so small and still sufficiently undevelopedthat the interest rates on these instruments probably do not represent a good benchmark; and(ii) if firms (or households) which borrow fbnds fulfil the marginal condition that the return to

where A/4= C+ DD+S, D+SJD, P is the price level, Y is a scale variable, e is an exogenousshock to money demand, it is the bank lending rate, and IM is a weighted average of theinterest rates on the components of M4, calculated as


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capital (or durables) is equated to the borrowing rate, then the bank lending rate representsthe return to capital (durables) which is an alternate asset to holding broad money. However,rather than using the return differential itself as an explanatory variable, the individualcomponents are allowed to enter the estimated equations separately. This is because thelending rate is only a proxy and imposing the restriction of equal coefficients on each interestrate generally gave a poorer fit, as well as less plausible parameter estimates.

60. The expected exchange rate depreciation that is needed to construct a proxy for theexpected return on foreign currency deposits is calculated using a purely statistical, backwardlooking, time series model of the exchange rate. Such a model should do better than thetheoretical restriction implied by uncovered interest parity, since, in the case of Croatia, thisrestriction implies that systematic and persistent forecast errors have been made over longperiods of time: the differential between Croatian and foreign interest rates has consistentlybeen positive, yet the kuna has rarely depreciated. The model that was eventually usedmeasured the value of the kuna against a basket of dollars and deutsche mark assumed to bepurchased at the average exchange rates of 1995, where dollars represent 30 percent of thebasket at the time of purchase.24 The forecasting model projected the current depreciation rateof the kuna on the lagged depreciation rate and one lag of the inflation rate. Further lags ofthese variables and lags of various nominal interest rates were found to have no additionalforecasting power. Rather than factor the estimate of the expected depreciation directly intothe interest rate on foreign currency deposits (iF) , it too was allowed to enter separately in theregression that follows. Specifications where the estimated expected depreciation wasfactored directly into the interest rate generally gave worse results overall.

61. In estimation, it is assumed that the money demand function is in log-linear form (sothat coefficients on quantities represent elasticities and the coefficients on interest ratesrepresent semi-elasticities), and that various lags of the left- and right-hand side variables maybe important in explaining the current demand for money. Specifically, ignoring constants, andpossible linear trends, it is assumed that

where a(L), b(L\ c(L\ d(L), and e(L) are polynomials in the lag operator, and dep is theestimated expected depreciation.

62. An important empirical question is whether the money demand functions, so estimated,are stable. In this context, stability is not taken to mean parameter constancy but the existenceof a stationary error term in the money demand function. The implication of such stabilitywould be that as long as some linear combination of all the variables in the money demandequation were found to be stationary—even if not stationary individually—then a statistically

"This split between deutsche mark and dollars has been roughly stable for several years.


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reliable forecast of real balances could be obtained, based on independent forecasts of theright hand side variables.

63. In the event that the error terms from the estimated equation appear to be stationaryand thus a stable money demand function can be estimated, a second question is whether theestimates are theoretically plausible. Plausibility affects the extent to which forecasts from themoney demand equation can be considered reliable and use&l.

M4 Demand—Empirical Results

64. Estimation of the demand function for M4 did not yield plausible results. Severaldifferent models were estimated, but the essence of the results was robust to these differentspecifications, and generally cast doubt on the existence of a stable and predictable demandfunction for M4. The basic problems with all the estimates can be illustrated by consideringthe simplest OLS specification that was used: the dependent variable was the log-level of realbalances (M4/P\ while the right-hand side variables wore a scale variable (measured by anaverage of the indices of industrial production and real retail transactions), the relevantinterest rates for A/4 deposits and bank credit, and the expected depreciation of the exchangerate.

65. The results were as follows:

Variable Coefficient Standard Error T-StatisticConstant -1.21 1.55 -0.78Activity 1.41 0.29 4.85 **iL 0.041 0.005 8.61 **iM4 -0.17 0.08 -2.13 *Expected depreciation 0.001 0.006 0.84

R2=0.87* significant at the 5% level** significant at the 1% level

66., The elasticity .with respect to activity (1.41) was vary large and of the expected sign butit exceeded estimates typically found in other money demand studies. On the other hand, theinterest rate elasticities on the alternate asset (/L) and on M4 itself had the wrong sign andwere significant, suggesting that the demand for M4 goes up when it becomes more costly tohold it and when the reward to holding it falls (a theoretically implausible finding). A furtherproblem with this specification was that the estimated residuals were highly serially correlated.

67. Several alternative specifications were tried as summarized in the attachment to thischapter. However, the implausible finding vis-a-vis the interest rate on the alternate asset wasrobust across these specifications. The conclusion drawn from the regressions was that ifbroad money demand was a standard function of activity and interest rates, the results using


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data in levels could be rationalized either by significant measurement error in the activity databeing used, or by large, persistent, shocks to money demand (which would favor thefirst-differenced specification discussed in the attachment). With regard to the latter, thefluctuations in activity and interest rates have been relatively minor over the sample period inrelation to the large observed changes in real balances. Absent autonomous shocks to moneydemand, and in the presence of plausible output and interest rate elasticities, thesedevelopments would be difficult to explain. Without such shocks, the price level would haveneeded to rise much faster than has been observed to achieve equilibrium in the moneymarket.

68. Once we accept the notion of large autonomous shocks to money demand, it is naturalto work with a trend, or a model in first differences. Unfortunately, the results using detrendedand first-differenced data suggested insufficient high frequency variation in output and interestrates for identification of the demand function. Another possible source of misspecificationacross both types of models of A/4 is that using the interest rate on bank lending may not bethe best measure of the opportunity cost of money. In the case of broad money, however, analternate measure is not obvious, given the lack of developed financial markets.

69. It would not appear that the underlying model driving the behavior of M4 can bestylized into a simple money demand framework. More complicated influences related toportfolio balance considerations are likely to be at play.

M2 Demand—Empirical Results

70. Next, kuna-denominated broad money (M2) demand was estimated using similarspecifications. The variables were the same as those used in the estimation of demand for M4,except with respect to the choice of an interest rate on a reasonable alternate asset, which inthe case of M2 was assumed to be holdings of foreign exchange denominated time and savingsdeposits. The empirical estimates for M2 were more in line with the money demand modelthan the results for M4: the own-interest rate elasticity had the correct sign and wasstatistically significant; the point estimate for the alternate asset-interest rate elasticity had theright sign, although it was small and insignificant.

Variable Coefficient Standard Error T-StatisticConstant -2.9 1.1 -2.65**Activity 1.5 0.21 7.1 **im 0.12 0.03 4.0 *IF -0,01 0.065 -0.17Expected depreciation 0.008 0.006 1.4

R2=0.74* significant at the 5% level** significant at the 1%


-33 -

However, once again, serial correlation of the error t^m was a problem, which alternatespecifications consistent with the model could not solve. In addition, the results wereextremely sensitive to the precise time series representation of the right hand side variableswith respect to lags, with neither the signs or the significance of coefficients being robust.Thus while more plausible than for M4, the results for M2 also presented a number ofstatistical difficulties.

Ml Demand — Empirical Results

71 . The last aggregate to be considered was narrow money. In this case the alternate assetswere considered to be kuna time and savings deposits and foreign currency deposits (i.e., allquasi-money). The return on quasi-money was calculated as a weighted average of interestrates on the two denominations. Here, as in the case of M4, the sign on the coefficient on theown-interest rate was of the wrong sign; however, it was not significant. The variables ofsignificance were activity and the return on kuna-denominated quasi-money. The latter,however, also had the wrong sign.

Variable Coefficient Standard Error T-StatisticConstant -0.99 1.42 -0.69Activity 1.1 0.27 4.04**im -0.09 0.08 -1.07i* 0.04 0.009 4.9**ip -0.004 0.06 -0.06Expected depreciation 0.009 0.006 1.58

RHX80'significant at the 5% level"'significant at the 1%

Estimating component shares in broad money

72. An alternative approach is tried in the second part of the analysis, which investigatesthe breakdown of M4 into its various components by modeling this breakdown as a functionof the component-wise interest rate differentials. It is convenient to assume a recursivestructure in how the different components of M4 produce liquidity services, that is, functionalseparability.25 An example would be if liquidity services were generated by a recursive series

2SIn very general settings the relative demand for two goods cannot always be characterized asa function of only their relative price. For example, to model the relative demand for twocomponents of a consumer's expenditure it is often necessary to assume some kind ofseparability in the utility function: either Hicksian or functional. For further discussion of thisissue see Varian (19%4), Microeconomic Analysis. New York: W.W. Norton and Co.


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of constant elasticity of substitution (CES) functions of currency, demand deposits, kuna timeand savings deposits, and foreign exchange deposits of the form:

where each of the functions fp is CES in its two arguments. This kind of structure motivatesthe following models of the breakdown of A/4 into its components.

73. The fraction of A/4 held as currency is modeled as a function of the average interestrate on noncurrency:

76. This recursive structure is restrictive in the sense that the demands for each componentof M4 may, in reality, be unrestricted functions of the corresponding interest rates on all othercomponents as well as the bank lending rate (/,). However, given limited data (and, thereforedegrees of freedom) some strong restrictions are needed. It is also true that the overalldemand for money could be a function of all the separate interest rates on the variousmonetary aggregates, as well as the credit rate, but also because of data limitations, it isconvenient and standard to assume that the specification above is adequate.26 Sahay and Vegh(1996) construct a continuous time model in which the rate of "dollarization," which theydefine as the fraction of interest bearing assets held in foreign currency, is a similar function ofthe differential between nominal interest rates in the two currencies, and the rate ofdevaluation of the local currency.27

26If the chosen model is misspecified the parameter estimates are likely to be inconsistent, asthe coefficient on the interest differential will capture the covariance between that differentialand the omitted variable.27Ratna Sahay and Carlos A. Vegh (1996) "Dollarization in Transition Economies: Evidence

(continued...)

74. The fraction of A/4 minus currency held as demand deposits is modeled as a function ofthe differential between the interest rate on demand deposits and the average interest rate onM4 minus currency and demand deposits (i.e. total quasi-money):

75. Similarly the fraction of A/4 minus A/1 (quasi-money) held as kuna savings and timedeposits is modeled as a function of the differential between the interest rate on these depositsand the interest rate on other quasi-money, namely foreign exchange deposits:


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77. The first regression run was of the share of M4 held as currency on theweighted-average interest rate on non-currency. This regression is motivated by theassumption that the demand for currency relative to the other components of M4 should beinversely related to the interest premium on holding those components.28 The coefficient in theestimated equation was significant and of the right sign: as the interest rate on demanddeposits and quasi-money (in kuna and foreign currency) increased the share of currency inM4 declined.

Variable Coefficient Standard Error T-StatisticConstant 0.14 0.005 29.9 **i^ -0.001 0.0007 -1.96 *

RMU4* significant at the 5% level** significant at the 1%

78. Second, a regression was run of the share of demand deposits in interest-bearing M4(i.e. demand deposits plus quasi-money) as a function of die difference between the interestrate on quasi-money and the interest rate on demand deposits. Again the results show asignificant coefficient on the interest rate premium which has the correct sign.

Variable Coefficient Standard Error T-StatisticConstant 0.28 0.006 43.24**i -i,. -0.004 0.001 -3.32*

R*=0.32* significant at the 5% level** significant at the 1%

79. Third, the share of kima-denominated time and savings deposits in M4 was modeled asa function of the differential between the interest rates on foreign currency- andkuna-denominated quasi monies. The coefficient on the interest rate differential is notsignificant, though it is of the correct, negative, sign.

27(...continued)and Policy Implications/' in P. Mizen and EJ. Pentecost, eds., The Macroeconomics ofInternational Currencies: Theory, Policy and Evidence. Cheltenham, U.K.: Edward Elgar.

2'In this part of the empirical analysis, the interest rate on any monetary aggregate whichforeign currency deposits is denominated in kuna and includes implicitly the constructedmeasure of expected kuna depreciation. Allowing expected depreciation to enter separatelyfrom the pure interest rate differential did not significantly improve the results.


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Variable Coefficient Standard Error T-StatisticConstant 0.15 0.009 16.77**I*M»O«-/.D -0.0006 0.001 -0.43

R^.OOl* significant at the 5% level** significant at the 1%

80. If agents regarded kuna- and foreign currency-denominated deposits as goodsubstitutes for one another this result would be surprising. One would expect that the share ofkuna-denominated deposits would be significantly related, and highly sensitive, to the interestdifferential. The fact that neither of these features is present lends support to the view thatagents do not hold foreign exchange primarily for transactions purposes, but rather as an assetfor purposes of diversification.

C. Concluding Remarks

81. This study had two main parts. First, it estimated demand functions for variousmonetary aggregates which, had they been stable and theoretically plausible, would have beenuseful for understanding their behavior and for gauging monetary policy. Of the threeaggregates, both the estimated demand for the broadest (M4) and the narrowest (Ml)aggregate yielded implausible results. The only monetary aggregate which displayed some ofthe expected properties was the domestic component of broad money (M2), but even herestatistical problems were present and the results obtained were not especially robust. Onepossible explanation for the relative implausibility of the results for A/4 is that demand forforeign currency deposits are not transactions based as in a standard money demandframework, bearing out the notion that the main Sanction of such deposits relates more toportfolio diversification.

82. The second part of the study investigated the behavior of the relative shares of thedifferent components of broad money. In this regard, the relative shares of some of itscomponents are related in a statistically significant way to interest rates. The exception, thelack of sensitivity in the share of kuna deposits to the interest rate on these deposits relativeto that on foreign exchange deposits, suggests that these two kinds of deposits may not beclose substitutes. This argues against the presence of any kind of pervasive "currencysubstitution" in the sense of a movement away from domestic currency into foreign currencyfor the purpose of transacting. Indeed, while the demand for foreign currency has beengrowing, the demand for domestic currency has also been growing, in a non-inflationarymanner.

83. Avenues for further research are severalfold. This chapter has focused on the demandfor money, and has assumed that comovements among real balances, output and interest ratescan be attributed to, or identified with, the money demand function. However, absent


-37-

monetary policy which exogenously targets the money supply, some of these comovementsare due to the nature of the money supply rule and money supply shocks. To formally dealwith this problem, a structural vector autoregression (VAR) approach might be useful. TheVAR would separately identify money demand, and money supply, and would facilitate anassessment of how monetary policy's effectiveness in offsetting autonomous shocks to moneydemand, but such an approach must await a longer data series. A second, interesting,extension of this work would be an assessment of money demand more along the lines ofCagan's analysis of hyperinflations, in which the expected inflation rate is taken to be the maindeterminant of money demand. This would be especially relevant to studying the historicalperiod that predates the sample used in this chapter.


ATTACHMENT

where a(L\ b(L\ c(L\ d(L\ and e(L) are polynomials in the lag operator, and dep is theestimated expected depreciation.

85. First, the equation above was estimated using two-stage least squares, and laggedvalues of real balances, activity, and the interest rates, as well as a constant and a trend asinstruments. This might be preferred to the method presented in the main text, given thatmoney demand shocks (the errors in the equation) are likely to be correlated with output andinterest rates if they have real effects. Only if the shocks are stationary and these lattervariables are nonstationary can OLS yield consistent estimates. Of course, the instrument setdescribed above, may be misspecified, if there is correlation between the money demandshocks and lagged right-hand side variables. The results were similar to those obtained usingOLS. For example, the estimated semi-elasticity with respect to the bank lending rate usingthis method was 0.041 (again positive) and was significant at the 1 percent level. Furthermore,the residuals from this equation were not highly serially correlated.

VariableConstantActivityJL*M4Expected depreciation

Coefficient-5.812.290.041

-0.040.017

Standard Error3.130.570.0070.140.027

T-Statistic-1.854.02 **5.64**

-0.30.67

R .77* significant at the 5 percent level** significant at the 1 percent level

86. The second specification included the lag of real balances on the right-hand side, butthe results were, for the most part, qualitatively and quantitatively unchanged. The impliedelasticity with respect to activity became insignificant, while the credit rate elasticity wasrobustly positive and the deposit rate elasticity was negative. This specification led to a verygood fit, since real balances resemble a unit root process: the coefficient on lagged realbalances was 0.91 with a standard error of 0.04.

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Alternative Specifications of M4 Demand

84. This attachment details results for estimating M4 using four alternate specifications.The equation estimated is the same basic money demand equation presented in the main text:


ATTACHMENT

Variable CoefficientConstant 1.26Activity -0.10Lagged Activity 0.91jL 0.0054« -0.08Expected depreciation 0.001RMX99* significant at the 5 percent level** significant at the 1 percent level

Standard Error0.40.10.040.0020.020.001

T-Statistic3.16**

-1.020.8 **2.48 *

-3.9 **1.03

* significant at the 5 percent level** significant at the 1 percent level

88. A further possibility is that the money demand shocks are trend stationary. Thismotivated the inclusion of a trend in the levels regression in the fourth specification used, butdid not change the sign of the coefficients on the interest rates while leaving the credit rateinsignificant. It also drove activity out of the equation. The trend appeared to explain almostall of the significant movement in money demand, the deposit rate being the only othervariable with a significant coefficient (robustly of the wrong sign). Thus, deviations from trendwere found to have little useful informational content.

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VariableConstantActivityA/£A/j«AExpected depreciationRM).21

Coefficient0.031

-0.14-0.00-0.0590.0017

Standard Error0.0050.10.0040.0040.0011

T-Statistic5.96 **

-1.36-.13

-1.381.55

87. The above specifications were motivated by the possibility that the error term in themoney demand equation might be stationary, even though real balances and activity might benonstationary or close to non-stationary. Another possibility is that the money demand shock,is, in fact, nonstationary, in which case the money demand equation should be estimated infirst differences. When this third specification was used, log first-differences of real balanceswere found to closely resemble a random walk with drift: none of the differenced variablesentered significantly into the equation. Adding lags of the dependent and right hand sidevariables to the specification did not significantly alter the fit or the point estimates. Putdifferently, there is insufficient information in the high frequency components of the data toidentify money demand functions.


ATTACHMENT

VariableConstantActivity*Lh«

Expected depreciationTrendRMJ.99

Coefficient5.1

-0.0180.001

-0.050.0030.03

Standard Error0.60.120.0030.0240.0020.002

T-Statistic8.56 **

-0.150.49

-2.21 *1.99

17.86**

* significant at the 5 percent level** significant at the 1 percent level

89. All these specifications confirmed the basic implausibility of the earlier results obtainedin the main text with respect to M4.

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m. OWNERSHIP, COMPETITION, AND EFFICIENCY IN THE CROATIAN BANKING SECTOR29

A. Introduction

90. This paper attempts to assess the relationship between the nature of bank ownership,age, conditions of competition, and bank size on interest rate spreads, bank profitability, andmeasures of bank operating costs and bank asset growth. The specific issues to be examinedare (i) the extent to which privatized banks are distinct in their behavior from either newprivate banks or the remaining state-owned banks and (ii) whether regional differences incompetition conditions are a significant determinant of overhead cost or bank interest ratespreads. Finally, the paper will briefly review the implications of its findings for the likelyresults of continued banking system entry by new private banks and for policies to lowerinterest rate spreads in Croatia.

91. Descriptive statistics on the variables used in this study are presented in a discussion ofgeneral trends and measurement issues in Section B. This is followed by some cross sectionregression estimates that attempt to test narrower hypotheses of bank behavior throughexamination of the relationships among these variables. The hypotheses are laid out in SectionC and the empirical results appear in Section D. The paper concludes with a brief discussionof the implications of the results for banking system evolution and policy in Croatia.

92. The Croatian banking system before the transition was characterized by two nationalbanks and roughly twenty regional banks, each competing in largely non-overlapping regionalmarkets. All banks were controlled by socially-owned (effectively state-owned) entities ratherthan private owners. Banks were owned and controlled by major borrowers to varyingdegrees. Starting in 1989, new private banks were allowed to enter the market. Two dozennew private banks entered the market by the end of 1994, mostly in the capital, Zagreb.Simultaneously, older Croatian banks and enterprises began a gradual process of privatizationin which banks sought new private owners directly through new share issues at the same timeas state-owned shareholders of banks also sought to privatize themselves. As a result of bothprocesses, the new private banks were joined by eight privatized banks by the end of 1994.Eighteen other banks were in majority-state ownership at the end of 199430. New entry intobanking was very heavily concentrated in Zagreb, while privatization of older banks occurredin both Zagreb and the other regions. At end-1995, Zagreb customers were served by twentybanks while customers in various regions of Croatia were generally served by one or two

29Prepared by Thomas Dorsey. This paper is an extension of a part of a larger paper preparedfor the Second Dubrovnik Conference on Economies in Transition: Velimir Sonje, Evan Kraft,and Thomas Dorsey, "Monetary and Exchange Rate Policy, Capital Inflows, and the Structureof the Banking System in Croatia," June 1996.

30Five additional majority state-owned banks entered the market between end-1991 andend-1995. Most were new subsidiaries of older majority state-owned banks.


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older regional banks, which may or may not have been privatized, and two national banks, oneof which was privatized. In some cases, generally the more populous regions, a new privatebank was also in the market.

93. Most of the descriptive statistics and almost all of the statistical analysis are based onbalance sheet data for end-1995 and cash flows for the year 1995. This choice of data isdriven by availability of useful information. Prior to 1994, Croatia was characterized by veryhigh inflation and a unresolved situation regarding bank privatization. Although 1994 cashflow data were available, the very recent and sudden end of high inflation raises some questionas to whether 1994 cash flows would be representative of "normal" conditions.31

94. Nominal magnitudes from bank balance sheets are presented as ratios to total assets inorder to come up with measurements independent of scale as in other papers on bankingsystem competition, structure, and performance.32 Two sources of data sometimes used inother analyses that were not available for this study are line of business cadi flow data andstock market data.33 Data on costs and revenues by line of business (e.g., household versusgovernment deposit-taking or commercial versus consumer loans) were not available at all.Information on the market valuation of assets exists but is quite limited; only a few banks haveshares that are actively traded in Croatian stock markets and only one bank is fully listed onthe Zagreb Stock Exchange. Therefore, this paper relies primarily on balance sheet databecause of the absence of alternatives.

B. Competitive Structure and Financial Differences Among Croatian Banks

95. Tables 1 and 2 below show the share of banking system assets classified by type ofbank ownership and regional competition conditions. Both classifications require someexplanation, particularly in the case of the ownership classification. To capture therelationship, if any, between ownership and bank behavior, three categories of ownership are

31Retail price inflation in Croatia fell from 38.7 percent in October 1993, to 1.4 percent inNovember 1993, and to O.S percent in December 1993. The first five months of 1994 ware allcharacterized by falling prices.

32This scaling is done to focus on the proportional effect of asset and liability allocation, not tooffset heteroskedasticity (although it may serve that function as well). As these data are drawnfrom balance sheets, the total assets (or equivalently total liabilities) should not be interpretedas asset market values. This approach has been used even in cases in which the banks underconsideration were failed banks. See in this regard David C. Wheelock and Paul W. Wilson,"Explaining Bank Failures: Deposit Insurance, Regulation, and Efficiency," Review ofEconomics and Statistics, 1995.

