Economic Recovery Development Policy Loan

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The global financial crisis has severely affected the Croatian economy, with Gross Domestic Product (GDP) contracting over 7 percent from the crisis outbreak to end- 2010. With high external debt and significant balance sheet exposure to the exchange rate risk, market confidence in Croatia has deteriorated sharply, but the Government has acted fast to address these vulnerabilities. The reform program proposed to be supported by the Economic Recovery Development Policy Loan (ERDPL) has been developed jointly with the Government, and builds upon the government's economic recovery program. The ERDPL objective is to support recovery through measures that: (i) promote fiscal sustainability through expenditure-based consolidation; and (ii) foster the private sector growth. The ERDPL series is also intended to mitigate the fiscal risks that might occur if the recovery gets more delayed than expected. The choice of a series of two single-tranche operations reflects the medium-term nature of reforms proposed to be supported and the specific political environment in which the ERDPL will be implemented, with general elections set for late 2011. The lessons learned from prior development policy lending as described in the FY09-12 country partnership strategy have also affected the choice of instrument. In addition to the ERDPL series, the Bank will support the broader medium-term competitiveness and growth agenda through analytical work and other complementary lending operations, including a financial intermediation loan and investment operations in infrastructure, science and technology, and the justice sector.