In 2004, the International Monetary Fund (IMF) issued a Fiscal Transparency Module to its Report on the Observance of Standards and Codes (ROSC) for Croatia. According to this report, Croatia has significantly progressed in its transparency practices as well as in strengthening its management policies. The ROSC further noted that the allocation of responsibilities across the different levels of government is generally well defined and that inter-governmental fiscal relations are stable. Nonetheless, the laws and regulations on public financial management are only weakly enforced, which leads to compromised fiscal oversight and control. In addition, quasi-fiscal activities are extensive and occur outside the budget process, and the agencies responsible for fiscal management are poorly coordinated. Thus, fiscal risks are not optimally managed and fiscal accountability is not assured. Croatia has been a subscriber to the IMF's Special Data Dissemination Standard since 1996.
General Overview
According to the International Monetary Fund's (IMF) 2004 Report on the Observance of Standards and Codes (ROSC), Fiscal Transparency Module, Croatia has achieved a degree of compliance with the fiscal transparency code, and has taken substantial steps toward greater transparency and stronger fiscal management. In particular, the ROSC noted that the apportionment of responsibility across the various levels of government is clearly laid out, and inter-governmental fiscal relations are stable. The ROSC mentioned the 2003 Budget Act as providing a strong legal framework for managing the budget. In addition, the report cited the newly created single treasury account (TSA) as providing better budget execution control. Further, the ROSC stated that the adoption in 2002 of a new chart of accounts "has facilitated the production of fiscal statistics on the general government in conformance with international standards" (p. 43). Finally, the ROSC noted that, in anticipation of eventual accession to the European Union, Croatia has been working to harmonize its legal frameworks for taxation, regulation, and administrative procedures with EU standards.
Nonetheless, the 2004 ROSC cites a number of significant weaknesses in Croatia's Fiscal Transparency regime. Laws and regulations covering public financial management are only weakly enforced, and there are still an excessive number of quasi-fiscal activities conducted off-budget. Government agencies involved in fiscal management are inadequately coordinated, both at the managerial level and in their oversight role, as well. Taken together, these factors have resulted in less than adequate fiscal oversight, poor management of fiscal risks, and less than optimal accountability. The report suggested that internal governmental control over fiscal operations needed to be strengthened, and the Ministry of Finance (MoF) needed to improve the transparency of tax and customs policy under its control. The IMF also called for greater parliamentary oversight of the budget, increased and improved reporting on public enterprises, and a greater effort on the part of the MoF, the Croatian National Bank (CNB) and the Croatian Bureau of Statistics (CBS) to reconcile their fiscal data.
In 2006, Katarina Ott produced a summary of Croatia's budget process for the International Budget Project's Open Budget Initiative. She scored Croatia's performance at 42%, noting that Croatia produced five of the seven key budget documents that are tracked by the International Budget Project. Croatia produces a pre-budget statement, the executive's budget proposal, in-year reports, a year-end report, and an auditor's report. Lacking are a citizen's budget and a mid-year review.
The IMF's 2006 Article IV Consultation, published in 2007, reports that the state continues to play an inordinately large role in fiscal policy, and that progress has been slow in the area of structural reform. This has had implications for Croatia's overall economic performance. Croatia's government is one of the largest in the region, and it provides extremely high levels of public assistance. In addition, the public sector is responsible for as much as 40% of GDP. Progress has been made in some areas of the transition process, but the privatization of state-owned enterprises has not moved forward as quickly as might be desired, due to a variety of factors. Among these factors, the 2007 IMF report cites "legal disputes, resistance of vested interests, onerous investment and employment conditions, and a legal framework favoring insiders" (p. 8). This last factor may, in fact, be exacerbated by the draft privatization law currently under consideration.
