CROATIA'S CAPACITY TO FINANCE ITS FISCAL DEFICIT

Sa？etak The paper represents an attempt to determine the level of fiscal deficit which does not require more financing than is compatible with sustainable internal and external borrowing, and which is consistent with the expected and desirable levels of macroeconomic indicators, such as economic growth and the rate of inflation. At the same time it takes into account the existing foreign trade potentials of the country as well as characteristics of foreign demand for exports. Empirical analysis has shown that Croatia has rather limited possibilities to finance its fiscal deficit. Foreign debt financing is to a large extent constrained by dynamics of exports, while the domestic debt financing is limited by a relatively low rate of growth of domestic economy. Financing through issuing money should be avoided because of possible inflationary effects