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Cablegate: Price Rises Confront New Government

P 181450Z JAN 08
FM AMEMBASSY ZAGREB
TO RUEHC/SECSTATE WASHDC PRIORITY 8486
INFO RUEHZL/EUROPEAN POLITICAL COLLECTIVE PRIORITY

UNCLAS SECTION 01 OF 02 ZAGREB 000035

SIPDIS

E.O. 12958: N/A
TAGS: ECON ELAB PGOV
SUBJECT: PRICE RISES CONFRONT NEW GOVERNMENT


1. Summary: Although Croatia's average annual inflation rate
for 2007 was 2.9%, slightly below
the 2006 rate, the year-on-year rates in October, November
and December were the highest since
2000 and 2001 at 4.3-5.8%. The Croatian National Bank expects
inflation for 2008 to be as high
as 4.5%. The price increases have caused concern among
Croatians, and the trade unions have
pushed the government to act. The government, unions, and
employers will form a commission
to monitor the price increases and propose measures to the
government. The government's ability
to influence prices is limited, but economists are concerned
that this pressure could lead to
public sector wage and pension hikes. Given Croatia's high
levels of state employment and the
large number of pensioners, such moves could affect the rest
of the economy and further
reinforce already strong inflationary expectations. End
summary.

2. Croatia's annual inflation rate dropped to 2.9% for 2007
from a rate of 3.2% for 2006. In the last
quarter of 2007, however, Croatia experienced its highest
inflation in the last seven years.
According to Croatia's Central Bureau of Statistics, prices
were 4.3% higher in October, 4.6%
higher in November, and 5.8% higher in December as compared
to the same months in 2006.
Rises in the prices of food and fuel drove much of the
overall rise. Comparing November 2007 to
November 2006, food prices rose 8.2% while the price of fuel
for automobiles rose 10.5%.
Comparing December 2007 to December 2006, food prices were
11.4% higher and auto fuel
prices, 9.7% higher. On top of these hikes, for Zagreb
residents, January 1st brought an increase
in the price of water (22% over January 2007), public
transportation (38%), and utilities (50%).

3. Given the acceleration of inflation at the end of 2007,
Croatian National Bank Governor Zeljko
Rohatinski described as unrealistic the estimates of some
analysts that inflation would be 3.0-
3.5% for 2008. At a news conference in late December, he said
he expected an inflation rate of
4.5% for 2008, and that this was neither a catastrophe nor a
cause for panic. He also cautioned
against using the price increases at the end of 2007 and the
projections for 2008 as a reason for
indexing wages, prices, or interest rates.

4. According to a survey conducted the first week of January,
many Croatians regard these actual
and expected price increases as the top issue of concern for
the government. The trade unions
also are focused on the price increases, and the lack of
commensurate salary increases. By union
calculations, price levels in Croatia are 70% of those in the
EU, while the average salary in
Croatia is 26% that of the EU. The unions have pressed
employers to increase wages, but with
little success. They also warned the government they would
organize protest rallies if the
government did not act to increase the minimum wage and
pensions and otherwise take measures
"to protect living standards." On occasion, union leaders
individually called for specific
measures such as indexing all salaries to inflation, setting
limits on price increases, and returning
recently raised prices to their old levels.

5. In response, PM Sanader and other government
representatives met with representatives of the
unions and the Croatian Employers Association on January 15.
Sanader said the economic
situation in Croatia was "difficult but not alarming." He
said the government, employers, and
trade unions would establish a commission to monitor price
increases and their effect on living
standards and to propose measures for the government to
consider. Sanader also announced the
government would host a meeting with the unions and employers
to raise the level of social
dialog on matters such as the minimum wage, the privatization
process, social and employment
policy, fighting the grey economy, and increasing economic
competitiveness. As a third step, he
said the government would meet with cities and municipalities
and encourage them to consider
the effect on residents before they raise the price of
utilities and municipal services.

6. Croatia's largest union, the Union of Autonomous Trade
Unions of Croatia (UATUC), announced
they would organize a protest rally on April 12, giving the
government three months to raise the
minimum wage. Leaders of the other unions said they would
wait to see if the measures proposed
at the meeting with Sanader produced results before joining
the UATUC in organizing the protest.

7. Comment: The unions' efforts succeeded in making inflation
one of the first topics
Sanader's new government had had to publicly address.
Despite some of the unions' calls for
government intervention, Sanader's response was measured,
essentially promising only further
dialog and the continuation of economic reforms. However,
indications are that Croatia will face
higher inflation and slower growth for 2008, beginning
already in the first quarter of
the year. As Croatians feel the effects of this worsening
situation, it may become more difficult
for Sanader's new coalition government to resist pressure for
intervention on wages and
pensions. End comment.
BRADTKE

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