Three core fiscal policy issues were raised by the IMF staff in the report published in 2007. First was a reduction in the sheer size of the government. Next was to intensify efforts toward greater fiscal consolidation. Finally, it was argued that fiscal policy needed to be made more flexible. The report did note that Croatian authorities have been contemplating at least a moderate approach to medium-term fiscal consolidation. In July of 2006, they promulgated their new Economic and Fiscal Policy Guidelines (EFPG), and in December 2006 they put forth their Pre-Accession Economic Program (PEP), both of which, according to the 2007 IMF report "target a fiscal deficit of 2.8 percent of GDP in 2007, gradually declining to 2.4 percent of GDP by 2009" (p. 11). In addition, Croatian authorities are continuing with structural reforms to reduce state-subsidized programs and are attempting to continue to practice restraint in the area of expenditures.
From the perspective of the 2007 IMF report writers, more ambitious medium-term fiscal targets are called for, particularly given the Croatian authorities' stated desire to expedite accession to the EU and, soon after, to adopt the euro. The IMF report suggested that selecting much lower fiscal deficit targets, specifically, 2% of GDP for 2008, reduced to 1.5% for 2009 would improve conditions and credibility for Croatia's economic policies. The Croatian authorities were in general agreement with this assessment. The 2007 report also noted that steps taken in Croatia in the recent past have helped to improve fiscal management and transparency. Particularly, the report cited "a fiscal and quasi-fiscal adjustment of 2.6 percentage points of GDP [made] in 2004 and 2005 in the context of a new medium-term fiscal framework," calling this a "key reform" (p. 52). In addition, the report applauded the government's 2%-of-GDP reduction in contingent liabilities for the 2004-2005 fiscal year, and its successful effort to include all railway subsidies in the budget, as well as combining the states largest extra-budgetary funds into a single treasury account.
In order to successfully extend the implementation of the medium-term fiscal framework going forward, the IMF 2007 report argued that structural reforms were needed, including reforms in the area of social benefit spending. In response, the Croatian authorities have expressed a general commitment to public-sector reforms, but no detailed specifics have yet been forthcoming in this regard. Croatian authorities acknowledge that transparency is an important goal, as is the development of safeguards to ensure against negative effects arising from contingent liabilities. In the 2007 report, the IMF advised the Croatian Ministry of Finance to make certain that any proposed public-private partnerships include appropriate risk-sharing mechanisms, for instance.
Croatia's reporting of national accounts data remains somewhat problematic, according to the 2007 IMF report. GDP data still contains significant discrepancies, particularly between the expenditure-based and value-added based data. The report attributed these discrepancies to a lack of coordination between the CBS and the CNB in reconciling certain constituent data estimates, incomplete reporting of data regarding the self-employed and unincorporated business entities, incomplete inventory and informal sector data, and too-infrequent reporting of data from seasonally volatile sectors of the economy, such as agriculture. The report also expressed a desire that Croatia transition from a cash-based to an accrual-based accounting system in its government financial statistics (GFS), and that greater effort be expended in publishing annual data, as well as in reconciling the annual figures with those published on a quarterly basis.
The 2007 IMF report noted that monthly GFS data is published (with a 30-day time-lag) by the Ministry of Finance in its Monthly Statistical Review, and that reliable next-day revenue data for both the central budget and budgetary funds are available on request. Economic and functional expenditure data are also available, but are presented on a cash basis. The Ministry of Finance reports, the monetary survey, and the balance-of-payments sheet are not reconciled, however, and because these various data sources employ different methodologies and definitions, there are often significant discrepancies in their data. In the last several years, representatives of the MoF, CNB, and CBS have been working to reconcile these data, however. Greater detail has been included in the MoF's Monthly Statistical Review, including a table documenting central government debt. The MoF also produces a database of government-guaranteed debt, which facilitates monitoring this aspect of the budget. The IMF found that local government and consolidated general government data is less well reported, being available only quarterly and with a 30-day time lag. Local government data is also deemed to be incomplete. The report adds that "annual cash data for the central and local governments up to 2004 are published in the 2005 GFS Yearbook. In the IFS, only annual cash data to 2002 are published" (p. 48).
