Summary of an interview with Borislav Skegro, Deputy Prime Minister and Minister of Finance

Interview conducted by Nikola Jelic

The Croatian economy began 1998 with a payment deficit amounting to ten per cent of the Gross Domestic Product (GDP) and continued unemployment growth, with some 20,000 insolvent companies, an empty pension fund, and businessmen and managers expecting 1998 to be more difficult than the previous year.

Nevertheless, the Croatian Deputy Prime Minister and Minister of Finance, Borislav Skegro, maintains that the Croatian people will live better in 1998.

On what does he base his optimism?

... I say that if the trends from 1997 were to continue, it will be just fine. The production growth will continue, quite certainly, at a rate of at least seven per cent. Even in the worst case scenario, with all the re-structuring processes, due to which some people must find new employment, there will be no growing unemployment. The payment deficit will surely be smaller than in 1997. The completion of the peaceful re-integration process will add to the production growth, there will be a better tourist season, effects of earlier investments ...

You say unemployment will not grow. This was supposed to be true of last year. What is more, 1997 should have seen the creation of 50,000 new jobs ... where are they?

You must also count the jobs created pursuant to investments and direct or indirect Government involvement, and you will see that more than 50,000 jobs have been created ... In all sectors. From those saved in direct rehabilitation of individual companies, those newly created through loans granted to demobilised Croatian defenders, land grants, activities of the Croatian Bank for Reconstruction and Development.

You claim that the payment deficit will not be a problem, but the Governor of the Central Bank of Croatia has found it necessary to warn of its actual growth. Moreover, he indicated ... that there would be no long-term stability in Croatia without dynamic export.

Whether or not to have the balance of payment deficit is not at issue. We need it in 1998; to put it simply, the only question is how large and how good. If we have major investment equipment and production materials imports, which we have had for the last four years, then it is a growth stimulating deficit. When investments must be larger than home savings, due to the rehabilitation of the war damage and transition, and the state shows low level indebtness, a moderate balance of payment deficit is acceptable. In a country with our development features, the balance of payment deficit is the best thing that can happen to us.

Why did the price of loans go up on the national financial market a month ago?

There was no general increase in interest rates, only in individual major banks. This happened for several reasons ... I can say that the loans have become more expensive, first as a result of the mandatory deposit insurance; due to public perception that all banks were equally secure, there occurred a movement of deposits from larger to smaller banks. Secondly, loans were affected by the introduction of the Money Laundering Act. Thirdly, we have an enormous loan demand, partially caused by the introduction of value-added tax (VAT). At the end of 1997 many people used loans to purchase goods to make reserves, believing that everything would be more expensive once VAT was introduced. Now we see that this is not the case, and that there is no reason for a price increase in many products. All this was followed by the re-introduction of passive interest rates, so it is no wonder that loans became more expensive.

Whether there is a reason for a price rise or not, the prices of many products has increased ... Could it be that you were being too hasty with your optimism?

... Of course we have expected product prices to increase, and we have expected what is happening now. Likewise, we have expected that there will be no immediate decrease in the prices of products which ought to become less expensive, and there is a whole lot more ... that are to become more expensive. The same happened in all countries which introduced VAT ... it is not right to point the finger solely at retailers, because they have acted more decently than the producers. The producers are the ones to blame for the price increase, they who accidentally/on purpose forget how VAT is calculated. The Government adopted measures for the most important groceries ... Everyone criticised me for not publicising them prior to the VAT introduction, and now you can see that we could not do such a thing due to the nature of those measures. Every product - bread, milk, oil, meat - has a specific programme, and each of them will serve as a stimulus to producers to calculate VAT correctly. Generally, whatever is happening has already been seen in other countries which introduced VAT before us.

Your measures relating to milk, bread and other products 'protect' the consumer at his own expense. The Government subsidises the producers who form the budget, which means it directly reaches into the pockets of those tax payers it claims to protect.

Yes, this is social policy, and the social policy is much better implemented with direct transfers from the State budget, rather than with differentiated tax rates. If we have the protection of the consumers' standard of living at heart, then we give back what was taken from them as VAT by keeping the price of the most important products level. Again, VAT and its rate is not at issue, but ...

What do you mean by saying that the high tax rate is another matter?

The VAT rate could even be 12 or 15 per cent, if some other income sources were to be found or the budget expenditure reduced. This is because the tax rate is determined for a particular country, year and budget, not as a school exercise or by copying the tax rate levels of neighbouring countries.

To continue, it is better to implement the social policy from the budget directly, because in such a case every single kuna spent becomes visible - you know who receives how much. On the other hand, if you set a privileged tax rate for someone, you have no idea who the final beneficiary of the privilege is. All research indicates that the target group of citizens to benefit from a privileged tax rate never obtains more than one-third of the privilege amount. Two-thirds are pocketed by others.

The economic policy of the Government is increasingly under fire with the push for its change. How do you comment on the theory of your former party colleague and one time Deputy Prime Minister, Dr Mladen Vedris, who blames Croatian economic policy for deliberately impoverishing the citizens, and who claims that export has been ruined by an over-rated kuna exchange rate, in order that a certain group of people would first make money in export and then use it for the purchasing of undervalued countries.

I do not know which government would undermine its own chances of re-election? This is a theory I cannot understand. HDZ has won the election eight times. Would it be able to do this by disastrous moves? When I joined the Government I calculated that my predecessors lasted six months on average. The circumstances have been as such that I am looking at my fifth full year with the Government ... Do you think all this could have been achieved by having such a bad economic policy? There were mistakes, of course, and moves which could have been made differently ...

... What about the President's demand from September 1997, that the Government should turn to the preparation of a new development strategy?

... A new chapter has opened in Croatian history. there is no war now, and under such new circumstances we should re-think the visions of development and international position of our country. However, it is not some sort of sector planning ... such planning is inappropriate for the market economy of a small open country like Croatia. We shall never prepare any strategy in which sector A will be declared more important than sector B and therefore obtain more favourable loans, lower interest rates ... It would be socialism non plus ultra. Regrettably, there are many people who cannot shake it off, even company managers do not know where to turn and are waiting for the Government to tell them what they should do.

Why is it that the item earmarking funds for the economic strategy disappeared from the final draft of this year's budget?

... first and foremost every company must have its own strategy, without waiting for the national one. Free market, private sector domination, trade liberalisation, global links, employment growth, change of the pension insurance system, privatisation of public companies - these are common knowledge and I will not waste millions of kunas to have somebody write a strategy about it. In this connection each company must have its own vision of development, and not wait for the Government to hand out instructions. Political parties must have strategies as a part of their programme. They cannot appear at the elections with a handful of promises, and only if elected to power ... arrive at some sort of strategy.

However, in his Christmas address, the President put it much more bluntly. He advocated a re-distribution of the national wealth and evenly spread tax burden. Will the Government act on it?

Yes, primarily through stricter enforcement of the available legislation. It may be accomplished if a little more attention is devoted to the collection of income tax at the actual rate levels. Real estate taxes can be considered, but at the moment the most can be achieved by the enforcement of the available legislation, better training of the tax authorities, more expedient operation of the courts, reduction in contributions, increase in the tax free basic amounts ...

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