Mission Concluding Statement 

Croatia: Concluding Statement of an IMF Staff Visit

December 19, 2016

The continuation of e conomic growth two years after a prolonged recession is very welcome. In 2016, real GDP growth is projected to reach about 2.7 percent, driven by a record tourism season, strong investment, and a pickup in consumption. Headline inflation is negative on the back of weak energy and food prices, while core inflation is close to zero. The general government deficit is expected to narrow to about 2 percent of GDP, outperforming the original budget target, mainly due to stronger-than-projected tax revenue. The Central Bank continues to pursue accommodative monetary policy and exchange rate stability, and to encourage kuna lending by providing long-term kuna liquidity. On average, the banking system remains well capitalized, and diligent supervision helped maintain the system’s stability. The current account remained in substantial surplus despite the continued increase in imports. The net international investment position continued to improve and gross international reserves increased slightly despite the abolishment of the requirement to maintain part of statutory reserves in foreign currency with the Central Bank.

The achieved fiscal consolidation is commendable and the ongoing recovery is an opportunity to sustain fiscal reforms in order to reduce high public debt, which is a source of vulnerability in an uncertain global economy. The proposed 2017 budget envisages an overall fiscal balance close to that of 2016, but the cyclical upturn should be utilized to continue to quickly reduce the deficit and debt. The recent broad tax reform is a step towards simplifying the system and improving its efficiency, with a view to supporting growth. The tax package lowered the burden on labor and business activity, made the VAT system less regressive, and eliminated a number of tax exemptions. It would have been preferable to introduce off-setting measures to ensure an improvement in the structural fiscal position, including by further reducing exemptions and rationalizing expenditure. It would also be important to carry out the reiterated government’s commitment to advance the preparation for introducing a modern real estate tax. Furthermore, while an increase in public wages after a prolonged freeze is understandable, it should be accompanied by streamlining the multi-layered and fragmented public administration to contain the fiscal cost and improve public services. In addition, it would be preferable to link part of remuneration to performance.

Advancing structural reforms in line with the National Reform Program (NRP) will be essential to raise potential growth and employment, and reduce contingent fiscal liabilities. It is reassuring that the government remains committed to the NRP as an anchor for their reform agenda in the period ahead. In particular, reforming the health sector and the complex system of social benefits will be crucial to reduce arrears and improve targeting. It would also be important to improve the efficiency of public enterprises via privatization and restructuring. In addition, reducing red tape and streamlining regulation will help enhance the business environment.

An IMF mission led by Khaled Sakr visited Zagreb during December 8-14, 2016, and met with Deputy Prime Minister and Minister of Economy Martina Dalić, Deputy Prime Minister and Minister of Public Administration Ivan Kovačić, Minister of Finance Zdravko Marić, Croatian National Bank Governor Boris Vujčić, Minister of Labor and Pension Systems Tomislav Ćorić, Minister of Health Milan Kujund ž ić, other senior officials, and representatives of parliament and the business community.