{
  "title": "IMF Executive Board Concludes 2019 Article IV Consultation with the Republic of Croatia",
  "publication": "IMF News, February 19, 2020",
  "sourceUrl": "https://www.imf.org/en/news/articles/2020/02/19/pr2054-croatia-imf-executive-board-concludes-2019-article-iv-consultation",
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  "summary": "The Executive Board concluded the 2019 Article IV consultation and \"considered and endorsed the staff appraisal without a meeting.\"",
  "publishDate": "2020-02-19",
  "sections": [
    {
      "heading": "Executive Board assessment and broad outlook",
      "content": "- The Executive Board concluded the 2019 Article IV consultation and \"considered and endorsed the staff appraisal without a meeting.\"\n- Croatia experienced its fifth consecutive year of solid economic growth in 2019, driven largely by private consumption and tourism.\n- Employment gains have been robust, wages have continued to rise, and import prices have helped keep inflation muted.\n- Increased absorption of EU funds is likely to raise public investment in the coming years.\n- With continued strong consumption, the current account surplus is expected to decline and turn into a moderate deficit while economic growth moderates.\n- Both public and external indebtedness are expected to continue their declining trajectories.\n- The Executive Board: \"The Croatian economy has performed well, but convergence with the EU needs to accelerate.\""
    },
    {
      "heading": "Fiscal policy and public finances",
      "content": "- Fiscal consolidation pace slowed in 2019; the budget is estimated to be close to balance.\n- Recently agreed public sector wage increases are expected to increase current spending in 2020.\n- Despite buoyant revenues, the budget balance is expected to turn into a small deficit in 2020, in part due to additional tax cuts.\n- Contingent liabilities could pressure budget balances in the coming years.\n- 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.\"\n- Recommendations to preserve fiscal gains:\n  - Shift spending priorities toward more and better public investment.\n  - Better absorption of EU funds while undertaking deeper reforms to public administration, pensions, healthcare, and fiscal/territorial relationships across government levels.\n  - Modernize state-owned enterprise management and performance.\n  - Accelerate digitalization of public administration and better target social benefits."
    },
    {
      "heading": "Monetary policy, banking sector, and macroprudential concerns",
      "content": "- Monetary policy remains appropriately accommodative within the limits of the exchange rate anchor.\n- Excess liquidity in the banking system continues to rise; interest rates remain low.\n- Bank lending to households has continued to grow.\n- The Croatian National Bank (CNB) issued recommendations for banks to be more cautious with long-term uncollateralized consumer lending.\n- The banking system is well capitalized and liquid; the NPL ratio continues to decline.\n- The CNB continues to utilize current conditions to build reserves.\n- Macroprudential guidance:\n  - Constant consideration of macroprudential action to prevent excessive lending, especially if real estate prices accelerate or household lending migrates to other forms.\n  - Reestablish full operational status of the credit register and consider including all debt in an extended debt-service-to-income ratio.\n  - Enhance efficiency of bankruptcy procedures, including facilitating out-of-court settlements, to support private sector deleveraging."
    },
    {
      "heading": "Structural reforms and growth drivers",
      "content": "- Croatia has barely reduced its distance with the EU average in income per capita over the last decade; youth emigration remains a challenge.\n- Recommended actions to raise potential growth:\n  - Renovate capital stock: focus on \"hard\" infrastructure (e.g., railways for freight, solid and waste water treatment) and upgrade \"soft\" technological infrastructure.\n  - Enhance business climate: eliminate barriers to regulated professions and remaining parafiscal fees.\n  - Continue streamlining administrative and fiscal burdens on business, enhance digital public services, and adapt legislation for EU Digital Single Market integration.\n  - Align education policy across primary, secondary, tertiary, and continuing education with infrastructure and ICT/business services upgrades."
