Via IMF (Den Internationale Valutafond)

IMF Staff Concludes Visit to Croatia

May 2, 2019

End-of-Mission press releases include statements of IMF staff teams that convey preliminary findings after a visit to a country. The views expressed in this statement are those of the IMF staff and do not necessarily represent the views of the IMF’s Executive Board. This mission will not result in a Board discussion.

An International Monetary Fund (IMF) team was in Zagreb from April 23-30,
2019, on a regular staff visit, to discuss recent macroeconomic and policy

At the end of the visit, the IMF mission headed by Mr. Srikant Seshadri,
issued the following statement:

“Macroeconomic conditions have remained positive.
Growth is gradually moderating from its recent highs, inflation remains
subdued, international reserves have increased, and public debt has been
declining. Fiscal performance has been strong despite sizable recent
shipyard guarantee payments. Private demand and tourism continue supporting
economic activity which is also underpinned by the CNB’s continued
accommodative monetary policy. Overall, the banking sector is liquid,
profitable, and well-capitalized.

“However, a possible slowdown in main trading partners may affect these
benign conditions.

If a slowdown were to emanate from Europe, the authorities are encouraged
to let the social safety net work, before considering fiscal stimulus.

“For the last three years, macroeconomic imbalances and vulnerabilities
have been steadily declining.

The recently approved Convergence Program for 2019-22 projects further
reduction of public debt, which is welcome. Achievement of the underlying
surpluses will require continued restraint with current expenditures. EU
funds need to be increasingly utilized to ramp up public investment.

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“Yet, reducing macroeconomic vulnerabilities is only half the task.

There is another equally important half on which significantly greater
progress is called for—to raise living standards durably and make the
economy more dynamic through structural reforms. Without the willingness to
embrace change, the country’s long-term aspirations are unlikely to
materialize. These reforms must be pursued while favorable economic
conditions last, to derive the maximum benefits of Euro adoption. IMF staff
emphasizes the following aspects as central in this regard:

  • Streamline the State.
    Merit-based civil servant compensation complemented by an
    appropriate reduction in total public employment expenditures could
    create room for higher public sector wages. This will help
    reward high-performing public sector employees and make the State
    more dynamic. Reducing the fragmentation between different layers
    of government will ensure that public services are delivered most
    effectively. Inefficient state-owned enterprises compromise the
    productivity of the economy. Decisive action is needed to divest
    non-essential state assets and strengthen the financial management
    of essential ones. Time is of the essence, as changes in these
    areas are highly sensitive to broader economic conditions, and are
    best carried out when times are good.

  • Increase labor force participation
    . Modernizing labor contracts would improve employment prospects
    for the young and reduce the incentive to emigrate. Improved child
    care access would facilitate higher participation from women.
    Reforms in education and training policies would alleviate skills’
    mismatches, reduce labor shortages, and generate more jobs.

  • Improve business conditions.
    It is encouraging to note recent initiatives to
    reduce parafiscal fees and simplify the process of starting a
    business. However, uncertainties and back-logs associated with
    legal processes are impediments to enhancing the business climate.

  • Preserve the sustainability of the pension system.

    Longer life-spans come with inescapably higher pension costs. The
    recently passed pension reform was a vital step in acknowledging
    realities that cannot be put off any longer. Without an increase in
    retirement age, the State would incur sizable debts, for which the
    youth of today will have to pay. Alternatively, the elderly would
    be consigned to living on lower pensions. If the pension system is
    not aligned with today’s life expectancy, the range of the
    country’s choices will be limited between these two outcomes.

  • Make the healthcare system financially self-sufficient.

    Despite increasing healthcare contributions, the buildup of arrears
    continues. Concerted actions to increase cost efficiency are
    compatible with maintaining the existing quality of the healthcare
    system and need to be pursued with urgency.

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The mission held fruitful discussions with the Minister of Finance Marić;
Governor of the Croatian National Bank Vujčić, and other government
officials, representatives from the private sector, and civil society
organizations. The mission thanks the authorities and all interlocutors for
the constructive dialogue and kind hospitality. The IMF looks forward to
the upcoming 2019 Article IV Consultations, scheduled for this autumn.”

IMF Communications Department

PRESS OFFICER: Gediminas Vilkas

Phone: +1 202 623-7100Email: