IMF Executive Board Concludes 2024 Article IV Consultation with Republic of Croatia

IMF News, July 26, 2024

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IMF Executive Board Concludes 2024 Article IV Consultation with Republic of Croatia

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Bibliographic details

• Published: July 26, 2024

Economic performance and outlook

• The economy "has performed strongly despite consecutive external shocks."
• Real GDP growth:
  • 2021-22: "impressive post-pandemic growth"
  • 2023: "3.1 percent"
  • Staff projects 2024: "3.4 percent"
  • Staff projects 2025: "2.9 percent"
• Inflation and wages:
  • Inflation "has decelerated considerably since early 2023 but still persists above the euro area average."
  • Inflation drivers: "elevated food and services inflation amid a tight labor market."
  • Inflation forecast: "expected to gradually return to about 2 percent in late 2025."
  • Wages: "robust wage growth" contributing to stickier inflation.
• Public debt and fiscal balance:
  • 2023 fiscal balance: "deficit of 0.7 percent of GDP"
  • Public debt declined to "63 percent of GDP" in 2023 due to "robust nominal GDP growth."

Risks to the outlook

• Broadly balanced risks.
• Downside risks to growth:
  • "heightened regional conflicts"
  • "commodity price volatility"
  • "a global or regional recession"
• Upside and two-sided inflation risks:
  • Upside: "stronger-than-expected wage growth"
  • Two-sided: "supply shocks could affect inflation on both sides"
• Structural constraint risks:
  • "subdued productivity and labor market shortages" constrain actual and potential growth.
• Mitigating factor:
  • "Croatia’s openness could play a mitigating factor."

Executive Board assessment and policy recommendations

• General assessment:
  • Directors "commended Croatia’s significant strides in catching up with more advanced European peers."
  • Growth prospects "remain favorable, supported by buoyant domestic demand."
  • "Disinflation is expected to continue albeit gradually."
• Fiscal policy recommendations:
  • "Reduce the fiscal stimulus in 2024."
  • Authorities’ plan welcomed: "meaningfully cut the deficit in 2025 and return to a structural primary balance by 2027."
  • Emphasis on building buffers and safeguarding financial stability.
  • Revenue-side measures: "scope for broadening the tax base, including by introducing a value-based property tax and removing the excessively favorable taxation on short-term rental income."
  • Spending-side measures: "rationalize the public wage bill and ensure sustainable pension and healthcare systems."
  • Strengthen "the medium-term fiscal framework" and improve "public investment management and strengthen corporate governance and fiscal risk management of state-owned enterprises."
• Financial sector and macroprudential policy:
  • Financial system resilience: "welcoming the resilience of the financial system."
  • Close monitoring: "closely monitor banks’ credit risks and the potential buildup of risks in the real estate sector."
  • Macroprudential stance: "the tight stance of capital-based macroprudential measures is appropriate."
  • Authorities encouraged to "continue to assess the need for introducing explicit borrower-based measures and stand ready to do so as warranted."
• Structural reforms to boost potential growth:
  • Leverage "progress in implementing the National Recovery and Resilience Plan."
  • Address labor shortages through coordinated policies to:
  • "foster labor participation"
  • "facilitate labor mobility"
  • "reduce skills mismatches and net emigration"
  • Revive productivity through:
  • "broad-based reforms to reduce barriers to entry"
  • "improve institutional quality"
  • "expand financing options for innovation"
  • Housing and green transition:
  • "Sustainably address housing affordability by boosting housing supply."
  • "Accelerate the green transition."
  • AML/CFT: "keep the momentum in addressing AML/CFT deficiencies in line with FATF recommendations."

