September the 14th, 2021 - While the International Monetary Fund (IMF) predictions for Croatian economic growth in 2021 are optimistic, it's worth noting that Croatia had no only the coronavirus pandemic to deal with, but two devastating earthquakes, too. Both lead to a drop in economic activity of eight percent last year.

As Poslovni Dnevnik writes, the Croatian economy has been exposed to enormous levels of stress caused by numerous factors over the past eighteen or so months, but it is showing resilience and its strong recovery is predicted for both this and next year, with GDP growth of 5.4 and 5.8 percent, members of the IMF Mission said in a closing statement issued on Friday.

"For 2021 and 2022, a strong recovery is projected with Croatian economic growth of 5.4 and 5.8 percent, respectively, driven by the recovery in the services sector, assuming the realisation of two thirds of tourist arrivals from 2019 in 2021 and their almost full recovery in 2022, and investments that will be driven by large inflows of grants from the EU in the medium term. In the medium term, GDP growth is projected to slow down to around three percent,'' the IMF mission said in a statement at the end of their visit to Croatia which takes place as part of regular consultations held with member states under Article IV of the IMF statute.

The IMF recalls that the coronavirus pandemic and two devastating earthquakes led to a decline in economic activity of 8 percent in 2020 in Croatia due to reduced domestic and foreign demand, with a particularly large decline in tourism revenues, amounting to about 60 percent annually.

However, they also point out that generous support for fiscal and monetary policy, along with appropriate easing of supervisory requirements, has helped mitigate the effects of the coronavirus pandemic.

At the same time, they note, Croatia's financial position was somewhat eased by EU funds, which financed most fiscal support measures, and the CNB intervened in the foreign exchange market and eased tensions in the domestic bond market by buying government securities in the amount of approximately 5, 5 percent of GDP and lowered the reserve requirement and conducted repo operations.

Markets calmed down, especially after the establishment of a swap line with the European Central Bank (ECB) in mid-April 2020. They also referred to inflation, estimating that it is still low despite the recent increase, and they have also forecast its stabilisation at the level of 2 percent in the year 2023.

For more on Croatian economic growth, make sure to follow our dedicated business 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, April 14, 2020 - In 2020 Croatia's economy will contract by nine percent, the most in the group of emerging European economies, shows the latest global economic forecast of the International Monetary Fund (IMF), published on Tuesday.

The coronavirus pandemic has been strongly impacting economic activity, shows the latest forecast, reflecting the consequences of quarantine and other stringent measures with which governments around the globe have been trying to fight the new, highly contagious virus.

According to the latest IMF forecast, Croatia's GDP will drop by 9% this year. For the sake of comparison, last autumn, before the outbreak of the epidemic, the IMF forecast a growth rate of 2.7% for Croatia's economy in 2020.

In 2021 recovery is expected, with an estimated growth rate of 4.9%.

The international lender has also revised the growth rate for 2019 to 2.9%, down by 0.1 percentage point.

The IMF expects a significant increase in unemployment this year, to 11.5%, as against the autumn forecast of an unemployment rate of 8%.

In 2019 unemployment was at 7.8%, whereby the October 2019 forecast has been revised down by 1.2%.

In 2021 unemployment is expected to drop again, to 8%.

The IMF also forecasts a deficit in the current account, expressed as a share in GDP of 4% in 2020, whereas in its autumn forecast it predicted a surplus of one percent.

A deficit in the current account of 1.5% is forecast also for 2021.

The forecast about consumer price growth in 2020 has been revised up by 0.1 percentage point, to 1.3%. In 2021 prices are expected to grow at an almost unchanged rate of 1.2%.

In 2019, according to the IMF's estimates, prices grew by 0.8%, a downward revision of the autumn forecast by 0.2 percentage points.

According to the latest forecast, the surplus in 2019 was 2.9%, which is 1.2 percentage points higher than forecast in October 2019.

The latest IMF estimates show that this year Croatia's economy is expected to drop the most in the group of emerging European economies, which also encompasses Russia, Turkey, Poland, Romania, Ukraine, Hungary, Belarus, Bulgaria and Serbia.

The IMF estimates that those economies will drop by 5.2% on average this year, as against a 2.5% growth, forecast in the autumn of 2019.

In 2021, strong recovery is expected, with an estimated growth rate of 4.2%.

Last year, the emerging economies grew by 2.1% on average, 0.3 pp more than forecast by the IMF in October 2019.

A more pronounced drop in economic activity is expected this year in Ukraine and Belarus, of 7.7% and 6% respectively. The two countries are followed by Russia, with an estimated drop of 5.5%, and Turkey and Romania, each with a decline of 5%.

Poland's economy is expected to contract by 4.6% and Bulgaria's by 4% while economic activity in Hungary and Serbia is expected to contract the least, by 3.1% and 3% respectively.

More economic news can be found in the Business section.

ZAGREB, October 9, 2018 - The International Monetary Fund (IMF) expects Croatia's growth to rise by 2.8% in 2018 and to decelerate at the rate of 2.6% in 2019, according to the latest issue of the World Economic Outlook.

ZAGREB, June 9, 2018 - The Constituency Group of the International Monetary Fund and the World Bank, comprising central bank governors and finance ministers of 15 countries, met near Split on Saturday and mostly discussed financial technology.

ZAGREB, May 23, 2018 - The International Monetary Fund (IMF) Mission expects Croatia's growth to remain at about 2.8 percent in 2018, before decelerating gradually over the medium term toward 2 percent in the absence of substantial structural reforms. according to a concluding statement of an IMF staff visit to Croatia.

ZAGREB, April 19, 2018 - A Croatian delegation, consisting of representatives of the Finance Ministry and the Croatian National Bank, will attend the spring meetings of the World Bank and the International Monetary Fund (IMF) in Washington from 19 to 22 April, the Finance Ministry announced in a press release on Thursday.

ZAGREB, April 18, 2018 - This year, the Croatian economy is expected to grow at the same rate as last year, at 2.8%, after which it will slow down a bit, the International Monetary Fund (IMF) said in its spring World Economic Outlook on Tuesday.

ZAGREB, Jan 16 (Hina) - The Executive Board of the International Monetary Fund (IMF) on Monday welcomed Croatia's continued economic recovery and favourable fiscal performance, warning however that GDP had not yet reached its level from before the recession and underlining the need to carry out structural reforms.