October the 17th, 2022 - The International Monetary Fund (IMF) has released its predictions amid ongoing inflation, the Ukraine-Russia war and spiralling energy prices during the post-pandemic period. What precisely awaits the Croatian economy according to their predictions?

As Poslovni Dnevnik writes, the main problem that is currently being experienced on a huge scale is that this current economic slowdown is very widespread. A third of the global economy could end up having to record a "technical recession", which is equal to two consecutive quarters of contraction of economic activity,'' Croatian economist Matej Bule from the Croatian National Bank told the Croatian Radio network.

''An additional problem is that that same economic slowdown is simultaneously being accompanied by very strong inflationary pressures,'' he pointed out, adding that the Republic of Croatia is currently handling it better than some other comparable countries, which might come as a surprise to those who feel that their pockets and bank accounts are taking hit after expensive hit.

 "Everything is currently heading in the direction of normalising these inflationary pressures"

"We had double-digit growth back in 2021, in 2022, growth of 5.6 percent is expected for the Croatian economy, but for 2023, all relevant institutions expect a strong slowdown for the economy," he said, adding that growth of a mere 1 percent is expected next year.

He also stated that the movement of inflation will depend on a number of factors, and one of the most important things is that we'll have to keep a close eye on the movement of the prices of raw materials on the global market.

For more on the Croatian economy and ongoing inflation, make sure to keep up with our dedicated news section.

April the 21st, 2022 - The International Monetary Fund (IMF) has drastically slashed Croatian GDP growth expectations, with the ongoing war in Ukraine following Russian invasion cited as a significant issue.

As Poslovni Dnevnik/Ana Blaskovic writes, the International Monetary Fund (IMF) has more than halved its growth forecast for the domestic economy to 2.7 percent this year due to the situation with the war in Ukraine. In its regular autumn forecasts for October, the IMF expected Croatian GDP growth of 5.8 percent. In 2023, growth should accelerate strongly to 4 percent.

While Croatian GDP growth will slow down, inflation should almost triple, from 2 to 5.9 percent. Next year, however, the International Monetary Fund estimates that price growth should slow down to 2.7 percent, which would almost return to the levels we experienced back in 2021.

In its latest forecast, the unemployment rate has been slightly adjusted to be lower, so the IMF now expects 7.7 percent, down a little from the previous 8 percent. In 2023, unemployment should still fall, down to 7.4 percent. Last year, that rate reached 8.2 percent, 0.2 percentage points lower than autumn's estimates.

The IMF has positive expectations about the current account deficit, which it estimates will halve to 0.4 percent of GDP. Next year, the current account should be in the plus with a 0.3 per cent GDP surplus.

The Republic of Croatia is in the group of emerging European economies, which is forecast to fall by 2.9 percent, after last year's growth forecast of 3.6 percent. In 2023, the IMF forecasts a recovery of 1.3 percent for emerging European economies.

The Fund also predicts a decline in economic activity for the entire Eurozone, which could rise by 2.8 percent this year (instead of 3.9 percent as was expected in January), and in 2023, it will likely slow down to further to 2.3 percent.

The biggest blow will more than likely be experienced by Germany, which will see its GDP grow by only 2.1 percent this year, 1.7 points less than previously expected. Due to the war in Ukraine, inflation across the Eurozone is expected to reach 5.3 percent and then weaken to 2.3 percent in 2023.

For more on Croatian GDP growth, make sure to check out our dedicated lifestyle section.

ZAGREB, 23 June, 2021 - Despite the considerable setback dealt by the pandemic, Croatia has a rare opportunity in the next five years to restore its economy to health and to ramp up the public investments necessary for appreciably higher growth rates with the help of EU funds, an IMF mission says in a Concluding Statement.

"Following a painful contraction of 8 percent in 2020, the economy looks set for growth between 5 and 6 percent in 2021 driven by a rebound in the services sector and investment - provided the pandemic does not provide further unwelcome surprises," the mission says the statement published on Wednesday after visiting Croatia as part of regular consultations with member states.

"With sufficient luck regarding tourism outcomes, and a successful vaccination drive within the next months, growth could even exceed 6 percent this year. Assuming the pandemic fades by the end of this year, growth could remain high over the next few years, if the country makes full and timely use of the potentially sizable forthcoming inflow of EU funds," according to the statement.

