U.S. Markets closed

Croatia to seek 3 years to bring budget in line with EU rules

Croatian Finance Minister Slavko Linic (C) removes a plague at the Republic Croatia customs administration next to his Slovenian counterpart Uros Cufer (R) and Hungarian Minister for National Economy Mihaly Varga, at the bordercross in Bregana early July 1, 2013. REUTERS/Srdjan Zivulovic

By Zoran Radosavljevic

ZAGREB (Reuters) - Croatia will ask the EU for three years to bring its budget deficit below the bloc's ceiling but will need longer than this to prune its public debt, Finance Minister Slavko Linic told Reuters.

Croatia, which joined the European Union in July after almost five years without economic growth, will have to go into the bloc's Excessive Deficit Procedure (EDP), probably in early 2014.

The EDP is the mechanism Brussels uses to keep pressure on European Union states to reduce their budget gap to below three percent of gross domestic product (GDP) and public debt below 60 percent of GDP.

"The usual time frame is one year, but we want to ask for more," Linic said after the government adopted 2014-16 fiscal guidelines, which see this year's general budget gap at 3.5 percent of GDP and widening to 5.5 percent in 2014.

Linic said the ex-Yugoslav republic was not in a position to reap immediate benefits from EU membership and ended up paying more into the EU budget than it could draw out yet.

On top of that, the government has tried to pay back most of the debts accumulated in the previous decade, mostly on loss-making shipyards and public health.

"Because of that, we want to discuss a longer adjustment period. We would be happy with three years but it remains to be seen what the Commission will decide," Linic said.

He said the general budget shortfall could be reduced to below 3 percent in 2016, if the government implements ambitious reforms of the whole public sector. But public debt is seen rising to 65 percent of GDP in 2016 from 56 percent this year.

"Public debt can hardly fall below 60 percent in the next five years. We can expect it to start tapering off once we contain the deficit," he said.


Linic did not expect the government's efforts to have much impact yet on the country's credit rating, cut to junk by all three main agencies this year.

"Not until we stop the rise of debt and show that the deficit is falling... only then can we expect a positive assessment of what we are doing."

The general budget deficit, monitored by the EU, is expected to start falling in 2015 and "could go below three percent in 2016," Linic said.

Earlier on Thursday, he said the government would overhaul the health sector, welfare policy, pension system, education and public administration, including staff cuts.

"The reforms first bring costs and then benefits. That is also the reason why our deficits are so high," he said.

Since it took office in late 2011, the government has acted to combat tax evasion, speed up bankruptcy proceedings and out of court debt settlements and enforce shorter payment deadlines between businesses and the state.

Linic said there was no reason for the government to falter, despite expected public protests against new cuts or the lure of higher spending before an election in late 2015 or 2016.

"The crucial year will be 2014, which is not an election year, and then we can reap some benefits in 2015. There is no going back now. The timeline has been set, we have a stable coalition and a stable majority in parliament".

However, local analysts remained sceptical.

"The growth forecast (for next year) is overly optimistic. The projected budget revenues and expenditures are more realistic than in previous years, but still we do not see major savings in place," said Zdeslav Santic from Splitska Banka, a local unit of Societe Generale.

Ivana Juric from Raiffeisenbank said the further rise in spending by 2016 was worrying. "We should not expect lower refinancing costs or better credit ratings in the near future," she said.

Santic said the EU might require a tighter budget squeeze than the government plans, a fact Linic also acknowledged.

"The Commission could make explicit requirements if they don't agree with our measures, with the aim of reducing the deficit even more," Linic said.

(Reporting by Igor Ilic and Zoran Radosavljevic; Editing by Ruth Pitchford)