Press Release No. 19/135

IMF Staff Concludes Visit to Croatia

May 2, 2019

An International Monetary Fund (IMF) team was in Zagreb from April 23-30, 2019, on a regular staff visit, to discuss recent macroeconomic and policy developments.

At the end of the visit, the IMF mission headed by Mr. Srikant Seshadri, issued the following statement:

“Macroeconomic conditions have remained positive. Growth is gradually moderating from its recent highs, inflation remains subdued, international reserves have increased, and public debt has been declining. Fiscal performance has been strong despite sizable recent shipyard guarantee payments. Private demand and tourism continue supporting economic activity which is also underpinned by the CNB’s continued accommodative monetary policy. Overall, the banking sector is liquid, profitable, and well-capitalized.

“However, a possible slowdown in main trading partners may affect these benign conditions. If a slowdown were to emanate from Europe, the authorities are encouraged to let the social safety net work, before considering fiscal stimulus.

“For the last three years, macroeconomic imbalances and vulnerabilities have been steadily declining. The recently approved Convergence Program for 2019-22 projects further reduction of public debt, which is welcome. Achievement of the underlying surpluses will require continued restraint with current expenditures. EU funds need to be increasingly utilized to ramp up public investment.

“Yet, reducing macroeconomic vulnerabilities is only half the task. There is another equally important half on which significantly greater progress is called for—to raise living standards durably and make the economy more dynamic through structural reforms. Without the willingness to embrace change, the country’s long-term aspirations are unlikely to materialize. These reforms must be pursued while favorable economic conditions last, to derive the maximum benefits of Euro adoption. IMF staff emphasizes the following aspects as central in this regard:

• Streamline the State. Merit-based civil servant compensation complemented by an appropriate reduction in total public employment expenditures could create room for higher public sector wages. This will help reward high-performing public sector employees and make the State more dynamic. Reducing the fragmentation between different layers of government will ensure that public services are delivered most effectively. Inefficient state-owned enterprises compromise the productivity of the economy. Decisive action is needed to divest non-essential state assets and strengthen the financial management of essential ones. Time is of the essence, as changes in these areas are highly sensitive to broader economic conditions, and are best carried out when times are good.

• Increase labor force participation . Modernizing labor contracts would improve employment prospects for the young and reduce the incentive to emigrate. Improved child care access would facilitate higher participation from women. Reforms in education and training policies would alleviate skills’ mismatches, reduce labor shortages, and generate more jobs.

• Improve business conditions. It is encouraging to note recent initiatives to reduce parafiscal fees and simplify the process of starting a business. However, uncertainties and back-logs associated with legal processes are impediments to enhancing the business climate.

• Preserve the sustainability of the pension system. Longer life-spans come with inescapably higher pension costs. The recently passed pension reform was a vital step in acknowledging realities that cannot be put off any longer. Without an increase in retirement age, the State would incur sizable debts, for which the youth of today will have to pay. Alternatively, the elderly would be consigned to living on lower pensions. If the pension system is not aligned with today’s life expectancy, the range of the country’s choices will be limited between these two outcomes.

• Make the healthcare system financially self-sufficient. Despite increasing healthcare contributions, the buildup of arrears continues. Concerted actions to increase cost efficiency are compatible with maintaining the existing quality of the healthcare system and need to be pursued with urgency.

“ The mission held fruitful discussions with the Minister of Finance Marić; Governor of the Croatian National Bank Vujčić, and other government officials, representatives from the private sector, and civil society organizations. The mission thanks the authorities and all interlocutors for the constructive dialogue and kind hospitality. The IMF looks forward to the upcoming 2019 Article IV Consultations, scheduled for this autumn.”