33See for example, Mary S. Schranz, "Takeovers Improve Firm Performance: Evidence fromthe Banking Industry/* Journal of Political Economy, 1993.


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employed in the tables and estimates: "new private" banks are those private banks establishedsince 1989 with a private ownership structure; "privatized" banks are those older banks withmixed but majority private ownership structures; and "state" banks, a majority of the shares ofwhich are owned by majority-state enterprises.34

96. While the ownership of the new private banks is straightforward, the ownership of theolder banks, whether privatized or not, requires some understanding of banking systemownership in the former Yugoslavia.

97. As noted above, the banks inherited from the old regime were owned by groups ofsocially-owned enterprises. This ownership structure was initially continued during theprivatization process although sales of new bank shares to household or other buyers dilutedthe original ownership in many cases. In addition, enterprise privatization has been an ongoingprocess throughout the period under consideration with enterprises becoming majorityprivately owned through a gradual process of share sales from the Croatian PrivatizationFund. As a result of both processes, the ownership structure of almost all of the old banks hasbeen constantly changing, and the measurement of private bank ownership is dependent uponthe measurement of privatization of the enterprises that own bank shares.

98. Privatized banks are those banks with a majority of shares owned by originally privatefirms, fully-privatized firms, majority-privatized firms, or private individuals as of end-1994.35

These banks include the largest bank measured by deposits (the second largest measured byassets) as well as seven other banks (see Tables 1 and 2). Only a single observation is used forthis measure: thus there is no change in the composition of the privatized banks over time; thesame eight banks contribute to the "privatized" data for all years. As a result, changes in theasset shares of this group over time reflect only the relative performance of these eight banksas they proceeded on the path to privatization and not changes in the composition of thegroup as banks move from "state" to "privatized" categories.36

^There are "new" state banks, but these are generally subsidiaries of, or successors to, otherstate banks that represent a continuation rather than a transformation of the ownershipstructure.

"The measurement of privatization for banks existing at end-1994 is taken from an inventoryof banks published in the Croatian financial journal Barika International, December 1995,pp. 38-43. Although the process of privatization began years earlier, these banks had notformally become majority private until 1994. Given that financial flow data was for 1995,end-1994 and end-1995 privatization data would be equally relevant However, even thoughtwo additional banks had become majority privately-owned by end-1995, changing thedefinition of "privatized" to reflect end-1995 ownership status to add these two banks to theprivatized category status did not substantially affect the empirical results.

**The number of privatized banks based on ownership structure at the time of measurementwas zero through 1993, 8 at the end of 1994, and 10 at the end of 1995.


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Table 1. Banking System Assets by Ownership and Region:end-1991 through end-19951

f^tum^i uliiiiv/WUCIaili|J

StatePrivate

New PrivatePrivatized

RegiopNationalRegionalZagreb

Share of Assets

1991 199 199 994

(hi percent)

62.1 67.0 65.0 62.3

2.1 3.5 3.8 7.735.8 29. 31.2 30.2

55.0 55. 59. 4.742.9 42. 38. 0.52.1 2.0 2.6 5.9

1995

58.9

10.031.3

54.738.57.8

'Data for 1993 are end-September rather than end-December observations.

OwnershipStatePrivate

New PrivatePrivatized

RegionNationalRegionalZagreb

Table 2. Number of Banks by Ownership and Region:end-1991 through end- 1995

1991 199 199 994

13 17 17 18

8 13 18 248 8 8 8

2 2 2 220 25 28 31

7 11 13 17

1995

18

278

23318

Total 29 38 43 50 53


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99. The regional categories used to proxy competition conditions also require someexplanation. Competition in the Croatian banking system may be characterized as follows:each regional bank competes primarily only with the two national banks and does not competesignificantly with other regional banks or Zagreb-based banks other than two national banks.New entry has changed this situation to some degree, but the new entrants have been heavilyconcentrated in Zagreb—the largest market in Croatia but one which has between one-fourthand one-fifth of the country's population. This has tended to make Zagreb a more competitivebanking market than other regions of the country. Ideally, information on business activity bybank for each region could be used to better measure the degree of sub-market competition,but such data are unavailable and the Zagreb/regional distinction is used as a proxy formarkets with relatively strong versus relatively weaker bank competition.

100. The relative average size of the banks and several other characteristics of banks in thevarious sectors are shown in Table 3 (end-1994 data). New private banks are on the order ofone-tenth the size of state and privatized banks respectively. Capital among new banks of allsorts is remarkably high.37 We will see below that capital to a great extent plays the role ofdeposits for these banks. Old banks, whether privatized or state-owned, have much lowerlevels of capital adequacy. Note that capital adequacy levels in general seem acceptable, evenfor the old state banks. Although, at least for the worst banks, potential loan losses may in factexceed existing capital.

TableS. Capital and Employee Productivity at end-1994

New PrivatePrivatizedState

AverageAssets perBank, inthousandsofHrK

237,3592,747,4452,279,218

CapitalAssetratio,in percent

653518

Assetsperemployee, inthousandsofHrK

3,0992,7592,935

Personnelexpense/assets,in percent

2.282.221.71

Reserves/grossloans,in percent

7.829.01

11.76

All banks 1,226,108 47 3,003 2.09 10.37

101. Efficiency measurement in banking is a complicated issue. As a practical matter, costratios and similar input-based measures of efficiency are all that can be readily calculated frombalance sheet data. Costs and inputs can be measured in a relatively straightforward manner

37Money assets such as reserve deposits with the NBC have been removed from total assets toapproximate risk-weighted capital ratios (since these items are zero-weighted) for this tableonly. All other references to asset ratios use total book value of all assets.


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and compared to assets of various types (as is done below); quality of services is harder tomeasure. Therefore, what is described here as efficiency refers to a narrow cost efficiencyconcept and not to a broad concept of economic efficiency that correctly accounts for servicequality. Evidence from other economies suggests that this might not be appropriate. Forexample, Berger, Kashyip, and Scalise (1995) found that non-interest expenses relative toassets were rising in the United States in recent years as a result o/increased competition andinnovation; bank competition for customers took the form of an increased range of financialservices and increased provision of customer services such as automatic teller machines andelectronic banking.31 In spite of the increase in non-interest expenses relative to assets, onewould not necessarily want to describe such an outcome as a decrease in 'true" efficiency in anormative sense given the clear indications of increased service in this case.

102. Two personnel-based measures of banking overhead costs are assets per employee andpersonnel cost relative to assets. Data from 1994 on both employee productivity measuresappear in Table 3. The evidence is mixed: new private banks have lower costs by the assetsper employee measure but state banks have lower cost by the personnel costs to assetsmeasure. It seems that the new private banks tend to pay higher wages, possibly to attractexperienced personnel away from older banks or to provide greater employee incentives.

103. Data on broader cost measures appears in Table 4. All ownership categories havealmost identical ratios of administrative costs to assets while new private banks have slightlyhigher ratios of total non-interest cost to asset than state or privatized banks. One item thatdoes stand out in table 4 is the mudh lower administrative and non-interest cost ratios of thetwo national banks (one privatized and one still in state ownership). These data point to thefact that special attention should be given to the problem of economies of scale.

104. There are marked differences between various classes of banks in terms of interest ratesand interest rate spreads. It may be seen in Table 4 that national banks have much lowerinterest rate spreads than either regional or Zagreb banks and that new private banks havehigher spreads than state banks with privatized banks falling in between. Data show that newprivate banks held an advantage in net interest income as a ratio of total income. Table 5presents data on interest income, interest rates, and profitability. New private banks tend tocharge higher interest rates on short-term loans.

38 Allen M. Berger, Anil K. Kashyip, and Joseph M. Scalise, "The Transformation of the USBanking Industry: What a Long Strange Trip It's Been/' Breakings Paper on EconomicActivity 1995:2, 1995.


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Table 4. Banking System Cost/Asset Ratios and Interest Rate Spreadsby Market Type, Age, and Ownership in 1995

Type Non-InterestExpense/Assets

AdministrativeCosts/Assets

Interest RateSpreads39

Interest Income/Assets

RegionalZagrebNationalNew PrivatePrivatizedState

8.49.44.79.08.38.3

(In percent)

4.65.22.44.74.74.7

7.67.83.6

10.88.76.6

8.59.45.0

10.87.77.7

Table5. 1994 Interest and Return on Assets Indicators

Short-termloan rates40

Returnon capital

Returnon assets

New PrivatePrivatizedState

All banks

24.3418.3321.13

21.73

(in percent)

5.107.41

-18.83

-5.48

1.280.68-1.45

-0.57

105. The structure of profitability is largely consistent with the interest rate levels. Both newprivate and privatized banks are profitable by all measures. New private banks are the mostprofitable by the return on assets measure, but are less profitable by the return on capitalmeasure due to high capital holdings of new private banks. It can be quite difficult for thesenew private banks to develop a retail deposit base. Opening up a branch network requireslarge initial investment hi both equipment and personnel. Furthermore, the short-run

39The spread is calculated as the ratio of interest income to assets less the ratio of interestexpenses to deposits. Three banks for which the interest rate spread is not meaningful(e.g., because of near zero deposits) are excluded from the calculation.

"Announced interest rates are taken from the financial weekly Privredni Vjesnik.


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opportunity cost of such a business strategy during 1995 was high. In the short run, it wasmore profitable for the new, capital-rich banks to lend at high interest rates through theinter-bank money market than to invest in branch networks.

C. Relationships Between Profitability, Efficiency, Competition, and Ownership

106. There are competing influences in the relationship between profitability, interest ratespreads, growth, and overhead cost structure on one hand and ownership, age, competitiveenvironment, and scale on the other hand. The nature of bank ownership structures might beexpected to be particularly important. New private banks might be expected to perform betterthan old, state-owned banks. This superior performance might be thought of as having avariety of causes. The new banks would not be burdened by an existing portfolio of suspectloans inherited from the former regime. Their private ownership would establish incentivesthat would make it less likely that they would engage in money-losing new lending for politicalreasons or reasons related to moral hazard inherent in their ownership structure. They wouldalso be expected to avoid excessive overhead costs in the form of over-staffing, excessivewages or real estate or other "empire-building" activities divorced from profitable banking.Older banks that have been privatized might be thought of as an intermediate case, performingbetter than old, majority state-owned banks because of the improved incentives associatedwith the transformed ownership but less well than new private banks. Competing influencesabout the behavior of the new or private banks can be categorized in terms of three stylizedtypes.

107. One hypothesis, combining several relationships might be characterized by describingthe new or private banks as "lean and mean". Support for this hypothesis would be finding atendency for new private or privatized banks to have higher profits, lower interest ratespreads, and lower overhead-to-assets ratios. Conversely, the hypothesis suggests that olderand majority state-owned banks might be expected to be relatively unprofitable, exhibit higherspreads, and have higher overhead cost ratios under this hypothesis. This is arguably themainstream stereotype of banks (or other economic enterprises) in transition economies: theold regime is characterized by bloat and inefficiency for which cost control and aggressivepricing brought about through privatization and new private entry are the remedy.

108. A second hypothesis would have it that new private banks (but not necessarilyprivatized banks) are exploiting a niche to engage in what might be characterized as "creamskimming"—taking the most profitable customers on both the deposit and lending sides of thebalance sheets by providing higher quality services (and therefore incurring higher costs).These banks might also be expected to be relatively profitable, but, unlike banks under thefirst hypothesis, they might be expected to have higher interest rate spreads and perhapsmodest growth rates reflecting the preference for high rates of return over aggressiveexpansion. This hypothesis would be consistent with the view that existing bank ownershiplinks have channeled excessive credit to bank shareholders while pushing otherwisecreditworthy customers to the margins of the banking system where they would face higherrates due to greater competition for funds. Support for this hypothesis would be finding a


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positive relationship between new private banks on one hand and higher profits, and relativelyhigh interest rate spreads, on the other.

109. A third hypothesis, closely related to the "cream skimming" hypothesis, might becharacterized as "aggressive full service banks" also taking the most profitable customers onboth the deposit and lending sides of the balance sheets by providing higher quality (andtherefore incurring higher costs). These banks might also be expected to be relativelyprofitable, but they might be expected to have higher overhead-cost-to-assets ratios.However, unlike banks under the cream skimming hypothesis, they would be expected to havelower interest rate spreads and high rates of asset growth reflecting the preference foraggressive expansion over high rates of return. Such banks might typically be foreign banks(largely absent from Croatia in 199S) or domestic banks seeking low risk foreign or domestic"blue chip"clients. Support for this hypothesis would be finding a positive relationshipbetween new or privatized banks and higher profits, higher overhead-to-assets ratios, andrelatively low interest rate spreads.

110. Independent of the differences between these three hypotheses, two factors that needto be controlled for are the influence of economies of scale and competitive environment.First, Croatia is a middle income country with less than five million people but more than fiftybanks of widely varying sizes; it is not obvious that all are at or above the minimum efficientscale. Absent a control variable for economies of scale, large but inefficient banks could havetheir inefficiency masked by the effect of the scale economies. Second, competition in themore competitive banking markets could result in an equilibrium with lower profits, spreads,and overhead cost relative to other markets independent of ownership and age effects. Theregional variables described above are used as proxies to capture the effects of regionaldifferences in competition.

D. Empirical Examination of Competition, Scale Economies, and Efficiency

111. This section presents the results of regressions that attempt to assess some of thesehypotheses. Two measures of profitability (profits to assets and profits to capital), two costratios (non-interest expenses-to-assets and administrative expenses-to-assets), the ratio ofinterest income to total assets less the ratio of interest expenses to deposits (the "spread" forthe purposes of these regressions), and rate of growth are the dependent variables. Theindependent variables are the natural log of total assets (to capture the influence of economiesof scale), the ratio of non-interest expenses to assets, a dummy variable for new private banks(established in 1989 or later), a dummy variable for older privatized banks, and a dummyvariable for banks operating in Zagreb. All regressions use 1995 flows and end-1995 stocksfor all variables.

112. The sample used for the regressions reported on below excluded those banks withdeposits-to-asset ratios under 0.2. Because these banks are not taking significant amounts ofdeposits relative to their assets, concepts such as interest rate spreads are of questionablerelevance and cost ratios need to be considered in the light of having few of those costsassociated with depositor services. Some of these banks operating with little or no deposits


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are in a very early phase of their start-up while others appear to be engaged in somethingmore like investment banking than intermediation between depositors and borrowers. Anotheranomalous bank, one created to manage the Croatian assets and liabilities inherited from abank based in Serbia, was also excluded due to its anomalous nature. These deletions reducesthe total sample from 53 banks to 48 banks. However, these omitted banks are relatively smalland account for a small share of Croatian banking assets.

Profitability

113. The first measure of profitability employed is the ratio of 1995 profits to end-1995assets. This measure of profitability was regressed on the logarithm of total assets to capturethe effect of economies of scale, the ratio of deposits to total assets (to capture the effect ofdependence on borrowed resources) and dummy variables for local banks based in Zagreb,new private banks, and privatized banks (Table 6). A second regression was run on the samevariables but with the profit to capital ratio as the dependent variable (Table 7). In both cases,restricted regressions were run excluding the least statistically significant variables. Therestrictions were statistically insignificant (as measured by the F-statistics) in both cases andthe new private dummy variable became positive and significant (by conventional t-statisticmeasures) while the privatized dummy variable remained positive but fell short of thetraditional t-statistic levels for statistical significance.41

41 Although somewhat subjective, the general criteria for the variables excluded from therestricted regressions shown in the table are the omission of variables with very low t-statisticsand, in the case of the highly correlated Zagreb and New Private dummies, the omission of theless significant variable of the two when both are marginally significant.


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Table 6. Determinants of ProfitabilityDependent Variable: Profits/Assets

Constant

Natural log of Assets

New Private

Privatized

Zagreb

F(2,42)=0.5595

(t -statistics in parentheses)

0.0032(0.68)

0.0003(0.08)

-0.046(-1.35)

0.015(1.25)

0.018(1.29)

0.013(1.05)

0.030(1.65)

-0.034(-1.28)

0.020(1.95*)

0.015(1.07)

* indicates statistical significance at the five percent level

Deposits/Assets


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Table?. Determinants of ProfitabilityDependent Variable: Profits/Capital

(1) (2) (3)

(t -statistics in parentheses)

Constant -0.013(0.68)

0.021(1.65)

0.029(1.29)

Natural log of Assets 0.005(0.38)

Deposits/Assets

New Private

Privatized

Zagreb

F(2,42)-0.11F(l,44)=2.07F(3,42)-0.74

-0.046(-0.44)

0.052(1.41)

0.059(1.35)

0.056(1.46)

for comparison of (1) and (2)for comparison of (2) and (3)for comparison of (1) and (3)

0.052(1.57)

0.055(1.33)

0.050(1.44)

0.068(2.16*)

0.047(1.14)

* indicates statistical significance at the five percent level

114. These regressions indicate that private banks, particularly new private banks, are moreprofitable than state banks when scale effects and the influence of deposit-to-asset ratios aretaken into account. Three features of the insignificant variables are worthy of note. First,differences in profitability between new private and privatized banks, which should have beenpicked up by the new bank dummy, do not appears to be substantial given that the coefficientis low relative to the standard error. Second, the dummy variable for Zagreb, although of alow level of significance, has the opposite of the expected sign. Rather than suppressingprofits, the more intensely competitive Zagreb market appears to be associated, albeit weakly,with higher profits. The third feature worth noting is the economic significance of thecoefficients on these new private and privatized dummy variables. The dummy on new privatebanks suggests an additional profit effect for new private banks equal to 2.0 percent of assetsand 6.8 percent of capital, almost exactly the size of the mean profit to assets and profit tocapital ratios for all banks (2.1 percent and 6.7 percent respectively). The estimated profit


-53-

effects for privatized banks (1.5 percent relative to assets and 4.7 percent relative to capital)are smaller and statistically insignificant but are also large in economic terms. This suggeststhat the low statistical significance may be more the result of low sample size rather than smalleconomic effect.

Non-interest expense and administrative cost ratios

115. Conventional wisdom about the banking system in Croatia suggests that the newerprivate banks are relatively efficient due to low overhead expenses (arguably too low foreffective loan evaluation according to some), while the older banks, particularly those thathave not yet been privatized are burdened with excessive overhead. The information in Tables4 and 5 provides some limited support for that view, but the differences across ownershiptypes are small and some measures show higher costs for the new private banks. The apparentlack of difference across ownership types may reflect the offsetting effects of economies ofscale trading to reduce the costs of the generally larger state-owned and privatized bankswhile poor cost control in those banks raises costs.

116. Two dependent variables (non-interest expenses to assets and administrative costs toassets) are regressed on the natural log of total assets (to capture the influence of economiesof scale), the ratio of deposits to assets (to capture the higher costs associated with retailbanking), a dummy variable for banks operating from Zagreb (other than the two nationalbanks), a dummy variable for new private banks established in 1989 or later, and a dummyvariable for older privatized banks.

117. In the case of both non-interest expense and administrative cost ratios, the results aresimilar. Both regressions show significant economies of scale, and a weaker but positiverelationship between the ratio of deposits to assets.42 The regressions on administrativeexpenses showed a marginally significant positive relationship between both new private banksand location in Zagreb on one hand and higher costs on the other (perhaps reflecting either aneed to provide more services in a more competitive environment or higher wages in Zagreb).Otherwise, the ownership, age and locations dummies showed little relationship to the costratios in the presence of the other independent variables.

118. These results tend not to support the idea that new private banks or more competitivebanking markets will reduce costs in the Croatian case or that older or state-owned banks aresuffering from bloated overhead costs. The new entrants may be more efficient in the sensethat they are providing a higher level of service with the same cost ratios as other banks.However, it does not seem to be the case that the new private or privatized banks areproviding lower cost banking services once the influences of scale and dependence upondeposits are taken into account.

"The deposit-to-assets ratio is included in the restricted regression for non-interest expensesin spite of its low t-statistic to maintain parallel treatment to the restricted regression foradministrative expenses.


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TableS. Determinants of Non-Interest and Administrative Expenses

Dependent variable: Dependent variable:Non interest expenses/ Administrative Expenses/

assets assets

Constant 0.244(4.00**)

Log Assets -0.015(-3.31**)

Deposits/Assets

0.036(0.84)

0.247(5.46**)

-0.015(-3.63**)

0.058(1.63)

New Private 0.012(0.88)

Privatized

Zagreb

F(3,42)-F(3,42)-

•0.001(-0.07)

0.012(0.80)

0.165(5.06**)

-0.011(-3.86**)

0.041(1.71)

-0.010(-1.18)

0.001(0.11)

0.013(1.47)

0.155(5.58**)

-0.011(-4.17**)

0.054(2.47**)

0.543 for non-interest expense to assets ratio0.885 for administrative expense to assets ratio

** indicates statistical significance at the one percent level

Interest rate spreads

119. Regressions with interest rate spreads as the dependent variable (Table 9) suggest thatthe regional variables do not have much explanatory power for this variable and theeconomies of scale is only marginally significant. Nevertheless, it is noteworthy that therelationship between bank size (log of assets) and spreads is positive once other factors arecontrolled for by the regression in spite of the generally lower spreads at the very largenational banks and the relatively high spreads at the small new private banks (see Table 4above). There is also a positive, albeit statistically marginal, relationship between higherinterest rate spreads and privatized banks. However, the size of the coefficient on non-interestexpenses gives a strong hint as to why the non-interest expenses variable had no strongcorrelation with profit ratios: the restricted regression suggest that more than 89 percent of

(t-statistics in parentheses)


-55-

these costs are passed on to customers in the form of lower deposits rates or higher creditrates43.

120. Similar results, although with weaker statistical significance were obtained with theadministrative costs ratio as the independent variable in place of the non-interest expenseratio. These regressions also suggested that there was a strong relationship between privateownership and higher spreads and that most of the non-interest costs were passed on throughinterest rate spreads. As with the non-interest and administrative cost ratios, it is worthdistinguishing between the marginal statistical significance of the ownership dummy variablecoefficients and the economic significance of the coefficient values. The parameter values inthe restricted regression for both the new private and privatized dummy variables suggest thatthe effect of either ownership status is in excess of one fourth of the mean interest rate spread.

"Ideally, the potential interdependence between non-interest costs and interest rate spreadsarising from accounting identities should be addressed through simultaneous equationsmethods. Broadly similar results were obtained with three-stage least squares estimates of asystem similar to the second columns of tables 8 and 9. However, the usefulness of suchestimates is severely limited because of the lack of truly exogenous instruments other thanownership and regional dummies (e.g., variables not included in balance sheet or profit-and-loss identities) and the attendant need for very strong assumptions behind the identifyingrestrictions.


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Table9. Determinants of Interest Rate Spreads(Dependent variable: interest rate spread)

(t- statistics in parentheses)

Constant

Log Assets

Non interest expenses/assets

New Private

Privatized

Zagreb

F(2,42)=1.48

-0.080(-1.12)

0.0049(1.02)

0.938(5.64**)

0.025(1.64)

0.025(1.39)

0.019(1.22)

-0.008(-0.53)

0.893(6.02**)

0.025(1.89*)

0.023(1.30)

* indicates statistical significance at the five percent level** indicates statistical significance at the one percent level


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Growth in assets

121. Regressions on asset growth in 1995 produced only one significant variable, thedummy variable for new private banks. The growth variable is calculated as the change inassets from end-1994 to end 1995 relative to the average of end-1994 and end-1995 assets.The coefficient on the dummy variable for new private banks suggests an additional49 percent growth in assets for these banks in both the restricted and unrestricted regressions.

