CONFORMED COPY LOAN NUMBER 8063-HR Loan Agreement (Economic Recovery Development Policy Loan) between REPUBLIC OF CROATIA and INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT Dated May 10, 2011 LOAN NUMBER 8063-HR LOAN AGREEMENT Agreement dated May 10, 2011, entered into between REPUBLIC OF CROATIA (“Borrowerâ€?) and INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT (“Bankâ€?) for the purpose of providing financing in support of the Program (as defined in the Appendix to this Agreement). The Bank has decided to provide this financing on the basis, inter alia, of (a) the actions which the Borrower has already taken under the Program and which are described in Section I of Schedule 1 to this Agreement, and (b) the Borrower’s maintenance of an appropriate macroeconomic policy framework. The Borrower and the Bank therefore hereby agree as follows: ARTICLE I - GENERAL CONDITIONS; DEFINITIONS 1.01. The General Conditions (as defined in the Appendix to this Agreement) constitute an integral part of this Agreement. 1.02. Unless the context requires otherwise, the capitalized terms used in this Agreement have the meanings ascribed to them in the General Conditions or in the Appendix to this Agreement. ARTICLE II - LOAN 2.01. The Bank agrees to lend to the Borrower, on the terms and conditions set forth or referred to in this Agreement, the amount of one hundred and fifty million Euro (EUR 150,000,000), as such amount may be converted from time to time through a Currency Conversion in accordance with the provisions of Section 2.07 of this Agreement (“Loanâ€?). 2.02. The Borrower may withdraw the proceeds of the Loan in support of the Program in accordance with Section II of Schedule 1 to this Agreement. 2.03. The Front-end Fee payable by the Borrower shall be equal to one quarter of one percent (0.25%). The Borrower shall pay the Front-end Fee not later than sixty days after the Effective Date. 2.04. The interest payable by the Borrower for each Interest Period shall be at a rate equal to the Reference Rate for the Loan Currency plus the Fixed Spread; provided, that upon a Conversion of all or any portion of the principal amount of the Loan, the interest payable by the Borrower during the Conversion Period on such amount shall be determined in accordance with the relevant provisions of Article IV of the General Conditions. Notwithstanding the foregoing, if any amount of the Withdrawn Loan Balance remains unpaid when due and such non- payment continues for a period of thirty days, then the interest payable by the -2- Borrower shall instead be calculated as provided in Section 3.02 (e) of the General Conditions. 2.05. The Payment Dates are April 15 and October 15 in each year. 2.06. The principal amount of the Loan shall be repaid in accordance with the amortization schedule set forth in Schedule 2 to this Agreement. 2.07. (a) The Borrower may at any time request the following Conversion of the terms of the Loan in order to facilitate prudent debt management, namely a change of the interest rate basis applicable to all or any portion of the principal amount of the Loan withdrawn and outstanding from a Variable Rate to a Fixed Rate, or vice versa, or from a Variable Rate based on a Variable Spread to a Variable Rate based on a Fixed Spread. (b) Any conversion requested pursuant to paragraph (a) of this Section that is accepted by the Bank shall be considered a “Conversionâ€?, as defined in the General Conditions, and shall be effected in accordance with the provisions of Article IV of the General Conditions and of the Conversion Guidelines. 2.08. Without limitation upon the provisions of Section 5.08 of the General Conditions (renumbered as such pursuant to paragraph 3 of Section II of the Appendix to this Agreement and relating to Cooperation and Consultation), the Borrower shall promptly furnish to the Bank such information relating to the provisions of this Article II as the Bank may, from time to time, reasonably request. ARTICLE III - PROGRAM 3.01. The Borrower declares its commitment to the Program and its implementation. To this end, and further to Section 5.08 of the General Conditions: (a) the Borrower and the Bank shall from time to time, at the request of either party, exchange views on the Borrower’s macroeconomic policy framework and the progress achieved in carrying out the Program; (b) prior to each such exchange of views, the Borrower shall furnish to the Bank for its review and comment a report on the progress achieved in carrying out the