IMF Staff Completes Staff Visit to Croatia

IMF News, March 7, 2022

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IMF team led by Mr. Srikant Seshadri conducted a virtual staff visit to Croatia during February 28-March 7, 2022.
End-of-Mission press releases convey preliminary findings after a visit; the views expressed are those of IMF staff and do not necessarily represent the views of the IMF’s Executive Board.
Key interlocutors included the Deputy Prime Minister and Minister of Finance Marić, Governor of the Croatian National Bank Vujčić, other government officials, and private sector representatives.

2021 growth: 10.4 percent.
The economy had fully recovered from the 2008 shock only by 2018.
Aggregate economy is back to 2019 real income levels.
The conflict in Ukraine is casting a shadow over an otherwise strong economic recovery from the pandemic.
Near-term inflationary risks are tilting higher as energy and commodities markets price in the consequences of the conflict in Ukraine.
Energy prices—and therefore inflation—will also remain higher for longer.

Macroeconomic policy should be nimble in the short-term given elevated uncertainty.
Fiscal measures announced to alleviate burdens on the population should be allowed to lapse once they have served their purpose to conserve the state’s revenues for possible future shocks.
Public sector wage increases should be carefully measured and combined with efficiency-enhancing public sector reforms that benefit the taxpayer.
Reforms associated with “Next-Gen” EU funds must be sustained; vested interests holding back reforms in pensions, healthcare, and public administration must be challenged.
Authorities’ policies to promote reskilling and retooling of the workforce should be supplemented by measures to support job creation in green and digital transitions.

“Next-Gen” and structural EU funds totaling some 30 percent of GDP over the next five years must play a greater role in generating economic growth.
If absorption of these funds and the quality of public investment significantly improve, the economy’s growth potential and ability to catch up with EU peers would improve.
A strong public investment management system is needed to maximize benefits of EU funds.
IMF provided capacity development through a Public Investment Management Assessment (PIMA) in 2021.
IMF welcomes creation of a strong central coordination function in the Ministry of Finance to appraise and supervise investment projects from a national perspective.
Decarbonizing Croatia’s economy will require major policy reforms and significant public and private investment; necessity of adapting to climate change and mitigating its impacts should be embedded in public investment projects.
Authorities are urged to develop national guidelines to facilitate climate considerations in public investment.

The banking system is well capitalized and liquid; profitability indicators have strengthened with the economic recovery.
Share of non-performing loans (NPLs): 5.5 percent at end-2019 and 4.3 percent end-2021, driven by NPL sales and the economic recovery.
The stock of general-purpose cash loans has declined since Q1 2020, but NPLs in this sector have increased.
House prices have continued to grow, particularly in Zagreb; possible contributors include foreign investor purchases and rising construction costs.
Against rising global risks, authorities are urged to remain vigilant and continue supervisory vigilance.

Croatia’s 2021 economic rebound from the pandemic has been impressive.
Future growth prospects hinge on efficient utilization and absorption of EU funds and improvement in public investment quality.
The IMF looks forward to the upcoming 2022 Article IV Consultations, scheduled for later in 2022.

Press Release No. 22/65 — March 7, 2022. IMF Communications Department.