IMF Executive Board Concludes the 2016 Article IV Consultation with the Republic of Croatia
IMF News, June 28, 2016
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- Published: June 28, 2016
Overview and context
- On June 22, 2016, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with the Republic of Croatia.
- Croatia has been gradually recovering from a six year recession, driven mostly by strong exports, tourism activity, and private consumption.
- GDP remains well below its pre-crisis level and unemployment is very high.
- Inflation was negative over the past two years, mainly due to lower energy and food prices.
- Vulnerabilities remain high due to elevated public and external debt levels.
Economic performance and outlook
- Growth drivers and outlook:
- Strong exports, tourism activity, private consumption, and better absorption of EU structural and investment funds are expected to give a further moderate boost to economic growth in 2016.
- Key projections and recent figures:
- Real GDP: 2015: 1.6; 2016 (Est.): 1.9; 2017 (Proj.): 2.1 (percent change).
- Unemployment (percent) 1/: 2015: 16.9; 2016: 16.4; 2017: 15.9.
- CPI inflation (average): 2014: -0.5.
- Growth in average monthly nominal wages: 2013: 0.2; 2014: ... (ellipsis in source).
- External sector:
- Current account balance (millions of euros): 2015: 2,293; 2016: 1,360; 2017: 1,004.
- Current account balance percent of GDP: 2015: 5.2; 2016: 3.0.
- The current account surplus increased significantly in 2015, but almost half of this increase was due to a one-off decline in profits of foreign-owned banks related to the conversion of Swiss franc loans.
Fiscal developments
- 2015 general government deficit was substantially smaller than anticipated due to:
- A cyclical upturn in revenue.
- Under-execution of public enterprise investment in the fourth quarter during the care-taker government.
- Some consolidation efforts.
- Fiscal targets and projections:
- General government balance 3/: 2015: -2.8; 2016 (Est.): -2.6 (percent of GDP).
- Structural balance (IMF calculation): 2013: -4.0; 2014: -2.4 (percent of GDP).
- The authorities target fiscal deficit of 2.6 percent of GDP in 2016 (staff projection for 2016 is -2.6 percent of GDP).
- General government revenue: 2015: 43.7; 2016: 44.1 (percent of GDP).
- General government expenditure: 2015: 46.9; 2016: 46.3 (percent of GDP).
- General government debt: 2015: 86.7; 2016: 86.1 (percent of GDP).
- Executive Directors’ fiscal guidance:
- Continue fiscal consolidation in a more growth-friendly manner.
- Avoid reliance on across-the-board expenditure cuts and focus on durable and targeted measures.
- Any tax reduction should be implemented after making progress on fiscal consolidation.
- Encourage increased absorption of EU structural and investment funds to mitigate adverse effects of consolidation on growth.
Monetary policy and financial sector
- Monetary policy stance:
- Monetary policy has remained relatively accommodative within the limitations of the quasi-peg exchange regime, which remains an adequate monetary anchor given the high degree of euroization.
- The Central Bank has continued to reduce its key policy rates and ensure ample liquidity in the banking system.
- Directors agreed monetary policy is appropriately accommodative within the quasi-peg and called for continued efforts to achieve gradual de-euroization and to safeguard financial stability until the euro can be adopted.
- Directors encouraged the Croatian National Bank (CNB) to smooth any sharp fluctuations in the foreign exchange market and look for opportunities to boost reserves.
- Directors underlined the importance of preserving the central bank’s independence.
- Banking sector performance and risks:
- The banking sector has remained stable and, on average, liquid and well-capitalized.
- The system remained profitable during the recession, with the exception of 2015 due to losses from the Swiss franc loan conversion.
- The non-performing loan ratio seems to have stabilized, albeit at a still high level.
- In 2015, one small, but regionally important, bank began the resolution process in accordance with the EU Bank Recovery and Resolution Directive.
- Directors commended the CNB for maintaining banking system stability and stressed the need for continued supervisory vigilance.
- Directors recommended additional efforts to clear impaired bank assets to improve credit creation.
- Directors noted that across-the-board bailouts similar to the conversion of the Swiss franc loans in 2015 should be avoided in the future, as they increase the risk of moral hazard and could adversely affect investor confidence.
Structural reforms and policy recommendations
- Directors emphasized decisive and timely implementation of the new National Reform Program to reduce vulnerabilities and boost growth and job creation.
- Priority reform areas recommended by Directors:
- Simplify the tax system; ensure tax reductions occur only after fiscal consolidation progress.