Table 10: Determinants of 1995 Asset Growth(Relative to the Average of end-1994 and end-1995 assets)

Constant

Log Assets

New Private

Privatized

Zagreb

F(2,42)«= 0.31

(t- statistics in parentheses)

0.985(1.55)

-0.064(-1.37)

0.492(2.96**)

0.014(0.07)

0.017(0.11)

0.984(1.59)

-0.063(-1.40)

0.494(3.44**)

** indicates statistical significance at the one percent level


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£. Concluding Remarks

Characterizing the private banks

122. These results suggest that Croatian private banks, particularly new private banks, aremore profitable, faster growing, and probably have higher spreads than those remaining instate hands. Profits of private banks tend to be higher by an amount roughly equal to medianprofitability regardless of whether profits are measured relative to assets or capital. Theestimates of the effect of ownership status on growth suggest that new private banks grow ata rate that is an additional 49 percent higher than other banks. There was no significantrelationship between ownership status, age, or market location in terms of non-interest oradministrative expenses once other variables were controlled for, although there were strongdiseconomies of scale which would fall heavily on the new private banks because they tend tobe smaller than other banks.

123. In terms of the three hypotheses about the behavior of private banks laid out above,the "lean and mean" hypothesis seems clearly inconsistent with these results with itsimplications of lower administrative and non-interest costs, and lower interest rate spreads.Similarly, the lower spreads argue against the "aggressive full service bank" hypothesis. The"cream skimming" hypothesis looks most consistent with the data; private banks do havesubstantially higher profits and interest rate spreads than their state-owned competitors.

124. The results on growth suggest that the higher spreads have not prevented growth ofthe new private banks, although perhaps growth would be still faster if new private bankswere to switch to an "aggressive full service" approach. However, as noted above, such anapproach may not be cost effective given the costs and time needed to build a retail bankingnetwork that could fund faster growth.

Implications for the Croatian banking system

125. New entry by either new private banks or by foreign banks might be thought of as asource of competitive pressure that could reduce the high interest rate spreads observed inCroatian banking. In Croatia, this new entrant role would potentially fall on new private banksas foreign banks were largely absent in Croatia during the sample period. However, it doesnot seem to be the case in Croatia that new entrants were putting downward pressure oninterest rates by undercutting the incumbent banks on pricing; new private banks in Croatiaappeared to have higher spreads.

126. Their profitability and rapid growth both suggest that new private banks are successfuland aggressive competitors in some sense (particularly notable given their high concentrationin Zagreb, Croatia's most competitive banking market). However, given that they have higherspreads and no lower overhead cost ratios than other banks, their competitiveness wouldappear to be founded on providing more or better services or serving previously under served


-59-

markets rather than gaining customers through more aggressive pricing and better costcontrol.

127. A reduction in interest rate spreads does not seem likely to be the direct, near-termresult of new entry by new private banks thus far. However, the absence of a direct effect ofnew entry in the sense of having new entrants undercutting the spreads of incumbent banksisn't to say that there has been no indirect effect on spreads as a result of new entry. Olderbanks may have reduced their spreads relative to what they would be otherwise in order toprevent an even fester erosion of market share.

128. If the new private banks or privatized banks exhaust the high return potential ofunder-served clients willing to pay high interest rates, their own business strategy mightchange. Absent a different strategy on the part of new private banks, other influences wouldseem to be called for in order to reduce interest rate spreads. Bank rehabilitation of problembanks is one possibility; this is already underway but results are not yet evident. The recentrehabilitation and possible future breakup of the largest state-owned bank and the recentrehabilitation of two other large state-owned banks could substantially change the structure ofthe Croatian banking market and the financial structure of its major participants. The firststages of bank rehabilitation in early 1996 have already reduced interbank interest rates, and itis certainly possible that spreads and lending rates will fell as rehabilitation proceeds.Moreover, foreign banks are only just now starting to enter the Croatian market. Their entrycould reduce concentration in the banking sector and bring down interest rate spreads throughgreater competition. The horizontal breakup of the larger state-controlled banks, for examplethrough privatization, could further invigorate competitive forces in ways that had not beenapparent before.


ANNEX I

SUMMARY OF THE CROATIAN EXCHANGE AND TRADE SYSTEM(POSITION AS OF DECEMBER 31,1996)

Exchange Arrangement

129. The currency of Croatia is the Kuna, the external value of which is determined in theinterbank market. The exchange rates in the interbank market are determined by authorized banksthat transact with each other at freely n^otiatedi^ates. The National Bank of Croatia (NBC) mayset intervention exchange rates at which it will transact with banks outside the interbank marketfor purposes of smoothing undue fluctuations in the exchange rate. On December 31,1996, theaverage interbank market rate for the U.S. dollar was HrK 5.5396 per US$1.

130. There are no taxes or subsidies on purchases or sales of foreign exchange.

131. Croatia accepted the obligations of Article Yin, Sections 2, 3, and 4 of the Articles ofAgreement on May 29,1995.

Administration of Control

132. Foreign exchange transactions are governed by the Law on the Foreign Exchange System,Foreign Exchange Operations, and Gold Transactions, which was enacted on October 7, 1993.The NBC formulates and administers exchange rate policy and may issue foreign exchangeregulations under this law. A Trade Law (codifying domestic trade and foreign trade legislationin a comprehensive law) was passed on January 31, 1996, and came into force on February 17,1996. Companies wishing to engage in foreign trade must register with the commercial courts.The representative offices of foreign companies must be registered with the Ministry of Economy.

133. Foreign exchange transactions must be conducted through authorized banks; currently 52commercial banks in Croatia are licensed to conduct foreign exchange transactions. Restrictedlicenses are given to banks that may open accounts for resident natural persons and may buy andsell banknotes and checks (currently 8 banks).

Prescription of Currency

134. Settlements between residents and nonresidents may be effected in any convertiblecurrency. Croatia does not maintain any bilateral payments agreements involving exchangerestrictions.

Resident and Nonresident Accounts

135. Resident natural and juridical persons may, in principle, open and operate foreignexchange accounts only in Croatia. However, the NBC has the authority to allow residentjuridical persons to keep foreign exchange in accounts with foreign banks in order to cover thecosts of business operations and meet the requirement of regular foreign trade activities abroad.

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ANNEX I

costs of business operations and meet the requirement of regular foreign trade activities abroad.The law also makes specific provisions for resident juridical persons engaged in capital projectconstruction abroad to maintain accounts with foreign banks, subject to a license issued by theNBC.

136. Nonresidents may open foreign exchange accounts with fully licensed banks in Croatia.These accounts may be credited freely with foreign exchange and debited for payments abroador conversion into domestic currency; reconversion of domestic currency into a foreign currencyis permitted. Juridical persons may credit these accounts with foreign banknotes up to a limit ofUS$20,000 without special permission from the NBC.

137. Nonresident natural and juridical persons may open accounts in domestic currency withthe proceeds from sales of goods and sendees or with foreign exchange transferred from abroad.They may purchase foreign exchange with fiinds held in these accounts without restriction.

Imports and Import Payments

138. Croatia does not maintain any import quotas—die existing quotas were abolished bydecree of July 12,1996, although such quotas are in principle allowed for under the TradeLaw under conditions similar to WTO rules. All imports except a list of products whoseimportation is controlled by international agreement for noneconomic reasons (such as, arms,gold, illegal drugs and narcotics, and artistic and historic work) are free from licensingrequirements, and a small number of other products (notably iron tubes and bars). Theimportation of these items is allowed on a case-by-case basis.

139. Imports are subject to a customs tariffs of up to 25 percent, with a few exceptions.The exemption for duty-free imports by travelers is US$100. Goods imported by travelers andpostal shipments up to the value of US$500 are subject to a simplified customs procedurewith a unified tariff rate of 8 percent. For imports exceeding that value, the regular importtariffs and taxes are applied. Returning citizens may bring into the country household effectsduty free in an amount related to the period spent abroad for household effects and for privatebusiness purposes without restrictions, but on a case-by-case basis, under the approval ofMinistry of Finance. Under certain conditions, goods imported by nonresidents for investmentpurposes are exempt from import duties. Also, raw materials and intermediate products usedin the production of exports are exempt from all import duties and taxes, provided that thevalue added of the export product is at least 30 percent of the value of the imported items andthat export proceeds are received in convertible currency. Payments for legal imports are notrestricted.

140. Advance payments for imports are permitted, where down payments are required bysuppliers, in accordance with customary international practices.

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ANNEXI

Payments for invisibles

141. Payments for invisibles related to legal imports by juridical persons may be madefreely. Payments of leasing fees are permitted provided that temporary imports have beenregistered with the Customs Office. Natural persons may also purchase foreign exchange inthe interbank market for the payment of goods and services abroad and for deposit in aforeign exchange account for the purpose of future payments. Resident juridical persons(including tradesmen and natural persons engaging in independent activities) may purchaseforeign exchange only for authorized payments abroad, except to make payments for activitiesrelated to scientific, humanitarian, cultural, or sport events. Payments of royalties, insurance,and legal obligations and contracting of life and casualty insurance policies with foreigncompanies are also permitted.

142. Resident natural parsons may take out of the country foreign currency equivalent toDM 1,000, including for short cross-border trips. There exist no restriction on the frequencywith which such amounts can be taken out. An additional amount equivalent up to DM 2,000may be taken out, provided that it is withdrawn from foreign currency accounts or purchasedfrom banks for travel expenses. In both cases the NBC may allow higher amounts to be takenout on a case-by-case basis. The exportation of Croatian currency by both residents andnonresidents is limited to HrK 2,000 a person.

Exports and Export Proceeds

143. Exports are free of restrictions except for certain products for which permits must beobtained (list D products: e.g., weapons, drugs, and art objects); several basic foodstuffs toensure adequate domestic supplies; unrenewaMe resources (oil and natural gas); hides and wood.

144. Export proceeds must be collected and repatriated in full to Croatia within 90 days of thedate of exportation; this period may be extended with the permission of the NBC. If paymentterms in excess of 90 days have been agreed with foreign importers, the credit arrangement mustbe registered with the NBC.

Proceeds from Invisibles

145. Proceeds from services are, in principle, subject to the same regulations as those applyingto merchandise exports. The importation of Croatian currency by both residents and nonresidentsis limited to HrK 2,000 a person.

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ANNEXI

Capital

146. Resident juridical persons, including commercial banks, may borrow abroad. They arerequired to register the loans contracted, including commercial credits, with the NBC. Financialcredits may be extended to nonresidents by resident juridical persons, only in accordance with theprovisions of the Law on Foreign Trade Credit Operations. Natural persons are permitted toobtain loans from nonresidents in domestic or foreign currency. The foreign exchange positionsof commercial banks are subject to a limit (maximum up to 30% of the bank capital).

147. Foreign direct investment by nonresidents may take the form of joint ventures or fullownership and must be registered with the commercial courts. Repatriation of capital andtransfers abroad of profits are not restricted. In principle, domestic and foreign investment istreated equally (e.g. "national treatment"). If the foreign equity capital participation exceeds20 percent, inputs used in the project are exempt from import duties. The profit tax rate isuniform and amounts to 35 percent. Foreign direct investment abroad by residents must beregistered with the Ministry of Economy within a 30-day period commencing from the signatureof the contract. Such investment must generally be undertaken through loans abroad or throughreinvestment of profits. Inward portfolio investment is not restricted, except in central bankshort-term securities on the primary market. In general, outward portfolio investment is restricted.

148. Nonresident natural persons may acquire real estate in Croatia through inheritance as longas their country of residence extends reciprocal treatment to residents of Croatia. Nonresidentnatural persons not engaged in economic activities in Croatia may purchase real estate only underthe same conditions. Nonresident natural or juridical persons engaged in economic activities inCroatia may also purchase real estate under these conditions and may sell it to resident ornonresident juridical persons. Residents may acquire real estate abroad on the basis of reciprocityof treatment, but they are not permitted to purchase foreign exchange in the exchange market forthis purpose; the use of balances in foreign exchange accounts for this purpose is also prohibited.

Gold

149. The National Bank of Croatia may export gold and gold coins without any restrictions.Unprocessed gold may be exported under the approval of the National Bank of Croatia.

ISO. Gold coins may be exported by authorized commercial banks, under the approval of theNational Bank of Croatia.

151. Importation of gold is subject to the approval of Ministry of Economy.

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ANNEXI

Changes From July 1,1995 through December 31,1996

152. December 14,1995 the Law on Issuance and Sale of Securities was passed and came intoforce on January 1,1996.

153. December 14t 1995 the Law on Investment Funds was passed and came into force onJanuary 3,1996.

154. February 17,1996 the Trade Law became effective.

155. June 8,1996 the Law on Foreign Credit Operations became effective.

156. July 1, 1996, the Law on Customs Tariffs (including unification of various and tariffsin a single tariff structures) became effective.

157. July 12,1996, a Decree Law Export Quotas (including abolition of import quotas)became effective.

158. July 31,1996 an exchange of bonds in the context of an agreement with London Clubcreditors was effected.

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ANNEXE

SUMMARY OF THE CROATIAN PENSION SYSTEM:CURRENT FEATURES AND ISSUES FOR REFORM45

A. Introduction

159. Pension reform is high on the agenda of several industrialized and transition countries.One route that countries are taking is a rationalization of the existing pay-as-you-go (PAYG)pennon system through selected parametric adjustments on dither the revenue or theexpenditure side or both, such as the contribution rate and the pension benefits formula.Croatia has been considering a broader approach, encompassing a more fundamental systemicreform of its pension system by (a) downsizing and rationalizing the existing PAYG systemand (b) introducing privately-managed, obligatory and voluntary funded pension schemes.

160. Under an unfunded regime like the PAYG system, current revenue of the pension planis expected to finance current obligations, and the rate of the payroll tax—the standardfinancing source for public pension plans—is adjusted periodically to ensure that revenues andexpenditures match. Such an approach formalizes an implicit intergenerational contract foryounger working generations to pay for the older generations' retirement benefits. Theexisting commitments to current and future retirees is an unfunded debt.

161. Under a funded regime, workers save in and invest for retirement via pensionaccounts. Reserves could be accumulated with a view to equaling the expected benefitspayable after retirement to those who work and save in the pension plan now. Contributors,upon retirement, would get back only what they put in plus the return on their investment.

162. Croatia—with the help of the World Bank—envisages a possible switch to a multiplepillar system, under which (1) the current PAYG pension system (first pillar) would be bothdownsized and rationalized, and complemented by (2) a compulsory, privately-managedsavings scheme in which current workers invest for their retirement (second pillar), and (3) anadditional voluntary pension scheme under which workers could invest additional amounts fortheir retirement (third pillar). Under the three pillar concept: the compulsory savings scheme(second pillar) would have the primary responsibility for handling the retirement savings of theworkers; the downsized publicly-managed and tax-financed first pillar would have the primarygoal of redistribution (to keep old people out of poverty); and voluntary saving plans (thirdpillar) would exist for people who want more protection than what is offered by the first andsecond pillars of the pension system.

163. As soon as the two funded pillars have been established, the working populationwould have to provide for the already retired population under the PAYG system and, at thesame time, save in their individual retirement accounts. Put differently, with unchangedpension contributions, a transitional financing gap would emerge in the PAYG system,because individual contributions would be diverted from the PAYG system to the compulsoryand voluntary individual retirement accounts. Until the transition from a single pillar PAYG

45 Prepared by Christian Schiller with Heliodoro Temprano-Arroyo.

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ANNEXH

system to the three pillar pension system is completed, the PAYG pension system would befaced with the obligation of having to meet pension obligations that exceed the reducedavailability of payroll tax revenues. This transitional gap depends on a number of factors,including the size of the second and third pillar relative to the PAYG system and the speed atwhich the funded pension schemes are phased in.

164. This paper provides an overview of the Croatian pension system in terms of its currentfeatures and issues for reform in light of the multi-pillar reform proposals currently underconsideration. Section B contains a description of the starting point, the existing PAYGpension system. Section C highlights the effect of aging on the existing PAYG pensionsystem. Section D discusses some issues related to the envisaged downsizing andrationalization of the PAYG system. Section E provides a short overview of issues related tothe establishment of compulsory and voluntary funded pension schemes which will beprivately managed. Sections F and G shed some light on issues related to the transition fromthe single-pillar PAYG pension system to the multi-pillar pension system being considered inCroatia. Sections H and I briefly review the role of privatization proceeds in the reformprocess and the impact on government and private savings. Section J contains concludingremarks.

B. The Existing Pension System

165. The PAYG system is managed by the pension and disability fond ("the pension fund"hereafter), which comprises three subfunds: the workers' fund (771,000 beneficiaries in 1996);the fund of self-employed (18,000 beneficiaries in 1996); and the farmers' insurance funds(55,000 beneficiaries in 1996). These three subfunds provide three types of benefits:retirement pensions (450,000 beneficiaries in 1996), disability pensions (197,000 beneficiariesin 1996), and survivor pensions (196,000 beneficiaries in 1996).

166. The average monthly retirement pension paid out by the workers' fund in September1996 was HrK 887, the average disability pension was HrK 905, and the average survivorpension was HrK 747. The benefits paid out by the fund of the self-employed were about25 percent below those of the workers1 fund. The benefits paid out by the farmers's insurancefiind were considerably lower, with the average old age pension for former farmers atHrK 153 in September 1996.

167. The pension fund is not allowed to run deficits except to the extent that it can financethem by drawing down bank deposits that were accumulated because of previous surpluses. In1995, tiie pension fund had a small deficit equivalent to 0.2 percent of GDP: its total revenuesamounted to 12.1 percent of GDP and total benefits to 12.3 percent of GDP. In 1996, thepension fund is estimated to have run a surplus of 0.1 percent of GDP, with revenues andexpenditures reaching 12.9 and 12.8 percent of GDP, respectively.

168. The pension fund obtains the bulk of its revenues from employee and employercontributions. The percentage of its revenues raised from contributions, however, declinedfrom 93 percent in 1995 to 88 percent in 1996, reflecting an increase in transfers from the

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ANNEXE

central government from HrK 280 million to HrK 1,200 million. Transfers are budgeted toincrease again in 1997, so that the share of contributions in total revenues is expected todecline to 83 percent in 1997. Contribution rates are set at 12.75 percent of wages for bothworkers and employers in the case of the workers' fund, and at 25.5 percent of theself-employed's insurance base in the case of the self-employed fund. Individual farmerscontributing to the farmers' fund pay 12.27 percent of the insurance base plus 0.76 percent oftheir annual cadastral income plus 0.76 percent of their average cadastral income. A smallpercentage of the revenues of the pension fund also accrues from its portfolio of shares inenterprises.

169. In terms of benefits, old age pensions are currently determined by the ten highestconsecutive years of earnings. For the calculation of the pension base, earnings are adjustedupward by average wage growth in the years up to the one preceding the year in which theentitlement is established. The accrual fkctor is set in such a way that it aims to produce an85 percent replacement rate for a foil career worker. For men, the pension base is multipliedby a coefficient of 0.35 plus an additional 0.02 per each year of contribution up to a maximumof 0.85. For women, the initial coefficient is 0.40 plus an additional 0.03 per each year ofcontribution or other qualifying periods, also up to a maximum of 0.85. The standardretirement age for men is 60 and for women 55, but one can choose early retirement. Forexample, men can retire at 55 (with reduced benefits) after 35 years of work, while womencan retire at 50 after 30 years of contributions. Under the early retirement option, the pensionbenefit is assessed in the same way as the regular old age pension, but a reduction factor of1.33 percent is applied for each year of early retirement. Farmers are not entitled to earlyretirement.

170. There is a guaranteed minimum pension, provided that neither the retiree nor othermembers of their household have other sources of income sufficient to support them. In 1995,about 1/6 of the total retirees were entitled to a supplement to reach this minimum guaranteedthreshold, which was increased to HrK 615 per month in early 1996. Certain groups ofpeople—such as former members of the Yugoslav army, retired Parliamentarians, World Warn veterans, invalids and families of victims of the last war, and refugees from other republicsof the former Yugoslavia—also receive so-called beneficiary pensions. These beneficiariesreceive pensions either without having contributed to the system or beyond the amount thatwould result from the application of the above-described arrangements. Starting in 1997,these beneficiary pensions are to be fully financed by transfers from the state. The increase inthe minimum guaranteed pension in 1996, the decision to fully finance beneficiary pensions bystate transfers, and the sharp increase in beneficiary pensions related to the last war explain thebulk of the increase in transfers from the central government budget in 1996 and 1997.

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ANNEX n

C Aging Population

171. The PAYG pension system is particularly sensitive to demographics. Croatia has arelatively old population. In 1990, the percentage of the population over 60 years of age stoodat 17.8 percent (see table 1). This percentage, which was only slightly below the average of18.2 percent seen in the OECD countries, made Croatia one of the transition countries withthe oldest populations. Moreover, as is the case with many other European countries, Croatiais undergoing a demographic transition. If current projections prove to be correct, Croatia'spopulation will experience significant aging in the next few decades as a result of decliningfertility rates and the convergence of life-expectancy to the higher levels observed in mostmiddle to upper income countries.

172. Based on the most recent world population projections published by World Bank, theCroatian old age dependency ratio (measured as the ratio of the population of normalretirement age to the working-age population) is expected to increase from 36 percent in 1990to 41 percent in the year 2000,49 percent in the year 2010 and almost 68 percent in 2035 (seechart 1).45 Fortunately, the rate of increase in the dependency ratio is projected to slow downsomewhat between 1995 and the beginning of the next century, thus providing someshort-term breathing space to the pension system. However, the rate of increase in thedependency ratio is projected to accelerate in the first half of the next decade, and growth inthis ratio will then remain at a substantially higher level until the year 2020. Under currentpension arrangements, this would require a dramatic increase in the contribution rate.

173. If the average pension is B, the payroll tax rate t, the number of contributors L, thecontributions base (the average wage) W, and the number of pensioners P, balancing thecash-flow of a PAYG plan requires the following: B*P - t*W*L; or t = (P/L)*(B/W). Thus,the required contribution varies directly with (P/L), a variable that can be proxied with the oldage dependency ratio, and the average replacement rate (B/W). Application of this equatioa toCroatia—assuming unchanged average retirement ages, replacement rates, and the increasesin ( P/L) implied by the World Bank's population projections—indicates that the requiredcontribution rate will have to be about 5, 25 and 70 percent higher than now in the years2000,2010 and 2035, respectively, to preserve the balance of the PAYG pension system.Based on current law, it would thus have to be raised from 25.5 percent to 26.7 percent by2000, to 32 percent by 2010 and to about 44 percent by 2035. These calculations clearlysuggest that the contribution rates required to balance an unreformed pension system wouldstart to become untenable from about 2005 onwards.

^International Bank for Reconstruction and Development 1994, World PopulationProjections 1994-95, (Baltimore: The Johns Hopkins University Press).

