IMF Executive Board Concludes 2010 Article IV Consultation with the Republic of Croatia

Public Information Notice (PIN) No. 10/79
June 21, 2010

Public Information Notices (PINs) form part of the IMF's efforts to promote transparency of the IMF's views and analysis of economic developments and policies. With the consent of the country (or countries) concerned, PINs are issued after Executive Board discussions of Article IV consultations with member countries, of its surveillance of developments at the regional level, of post-program monitoring, and of ex post assessments of member countries with longer-term program engagements. PINs are also issued after Executive Board discussions of general policy matters, unless otherwise decided by the Executive Board in a particular case.

On June 21, 2010 the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with Croatia.1


The global economic and financial crisis has significantly affected the Croatian economy. With reduced capital inflows, subdued export demand, and tight credit conditions on the domestic front, real GDP fell by 5.8 percent in 2009, and unemployment rose sharply to 17 percent. While exports plunged, an even larger contraction in imports resulted in a near-halving of the current account deficit to 5 percent of GDP. The economy remained in the midst of a severe downturn in the early part of 2010, and positive growth is expected to resume gradually in the second half of the year, with a forecast for zero growth in 2010.

The authorities’ policy response to the crisis has been swift. The Croatian National Bank (CNB) appropriately addressed liquidity shortages in the banking sector in 2009 through relaxation of regulatory requirements, repo auctions, and simplification of rules for banks to access CNB’s emergency liquidity assistance. The timely policy response helped improve financial market sentiment: the kuna has fully retracted its losses, official reserves have been replenished, and bond spreads declined, which allowed the authorities to tap international capital markets twice in 2009. Liquidity pressures abated in 2009 as domestic deposits remained stable and foreign parent institutions maintained their credit lines to domestic subsidiaries.

The authorities also took strong fiscal actions in 2009 to offset plunging revenues and contain the 2009 budget deficit to financeable levels. Three supplementary budgets were adopted with a number of short-term measures that included expenditure cuts, a wage and pension freeze, a VAT rate hike, and the introduction of a temporary “solidarity tax” on incomes and pensions. These measures helped, but the fiscal deficit nevertheless widened to just under 4 percent of GDP (including the payment for a called guarantee of a public shipyard). Public debt also rose sharply to 50 percent of GDP including the guaranteed stock.

Banks have weathered the crisis relatively well owing to high capital buffers, but profitability has declined, largely reflecting an increase in the provisioning for nonperforming loans which reached 7.8 percent at end-2009. Private sector credit growth fell sharply as the uncertain macroeconomic environment lowered demand for new loans, and banks tightened underwriting standards. Concerns about the lack of credit recovery prompted the authorities to introduce earlier this year three schemes to revive credit to corporates, through loans to finance working capital as well as provision of government guarantees for investment loans. These schemes are expected to be in place until end-2010.

Executive Board Assessment

Executive Directors commended the authorities for skillfully navigating the economy through the global financial and economic crisis, as their swift intervention had helped preserve financial stability, contain the fiscal deficit, and maintain investor confidence and access to international capital markets. Directors noted the incipient recovery faces considerable downside risks given the uncertain global outlook, unsettled regional financial markets, and significant domestic economic vulnerabilities. Well-focused medium-term fiscal consolidation and ambitious structural reforms will be needed to increase competitiveness and attract investment to bring about stronger and more balanced growth.

Directors noted that the burden of demand management falls largely on fiscal policy, given the stable exchange rate policy. They agreed that a cyclically-balanced budget over the medium-term would provide needed policy room and ensure debt sustainability. Directors considered that fiscal adjustment could be best achieved through expenditure measures, including reductions in the public sector wage bill and public enterprise subsidies, rationalization of pension and health expenditure, and better targeting of social assistance expenditure. They welcomed the inclusion of many of these measures in the Economic Recovery Program (ERP), while recommending that expenditure reforms should precede the envisaged tax cuts. In addition, Directors encouraged containment of rising contingent fiscal liabilities and endorsed plans to adopt a Fiscal Responsibility Law.

While recognizing the difficult trade-offs, Directors considered that maintaining a broadly stable exchange rate provides an appropriate anchor given market volatility and high financial euroization. They emphasized the importance of structural reforms to improve competitiveness, including by removing inefficiencies in the labor market and business environment, and pursuing appropriate income and wage policies to achieve internal adjustment of the economy. Directors recommended greater flexibility in employment policies and social benefits to remove adverse incentives for labor force participation. They also observed that improving the business environment would require privatization, reduced para-fiscal fees, and simplified business entry requirements. Directors welcomed the recent introduction of reforms in many of these areas under the ERP, noting that speedy, well-sequenced and full ERP implementation would be instrumental in strengthening market confidence and assisting Croatia in entering the European Union from a position of strength.