"Since the first quarter, the recovery has picked up noticeably with areas like construction and manufacturing already reaching activity levels higher than in 2019. Overall, the number of registered unemployed persons has fallen by nearly 13 percent since a year ago. However, tourism and directly related sectors are yet to fully recover. This process is likely to take another year or two."

Swift measures by the authorities

"Between the pandemic and two large earthquakes, Croatia has been severely tested, and the country’s resilience has come through. The economic contraction in 2020 - painful as it has been -was not as severe as those experienced by many other economies with a strong tourism component. This is mainly due to the swift measures enacted by the authorities," the IMF staff said.

"Support measures must remain in place until the health of the population and the economy have been fully restored. As conditions improve, support measures need to rotate toward preparing the workforce for the post-pandemic world, and facilitating balance sheet repair of viable businesses. Thereafter, the challenge of once again reducing deficits and the public debt whilst shifting growth into a new high gear must be taken on. The generous funding from the EU represents a historic opportunity, to help meet these challenges successfully - an opportunity that must be fully utilized, in a timely fashion," the IMF mission said.

Not the right time to further cut taxes

Noting the government's support measures, the mission said, "Just as these support measures were essential during the worst of the crisis, they must now be better targeted to lagging sectors of the economy - and they must remain in place till the economy has more fully recovered."

"It is paramount that a vaccination drive be as successful and widespread as possible, that extra healthcare costs are fully met and arrears in the healthcare system are reduced to the maximum possible extent," according to the statement.

"Complementing the use of funds such as the European Social Fund, fiscal resources saved this year due to improving conditions can also be usefully redeployed to train more workers in sectors like greening and digitalization."

"In sum, in the view of IMF staff, the most important fiscal goal in 2021 is to focus on spending available resources wisely to restore the economy to health. If this is successfully accomplished this year, it will more firmly ground the efforts to reduce the deficit and debt over the next few years," said staff said in the Concluding Statement.

"Regarding revenues, the authorities need to conserve all available resources to meet any unexpected expenditures into 2022, and well beyond. This is one clear lesson from this completely unforeseen shock the world has suffered. We hold that this is not the right time for any further tax cuts or weakening of the tax base. Current conditions are still far too fragile for the country to afford them," they said. 

Recovery and Resilience Fund provides unique opportunity for economic development

They said that there were few doubts that a post-pandemic "will be more digitalized in the most basic aspects of our lives, and that it should be greener. In these two areas, Croatia has great strides to take, from which there will be a sizable return on investment, for decades to come."

The IMF reiterated that "our most important recommendation was to raise public investment, for the sake of future growth. Now, that conviction has only deepened, as it is important to acknowledge a singular aspect in which Croatia is actually better off than it was before the pandemic."

That is "the generous allocation of EU Funds, including from the Recovery and Resilience Fund (RRF). The RRF resources amount to 10.6 percent of GDP in grants to be utilized by 2026."

"These funds reflect a truly unique opportunity along the path of economic development, which many countries in the world are not fortunate enough to have. It is important for all stakeholders in Croatia to fully understand the significance of this opportunity. These funds are available, but they need to be absorbed efficiently, and in a timely manner. They must also be accompanied by needed reforms," the IMF said.

"Thanks to the influx of these EU funds beginning towards the end of this year, Croatia can significantly upgrade its public capital stock, decarbonize its economy, catch up with digitalization, and improve its maritime and rail transport systems. If the projected investments go according to plan, we currently assess that the funds from the RRF alone could add as much as 2.9 percentage points to real GDP over the next twenty years."

Opportunity to reduce income gap in relation to EU

"When the effects of the planned reforms, as well as the other EU structural funds are put together, Croatia now has its best chance since independence to significantly narrow the current 35% gap in per capita income with respect to the EU average," the mission said.

It added that "the prospect of living in a vibrant society with prosperity rapidly converging to EU levels could cause the young to fundamentally re-evaluate their future, thereby further stemming the tide of outward migration. That, in turn, would have the positive effect of reducing risks to the sustainability of the healthcare and pensions systems. It is very much possible now, and unlike ever before, to start a virtuous cycle - and to definitively escape past vicious circles."

The authorities have requested a Public Investment Management Assessment from the IMF, to take place in August 2021, the statement noted. "This assessment will help prepare an action plan to help make sure investment spending is effective, is sensitive to climate change related considerations and supports sustainable long-term growth."

