ZAGREB, January 1, 2020 - Ministries in charge of the economy have ambitious plans for 2020 including the construction and reconstruction of roads, railways and ports as well as improving macroeconomic indicators and the business climate which should lead to improvement of standard for citizens and facilitate doing business for entrepreneurs.

The Finance Ministry says that the 2020 budget is directed to further tax reliefs of 2.3 billion kuna for workers and entrepreneurs.

The ministry forecasts that intake of EU funds in 2020 will amount to 18.1 billion kuna and that the trend of decreasing the public debt to GDP ratio will continue.

Croatia is also due to enter the European Exchange Mechanism (ERM II) in the second half of the year.

The ministry forecasts a general government surplus of 0.2% of GDP in 2020, 0.4% in 2021 and 0.8% in 2022.

When it comes to the public debt, at the end of 2015 it amounted to 84.4% of GDP and at the end of 2019 it was reduced to 71.3% and by the end of 2020 it is expected to decline to 68%.

Favourable trends on the labour market are expected to continue and unemployment should continue to fall toward to 6.3% in 2022.

A set of legislative amendments entered into force on January 1 as part of the fourth round of tax reforms which among other things means that the non-taxable income threshold will be raised from 3,800 kuna to 4,000 kuna. Income taxes for young people under 25 years of age have been reduced by 100% while income taxes for those aged between 26 and 30 have been cut by 50%.

Economy, Entrepreneurship and Crafts Ministry plans to continue with reliefs for entrepreneurs and reducing or abolishing parafiscal levies.

An action plan is prepared to liberalise the services market by deregulating professions.

Amendments are expected to the legislation regulating working hours for stores to on Sunday, which are aimed at introducing non-working Sundays.

The ministry also plans to co-finance R&D projects for entrepreneurs through state subsidy schemes

Sea, Transport and Infrastructure Ministry underscores that 2020 will be marked with works to the railway network.

The current projects, which are underway, are estimated at 1.2 billion euro and during 2020 the Croatian Railways (HZ) passenger transport fleet will be upgraded with electric trains. These investments are set at 1.03 billion kuna. A project to improve the safety of railway/road level crossings is planned with the installation of equipment valued at 127.7 million kuna.

Several significant road construction projects have been announced including the construction of access roads to Pelješac Bridge with a total distance of 30.13 kilometres and valued HRK 990 million kuna as well as a new multimodal platform for the Split agglomeration including the towns of Solin, Stobreč, Dugi Rat and Omiš with a total investment value of 2.4 billion kuna.

Another significant project in road infrastructure is the completion of the first stage of the Istrian motorway with a tender for another tunnel through Učka Mountain.

Investments of more than 453.8 million kuna are planned for Croatian ports.

A national broadband aggregation infrastructure will be built with a value of 780 million kuna.

Croatia plans to determine its first 5G city and to adopt a national plan for the development of broadband access throughout the country for the period 2021-2027.

Environment and Energy Ministry says that 2020 will be marked with the preparation and adoption of a global and European strategy on biodiversity.

It expects to adopt the first national Strategy of adapting to climate change for the period until 2040 with a view to 2070 and it also plans to prepare a national action plan for the next five-year period that will contain priority measures in that regard.

More economy news can be found in the Business section.

ZAGREB, December 30, 2019 - Croatia's industrial production shrank by 0.4% compared to November 2018, whereas output in the first eleven months of 2019 rose by 0.8% compared to the corresponding period in 2018, the national statistical office (DZS) said on Monday.

The DZS data show that November's industrial production also fell in comparison to October 2019, by 0.7%.

Broken down by industry group, November's production of durable consumer goods saw the biggest rise of 17.5% on the year. Energy production increased 8.3%, and non-durable goods by 1.4%.

On the other hand, the production of capital goods declined by 18.9% and of intermediate goods by 0.4%.

Broken down by types of industrial production, mining and oil and gas production declined by 13.9%, while manufacturing shrank by 3.1%. The provision of electrical energy, gas increased by 16% in November, year on year.

Total industrial sales in Croatia in October grew by 2.3% from September, while according to working-day adjusted data they dropped by 3.1% year on year, according to figures from the national statistical office (DZS).

