Croatia to enforce spending cuts, eyes investors

ZAGREB – The Croatian government will on Wednesday unveil a set of spending cuts needed to fix this year’s strained budget and reassure foreign lenders ahead of a Eurobond issue planed in April or May.

As part of its anti-recession efforts, the government is likely to cut salaries of around 180,000 teachers and doctors by up to 10 percent, even though unions have threatened to go on strike should that happen.

Failure to enforce serious spending cuts would send a wrong signal to international investors and force Zagreb to turn to the International Monetary Fund for help later in the year, analysts said. “This is a watershed moment for Croatia, when we have to show if we can manage our public finances… The situation is much more difficult than a few months ago, when we had drafted the budget,” Prime Minister Ivo Sanader said on Tuesday.

This is expected to be the most severe cut in public finances since the former Yugoslav republic became independent in 1991. Earlier this week, government employees accepted a wage bill freeze, saying they were choosing “the lesser of two evils”, but teachers and doctors, who make up almost three-quarters of the country’s public sector, rejected it.

The government said it was determined to save the planned 1.4 billion kuna ($255.5 million) despite the refusal. It did not say outright it would cut all public sector salaries but officials later said it would have no choice. “There is no money. There is no alternative but to cut. The only question is how big the cuts will be,” said a government official who asked not to be named.

Local media also reported the ruling HDZ party had agreed to enforce salary cuts. “This has to be done if we want to look like a serious government for the roadshows when we go abroad to look for money,” the official said. The government plans to finance the budget gap, seen at around 4.5 billion kuna, or between 1.5 and 2.0 percent of GDP, by issuing its first Eurobond since 2004 in April or May. The finance ministry said last week the latest estimates showed this year’s budget would lack some 10.4 billion kuna and major cuts were necessary.

The ministries have already cut costs by some 3.7 billion kuna. The government had set the budget gap at 0.9 percent of gross domestic product in December, after the unions first rejected a wage freeze proposal. Since then, it has cut its growth projection to minus 2 percent from 2 percent growth, as the global crisis took a higher than expected toll on the country, curbing retail sales, output and exports while boosting unemployment. The budget gap is now likely to widen as the revenue projections have been cut to 116.5 billion kuna from 124.6 billion. Spending was originally set at 126.9 billion kuna.

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