IMF Staff Concludes Virtual Visit to Croatia

IMF News, November 30, 2020

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Virtual discussions held during November 16-25, 2020 between an IMF team led by Mr. Srikant Seshadri and Croatian authorities.
Mission type: virtual visit; this mission will not result in a Board discussion.
Statement reflects views of IMF staff and does not necessarily represent views of the IMF’s Executive Board.

2020 contraction: expected between 8-10 percent, reflecting lower domestic and external demand and a 50 percent decline in tourism volumes (year-on-year).
Public debt: expected to rise back up to 88 percent of GDP in 2020.
General government deficit: forecast of 8 percent of GDP in 2020 due to lower tax revenues and fiscal support measures.
Private sector credit: growth has held its ground, partly supported by a temporary debt service moratorium.
2021 outlook: economic growth is expected to rebound to about 6 percent in 2021, driven by higher public investment and a partial recovery in tourism; forecast is subject to significant pandemic-related uncertainty.

Keep economic support in place until the recovery is well entrenched.
Ensure measures remain effectively targeted to reach viable sectors and minimize scarring.
Ensure resources for potentially higher healthcare expenses, particularly if the epidemiological situation worsens.
Design Covid-19-related support measures to remain in place as long as the pandemic has not abated to remove uncertainty about their duration.
Monitor measures constantly to ensure support is targeted to viable firms.

Restore fiscal space ahead of euro adoption and guide budgets back towards balance.
Enact structural reforms to address healthcare and pensions.
Streamline the role of the state, prominently through improved SOE governance.
Enhance the business climate to raise productivity and convergence with EU living standards.
Invest in technological and human capital; recommendations align with the 2019 Article IV consultations.
Once recovery is entrenched, steer the fiscal framework closer to objectives of lowering debt and balancing the budget.
Communicate a medium-term fiscal strategy that covers medium-term financing needs and includes an assessment of fiscal risks.
Fiscal stimulus aimed at raising growth would be more effective delivered as spending increases than further tax cuts; at this stage further reductions in VAT are not advisable without adequate offsets that guard against permanent revenue losses.

Active training and reskilling should take place in areas with excess capacity such as tourism and hospitality and into areas like greening the economy and construction.

Next Gen EU allocation: averaging 5 percent of GDP over the next several years starting in 2021.
These funds can be utilized to raise public investment in physical, digital, green, and soft infrastructure.
If properly absorbed and utilized, these funds could meaningfully raise productivity and growth while shielding the ability to meet current expenditure needs such as healthcare.
The Croatia 2030 National Development Strategy is encouraging; crucial to develop a concrete investment plan and follow through with strong implementation.

CNB actions at outset of the pandemic: aided the currency, provided additional liquidity, supported the government securities market, and temporarily eased the regulatory burden on banks.
ECB and CNB agreed on a €2 billion swap line on April 15.
CNB conducted five purchases of government securities, for about 5.5 percent of GDP by end-June.
Domestic financial markets quickly stabilized.
Croatia joined ERM II and established close cooperation with the ECB on banking supervision; joined the Single Resolution Mechanism on July 10.

Mission held discussions with Deputy Prime Minister and Minister of Finance Marić; Governor of the Croatian National Bank Vujčić; other government officials; and representatives from the private sector.
IMF looks forward to the upcoming 2021 Article IV Consultations, scheduled for next Spring.

IMF Press Release No. 20/360, November 30, 2020.

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