In October, compared with September, total seasonally and working-day adjusted industrial sales went up by 5.7% on the domestic market and by 0.4% on the foreign market.

A monthly comparison of statistics shows that energy sales dropped by 14.2%, while sales of capital goods increased by 9%, sales of non-durable consumer goods by 6.1%, sales of durable consumer goods by 5.7% and sales of intermediate products by 4.1%.

Year on year, total working-day adjusted industrial sales dropped by 1.1% on the domestic market and by 5.8% on the foreign market.

Energy sales declined by 32.7%, sales of intermediate products by 1.9% and of capital goods by 1.8%, while sales of non-durable consumer goods rose by 6.4% and those of durable consumer goods increased by 3.4%.

In November 2019, the retail trade turnover was higher in real terms at both the monthly and the annual level, with October's annual growth of 3.1% slowing down to 2.5%, the Croatian Bureau of Statistics said on Monday. On the month, the retail trade turnover was higher in real terms by 0.3%.

The retail trade turnover of non-food products (except automotive fuels and lubricants) increased by 5.6%, while the retail trade turnover of food products decreased by 0.2%.

In November 2019, as compared to the same month of the previous year, the retail trade turnover was 2.5% higher in real terms, reflecting a continuation of positive trends in retail, although the annual growth rate slowed down.

Annually, the retail trade turnover of food, beverages and tobacco increased by 3.4% and of non-food products (except of automotive fuels and lubricants) by 5.5%.

At the annual level, the retail trade turnover in real terms has kept increasing since June 2019. After May, when there was an annual decrease (-1.9%) after 56 months of growth, in June consumption jumped 5.9%. In July it went up 3.7%, in August 1.2%, in September 3.5% and in October 3.1%.

In the first 11 months, the working-day adjusted retail trade turnover in real terms increased by 3.6% compared to the same period of the previous year.

Commenting on the data, Raiffeisenbank Austria (RBA) analysts said the improvement of the consumer confidence index, at its highest level to date, indicated that positive annual retail trade growth rates would continue.

Moderate inflation, salary growth, relatively strong consumer lending and a high inclination towards spending confirm expectations that this year's retail trade will record solid results, mirroring the positive trends in personal consumption, RBA said, adding that personal consumption would be the main GDP growth generator this year.

More economy news can be found in the Business section.

ZAGREB, December 31, 2019 - In the last 20 years Croatia's debt has increased sixfold, HRK 50 billion kuna to nearly 300 billion, the Večernji List daily says in its Tuesday edition, citing figures that show that the HDZ government of Ivo Sanader set the record in borrowing while the most reforms were carried out by the government led by Social Democrat Ivica Račan.

The political rise of Zoran Milanović has refuelled debates about his government having been the most spendthrift. The statistics, however, show a different thing.

The leader in terms of borrowing was the HDZ government led by Ivo Sanader and his successor Jadranka Kosor, during whose four-year term (2008-2011) public debt rose by 95 billion kuna, more than doubling in the two terms, says Večernji List.

Milanović's government increased the debt by around 73 billion kuna, Račan's by around 40 billion and Plenković's by around 15 billion.

Economists, however, warn that adding up public debt is like comparing apples and oranges.

"Macroeconomically, we are talking about different environments. It would be more sensible to judge reforms and their impact on long-term growth," says Željko Lovrinčević of the Institute of Economics.

"The term of the Ivo Sanader government was a period when loans were sought for infrastructure projects that were financed by the Croatian state, and there were both rational and irrational investments," said Lovrinčević.

Milanović's government led the country during the period of a very deep financial crisis, when deficits were a way to maintain the country's financial system and prevent complete chaos.

"It was a period of record-high interest rates, unlike the current situation, with artificially created low interest rates. The two periods are almost incomparable, in terms of both sources of financing and capital prices," said Lovrinčević.

Sanader and Milanović did not have at their disposal EU funds available to the incumbent government, which is macroeconomically the most successful one, if the short term of PM Tihomir Orešković is disregarded, as public debt has been falling as measured by its share in GDP, however, neither Sanader nor Milanović performed well in terms of structural reforms.

