IMF Executive Board Concludes the 2011 Article IV Consultation with the Republic of Croatia

Public Information Notice (PIN) No. 11/84
July 1, 2011

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. The staff report (use the free Adobe Acrobat Reader to view this pdf file) for the 2011 Article IV Consultation with Croatia is also available.

On June 24, 2011, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with Croatia.1


Croatia’s economy has yet to show signs of a sustained recovery from the effects of the economic crisis. Domestic demand continued to contract in 2010, as household deleveraging and falling employment constrained private consumption, and low confidence hampered investment. Exports rebounded strongly, but given the narrow export base, were insufficient to pull Croatia out of the recession. Real GDP thus fell by 1¼ percent in 2010. The near-term outlook remains subdued, and growth is expected to reach 1 percent in 2011, while medium-term growth is likely to be curtailed by weak competitiveness.

The authorities made some progress in implementing the reforms outlined in the government’s 2010 Economic Recovery Program (ERP), aimed at addressing deep-rooted structural rigidities and competitiveness problems. The pension law was amended to gradually harmonize the retirement age between men and women at 65 years, and discourage early retirement. The unemployment law was changed to reduce benefits and duration. Judicial reforms were instituted to strengthen bankruptcy procedures for companies and business registration procedures were streamlined. However, implementation of other reforms needed to improve competitiveness, such as increasing labor market flexibility and reducing the size of the public sector, has been hampered by strong social resistance.

The authorities’ efforts did not prevent fiscal deterioration in 2010. Despite substantial positive contributions from measures undertaken in 2009 and 2010, the general government’s deficit widened to 5 percent of GDP in 2010 on the back of falling revenues. This was largely caused by declining profit and income taxes, and social contributions, as corporate profitability and employment plunged. Public debt stock rose to 41 percent of GDP.

External vulnerabilities remain elevated despite substantial adjustment in the current account. Rising exports and a contraction in imports reduced the current account deficit to about 1¼ percent of GDP in 2010 from just over 5 percent of GDP in 2009. Capital inflows slowed down correspondingly due to excess capacity and weak economic prospects. Yet external debt amounts to 100 percent of GDP, and foreign currency debt of the public and non-financial private sector is even higher.

The largely foreign-owned banking sector has weathered the economic downturn relatively well. The banking system has ample liquidity and is sufficiently capitalized. Nevertheless, asset quality deteriorated, with the overall nonperforming loan (NPL) ratio reaching 11 percent at end-2010. While aggregate profitability indicators started to recover in recent months, several small banks reported losses. Credit growth to corporates recovered somewhat, aided by official credit support schemes and accommodative monetary policy.

Executive Board Assessment

Executive Directors agreed with the thrust of the staff appraisal. They welcomed Croatia’s progress towards EU accession. At the same time, Directors noted that its narrow export base has prevented the country from taking full advantage of the growth rebound in its trading partners, and that significant challenges remain to be addressed to secure a sustained recovery. To improve the medium-term growth prospects of the economy, Directors stressed the need to tackle structural rigidities and weak competitiveness. Action is also needed to reduce the vulnerabilities arising from large external and foreign-currency debt and deteriorating public finances.

Directors emphasized that the implementation of comprehensive reforms to restore competitiveness and put the economy on a more sustainable footing is a priority. In light of the stable exchange rate policy, Directors generally agreed on the need for internal devaluation via reduction of prices and wages to more competitive levels. A few Directors cautioned that such devaluation could weaken growth prospects, stressing that it would need to be complemented by productivity-enhancing measures. Directors welcomed the progress made in some areas of the government’s Economic Recovery Program. However, a more decisive reform effort is needed, focusing on increasing labor market flexibility and labor force participation, reducing the size of public administration, privatization of public companies, and further improving the business climate.

Directors stressed that the authorities should undertake substantial fiscal consolidation, especially by identifying additional spending cuts, to preserve market confidence and keep interest rates in check. For the medium term, they saw a need for continued expenditure-based consolidation, as envisaged in the Fiscal Responsibility Law (FRL), until an overall cyclically-adjusted balanced budget is achieved. This will create sufficient fiscal space and ensure debt sustainability. To make the FRL more credible, Directors encouraged the authorities to outline early on the measures underlying the fiscal targets.

Executive Directors considered the current accommodative monetary policy to be appropriate given the large output gap and low core inflation. While a few Directors considered the reserves adequate, many noted Croatia’s relatively low reserve coverage. Directors underscored the need for adequate buffers in light of the high degree of euroization in the financial sector. They therefore generally agreed that monetary policy should aim at gradually building up reserves in order to increase Croatia’s resilience to external vulnerabilities, while exercising caution toward shifts in market perception.