Croatia became a subscriber to the IMF's Special Data Dissemination Standards (SDDS) in 1996. According to the IMF SDDS website, Croatia meets the coverage requirements for the coverage in every data category except one, but meets periodicity requirements in every category. With regards to timeliness, Croatia meets all requirements except for general government or public sector operations and central government operations data, and in these cases it has availed itself of the flexibility option. It provides documentation regarding the sources and methodologies used on all data sets but one, disseminating this information on the websites of the MoF, CBS, and CNB websites or through formal published documents.
The IMF's 2004 ROSC reports that Croatia complies with fiscal transparency code to some degree, and has taken important steps in improving its performance in this area. The ROSC also notes that Croatian legislation clearly defines and allocates roles and responsibilities across the various levels and agencies of government, and that the fiscal relationships across those agencies and government levels are stable. The report noted that Croatia employs a definition of general government that is consistent with that of the Government Finance Statistics Manual (2002), and that coverage of general government fiscal activity has been expanded to include state institutions, certain select extrabudgetary funds, and sub-national administrative units such as counties, municipalities, and urban centers. The ROSC applauds the adoption of the 2003 Budget Act, which addressed deficiencies in prior legislation, and appreciated the creation of a single treasury account, which has enabled better control over the execution of the budget. Finally, the ROSC praised the adoption of a new chart of accounts in 2002, which, according to the report, "has facilitated the production of fiscal statistics on the general government in conformance with international standards" (p. 43). The ROSC also praised ongoing efforts to harmonize Croatia's tax, regulatory, and administrative procedures with those employed by the EU.
The World Bank's 2000 Public Expenditure and Institutional Review enumerated the component elements of Croatia's public sector as tripartite, including the Central Government (19 ministries, 17 offices, 8 agencies, 8 administrative units), the Extra Budgetary Funds, and the Local Governments (420 municipalities, 122 cities, 21 counties). The first two components together make up the Consolidated Central Government. All three, taken together, comprise the Consolidated General Government.
The Croatian constitution and the 2003 Budget Act provide definitions of the fiscal roles allocated among the executive, legislative, and judicial branches, as well as the roles attributed to the sub-national government entities. The 2004 IMF ROSC reports that tax-sharing criteria are also set forth in clear legislation. The Budget Act of 2003 employs a standardized budget classification system for all levels of government. According to the ROSC, MoF approval is required when subnational government units wish to borrow from domestic or foreign sources. The ROSC does caution that, although the 2003 Budget Act still could be strengthened. In particular, the ROSC suggests that there should be a legislative mandate to formally organize the functions of debt management. In addition, clear regulations should be drawn up to cover the transfer of profits derived from public enterprises to the state budget.
The Constitution endows the Croatian National Bank (CNB) with operational independence. The 2004 IMF ROSC found that CNB's financial relationship with the government to be transparent. Although the ROSC found that public financial institutions still perform a number of quasi-fiscal activities, it added that the reporting of both these and the fiscal activities of the Croatian Development and Reconstruction Bank (HBOR) has been of greater quality since 2004. Less clear is the responsibility for oversight of fully state-owned corporations. The ROSC found that the privatization process is well laid out and is more transparent than in the past.
The Budget Act of 2003 sets forth the steps required for producing the annual budget, which provide the Croatian parliament with only a limited role to play. Tax law has been reformed to more closely harmonize Croatia's value-added and customs tax policies with EU standards, but the IMF's 2004 ROSC finds that the statutes include too many exceptions, which negatively impacts on transparency. are increasingly being harmonized with European Union (EU) standards, but there is a large and increasing number of exceptions in tax statutes, diminishing transparency and certainty. According to the Tax Administration (TA) website, the TA is a department under the authority of the MoF. The 2004 IMF ROSC notes that the MoF continues to strengthen the administrative aspect of taxation and customs. Still lacking, however, is a functional internal audit mechanism.