"Running the country was most difficult during the term of the Ivica Račan government, it was a heterogeneous coalition that led the country in a transition from a semi-military model of state functioning to a civilian economy. That is when most progress was made in structural reforms," Lovrinčević believes.

Lovrinčević previously compared growth rates in Croatia with rates in other transition countries behind which Croatia lagged by 30%.

Paradoxically, but Croatia lagged the most behind during the term of the first Ivo Sanader government, from 2004 to 2007, when economic growth was 14% lower than in other transition countries, unlike the most successful, Ivica Račan government, during whose term the national economy lagged behind by 2%.

Račan's government raised GDP by around 18% during its term and at the time Croatia's economy grew faster than the economies of the Czech Republic, Slovakia, Hungary and Slovenia, which from today's perspective looks like science fiction, says Večernji List.

More economic news can be found in the Business section.

ZAGREB, December 30, 2019 - After Economy Minister Darko Horvat announced on Christmas that Sunday work would be restricted and Prime Minister Andrej Plenković confirmed it on Saturday, Croatia's leading shopping centres are appealing against that, claiming the damage will be incalculable, Jutarnji List reports on Monday.

The government's analyses are incorrect and will damage the economy, the daily says, quoting Denis Ćupić of the management of Westgate, the largest shopping centre in the European Union, and Slobodan Skolmik, chairman of the Board of Emmezeta, the second largest furniture retailer in Croatia with 981.4 million kuna in revenue in 2018.

They say Sunday revenue is higher, not lower as claimed by the government. People will buy more online from other countries, which will reduce state budget revenues, they warn, adding that there is no Austrian model of partial Sunday work as Sunday is a non-working day there.

Minister Horvat said he would present "a very interesting analysis" that would result in a new law regulating Sunday work and that the proposal would be based on the Austrian model, meaning that a certain number of Sundays would be working and a certain number non-working days.

Prime Minister Plenković told Jutarnji List that an analysis by the finance and economy ministries showed that Sunday turnover was 41 to 52 percent lower on average than on other days.

Neither the Croatian Chamber of Commerce (HGK) nor the Croatian Employers Union (HUP) have a uniform stand on Sunday work.

Tomislava Ravlić of the HGK says retail is a broad term and therefore there are different takes on Sunday work. We are waiting for the government's proposal and then we will be able to be more specific, she says, adding that they expect some data already on Monday.

Lea Šćrbec of the HUP says they too are waiting for concrete proposals from the government before giving an answer, according to Jutarnji List.

More economy news can be found in the Business section.

ZAGREB, December 30, 2019 - After 11 years Sunday work is being regulated again, the public broadcaster said on Sunday, adding that the government had announced it would amend the Labour Act in 2020 so that shops worked several Sundays a year.

"We are closest... to the Austrian model," Economy Minister Darko Horvat told HTV. "We are currently discussing how many Sundays employers could define as working Sundays."

The amendments could be adopted in the first half of next year, the government has said. The Austrian model means shops could work only several Sundays a year, those in tourist resorts could choose them in summer and the rest in December.

"We have been doing a thorough analysis concerning Sunday work over the past six months, contacting all EU countries," Horvat said, adding that the analysis revealed that "employers' Sunday revenues are far lower than what the Croatian public knows."

He said Austria "is very similar to Croatia and has its tourist season. Their employers are a very active social partner to the government."

He said a public consultation would be launched soon, to be followed by a proposal to the government, and the number of working Sundays would be "hammered out" with employers, eight to 12 Sundays of their choice.

Horvat said all workers who needed to work on Sundays would be rewarded. He said overtime, weekend, night, Sunday and holiday work was currently paid more and that the State Inspectorate was supposed to improve the oversight of that.

"The fact is that this is also a world view issue and I believe Sunday should be free," he said, adding that his job as minister of the economy was to make Croatia less dependent on retail and tourism.

Speaking of Sunday work, Labour Minister Josip Aladrović said it was important that "both world view and economic goals are covered (so that) redefining Sunday work doesn't endanger the economy."

