Croatia Needs Further Fiscal Efforts, Structural Reforms

  • Croatia is still struggling to restart growth after deep recession in 2009
  • Further fiscal consolidation can restore sustainability, retain market access
  • Structural reforms are critical for raising medium-term growth
  • With a slowing global economy and domestic spending held back by high unemployment, lack of confidence, and weak private sector credit growth, Croatia’s economy is expected to contract by 1½ percent in 2012 before growing by a modest ¾ percent in 2013, the IMF report said.

    “The authorities’ fiscal consolidation measures in 2012 will likely achieve the targeted deficit, albeit partly due to regrettable underexecution of capital spending” said Nikolay Gueorguiev, IMF mission chief for Croatia. But further efforts are needed in 2013 and beyond to return to fiscal sustainability, he added.

    The banking sector remains stable, well capitalized, and resilient to potential stress. However, the ongoing recession has increased nonperforming loans, as businesses and consumers struggle to pay back debt. The overall ratio of loans in trouble to total lending reached 13 percent in June 2012 compared with 4.9 percent in 2008, with the ratio for business loans at 23 percent, the IMF said.

    Large risks

    Significant slowdown in Croatia’s main trading partners in the European Union and the Balkans could lead to a sharp decline in exports and more job losses, further weakening domestic demand. Meanwhile, capital outflows could put pressure on the balance of payments, while reduced financing from foreign banks could shrink available credit.

    Despite the launch of fiscal consolidation, the budget deficit remains high and public debt is rising fast while market confidence remains fragile. A large external debt denominated in foreign currencies and a high external financing requirement pose risks if problems in Europe deepen, the IMF said in its report.

    In the medium term, without fundamental policy changes, sluggish growth due to deep-rooted competitiveness problems and elevated vulnerabilities will further weaken the economy’s ability to withstand economic and financial distress.

    On the upside, the forthcoming EU accession could help spur official and private capital inflows. It is crucial that Croatia strengthen its capacity to absorb EU funds to take full advantage of the considerable opportunities that EU accession offers.

    Macroeconomic policy priorities

    The growing challenges facing the Croatian economy call for strong policy...

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