IMF Executive Board Praises Croatia’s Continued Recovery, Calls for Reforms

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ZAGREB, Jan 16 (Hina) – The Executive Board of the International Monetary Fund (IMF) on Monday welcomed Croatia’s continued economic recovery and favourable fiscal performance, warning however that GDP had not yet reached its level from before the recession and underlining the need to carry out structural reforms.

“In 2017, Croatia continued its third year of positive economic growth supported by strong tourism and private consumption, trade partner growth, and improved confidence. Growth is expected to stay at similar levels in the near future but to decelerate over the medium term,” reads the IMF report released on Tuesday, after the IMF Executive Board last week concluded the Article IV consultation with the Republic of Croatia. The IMF concluded the consultations on 10 January and the foundation for that debate was a report submitted by the IMF mission which visited Croatia in late October 2017.

According to IMF assessments, stated in the report released today, Croatia’s GDP growth in 2018 is projected at 2.8%.

Nonetheless, output has not yet fully recovered to its pre-recession level and per capita income remains well below the EU’s average, reads the report.

In addition, public debt, elevated unemployment, and structural impediments continue to weigh on medium term growth prospects.

With this background, Executive Directors underscored the need to implement policy measures and expedite structural reforms to boost growth and reduce vulnerabilities.

Consumer prices increased at a moderate pace and wage growth was also moderate as unemployment remained high.

The external current account is expected to record another strong surplus, underpinned by robust performance of exports and tourism and lower repatriation of profits as banks absorbed losses from Agrokor.

The balance of risks has improved but vulnerabilities remain sizable as public and external debt levels are still high and the full impact of the Agrokor restructuring is yet unknown, the report said.

Fiscal consolidation faster than planned

Fiscal consolidation progressed at a faster pace than planned and Croatia exited the European Union’s Excessive Deficit Procedure in June. Preliminary information indicates that the fiscal position will be in a small surplus in 2017.

Directors were encouraged by the commitment to fiscal discipline, and noted the overperformance of recent years. The favorable cyclical position provides an opportunity for growth friendly consolidation and a faster reduction in public debt. In this context, Directors emphasised the need to improve the structure of revenue and expenditure.

“They supported a streamlining of VAT rates and an introduction of a modern real estate tax. Directors encouraged the authorities to resist pressures to increase the wage bill and untargeted benefits. They stressed the need for reforms to enhance the efficiency of public services. Directors also underscored the importance of an ambitious reform of the pension and health care systems,” the IMF said.

Domestic monetary conditions remained accommodative and banks’ financial positions strengthened. Money market rates have been modest and liquidity ample.

Although continued deleveraging resulted in a negative overall credit growth on a stock basis, transaction data suggest that bank lending has resumed.

There has been moderate upward pressure on the exchange rate and the Croatian National Bank (HNB) accumulated international reserves. On average, the banking system remained well capitalized and liquid. The still high NPL (nonperforming loan) ratio to total loans has been declining despite the Agrokor crisis, the IMF said.

Directors encouraged the HNB to maintain such a stance as long as risks to inflation and financial stability remain low.

Directors stressed that the ambition to adopt the euro raises the importance of pressing ahead with reforms to maximize the benefits from joining the currency union while enhancing the ability of the economy to respond to adverse shocks.

Directors commended the HNB for its conservative prudential policies which have thus far helped banks withstand the Agrokor crisis. They stressed that it is vital to maintain these policies and vigilant supervision.

Directors encouraged the authorities to build on recent improvements in bankruptcy legislation to address remaining gaps in corporate governance.

Reform pace slows down after EU accession

The pace of structural reforms slowed down after the EU accession in 2013. Croatia’s GDP per capita stands at about 60 percent of the EU average and the business environment remains less favorable than in peer countries.

Directors urged the authorities to advance structural reforms to remove impediments to sustained growth. They highlighted the need to improve the business environment by streamlining public administration, and enhancing the legal process and property rights.

In addition, they encouraged the authorities to ease regulations on temporary employment, and the hiring and retrenchment of labor. Directors stressed the need to improve productivity and resource allocation by raising the efficiency of SOEs (state owned enterprises) and divesting underutilised state assets.

It is expected that the next Article IV consultation with the Republic of Croatia will be held on the standard 12-month cycle.


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