Zlatica Štulić, president of the Commercial Trade Union of Croatia, said the union supported the initiative to amend the law and regulate Sunday work. "That's something for which we have been fighting for a long time and we believe it will benefit workers."

More economy news can be found in the Business section.

What follows is a review of events in Croatian politics in 2019, as reported by TCN. If you would like to refresh your memory about the events which has led us here, read the reviews for the three previous years (2016, 2017, 2018).

The year started with a high-profile failure by the government. Months after it was announced that Croatia would buy used Israeli F-16 fighter planes, the US government vetoed the sale and the whole project fell through. Despite earlier warnings from experts that the deal was in question, ministers continued to claim that everything was alight. However, after a meeting between high-ranking officials from the United States and Israel, the truth was revealed. Ministers lost their nerves and the government launched an immediate investigation, which expectedly ended without any real results, and also announced that it would re-start the process. To show its level of seriousness, it even established a commission! Twelve months later, the process of deciding which aircraft to buy still hasn't move any further on and is not expected to end for at least another year.

The migrant crisis continued to be in the news this year. The inflow of migrants over the borders with Bosnia and Herzegovina and Serbia increased somewhat, together with media coverage about alleged brutality of Croatian police and illegal pushbacks of migrants to Bosnia. The authorities were quick to deny everything, but the sheer number of documented cases makes it apparent that at least some of the allegations are founded.

Efforts to limit media freedoms continued this year and some reporters were even briefly arrested. Journalists, NGOs and international organisations stood up to these attempts, but the final score is still unknown.

Repression continued in other ways as well, with courts ruling that peaceful protesters should go to prison, Croatia's human rights situation being criticised from abroad, ethnically-motivated assaults (several of them) taking place, ombudswomen’s warnings not being heard, journalists receiving instructions from the president on what to do, and diplomats spreading hate...

Historical revisionism was in full force once again this year. As a result, representatives of Jews, Serbs and anti-fascist organisations once again boycotted the government’s annual commemoration at the site of the Jasenovac concentration camp.

European elections were held in May (with even Pamela Anderson giving recommendations to Croatian voters). While the ruling HDZ party had high hopes earlier in the year (and was supported by German Chancellor Angela Merkel, who attended one of its rather controversial rallies in Zagreb), the actual results were much tighter and were interpreted by everyone as a success for the opposition (particularly SDP) and a disappointment for the government.

June brought us a few days of excitement when it seemed possible that prime minister Plenković might just succeed in his life-long dream of getting a top EU job. Despite denying he ever wanted such a thing, he was rumoured to be trying to become president of the European Commission (or president of the European Council, or perhaps something else). In the end, he had to return to Croatia empty handed, again denying his alleged attempts.

Unlike Plenković, foreign minister Marija Pejčinović-Burić was more successful in the area of career development. In June, she was elected secretary-general of the Council of Europe. She promptly resigned her post in Croatia and has not been heard about since. Another happy politician is Dubravka Šuica, who has been appointed Croatia’s commissioner in the European Commission.

Mostly good economic news continued. Public debt is at its lowest level in decades, the European Commission concluded that Croatia no longer suffered from excessive economic imbalances, and GDP growth is holding up.

One of the companies which was in the public focus this year was Croatia Airlines, Croatia’s national flag carrier. Its business results were dismal and the search for possible strategic partners was on, but without any real results. The government eventually decided to cover some of the debts, but as the year comes to and end, there is no long-term solution in sight. In the meantime, Zagreb Airport continues to lose airlines using its services.

The construction of an LNG terminal on the island of Krk has apparently started out with strong support from the US government, after many years of delays and announcements. The project is funded from the state budget, since there was no interest among anyone to actually use the terminal. The government claims that there will be interest once the terminal is built, but it would not be the first major government-funded project in Croatia’s history to fail to deliver on its promises.

The construction of Pelješac bridge continues to go at an even faster pace than expected (despite occasional Bosnian protests), mostly thanks to the efforts by the Chinese construction company which won the tender, which also brought about a marked improvement in the relations between Croatia and China. Unfortunately, the construction of the access roads leading up to the bridge has not progressed nearly as fast, with tenders being decided just several months ago. It is quite possible that, when the bridge is built, it will be unusable for a while because there will be no roads leading to it.