    },
    {
      "heading": "Croatia: Selected Economic Indicators (as reported)",
      "content": "- Real GDP growth (Percent change, annual average, unless otherwise indicated)\n  - 2016: 3.5\n  - 2017: 3.1\n  - 2018: 2.7\n  - 2019: 2.9\n  - 2020 (Proj): 2.5\n  - 2021 (Proj): 2.2\n  - 2022 (Proj): 2.1\n  - 2023 (Proj): 2.0\n- Contributions to growth: Domestic demand\n  - 2016: 3.2\n  - 2017: 3.8\n  - 2018: 4.4\n  - 2019: 3.6\n  - 2020 (Proj): 3.4\n  - 2021 (Proj): 2.6\n- Contributions to growth: Net exports\n  - 2016: 0.3\n  - 2017: -0.7\n  - 2018: -1.9\n  - 2019: -0.5\n  - 2020 (Proj): -0.9\n  - 2021 (Proj): -0.3\n- Unemployment\n  - 2016: 15.0\n  - 2017: 12.4\n  - 2018: 9.9\n  - 2019: …\n- CPI inflation (avg.)\n  - 2016: -1.1\n  - 2017: 1.1\n  - 2018: 1.5\n  - 2019: 0.8\n  - 2020 (Proj): 1.2\n  - 2021 (Proj): 1.3\n  - 2022 (Proj): 1.4\n- Domestic investment (Percent of GDP)\n  - 2016: 21.0\n  - 2017: 21.8\n  - 2018: 23.2\n  - 2019: 25.0\n  - 2020 (Proj): 24.8\n  - 2021 (Proj): 24.7\n  - 2022 (Proj): 25.7\n  - 2023 (Proj): 25.2\n- Domestic saving (Percent of GDP)\n  - 2016: 25.1\n  - 2017: 26.9\n  - 2018: 25.8\n  - 2019: 25.4\n  - 2020 (Proj): 24.3\n  - 2021 (Proj): 24.2\n- Government (Percent of GDP)\n  - 2016: 3.3\n  - 2017: 5.0\n  - 2018: 4.7\n  - 2019: 4.0\n  - 2020 (Proj): 4.1\n  - 2021 (Proj): 4.2\n  - 2022 (Proj): 4.3\n- Nongovernment (Percent of GDP)\n  - 2016: 19.8\n  - 2017: 20.8\n  - 2018: 20.1\n  - 2019: 22.2\n  - 2020 (Proj): 20.9\n  - 2021 (Proj): 21.3\n  - 2022 (Proj): 20.6\n  - 2023 (Proj): 20.0\n- General government revenue (ESA 2010 definition)\n  - 2016: 46.3\n  - 2017: 46.0\n  - 2018: 46.5\n  - 2019: 46.8\n  - 2020 (Proj): 46.2\n  - 2021 (Proj): 46.4\n  - 2022 (Proj): 46.1\n- General government expenditure\n  - 2016: 47.3\n  - 2017: 45.2\n- General government balance\n  - 2016: -1.0\n  - 2017: 0.0\n  - 2018: -0.2\n  - 2019: -0.1\n- Structural balance 1/\n  - 2016: 1.6\n  - 2017: -0.4\n- General government debt 2/ (Gross debt as defined by the EU under the Maastricht Treaty)\n  - 2016: 80.5\n  - 2017: 77.6\n  - 2018: 74.7\n  - 2019: 71.5\n  - 2020 (Proj): 69.1\n  - 2021 (Proj): 67.0\n  - 2022 (Proj): 67.1\n  - 2023 (Proj): 65.0\n  - 2024 (Proj): 63.3\n  - 2025 (Proj): 61.8\n- Current account balance\n  - 2016: 1.9\n  - 2017: 1.0\n- Capital and financial account\n  - 2016: -2.2\n  - 2017: 0.9\n- FDI, net\n  - 2016: 2.3\n- Gross official reserves (billions of euros)\n  - 2016: 13.5\n  - 2017: 15.7\n  - 2018: 17.4\n  - 2019: 18.3\n  - 2020 (Proj): 20.2\n  - 2021 (Proj): 21.7\n  - 2022 (Proj): 23.1\n  - 2023 (Proj): 26.7\n  - 2024 (Proj): 28.6\n- Percent of short-term debt (by residual maturity)\n  - 2016: 110.1\n  - 2017: 117.3\n  - 2018: 121.6\n  - 2019: 161.5\n  - 2020 (Proj): 166.2\n  - 2021 (Proj): 175.4\n  - 2022 (Proj): 202.3\n  - 2023 (Proj): 217.4\n  - 2024 (Proj): 226.4\n  - 2025 (Proj): 248.7\n- In months of imports in goods and services (based on next year level)\n  - 2016: 7.5\n  - 2017: 7.8\n  - 2018: 7.9\n  - 2019: 7.7\n  - 2020 (Proj): 7.6\n- Total external debt (percent of GDP)\n  - 2016: 95.9\n  - 2017: 88.9\n  - 2018: 82.7\n  - 2019: 75.9\n  - 2020 (Proj): 72.2\n  - 2021 (Proj): 68.2\n  - 2022 (Proj): 67.3\n  - 2023 (Proj): 64.8\n  - 2024 (Proj): 62.2\n  - 2025 (Proj): 60.0\n- Broad money (M4) (End of period, change in percent)\n  - 2016: 5.5\n- Claims on other