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Table 1: Percentage of the Population Over Sixty, 1990-2150

Economy

Croatia

OECD countries I/

Eastern Europe and former Soviet Union I/

Latin America and Caribbean If

Middle East and North Africa I/

Sub-Saharan Africa 11

Asia I/

1990

17.8

18.6

13.8

8.2

5.7

5.2

6.3

2000

21.2

20.0

15.6

8.8

6.0

5.0

7.3

2010

23.9

23.2

16.9

9.6

6.5

4.9

8.6

2020

26.9

26.9

20.2

12.0

8.0

5.5

11.6

2030

28.7

30.8

22.2

16.4

9.8

6.8

15.0

2050

30.0

31.3

26.6

23.7

14.5

11.2

20.7

2075

29.7

30.2

28.8

27.9

21.6

20.0

25.9

2100

30.1

30.4

29.8

29.4

27.3

26.1

28.3

2125

30.6

30.7

30.4

30.2

29.5

28.3

29.6

2150

30.9

30.9

30.8

30.6

30.3

29.5

30.3

Source: International Bank for Reconstruction and Development (1994).

I/ Simple average.


CHART 1

Croatia: Old Age Dependency Ratio andContribution Rate I/ 2/

Sources: International Bank for Reconstruction and Development (1994) and staff calculations

1/ The old age dependency ratio is defined as the population of normal retirement ages (60 for men and 55 for women)as a percentage of the working-age population (men aged 15-59 plus women aged 15-54).2/ The pension contribution rate is calculated as described in section C of the paper.


ANNEX n

174. The necessity to pay for old age, disability and survivors pensions would eventuallybecome a major burden for the economy. As the pace of privatization and the role of privatesector firms increases, the negative effects on labor supply engendered by ever highercontribution rates would aggravate the tensions already emerging in the PAYG pensionsystem's financial situation. Therefore, the government's decision to overhaul the currentpension system is welcome. It also appears that the government would be getting an earlystart as near-term estimates by the World Bank suggest that the aging of the Croatianpopulation would start to put the most serious pressure on an unreformed pension systemaround 2005.

D. Reform of the PAYG System

175. Under the reform proposal, a one-pillar PAYG system would be replaced by athree-pillar system. The first pillar would not vanish, but would be reduced in size andrationalized. Thus, workers would continue to contribute to the mandatory and public PAYGsystem and benefits would continue to be received under the PAYG system at the time ofretirement, but they would be less generous. Accordingly, the accrual factor of the PAYGplan would need to be adjusted.

176. Measures that are being considered in the context of a rationalization of the PAYGsystem in Croatia—or elsewhere for that matter—have one thing in common: the choice isbetween cutting benefits (of the pensioners) and increasing the contributions (of workers). Inline with the general approach of downsizing the role of the PAYG system, the reform optionsenumerated below are all based on the former. One advantage of concentrating onexpenditure-cutting rather than revenue-raising measures is that it avoids increases incontributions which, by increasing the indirect cost of labor, may have a negative impact onemployment. With Croatia already suffering from a relatively high rate of unemployment, thisconsideration is particularly relevant.

177. The main reform options are discussed below.

• Increasing the retirement age. Under the current pension regime, the normalretirement age in Croatia of 60 and 55 years for men and women, respectively, whichis low for a country with a population almost as old as that of the OECD countries.For comparison, average normal retirement ages in the OECD countries in 1990 were64.4 and 62.9 years for men and women respectively, with several countries havingretirement ages of 67 for both men and women47. Although life-expectancy in OECDcountries is also significantly higher than in Croatia, these figures clearly suggest thatthere is substantial room for increasing the retirement age in Croatia. In this respect,recent simulations conducted by the IMF staff for industrial countries suggest thatrelatively moderate extensions in the retirement ages can have powerful positive

"See the statistical appendix of International Bank for Reconstruction and Development,1994, Averting the Old Age Crisis, (New York: Oxford University Press).

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ANNEXE

effects on the financial position of pension systems.48 Recognizing this, the Croatianauthorities have been considering an increase in the retirement age to 65 years for menand to 60 years women. A rapid increase has obvious advantages from a financialperspective, but political and social considerations advice a more gradual approach toraising retirement ages.

Linking benefits to lifetime earnings. In general, a lengthening of the earnings periodapplied for calculating the pension base (of currently a worker's best ten consecutiveyears) should result in a reduction of the pension base.

• Changing the benefits adjustment formula. If pensions are linked to wages, they willprobably grow fester than if they ware linked to prices. Linking pensions to pricesprotects the real value of pensions, but would probably exclude pensioners fromparticipating in the growth of the economy and, as a consequence, the replacementrate would probably fall. To address the problem of a drop in the replacement rate, areview, say every five years, could take place to allow for a supplementary adjustmentif this were felt to be warranted by the increase in wages and salaries. An alternativeoption (and one that has been considered by the Croatian authorities) would be toadopt a mixed system of indexation, such as the Swiss one, whereby pensions arelinked to both wages and prices through a formula. With this intermediate option,pensions would grow over the medium-term less rapidly than wages but fester thanprices, allowing pensioners to thereby benefit partially from productivity growth in theeconomy. Basically, the question of price versus wage indexation of pensions iscentered on the issue of the extent to which pensioners should also enjoy the benefitsof growth in labor productivity taking place after they have left the labor force.

• Curtailing pension credits for years spent in child rearing, higher education andothers.

• Reducing the accruals rate. Unless the change is retroactive, it will effect pensionbenefits and the finances of the PAYG pension system only very gradually.

• Increasing the actuarial decrement for early retirement. The size of the actuarialdecrement for early retirement is a key variable in a worker's retirement decision. Ifthe factor is too small, individuals will be encouraged to retire early because thediscounted value of their expected pensions with early retirement is larger than withnormal retirement. The 1991 reform in Germany introduced a 3.6 percent factor peryear, which is being considered in Croatia, representing a marked increase comparedto the 1.33 percent decrement under the current PAYG pension system.

178. In addition to these parametric changes that aim at rationalizing the benefits of thecurrent PAYG system, the Government of Croatia has also focused on the collection side. In

48 Sheetal K. Chand and Albert Jaeger, 1996, Aging Populations and Public PensionSchemes, Occasional Paper 147, (Washington: International Monetary Fund).

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•


ANNEXE

1996, efforts to improve the collection of contributions owed to the pension fund included:strengthening the Institute for Payments system of collections such that social securitycontributions are in fact deducted before wage payments can be executed; legalcharacterization of social contributions as tax due and owed to the central government, withthe same penalties as would apply to failure to pay income and profit taxes; enforcement ofsocial security contributions by the dedicated unit within the Ministry of Finance; and lateinterest charges on delinquent payments that are significantly higher than commercial bankcredit rates. In addition, means-testing provisions have been enforced.

E. The Two Funded Pillars

179. The PAYG system could be complemented by two funded pillars. The second pillarwould be an obligatory funded and privately-managed pension scheme that would be based onindividual accounts that are supervised and regulated by public authorities. Upon retirement,the payments out of the individual accounts would be in the form of annuities according to lifetables. The third pillar would be a voluntary retirement savings scheme in the form of highercontributions to individual accounts, also supervised by public authorities.

180. One critical prerequisite for moving toward funded pension schemes is the existence ofan adequately developed financial infrastructure, offering a basic set of financial instruments ina reasonably efficient way. Besides bank instruments, this should include government debtinstruments allocated by a well-functioning, competitive market. The existence of independentpension fund management companies and life insurance companies associated with the pensionsystem can improve the functioning of the financial market and, more generally, help facilitatefinancial market development. At the same time, private pension funds* ability to earnreasonable rates of return is enhanced with well functioning financial markets, while ensuringthat pension savings can be invested in financial instruments which are adequately regulatedand appropriately safe.

F. The Transition

181. As soon as the two funded pillars have been established, the working population—fora number of years—would have to provide for the pensions of the already retired populationunder the PAYG pension system and, at the same time, save in their compulsory retirementaccounts as well as, if desired, in the voluntary retirement accounts. They would have to pay,from currant income, both for their own pension plan investments and the (unfunded) benefitspromised to current retirees. In other words, with an unchanged rate of pension contributions,a fiscal gap would be created by diverting individual contributions from the PAYG system tocompulsory and voluntary retirement accounts. This gap would change over time, buteventually disappear.49

49 The fiscal deficit of the transition to a new pension arrangement in reality reflects thefinancial materialization of the outstanding implicit debt of the PAYG system. Holzmann hasestimated, for a number of countries and for a reasonable range of parameter assumptions,

(continued...)

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ANNEXE

182. Croatia is envisaging only a partial shift towards a funded system. The PAYG pensionsystem would stay, but would be scaled down. There are various options in terms of the speedat which the role of the current PAYG system could be diminished and the funded pensionplans be phased in. The key factors are (1) the size of the pensions to be provided under thenew PAYG pension system and thus the share of pension contributions that will remain withthis system and (2) at which age a switch to the funded pension scheme would take place.

183. Under a very gradual approach, only new labor market entrants would be required tomake contributions both to the PAYG system and to the funded system. Under this scenario,contributions for new labor market entrants could be, for example, 15.5 percent of wages tothe first pillar and 10 percent to the second pillar.50 Everybody else would continue tocontribute the full 25.5 percent to the PAYG pension system. The total contribution ratewould therefore remain at 25.5 percent. It would take about 45 years until all workers wouldbe contributing under the multi-pillar system.51 Upon retirement, those who had contributed tothe funded pension schemes would receive the basic pension under the new PAYG system andadditional annuities based on the savings accumulated in their retirement account. Those whohad not contributed to the funded scheme, but only to the PAYG system, would receive thebasic pension under the new PAYG system plus transition benefits under the PAYG system.Over time, those who receive a transition benefit would diminish and disappear (after some85 years).

184. For a more rapid shift, a plan could be adopted under which, for example, all workersbelow a cut-off age (say 40 years) would be included in the multi-pillar system. This planwould be along the lines of the proposal currently under consideration in Croatia. Under thisscenario, contributions for workers below the age of 40 could be 10 percent of wages to thesecond pillar and 15.5 percent to the first pillar. For those currently above the age of 40,contributions would continue to be made in an amount of the full 25.5 percent of wages to thePAYG pension system. Within 20 years (assuming that retirement ages are kept at theirpresent levels), all workers would be contributing under the multi-pillar system. Transition

49(... continued)that the present value of the total unfunded future liabilities of PAYG systems is 15 to 25times current annual pension expenditures. With pensions in Croatia currently running atabout 11 percent of GDP, applying these results to Croatia would imply an unfunded debt ofthe PAYG pennon system in Croatia on the order of 160 percent to 275 percent of GDP inpresent value terms. See R. Holzmann, 1993, "Reforming Old-age Pension Systems in Centraland Eastern European Countries in Transition", Journal of Economics, pp. 191-218.

50 Recall the total contributions are 12.75 percent of wages from workers, matched byemployers to give a total of 25.5 percent.

51 This would be the time needed for the normal retirement of the youngest men alreadyworking at the time of the introduction of the pennon reforms, assuming no change inretirement ages and assuming that workers enter the labor force from the age of 16 onwards.

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ANNEXE

benefits under the PAYG system, however, would need to be paid for as long as under theprevious scenario because of the rights that those under 40 of age at the time of the start ofthe reform would have accumulated from the previous PAYG system.

185. Under the most rapid approach, all workers would start contributing to the multi-pillarsystem from the beginning of the reforms. Again, transition benefits would need to be paid forthe same length of time as under the two previous scenarios, i.e., until the last pensioner whoentered the labor force before the reform process started, and has thus accumulated rightsfrom the previous PAYG system, dies off.

F. Transition Costs

186. The calculations that follow are meant to be helpful as illustrations of the magnitude ofthe possible fiscal consequences of various transition scenarios.

187. In 1996, the Croatian pension fund had budgeted for payroll tax collections equivalentto 11 percent of GDP. Diverting 1 percentage point of today's 25.5 percent contribution ratefor every worker from the PAYG system to individual retirement accounts would result in arevenue dedine for in PAYG system of about 0.4 percent of GDP. Assuming a cut-off age of40, about half of the total wage bill would be affected by the switch52, and the budgetarycosts of diverting 1 percentage point of today's 25.5 percent contribution rate would be0.2 percent of GDP. Consequently, 10 percentage points would probably "cost" about2 percent of GDP188. During the transition, the fiscal gap of the PAYG system would change according tothe speed of the switch to the three-pillar pension system. The dynamics depend on twofactors: the speed at which the transition benefits paid out by the PAYG system disappear; andthe extent to which pension contributions are diverted from the PAYG system to the fundedpension plans. These two elements are in fact interrelated.

189. Under the very gradual approach, where part of the contributions for only newentrants to the labor market are sent to the funded pension schemes, the revenue shortfall inthe PAYG system would be small in the beginning, but increase over time. At the same time,pension obligations under the PAYG system would remain unchanged for some time and startto decline only after the first worker retires under the multi-pillar system and begins to draw apension from his individual accounts (after some 40 years).

190. On the other hand, if all workers wore to switch immediately, the PAYG pensionsystem would suffer the full revenue loss right from the beginning of the transition period, butpension obligations under the PAYG system would also start to decline early. Assumingcontributions for all workers to the funded pension system were equal to 10 percentage points

52 Information on the distribution of wages by age was not available. A cut-off age of 40 isassumed to affect about half of the total wage bill: the World Bank population projectionsindicate that 56.4 percent of the working age population was below 40 in 1995. However, theaverage wage of workers below 40 is usually less than the wage of the more senior workers.

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ANNEXE

of the total of 25.5 percentage points, a deficit of 4 percent of GDP would immediatelyemerge in the P AYG pension system. The fiscal gap would begin to decline as retirees start todraw a pension from their funded pension schemes, accompanied by a fall in transition benefitspaid out by the PAYG pension system. The gap reaches zero when the last transition benefitunder the PAYG system is paid out (after some 85 years).

191. Recent discussions between the Croatian authorities and the World Bank, in thecontext of a possible Public Sector Adjustment Loan, have focused on a transfer to the secondpillar funds, from the beginning of the reforms, of between 5 and 8 percentage points of the25.5 percent contribution paid by workers aged 40 or below. If, for example, 8 percentagepoints of the contribution were transferred to the second pillar, the initial fiscal gap in thePAYG system would be equivalent to about 1% percent of GDP. This gap would increaseduring the years after pension reform is introduced because more and more workers woulddivert their contributions to their individual account; at the same time, PAYG benefits wouldremain unchanged. The effect on the fiscal deficit would peak in 20 years because, at thattime, all workers would have moved to the multiple pillar system and the new pensionerswould begin to draw a pension from their individual retirement accounts. Thus, the revenueshortfall in the PAYG system would stop growing; and benefits paid out by the PAYG systemwould start to decline.

G. Using Privatization Proceeds

192. Croatia is contemplating the use of privatization proceeds to help cover the financialburden resulting from the transition to a multi-pillar pension system. To finance the transitioncosts by earmarking these proceeds for the pension system could be done in a direct and anindirect way. In the second case, assets of the privatization fund would be sold and theproceeds used to close the initial financing gap. Alternatively, the assets owned by theprivatization fund could be handed over directly to the obligatory pension plans.

H. Private and Government Savings

193. During the transition, when a financing gap would emerge in the public PAYG pensionsystem, the private pension funds would, concurrently, run a surplus. Thus, if the Governmentdecides to raise resources to cover the temporary gap in the PAYG system by issuing debt,there could be strong demand for this debt by the pension funds, since they need to invest inlong-term instruments.92 At the same time, saving by the private sector would, ceteris paribus,

52 In Chile, for example, when the new fully funded pennon scheme was introduced in 1981,the pension funds were required to invest virtually all their portfolio in government paper. Inthe meantime, these restrictions have been eased somewhat.

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ANNEXE

rise in line with the pension funds' surplus that results from introducing the second and thirdpillar. Thus, the deficit created in the government PAYG pension system and the consequentreduction in government saving would be offset by an increase in saving by the private sector.

194. The implications for national saving would, however, become more uncertain once theceteris paribus assumption is relaxed. The final effect of pension reform on national savingwould depend on its effect on the private sector's perception of its future tax liabilities, onwhether or not the private sector shows some degree of Ricardian behavior, on the extent towhich the government takes fiscal measures to offset the temporary gap in the PAYG system,and on the particular form those measures take.53

L Concluding Remarks

195. Population aging is a widespread phenomenon and will—as in many othercountries—contribute to fiscal stresses on Croatia's existing PAYG pension system. Asubstantial reform of Croatia's pension system is unavoidable, although the most seriouspressures from these demographic trends are unlikely to arise until about the middle of thenext decade.

196. One route that a number of countries have taken is a reform through selectedparametric adjustments of the PAYG system on either the revenue or the expenditure sides orboth.

197. Croatia is considering a different approach. It plans to downsize, but not eliminate, thePAYG system, and complement it with fully funded pension schemes. Such an approachshould significantly reduce the vulnerability of Croatia's pension system to the agingphenomenon. However, there would also be significant temporary fiscal costs from shifting toa multi-pillar pension system, in the form of a transition gap in the public PAYG pensionsystem that would need to be dealt with. In this regard, a large part of the transition costscould be covered by privatization proceeds if the privatization process were to gathersufficient momentum. Further, the temporary gap of the PAYG system would have as acorollary temporary surpluses of the funded pension schemes. A key question is the extent towhich pension reform could generate an increase in private saving and how to channel ittowards the financing of the deficit of the PAYG system.

198. Generally, pension measures take a long time to mature in the sense that their foilfinancial implications may take more than a generation to become apparent. It is, therefore,

53 A comprehensive list of the main references in the literature on the impact of pensionsystems on saving can be found in the bibliographic notes (p. 400) of Averting the Old AgeCrisis, referenced in footnote 3.

-77-


ANNEXE

welcome that Croatia is giving attention now to how to cope with the aging phenomenon; butcare will need to be taken to ensure that the transition costs to a new pension system aremanageable.

-78-


SUMMARY OF THE CROATIAN TAX SYSTEM AS OF DECEMBER 31,1996

Tax Nature of Tax Deduction andExemptions

Rates Remarks

1. Taxes on income, profits and capital gains

1. Individual Income

1.2 Profit Tax

The unified tax is levied on allpersonal income and includesincome from employment,small-business activity and self-employment, fanning andforestry, and property andproperty rights. The tax base forresidents is both income earneddomestically and abroad;foreigners are taxed for incomeearned in Croatia.

The tax is levied on legal entitiesas well as natural persons whoengage in regular and for-profitbusiness activity, and who arerequired to keep business booksand have to submit financialstatements. Natural personswho engage in small businessactivities that are covered by theincome tax can choose to payprofit taxes and keep accountingbooks instead. The taxable baseis the difference between thevalue of assets and liabilities atthe beginning and the end of thetax period. The tax is imposedon both residents and non-residents operating a business inCroatia.

There is an exempt taxthreshold of HrK 800 permonth (as of Jan. 1,1997).This amount increases ifthe taxpayer has adependent spouse or otherclose or disabled familymembers and/or children.As of January 1,1995,allowances for food, andtravel are included in thetax base. Capital gains aretax exempted. Taxexemptions granted underthe former Direct TaxesAct continue to be validuntil they expire.

Exemptions and tax reliefcan be granted toenterprises which invest inwar affected regions.Taxes which are paidabroad for activities inCroatia can be deductedfrom the tax liability.Exemptions that weregranted under the DirectTaxes Act continue to bevalid until they expire.

20 percent on taxable incomeup to three annual minimumsalaries (decreased as ofJanuary 1,1997 from25 percent); 35 percent ontaxable income exceedingthree annual minimumsalaries.

As of January 1,1997, therate was increased from 25 to35 percent of the assessedtaxable base.

Income Tax Act becameeffective January 1,1994.Taxes which are paid abroadfor activities in Croatia can bededucted from the tax liabilityup to the overall liability inCroatia.

The Profit Tax Act becameeffective January 1,1994. Asof January 1,1997, the taxbase is reduced by a "normal1*rate of return on equity whichis defined as 5 percentincreased by the change in theproducer price indexpublished by the NationalInstitute for Statistics.



Rates Remarks

L3 Surcharge on IncomeTax

1.4 Gaining Tax

Towns and cities of more than

surcharge to be collected by thecities on the income tax of thecentral government.

The tax is levied on individualswho realize profits fromgambling.

Up to 30 percent.City of Zagreb up to 60percent.

2. Social security contributions

2.1 Employees

2.1.1 Pension fund

2.1.2 Healthinsurance

2.1.3 Employmentfund

2.1.4 Childbenefits

2.2 Employers

2.2.1 Pension fund

2.2.2 Healthinsurance

The tax is levied on individualswho receive wages and salariesfor work performed in thecountry or abroad if they havebeen assigned to a job by aCroatian employer. The taxtakes the form of a CentralGovernment payroll tax. Thefunds are in principle obliged tobalance their budgets, andbenefits are financed on a pay-as-you-go basis.

Same tax base as for employees'contributions.

No exemptions areprovided.

No exemptions areprovided.

Standard rates:

Pension:12.75 percent

Health:7.00 percent

Employment:0.85 percent

Children:2.20 percent

Pension:12.75 percent

Health:7.00 percent

Employment:0,85 percent

40,000 inhabitants can impose a



Rates Remarks

3. Tax on property

3.1 Tax on real propertytransactions

3.2 Inheritance and gift tax

3.3 Tax on motor vehicles

3.4 Tax on watercraft

3.5 Tax on firms

3.6 Tax on weekend houses

The tax is paid by individualsselling property and by personstaking part in exchangetransactions.

The tax is paid by those whoinherit property or receive it as agift. The rate is set andcollected by the counties.

The tax is levied on owners ofmotor vehicles and collected bythe counties. It is based on bothengine power and age of thevehicle.

The tax is paid by owners ofwatercraft and collected by thecounties. It is based on the ageof the boat, equipment andlength.

The tax is paid by legal andnatural persons who own abusiness but do not pay incomeand profit tax. The fee is set andcollected by the municipality.

The tax is paid by legal andnatural persons who ownweekend houses. The fee is setand collected by themunicipality.

Certain exemptions areenvisaged by statute.

5 percent.

Up to 5 percent

Automobiles DM 30 to DM200 per year.Motorcycles DM 20 to DM100 per year.

DM 30 to DM 550 per year.

Up to DM 500 per year.

Up to DM 3 per squaremeter.



Rates Remarks

4. Domestic taxes on goods and services

4.1 Safes tax on goods

4.2 Sales tax on services

4.3 Excise taxes

4.3.1 Tax on oilderivatives

4.3.2 Tax ontobacco

4.3.3 Tax on beer

4.3.4 Tax on highpercentage alcohol

4.3.5 Tax on softdrinks

4.3.6 Tax on carimports

The tax is paid on goodsintended for final consumption.The tax is paid by legal entitiesand natural persons that engagein the activity of selling goodsand raw materials. The tax baseis the sales price of the good.

The tax is paid on the sale ofservices by legal entities andnatural parsons who providethese services for a nominal fee,in kind or in form of reciprocalservices.

Specific unit taxes paid byproducers and importers.

Standard rate:15 percent

Standard rate:10 percent

HrK 0.30 to 1.90 per liter.

HrK 2.50 to 8.50 per packageof cigarettes.

HrK 80.00 to 120.00 perhectoliter.