Directors called for continued vigilant monetary and financial sector policies, as banks remain vulnerable to credit and liquidity risks. They viewed the moderate pace of monetary easing as adequate and cautioned against further easing as the financial outlook remains uncertain. While noting safeguards to prevent weakening of credit underwriting standards, Directors recommended close supervision of the quality of loans issued under the credit support measures. They expressed concerns about the recapitalization of public banks from the deposit insurance fund.

Croatia: Key Macroeconomic Indicators, 2005–11 1/

  2005 2006 2007 2008 2009 2010 2011
            Proj. Proj.

Output, unemployment, and prices


Real GDP

4.2 4.7 5.5 2.4 -5.8 0.0 2.0

Unemployment (labor force survey, in percent)

12.7 11.1 9.6 8.7 9.2 9.5 9.0

CPI inflation (average)

3.3 3.2 2.9 6.1 2.4 2.0 2.7

Saving and investment


Domestic investment

28.0 29.8 30.5 32.8 28.3 30.2 30.6

Of which: fixed capital formation

24.6 26.1 26.2 27.6 24.7 25.1 25.6

Domestic saving

22.5 22.9 22.9 23.6 23.1 24.8 24.7


2.3 2.9 3.8 3.2 0.0 -0.6 -0.6


20.2 20.0 19.1 20.4 23.1 25.4 25.3

Government sector 2/


General government revenue 2/

39.2 39.6 40.7 39.8 38.7 37.6 37.4

General government expenditure 2/

42.1 41.4 42.0 40.7 41.9 41.2 41.1

General government balance 2/

-2.8 -1.8 -1.2 -0.9 -3.2 -3.6 -3.7

General government balance (broad definition) 2/ 3/

-2.8 -0.8 -2.4 -1.3 -4.1 -3.8 -3.9

HBOR balance (net of budget transfers)

-0.1 -0.2 -0.5 -0.1 -0.6 -0.6 -0.6

Cyclically adjusted balance 2/

-2.8 -2.1 -2.3 -2.7 -2.8 -2.9 -3.4

General government debt

38.4 35.8 33.2 29.3 35.4 38.2 39.6

Money and credit


Bank credit to the nongovernment sector

17.4 23.1 15.0 10.6 -0.6 ... ...

Broad money

10.5 18.0 18.3 4.3 -0.9 ... ...

Interest rates 4/


Average kuna deposit rate (unindexed)

1.7 1.7 2.3 2.8 3.2 ... ...

Average kuna credit rate (unindexed)

11.2 9.9 9.3 10.1 11.6 ... ...

Average credit rate, foreign currency-indexed loans

6.7 6.3 6.3 7.5 8.1 ... ...

Balance of payments


Current account balance

-1,976 -2,715 -3,237 -4,371 -2,361 -2,505 -2,888

(In percent of GDP)

-5.5 -6.9 -7.6 -9.2 -5.2 -5.4 -5.9

Capital and financial account

3,924 5,083 4,861 5,621 3,981 3,267 2,905

Overall balance

822 1,412 722 -330 896 262 -583

Debt and reserves


Gross official reserves

7,438 8,725 9,307 8,926 10,376 10,638 10,055

In percent of short-term debt (by residual maturity)

85 88 109 69 71 74 80

In months of following year's imports of goods & NFS

4.5 4.9 4.7 6.0 6.7 6.5 5.8

Net international reserves

5,604 6,464 7,349 7,849 9,365 9,947 9,364

External debt service to exports ratio (in percent)

27.2 37.5 37.8 34.3 50.5 38.1 38.1

Total external debt (in percent of GDP)

72.1 74.9 77.6 85.1 97.4 99.9 98.6

Net external debt 5/

37.7 38.7 41.1 48.6 60.8 63.3 62.0

Sources: Croatian authorities, and IMF staff estimates.

1/ National account data for 1995-2008 were revised in 2009. Under the new ESA95 methodology, revised data include estimates for the "gray economy," imputed dwelling rates, and financial intermediate services indirectly measured (FISIM). Revised nominal GDP figure for 2008 is about 14 percent higher than the previous estimate.

2/ ESA 95 presentation.

3/ Includes repayments of “pensioners’ debt”, and the balances of HBOR and HAC (net of budget transfers).

4/ Weighted average, all maturities. Foreign currency-indexed loans are indexed mainly to euros.

5/ Net of official reserves and commercial bank foreign assets.

1 Under Article IV of the IMF's Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. A staff team visits the country, collects economic and financial information, and discusses with officials the country's economic developments and policies. On return to headquarters, the staff prepares a report, which forms the basis for discussion by the Executive Board. At the conclusion of the discussion, the Managing Director, as Chairman of the Board, summarizes the views of Executive Directors, and this summary is transmitted to the country's authorities. An explanation of any qualifiers used in summings up can be found here:


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