Program, in such detail as the Bank shall reasonably request; and (c) without limitation upon the provisions of paragraphs (a) and (b) of this Section, the Borrower shall promptly inform the Bank of any situation that would have the effect of materially reversing the objectives of the -3- Program or any action taken under the Program, including any action specified in Section I of Schedule 1 to this Agreement. ARTICLE IV - REMEDIES OF THE BANK 4.01. The Additional Event of Suspension consists of the following, namely that a situation has arisen which shall make it improbable that the Program, or a significant part of it, will be carried out. ARTICLE V - EFFECTIVENESS; TERMINATION 5.01. The Additional Condition of Effectiveness consists of the following, namely that the Bank is satisfied with the progress achieved by the Borrower in carrying out the Program and with the adequacy of the Borrower’s macroeconomic policy framework. 5.02. The Effectiveness Deadline is the date ninety (90) days after the date of this Agreement. ARTICLE VI - REPRESENTATIVE; ADDRESSES 6.01. The Borrower’s Representative is its Minister of Finance. 6.02. The Borrower’s Address is: Ministry of Finance KatanÄ?ićeva 5 Zagreb, Republic of Croatia Telex: Facsimile: 862-21215 (385-1) 4922-598 862-21833 6.03. The Bank’s Address is: International Bank for Reconstruction and Development 1818 H Street, N.W. Washington, D.C. 20433 United States of America Cable address: Telex: Facsimile: INTBAFRAD 248423(MCI) or 1-202-477-6391 Washington, D.C. 64145(MCI) -4- AGREED at Zagreb. Republic of Croatia, as of the day and year first above written. REPUBLIC OF CROATIA By /s/ Martina Dalic Authorized Representative INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT By /s/ Hongjoo Hahm Authorized Representative -5- SCHEDULE 1 Program Actions; Availability of Loan Proceeds Section I. Actions under the Program The actions taken by the Borrower under the Program include the following: 1. The Borrower has: (a) introduced temporary fiscal rule through enactment of the Law on Fiscal Responsibility of November 26, 2010 (Official Gazette 139/10); and (b) established the Fiscal Board through the Government Decision on the Establishment of the Fiscal Policy Board of March 25, 2011. 2. The Borrower has: (a) submitted draft amendments to the Civil Service Act to its Parliament, aiming at strengthening the appraisal system and disciplinary measures in the civil services; and (b) established the Human Resource Management Information System (HRMIS) through enactment of the Law on Registry of Public Employees of March 23, 2011 (Official Gazette 34/11). 3. The Borrower has: (a) streamlined co-payment exemptions through enactment of the Amendment to the Act on Complementary Health Insurance of June 2, 2010 (Official Gazette 71/10); (b) reduced drug costs through adoption of the Ordinance on Establishing the Criteria of Wholesale Pricing and Reporting Wholesale Prices of Medicines of December 28, 2009 (Official Gazette 155/09), and the Ordinance on Establishing the Criteria for Inclusion of Medicines in the Basic and Supplementary Reimbursement Lists of the Croatian Institute for Health Insurance of December 28, 2009 (Official Gazette 155/09); and (c) launched hospital network rationalization, through the adoption of the Revision of the Public Health Insurance Network of June 24, 2010 (Official Gazette 81/10). 4. The Borrower has: (a) adopted the Social Welfare Strategy through the Government Conclusion on the Adoption of the Social Welfare Strategy of April 2, 2011; and (b) submitted the draft Social Welfare Act to Parliament, aiming at consolidating benefits, improved targeting of social benefits, and rationalizing the social welfare administrative network. 5. The Borrower has: (a) reduced privileged pensions by 10% through enactment of the Law on Reducing Pensions Determined or Earned According to Special Regulations on Pensions Insurance of June 2, 2010 (Official Gazette 71/2010); (b) increased minimum service of Members of Parliament to one parliamentary term, through enactment of the Amendments to the Law on Rights of Members of the Parliament of July 18, 2009 (Official Gazette 86/09); and (c) submitted a draft amendment to the Law on Rights of Members of Parliament to its Parliament, aiming at increasing the retirement age for Government officials, Members of Parliament and Constitutional Court Judges. -6- 6. The Borrower has: (a) equalized the retirement age for men and women at age 65 and doubled the early retirement penalty, through enactment of amendment to the Obligatory Pension Insurance Act of October 25, 2010 (Official Gazette 121/10); and (b) reduced administrative costs in funded pension pillars, through adoption of the Decision on the Maximum Mandatory Pension Funds’ Asset Management Fee for 2011 by the Croatian Financial Service Supervisory Agency on December 23, 2010 (Official Gazette 148/10). 