Emigration continues amid Croatia's demographic crisis, although somewhat slower than in previous years, probably as a result of the fact that most of those who could have left have already done so. The authorities talk about demographic revival, but nothing much has happened so far.

Political scandals were as numerous as ever. The regional development minister had an accident while driving without a driving license, the agriculture minister forgot to list all his assets on an official statement, the administration minister had his own scandals which were too numerous even to count, and the state assets minister had problems of his own. The Prime minister strongly supported his ministers before some of them resigned, and then he changed his mind and dismissed the rest of them.

The ruling coalition remained stable this year, despite occasional rumours of impending collapse. Ultimatums were rejected, resignations demanded, talks announced, decisions to stay in coalition made, threats given... Just the usual stuff.

As expected, the border dispute between Croatia and Slovenia has not been resolved this year. Slovenia was disappointed with the EU’s decision not to get involved in a dispute between its two members. The chances that this issue will feature in our review for 2020 are quite high.

In October, the European Commission announced that Croatia has fulfilled all the technical conditions to join the Schengen area. However, the final decision will require the unanimous support of all EU member states, and Slovenia does not seem ready to give its approval until the border dispute with Croatia is resolved. 

Another major project is the introduction of euro in Croatia. After a lot of talk, the government has finally sent an official request. The process will certainly take years and opinion is divided as to whether it is a good idea or not.

One of the highlights were the trade union's activities. Earlier in the year, the unions managed to collect enough signatures for a referendum against the government’s pension reform and an increase in the retirement age. The government capitulated and revoked already approved laws (although it previously warned that such a decision would be a disaster).

The other major trade union success was the primary and secondary school strike later in the year. After almost two months, the government capitulated and gave the unions more or less everything they had asked for.

One of the highlights of the next six months will be Croatia’s EU presidency. The government is promoting it as a great success, although all EU member states sooner or later get their chance to hold the rotating presidency. While Croatia's plans are ambitious, their delivery will probably be more modest.

The major event at the end of the year was the first round of Croatia's presidential elections.

While the post is largely ceremonial, elections are held every five years and still manage to occupy public attention for months. Three major candidates launched their bids: incumbent president Kolinda Grabar-Kitarović (officially an independent candidate who in reality is HDZ), former SDP prime minister Zoran Milanović, and singer Miroslav Škoro, who presented himself as a candidate of change, despite having been an MP, a diplomat and a former HDZ member.

The first round was held on December 22. Zoran Milanović won with 29.6% of the vote, followed by Kolinda Grabar-Kitarović with 26.7%. Škoro was third with 24.5%. Milanović and Grabar-Kitarović will take part in the run-off on January 5.

ZAGREB, December 21, 2019 - Erste Bank estimates that Croatia's GDP growth in 2020 will slow down to 2.5% compared to the 3% forecast for this year, it was said on Friday during a Christmas function for the bank's executives and the media.

Chief analyst at Erste Bank Alen Kovač said that personal consumption and investments were the main generators of growth in 2019 and that investments were supported by better absorption of European Union funds. Kovac expects that these two segments will once again be the main contributors to growth in 2020 and that a relatively strong growth in investments, once again supported by EU funds, would compensate for the potentially unfavourable economic situation abroad next year, which could mean negative risks for Croatian exports.

Those risks are primarily related to Brexit, the potential further deterioration of trade relations between the major powers, and the level of growth in Germany and Italy. Personal consumption and its contribution should remain relatively stable and strong, and that should be supported by positive aspects in the area of disposable income, consumer confidence, the labour market and increased wages in the public sector, Kovač said.

Risks related to the estimated growth rate of 2.5% in 2020 are relatively balanced and investments represent a positive risk, while the global surroundings are a negative risk," Kovač underlined.

He added that growth climaxed in central and eastern Europe in 2018 while it slowed down in the majority of countries in 2019. Croatia is among that group of countries where a mild acceleration occurred, which is a positive exception.