The authorities’ National Recovery and Resilience Plan "has laid out major complementary reform commitments across five components: green and digital economy, public administration and judiciary, education, science and research, labor market and social protection, and healthcare. These are essential for the flexibility Croatia needs to operate its economy smoothly, once inside the eurozone."

Reforms needed for stronger public finance

Within the reform areas where the strength of public finances is the focus, IMF staff re-emphasizes the importance of support, from all stakeholders, for civil service and administrative reforms, "including a modernization of the public salary system, as well as improving the territorial organization of sub-national governments."

Support is also called for ending "stop-gap measures to take care of healthcare arrears, through an overhaul of its cost structure" and "exploring a more sustainable revenue base, to preserve healthcare quality standards."

The IMF also recommends the development and implementation of a full-fledged strategy for state-owned enterprises (SOEs), "including the separation of core from non-core businesses, and a strengthened oversight system for the former to ensure that they contribute their fair share to the budget by remaining financially durable after their public service obligations are met. The authorities’ commitments to sell some non-core SOEs over the next few years is a promising start." 

Also recommended is ensuring the long-term sustainability of the pension system, given population aging.

In addition to these areas, constantly improving the competitiveness of the Croatian economy through active dialogue with the private sector, remains essential.

"For the forthcoming increase in public investment to have maximum effect on the economy’s growth rate, it must be complemented by increases in private investment, as well. Reforms to the framework of debt restructuring, insolvency, and efforts to further improve predictability and efficiency in legal procedures remain central to unlocking more resources from investors, as it allows them to invest with greater confidence."

Banking system liquid and sufficiently capitalized

"Monetary policy remains highly expansionary, within the exchange rate anchor in place since 1993. This stance is appropriate given the need to nurse the economy fully back to health," the IMF staff said.

The recent pick-up in inflation is more likely than not to be transitory in nature, but should inflationary pressures prove more persistent than in the euro area, the central bank "may consider reducing excess liquidity in the banking system, while maintaining exchange rate stability."

"The banking system has remained liquid and is on average well capitalized," the mission said, adding that there was more than enough money to meet the demand for corporate loans.

Housing lending remains strong, while uninsured household cash loans have decreased, which the IMF said was positive.

Although the ratio of non-performing loans to total loans has remained stable, the so-called stage II loans, a forward-looking indicator of future asset quality problems, has risen - particularly for non-financial corporations. This development warrants continued close monitoring."

"The pandemic has not affected the upward trend in house prices in Zagreb and coastal areas. To the extent that housing purchases are not driven by excessive household borrowing, they do not constitute an immediate financial stability risk," the IMF said.

However, this also requires continued monitoring by the central bank, If circumstances require it, the central bank "might wish to consider putting in place more formal macro-prudential measures (than the current implicit debt-service-to-income ratio included in the Foreclosure Act)."

"Despite the considerable setback dealt by the pandemic, Croatia has a rare opportunity, over the next five years, to restore its people and economy to health. It can ramp up the public investments necessary for appreciably higher growth rates, with the help of EU funds. Such opportunities should not be taken for granted. The onus of efforts is not exclusively on the authorities. All stakeholders in society must offer them the support for vital reforms, while doing their parts to re-energize private investment, and innovation. Adopting the euro will help remove some existing economic frictions by removing exchange rate risk. Yet, reaping the full benefits of the currency union requires strong focus and preparation. A brighter future is very much within reach. The time to act is now," according to the Concluding Statement.

For more about business in Croatia, follow TCN's dedicated page.

ZAGREB, 6 April, 2021 - The International Monetary Fund (IMF) has revised down its growth forecast for the Croatian economy for this year from 6.0% to 4.7%, expecting a pickup in economic activity and a return to the pre-pandemic level in 2022.

The Croatian economy contracted by 9.0% in 2020, the IMF said in its World Economic Outlook on Tuesday, reaffirming its forecast from last autumn. The national economy is expected to grow by 5.0% in 2022 and thus exceed the pre-pandemic growth level.

The IMF included Croatia among the emerging European economies that are expected to record the highest growth rates this year and the next.