7. The Borrower has reduced the unemployment benefit and its duration, and reduced pre-retirement unemployment benefit duration to five (5) years, through enactment of Amendments to the Law on Employment Mediation and Unemployment Benefits of October 25, 2010 (Official Gazette 121/10). 8. The Borrower has introduced accelerated enforcement of commercial dispute resolution, through the adoption of the Law on Enforcement of November 26, 2010 (Official Gazette 139/10), the Law on Bailiffs of November 26, 2010 (Official Gazette 139/10) and the Law on Execution of Cash Assets of July 14, 2010 (Official Gazette 91/10). 9. The Borrower has: (a) strengthened the institutional framework for management of state property and its privatization, through the enactment of the Act on State Property Management of December 17, 2010 (Official Gazette 145/10); and (b) sold or liquidated at least one hundred (100) state-owned companies. Section II. Availability of Loan Proceeds A. General. The Borrower may withdraw the proceeds of the Loan in accordance with the provisions of this Section and such additional instructions as the Bank may specify by notice to the Borrower. B. Allocation of Loan Amounts. The Loan is allocated in a single withdrawal tranche, from which the Borrower may make withdrawals of the Loan proceeds. The allocation of the amounts of the Loan to this end is set out in the table below: Amount of the Loan Allocated Allocations (expressed in Euro) Single Withdrawal Tranche 150,000,000 TOTAL AMOUNT 150,000,000 -7- C. Payment of Front-end Fee. No withdrawal shall be made from the Loan Account until the Bank has received payment in full of the Front-end Fee. D. Withdrawal Tranche Release Conditions No withdrawal shall be made of the Single Withdrawal Tranche unless the Bank is satisfied (a) with the Program being carried out by the Borrower, and (b) with the appropriateness of the Borrower’s macroeconomic policy framework. E. Deposits of Loan Amounts. Except as the Bank may otherwise agree: 1. all withdrawals from the Loan Account shall be deposited by the Bank into an account designated by the Borrower and acceptable to the Bank; and 2. the Borrower shall ensure that upon each deposit of an amount of the Loan into this account, an equivalent amount is accounted for in the Borrower’s budget management system, in a manner acceptable to the Bank. F. Excluded Expenditures. The Borrower undertakes that the proceeds of the Loan shall not be used to finance Excluded Expenditures. If the Bank determines at any time that an amount of the Loan was used to make a payment for an Excluded Expenditure, the Borrower shall, promptly upon notice from the Bank, refund an amount equal to the amount of such payment to the Bank. Amounts refunded to the Bank upon such request shall be cancelled. G. Closing Date. The Closing Date is December 31, 2011. -8- SCHEDULE 2 Amortization Schedule The Borrower shall repay the principal amount of the Loan in full on April 15, 2026. -9- APPENDIX Section I. Definitions 1. “Excluded Expenditureâ€? means any expenditure: (a) for goods or services supplied under a contract which any national or international financing institution or agency other than the Bank or the Association has financed or agreed to finance, or which the Bank or the Association has financed or agreed to finance under another loan, credit, or grant; (b) for goods included in the following groups or sub-groups of the Standard International Trade Classification, Revision 3 (SITC, Rev.3), published by the United Nations in Statistical Papers, Series M, No. 34/Rev.3 (1986) (the SITC), or any successor groups or subgroups under future revisions to the SITC, as designated by the Bank by notice to the Borrower: Group Sub-group Description of Item 112 Alcoholic beverages 121 Tobacco, un-manufactured, tobacco refuse 122 Tobacco, manufactured (whether or not containing tobacco substitutes) 525 Radioactive and associated materials 667 Pearls, precious and semiprecious stones, unworked or worked 718 718.7 Nuclear reactors, and parts thereof; fuel elements (cartridges), non- irradiated, for nuclear reactors 728 728.43 