In its 2007 Article IV Consultation report, the IMF found that "Croatian authorities have recognized the need for transparency and safeguards to avoid problems from contingent liabilities" (p. 14). The report applauded the MoF's commitment to reduce state guarantees of liabilities, such as those extended to the shipyards. The IMF suggested that the MoF employ greater vigilance in reviewing future public-private partnership proposals in order to make certain that risk is adequately shared. MoF officials have asked for IMF assistance in achieving this goal. Finally, the 2004 IMF ROSC notes that Croatian civil servants must adhere to a code conduct, and that some measures to combat corruption have been set in place. However, the ROSC suggests that more progress is required.
The IMF's 2004 ROSC reports that Croatia has met certain fiscal transparency code requirements, and has made some improvements in management and transparency in its efforts to accede to the EU in the near future. The ROSC found that the roles of budget process participants are well defined, and that the fiscal relationships obtaining across government agencies is stable. The ROSC notes that the Budget Act of 2003 made important improvements in the legal underpinnings of the budget process, and applauded the creation of the single treasury account. In addition, the 2002 introduction of a new chart of accounts was praised for having helped to bring Croatia's fiscal statistical reporting more in line with international standards. The ROSC added that "legal frameworks for taxation, regulation, and administrative procedures are being harmonized with European Union standards (p. 43).
However, the 2004 ROSC called for stronger enforcement of the laws, a reduction in the number of off-budget fiscal and quasi-fiscal activities, and improved coordination among the various agencies (MoF, CNB, CBS) involved in fiscal management. Also desirable would be reforms to the tax and customs policy by the MoF to require greater transparency. Greater oversight powers for the parliament would also be helpful. According to the ROSC, the Budget Act of 2003 provides parliament only limited oversight or other participatory rights in the budget process. The Budget Act also makes no formal provision for parliament to involve itself in the formulation of budget strategy prior to its presentation in final form in November of each year.
The annual budget does not provide prior year data, nor does it offer forecasts of future-year estimates, expectations, or risks, according to the 2004 IMF ROSC. The ROSC also notes that the budget excludes data on existing contingent liabilities (these are covered, in part, by the MoF in its Statistical Review and annual report). State guarantees of the liabilities of subsidized entities are also excluded from the budget, as are tax expenditures and the liabilities accruing from quasi-fiscal activities. The ROSC also decried the lack of reporting on government financial assets.
The 2004 IMF ROSC reports that there is an increasing tendency to produce macroeconomic forecasts that employ a consistent framework and include a variety of sectoral and macroeconomic data, but this is not included in the budget. Proposed new revenue and expenditure policies are not clearly presented in the budget, and the budget document treats fiscal risks in an extremely limited fashion. The budget also provides only a limited consideration of fiscal policy objectives beyond the current fiscal year.
According to the 2004 IMF ROSC, "budget data are presented mainly on a gross basis, and classifications conform to international standards" (p. 47). The budget offers no information regarding the objectives or performance measures for expenditure programs, nor does it include the public sector balance, even though public enterprises engage in extensive quasi-fiscal activities. Expenditure arrears can and do occur, in part because of the heavy entitlement burden placed on the budget by law. The system of accounting employed in Croatia's budget process is largely reliable for the production of in-year fiscal reports. The Public Procurement act is inadequate to ensure transparency in this area. Hiring of public service employees is governed by the Civil Service Law, but the IMF ROSC found this legislation also to be in need of strengthening. There is no effective internal audit mechanism in place, as yet.
In 2006, Katarina Ott produced a summary of Croatia's budget process for the International Budget Project's Open Budget Initiative. She scored Croatia's performance at 42%, noting that Croatia produced five of the seven key budget documents that are tracked by the International Budget Project. Croatia produces a pre-budget statement, the executive's budget proposal, in-year reports, a year-end report, and an auditor's report. Lacking are a citizen's budget and a mid-year review.
