Republic of Croatia - Second Review Under the Stand-By Arrangement, and Requests for Waiver of Performance Criteria and for Modification of a Performance Criterion-Staff Report;staff Statement;news Briefs on the Executive Board Discussion; And Statement by (Electronic book text)

1. Strong capital flows and rapid credit growth in recent years helped Croatia reach high levels of prosperity, but also increased vulnerabilities. Annual GDP growth accelerated to 4-5 percent, per capita incomes advanced further toward the EU average, and unemployment declined to the lowest levels since Croatia's independence (Table 1). But domestic and external imbalances also widened considerably. Rapid credit growth led to a significant debt build-up; prevalent foreign currency borrowing aggravated balance sheet vulnerabilities; and booming domestic demand led to surging trade deficits, moderated only partially by strong tourism earnings.