- Introduce a modern real estate tax.
- Implement pension reforms.
- Streamline social benefits.
- Improve the efficiency of the healthcare system.
- Make part of civil servants’ compensation performance-based.
- Accelerate privatization and enhance the efficiency of the public sector.
- Remove bureaucratic impediments to doing business, reduce red tape, and streamline overlapping layers of government and public agencies.
- Enhance labor market flexibility to increase labor participation.
- Build political consensus to ensure broad support for the reforms.
- Directors encouraged the authorities to increase the absorption of EU structural and investment funds.
Selected key statistics (from Croatia: Selected Economic Indicators, 2010–17)
- Real GDP (percent change): 2010: -1.7; 2011: -0.3; 2012: -2.2; 2013: -1.1; 2014: -0.4; 2015: 1.6; 2016 (Est.): 1.9; 2017 (Proj.): 2.1.
- Unemployment (percent) 1/: 2010: 11.5; 2011: 13.3; 2012: 15.2; 2013: 17.0; 2014: 17.1; 2015: 16.9; 2016: 16.4; 2017: 15.9.
- Domestic investment (percent of GDP): 2010: 21.3; 2011: 20.6; 2012: 19.3; 2013: 19.1; 2014: 18.2; 2015: 18.3; 2016: 18.7.
- Domestic saving (percent of GDP): 2010: 20.2; 2011: 19.9; 2012: 19.0; 2013: 23.5; 2014: 21.7; 2015: 21.5.
- General government revenue (percent of GDP): 2010: 41.3; 2011: 41.0; 2012: 41.7; 2013: 42.5; 2014: 42.6; 2015: 43.7; 2016: 44.1.
- General government expenditure (percent of GDP): 2010: 47.5; 2011: 48.8; 2012: 47.0; 2013: 47.8; 2014: 48.1; 2015: 46.9; 2016: 46.3.
- General government balance 3/ (percent of GDP): 2010: -6.2; 2011: -7.8; 2012: -5.3; 2013: -5.5; 2014: -3.2; 2015: -2.8; 2016 (Est.): -2.6.
- General government debt (percent of GDP): 2010: 57.0; 2011: 63.7; 2012: 70.7; 2013: 82.2; 2014: 86.5; 2015: 86.7; 2016: 86.1.
- Claims on other domestic sectors (end of period; change in percent) 4/: 2010: 2.4; 2011: 4.4; 2012: -1.3; 2013: -3.0.
- Broad money (M4) (end of period; change in percent): 2010: 5.7; 2011: 3.6; 2012: 4.0; 2013: 3.2; 2014: 5.1.
- Kuna credit rate (unindexed) 6/ (end of period; percent): 2010: 9.9; 2011: 8.6; 2012: 8.2; 2013: 7.8; 2014: 7.5; 2015: 7.1.
- Current account balance (millions of euros): 2010: -503; 2011: -360; 2012: -61; 2013: 341; 2014: 368; 2015: 2,293; 2016: 1,360; 2017: 1,004.
- Gross official reserves (millions of euros): 2010: 10,660; 2011: 11,195; 2012: 11,236; 2013: 12,908; 2014: 12,688; 2015: 13,707; 2016: 14,711; 2017: 15,489.
- Net international reserves (millions of euros): 2010: 9,269; 2011: 10,006; 2012: 10,195; 2013: 10,491; 2014: 10,590; 2015: 11,731; 2016: 12,735; 2017: 13,513.
- Total external debt (percent of GDP): 2010: 104.2; 2011: 103.7; 2012: 103.0; 2013: 105.6; 2014: 108.4; 2015: 101.3; 2016: 96.9; 2017: (blank in source).
- Net external debt (percent of GDP): 2010: 65.9; 2011: 66.6; 2012: 65.6; 2013: 64.8; 2014: 65.5; 2015: 59.1; 2016: 55.2; 2017: 50.2.
- Nominal GDP (millions of euros): 2010: 45,025; 2011: 44,744; 2012: 43,962; 2013: 43,522; 2014: 43,051; 2015: 43,921; 2016: 44,922; 2017: 46,388.
- Per capita GDP (2015): $11,556.
- Poverty rate: 9.8 percent (World Bank, 2014).
- Quota (2015): SDR 365.1 million (510.4 million U.S. dollars).
IMF Communications Department, Press Release No. 16/309, June 28, 2016. Executive Board discussion concluded on June 22, 2016.