As Novac/Goran Penic/Marina Klepo writes on the 29th of August, 2020, the worst coronavirus-dominated economic forecasts have unfortunately come true: Croatia’s GDP sank 15.1 percent in the second quarter, and among EU countries, according to the data released so far, Croatia recorded the fifth worst result, after Spain, France, Italy and Portugal. The Croatian Government has some tricks up its sleeve.
Historically, Croatia has never seen such a sharp decline in its economy, and CBS data from 1996 shows that the biggest quarterly decline so far was at the beginning of 2009, at the outbreak of the financial crisis, which stood at 8.8 percent. The lockdown to curb the spread of the new coronavirus has resulted in a much worse drop.
Due to the absence of the pre-season, CBS data shows that export of services fell by as much as 67.4 percent. The export of goods, meanwhile, fell 10.4 percent, household consumption fell by 14 percent and investment fell by 14.7 percent. The fact that household consumption was reduced during quarantine doesn’t come as a surprise, but investments have sunk more than expected. Of the total investments in the country, as was explained by the Minister of Finance, Zdravko Maric, 52 percent refers to construction, and it recorded a slight plus.
Big challenges lie ahead according to Zdravko Maric…
”We believe that the procurement of equipment led to the fact that total investments fell more than expected. We also had a physical barrier regarding the procurement of equipment due to the pandemic,” said Maric, saying at the same time that “challenges lie ahead”. Of all the components of GDP, the only exception in terms of the drop is government spending, which increased by 0.7 percent.
Goran Saravanja, the director of the Imelum consulting company, pointed out that the worst is over, although the recovery will be long and uncertain, and he expects GDP decline this year to be less than 10 percent “due to a better tourist season than what was expected”. But he doesn’t expect a more pronounced recovery in terms of personal consumption. Zrinka Zivkovic-Matijevic, an RBA analyst, has more pessimistic expectations, believing that the latest announcement confirms that the fall in GDP will be above 10 percent this year, and growth of only three percent can be expected next year.
If we want to mitigate the economic downturn and prevent significant layoffs, the finance minister said, the government faces major challenges. Although it launched a very generous job preservation package in the spring, there is a real danger that many will find themselves in a thankless situation after the measures expire. When asked what he thinks the government could or should do to prevent the worst-case scenario, Zivkovic-Matijevic singles out “working on strengthening the institutional capacity to withdraw the planned European Union funds” as something of significance.
The first payments of the agreed 22 billion euros from the EU are expected this autumn, and that money should mitigate the consequences of the coronavirus crisis, accelerate domestic economic growth and make things a bit more sustainable. But to what extent Croatia will be able to offer quality programmes in order to make really good use of the large amount is still something which is yet to be seen.
According to Saravanja, the Croatian Government would mitigate the decline in domestic demand the most if it could accelerate the start of infrastructure projects, ie capital investments that are in a high stage of preparation, especially projects with an EU financial component. He adds that those in charge should absolutely not lose focus on structural reforms.
The third quarter
Croatia’s GDP, when viewed over the first turbulent six months of 2020, fell by 7.8 percent, which is actually slightly better than the EU average where the decline stood at 8.3 percent. Owing to the fact that Croatia had a slightly better first quarter, and since Croatia recorded 53 percent of overnight stays in tourism compared to last year until this August, and planned for a massive 70 percent decline, the Government expects that in the third quarter, the predicted decline will be slightly lower, and ultimately at the end of the year – GDP decline will be slightly less than planned.
”Even under the theoretical assumption that by the end of the year we have no more tourists, overnight stays will be at over 40 percent of what was recorded last year, which will reflect GDP trends and a correction of the fall in the third quarter and by the end of the year,” said the Prime Minister’s Adviser for Economic Affairs, Zvonimir Savic. When it comes to further measures to mitigate the consequences of the ongoing coronavirus crisis, the Croatian Government is counting on generous funds from the EU for liquidity of the economy, the preservation of jobs, as well as for reforms and investments.