 More economic news can be found in the Business section.

ZAGREB, December 19, 2019 - Croatia's economic growth is expected to slow down to 2.5% in 2020, from the medium forecast of GDP growth 2.9% in 2019, a survey conducted by the Croatian Banking Association (HUB) showed on Thursday.

The expected slowdown is due to external factors and internal weaknesses, such as the lack of reforms, investment barriers, an inefficient state sector and unfavourable demographics, members of the HUB Club of Chief Economists said in the survey.

Kuna exchange rates are expected to remain the same as in late 2019, while public debt should continue decreasing approximately at the same rate as this year. Interest rates are expected to remain low.

Projections by the chief economists of four leading Croatian banks are in line with those of the International Monetary Fund and the European Commission. The IMF expects the Croatian economy to rise by 3% in 2019 and by 2.7% in 2020, while the EC has forecast Croatia's growth at 2.9% in 2019 and 2.6% in 2020.

Those interviewed projected the public debt to GDP ratio at 72% this year, down from 74% in 2018, but slightly higher than the government's forecast of 71%, HUB said.

More economy news can be found in the Business section.

ZAGREB, December 18, 2019 - The European Commission on Tuesday recommended a detailed analysis be conducted next year of possible macroeconomic imbalances in 13 member states, including Croatia.

After its meeting in Strasbourg, the Commission released the Annual Growth Survey, the Alert Mechanism Report and the Single Market Scoreboard, marking the new cycle of the European Semester, a mechanism for the coordination of economic policies within the Union. The Single Market Scoreboard was included in the European Semester cycle for the first time.

The Alert Mechanism Report, which serves as a tool to detect any macroeconomic imbalances, says that 13 member states will be subject to a detailed review in 2020 as well. These are the same countries that were covered by the same procedure last year: Bulgaria, Croatia, Cyprus, France, Germany, Greece, Ireland, Italy, the Netherlands, Portugal, Romania, Spain and Sweden.

In February this year, the Commission confirmed that Croatia was no longer experiencing excessive macroeconomic imbalances, but only macroeconomic imbalances.

The Commission will present the results of the analysis in country reports in February or March 2020. It will then decide whether to start a corrective mechanism to remedy the macroeconomic imbalances based on an assessment of whether the government's reform programme is ambitious enough to correct the imbalances.

More news about Croatia and the EU can be found in the Business section.

ZAGREB, December 16, 2019 - The existing gap between Croatians and other residents in the EU in terms of the average income per capita can be narrowed by higher and better investments of the public sector alongside investments of the private sector, according to conclusions made by the International Monetary Fund (IMF).

"If, for example, Croatia were to aspire to bridge 15 percentage points of the current average per person income gap with the EU by 2030, the economy would need to grow at 1.5 percentage points more rapidly than the EU average, over this period. To maintain such higher relative growth rates, in addition to higher private investment, Croatia needs to raise its public sector investment as well—both in quantity and quality," reads the conclusions of the IMF mission which has recently visited Croatia.

The conclusions, published on Monday, praise Croatia for having come a long way over the last five years.

"Growth is strong, inflation is subdued, and unemployment has been significantly reduced. Public debt is steadily declining and external reserves are healthy."

"Following a protracted and painful recession, the last five years have seen the Croatian economy become stronger and healthier. Some of this can be attributed to 'good fortune', that is to say favourable global conditions, helping a tourism boom. However, a significant share is due to good policies—strong budget management and skilful policies by the Central Bank," say the conclusions praising the central bank (HNB).

"As long as the authorities maintain prudent policies and global conditions remain supportive, this picture is likely to continue next year. Looking further ahead, Croatia must rise to the significant challenge of successfully deepening integration with Europe—including through future Euro adoption—during a period of rapid technological change."

Croatia is urged to make prudent investments so as to to catch up with other countries that have made greater progress.

The IMF also calls for measures so as to ensure that the economic expansion can be felt more broadly across the population.