Tobacco processing machinery 897 897.3 Jewelry of gold, silver or platinum group metals (except watches and watch cases) and goldsmiths’ or silversmiths’ wares (including set gems) 971 Gold, non-monetary (excluding gold ores and concentrates) (c) for goods intended for a military or paramilitary purpose or for luxury consumption; (d) for environmentally hazardous goods, the manufacture, use or import of which is prohibited under the laws of the Borrower or international agreements to which the Borrower is a party. - 10 - (e) on account of any payment prohibited by a decision of the United Nations Security Council taken under Chapter VII of the Charter of the United Nations; and (f) with respect to which the Bank determines that corrupt, fraudulent, collusive or coercive practices were engaged in by representatives of the Borrower or other recipient of the Loan proceeds, without the Borrower (or other such recipient) having taken timely and appropriate action satisfactory to the Bank to address such practices when they occur. 2. “General Conditionsâ€? means the “International Bank for Reconstruction and Development General Conditions for Loansâ€?, dated July 31, 2010, with the modifications set forth in Section II of this Appendix. 3. “Programâ€? means the program of actions, objectives and policies designed to promote growth and achieve continued economic recovery and set forth or referred to in the letter dated April 2, 2011 from the Borrower to the Bank declaring the Borrower’s commitment to the execution of the Program, and requesting assistance from the Bank in support of the Program during its execution. 4. “Single Withdrawal Trancheâ€? means the amount of the Loan allocated to the category entitled “Single Withdrawal Trancheâ€? in the table set forth in Part B of Section II of Schedule 1 to this Agreement. Section II. Modifications to the General Conditions The modifications to the General Conditions are as follows: 1. The last sentence of paragraph (a) of Section 2.03 (relating to Applications for Withdrawal) is deleted in its entirety. 2. Sections 2.04 (Designated Accounts) and 2.05 (Eligible Expenditures) are deleted in their entirety, and the remaining Sections in Article II are renumbered accordingly. 3. Sections 5.01 (Project Execution Generally), and 5.09 (Financial Management; Financial Statements; Audits) are deleted in their entirety, and the remaining Sections in Article V are renumbered accordingly. 4. Paragraph (a) of Section 5.05 (renumbered as such pursuant to paragraph 3 above and relating to Use of Goods, Works and Services) is deleted in its entirety. 5. Paragraph (c) of Section 5.06 (renumbered as such pursuant to paragraph 3 above) is modified to read as follows: - 11 - “Section 5.06. Plans; Documents; Records … (c) The Borrower shall retain all records (contracts, orders, invoices, bills, receipts and other documents) evidencing expenditures under the Loan until two years after the Closing Date. The Borrower shall enable the Bank’s representatives to examine such records.â€? 6. Paragraph (c) of Section 5.07 (renumbered as such pursuant to paragraph 3 above) is modified to read as follows: Section 5.07. Program Monitoring and Evaluation … (c) The Borrower shall prepare, or cause to be prepared, and furnish to the Bank not later than six months after the Closing Date, a report of such scope and in such detail as the Bank shall reasonably request, on the execution of the Program, the performance by the Loan Parties and the Bank of their respective obligations under the Legal Agreements and the accomplishment of the purposes of the Loan. 7. The following terms and definitions set forth in the Appendix are modified or deleted as follows, and the following new terms and definitions are added in alphabetical order to the Appendix as follows, with the terms being renumbered accordingly: (a) The definition of the term “Eligible Expenditureâ€? is modified to read as follows: “‘Eligible Expenditure’ means any use to which the Loan is put in support of the Program, other than to finance expenditures excluded pursuant to the Loan Agreement.â€? (b) The term “Financial Statementsâ€? and its definition are deleted in their entirety. (c) The term “Projectâ€? is modified to read “Programâ€? and its definition is modified to read as follows (and all references to “Projectâ€? throughout these General Conditions are deemed to be references to “Programâ€?): “‘Program’ means the program referred to in the Loan Agreement in support of which the Loan is made.â€?