Directors noted that the financial sector appears resilient because of significant capital and liquidity buffers. Nevertheless, challenges arise from weak growth prospects, rising non-performing loans, and liquidity risks due to reliance on financing from parent banks. Directors therefore called for continued strong regulatory and supervisory measures and close coordination with home supervisors.

Croatia: Selected Economic Indicators, 2007–12 1/
  2007 2008 2009 2010 2011 2012
        Est. Proj.

Output, unemployment, and prices

(Percent change, unless otherwise indicated)

 Real GDP

5.1 2.2 -6.0 -1.2 1.0 1.8



  Domestic demand

6.4 2.9 -7.7 -3.5 0.5 0.9

  Net exports

-1.9 -0.9 4.3 3.0 0.8 0.1

 Unemployment (labor force survey, percent)

9.6 8.4 9.1 11.8 12.7 12.2

 CPI inflation (average)

2.9 6.1 2.4 1.0 3.2 2.4

 Average monthly nominal wages

6.2 7.1 2.2 -0.4 ... ...

Saving and investment

(Percent of GDP)

 Domestic investment

31.0 32.8 28.7 25.0 26.0 27.4

  Of which: fixed capital formation

26.2 27.7 24.9 21.6 22.1 21.8

 Domestic saving

23.8 23.9 23.4 23.7 23.9 24.1


3.7 3.2 0.0 -1.5 -2.5 -2.6


20.1 20.8 23.4 25.2 26.5 26.7

 Government sector 2/

 General government revenue

40.2 39.5 38.4 37.2 35.5 35.4

 General government expenditure

42.4 40.7 42.5 42.2 41.3 40.5

 General government balance

-2.1 -1.3 -4.1 -5.0 -5.7 -5.1

 General government balance (broad definition) 3/

-3.1 -2.3 -5.4 -5.2 -6.0 -5.4

 HBOR balance (net of budget transfers)

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

 General government debt

32.8 29.0 35.2 41.2 47.4 50.0

Money and credit 4/

(End of period; change in percent)

 Bank credit to the nongovernment sector

15.0 10.6 -0.6 6.8 6.6 ...

 Broad money

18.3 4.3 -0.9 4.4 3.1 ...

Interest rates 4/ 5/

(Period average; percent)

 Average kuna deposit rate (unindexed)

2.3 2.8 3.2 1.8 1.6 ...

 Average kuna credit rate (unindexed)

9.3 10.1 11.6 10.4 9.7 ...

 Average credit rate, foreign currency-indexed loans

6.3 7.5 8.1 8.1 7.4 ...

Balance of payments

(Millions of euros, unless otherwise indicated)

 Current account balance

-3,119 -4,217 -2,408 -582 -1,037 -1,494

  Percent of GDP

-7.2 -8.8 -5.3 -1.3 -2.2 -3.0

 Capital and financial account

5,247 5,470 4,418 1,804 1,958 3,143

  FDI, net (percent of GDP)

8.0 6.8 2.6 1.3 1.6 2.0

 Overall balance

722 -330 896 84 -299 328

Debt and reserves

(End of period; millions of euros, unless otherwise indicated)

 Gross official reserves

9,307 9,121 10,376 10,660 10,362 10,691

  Percent of short-term debt (by residual maturity)

109 70 95 71 76 75

Months of following year's imports of goods and nonfactor services

4.7 6.2 7.1 6.7 6.2 6.1

 Net international reserves

7,349 8,020 9,365 9,644 9,715 10,043

 External debt service to exports ratio (percent)

57.2 52.3 86.1 68.8 90.7 81.2

 Total external debt (percent of GDP)

77.7 85.0 99.1 101.1 97.6 97.7

 Net external debt (percent of GDP) 6/

40.6 50.9 60.0 62.5 60.4 60.5

 Exchange rate

 Kuna per euro, end of period 7/

7.3 7.3 7.3 7.4 7.4 ...

 Kuna per euro, period average 7/

7.3 7.2 7.3 7.3 7.4 ...

 Real effective rate (CPI, percent change) 4/

0.7 4.6 1.1 -2.4 -1.5 ...

 Memorandum items:

 Nominal GDP (millions of euros)

43,391 47,769 45,668 45,919 47,132 49,406

 Output gap (percent of potential)

0.9 1.7 -1.8 -4.2 -4.7 -4.5

 Per capita GDP (2010): € 10,356 (WEO)

    Percent of pop. below poverty line (2004): 11.1

 Quota (2010): SDR 365 million (563 million U.S. dollars)


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 the balances of HBOR and HAC (net of budget transfers).

4/ Latest data as of end-April, 2011.

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

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

7/ Latest data as of end-May, 2011.

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:


Public Affairs    Media Relations
E-mail: E-mail:
Fax: 202-623-6220 Phone: 202-623-7100