Croatia has subscribed to the IMF SDDS since 1996. The IMF SDDS website discloses that Croatia meets most requirements for coverage, periodicity, and timeliness, but there are some exceptions. Croatia provides the SDDS with documentation on the methodology and data sources it uses for nearly all its statistics, and these are also made available on government websites and in other publications.
According to the IMF's 2004 ROSC, "budget documents cover nearly all of the consolidated central government fiscal activities" (p. 16). The consolidated central government and much of the general government make fiscal reports publicly available, along with general government operations sector data. However, the ROSC noted inconsistencies in methodology and definitions used by the key reporting agencies. The MoF produces general government data, as do the CBS and the CNB. Consolidated central government data is reported monthly, while general government data is provided quarterly, according to the IMF SDDS website. Croatia has subscribed to the IMF SDDS since 1996, and meets most requirements for timeliness, coverage, and periodicity. According to the IMF's 2004 report, the MoF publishes a monthly Statistical Review, which includes a six-month advance release calendar.
In 2006, Katarina Ott produced a summary of Croatia's budget process for the International Budget Project's Open Budget Initiative. She scored Croatia's performance at 42%, noting that Croatia produced five of the seven key budget documents that are tracked by the International Budget Project. Croatia produces a pre-budget statement, the executive's budget proposal, in-year reports, a year-end report, and an auditor's report. Lacking are a citizen's budget and a mid-year review.
In its 2004 ROSC, the IMF reports that "Croatia's revenue projections provide a sound basis for the budget, but there are frequent reallocations from the original expenditure provisions. Statements of accounting policy are not included in the budget and final accounts documents. The processes of accounts reconciliation and fiscal reporting are not fully in place" (pp. 48, 49). The State Accounting Office (SAO) is operationally independent, according to the provisions of the State Audit Act. The ROSC found that steps were being taken to strengthen internal controls, but that these were hampered by the lack of a functional internal audit system. Instead, the control function is spread across a variety of ministries. According to the ROSC, these include "the Government Office for Internal Supervision reporting to the prime minister; the Ministry of Finance's (MoF) Directorate for Internal Audit and Control, the Budgetary Supervision Department, the Office for Internal Supervision, and the Office for State Property" (p. 28). The result of this is a significant reduction in accountability.
The ROSC does note that efforts have been made to strengthen tax and customs administration and that a training program for staff has been initiated, but reiterates that formal internal audit procedures must be set in place. This is called for by the provisions of the 2003 Budget Act, which places responsibility for this upon the MoF. The MoF has gone so far as to draw up a set of rules for internal audits, and work is ongoing to implement its procedures, but this has yet to be completed. However, there is a code of conduct for civil servants, and other steps to reduce government corruption have been taken, but the 2004 ROSC cautions that there is more work to be done.
At present, according to the 2004 IMF ROSC, "the legislature discusses external audit reports separate from the State Budget Execution Report and systematic review and follow-up are limited" (p. 49). This system is currently being overhauled. Articles 8 and 11 of the Law on Official Statistics assure the independence of the CBS.
International Monetary Fund, "Republic of Croatia: Report on Observance of Standards and Codes - Fiscal Transparency Module," Country Report No. 04/365, Washington, D.C.: IMF. Available from International Monetary Fund website. Accessed on April 21, 2007. (IMF 2004)
International Monetary Fund, "Croatia: 2006 Article IV Consultation and Request for Stand-By Arrangement-Staff Report; Public Information Notice and Press Release on the Executive Board Discussion; and Statement by the Executive Director for the Republic of Croatia," Country Report 07/81, Washington, D.C.: IMF, August 2006. Available from International Monetary Fund website. Accessed on April 21, 2007. (IMF 2007)
World Bank, "Croatia: Regaining Fiscal Sustainability and Enhancing Effectiveness," Public Expenditure and Institutional Review, Report No. 22155-HR, World Bank, 2000. Available from Croatia's Ministry of Finance website. Accessed on March 21, 2007. (WB 2000)
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