Gov't adopted Economic and Fiscal Policy Guidelines 2020-2022

The Croatian government projects budget revenues for 2020 at HRK 141.6 billion and expenditures at HRK 144.3 billion, Finance Minister Zdravko Maric said while presenting the Economic and Fiscal Policy Guidelines 2020-2022 at a Cabinet meeting on Thursday.

Maric said that the projections were a continuation of the policy aimed at ensuring the sustainability of public finance, economic growth and increasing the citizens' living standards.

Real GDP growth was forecast at 2.8% in 2019, 2.5% in 2020 and 2.4% in 2021 and 2022.

Prime Minister Andrej Plenkovic said that the projected rates were realistic and sound. He said that the focus of the Guidelines was on further strengthening fiscal sustainability and economic growth, adding that reform activities would be aimed at strengthening the long-term potential of the national economy.

He announced effective use of budgetary funds, with strict control of expenditures, and said that the faster absorption of EU funding would help accelerate growth. He also announced further efforts to improve the business climate.

GDP growth driven by personal consumption

Maric said that domestic demand and personal consumption would be the main drivers of growth in the entire three-year projection period, citing a rise in economic sentiment, improved credit terms, positive labour market trends and tax changes that leave the citizens with more disposable income.

He also mentioned a positive contribution from investment, which he said generated one percentage point of total growth on average, and added that further efforts would be made to improve the business climate and encourage private investment.

The finance minister warned that with stable exports growth rates imports were also growing and that therefore he expected a negative net contribution from exports in the projection period.

For 2020, government budget revenues are projected at HRK 141.6 billion. The Guidelines say that revenues are expected to rise by 2.6% to HRK 145.3 billion in 2021 and by 2.4% to HRK 148.7 billion in 2022. These movements are based on the expected economic growth and the fiscal impact of further tax cuts.

Maric noted that budget expenditures were also growing at a slower rate that GDP.

Tax changes

The most important changes with a fiscal impact on government budget revenues relate to changes to Value Added Tax (VAT), notably a reduction of the general VAT rate from 25% to 24% as of 1 January 2020 and a reduction of VAT on food in the hospitality industry to 13%.

The latest round of the tax reform provides for changes to profit tax, under which income subject to a profit tax of 12% will be raised from HRK 3 million to 7.5 million. In that way an additional 10,000 businesses, or a total of 93% of businesses liable to profit tax, will be subject to the 12% rate.

The government also expects a considerable impact on budget revenues from the absorption of EU funding, which is expected to continue to grow.

As for budget expenditures, they are forecast at HRK 144.3 billion for 2020. Expenditures financed from general revenues and receipts, contributions and special-purpose receipts are projected at HRK 113.6 billion, 2 billion higher than for the current budget.

At the same time, expenditures financed from other sources of financing, which do not affect the level of the budget deficit, are projected at HRK 30.7 billion, up by HRK 1.9 billion.

In 2021, total expenditures are planned at HRK 146.1 billion, an increase of HRK 1.8 billion compared with 2020. Expenditures financed from general revenues and receipts, contributions and special-purpose receipts are expected to be 2.2 billion higher, while those financed from EU funds and other sources would be reduced by HRK 369 million. In 2022, expenditures financed from EU funds and other sources are expected to be reduced by HRK 569.1 million.

The reductions follow from the dynamics of implementation of EU-funded projects from the programme period 2014-2020 which will be in final stage. Contracting for projects that will be funded from EU funds in the next programme period 2021-2027 is yet to begin. As a result, total expenditures in 2022 are projected at HRK 147.5 billion.

Public debt to continue to fall

The Guidelines say that the public debt to GDP ratio in 2019 is expected to decrease by a further 3.3 percentage points to 71.3% of GDP. In the medium term, the ratio should continue to fall by 3.1 percentage points annually to 68.3% of GDP in 2020, 65.3% in 2021 and 61.9% of GDP in 2022.

The general government budget is expected to run a deficit of 0.2% in 2020, while surpluses of 0.2% and 0.6% are forecast for 2021 and 2022 respectively.

The inflation rate is projected at between 1% and 1.5%.

Gov't decides to get involved in unblocking 3. Maj shipyard's account and relaunching production

The government decided at its meeting on Thursday to get involved in the process of unblocking the account of Rijeka's 3. Maj shipyard, relaunching production and completing the vessels on which work had begun. 

The Croatian shipbuilding corporation Jadranbrod was instructed to thoroughly analyse the proposed measures and submit its findings to the Ministry of Economy, Entrepreneurship and Crafts. The ministry will then propose specific measures based on the laws on the budget, state grants and other regulations and will present them to the ministries of finance and justice.

After the harmonisation of the proposed measures, the authorities in charge are required to submit a proposal for the implementation of today's conclusions to the government by August 29.

The 3. Maj shipyard completed the process of restructuring in late 2017, but found itself in financial trouble as a member of the Uljanik Group.

"3. Maj, unlike Uljanik, is not overindebted, and had it not granted those loans to Uljanik it would have been operating normally because both the present and potential buyers have expressed an interest in completing the ships, and there is also an interest in building new ones," Prime Minister Andrej Plenkovic said.

He said he expected the 3. Maj shipyard to draw up a firm action plan to ensure its operation in the years to come.

