(Updates with Finance Minister’s comments, budget gap revision from second paragraph.)
Feb. 13 (Bloomberg) -- Croatia’s government submitted its 2012 budget draft to the Parliament, which includes 4 billion kuna ($700 million) in proposed cuts to narrow the deficit and to bolster the country’s credit ratings.
The government revised its budget gap forecast for this year to 3.8 percent of gross domestic product, less than a previous forecast of 4.2 percent and from 5.5 percent in 2011, Finance Minister Slavko Linic told reporters in Zagreb today. The cost-cutting should affect all branches of the public sector as budget spending is cut to 118.8 billion kuna, from last year’s 122.3 billion kuna.
“This is not the ideal budget proposal, but it’s the best we could do,” Prime Minister Zoran Milanovic said today at the Cabinet meeting in Zagreb. “This budget will not lead to an explosion in investment, but without the adopted measures we can’t go forward.”
Croatia, which is set to become the European Union’s 28th member in 2013, is facing a review of its credit rating as it needs to service a growing external debt and revive its faltering economy. Milanovic last month said the economy will grow 0.8 percent this year, while central bank Governor Zeljko Rohatinski said in December the country may slide into recession again this year after a modest recovery in 2011.
The government expects to gain 2 billion kuna from selling state assets this year, Linic said. The budget deficit in 2013 is forecast to narrow to 3.3 percent of GDP and to 2.6 percent in 2014, Linic said. The government projects expenditures at 120 billion kuna in 2013 and 122.6 billion kuna in 2014.
The International Monetary Fund said in a Feb. 6 statement that “with current policies” the economy will probably decline by 1 percent this year and urged the government to continue spending cuts and reduce the number of employees and benefits in the public administration.
Standard & Poor’s lowered Croatia’s credit rating a year ago to BBB-, one step above junk, citing a “deteriorated fiscal position and continuously weak” external financing.
Fitch Ratings said on Dec. 5 it will review its assessment in the first quarter in 2012, when it expects to have more information on the government’s fiscal and economic program.
The government plans achieve economic expansion of 0.8 percent by boosting competition and domestic demand, rather than exports, to limit the effect of the sovereign debt crisis in the euro area, where Croatia exports 42 percent of its products, Linic said in a Bloomberg interview on Jan. 31.
Croatia plans to sell at least $1.3 billion in bonds to Japanese and U.S. investors this year, starting by the end of the first quarter, Linic said. The government may borrow as much as 17 billion kuna this year, down from 22 billion last year, he said earlier. Croatia must pay 8.4 billion kuna to service this year’s debt, including a bond of 500 million euros ($663 million) maturing in May.
The government will also raise from March 1 the value-added tax rate to 25 percent from 23 percent to boost revenue.
--Editors: Elizabeth Konstantinova, Pawel Kozlowski
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