HrK 30.00 to 60.00 per literper absolute alcohol content.

HrK 40.00 to 80.00 perhectoliter.

75-90 kw engine power -HrK 7,000; 90-110 kwengine power - HrK 15,000;more than 110 kw enginepower-HrK 30,000.

The excise taxes becameeffective July 1,1994.

Effective August 15,1995



Rates Remarks

4.3.7 Tax onimported coffee

4.4 Ticket tax

4.4 Ticket tax

4.5 Sales surcharge

4.6 Special consumptiontax

4.7 Tax on advertizing

The tax is paid by the organizersof sports events and levied onthe ticket price. It is collectedby the counties.

The tax is paid by the organizersof sports events and levied onthe ticket price. It is collectedby the counties.

A general surcharge on goodsbased on the after sales tax retailprice.

The tax is paid by restaurantowners and levied on the salesprice of beverages sold.Municipalities collect therevenues and set the rates.

The tax is paid by legal andnatural persons who advertize inpublic places. The tax is set andcollected by the municipalities.

Certain items such ascigarettes and oilderivatives are exempted.

DM 1.00 to DM 4.00 perkilogram.

Up to 5 percent.

Up to 5 percent.

10 percent.

Up to 3 percent.

Up to DM 300 per year.



Rates Remarks

S. Taxes on international trade and transactions

5.1 Import duties

5.1.1 Customsduties

Paid by the importer of a widerange of goods and services

A large number of itemsare not considered customsgoods (e.g., movableproperty owned byCroatian citizens,enterprises, and other legalpersons; certain foreignpersonal investments indomestic enterprises andretail shops; imports whichwill be used mainly forproduction of goods forexports).

Most tariff rates are in the5-25 percent range.


Table 1. Croatia: Quarterly GDP at Constant 1990 Prices

1989QlQ2Q3Q4

Total

1990QlQ2Q3Q4

Total

1991QlQ2Q3Q4

Total

1992QlQ2Q3Q4

Total

1993QlQ2Q3Q4

Total

1994QlQ2Q3Q4

Total

1995QlQ2Q3Q4

Total

1996QlQ2Q3

GDP inmillion kunas

71.274.778.572.2296.6

68.669.072.266.4276.2

59.260.753.348.3221.5

47.948.650.549.8196.8

48.049.049.848.3195.1

46.048.151.850.4196.3

48.550.150.850.4199.8

49.151.154.4

Index1990 = 100

103.1108.2113.6104.6107.4

99.399.9104.696.2100.0

85.788.077.270.080.2

69.470.473.272.271.3

69.671.072.170.070.7

66.769.775.073.171.1

70.272.573.572.972.3

71.174.078.8

Source: Central Bureau of Statistics.

- 85 -STATISTICAL APPENDIX


Table 2. Croatia: Gross Domestic Product at Current Prices I/

(In millions of kuna)

Percent composition

Total activity at factor costs

Industry and mining

Agriculture and fisheries

Forestry

Water management

ConstructionTransport and communication

Trade

Hotels, restaurants, and tourism

Crafts and trades

Housing, utilities, and public services

Financial and other services

Education, health care, central

government, funds and associations

Net indirect Taxes

GDP-at market prices

1990

253

642431

152222129

1610

55

26

279

1991

374

963552

19393610133322

65

34

408

1992

2,294

580290326

701592318260

242169

372

334

2,628

1993

36,023

9,007

4,172

46297

1,278

2382

2,734

1,158

8924,803

2,905

6,135

5,810

41.833.2

1994

68,263

14,934

8,097

934'

1942,615

5,077

5,019

2,739

2,227

5,7736,562

14,091

17,037

85,299

1995

74,828

14,889

8,380

885200

2,950

5,499

6,123

2,512

2,873

6,208

6,844

17,464

19,736

94,564

1990

90.6

23.1

8.51.00.35.27.97.94.53.15.73.5

19.9

9.4

100.0

1991

91.7

23.6

8.71.20.44.69.58.82.43.18.25.4

15.9

8.3

100.0

1992

87.3

22.1

11.0

1.20.22.76.08.83.12.39.26.4

14.2

12.7

100.0

1993

87.2

21.5

9.91.10.23.05.66.62.82.1

11.57.0

14.8

13.9

100.0

1994

80.0

17.5

9.51.10.23.16.05.93.22.66.87.7

16.5

20.0

100.0

1995

79.1

15.7

8.90.90.23.15.86.52.73.06.67.2

18.5

20.9

100.0

Source: State Institute for Macroeconomic Analysis and Forecasting.

I/ These estimates are produced independently by SIMAF. The Central Bureau of Statistics is in the process of preparing current price estimates for GDP.


Table 3. Croatia: Gross Domestic Product at Constant 1994 Prices II

(In millions of kunas)

Percent composition


Industry and miningAgriculture and fisheriesForestryWater managementConstructionTransport and communicationTradeHotels, restaurants, and tourismCrafts and tradesHousing, utilities, and public servicesFinancial and other servicesEducation, health care, centralgovernment, funds and associations

Net indirect Taxes


1990

93,585

24,0449,9891,527

2324,5515,573

11,1105,8382,4926,0157,933

14,280

10,344

103,928

1991

77,373

18,0339,1801,191

1993,2455,0169,2772,7152,0435,8887,203

13,384

6,920

84,293

1992

70,404

15,9057,922

897192

2,9475,0766,8652,4401,9275,7326,591

13,910

12,124

82,528

1993

67,947

15,3178,271

838192

2,6964,7065,2722,1232,0155,7356,696

14,085

12,536

80,483

1994

68,263

14,9348,097

934194

2,6155,0775,0192,7392,2275,7736,562

14,091

17,037

85,299

1995

69,838

14,9798,178

873196

2,5655,0776,1232,4382,4505,7746,766

14,419

17,721

87,559

1990

90.0

23.19.61.50,24.45.4

10.75.62.45.87.6

13.7

10.0

100.0

1991

91.8

21.410.91.40.23.86.0

11.03.22.47.08.5

15.9

8.2

100.0

1992

85.3

19.39.61.10.23.66.28.33.02.36.98.0

16.9

14.7

100.0

1993

84.4

19.010.31.00.23.35.86.62.62.57.18.3

17.5

15.6

100.0

1994

80.0

17.59.51.10.23.16.05.93.22.66.87.7

16.5

20.0

100.0

1995

79.8

17.19.31.00.22.95.87.02.82.86.67.7

16.5

20.2

100.0


I/ These estimates are produced independently by SIMAF and, therefore, are not consistent with official estimates from the Central Bureau of Statistics.


- 88 - STATISTICAL APPENDIX

Table 4. Croatia: Gross Domestic Product Deflators I/

(1994«100)


Industry and miningAgriculture and fisheriesForestryWater managementConstructionTransport and communicationTradeHotels, restaurants, and tourismCrafts and tradesHousing, utilities, and public servicesFinancial and other servicesEducation, health care, centralgovernment, funds and associations

Net indirect Taxes


1990

0.3

0.30.20.20.40.30.40.20.20.30.30.1

0.4

0.3

0.3

1991

0.5

0.50.40.40.80.60.80.40.40.60.60.3

0.5

0.5

0.5

1992

3.3

3.63.73.63.12.43.13.43.43.14.22.6

2.7

2.8

3.2

1993

53.0

58.850.455.150.647.450.651.954.544.383.743.4

43.6

46.3

51.9

1994

100.0

100.0100.0100.0100.0100.0100.0100.0100.0100.0100.0100.0

100.0

100.0

100.0

1995

107.1

99.4102.5101.4101.9115.0108.3100.0103.0117.3107.5101.2

121.1

111.4

108.0


I/ These estimates are produced independently by SIMAF. The Central Bureau of Statistics is in the processof preparing current price estimates for GDP.



Table 5. Croatia: Trends in Industrial Production I/

Total Capital Inter- Consumer Electricity Oil and gas Oil Metal Machine Shipindustry goods mediate goods generation extraction refining working building building

goods

198819891990199119921993199419951996

1990Q4

1991QlQ2Q3Q4

1992QlQ2Q3Q4

1993QlQ2Q3Q4

1994QlQ2Q3Q4

1995QlQ2Q3Q4

1996QlQ2Q3Q4

1996Jan.Feb.Mar.Apr.MayJun.Jul.

Aug.Sep.Oct.Nov.Dec.

113.4112.7100.071.561.157.455.956.157.8

99.3

81.382.465.856.6

58.659.260.566.2

58.258.156.655.1

53.355.355.459.9

56.056.653.258.3

56.057.456.860.9

56.155.756.356.758.257.356.756.057.865.463.154.2

121.3118.9100.064.951.044.938.540.143.9

95.7

71.973.559.754.4

52.455.447.154,0

43.952.245.540.5

35.740.234.443.4

37.239.837.645.7

38.648.443.644.2

38.439.339.149.450.045.937.348.245.345.945.940.7

114.6113.8100.072.262.359.358.960.061.1

97.8

84.485.967.151.1

60.258.960.269.1

60.858.957.456.0

57.058.658.161.4

60.861.454.359.2

60.861.058.563.7

59.859.363.362.160.460.760.155.659.867.466.856.9

107.8108.4100.074.064.161.060.660.060.6

103.1

81.982.467.164.0

61.260.666.167.8

60.659.560.260.4

56.857.662.065.5

58.858.559.159.7

58.257.261.465.7

59.359.056.453.759.158.662.160.661.672.866.957.3

108.898.4

100.0101.0101.3107.999.7

104.6131.1

122.6

127.9116.275.384.3

92.9105.584.8

122.0

119.7102.6105.6107.8

118.289.791.699.2

118.499.997.9

115.4

145.3120.8107.6150.7

165.3144.7

125.7126.1118.6117.7112.999.0

110.7149.4145.1157.6

107.5107.0100.082.481.886.078.382.676.3

110.3

104.282.672.670.0

87.472.575.192.0

92.776.573.178.6

88.266.766.991.3

91.884.474.691.0

90.166.064.085.0

95.687.5

87.172.268.057.758.861.272.180.883.890.6

102.298.4

100.068.857.665.064.982.476.1

99.9

84.278.076.036.9

50.655.560.563.6

67.467.257.961.5

61.753.275.968.9

91.9114.093.187.4

83.065.878.270.0

78.773.8

96.466.166.3

65.094.093.147.458.183.868.0

129.2129.5100.066.349.146.141.940.640.3

86.0

76.179.060.149.8

49.147.848.251.1

45.647.847.544.2

40.641.742.742.6

37.942.338.943.2

40.741.244.039.4

39.439.742.742.537.443.837.7

45.049.246.642.229.5

122.2113.4100.055.131.727.122.225.424.7

107.9

66.462.651.240.0

32.029.331.234.4

23.432.528.525.5

17.523.119.029.3

19.023.234.436.1

20.528.1

23.721.0

19.723.718.127.229.8

27.323.923.024.124.119.119.8

118.1106.9100.068.459.546.638.138.434.1

96.0

63.079.266.864.4

56.871.050.159.9

46.157.746.940.3

38.442.434.437.0

35.040.534.343.9

42.956.6

46.950.7

36.944.047.951.762.355.645.839.255.658.853.439.9


II Seasonally unadjusted indices, 1990*100.


Table 6. Croatia: Mining and Industry - Indices of Production, Stocks, Consumption, Employees and Productivity

Production

1990199119921993199419951996

1995Jan.Feb.Mar.Apr.MayJim.Jul.Aug.Sep.OcLNov.Dec.

1996Jan.Feb.Mar.Apr.MayJun.JuLAug.Sep.OctNov.Dec.

Total

178.3127.5108.9102.499.7100.0103.1

95.996.6107.598.9101.4102.895.091.498.4106.7110.095.5

100.099.4100.4101.2103.7102.1101.199.9103.1116.7112.596.6

Equipmentand Machinery

249.2161.8127.2112.196.0100.0109.4

84.593.4100.896.697.3104.093.987.699.8104.6110.6126.9

98.297.997.4123.2124.8114.693.1120.2113.0114.4114.5101.4

ProductionMaterials

169.7122.5105.7100.599.9100.0103.6

98.798.0113.0104.4104.5103.892.888.494.9101.8108.191.5

101.5100.6107.4105.3102.6102.9102.094.3

101.4114.3113.396.5

ConsumerGoods

166.8123.4106.9101.7101.0100.0101.1

96.095.5103.393.198.9101.297.996.4101.7113.5112.789.7

98.898.494.089.598.697.7103.6101.1102.7121.3111.595.5

StocksFinal Products

Total

154.7136.7115.8117.4104.0100.0

100.498.3101.0105.2107.5104.8100.397.893.992.297.9100.7

101.5104.8104.4100.7100.499.093.193.888.492.8101.6

Equipmentand Machinery

181.3171.2154.4151.0131.8100.0

119.0125.7129.5134.4137.5121.5118.671.367.570.156.748.2

49.551.242.848.844.341.941.249.450.752.457.6

Production.Materials

132.8121.2110.4114.299.4100.0

97.993.996.1103.2104.6102.098.4104.299.092.499.9108.2

107.0109.7109.7107.1107.5106.299.1100.490.689.998.2

ConsumerGoods

186.3155.4115.1114.0103.4100.0

100.399.0102.3101.1104.7105.599.493.591.497.1104.7101.0

104.8109.1110.1102.4102.0100.895.493.393.9107.6118.3

RawMaterials

125.8108.0113.4115.1101.4100.0

95.595.995.697.893.993.795.298.696.1111.9112.7113.0

110.5105.0105.2104.0106.395.799.6100.195.698.5103.7

ConsumptionRaw

Materials

157.9111.7101.398.199.5100.0

101.599.3110.3103.1106.698.191.192.093.2104.1107.193.6

95.993.1100.397.492.786.884.885.793.2104.8107.3

Electricityand Fuck I/

160.8122.0103.9104.199.3100.0

112.298.0115.0110.295.095.886.680.677.499.5120.2108.9

103.51183113.8100.088.482.682.174.981.5103.6108.6

Number ofEmployees

171.6141.3120.2112.7106.4100.0

102.8102.4101.9101.1100.7100.199.899.198.898.497.897.0

94.694.193.893.793.392.892.892.291.791.390.8

Productivity 2/

104.490.590,891.193.8100.0

111.7111.5111.0110.4109.9110.0109.4108.7107.5107.2107.2106.6

113.3112.5108.6109.1109.2108.9109.7110.6110.7111.6111.4


I/ Consumption of electricity and fuck includes only fuels used for production and technology purposes. Fuels used as raw materials for further production are not included,II Productivity indices show the change in the period from January to the month for which the data is given k comparison with the same period in the previous year.


STATISTICAL APPENDIX

Table 7. Croatia: Agricultural Production

(1988=100)

1989 1990 1991 1992 1993 1994 1995

(All production units)

Total production

Field cropsCerealsIndustrial cropsMeadow crops

FruitViticultureStock-raising

CattlePigs

Total production



CattlePigs

Total production



CattlePigs

104.0

108.0103.0116.0110.0122.0106.0100.0100.0100.0

104.0

107.098.0

123.089.0

101.098.0

103.0110.0102.0

104.0

108.0105.080.0

111.0131.0107.098.097.099.0

100.9

105.8108.2112.597.989.1

115.595.091.0

100.0

101.9

107.0107.8107.087.288.9

108.897.992.4

105.1

100.9

105.8108.2100.898.889.1

116.693.190.297.0

93.8

108.0115.7106.9101.8123.8123.672.267.373.0

88.7

108.1108.9108.1103.887.1

105.570.559.159.9

95.8

108.0119.083.7

102.7137.2128.372.669.579.6

81.2

74.170.086.368.5

128.4119.172.879.172.7

70.7

70.064.377.661.776.974.170.763.759.9

85.4

76.072.888.669.6

144.6129.673.386.579.1

85.2

85.788.586.871.1

104.8124.267.070.270.7

75.9

83.578.889.849.190.872.767.258.165.9

86.7

86.993.472.472.8

109.5135.966.476.472.8

82.7

85.783.278.176.085.9

114.265.666.071.4

63.0

70.164.675.481.063.563.259.141.266.6

88.4

93.093.476.011. 194.1

125.168.476.473.6

83.5

92.589.082.077.695.3

106.261.061.465.0

58.0

68.767.268.6

185.454.641.752.037.555.9

91.1

104.1101.896.574.8

111.1120.065.071.869.9


- 91 -



Table 8. Croatia: Tourism Data - Overnight Stays

1983198419851986198719881989199019911992199319941995

1994

1995

1996

Jan.Feb.Mar.Apr.MayJun.Jul.

Aug.Sep.Oct.Nov.Dec.Jan.Feb.Mar.Apr.MayJun.Jul.

Aug.Sep.Oct.Nov.Dec.

Jan.Feb.Mar.Apr.MayJun.Jul.

Aug.Sep.Oct.Nov.

Total

54,63259,46567,66568,21668,16067,29861,84952,52310,15810,72412,90919,97712,885

231.0239.0337.0455.0949.0

1,971.05,653.07,068.02,075.0

400.0286.0311.0248.0259.0286.0595.0666.0

1,559.04,121.0

3,516.0850.0295.0225.0266.0

247.0252.0289.0560.0918.0

2,178.06,109.08,020.01,950.0

389.0257.0

Overnight StaysDomestic

(In thousands)

8,5418,5278,7908,8368,3977,9467,3836,7473,3943,1703,1524,4214,370

141.0138.0188.0167.0260.0335.0990.0

1,358.0358.0170.0169.0146.0160.0157.0162.0226.0254.0367.0

1,111.0

1,153.0319.0166.0146.0149.0

155.0139.0148.0220.0253.0432.0

1,224.01,536.0

322.0174.0155.0

Foreign

46,09150,93858,87559,38059,76359,35254,46645,7766,7647,5549,757

15,5568,515

90.0101.0149.0288.0689.0

1,636.04,663.05,710.01,717.0

230.0117.0166.088.0

102.0124.0369.0412.0

1,192.03,010.0

2,363.0531.0129.079.0

117.0

92.0113.0141.0340.0665.0

1,746.04,885.06,484.01,628.0

215.0102.0

Source: Croatian Economic Trends.



Table 9. Croatia: Number of Nights Spent According to Accomodation

(In thousands)

1990 1991 1992 1993 1994 1995 1996

(Total nights spent)

HotelsPensionsMotelsOvernight lodging housesTourist facilitiesInns and other food and

lodging establishmentsSpas and sanatoriumsCompany vacation facilitiesVacation facilities for

children and adolescentsCampgroundsHousekeeping facilities - private rooms,

apartments, villas and weekend cottagesOther

Total

20,716122337127

5,198

16617

4,412

1,24512,010

7,375348

52,523

5,90421

15962

844

15283740

981,436

456140

10,158

4,98315

10032

1,648

2300140

612,651

70984

10,725

5,729228221

2,178

2199139

1073,562

748119

12,908

8,43321

10327

3,357

2283249

2195,079

2,054150

19,977

5,587159529

1,972

2261303

1923,429

840160

12,885

855131

11141

3083

5172401

2255815

2806214

21,455

(Nights spent by tourists from Croatia)

HotelsPensionsMotelsOvernight lodging housesTourist facilitiesInns and other food and

lodging establishmentsSpas and sanatoriumsCompany vacation facilitiesVacation facilities for

children and adolescentsCampgroundsHousekeeping facilities - private rooms,


Total

2,64845

10652

353

4355

1,317

323677

728139

6,747

2,249135925

258

2244209

45114

12947

3,394

2,067106412

391

125278

16161

9523

3,170

2,0538

5310

369

111988

41257

9754

3,150

2,6096

6414

410

1130174

108368

44988

4,421

2,5697

6616

466

1173225

108349

279111

4370

2732107321

502

3139251

107387

527157

4909

(Nights spent by foreign tourists)

HotelsPensionsMotelsOvernight lodging housesTourist facilitiesInns and other food andlodging establishments

Spas and sanatoriumsCompany vacation facilitiesVacation facilities forchildren and adolescents

CampgroundsHousekeeping facilities - private rooms,


Total

18,06877

23175

4,845

12262

3,095

92211,333

6,647209

45,776

3,6558

10037

586

1339

531

531,322

32793

6,764

2,9165

3620

1,257

14862

452,490

61461

7,555

3,676142911

1,809

18051

663,305

65165

9,758

5,824153913

2,947

115375

1114,711

1,60562

15,556

3,0188

2913

1,506

18878

843,080

56149

8,515

5819213820

2581

233

150

1185428

227957

16546



Table 10. Croatia: Nights Spent by Tourists According to Country of Origin

1990 1991 1992 1993 1994 1995 1996

(Number of nights)

European UnionEastern EuropeOther EuropeanNon-European

Total

European UnionEastern EuropeOther EuropeanNon-European

30,170,0008,120,000

401,000640,000

39,331,000

76.720.6

1.01.6

2,877,0002,178,0001,563,000

155,000

6,773,000

42.532.223.12.3

3,642,0003,257,000

36,000109,000

7,044,000

51.746.20.51.5

5,130,3544,133,029

338,204156,450

9,758,037

(In percent)

52.642.43.51.6

8,026,7246,946,380

397,308185,658

15,556,070

51.644.72.61.2

4,569,2153,502,749

296,713146,714

8,515,391

53.741.13.51.7

8,986,6966,843,974

442,505272,451

16,545,626

54.341.42.71.6

Source: Statistical Yearbook, Central Bureau of Statistics.



Table 11. Croatia: Composition of Employment I/

1991 1992 1993 1994 1995 1996 2/XI

(In thousands)

Total

Goods and services

Mining and industryOfwhich:

Manufacture of metal productsMachine industryShipbuildingManufacture of electrical equipmentFinished wood productsTextile fibre and fabricsFinished textile productsLeather footwear and accessoriesFood products industry

Agriculture and fisheriesOf which: fisheries

Forestry

Water management

Construction

Transport an** <^nmrnllnic^infi^Qfwhich:

RailwaysOcean shippingRoad transportCommunications

TradeRetail tradeWholesale tradeForeign trade

Hotels, restaurants, tourism

Crafts and trade


Financial and other servicesOfwhich: banking

Education, health, and government

Education, culture, and the arts

Health care and social services

Government bodies

1,303.6

1,053.0

461.9

36.825.321.728.327.520.552.924.351.1

48.31.6

13.4

5.6

98.8

110.2

33.110.024.420.3

142.3103.531.07.8

61.0

28.3

28.3

55.421.7

250.6

93.8

101.9

54.4

1,137.9

903.8

397.6

28.921.716.424.922.916.246.221.446.5

43.21.6

11.5

5.0

76.2

95.6

28.67.2

21.119.9

123.990.128.25.6

52.5

24.2

23.8

50.719.0

234.1

87.7

97.4

48.6

1,108.4

872.3

384.7

28.219.716.323.922.315.548.922.244.1

42.31.5

10.8

4.3

66.3

90.0

26.45.3

20.020.2

125.287.931.85.5

50.5

23.8

23.3

51.518.6

236.1

88.9

98.6

48.2

1,061.5

827.0

368.3

26.417.715.521.521.214.348.323.244.2

39.51.4

10.9

4.0

59.0

84.9

23.94.7

18.320.4

116.580.431.64.5

48.8

21.8

23.5

50.119.1

234.5

89.4

97.3

47.5

1,026.8

792.2

349.2

24.415.714.120.519.513.245.621.243.9

35.21.3

10.9

4.0

59.0

84.1

23.44.6

17.921.1

109.873.032.44.4

44.6

20.0

24.1

51.319.3

234.6

88.9

95.3

50.4

962.2

728.3

314.5

20.012.512.918.217.810.740.318.142.8

30.31.1

10.4

4.0

54.2

82.9

24.04.3

16.322.1

95.563.628.23.7

40.1

17.7

24.4

54.523.8

233.9

90.0

96.5

47.4

Source: Central Bureau of Statistics, Monthly Statistical Report.