Key statistics and projections (selected figures)

• Real GDP growth (percent, annual average):
  • 2019: 3.4
  • 2020: -8.5
  • 2021: 13.0
  • 2022: 7.0
  • 2023: 3.1
  • 2024 (Projections): 3.4
  • 2025 (Projections): 2.9
  • 2026 (Projections): 2.7
  • 2027 (Projections): 2.6
  • 2028 (Projections): 2.6
  • 2029 (Projections): 2.6
• Unemployment rate (percent):
  • 2019: 7.8
  • 2020: 9.0
  • 2021: 8.1
  • 2022: 6.8
  • 2023: 6.2
  • 2024 (Projections): 5.6
  • 2025 (Projections): 5.5
• HICP inflation (avg., percent):
  • 2019: 0.8
  • 2020: 0.0
  • 2021: 2.7
  • 2022: 10.7
  • 2023: 8.4
  • 2024 (Projections): 4.2
  • 2025 (Projections): 2.8
  • 2026 (Projections): 2.2
  • 2027 (Projections): 2.2
  • 2028 (Projections): 2.2
  • 2029 (Projections): 2.2
• Government sector (Percent of GDP, ESA 2010 definition):
  • General government revenue (2023): 46.7; 2024 (Projections): 46.3; 2025 (Projections): 47.3
  • General government expenditure (2023): 47.4; 2024 (Projections): 48.7; 2025 (Projections): 49.1
  • General government balance (2023): -0.7; 2024 (Projections): -2.4; 2025 (Projections): -1.8
  • Structural primary balance (2023): -0.4; 2024 (Projections): -1.9; 2025 (Projections): -1.2
  • General government debt 2/ (percent of GDP): 2019: 70.4; 2020: 86.1; 2021: 77.5; 2022: 67.8; 2023: 63.0; 2024 (Projections): 59.7; 2025 (Projections): 58.4; 2026 (Projections): 57.5; 2027 (Projections): 56.7; 2028 (Projections): 55.9; 2029 (Projections): 55.0
• Balance of payments (percent of GDP):
  • Current account balance: 2019: 2.5; 2020: -1.0; 2021: 1.0; 2022: -2.8; 2023: 1.1; 2024 (Projections): 1.6; 2025 (Projections): 0.8; 2026 (Projections): 0.2
  • Capital account (2023): 2.9; 2024 (Projections): 2.3; 2025 (Projections): 2.6; 2026 (Projections): 2.9
  • Financial account (2023): -1.6; 2024 (Projections): -3.8; 2025 (Projections): -3.4; 2026 (Projections): -3.2
• External debt and reserves:
  • Gross official reserves (billions of euros): 2019: 18.6; 2020: 18.9; 2021: 25.0; 2022: 27.9
  • Total external debt (percent of GDP): 2019: 73.4; 2020: 81.0; 2021: 80.3; 2022: 72.9; 2023: 83.7; 2024 (Projections): 77.5; 2025 (Projections): 73.0; 2026 (Projections): 69.2; 2027 (Projections): 66.2; 2028 (Projections): 63.5; 2029 (Projections): 61.0
  • Total external debt excl. CNB share (percent of GDP): 2019: 71.2; 2020: 79.3; 2021: 74.2; 2022: 66.7; 2023: 57.9; 2024 (Projections): 53.6; 2025 (Projections): 50.4; 2026 (Projections): 47.8; 2027 (Projections): 45.8; 2028 (Projections): 44.0; 2029 (Projections): 42.4
• Money and credit:
  • Broad money (M3, percent change): 2019: 3.8; 2020: 11.5; 2021: 15.0; 2022: 10.7; 2023: 21.3
  • Claims on other domestic sectors (percent change): 2019: 2.6; 2020: 3.3; 2021: 2.6; 2022: 10.0; 2023: 7.7
• Interest rates:
  • 12-month average T-bill rate (in kuna until 2023, then euros): 2019: 0.1; 2020: 0.1; 2021: 0.0; 2022: 0.1; 2023: 3.1
  • 10-year government bond yield: 2019: 0.7; 2020: 0.6; 2021: 0.1; 2022: 2.8; 2023: 3.7
• Exchange rate:
  • Real effective exchange rate (percent, "-" = appreciation): 2019: -1.3; 2020: -1.3; 2021: -0.1; 2022: 0.2; 2023: 3.5
• Memorandum: Nominal GDP (billions of euros): 2019: 55.3; 2020: 51.0; 2021: 58.9; 2022: 68.4; 2023: 76.5; 2024 (Projections): 82.5; 2025 (Projections): 87.7; 2026 (Projections): 92.3; 2027 (Projections): 96.8; 2028 (Projections): 101.5; 2029 (Projections): 106.5

References

• IMF Policy Advice -- A Factsheet