IMF Executive Board Concludes 2019 Article IV Consultation with the Republic of Croatia
IMF News, February 19, 2020
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- Published: February 19, 2020
Executive Board assessment and broad outlook
- The Executive Board concluded the 2019 Article IV consultation and "considered and endorsed the staff appraisal without a meeting."
- Croatia experienced its fifth consecutive year of solid economic growth in 2019, driven largely by private consumption and tourism.
- Employment gains have been robust, wages have continued to rise, and import prices have helped keep inflation muted.
- Increased absorption of EU funds is likely to raise public investment in the coming years.
- With continued strong consumption, the current account surplus is expected to decline and turn into a moderate deficit while economic growth moderates.
- Both public and external indebtedness are expected to continue their declining trajectories.
- The Executive Board: "The Croatian economy has performed well, but convergence with the EU needs to accelerate."
Fiscal policy and public finances
- Fiscal consolidation pace slowed in 2019; the budget is estimated to be close to balance.
- Recently agreed public sector wage increases are expected to increase current spending in 2020.
- Despite buoyant revenues, the budget balance is expected to turn into a small deficit in 2020, in part due to additional tax cuts.
- Contingent liabilities could pressure budget balances in the coming years.
- Staff supports the government’s decision to withhold the planned reduction in the overall VAT rate and "would recommend holding back on any other tax reductions at this stage."
- Recommendations to preserve fiscal gains:
- Shift spending priorities toward more and better public investment.
- Better absorption of EU funds while undertaking deeper reforms to public administration, pensions, healthcare, and fiscal/territorial relationships across government levels.
- Modernize state-owned enterprise management and performance.
- Accelerate digitalization of public administration and better target social benefits.
Monetary policy, banking sector, and macroprudential concerns
- Monetary policy remains appropriately accommodative within the limits of the exchange rate anchor.
- Excess liquidity in the banking system continues to rise; interest rates remain low.
- Bank lending to households has continued to grow.
- The Croatian National Bank (CNB) issued recommendations for banks to be more cautious with long-term uncollateralized consumer lending.
- The banking system is well capitalized and liquid; the NPL ratio continues to decline.
- The CNB continues to utilize current conditions to build reserves.
- Macroprudential guidance:
- Constant consideration of macroprudential action to prevent excessive lending, especially if real estate prices accelerate or household lending migrates to other forms.
- Reestablish full operational status of the credit register and consider including all debt in an extended debt-service-to-income ratio.
- Enhance efficiency of bankruptcy procedures, including facilitating out-of-court settlements, to support private sector deleveraging.
Structural reforms and growth drivers
- Croatia has barely reduced its distance with the EU average in income per capita over the last decade; youth emigration remains a challenge.
- Recommended actions to raise potential growth:
- Renovate capital stock: focus on "hard" infrastructure (e.g., railways for freight, solid and waste water treatment) and upgrade "soft" technological infrastructure.
- Enhance business climate: eliminate barriers to regulated professions and remaining parafiscal fees.
- Continue streamlining administrative and fiscal burdens on business, enhance digital public services, and adapt legislation for EU Digital Single Market integration.
- Align education policy across primary, secondary, tertiary, and continuing education with infrastructure and ICT/business services upgrades.
Croatia: Selected Economic Indicators (as reported)
- Real GDP growth (Percent change, annual average, unless otherwise indicated)
- 2016: 3.5
- 2017: 3.1
- 2018: 2.7
- 2019: 2.9
- 2020 (Proj): 2.5
- 2021 (Proj): 2.2
- 2022 (Proj): 2.1
- 2023 (Proj): 2.0
- Contributions to growth: Domestic demand
- 2016: 3.2
- 2017: 3.8
- 2018: 4.4
- 2019: 3.6
- 2020 (Proj): 3.4
- 2021 (Proj): 2.6
- Contributions to growth: Net exports
- 2016: 0.3
- 2017: -0.7
- 2018: -1.9
- 2019: -0.5
- 2020 (Proj): -0.9
- 2021 (Proj): -0.3
- Unemployment
- 2016: 15.0
- 2017: 12.4
- 2018: 9.9
- 2019: …
- CPI inflation (avg.)