"The share of the workforce between the ages of 20 and 64 that is employed is only slightly above 60 percent. And the share of the population at risk of poverty and social exclusion is estimated at 25 percent. The country’s most vital resource—its youth—remain concerned about their long-term prospects. This has spurred emigration and a hollowing out of the internal regions of the country. In the short-term, the obvious symptom has been labor shortages in areas like construction and tourism. However, the more insidious problems are those of 'brain drain', and challenges to the sustainability of pension and healthcare systems," the Fund warns.

According to current official figures, the income per person of Croatia stands at 63 percent of the EU average.

Higher wages must be supported by higher productivity that grows the economy and to this aim, the IMF suggests three steps: maintaining macroeconomic and financial stability; making the state a source of greater dynamism through reforms; and, investing resources wisely to raise productivity.

Regarding the first step, the IMF praises the authorities for "considerable success" attained with the first step and it "needs to be carefully preserved."

"However, without more significant progress on the second step, the right climate and needed resources for the third step will prove difficult to realize."

Concerning the reforms of the public sector, Croatia is praised for increasing public investments in accordance with continued debt reduction which do not call for any austerity measures.

"Yet, they do require strong public sector reforms and a shift of some share of current spending to capital spending. Over the last decade, whether compared to the EU, or to other emerging economies, the balance of public spending in Croatia has tilted considerably toward spending on items like non-investment goods and services, subsidies, compensation of employees, and other social benefits, and away from public investment. This has reduced the flexibility of the budget and its capacity to spark economic growth."

The country is called to implement active employment policies "to facilitate smooth transfers of public sector workers with suitable skills to the private sector" now when the economy as a whole is doing relatively well.

"State-owned enterprise management and performance need to continue on the path of more modernization, so that enterprises in core areas support the productivity of the economy. It is noteworthy that this year they will meet or exceed the initial target of 0.4 percent of GDP contribution to the budget."

The government is advised to optimise social benefits system through better targeting of benefits to those who are most vulnerable and in need.

"The government should also continue social dialogue to come up with measures that mitigate the effects of the recent roll-back of pension reforms."

"Improving the territorial organization of local governments would significantly improve their capacity to invest and deliver uniform high-quality public services," says the IMF.

The Fund also estimates that if "around 4 percent of overall government revenues were gradually and efficiently reallocated to smart investments, the Croatian economic growth rate can be raised sufficiently as to bridge a significant portion of the gap with the EU over the next decade." These investments should be conducted in parallel with public sector reforms "that are supposed to enable savings in current spending that can be redeployed to capital spending, without the need to raise taxes, or cut the overall level of government spending. These adjustments, if properly executed and implemented, will repay the Croatian people handsome returns in the future."

In order to achieve higher future living standards, in terms of transportation infrastructure, the country "already has a good network of roads. Investment in ports on the coast are also underway. However, to make these ports fully productive, investment in railways—particularly for freight purposes—also needs to occur." Investments in both solid waste and waste-water treatment are also high priority areas.

"Aside of 'physical' infrastructure, Croatia also needs to upgrade its technological infrastructure. The overall strategy and responsibility for digitalization of the country would benefit from having a single independent entity with a long-term perspective.

"Although connectivity with regard to existing fixed broadband and mobile technologies is good, Croatia significantly lags behind advanced European peers and many other New Member States when it comes to leading edge fast and ultra-fast digital technology," says the IMF.

"Croatia has made some progress in the availability of digital public services for individual citizens. More progress is needed when it comes to the availability and use of digital services for businesses. The recently launched “START” initiative which allows for simple electronic procedures to start a business is a welcome development in this regard."

"The IMF supports the government’s decision to withhold the reduction in the overall VAT rate from 25 to 24 percent, given recent demands for higher wages. Indeed, we would recommend holding back on any other tax reductions at this stage, as they could return the fiscal balances to deficits, and undermine the reduction in public debt which is still elevated.

"For the same reason, we also strongly urge restraint with regard to any further wage demands, until a thoroughly analytically researched new public sector wage grid and coefficients are developed."

The IMF also praises the Croatian banking system as "profitable, liquid, and well-capitalized."

The conclusions describe the preliminary findings of IMF staff at the end of their official staff visit to Croatia earlier this month.

More economic news can be found in the Business section.