1 / The data cover the fonner socially - owned enterprises, privated and partially privatized enterprises, as well as the general governmentsector. Annual data are the average of March and September.2/ The last available data is for November 1996; provisional data is presented for that month. The number of employed persons forNovember 1996 is taken from a monthly survey which covers 70% of employed from each activity. The employed persons in the Ministryof Defense. Ministry of Interior and independent fanners are not included.


Table 12. Croatia: Trends in Employment and Unemployment I/

(End of period)

1990199119921993199419951996 Q21996 Q3

Majority state-owned ent. &pub. sector 2/

(1)

1,670,0961,482,7401,221,3331,054,357

870,787799,665

Privatesector 3/(2)

285,766343,650435,200586,823716,791738,804

Totalemployment(3)=(l)+(2)

1,955,8621,826,3901,656,5331,641,1801,587,5781,538,4691,451,7331,468,316

Unemployed(registered)

(4)

195,466283,308261,050243,096247,555249,070252,524262,203

Laborforce

(5)=(3)+(4)

2,151,3282,109,6981,917,5831,884,2761,835,1331,787,5391,704,2571,730,519

Unemploymentrate

(4)/(5)

9.113.413.612.913.513.914.815.2

Vacancies

10,7016,9228,8638,4269,0697,76510,66910,974




Table 13. Croatia: Trends in Wage Bills and Non-wage Compensation

(In thousands of kunas, prices of December 1990)

1989199019911992199319941995

1994Jan.Feb.Mar.Apr.May.JimJul.Aug.Sep.Oct.Nov.Dec.

1995Jan.Feb.Mar.Apr.May.JunJul.Aug.Sep.Oct.Nov.Dec.

1996Jan.Feb.Mar.Apr.May.JunJul.Aug.Sep.Oct.

TotalCompensation

140,485155,907116,40961,21150,19469,70182,786

4,0114,6145,5765,5725,6606,4625,9735,8846,1636,1856,5077,099

5,9166,2666,7826,7206,8927,0917,2526,9177,2237,1456,9387,645

6,9656,8987,1907,2727,6057,5828,0137,8797,7377,958

Wage Social Compensation WageBill Benefits from Employmen Bill

and Work

98,47398,50571,05133,59927,19835,12349,148

2,4132,5662,6962,8122,6982,9182,9383,0913,1493,1423,1983,505

3,7693,9394,1894,0954,0924,1884,2684,1474,1764,0613,9984,227

3,9473,9424,0554,0634,2294,3044,3464,5934,3274,347

31,44641,93029,85313,68110,56214,55715,946

7231,0541,3981,0821,2061,4791,1801,1861,2591,2321,4001,360

9851,1451,2731,2811,2281,3611,3171,3741,5221,4611,4101,589

1,6661,5971,7501,7341,8421,8681,9631,8971,9431,994

10,56615,47115,50513,93112,43420,02117,692

875994

1,4821,6781,7562,0651,8551,6071,7551,8111,9092,234

1,1621,1821,3201,3441,5721,5421,6671,3971,5251,6221,5301,829

1,3521,3591,3851,4761,5351,4111,7041,3901,4661,616

0.700.630.610.550.540.500.59

0.600.560.480.500.480.450.490.530.510.510.490.49

0.640.630.620.610.590.590.590.600.580.570.580.55

0.570.570.560.560.560.570.540.580.560.55

Socialbenefits

(Shares)

0.220.270.260.220.210.210.19

0.180.230.250.190.210.230.200.200.200.200.220.19

0.170.180.190.190.180.190.180.200.210.200.200.21

0.240.230.240.240.240.250.240.240.250.25

Compensationfrom Employment

and Work

0.080.100.130.230.250.290.21

0.220.220.270.300.310.320.310.270.280.290.290.31

0.200.190.190.200.230.220.230.200.210.230.220.24

0.190.200.190.200.200.190.210.180.190.20

Source: Croatian Economic Trends.



Table 14. Croatia: Trends in Average Monthly Net Wages and Salaries I/

1989199019911992199319941995

1995Jan.Feb. 21Mar.Apr.MayJun.Jul.Aug.Sep.Oct.Nov.Dec.

1996Jan.Feb.Mar.Apr.MayJun.Jul.Aug.Sep.

Total

(InHrK)

0.84.88.1

33.4535.4

1,248.61,819.1

1,745.01,725.01,800.01,791.01,836.01,843.01,798.01,839.01,826.01,848.01,895.01,883.0

1,924.01,908.01,920.01,980.02,067.01,994.02,071.02,085.02,028.0

Total

(InUS$)

414.9112.0140.4234.0347.8

317.5326.0360.2361.7367.9365.5359.1342.8347.5351.8354.9354.2

349.5355.3351.8355.7370.6366.3393.9396.7373.8

Total Economy Non-economy

(InHrK, prices of Dec. 1990)

5.35.64.42.22.02.84.1

3.93.94.04.04.14.14.04.14.04.14.24.1

4.24.24.24.34.54.34.44.54.3

5.25.54.42.21.92.83.9

3.83.83.93.94.04.03.94.03.94.04.14.0

4.14.14.14.24.44.24.44.44.3

5.87.55.62.32.13.14.4

4.44.34.44.44.44.64.34.34.34.44.44.5

4.44.44.54.54.64.54.54.64.5

Source: Croatian Economic Trends; and staff estimates.

I/ Comprises the formerly socially-owned industrial sector ("economy11) and the generalgovernment sector ("non-economy").21 Series break starting in January 1995 when amounts previously included in non-wagecompensation are shifted to wages.



Table 15. Croatia: Average Gross Monthly Pay per Employeeloyee

(In Croatian kuna)

Total

Goods and services

Mining and industryOfwhich:


Agriculture and fisheriesOf which:

Fisheries

Forestry

Water management

Construction

Transport and communicationsOfwhich:




Crafts and trade


Financial and other servicesOfwhich:

Banking

Education, health and government

Education, culture and the arts


Government bodies

1994

2,155

2,092

2,083

1,8231,7881,6602,4091,6221,3521,8551,5352,530

2,020

1,969

2,187

1,927

1,970

2,189

1,7913,1561,8332,259

1,8551,6822,2402,754

1,967

2,003

1,946

2,895

2,886

2,360

2,310

2,234

2,686

1995

2,887

2,781

2,743

2,3842,2722,3083,1372,0321,7452,1951,8773,472

2,690

2,603

3,041

2,558

2,550

2,840

2,5133,8452,4212,906

2,5902,3783,1043,546

2,591

2,625

2,741

3,796

3,829

3,190

2,988

3,202

3,510

1996I- VI

3,159

3,075

3,000

2,4532,6312,7153,6291,9591,8842,2261,9183,649

2,915

2,774

3,285

2,869

2,809

3,209

2,7244,0912,6083,543

2,8012,5233,5443,754

2,605

2,743

3,180

4,386

4,577

3,386

3,193

3,386

3,734

1996I-X

3,210

3,143

3,061

2,5212,6762,8273,6022,0101,8682,2611,9563,688

2,967

2,789

3,407

3,044

2,930

3,275

2,8484,1502,7123,532

2,8662,7563,6223,875

2,740

2,850

3,234

4,383

4,542

3,393

3,209

3,402

3,713



Table 16. Croatia: Indices of Nominal Net Wages and Salaries per Employee

(1993=100)

Total

Goods and servicesMining and industry

Of which:Manufacture of metal productsMachine industryShipbuildingManufacture of electrical equipmentFinished wood productsTextile fibre and fabricsFinished textile productsLeather footwear and accessoriesFood products industry

Agriculture and fisheriesQfwhich:

FisheriesForestryWater managementConstructionTransport and communications

Ofwhich:RailwaysOcean shippingRoad transportCommunications


Hotels, restaurants, tourismCrafts and tradeHousing, utilities, and public servicesFinancial and other services

Ofwhich:Banking

Education, health, and governmentEducation, culture and the artsHealth care and social servicesGovernment bodies

1991

1.5

1.51.4

1.11.41.71.31.21.41.11.31.71.5

1.51.51.51.41.6

.8

.5

.6

.8

.8

.91.71.51.21.4.6.5

.4

.7

.81.71.6

1992

6.3

6.46.5

6.26.78.46.36.67.06.46.56.16.9

6.96.85.95.46.6

7.96.37.26.17.37.66.96.25.76.36.05.9

5.56.16.16.25.7

1993

100.0

100.0100.0

100.0100.0100.0100.0100.0100.0100.0100.0100.0100.0

100.0100.0100.0100.0100.0

100.0100.0100.0100.0100.0100.0100.0100.0100.0100.0100.0100.0

100.0100.0100.0100.0100.0

1994

237.1

236.6230.5

209.5227.4209.2225.6217.5231.8210.2199.4244.7231.4

200.2225.6234.6260.1227.8

228.1224.3240.4218.7254.3259.2245.0233.9241.6239.5234.3234.8

218.6236.2229.3247.3230.2

1995

345.6

343.2332.0

300.6318.4320.6328.2300.7325.8276.2268.2361.4330.6

293.2344.4342.2372.0326.0

348.0304.5346.7314.2381.9392.3365.5334.6340.8344.5355.8337.0

317.8346.7324.4380.6328.9

1996I-X

381.2

384.0366.9

318.6370.4386.2372.0300.2346.0284.7280.0382.2363.6

307.2381.4398.6422.8374.0

390.0327.7386.0382.0418.3422.2419.5363.8358.8374.1412.9383.7

370.1367.5345.5403.5348.2


STATISTICAL APPENDIX- 100 -

1.1.1.1.1.1.1.

1.1.

1.1.1.1.1.



Table 17. Croatia: Indices of Real Net Wages and Salaries per Employee

(1993=100)

Total

Goods and services

Mining and industryOf which:


Agriculture and fisheriesOf which:

Fisheries

Forestry

Water management

Construction

Transport and communicationsOf which:




Crafts and trade


Financial and other servicesof which

Banking

Education, health, and government

Education, culture, and the arts


Government bodies

1991

174.4

174.4

162.7

127.9162.7197.6151.1139.5162.7127.9116.2197.6

174.4

174.4

174.4

174.4

162.7

186.0

209.3174.4186.0209.3

209.3220.9197.6174.4

139.5

162.7

186.0

174.4

162.7

197.6

209.3

197.6

186.0

1992

100.0

101.5

103.1

98.4106.3133.3100.0104.7111.1101.5103.196.8

109.5

109.5

107.9

93.6

85.7

104.7

125.3100.0114.296.8

115.8120.6109.598.4

90.4

100.0

95.2

93.6

87.3

96.8

96.8

98.4

90.4

1993

100.0

100.0

100.0

100.0100.0100.0100.0100.0100.0100.0100.0100.0

100.0

100.0

100.0

100.0

100.0

100.0

100.0100.0100.0100.0

100.0100.0100.0100.0

100.0

100.0

100.0

100.0

100.0

100.0

100.0

100.0

100.0

1994

114.4

114.2

111.2

101.1109.8100.9108.9105.0111.9101.496.2118.1

111.7

96.6

108.9

113.2

125.5

110.0

110.1108.2116.0105.6

122.7125.1118.3112.9

116.6

115.6

113.1

113.3

105.5

114.0

110.7

119.4

111.1

1995

160.4

159,3

154.1

139.5147.7148.8152.3139.5151.2128.2124.5167.7

153.4

136.1

159.8

158.8

172.6

151.3

161.5141.3160.9145.8

177.2182.0169.6155.3

158.1

159.9

165.1

156.4

147.5

160.9

150.5

176.6

152.6

1996I-X

169.6

170.9

163.3

141.8164.8171.9165.6133.6154.0126.7124.6170.1

161.8

136.7

169.7

177.4

188.2

166.4

173.6145.8171.8170.0

186.2187.9186.7161.9

159.7

166.5

183.8

170.8

164.7

163.6

153.8

179.6

155.0

Source : Central Bureau of Statistics.

- 101 -


Table 18. Croatia: Health Insurance of Workers

(Number of persons insured)

Total

Currently employed

Receiving retirement pensions

Unemployed persons

Other

Family members

Refugees

1990

4,394,398

1,723,059

657,961

81,260

72,736

1,859,382

0

1991 If

4,899,083

1,839,657

712,865

163,615

78,481

2,104,465

0

1992

4,608,466

1,606,984

712,032

178,618

72,266

1,847,566

191,000

1993

4,571,955

1,573,520

742,828

166,534

79,356

1,818,717

191,000

1994

4,591,341

1,564,494

778,400

161,660

82,710

1,813,077

191,000

1995

4,629,280

1,588,344

799,892

158,164

79,629

1,811,602

191,649

Source: Central Bureau of Statistics, and Croatian Health Insurance Institute.

I/ As of 1991 health insurance for agricultural workers is also included.


Source: Central Bureau for Statistics, and National Workers1 Retirement and Disability Fund.

Table 19. Croatia: Child Care Supplements

Number receiving benefits

Number of children

Expenditures, (thousand kunas)

Child care supplement, (thousand kunas)

1990

175,103

334,804

2,369

2,280

1991

194,022

365,469

4,268

4,096

1992

208,414

394,034

17,505

16,740

1993

193,423

359,529

113,820

102,945

1994

204,975

378,434

662,780

636,319

1995

199,775

370,150

820,581

801,540

1996

196,962

365,202

853,164

825,249


Table 20. Croatia: Disability and Retirement Insurance II

1990 1991 1992 1993 1994 1995 1996I-VI

(Number of persons)

Retirement benefitsDisabilty pensionsOld-age pensionsSurvivor pensionsFormer republics of former Yugoslavia

Disability compensation(for bodily injury)

Disabled workers - retrainingor additional training

Disabled workers -unemployment benefits

Compensation for less thanfull-time employment

Compensation for reducedpay on new job

594,839163,309264,096167,434

89,186

1,766

3,960

23,619

26,771

646,140164,858310,068171,214

94,186

2,472

6,650

20,441

31,056

762,072183,530387,405191,137

95,153

2,472

7,418

16,947

32,043

784,364181,614409,122193,628

100,964

2,159

11,654

16,192

31,637

813,382184,989433,180195,21325,620

104,172

2,102

13,061

16,145

32,956

863,551193,654443,688200,58929,118

104,819

2,476

14,434

14,390

32,217

866,126194,846446,929195,23329,118

104,520

(Expenditures, in thousands of kunas)

TotalDisability pensionsOld-age pensionsSurvivor pensionsSupplement (100 kuna)Compensation for bodily injuryCosts and compensations associated

with retraining and additionaltraining of disabled workers

Contributions to housing constructionAdministrative costsOther

31,6036,860

13,5455,793

206

1,069521818

2,790

47,7809,558

22,3177,984

309

1,675553

1,0594,325

208,83639,383

108,68136,132

1,382

4,4712,7544,933

11,100

3,318,269593,397

1,756,203571,993

20,709

96,25636,12891,481

152,102

8,479,0611,245,6133,698,3751,208,417

413,08742,780

240,0433,243

166,3271,874,265

10,667,3021,648,7544,412,0541,510,676

521,76751,695

257,6321,782,484

316,078274,842

5,947,376915,942

2,219,835793,682521,76747,544

155,280947,428118,876227,022

Source: Central Bureau of Statistics, and National Workers1 Retirement and Disability Fund.

I/ From 1991 onwards, coverage is slightly broader than previously.



Table 21. Croatia: Price Developments

Retail Prices Producer PricesRate of Growth

199019911992199319941995

1995Jan.Feb.Mar.Apr.MayJun.Jul.Aug.Sep.Oct.Nov.Dec.

1996Jan.Feb.Mar.Apr.MayJun.Jul.Aug.Sep.Oct.Nov.Dec.

IndexDec. 1994=100

100.7100.8100.9101.6101.8101.4101.4101.3102.9103.4103.5103.7

103.9104.4104.3104.0105.2105.7106.1106.1106.2106.7107.2107.2

PreviousPeriod

609.5123.0665.5

1,517.597.62.0

0.70.10.10.70.2

-0.40.0

-0.11.60.50.10,2

0.20.5

-0.1-0.31.10.50.40.00.10.60.50.0

Same MonthPrevious Year

-2.2-0.70.42.52.82.61.91.92.93.53.73.7

3.23.63.32.43.34.14.54.73.13.23.53.4

IndexDec. 1994=100

99.9100.5100.099.599.699.499.599.8100.1100.6101.1101.6

101.7101.7100.7101.1100.7101.1101.1101.1101.2101.2102.8103.1

Rate of GrowthPrevious Same MonthPeriod Previous Year

455.3146.3825.5

1,512.477.60.7

-0.10.6

-0.5-0.50.1

-0.20.10.30.30.50.50.5

0.10.0

-1.00.4

-0.40.40.00.00.10.01.60.3

-4.30.61.71.31.31.71.20.80.71.31.21.6

1.91.30.71.61.21.71.71.31.10.61.71.5



Table 22. Croatia: Retail Inflation Rates

(Average percentage change)

Total

Goods

Agricultural products

Industrial products - total

Processed food products

Alcoholic beverages

Tobacco

Non-food industrial productsTextile productsFuel and lightHousehold furnishingsElectric appliancesMedicine

ServicesHousing servicesPublic utilities and servicesTransportCommunications

1990

609.5

591.6

915.3

582.5

507.7

704,6

435.6

614.8639.9514.1567.7704.0483.4

690.11,074.7

750.2598.2398.0

1991

123.0

115.5

104.0

115.9

127.7

87.8

101.9

113.768.296.474.569.3

404.2

152.5320.7117.5159.5202.5

1992

665.5

746.8

632.3

751.1

740.7

749.7

1,050.0

743.3817.4659.9771.1958.5374.7

393.577.0

358.2486.7246.2

1993

1,517.5

1,502.4

1,135.9

1,514.2

1,442.2

1,593.4

1,278.2

1,552.61,774.71,807.11,776.31,488.62,665.1

1,604.21,534.41,805.51,681.41,703.8

1994

97.6

95.1

134.5

94.1

93.3

108.2

159.1

90.8103.587.6

103.862.2

110.5

110.9142.8113.798.895.2

1995

2.0

0.0

3.7

-0.2

0.0

4.4

27.2

-2.2-4.2-3.5-5.8

-10.60.6

11.918.15.36.5

23.8

1996

3.5

2.4

0.0

2.5

4.5

7.7

18.2

0.2-1.51.9

-3.3-3.9-0.6

8.65.14.55.9

32.8



Table 23. Croatia: Indices of Prices

(1989=100)

Indices of manufacturers' prices for industrial productsOf which:Equipment and machine

Production materials

Consumer Goods

Indices of wholesale prices for industrial products

Indices of producer process for agricultural products

Hotel and restaurant services

1990

555

543

559

551

566

628

668

1991

1,368

1,303

1,472

1,237

1,282

1,141

1,605

1992

12,654

14,069

14,412

10,178

12,142

10,435

14,336

1993

204,033

224,526

237,811

158,512

179,504

143,647

233,293

1994

362,363

373,386

413,077

296,576

340,520

284,852

450,022

1995

364,899

362,185

413,491

304,584

344,947

291,688

466,223

1996

370,008

369,428

411,423

316,463

351,846

550,143



Table 24. Croatia: Electro-Energy Balance Sheet

(In millions of Kwh)

Total supply of electro-energy

Domestic production It

Imported from other SFRY republics

Imported from outside SFRY

Total use

Industry

Agriculture

Transportation

Others

Transmission loss

Exports (including other SFRY republ

1980

12,445

9,109

3,259

76

12,445

5,106

84

355

5,175

1,237

488

1985

15,019

7,627

6,388

1,005

15,019

5,811

103

410

6,897

1,328

472

1986

15,675

8,149

6,265

1,261

15,675

6,186

114

403

7,049

1,546

377

1987

16,133

8,733

6,486

914

16,133

6,247

115

410

7,475

1,477

409

1988

16,385

8,690

7,376

319

16,385

6,305

116

393

7,499

1,554

518

1989

16,128

8,109

6,726

1,293

16,128

6,361

115

382

7,436

1,548

286

1990

16,214

8,693

6,231

1,290

16,214

5,860

115

406

7,789

1,584

460

1991

14,482

8,414

5,627

441

14,482

4,591

103

217

7,322

1,481

768

1992

12,313

8,894

2,811

609

12,313

3,333

81

219

6,560

1,487

632

1993

12,942

9,359

2,391

1,192

12,942

2,997

71

229

7,048

1,329

1,257

1994

12,820

8,273

2,455

2,092

12,820

2,972

74

238

6,971

1,584

982

1995

13,244

8,862

2,548

1,834

13,244

2,695

68

240

7,696

1,660

886

Source: Electricity Institute Zagreb.

I/ Including hydro- and nuclear-generated electricity.


Table 25. Croatia: Energy Balance Sheet

(In millions of tons coal equivalent)

1980 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995

Domestic sourcesCoalOther solid fuelsLiquid fiielOther

of which: hydro I/

ImportsLiquid fuel

USSR/FSUOthers

GasUSSR/FSU

Other primary energyof which: nuclear fuel 21

ExportsLiquid fuelSolid fuels

Change in stocks

Domestic use of primary energyElectricity generation

IndustryAgricultureHouseholdsTransportOther

8.90.30.94.43.32.2

10.08.22.16.10.50.5

1.30.0

6.35.70.6

-0.2

12.33.24.30.21.82.30.5

8.70.20.84.33.31.7

8.04.71.43.30.80.8

2.50.7

3.63.00.7

-0.3

12.83.44.40.21.92.40.5

9.20.20.84.33.91.9

8.85.41.34.10.80.8

2.60.7

4.23.60.6

-0.7

13.13.54.50.21.92.40.5

9.00.20.83.94.11.8

8.75.52.72.80.90.9

2.30.8

3.63.20.4

0.3

14.33.84.90.22.12.60.6

9.80.20.84.34.41.7

10.67.21.85.40.90.9

2.40.7

5.24.60.6

0.0

15.13.95.60.22.02.70.7

9.20.20.84.14.11.4

10.57.12.05.10.90.9

2.50.8

5.04.50.5

-0.2

14.53.65.20.22.12.70.6

8.70.20.83.93.91.3

10.47.51.65.80.80.8

2.10.8

5.14.70.4

0.1

14.13.74.70.22.12.80.6

8.10.10.73.14.11.9

6.74.10.33.80.90.9

1.70.9

3.32.90.4

0.4

11.93.73.60.22.01.90.4

6.90.10.42.73.71.5

6.94.30.83.50.80.8

1.80.7

2.82.40.4

-0.3

10.73.72.90.41.51.80.5

7.30,10.42.74.11.5

6.74.10.63.50.90.9

1.70.7

2.82.30.5

-0.2

11.03.82.70.41.61.90.6

6.70.10.42.34.01.7

7.75.80.85.00.90.9

1.00.0

3.63.20.4

-1.0

10.72.82.80.61.62.20.7

6.90.10.42.14.31.8

7.56.40.36.10.30.3

0.80.0

3.43.20.2

0.1

11.02.92.90.31.82.30.7

Source: Electricity Institute Zagreb.

