US embassy cable - 04ZAGREB280

UNCLAS  ZAGREB 000280 
 
SIPDIS 
 
 
SENSITIVE 
 
USAID FOR E&E/A CONVERY 
 
E.O. 12958: N/A 
TAGS: EFIN, ECON, PREL, HR, Trade 
SUBJECT: NEW FINANCE MINISTER TALKS FISCAL DISCIPLINE 
 
Sensitive but Unclassified -- please protect accordingly. 
 
Summary 
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1.  (SBU) The Ambassador met new Finance Minister Ivan Suker 
February 10.  Suker declared the government's intention to 
negotiate a new Standby Arrangement with the IMF -- 
apparently EU pressure caused the government to overcome 
earlier misgivings about another SBA.  Such an agreement 
would mean crafting a restrictive budget.  Suker emphasized 
fiscal discipline first, tax cuts second.  The Ambassador 
reviewed various USG assistance projects and asked for more 
feedback to make them more effective.  Suker, a former mayor, 
emphasized the importance of strong financing mechanisms at 
the local level.  End Summary. 
 
"Dedicated to new Standby Arrangement" 
-------------------------------------- 
 
2.  (SBU) Suker began the February 10 meeting with the 
Ambassador by noting that he was embroiled in tough 
negotiations with various ministries in an attempt to put a 
budget together (the government has until the end of March to 
put together its first budget -- it is currently operating on 
a provisional budget passed by the last government).  He 
believed that this first budget would demonstrate to the 
international community and to the financial markets the HDZ 
government's seriousness. 
 
3.  (SBU) Suker highlighted the government's intention to 
pursue a Standby Arrangement with a target budget deficit of 
4.5-4.8 percent of GDP (this would be far above the 3.8 
percent the last government agreed with the IMF for this 
year).  He argued that the last government had "achieved" a 
budget deficit of 4.8 percent -- far below the target of 6.7 
percent -- in 2002 only by failing to fulfill commitments. 
While the figures are not yet official (or even public), the 
previous government had NOT met its 4.5 percent target for 
2003; he believed the figure was 5.8 percent.  Thus, 4.5-4.8 
percent this year would represent real discipline.  "We will 
need to say 'no' to a lot of spending."  The Ambassador noted 
that he had just met with the Minister of Transportation, who 
had a lot of ambitious -- and expensive -- projects. 
Preparing for NATO would also not be a cheap endeavor. 
 
Tax Cuts to Wait 
---------------- 
 
4.  (SBU) Suker also said that tax reform could come only 
after deficit reduction.  Suker did not even mention one of 
the HDZ's most important campaign promises -- VAT reduction 
-- but rather stressed the importance of lowering the cost of 
labor (i.e., payroll taxes) to stimulate employment. 
 
5.  (SBU) Suker highlighted the need to bring order to 
government finances -- he would begin by sorting out the 
Treasury function in the Ministry.  Transparency would also 
be a focus. 
 
Leadership Needed to Make Assistance Work 
----------------------------------------- 
 
6.  (SBU) The Ambassador explained that, in the last 
government, the Mission had found the Ministry often 
unresponsive.  Given the appointment of so many evidently 
competent people to the Ministry, we looked forward to a 
better relationship, particularly in implementing our 
assistance programs.  Many of our programs were designed to 
achieve just what the Minister had identified as his 
principle goal -- getting a grip on finances.  Much of our 
assistance to the Ministry was coming to an end in September. 
 To maximize its effectiveness, we wished to work closely 
with Ministry, especially in the areas of continuing to 
implement a new financial information management system and 
the area of fiscal decentralization. 
 
7.  (SBU) Suker noted that as a mayor until the end of last 
year, he had seen how localities should not and could not 
rely on the central government.  He remarked on the need to 
simplify and streamline the patchwork of taxes and fees and 
to improve the management of infrastructure -- areas where 
U.S. assistance can help. 
 
Comment 
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8.  (SBU) Suker -- an ex-mayor and tax collector -- sounded 
the right notes on the need for fiscal discipline.  He may 
 
find the IMF a good stick with which to beat his fellow 
ministers, as he tries to ratchet down the deficit.  However, 
the IMF will likely demand, at least as a starting position, 
more ambitious deficit reduction than that contemplated by 
the government --- we understand in the neighborhood of 4.0 
percent.  Meanwhile, the pensioners are getting restless, the 
Ministry of Defense needs to invest in NATO preparedness, and 
the ambitious Minister of Transportation has plans for roads, 
bridges, railroads and a new Coast Guard.  It is unclear to 
us that Suker has the political weight to push back against 
more politically influential ministers.  Only the interest of 
the EU in Croatia continuing with an SBA has brought the 
government this far; at some point the government will have 
to balance constituencies against IMF and EU pressure. 
FRANK 
 
 
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