International Monetary Fund. Asia and Pacific Dept
The coronavirus disease (COVID-19) pandemic is still unfolding around the globe. In Asia, as elsewhere, the virus has ebbed in some countries but surged in others. The global economy is beginning to recover after a sharp contraction in the second quarter of 2020, as nationwide lockdowns are lifted and replaced with more targeted containment measures.
International Monetary Fund. Western Hemisphere Dept.
The economy is still in its deepest recession in decades, partly the result of the failure of past policies. The recession has been aggravated by a political crisis, which had, until recently, paralyzed policymaking and further damaged confidence. President Rousseff was impeached for responsibility crimes related to fiscal practices on August 31, and the government that took office in May will remain in charge until January 1st, 2019. Markets have responded positively to the new government's reform agenda, bolstering asset prices and confidence and helping the country ride a positive wave of sentiment toward emerging economies. However, while some high-frequency indicators suggest the recession may be nearing its end, the implementation of much-needed reforms to durably restore policy credibility is subject to risks.
KEY ISSUES Removing structural obstacles to growth. After six years of persistent contraction, Croatia’s economy is showing signs of a tentative recovery, supported by a favorable environment—the last economy in emerging Europe to exit the post-Lehman recession of 2008/09. Deep-seated structural factors have impeded the economy’s capacity to adjust, many of them relating to incomplete transition of Croatia’s corporate sector toward market orientation. While the authorities have made progress with some structural reforms in previous years, others remain incomplete—notably reform of the bloated, inefficient state- owned enterprise sector and of Croatia’s opaque governance system, characterized by much overlap between different layers of government. Unless addressed, these factors are bound to weigh on activity going forward. Restoring Fiscal Sustainability. Large fiscal vulnerabilities have built up in the wake of the recession. In the face of high fiscal deficits and public debt, policy has started to move in the right direction under the auspices of the European Commission’s Excessive Deficit Procedure. However, it requires more of a long-term orientation: a comprehensive consolidation plan should aim not only at reducing the deficit, but also at restructuring the budget to render it more growth and employment friendly. Safeguarding Monetary and Financial Stability. The kuna-euro exchange rate anchor remains without viable alternative for the time being, given the high degree of loan euroization. The banking system has remained resilient despite the drawn-out recession. Continued supervisory vigilance is needed to preserve this record. Previous Staff Advice. No major additional progress has been made on structural reforms since the 2014 Article IV consultation. Fiscal consolidation has advanced gradually, although efforts to reduce the headline deficit have been frustrated by revenue underperformance in a deflationary environment.
This 2014 Article IV Consultation highlights that Croatia remains stuck in an unusually drawn out recession. In 2013, real GDP contracted for the 5th consecutive year, and stands now at less than 90 percent of the end-2008 level. Unemployment has risen to 17 percent. Domestic demand remains depressed as corporations and households focus on reducing excessive debts accumulated in the 2000s. Exports and foreign direct investment are also feeble. The outlook is for an additional contraction in 2014 of almost 1 percent. Real domestic demand would remain feeble, reflecting both weak private sector demand and fiscal consolidation.