I/ Hydro=hydro-generated electricity/0.35.2/ Nuclear fuel=nuclear generated electricity/0.336.


Table 26. Croatia: National Public Enterprises

(End of Year)

Source: State Institute for Macroeconomic Aaalisis and Forecasting.

Employment Assets Sales

1990 1991 1992 1993 1994 1995 1994

(In persons)

HRVATSKA ELEKTROPRIVREDA(Electricity)

HRVATSKA VODOPRIVREDA(Water Supply)

HRVATSKE CESTE(Road Construction)

HRVATSKE ELJEZNICE(Raikoads)

HPT(Post and telecommunications)

JADROLINIJA RIJEKA(Coastal navigation)

HRVATSKA RADIO - TELEVIZIJA (HE(Radio and TV)

HRVATSKE [UME(Forestry)

NARODNE NOVINE(Printing)

INA - INDUSTRIJA NAFTE(Oil refining and distribution)

Total

18,289

859

4,444

37,702

20,067

2,309

3,496

14,734

736

32,585

135,221

14,250

569

3,857

29,301

18,439

2,209

2,846

10,113

725

18,345

100,654

13,984

426

3,643

22,840

19,445

1,499

2,752

9,882

763

18,084

93,318

14,457

400

3,715

22,004

19,687

2,113

2,719

10,201

746

17,965

94,007

14,158

401

3,645

21,812

20,493

1,974

2,928

10,034

727

17,513

93,685

23,331

4,952

36,590

7,086

7,618

317

793

22,328

203

20,540

123,758

1995

(Millions

23,628

5,332

37,000

7,791

8,609

267

851

22,190

206

21,171

127,045

1994

of kuna)

5,386

232

1,391

2,241

3,385

348

526

1,470

439

10,773

26,191

1995

5,831

276

988

2,323

3,854

339

711

1,359

518

9,490

25,689


Table 27. Croatia: Number of Enterprises in the Economic Sector and Number of Legal Entities Undergoing Bankruptcy

(End of Year)

Number of Enterprises in the Economic Sector

Total

Industry

Agriculture and fishing

Forestry

Water supply

C onstruction

Transport and communication

Trade

Restaurants and Tourism

Artisanship and personal services

Housing and urban services

Financial,engineering and business

1991

32,051

4,556

849

21

29

2,076

800

14,948

2,076

1,386

785

4,525

1992

54,703

6,790

1,476

50

32

3,562

1,441

27,010

3,072

2,214

915

8,150

1993

83,788

9,519

2,243

87

33

5,519

2,625

42,214

4,376

3,465

1,041

12,666

1994

117,483

12,035

2,973

124

33

7,635

4,185

61,384

6,026

4,992

1,133

17,000

1995

135,403

13,437

3,319

151

35

8,943

4,731

71,258

6,828

5,983

1,193

19,615

1996 I/

139,748

13,874

3,399

161

35

9,472

44,943

73,127

7,102

6,043

1,226

20,366

Legal Entities Undergoing Bankruptcy

1991

339

176

13

60

3

28

7

23

4

25

1992

373

147

15

63

2

83

12

21

3

27

1993

397

131

17

64

2

110

14

24

2

33

1994

275

84

14

45

4

78

9

15

2

24

1995

348

112

20

55

6

95

11

18

3

28

1996 I/

413

127

26

57

8

121

17

19

2

35


I/ October.


Source: State Institute for Macioeconomic Analysis and Forecasting

II October.

Table 28. Croatia: Number of Employees in Enterprises Undergoing Bankruptcy

(End of Year)

Number of Employees in Enterprises Undergoing Bankruptcy

Total

Industry

Agriculture and fisfrrng

Construction

Transport and communication

Trade

Restaurants and Tourism

Artisanship and personal services

Housing and urban services

Financial,engmeering and business

1991

87,177

73,170

1,139

6,590

1,355

1,101

441

1,670

764

947

1992

69,062

53,941

1,182

8,306

2

1,942

454

1,448

368

1,419

1993

59,017

44,489

1,588

7361

2

2,212

343

1,541

4

1,477

1994

33,532

24,356

1,408

4,184

452

1,696

143

494

799

1995

43,589

30302

1,972

6,791

457

2,591

141

534

4

797

1996 11

46,792

32,142

2,212

7,172

457

3,305

141

579

0

784

1991

189,537

135,853

6,532

20,964

3,843

9,065

1,868

4348

1,621

5,443

Number of Employees in Insolvent Enterprises

1992

164,797

80,291

10,266

20375

30386

9,413

1,273

3371

383

9,039

1993

158,324

86,621

15,433

20,338

1,170

20,366

2,910

2,910

81

8,479

1994

188,902

95,464

18,273

16,598

26,434

22,638

3,110

2,010

201

4,171

1995

194,757

103,328

23,692

17,886

7,349

28,480

7,687

2,019

285

4,006

1996 I/

160,792

81,429

16,368

16,199

3,764

27,230

6,768

2366

738

4,897


Table 29. Croatia: Government Employment

Central government

Budgetary central government

AdministrationLegislatureJudiciary

Social Accounting Service (ZAP)

National Bank of Croatia (NBC)

Extrabudgetary funds

Regional and local governments

Healthcare

Social services

EducationPrimarySecondaryTertiaryOther

Research

Culture, aits and information

Sports

Total general government

1991Dec.

29,312

19,938

6,880723

6,047

6,288

400

8,974

22,952

76,859

24,441

66,97639,48517,4009,159

932

5,742

20,124

1,779

248,185

1992Dec.

25,635

18,885

6,938721

5,725

5,501

384

6,366

20,443

73,158

24,090

64,48938,20217,2498,280

758

3,994

17,048

1,608

230,465

1993Dec.

27,439

15,137

8,471852

5,814

5,430

401

6,471

19,395

73,409

24,613

67,32839,44918,3548,4201,105

3,947

16,576

1,578

234,285

1994Jul.

27,668

15,695

9,024912

5,759

5,037

434

6,502

23,376

71,046

24,754

67,23739,44118,2888,5071,001

3,979

16,142

1,552

235,754

Dec.

26,738

14,440

7,823817

5,800

5,252

431

6,615

25,560

69,996

24,976

65,86038,91017,9228,374

654

3,865

16,446

1,513

234,954

1995Jul.

21,070

13,787

7,247833

5,707

5,252

460

6,823

26,060

69,678

25,044

65,89138,88817,9288,422

653

3,863

16,486

1,509

234,853

Dec.

24,693

17,595

10,6911,0995,805

5,252

460

6,638

18,948

71,234

25,578

67,28439,19718,5748,607

906

3,990

16,619

1,536

237,310

1996Jul.

25,357

18,295

11,2141,1505,931

5,200 I/

460 11

6,602

19,000

71,317

25,097

66,18738,34118,1498,6901,007

3,361

17,093

1,458

231,083

(In percent of total employment)

Total general governmentBudgetary central governmentRegional and local governmentsExtrabudgetary fundsProviders of

HealthcareEducationSocial servicesCulture, arts and information

11.60.91.10.4

3.63.11.10.9

11.71.01.00.3

3.73.31.20.9

12.20.81.00.3

3.83.51.30.9

12.40.81.30.3

3.73.51.30.9

13.01.01.00.4

3.93.71.40.9

Source: Croatian Ministry of Finance.

I/ Estimate.



Table 30: Croatia - Budgetary Central Government Revenue

19961991 1992 1993 1994 I/ 1995 Budget Jaa-Nov. 11

(in millions of kunas)

Revenue and grantsRevenue

Current revenueTax revenue

Income and profit taxProperty taxTaxes on goods and servicesTaxes on international tradeOther taxes

Non-tax revenueCapital revenue

Grants

64646463250

3350

100

557557547502

842

316

990

45100

8,4718,4718,3717,892

93663

5,6631,230

0479100

0

24,26024,26023,90623,3503,803

11815,8943,487

49556354

0

27,98127,88127,28726,505

4,507142

17,746

3,939172782594100

31,085

31,08530,14729,076

4,851157

19,365

4,40033

1,072938

0

28,598

28,59827,55225,9664,947

15017,250

3,58830

1,5861,046

0

(in percent of GDP)





Grants





Grants

15.015.015.014.85.80.07.81.20.00.20.00.0

100.0100.0100.098.538.50.0

52.17.90.01.5

0.00.0

20.420.420.118.43.10.1

11.63.60.01.60.40.0

100.0100.098.290.115.10.4

56.817.90.08.11.80.0

20.320.320.018.92.20.2

13.52.90.01.10.20.0

100.0100.098.893.211.00.7

66.914.50.05.71.20.0

28.928.928.527.84.50.1

18.94.20.10.70.40.0

(composition)

100.0100.098.596.315.70.5

65.514.40.22.31.50.0

32.232.131.430.55.20.2

20.44.50.20.90.70.1

100.099.697.594.716.10.5

63.414.10.62.82.10.4

32.932.931.930.75.10.2

20.54.70.01.11.00.0

100.0100.097.093.515.60.5

62.314.20.13.43.0

0.0

33.033.031.830.0

5.70.2

19.94.10.01.81.20.0

100.0100.096.390.817.30.5

60.312.50.15.53.70.0

Source: Ministry of Finance.

I/ Includes the Road Fund.21 GDP shares are at an annual rate.




Table 31. Croatia: Budgetary Centra! Government Expenditure and Net Lending

1991 1992 1993 1994 11 1995 1996Budget Jan.-Nov. 21

(In millions of Croatian kuna)

Expenditure and net lendingExpenditure

Current expenditureExpenditure on goods and services

Wages and salariesEmployer contributionsOther goods and services

Interest paymentsDomesticExternal

Subsidies and other current transfersCapital expenditure

Lending minus repayments

8383806221

437

000

1730

564564520396

9824

27321210

103440

8,4038,4037,7426,1111,941

4843,686

212207

51,419

6610

23,71923,40321,19417,1456,5891,3839,1731,3051,132

1732,7442,210

316

28,69628,47625,49520,735

8,3941,716

10,6251,392

911481

3,3692,980

221

33,26831,97226,39219,8918,4682,0039,4201,4511,015

4355,0505,5801,297

28,43727,88123,93918,2177,6731,8458,7001,162

928234

4,5604,052

446

(In percent of GDP)













19.619.618.814.64.91.08.70.10.10.04.10.80.0

100.0100.096.074.724.8

5.444,5

0.50.50.0

20.94.00.0

20.720.719.114.53.60.9

10.00.80.80.03.81.60.0

100.0100.092.170.117.443

48.43.73.70.0

18.37.90.0

20.120.118.514.64.61.28.80.50.50.03.41.60.0

100.0100.092.172.723.1

5.843.92.52.50.1

16.97.90.0

28.327.925.320.47.91.6

10.91.61.30.23.32.60.4

(Composition)

100.098.789.472.327.8

5.838.7

5.54.80.7

11.69.31.3

33.032.829.423.9

9.72.0

12.21.61.00.63.93.40.3

100.099.288.872.329.26.0

37.04.93.21.7

11.710.40.8

35.233.827.921.09.02.1

10.01.51.10.55.35.91.4

100.096.179.359.825.56.0

28.34.43.11.3

15.216.83.9

32.832.227.621.0

8.92.1

10.01.31.10.35.34.70.5

100.098.084.264.127.06.5

30.64.13.30.8

16.014.21.6


I/ Includes the Road Fund.2/ GDP shares are at an annual rate.


Table 32. Croatia: Budgetary Central Government Expenditure by Function

1991 1992 1993 1994 1995 1996Budget I/ January -

September

(In millions of Croatian Icuna)

Expenditure by function

General public services

Defense affairs and services

Public Order and safety

EducationHealth affairs and services

Social security and welfare

Culture

HousingAgriculture, forestry and fisheriesMining and mineral resourcesTransportation and communication

Other

83

322151518202077

565

2119665603

667

10430

3758

8,403

3953,259

998824

885612676

49574

578715

22,283

1,6757,650

2,8412,865

572,547

309463653192

1,4991,532

28,476

1,9119,9113,3513,278

783,186

4301,343

512255

2,232

1,988

31,622

2,072

7,760

3,827

3,696

2164,357

4362,459

556463

3,408

2,372

15,267

8245,027

1,6621,712

282,166

178772278173

1,508938

(In percent of GDP) 2/


General public servicesDefense affairs and servicesPublic order and safety

EducationHealth affairs and servicesSocial security and welfare

Culture

HousingAgriculture, forestry and fisheries

Mining and mineral resources

Transportation and communication

Other


General public servicesDefense affairs and services

Public Order and safety

EducationHealth affairs and servicesSocial security and welfare

Culture

HousingAgriculture, forestry and fisheries

Mining and mineral resourcesTransportation and commuiucrtion

Other

19.6

0.85.13.63.60.32.00.40.00.50.01.71.7

100.0

4.226.018.218.21.5

10.11.90.22.30.08.88.7

20.7

0.87.22.42.20.12.40.30.41.60.01.32.1

100.0

3.834.711.410.60.5

11.71.31.87.50.06.5

10.2

20.1

0.97.82.42.00.02.00.30.21.20.21.41.7

100.0

4.738.811.99.80.1

10.21.50.95.90.96.98.5

26.5

2.09.13.43.40.13.00.40.60.80.21.81.8

(Composition)

100.0

7.534.312.812.90.3

11.41.42.12.90.96.76.9

31.7

2.111.03.73.60.13.50.51.50.60.32.52.2

100.0

6.734.811.811.50.3

11.21.54.71.80.97.87.0

32.0

2.17.93.93.70.24.40.42.50.60.53.42.4

100.0

6.624.512.111.70.7

13.81.47.81.81.5

10.87.5

15.5

0.85.11.71.70.02.20.20.80.30.21.50.9

100.0

5.432.910.911.20.2

14.21.25.11.81.19.96.1


I/ Includes the Road Fund.21 GDP shares for January-September 1996 are at an annual rate.




Table 33. Croatia: Consolidated Fiscal Accounts

1991 1992 1993 1994 1995 1996

Budget

1996

Jan-Sep.

(In millions of Croatian kuna)

Central government II 21

Revenues and grants

Expenditures plus net lending 11

Balance

Extrabudgetary funds 1/3/

Revenues and grants

Expenditures plus net lending

Balance

Consolidated central government

Revenues and grants


Balance

64

70

-6

75

90

-15

139

160

-21

557

500

57

315

477

-162

872

977

-105

8,471

7,482

989

4,849

6,163

-1,314

13,320

13,645

-326

24,260

22,112

2,148

12,622

13,529

-907

36,882

35,642

1,241

27,981

26,189

1,791

15,302

17,976

-2,674

43,283

44,165

-883

31,085

29,451

1,634

16,176

20,180

-4,004

47,262

49,631

-2,369

23505

20658

2,846

12580

15534

-2,954

36,084

36,192

-108

(In percent of GDP)

Central government

Revenues and grants

Expenditures plus net lending 11

Balance

Extrabudgetary funds 3/

Revenues and grants


Balance

Consolidated central government

Revenues and grants


Balance

15.0

16.5

-1.5

17.6

21.1

-3.4

32.6

37.5

-4.9

20.4

18.3

2.1

11.6

17.5

-5.9

32.0

35.8

-3.8

20.3

17.9

2.4

11.6

14.7

-3.1

31.9

32.6

-0.8

28.9

26.4

2.6

15.0

16.1

-1.1

44.0

42.5

1.5

32.2

30.2

2.1

17.6

20.7

-3.1

49.8

50.8

-1.0

32.9

31.1

1.7

17.1

21.3

-4.2

50.0

52.5

-2.5

33.1

29.1

4.0

17.7

21.9

-4.2

50.9

51.0

-0.2

Sources: Ministry of Finance; and staff estimates.

I/ Revenues and expenditures adjusted for inter-governmental transfers.

II Includes since 1994 the Croatian Roads fund

3/ Composed of the Pension fund, Health fund, Employment fund, Child Benefits fund and, since 1994, the Water

Management fund. Does not include the Privatization fund.


Source: National Bank of Croatia.

Table 34: Croatia: Monetary Survey

(End of period, millions of kuna)

ASSETS

1. Foreign assets (net)

2. Domestic credit

2.1 . Claims on central government and funds (net)

2.2. Claims on other domestic sectors

2.3. Claims on other banking institutions

2.4. Claims on nonbank financial institutions

Total (1+2)

LIABILITIES

1. Money

2. Savings and time deposits3. Foreign currency deposits4 . Bonds and money market instruments

5. Restricted and blocked deposits

o/w: Households' blocked ffc deposits

6. Other items (net)

Total (1+2+3+4+5+6)

1993

Dec.

24040,364

19,069

21,2691016

40,604

3,139

1,4765,412

4815,594

13,857

14,934

40,604

1994

Dec.

3,009

43,832

15,625

28,115

3062

46,840

6,641

1,8738,775

19913,322

11,471

16,031

46,840

1995

Mar.

2,879

43,104

15,441

27,551

3577

45,983

6,829

1,8658,977

9512,946

11,06115,271

45,983

Jun.

4,011

43,107

15,038

27,950

3585

47,119

7,749

1,8519,991

10812,719

10,798

14,702

47,119

Sep.

4,782

45,423

15,162

30,137

21103

50,205

8,364

2,13412,179

15412,481

10,477

14,894

50,205

Dec.

4,750

49,297

15,156

34,01031

10154,047

8,275

2,04314,099

12411,921

9,812

17,584

54,047

Mar.

5,353

50,742

15,169

35,437

3798

56,095

8,601

2,304

16,499137

11,233

9,219

17,321

56,095

1996

Jun.

6,942

50,711

13,731

36,826

35119

57,653

9,397

2,52217,337

16610,709

8,704

17,52357,653

Sep.

9,563

51,537

13,450

37,920

33134

61,100

10,326

2,99119,813

1079,988

7,940

17,87461,100

Oct.

9,596

52,375

13,468

38,730

33144

61,971

10,612

3,14520,506

989,741

7,580

17,87061,971



Table 35: Croatia: Monetary Authorities Balance Sheet

(End of period, millions ofkuna)

ASSETSForeign assets

1.1. Goldof which:Holdings of SDKs

Foreign cash in vaultsDemand deposits with foreign banksTime deposits with foreign banks

Securities in f/cNonconvertible foreign exchange

Claims on central government and fundsClaims in Kuna

Bridging loansLoans under separate decreesOverdue claims

Claims in f/cClaims on other domestic sectors

Claims on DMBsCredits to DMBs

Refinancing of DMBsShort ..term credits against securities portfolioLombard creditsOther creditsNBC bills under repurchase agreement

NBC deposits with DMBsOverdue claims

Claims on other banking institutions

Total Assets

LIABILITIESReserve money

Currency outside banksDMBs' cash in vaults

DMBs1 depositsGiro accountsStatutory reservesNBC bills on obligatory basis

Deposits of other banking institutionsDeposits of other domestic sectors

Restricted and blocked depositsRestricted depositsEscrow deposits

Foreign liabilitiesUse of IMF credit

Liabilities to international organizations

Central government and funds depositsDemand deposits

Central government demand depositsCentral government funds demand deposits

4.2. Central government f/c deposits

NBC billsCapital accounts

Other items (net)

Total Liabilities

1993Dec.

4,044

24608

73,403

0535384

3777

1510

192182140

636

19

4,771

2,249

1,36752

82155

767

0811

152151

000

0

212,366

19

4,771

1994Dec.

7,908

2588

17,794

0251180

180

701

224222

240

19711

8,383

4,714

2,658134

1,901116

1,785

6154040

716715

1794794725

68

3752,066

322

8,383

1995Mar.

7,672

28828

7,554

0192131

1256

613

173171

1710

11

8,039

4,5442,556

1201,855

481,807

85

13027

103672671

1629629511117

4071,652

6

8,039

Jun.

9,208

518252

58,433

011970

70

492

20540

3010

1163

9,534

5,5582,983

1262,422

982,055

2701512

15540

1151,1881,187

1705705524181

2521,664

12

9,534

Sep.

10,215

770383

78,997

560

109604515

491

9188

27610

11

10,416

6,4373,212

1323,059

592,320

6802212

17245

1271,1891,188

132832827752

3091,969

12

10,416

Dec.

10,075

743384

128,381

5550

390353

3530

371

220123

26970

196

10,686

6.744

3,365131

3,199181

2,202816463

21254

1581,1751,174

1396396339

57

1682,019

28

10,686

Mar.

10.319

753385

48,593

5850

586548200348

0383

137135

1340

11

11.045

6,6763,275

1133,239

1822,255

802480

21653

1631,1931,191

2580580423156

3462,073

38

11,045

1996Jun.

10,989

720195

39,314

7570

352328

30028253

123120

1200

11

11,466

7,1253,577

1113,393

2702,459

664440

23058

1721.1611,159

2613613510103

5121,831

6

11,466

Sep.

12,452

703114

211,040

5920

275251

2510

24230

0

11

12,731

7,8823,919

1373,775

4452,955

375510

22766

1611,1491,148

254754745493

1,116

1,8199

12,731

Oct.

12,457

690114

111,061

5920

261249

249

122

6057

570

11

12,780

7,9633,946

1453,826

6193,113

93460

24281

1611,135

1,1332

518518428900

1,138

1,807

23

12,780



Table 36: Croatia: Deposit Money Banks' Accounts

(End of period, millions of kuna)

ASSETS1 . Reserves2. Foreign assets

o/w: Claims on former Yugoslavia3. Claims on central governments and funds3.1 . Bonds arising from blocked f/c deposits3.2. Big bonds3.3. Other claims

4. Claims on other domestic sectors4.1 . Claims on local governments and funds4.2. Claims on enterprises4.3. Claims on households

5. Claims on other banking institutions6. Claims on nonbank financial institutionsTotal Assets

LIABILITIES1. Deposit money2. Savings and time deposits3. Foreign currency deposits4. Bonds and money market instruments5. Foreign liabilities

o/w: Liabilities to former Yugoslavia6. Central government and funds' deposits7. Credit from central bank8. Restricted and Mocked deposits

o/w: Households' blocked #c deposits9. Capital accounts

10. Other items (net)Total Liabilities

1993Dec.

8668,5963353

19,97214,8373,6351,500

21,26911

193551,902

1016

50,729

1,7641,4765,412

4812,24883561,438

27515,59313,85711,756

71850,729

1994Dec.

2,0369,1172,425

17,83811,4374,9721,429

28,114113

24,6263375

3062

57,197

3,9611,8738,775

199133016,942

1,669224

13,28111,47114,185

-27257,197

1995Mar.

1,9818,8332,354

17,53711,0435,103

1,39127,548

12223,8993,527

3577

56,012

4,2611,8658,977

9512,953

6,7461,660

18312,91911,06114,168-1,06856,012

Jun.

