IMF Executive Board Concludes 2023 Article IV Consultation with Croatia
IMF News, June 29, 2023
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- Published: June 29, 2023
Economic performance and recent developments
- Real GDP expanded by 6.2 percent in 2022, driven by domestic demand and tourism.
- Public debt declined significantly to about 69 percent of GDP in 2022, below pre-pandemic levels.
- The fiscal position improved considerably to a small surplus in 2022.
- Headline inflation surged to a multi-decade high at year end 2022 due to energy and food prices; inflation is described as having peaked but remaining elevated and broad-based.
- The largely foreign-owned banking system has remained profitable, well-capitalized, and extremely liquid.
Outlook and risks
- Growth projections:
- Economic growth is expected to moderate to 2.4 percent in 2023.
- Growth is projected to gradually recover from 2024 towards its potential, with projections of 2.7 percent in 2024, 2.9 percent in 2025, and 2.8 percent in 2026 (see Table 1 projections).
- Inflation projections:
- Inflation is projected to recede to an average of 7½ percent in 2023 and fall towards the ECB’s 2 percent target in late 2025.
- The adoption of the euro had a very limited impact on inflation.
- Key downside risks:
- Intensification of Russia’s war in Ukraine.
- A renewed surge of commodity prices and inflation.
- A sharper global or regional recession.
- Tighter-than-expected financial conditions.
- Key upside potential:
- Euro adoption and entry into the Schengen area could boost tourism, trade, and investment.
- Overall: The outlook remains subject to significant uncertainty; risks to growth are broadly balanced while risks to inflation are tilted to the upside.
Executive Board assessment and policy guidance
- Monetary–fiscal interaction:
- Near-term fiscal policy should complement monetary tightening and avoid adding to aggregate demand.
- An expansionary fiscal stance risks fueling domestic demand and inflation and hurting competitiveness.
- Broad-based support measures—notably energy price caps and tax cuts—need to be reversed.
- Medium-term fiscal framework:
- Maintain growth-friendly fiscal consolidation by improving tax policy, reducing spending rigidity, and enhancing spending efficiency.
- Any tax reforms should preserve revenue resources while improving tax structure to reduce distortions and support fairness and growth.
- Modernize the property tax and reduce favorable taxation on short-term rental income to dampen housing demand, boost supply, and encourage labor participation.
- Simplify and make transparent the public sector pay system to reward merit and productivity.
- Renew efforts to lengthen the working life and decisively address healthcare arrears in response to aging-related pressures on healthcare and pension costs.
- Enhance monitoring and corporate governance of SOEs to reduce fiscal risks and maximize contribution to growth.
- Strengthen public investment management, including establishing a strong central coordination function in the MOF.
- Financial stability:
- The financial system is currently stable, but continued vigilance is needed given ongoing challenges.
- Consider explicit borrower-based measures to contain potential future financial stability risks from housing market pressures, taking into account measures already in place and other risk mitigating factors.
- A comprehensive review of housing support measures should be considered to address housing affordability challenges.
- Announced increases of the counter-cyclical capital buffer were noted.
- Structural reforms and euro adoption gains:
- Continue implementation of the NRRP.
- Priorities: raise productivity, advance the green and digital transition, and make the best of an aging and declining population.
- Use the currently tight labor market to carry out further labor market reforms.
- More ambitious reforms and EU funds are warranted to address low firm-level productivity and inefficient resource allocation.
- Develop a comprehensive climate strategy, fully aligned with the energy strategy, to diversify the energy mix, promote energy savings, improve energy efficiency, and accelerate the green transition.
- Consider an economy-wide carbon pricing accompanied by sectoral policies and targeted support to the vulnerable to promote cost-effective emissions reductions and meet EU-wide targets.
Key statistics from Table 1 (selected)
- Real GDP growth: 3.4 (2019); -8.5 (2020); 13.1 (2021); 6.2 (2022); 2.4 (2023); 2.7 (2024); 2.9 (2025); 2.8 (2026).
- Contributions to 2022 growth: Domestic demand 3.5; Net exports 0.9.
- Unemployment rate: 7.8 (2019); 9.0 (2020); 8.1 (2021); 6.8 (2022); 6.3 (2023); 5.9 (2024); 5.6 (2025).
- CPI inflation (avg.): 0.8 (2019); 0.0 (2020); 10.7 (2021); 7.5 (2022); 3.8 (2023); 2.5 (2024).
- Domestic investment (percent of GDP): 22.9 (2019); 24.2 (2020); 21.9 (2021); 25.8 (2022); 25.9 (2023); 26.1 (2024); 25.0 (2025); 24.5 (2026); 24.0 (2027).
- Domestic saving (percent of GDP): 23.6 (2019); 25.6 (2020); 25.7 (2021); 25.2 (2022); 24.7 (2023); 24.3 (2024).
- General government revenue (percent of GDP): 46.5 (2019); 46.8 (2020); 46.2 (2021); 45.5 (2022); 45.7 (2023); 45.2 (2024); 45.3 (2025); 44.8 (2026); 44.7 (2027).
- General government expenditure (percent of GDP): 44.3 (2019); 54.1 (2020); 48.7 (2021); 45.1 (2022); 46.9 (2023); 46.3 (2024); 46.1 (2025); 45.6 (2026).
- General government balance (percent of GDP): -7.3 (2019); -2.5 (2020); 0.4 (2021); -0.8 (2022); -1.8 (2023); -0.6 (2024).
- General government debt (percent of GDP): 71.0 (2019); 86.9 (2020); 78.3 (2021); 68.8 (2022); 63.7 (2023); 62.5 (2024); 60.9 (2025); 59.2 (2026); 57.6 (2027); 55.9 (2028).
- Current account balance (percent of GDP): -1.6 (2019); -0.3 (2020); -0.7 (2021).
- Gross official reserves (billions of euros): 18.6 (2019); 27.9 (2020).
- IMF metric (percent) 3/: 136.2 (2019); 175.0 (2020); 197.6 (2021); 187.1 (2022).
- Nominal GDP (billions of euros): 54.8 (2019); 50.5 (2020); 58.2 (2021); 66.9 (2022); 73.8 (2023); 78.1 (2024); 82.3 (2025); 86.5 (2026); 90.9 (2027); 95.5 (2028).
IMF Executive Board Concludes 2023 Article IV Consultation with Croatia — Press Release No. 23/241 (June 29, 2023).