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IMF Country Report No. 16/187
REPUBLIC OF CROATIA: 2016 ARTICLE IV CONSULTATION—PRESS RELEASE; STAFF REPORT; AND STATEMENT BY THE EXECUTIVE DIRECTOR FOR THE REPUBLIC OF CROATIA
June 2016
Under Article IV of the IMF’s Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. In the context of the 2016 Article IV consultation with the Republic of Croatia, the following documents have been released and are included in this package:
A Press Release summarizing the views of the Executive Board as expressed during its June 22, 2016 consideration of the staff report that concluded the Article IV consultation with the Republic of Croatia.
The Staff Report prepared by a staff team of the IMF for the Executive Board’s consideration on June 22, 2016, following discussions that ended on May 10, 2016, with the officials of the Republic of Croatia on economic developments and policies. Based on information available at the time of these discussions, the staff report was completed on June 8, 2016.
An Informational Annex prepared by the IMF staff.
A Statement by the Executive Director for the Republic of Croatia.
The documents listed below have been or will be separately released.
Selected Issues
The IMF’s transparency policy allows for the deletion of market-sensitive information and premature disclosure of the authorities’ policy intentions in published staff reports and other documents.
Copies of this report are available to the public from
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International Monetary Fund
Washington, D.C.
© 2016 International Monetary Fund
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REPUBLIC OF CROATIA: STAFF REPORT FOR THE 2016 ARTICLE IV CONSULTATION
June 8, 2016
Key Issues
Context: The economy is gradually recovering from a six year recession, mostly on the back of strong exports, tourism activity, and private consumption. Public and external debt levels and financing needs remain high. Real GDP is still about 11 percent lower than in 2008, unemployment is high at about 16 percent, and merchandise exports are low, although improving following EU accession. A new coalition government was formed in January with a narrow majority and has passed a tight budget and announced a wide-ranging National Reform Program (NRP) that will require decisive implementation to achieve Croatia’s economic potential.
Key policy recommendations: Economic priorities in the period ahead are to: (i) reduce vulnerabilities through fiscal consolidation; and (ii) boost growth and employment creating by accelerating structural reforms and utilization of EU structural and investment funds.
Fiscal policy: Adopt a growth-friendly fiscal consolidation strategy to put public debt firmly on a downward path, advance privatization, and improve the efficiency of the bloated public sector.
Monetary policy: At this juncture, given the high degree of both deposit and loan euroization, there is no viable alternative to the quasi-peg to the euro. Within the limits of this framework, continue to maintain an accommodative monetary policy stance as long as inflationary pressures and financial stability risks remain subdued. Ensure adequate international reserve coverage to safeguard monetary and financial stability and consider options to gradually reduce euroization.
Structural policies: Improve the business climate and further reform the labor market to strengthen competitiveness and reduce unemployment. Enhance policy predictability to help improve confidence and investment. Streamline social benefits that are inefficient and poorly targeted. Address overlaps between different layers of ministries, agencies, regions, and municipalities to reduce red tape.
Previous staff advice: Deficit reduction in 2015 exceeded staff’s advice, largely due to a stronger than projected recovery and lower investment in the fourth quarter under the care-taker government. No major additional progress has been made on structural reforms since the 2015 Article IV consultation, with the exception of the new Consumer Bankruptcy Law that came into force in January 1, 2016.
Approved By
James Gordon (EUR) and Masato Miyazaki (SPR)
Discussions took place in Zagreb during April 27 to May 10, 2016. The staff team comprised Messrs. Sakr (Head), Crivelli, Lybek, Omoev (all EUR), and Ms. Shi (FAD). Mr. Gordon (EUR) and Mr. Manchev (OED) attended some of the meetings. Ms. Samuel, Ms. Borisova, and Ms. Rhee (all EUR) assisted in the preparation of the staff report.
The staff team met with Prime Minister Orešković, Deputy Prime Minister Petrov, Minister of Finance Marić, Minister of Social Policy and Youth Juretić, Minister of Health Nakić, Minister of Tourism Kliman, Governor of the Croatian National Bank Vujčić, Chairman of the Commission on Fiscal Policy and of the Finance and Central Budget Committee of the Parliament Marić, other officials, and representatives of the banking sector, business community, labor unions, and academia.
Contents
BACKGROUND
A. Context
B. Recent Developments
OUTLOOK AND RISKS
A. Outlook
B. Risks to the Outlook
POLICY DISCUSSIONS
A. Fiscal Policy
B. Monetary Policy
C. Financial System
D. Structural Reforms
STAFF APPRAISAL
FIGURES
1. Short-Term Indicators
2. Balance of Payments, 2007–15
3. Financial Market Developments, 2008–15
4. Monetary and Banking Sector Updates, 2008–15
5. Croatia Compared to Peers
6. Labor Market Developments, 2008–15
7. Business Environment, 2015–16
8. Fiscal Developments, 2010–18
9. Competitiveness Indicators, 2000–15
10. Vulnerability Indicators, 2007–15
11. Vulnerability Indicators vs. Regional Peers, 2008–15
TABLES
1. Selected Economic Indicators, 2010–17
2. Medium-Term Baseline Scenario, 2010–21
3. The Statement of Operations of General Government, 2010–21
4. Balance of Payments, 2010–21
5. Monetary Accounts, 2010–15
6. Financial Soundness Indicators, 2010–15
ANNEXES
I. Conversion of Swiss Franc Loans to Euro
II. Public Debt Sustainability Analysis
III. External Debt Sustainability Analysis
IV. Risk Assessment Matrix
V. National Reform Program
VI. Real Exchange Rate Assessment and Competitiveness
VII. Reducing Fiscal Fragmentation
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REPUBLIC OF CROATIA: STAFF REPORT FOR THE 2016 ARTICLE IV CONSULTATION—INFORMATIONAL ANNEX
June 8, 2016
Prepared By
European Department in Consultation with Other Departments
Contents
FUND RELATIONS
WORLD BANK RELATIONS
STATISTICAL ISSUES
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Press Release No. 16/309
FOR IMMEDIATE RELEASE
June 28, 2016
International Monetary Fund
Washington, D.C. 20431 USA
Telephone 202-623-7100
Fax 202-623-6772