2,4949,2082319

17,44410,8535,0641,527

27,948131

23,9803,837

3585

57,213

4,7391,8519,991

10813,2166,7901,821

13812,67810,79813,404

-73257,213

Sep.

3,2069,4712,403

17,32610,4865,0001,839

30,135161

25,7124,262

21103

60,262

5,1182,134

12,179154

13,7146,8711,945

9012,43510,47713,413

-91960,262

Dec.

3,30411,1852,337

17,18710,0785,0612,048

34,009147

293504,513

31101

65,816

4,8612,043

14,099124

15,335

6,8962,026

18311,866

9,81216,228

-95065,816

Mar.

3,36712,1942,257

16,9289,5394,8782,511

35,434150

30,4364,848

3798

68,058

5,2772,304

16,499137

15,9666,9581,765

13711,1799,219

15,782-987

68,058

1996Jim.

3,513

13,4592,193

15,6548,4774,6562,520

36,823139

31,5445,139

35119

69,603

5,7762,522

17,337166

163466,7301,661

12210,6488,704

16308-1,28469,603

Sep.

3,927

14,5612,017

15,5077,8584,0533,596

37,918139

32,2285,551

33134

72,080

6,3572,991

19,813107

16,300

6,6351,785

299,9207,940

16,737-1,95972,080

Oct.

3,985

14,5092,017

15,5017,8324,0473,622

38,728138

32,7885,802

33144

72,900

6,6203,145

20,50698

16,2366,5851,775

599,6577,580

16,321-1,51772,900

Source: National Bank of Croatia.©International Monetary Fund. Not for Redistribution

Table 37: Croatia: Interest Rates of the National Bank of Croatia

(In Percentage, On Yearly Basis)

Deposit RatesInterest rates on

Year Month statutory reserves™th the NBC I/

1994 January

February

March

April

MayJune

July

AugustSeptember

OctoberNovember

December

1995 January

FebruaryMarchApril

MayJune

JulyAugust

September

OctoberNovember

December

1996 January

February

MarchApril

MayJune

July

AugustSeptemberOctober

6.06.05.25.25.252525.25.25.2

5.25.25.25.25.55.55.55.55.55.55.55.5

5.55.55.55.55.55.55.55.55.55.5

Interest rates on

NBC bills onobligatory basis

16.5

16.5

16.5

16.5

16.5

16.5

16.5

16.5

16.5

16.5

16.5

16.5

16.5

16.5

16.5

12.0

Interest rates on NBC billson voluntary basis 2/

7 days

26.8

28.3

24.0

17.5

17.9

15.2

11.0

11.0

11.1

11.1

9.09.0

9.09.59.09.09.09.09.0

10.0

12.0

12.0

12.0

12.0

12.0

12.0

12.0

12.0

12.0

35 days

66.9

41.1

24.8

18.7

19.4

20.0

14.0

14.0

14.1

13.7

11.0

12.0

12.0

12.5

16.1

15.9

15.8

18.0

19.0

19.2

22.0

22.9

24.4

25.5

26.0

26.0

26.0

26.0

25.1

21.5

16.5

9.18.08.0

91 days

66.7

71.5

25.0

15.0

22.0

16.8

17.0

17.0

17.0

14.0

14.0

14.0

14.8

17.3

17.5

17.5

19.3

19.5

24.0

24.0

26.0

27.0

27.0

27.5

27.5

28.0

26.5

22.8

17.6

10.8

9.59.5

Credit ra tes

NBC On ReserveDiscount Lombard Shortfall On arrears

Rate Credits Credits

14.0

14.0

11.0

11.0

9.59.58.58.58.58.58.58.5

8.58.58.58.58.58.58.58.58.58.58.5

8.5

8.58.58.58.58.58.58.56.56.56.5

18.9

18.9

14.5

14.5

12.5

12.5

14.0

14.0

14.0

14.0

14.0

18.0

18.0

18.0

18.0

18.0

18,0

18.9

19.7

20.5

22.3

24.4

24.9

25.5

25.7

27.3

27.7

28.1

28.3

27.1

20.9

19.6

13.0

11.0

200.4127.8

71.0

40.0

34.5

34.5

23.0

23.0

23.0

17.0

17.0

17.0

17.0

17.0

17.0

17.0

17.0

17.0

17.0

17.0

17.0

17.0

17.0

17.0

17.0

17.0

17.0

17.0

17.0

17.0

17.0

17.0

17.0

17.0

127.8

51.1

47.1

30.0

30.0

30.0

22.0

22.0

22.0

22.0

22.0

22.0

22.0

22.0

22.0

22.0

22.0

22.0

22.0

22.0

22.0

22.0

22.0

22.0

22.0

22.0

22.0

22.0

24.0

24.0

24.0

24.0

18.0

18.0


I/ From December 1992 through October 7, A291993 data present weighted averages of monthly interest rates on statutory reserves

deposited with the NBC.2/ Since November 1993 table shows weighted averages of monthly interest rates from auctions of NBC bills.



Table 38: Croatia: Deposit Money Bank Interest Rates - Domestic Currency Rates

Interest rates on deposits in KunaYear Month Total On demand On time and

average deposits savings deposits

1994 JanuaryFebruaryMarchAprilMayJuneJulyAugustSeptemberOctoberNovemberDecember


1996 JanuaryFebruaryMarchAprilMayJuneJulyAugustSeptemberOctober

16.114.48.04.93.83.84.23.94.34.95.05.0

5.15.55.35.35.35.45.25.35.95.86.26.1

6.46.66.46.56.45.85.95.54.74.5

7.77.65.73.22.82.72.82.93.03.53.63.6

3.63.83.83.83.83.93.83.74.14.23.93.9

4.04.03.93.93.93.63.53.12.72.6

38.332.914.39.87.77.67.67.58.69.19.09.7

9.210.110.310.510.711.210.611.312.411.214.113.7

14.815.214.915.114.913.814.113.410.710.2

Interest rates on credits in KunaTotal On short-term On long-term

average credits credits

55.953.623.317.716.516.216.114.915.215.515.715.4

16.016.116.717.618.722.621.922.021.723.524.222.3

26.425.824.925.625.123.622.820.818.718.0

56.353.923.917.716.516.216.215.015.215.515.715.4

16.116.216.817.718.822.822.622.621.823.624.422.6

26.626.025.225.825.224.023.120.919.118.5

24.226.515.015.111.511.712.612.712.612.913.813.8

13.614.413.314.615.315.210.111.916.917.417.213.5

16.214.916.415.917.313.216.517.910.810.8

Source: National Bank of Croatia


Table 39: Croatia: Deposit Money Banks Interest Rates - Foreign Currency Rates

Interest rates on deposits in foreign currency

Year Month

1995 JanuaryFebruaryMarch

April

MayJune

JulyAugust

September

October

November

December

1996 January

February

March

April

MayJune

July

August

September

October

Total

average

4.55.24.63.74.64.6

4.64.74.74.74.44.14.04.24.54.8

On demand

deposits

3.33.93.11.72.92.8

3.02.82.92.82.81.71.51.91.51.4

On time and

savings deposits

6.26.96.65.96.76.8

6.77.06.86.86.26.46.36.27.07.5

Interest rates on credits in foreign currency

Total

average

17.333.816.6

8.416.8

15.7

17.7

17.7

17.6

16.1

14.1

14.3

15.1

15.7

19.6

21.0

On short-term

credits

17.1

35.2

16.6

8.316.9

16.6

18.0

17.8

18.7

19.1

14.6

15.8

17.6

20.7

20.9

22.1

On long-term

credits

17.9

17.313.7

13.1

14.0

12.3

14.9

15.0

14.3

13.5

12.910.9

10.8

10.9

10.7

9.8




Table 40. Croatia: Balance of Payments, 1993-1996(In millions of U.S. Dollars)

Merchandise trade balance

Exports (fo.b.)(in percent change)

Imports (c.i.f.)(in percent change)

Services and transfers

TransportationTourismOther servicesInterest income (scheduled, net) I/Government transfersPrivate transfers

Current account balance

Capital account

Foreign direct investmentMedium and long term loans

DisbursementsAmortization scheduled I/

Net non-loan claimsBank net non-loan claimsOther sectors net non-loan claims

Net short-term lending 21

Errors and omissions 3/

Overall balance

Gross reserves (US$m) (- = increase)Arrears (+ - increase)Exceptional financing

Memorandum items:Current account as percent of GDPGross reserves (US$m)Reserves in months of imports

of goods and nontinancial services

1993

-763

3904(-15.1)-4666

(4.6)

867

179533-80

-141250126

104

42

74-192154

-34544

-211255116

76

222

-449251-24

0.9616

1.1

1994

-969

4260(9.1)

-5229(12.1)

1072

120875

-257-124235224

104

220

98-137184

-321242

-190431

17

102

425

-789258106

0.71405

1.7

1995

-2877

4633(8.7)

-7510(43.6)

1165

60813

-260-94280366

-1712

491

81-137315

-45250

-467517497

1300

78

-490315

98

-10.31895

2.3

1996Est.

-3277

4511(-2.6)

-7788(3.7)

2013

1181313-186-50222596

-1263

1054

287310722

-413409

-7061115

49

595

386

-418-14051436

-7.22313

2.6


II Does not include debt that was excluded from London Club agreement, andclaims on international reserves of the former SFRY.

21 Includes deposits by non-residents, mainly international organizations.3/ Includes trade credits under 3 months, unreported foreign interest income,

workers remittances and repatriation of savings in kind.4/ Excludes short-term trade related debt.

- 124 -



Table 41. Croatia: Merchandise Exports and Imports, 1993-96

(In millions of U.S. dollars)

Month

1993JanuaryFebruaryMarchAprilMayJuneJulyAugustSeptemberOctoberNovemberDecember




Overall

Exports

3,904185353240542390277330.356257364301307

4,260135232260267244420520332512386564387

4,633370366430290468441352270555329427335

4,512390292401353433294414369275332458501

Imports

4,666162646362439538353273254569417282374

5.229137315278409292421520481432544111626

7,510505554676619679679787503615605702584

7,788527502633668637588732588587699857771

World except Former Yugoslav Former YugoslavRepublics Republics

Exports

2,938130261170389305218263278193256236240

3,292102190211204180340436249357290438296

3,571303284338218381346282174427236330252

3,293305212298255313204304261197243352349

Imports

3,894119514300380477299240209482326245303

4,657110290245370256383468429386473685564

6,658447487599550605602717444533532616526

6,922472447557599562517646519508618775703

Exports

96655927015486596877651086568

96833425064648084831559612691

1.0616782927287957096128939783

1.219858010398120901101087889106152

Imports

7734313263596154334486903771

572272533393638525246719262

850586777697477705982738658

866555576697571866979818268

Source: Central Bureau of Statistics


Table 42. Croatia: Composition of Exports (SITC)


Total

Food productsLive animalsMeat and meat productsFish and fish productsGrain and grain productsFruit and vegetablesCoffee, tea, cocoa and spicesLivestock feedOther food products

Beverages and tobaccoRaw materials, excluding fuels

Oil seeds, for planting and consumptionRaw rubberWood, framing lumber and corkTextile fibers and waste materialRaw fertilizers and mineralsMetal ores and scrapOther raw materials

Mineral fuels and lubricantsPetroleum and petroleum productsGas, natural and industrialOther fuels and lubricants

Animal and vegetable oil and fatsChemical products

Organic chemicalsPaints, material for tanning and dyeingMedical and pharmaceutical productsSynthetic fuelsPlastic, cellulose resinsOther chemical products

Products classified according to constituent materialRubber productsPaper, cardboard and products thereofTextile yarns, textiles and the likeNon-metal mineral productsRaw iron and steelNon-ferrous metalsOther metal products

Machines and transport equipmentSpecial machines for specific industriesMetal-working toolsGeneral-purpose industrial machinesElectrical machines, devices and toolsOther machines and transport equipment

Miscellaneous ready-made productsHousehold furnishingsClothingFootwearScientific and monitoring instrumentsOther ready-made products

Miscellaneous transactions and goods

1991

3,292

246435528264347

4024

17170

117648

29223172

942

1399402768829389

47711437463

10874

104770109433776

505971128585152

6100

10

1992 I/

4,597

4595690546546322194

112286

30

16756111435

397340

17396

5974022

127123165119820449595

125124195142849492243

162572

1,04410955318617

17928

Total1993

3,904

3672249497440251098

101237

10

1686

121040

377322

18374

5646116

10077

145166526118095

1026641

131552321739

143321

1,169148644225

13139

7

1994

4,232

3695

605064401

2112867

21420

1446

132029

386344

1626

75434314

13386

17790

6541398

1291266950

168732471542

172456

1,257138629279

17194

3

1995

4,633

3956

504575423415

12890

25140

1617

132244

3913662239

8145318

137112361133670

91071241265973

172778452852

211442

123315167323428

1472

1996

4,512

4117

474964403115

15892

24720

1663

132043

416371281710

6434423

139118209110594

962

1101354865

165964

512454

219616

113312063323522

1232


II Starting with 1992 data include trade with the countries of the former Yugoslavia.



- 127 STATISTICAL APPENDIX

Table 43. Croatia: Composition of Imports (SITC)


Total

Total

Food productsLive animalsMeat and meat productsFish and fish productsGrain and grain productsFruit and vegetablesCoffee, tea, cocoa and spicesLivestock feedOther food products

Beverages and tobaccoRaw materials, excluding fuels

Oil seeds, for planting and consumptionRaw rubberWood, framing lumber and corkTextile fibers and waste materialRaw fertilizers and mineralsMetal ores and scrapOther raw materials

Mineral fuels and lubricantsPetroleum and petroleum productsGas, natural and industrialOther fuels and lubricants

Animal and vegetable oil and fatsChemical products

Organic chemicalsPaints, material for tanning and dyeingMedical and pharmaceutical productsSynthetic fuelsPlastic, cellulose resinsOther chemical products

Products classified according to constituent materialRubber productsPaper, cardboard and products thereofTextile yarns, textiles and the likeNon-metal mineral productsRaw iron and steelNon-ferrous metalsOther metal products

Machines and transport equipmentSpecial machines for specific industriesMetal-working toolsGeneral-purpose industrial machinesElectrical machines, devices and toolsOther machines and transport equipment

Miscellaneous ready-made productsHousehold furnishingsClothingFootwearScientific and monitoring instrumentsOther ready-made products

Miscellaneous transactions and goods

1991

3,828

37531421314

12158445322

1991195

42454740

667499

808810

51512545552392

174347

15468936602377

8409714

15698

47555111

17014478

147302

1992 I/

4,461

46868

1041222793036

11752

263146

1592653239

430321664323

67211461

1063872

28180848

13615570

15278

17072611713

15714529471531

175286

53169304

1993

4,666

357696113199224413837

17674

1636453136

4613021035615

57510247982458

24680445

16614875

15964

1471,123

14724

16915962578032

17335858

159339

1994

5,229

49818761939

1315234

12962

151124

1928387

43589436955812

5418146991570

23080153

13414977

14281

1651,367

17624

21724170977654

23120279

210431

1995

7,510

78027

1142345

2229838

21366

198138

2732513

6487173634

10125

81011468

1772277

3521304

86236210124243137268

200928128

330376994

101393

271214113322433

1996

7,788

76746982857

1948953

20258

220146

5230567

558577071074338

84811871

1882073

3781384

88249203142257133312

212931831

370399

10111117

92286240132367370


II Starting with 1992 data include trade with the countries of the former Yugoslavia.


- 128

Table 44. Croatia: Exports by Destination



Total

Developed countries

EU countriesAustriaBelgiumDenmarkFranceItalyNetherlandsGermanySwedenGreat BritainOther

EFT A countriesNorwaySwitzerlandOther

Other developed countriesAustraliaJapanCanadaU.S.A.TurkeyOther

Developing countries

Countries of former YugoslaviaBosnia. . .HerzegovinaFYR of 'MacedoniaSloveniaOther and unclassified

Countries of the former USSR

Other developing European countriesCzech and Slovak RepublicsCzech RepublicHungaryPolandSlovakiaOther

Developing 'Middle East countriesDeveloping Asian countriesDeveloping countries of North AfricaDeveloping other African countriesDeveloping countries in the AmericasDeveloping countries of Oceania

1991

3,292

2,474

2,16297289

667151269684457

177

10458424

207719

1201060

818

247

14651

3644,,,15

2111463

191350

1992 I/

4,597

2,588

2,415105327

5890998

773339

5638

6123362

113535

691120

2,008

1,47019287

1,10190

155

11232

4232

6

101373060340

1993

3,904

2,419

2,245130297

13382892

895257333

453

402

129615

822015

1,484

96618963

7122

173

158111354378

35

19592255330

1994

4260

2729

25311493810

11191094

9411646846

654

601

133515

881420

1531

96733873

556

176

192

3468451629

14282271610

1995

4633

2862

2672200437

1101098

80997

145765

595

522

131617

835

30

1770

106138370

608

185

229

3671492152

396033

115480

1996

4512

2478

2303198414

8494969

839137035

413

371

135428

891319

2034

121954959

6110

172

191

4055562217

645439

270240


I/ Starting with 1992 data include trade with countries of the former Yugoslavia.



Table 45. Croatia: Imports by Origin


Total

Developed countries

EU countriesAustriaBelgiumDenmarkFranceItalyNetherlandsGermanySwedenGreat BritainOther

EFT A countriesNorwaySwitzerlandOther

Other developed countriesAustraliaJapanCanadaU.S.A.TurkeyOther

Developing countries

Countries of former YugoslaviaBosnia. . .HerzegovinaFYR of MacedoniaSloveniaOther and unclassified

Countries of the former USSR

Other developing European countriesCzech and Slovak RepublicCzech RepublicHungaryPolandSlovakiaOther

Developing 'Middle East countriesDeveloping Asian countriesDeveloping countries of North AfricaDeveloping other African countriesDeveloping countries in the AmericasDeveloping countries of Oceania

1991

3,828

2,571

2,145177422999

62311583346

11170

10111873

3268

1118

1482130

1,257

252

332202

8025

25

1823323342

1450

1992 I/

4,461

2,392

2,118190503172

76189

768536539

777

673

1969

324

1061530

2,058

1,0318156

87421

231

378215

10332

28

92567427610

1993

4,666

2,952

2,630311471697

88292

991609044

865

792

2355

4210

1249

45

1,714

7731446

7121

261

235524278252414

3284

6437570

1994

5,229

3,525

3,096353

5531

116994115

1,11081

17962

1128

1013

3175

5419

1721650

1,705

5724

27541

254

210

92100385327

163649115810

1995

7,510

5,300

4,6645758551

1881,366

1741,509

148455113

21944

1696

4179

8012

2012888

2,210

8508

36805

224

473

147158457845

4421323624

1450

1996

7,788

5,262

4,62559710048

1991,421

1761,602

117225139

17927

1448

45717

10417

2132779

2,5268666334

769769

253

571

207193508438

106301269

17143

0

Source: Central Bureau of Statistics

I/ Starting with 1992 data include trade with countries of the former Yugoslavia.



Table 46. Croatia: Exchange Rates and International Reserves

HrK/US$ II HrK/lOODM I/ Real Effective Foreign Exchange

1994 JanuaryFebruaryMarchAprilMayJuneJuryAugustSeptemberOctoberNovemberDecember


1996 JanuaryFebruaryMarchAprilMayJuneJulyAugustSeptemberOctober

November

December

e.o.p

6.546.186.146.146.125.875.895.855.735.495.705.63

5.505.295.004.954.995.045.015.365.265.255.345.32

5.515.375.465.575.585.445.265.265.435.39

5.47

5.54

p.a.

6.606.446.176.236.166.075.835.775.745.605.615.72

5.565.465.115.015.065.055.015.235.405.265.265.35

5.405.435.465.545.575.485.365.265.355.45

5.38

5.52

e.o.p

377.51359.52366.11369.41371.65371.76369.43369.68369.52366.52364.48363.21

363.02362.88362.96359.53359.84360.80361.52363.41370.75372.03371.66370.59

370.83369.06369.96365.52360.85357.55355.73355.11356.24356.58

356.18

356.22

p.a. Exchange Rate(Jan. 1992=100) 2/

378.85371.03364.28367.25371.38371.73370.10369.37369.31368.12365.10363.95

362.97363.05362.90362.64359.63359.95360.84362.69369.16372.02372.11371.17

370.51370.13369.58368.82363.57359.09356.13354.68355.63356.28

356.49

356.02

144.5144.8146.5141.7143.2139.8140.7140.7140.8140.8141.4142.0

143.0143.1146.0147.2147.2145.5144.8142.2141.8142.9142.7143.1

143.3143.3142.8141.4144.5145.1146.3147.1146.9146.8

146.8

146.1

Reserves (NBC)(In millions of

U.S. dollars)

624.9673.2716.1777.0795.2866.1970.0

1 082.11 160.31 393.91369.21405.0

1445.21 477.41 535.21641.71 721.71 826.11 911.51863.11943.81 897.41 892.01 895.2

1845.21 883.61 890.81 876.31 919.22019.12 216.32331.12295.12,312.5

2,292.5

2,076.6


II Croatia introduced a new currency, the Croatian kuna, on May 30,1994, at the rate of one kuna per 1,000Croatian dinars, Exchange rates prior to May 1994 are foreign currency units per 1,000 Croatian dinars.2/ Real effective exchange rates are calculated relative to seven currencies using retail or consumer prices.An increase in die rate denotes a real appreciation.


Table 47. Croatia: External Debt Stock and Principal Repayments, 1993-2001 I/(In millions of U.S. dollars)

Debt Stock

12/31/93 12/31/94 12/31/95

TotalMedium and long term debt 3/Short term debt

Official Creditors

International OrganizationsIMFIBRDEUROFIMAEFCEEBEFREBRD

Governments (Paris Club) 4/

Private creditorsOf which : commercial banks, nonguaranteedOf which : suppliers credits, nonguaranteed

Short-term external debtCommercial banksSuppliers

Memorandum items:Interest arrearsScheduled interest payments 21

30392984

55

1636

3202189602

13910

n.a.

1317

1348136105

551144

152n.a.

33493265

84

1917

40412671482

14610

n.a.

1513

1382109163

501635

365n.a.

37583499259

2005

51922386390

1441017

1487

1527190247

22513689

425n.a.

1996

600444156

212

454

13100963

167

2326673

15611640

n.a.141

Scheduled Payments 21

1997

799483317

213

352

1110

1029

178

27015977

31725958

n.a.251

1998

413413

0

262

659

14140

112

17

197

1517057

000

n.a.211

1999

295295

0

184

79321530

121

16

105

1115631

000

n.a.192

2000

346346

0

177

82311390

130

16

95

1692717

000

n.a.180

2001

327327

0

161

82371080

140

13

79

1667

10

000

n.a.160

Source: National Bank of Croatia; and staff estimates.I/ Debt stock data for 1993-1995 have been adjusted to reflect the shares in unallocated principal debt to the Paris Club and the London Club

creditors that have been recognized by Croatia.21 Scheduled payments as of end-October 1996.3/ Excludes estimates of interest arrears, includes IMF.4/ Includes post-cutoff commercial credits (signed after December 2,1982) guaranteed by Government agencies.


©1997 international monetary fund€¦ · 1. quarterly gdp at constant 1990 prices 2. gross...

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