- 2016: -1.1
- 2017: 1.1
- 2018: 1.5
- 2019: 0.8
- 2020 (Proj): 1.2
- 2021 (Proj): 1.3
- 2022 (Proj): 1.4
- Domestic investment (Percent of GDP)
- 2016: 21.0
- 2017: 21.8
- 2018: 23.2
- 2019: 25.0
- 2020 (Proj): 24.8
- 2021 (Proj): 24.7
- 2022 (Proj): 25.7
- 2023 (Proj): 25.2
- Domestic saving (Percent of GDP)
- 2016: 25.1
- 2017: 26.9
- 2018: 25.8
- 2019: 25.4
- 2020 (Proj): 24.3
- 2021 (Proj): 24.2
- Government (Percent of GDP)
- 2016: 3.3
- 2017: 5.0
- 2018: 4.7
- 2019: 4.0
- 2020 (Proj): 4.1
- 2021 (Proj): 4.2
- 2022 (Proj): 4.3
- Nongovernment (Percent of GDP)
- 2016: 19.8
- 2017: 20.8
- 2018: 20.1
- 2019: 22.2
- 2020 (Proj): 20.9
- 2021 (Proj): 21.3
- 2022 (Proj): 20.6
- 2023 (Proj): 20.0
- General government revenue (ESA 2010 definition)
- 2016: 46.3
- 2017: 46.0
- 2018: 46.5
- 2019: 46.8
- 2020 (Proj): 46.2
- 2021 (Proj): 46.4
- 2022 (Proj): 46.1
- General government expenditure
- 2016: 47.3
- 2017: 45.2
- General government balance
- 2016: -1.0
- 2017: 0.0
- 2018: -0.2
- 2019: -0.1
- Structural balance 1/
- 2016: 1.6
- 2017: -0.4
- General government debt 2/ (Gross debt as defined by the EU under the Maastricht Treaty)
- 2016: 80.5
- 2017: 77.6
- 2018: 74.7
- 2019: 71.5
- 2020 (Proj): 69.1
- 2021 (Proj): 67.0
- 2022 (Proj): 67.1
- 2023 (Proj): 65.0
- 2024 (Proj): 63.3
- 2025 (Proj): 61.8
- Current account balance
- 2016: 1.9
- 2017: 1.0
- Capital and financial account
- 2016: -2.2
- 2017: 0.9
- FDI, net
- 2016: 2.3
- Gross official reserves (billions of euros)
- 2016: 13.5
- 2017: 15.7
- 2018: 17.4
- 2019: 18.3
- 2020 (Proj): 20.2
- 2021 (Proj): 21.7
- 2022 (Proj): 23.1
- 2023 (Proj): 26.7
- 2024 (Proj): 28.6
- Percent of short-term debt (by residual maturity)
- 2016: 110.1
- 2017: 117.3
- 2018: 121.6
- 2019: 161.5
- 2020 (Proj): 166.2
- 2021 (Proj): 175.4
- 2022 (Proj): 202.3
- 2023 (Proj): 217.4
- 2024 (Proj): 226.4
- 2025 (Proj): 248.7
- In months of imports in goods and services (based on next year level)
- 2016: 7.5
- 2017: 7.8
- 2018: 7.9
- 2019: 7.7
- 2020 (Proj): 7.6
- Total external debt (percent of GDP)
- 2016: 95.9
- 2017: 88.9
- 2018: 82.7
- 2019: 75.9
- 2020 (Proj): 72.2
- 2021 (Proj): 68.2
- 2022 (Proj): 67.3
- 2023 (Proj): 64.8
- 2024 (Proj): 62.2
- 2025 (Proj): 60.0
- Broad money (M4) (End of period, change in percent)
- 2016: 5.5
- Claims on other domestic sectors 3/ (End of period, change in percent)
- 2016: -3.4
- 2017: -0.8
- 2018: 1.8
- Average 12-month T-bill interest rate (in kuna)
- 2016: 0.4
- 2017: 0.1
- Kuna credit rate (unindexed, outstanding amount)
- 2016: 6.5
- 2017: 6.0
- 2018: 5.7
- Kuna per euro
- 2016: 7.4
- Real effective exchange rate (percent, "-" = appreciation)
- 2016: 0.7
- Nominal GDP (billions of euros)
- 2016: 46.6
- 2017: 49.1
- 2018: 51.7
- 2019: 53.9
- 2020 (Proj): 56.2
- 2021 (Proj): 58.7
- 2022 (Proj): 58.9
- 2023 (Proj): 61.5
- 2024 (Proj): 64.0
- 2025 (Proj): 66.6
Press Release No. 20/54; February 19, 2020; IMF Communications Department.