Gov't selects Lazard as new consultant on buyback of MOL's stake in INA

The Croatian government formally decided on Thursday that its new investment consultant on the possible buyback of the Hungarian energy group MOL's stake in the INA oil company and its possible sale to a strategic partner would be the Lazard consultancy.

Prime Minister Andrej Plenkovic said at the Cabinet meeting that problems had arisen with the consultant selected last year, that they had not been resolved in a way that suited the government, and that it therefore selected another global investment company which also competed in the tender.

"Lazard is well-known to the Croatian government. It participated in the successful refinancing of the road sector's debt. This is a consulting firm with global references and one that also has references in relations with the government," the prime minister said.

Environment and Energy Minister Tomislav Coric said that the Advisory Committee on INA, at its meeting on Wednesday, had proposed choosing a new investment consultant on the buyback of shares held by MOL and that it be Lazard. He added that due diligence was estimated to take six months and that Croatia could make an offer to MOL already in the first quarter of next year.

Finance Minister Zdravko Maric said that the total cost of this financial arrangement was estimated at up to €9 million, noting that no payments had been made to the previous consultant.

Maric said that due diligence could be launched shortly after the signing of the agreement, and that the idea was for this process to be carried out in less than six months.

PM says is sorry for exaggerated reactions from Bosnia and Herzegovina

The government on Thursday decided to allocate HRK 25.8 million to finance projects of interest for the Croatian people in Bosnia and Herzegovina, while Prime Minister Andrej Plenkovic regretted, as he said, the exaggerated reactions in Bosnia and Herzegovina to an incorrectly carried statement by President Kolinda Grabar-Kitarovic in an Israeli newspaper.

"Our policy toward Bosnia and Herzegovina in general is to develop good neighbourly cooperation and partnership," Plenkovic said at the cabinet meeting and added that he was sorry that news during the president's visit to Israel was reported incorrectly and led to exaggerated reactions in Bosnia and Herzegovina.

He sent a message to all officials in Bosnia and Herzegovina that the two countries are linked, that they are friendly countries that respect each other and that Bosnia and Herzegovina does not have a greater advocate, friend and ally than Croatia in any international institution, particularly in European institutions.

It is important to be careful during communication 

"It is important that we are careful in communication, that we value each other and resolve outstanding issues," Plenkovic said and added that the Peljesac Bridge is not an outstanding issue with Bosnia and Herzegovina, but a strategic project to connect Croatian territory that will also help the people in Bosnia and Herzegovina who live in the Neum area.

He underscored that the Croatian government wants Croats to be an equal and constituent people in Bosnia and Herzegovina, and that they are adequately represented in institutions and in government in a legitimate way. "Bosnia and Herzegovina is our neighbour and a close country and that is why I am sorry that reactions of this nature emerged without any verification," he concluded and supported the president.

The government decided to provide HRK 25.8 million to finance 89 cultural, educational, scientific, health and other programmes and projects of interest for the Croatian people in Bosnia and Herzegovina.

Croatia is financing development projects with long term effects for the survival of the Croatian people in Bosnia and Herzegovina

The State Secretary in the Central State Office for Croats Abroad, Zvonko Milas, said that funding would be made available to development projects that will have long term effects for the survival of the Croatian people in Bosnia and Herzegovina, in cooperation with the local community.

Gov't issues guarantee for rail infrastructure company's HRK 350mn loan

The government on Thursday adopted a decision on Croatia's participation in the general and selective increase in capital of the International Bank for Reconstruction and Development as well as a decision to launch procedures for Croatia to become a member of the Asian Infrastructure Investment Bank, and also issued a guarantee for a HRK 350 million loan to be taken by the HZ Infrastruktura rail company. 

Croatia will inject US$ 8.2 million into the International Bank for Reconstruction and Development, in line with its share in the bank's equity, while potential liabilities amount to $48.5 million, which will be paid over the next 5 years, Finance Minister Zdravko Maric explained.

Croatia will apply for membership in the Asian Infrastructure Investment Bank.

"We've been offered the opportunity of a maximum number of shares for a country that is a non-regional members and that is 50 shares. The effective deposit is $1 million and the potential liability an additional $4 million," said Maric.

HZ Infrastruktura was given consent and a state guarantee to take a HRK 350 million loan at the OTP Bank to finance an upgrade of railway infrastructure. OTP has offered the loan with a fixed interest rate of 1.67% and repayment period of 10 years, with 3 years' grace.

Gov't approves two projects for health sector

The government on Thursday approved funding for two projects in the health sector, one earmarked for the emergency ward at the Sisters of Charity Hospital in Zagreb and the other for the construction of a children's hospital and gynecology and maternity clinic at Rijeka University Hospital.

The government has earmarked a total of HRK 42.9 million to be expended from 2020 to 2022 for the emergency services of the Sisters of Charity Hospital.

An amount of HRK 649.2 million will be allocated from the state budget for the construction of the children's hospital and gynecology and maternity clinic in Rijeka and will come from the state budget in the period from 2020 to 2023.

That project is valued at a total of HRK 799.3 million, and HRK 150 million was already secured from the state budget for this year.

The City of Zagreb was given consent to take a loan with the Privredna Banka Zagreb in the amount of HRK 300 million for capital projects such as cultural institutions, kindergartens, schools, health institutions, sports facilities, social welfare institutions and a cable car for Mount Sljeme.

Text: Hina

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