This year, only Turkey and Romania are projected to achieve higher growth rates, of 6%, and the Serbian economy is expected to grow at a rate of 5.0%. Next year, a higher rate is forecast only for the Hungarian economy, of 5.7%.

The economic activity of the emerging European economies should rise by 4.4% this year, half a percentage point higher than projected last autumn, while next year it is expected to slow down to 3.9%.

Projections of current account deficit and unemployment revised down

Croatia's current account deficit is forecast at 2.3% of GDP this year, which is 0.8 percentage points lower than in the October report.

In 2020 the current account deficit was 3.5%, up by 0.3 percentage points from the autumn report, while in 2022 it is projected to drop to 1.6%.

The unemployment rate for this year is forecast at 9.4%, down from 10.3% projected last autumn. In 2020, the rate was 9.2% and in 2022 it should slide to 9.0%.

In 2021, consumer prices are expected to increase by 0.7%, compared to 0.8% projected in October. In 2020, the inflation rate was 0.3% as forecast in October, while in 2022 consumer prices are expected to pick up to 1.2%.

For more about business in Croatia, follow TCN's dedicated page.

ZAGREB, Feb 20, 2020 - Croatia's economy has performed well, but convergence with the EU needs to accelerate, hard-won fiscal gains are fragile and should be carefully preserved, and a more dynamic state is vital for future economic prospects, are some of the assessments of the International Monetary Fund (IMF)

The Executive Board of the International Monetary Fund (IMF) concluded the IMF Article IV consultation with Croatia at the end of last week, and a press release and a comprehensive report by the IMF Mission were published at the IMF website on Wednesday.

The IMF Mission visited Croatia from 3 to 16 December last year within the framework of yearly consultations with member states, and they published their final statement at the end of their visit.

In a press release published today, the Executive board emphasised that Croatia experienced its fifth consecutive year of solid economic growth, once again driven largely by private consumption and tourism. The economic growth is expected to moderate, the says the IMF adding that both public and external indebtedness are due "to continue their declining trajectories."

"The pace of fiscal consolidation in 2019 continued to slow, with the budget estimated to be close to balance. Recently agreed wage increases in the public sector are expected to increase current spending in 2020. Even though revenues will remain buoyed by economic activity, the budget balance is expected to turn into a small deficit in 2020, in part due to additional tax cuts," it was stated in the IMF Executive Board's press release, where it was also noted that contingent liabilities could also pressure budget balances in the coming years.

The IMF Executive Board also noted that Croatia was currently targeting ERM II entry in mid-2020, and eventually the Euro Area.

The Executive Board stressed that the Croatian economy had performed well, but convergence with the EU needed to accelerate.

"The Croatian economy has become stronger over the last five years. This is significantly because of strong budget management and skilful policies by the Central Bank. As a result, public debt has fallen along with interest rates, creating room for a robust consumption-led private sector expansion," the IMF stated.

The Fund's experts assess that unemployment was down, wages were growing, and inflation remained subdued.

"Yet, Croatia has barely reduced its distance with the EU average in terms of income per capita in the last decade, and emigration of the young continues to pose challenges."

The IMF Executive Board also assessed that "hard-won fiscal gains are fragile and should be carefully preserved".

"While public debt ratios continue to decline due to buoyant activity, fiscal performance has recently become encumbered by numerous spending demands," stated the IMF, adding that for this reason, the members of the IMF Mission support the Croatian government’s decision to withhold the planned reduction in the overall VAT rate.

The IMF Executive Board also assessed that "a more dynamic state is vital for future economic prospects".

"The budget is currently too rigid and losing its capacity to spark economic growth," emphasised the IMF.

"Better absorption of EU funds could ease this shift in priorities but cannot substitute for deeper reforms to the cost structure of public administration, pensions and healthcare systems, and the fiscal and territorial relationships between different levels of government," accentuated the IMF.

They also point out that state-owned enterprise management and performance needs more modernization and that "accelerating the digitalisation of public administration and using technological improvements to better target social-benefits would also help make the state more dynamic".

The Executive Board also evaluates that "renovating the capital stock and enhancing the business climate will help raise potential growth".

They also noted that recent improvements in streamlining the administrative and fiscal burdens on the business sector were welcome, but that members of the Mission also encouraged further progress in the areas of enhancing digital public services and adapting legislation to facilitate Croatia’s integration in the EU’s Digital Single Market.

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