In two years, Croatia’s GDP growth will fall to only 0.2 percent.
In its recent analysis of public debt sustainability, the European Commission has emphasized twelve EU member states whose high public debt poses a significant risk for their economies, reports Večernji List on January 13, 2017.
One of them is Croatia, which EU believes that in the next four years could lower the public debt by two to three percentage points compared to the current level. However, that will be followed by a new period of increased borrowing which would in 2027 rise the share of public debt in Croatian GDP again to 88 percent.
Croatia’s efforts to significantly reduce the debt and dependence on borrowed capital will primarily be limited by high expenditures on interest rates, and a snowball effect which makes debts rise even in a situation when nominal government spending does not increase.
Another limiting factor are low rates of growth of the Croatian economy, which are significantly lower than the total expenditures for interest. If ten-year forecast turns out to be accurate, Croatia can expect growth rates of more than 2 percent only in 2017 and 2018, which will be followed by annual growth of just between 0.1 to 0.9 percent.
Željko Lovrinčević, a researcher at the Institute of Economics, explains that Croatia has a large number of unknowns and uncertainties, which makes estimates of future trends very difficult. The growth of the Croatian economy depends on a number of external factors, such as the level of interest rates in the world markets and the movement of energy prices over which Croatia has no influence.
Similar situation exists with regards to tourism. Foreign guests helped Croatian economy due to a combination of international circumstances, but it is difficult to predict until when will these circumstances last. New problems will arise due to the aging of population and the loss of young workers.
“At some point, these developments can join forces and go in the right direction, but they can also become negative. Our problem is that we are exposed to shocks that we cannot influence and the only way to reduce the vulnerability is the implementation of strong fiscal consolidation”, said Lovrinčević.
The European Commission predicts that Croatian public debt, under unfavourable circumstances, could jump up to 110 percent of GDP, but could also fall below 80 percent if more optimistic scenario prevails. One of the variables they monitored is the impact of foreign exchange risk and increase in public expenditure for healthcare for aging population.
The highest level of public debt in 2027 is expected in Italy (128 percent) and Portugal (124 percent), while Croatia with its 87.8 percent of projected debt will be the worst among transition countries.