domestic sectors 3/ (End of period, change in percent)\n  - 2016: -3.4\n  - 2017: -0.8\n  - 2018: 1.8\n- Average 12-month T-bill interest rate (in kuna)\n  - 2016: 0.4\n  - 2017: 0.1\n- Kuna credit rate (unindexed, outstanding amount)\n  - 2016: 6.5\n  - 2017: 6.0\n  - 2018: 5.7\n- Kuna per euro\n  - 2016: 7.4\n- Real effective exchange rate (percent, \"-\" = appreciation)\n  - 2016: 0.7\n- Nominal GDP (billions of euros)\n  - 2016: 46.6\n  - 2017: 49.1\n  - 2018: 51.7\n  - 2019: 53.9\n  - 2020 (Proj): 56.2\n  - 2021 (Proj): 58.7\n  - 2022 (Proj): 58.9\n  - 2023 (Proj): 61.5\n  - 2024 (Proj): 64.0\n  - 2025 (Proj): 66.6\n\nPress Release No. 20/54; February 19, 2020; IMF Communications Department.\n\n---\n\n\n References\n\n- https://www.imf.org/-/media/images/imf/bios/imfboard.jpg\n- The Executive Board\n- Republic of Croatia and the IMF\n- IMF Policy Advice -- A Factsheet\n- Press Releases\n- PRESS CENTER\n- https://www.imf.org/en/home\n\nSource: https://www.imf.org/en/news/articles/2020/02/19/pr2054-croatia-imf-executive-board-concludes-2019-article-iv-consultation"
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    "Published: February 19, 2020",
    "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 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:",
    "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:",
    "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:",
    "Real GDP growth (Percent change, annual average, unless otherwise indicated)",
    "Contributions to growth: Domestic demand",
    "Contributions to growth: Net exports",
    "Unemployment",
    "CPI inflation (avg.)",
    "Domestic investment (Percent of GDP)",
    "Domestic saving (Percent of GDP)",
    "Government (Percent of GDP)",
    "Nongovernment (Percent of GDP)",
    "General government revenue (ESA 2010 definition)",
    "General government expenditure",
    "General government balance",
    "Structural balance 1/",
    "General government debt 2/ (Gross debt as defined by the EU under the Maastricht Treaty)",
    "Current account balance",
    "Capital and financial account",
    "FDI, net",
    "Gross official reserves (billions of euros)",
    "Percent of short-term debt (by residual maturity)",
    "In months of imports in goods and services (based on next year level)",
    "Total external debt (percent of GDP)",
    "Broad money (M4) (End of period, change in percent)",
    "Claims on other domestic sectors 3/ (End of period, change in percent)",
    "Average 12-month T-bill interest rate (in kuna)",
    "Kuna credit rate (unindexed, outstanding amount)",
    "Kuna per euro",
    "Real effective exchange rate (percent, \"-\" = appreciation)",
    "Nominal GDP (billions of euros)",
    "[https://www.imf.org/-/media/images/imf/bios/imfboard.jpg](https://www.imf.org/-/media/images/imf/bios/imfboard.jpg)",
    "[The Executive Board](https://www.imf.org/external/np/sec/memdir/eds.aspx)",
    "[Republic of Croatia and the IMF](http://www.imf.org/external/country/HRV/index.htm)",
    "[IMF Policy Advice -- A Factsheet](https://www.imf.org/en/about/factsheets/imf-surveillance)",
    "[Press Releases](https://www.imf.org/en/news/searchnews)",
    "[PRESS CENTER](http://presscenter.imf.org/)",
    "[https://www.imf.org/en/home](https://www.imf.org/en/home)"
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