A few days ago, we received confirmation that we will have one billion euros of soft loans from the SURE programme at our disposal, with which the government will compensate the current cost for co-financing salaries during the lockdown, but also for further measures. According to Savic, the measures will be targeted towards activities that are the most affected by the coronavirus crisis, in the sectors of tourism, catering and transport. This money will then be used to finance the measure of a shortened working week and other things. The tourism sector is demanding that the measures last until the beginning of next season.
The second thing that is planned, according to Savic, is to maintain the liquidity of the real sector through favourable loans from HAMAG BICRO and HBOR for small and medium-sized enterprises.
”The concept of the Covid loan goes further with a grace period, five years of repayment and an interest rate of 0.25 percent. It is estimated that this year alone, we’ll have 100 to 200 million euros, and in two years a total of 700 to 800 million euros,” added Savic.
The most significant funds lie in the mechanism for recovery and resilience of the economy – over 6 billion euros that can be used over the next three years. EU countries must draw up national recovery plans in the next three months, and through this mechanism, all reforms and investments related to strengthening the economy in the pandemic can be financed. These are projects for environmental protection, infrastructure, digitalisation and the reform of public administration, the judiciary, and as has since been found out, Croatia has negotiated that the funds be used for the reconstruction and construction of school buildings after the Zagreb earthquake, and the same is being negotiated for health and cultural facilities.
Wage growth
”These are non-refundable funds with which we can renovate public buildings, and this is then an opportunity for the construction sector, but also for companies that will equip schools and hospitals. We can also justify the costs of distance education,” said Savic, noting that the programme has been in force since back in February. There is also a tax relief that will come into force next year, and which, through a reduction in income and profit taxes, will bring citizens higher salaries and business owners higher incomes, which should encourage more consumption.
The Croatian Government is also counting on negotiations with the unions about the agreed increase in salaries in the public and state sector. As we have learned, the dynamics of wage growth will be negotiated with regard to the situation. There will be either a delay for a while (for two years, for example) or a slowdown in growth (minor increases) on the table. The government wants a compromise, it doesn’t want to cause friction, and it hopes that the unions are on the same wavelength as them in terms of awareness of the velocity of the coronavirus crisis we’re all trying to wade through together.
It wants to speed up investments as well. At the moment, over 20 billion kuna are involved in various projects financed from the EU, and state-owned companies are expected to invest more.
Urgent moves by the Croatian Government to get out of the coronavirus crisis are as follows:
1. A shortened working week
The government will help activities in tourism, catering and hospitality and transport with co-financing of 2000 kuna per worker for a shortened working week. The criteria and duration of this measure are still being agreed on.
2. Favourable loans for business owners
HAMAG BICRO and HBOR will continue to provide loans with interest rates of 0.25 percent to maintain the company’s liquidity.
3. The construction of schools and hospitals in Zagreb
Croatia has 6 billion euros of grants at its disposal that can be used for various projects which involve environmental protection, infrastructure, digitalisation and the reform of public administration, the judiciary and so on. The funds will be used for the reconstruction and equipping of schools, as well as health and cultural facilities after the Zagreb earthquake, which will boost the construction sector.
4. Tax relief
A new tax reform will take effect on January the 1st, 2021, reducing income tax rates from 24 to 20 percent and from 36 to 30 percent, as well as income tax from 12 to 10 percent for small and medium-sized enterprises. Salaries should thus increase by 100 to 800 kuna. The Croatian Government once again wants to encourage consumption.
5. Negotiations with trade unions on the increase of salaries
The Croatian Government wants a compromise to either freeze the agreed wage increase until GDP starts to rise, or to make the increases smaller than agreed.
6. Investments
It wants to accelerate investments financed from EU funds, as well as payments from the EU budget, and encourage state-owned companies to have more investments.
For more on the Croatian Government’s moves during the coronavirus pandemic, follow our politics section.
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