Press Release No. 24/289

IMF Executive Board Concludes 2024 Article IV Consultation with Republic of Croatia

July 26, 2024

Washington, DC: On July 26, 2024, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation[1] with Croatia.

The economy has performed strongly despite consecutive external shocks. The impressive post-pandemic growth during 2021-22 moderated to 3.1 percent in 2023, still among the highest in the euro area. Inflation has decelerated considerably since early 2023 but still persists above the euro area average, owing to elevated food and services inflation amid a tight labor market. The fiscal balance deteriorated to a deficit of 0.7 percent of GDP in 2023 and thanks to robust nominal GDP growth public debt declined further to 63 percent of GDP. The financial sector has weathered well the recent monetary tightening, with high bank capital and liquidity. Staff projects continued robust growth at 3.4 percent in 2024 and 2.9 percent in 2025, led by strengthening household real incomes and investment supported by EU funds. Inflation is stickier, reflecting robust wage growth, and is expected to gradually return to about 2 percent in late 2025.

Risks to the outlook are broadly balanced. Downside risks to growth include heightened regional conflicts, commodity price volatility, and a global or regional recession. Faster implementation of structural reforms could raise actual and potential growth, which is constrained by subdued productivity and labor market shortages. Supply shocks could affect inflation on both sides. Stronger-than-expected wage growth poses an upside risk to inflation while Croatia’s openness could play a mitigating factor.

Executive Board Assessment[2]

Executive Directors commended Croatia’s significant strides in catching up with more advanced European peers. Directors noted that growth prospects remain favorable, supported by buoyant domestic demand, and disinflation is expected to continue albeit gradually. Given external and domestic risks to the outlook, they encouraged the authorities to focus on building buffers, safeguarding financial stability, and advancing structural reforms to address labor shortages, enhance productivity, and boost potential growth.

Directors underscored the need to reduce the fiscal stimulus in 2024 and welcomed the authorities’ plan to meaningfully cut the deficit in 2025 and return to a structural primary balance by 2027. They stressed that fiscal prudence and decisive reforms are warranted to build buffers for future shocks and create space for long-term spending needs. Directors saw scope for broadening the tax base, including by introducing a value-based property tax and removing the excessively favorable taxation on short-term rental income. On spending, they highlighted the need to rationalize the public wage bill and ensure sustainable pension and healthcare systems. Directors also encouraged the authorities to strengthen the medium-term fiscal framework and continue to improve public investment management and strengthen corporate governance and fiscal risk management of state-owned enterprises.

While welcoming the resilience of the financial system, Directors emphasized the need to closely monitor banks’ credit risks and the potential buildup of risks in the real estate sector. They concurred that the tight stance of capital-based macroprudential measures is appropriate. Directors encouraged the authorities to continue to assess the need for introducing explicit borrower-based measures and stand ready to do so as warranted.

Directors underscored the importance of ambitious and comprehensive reforms to boost potential growth, leveraging the progress in implementing the National Recovery and Resilience Plan. They encouraged tackling labor shortages through coordinated policies to foster labor participation, facilitate labor mobility, and reduce skills mismatches and net emigration. Reviving productivity requires broad-based reforms to reduce barriers to entry, improve institutional quality, and expand financing options for innovation. Directors encouraged the authorities to sustainably address housing affordability by boosting housing supply. They highlighted the need to accelerate the green transition and keep the momentum in addressing AML/CFT deficiencies in line with FATF recommendations.

Table 1. Croatia: Selected Economic Indicators, 2019-2029

[1] Under Article IV of the IMF's Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. A staff team visits the country, collects economic and financial information, and discusses with officials the country’s economic developments and policies. On return to headquarters, the staff prepares a report, which forms the basis for discussion by the Executive Board.

[2] At the conclusion of the discussion, the Managing Director, as Chairman of the Board, summarizes the views of Executive Directors, and this summary is transmitted to the country's authorities. An explanation of any qualifiers used in summings up can be found here: http://www.IMF.org/external/np/sec/misc/qualifiers.htm.