Tue. Sep 21st, 2021

September 10, 2021

Washington, DC: On August 30, 2021 the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation [1] with Croatia.

The Croatian economy has been subjected to severe stress, but is showing its resilience. The pandemic and two devastating earthquakes led to a 8.0 percent drop in activity in 2020, reflecting lower domestic and external demand—particularly, a drop of some 60 percent in tourism receipts (yoy). Ample support of fiscal and monetary policy, coupled with appropriate relaxation of supervisory requirements, helped to contain the effects of the pandemic. The financial position of the government was somewhat alleviated by the EU funds (loans, transfers) that have financed most of the fiscal support measures. The CNB intervened in the currency market and mitigated tensions in the domestic bond market through purchases of government securities (about 5.5 percent of GDP). It also lowered reserve requirements and conducted repo operations. Markets calmed, not least after a €2 billion SWAP arrangement with the ECB was announced in mid-April 2020. External indicators held up relatively well, the current account posted a small 0.4 percent deficit in 2020, despite the collapse in tourism receipts. However, gross public and external debt climbed by almost 16 and 6 percentage points, respectively, causing a reversal of earlier gains. Inflation has remained benign, despite a recent uptick.

A robust bounce back is projected for 2021 and 2022, of 5.4 and 5.8 percent growth respectively driven by a rebound in the services sector (assuming ⅔ and nearly full recovery of tourist arrivals in 2021, and 2022 respectively), and investment which will be bolstered by large EU investment grants over the medium-term. Over the medium term, growth is projected to ease closer to 3 percent. Inflation is projected to pick up and stay at 2 percent through 2023, in line with the ECB inflation target. There are large risks on both sides, including from virus mutations in the near-term which could result in significant economic scarring. Medium-term growth would be substantially lower if the pace of recovery in EU trading partners is lower than expected, if EU funds are not effectively absorbed and/or if promised complementary reforms remain challenging to deliver. On the upside, a more rapid and successful vaccination campaign would enable a quicker return to the health of the population and the economy. Over the medium-term, the positive effects of green investments and digitalization may be greater than projected.

Executive Board Assessment [2]

Executive Directors welcomed the swift measures taken to combat the COVID-19 pandemic thus building the foundations for the projected recovery, underpinned by tourism and investment.

Directors welcomed the authorities’ efforts to balance the pandemic recovery with fiscal prudence while remaining vigilant to support the nascent recovery as needed. They stressed that it will be important to avoid further tax cuts to conserve fiscal resources and to firmly place public debt levels on a downward trajectory over the medium term.

Directors called for an accelerated implementation of structural reforms and the need to increase the capacity to absorb EU structural funds, in particular in the area of public investment management. Such reforms are essential to make progress toward the goal of closing the income gap to the EU average and to achieve the desired decarbonization, digitalization, and diversification of the economy. In this context, they also welcomed the authorities’ plans to implement a civil service remuneration system that rewards productivity, as well as the merging of healthcare services across sub-national governments.

Directors considered that monetary policy had been appropriately accommodative within the limits of the exchange rate anchor and ample global liquidity. They welcomed ERM II membership in July 2020, in the context of the authorities’ strategic priority of euro adoption. Noting the benefits of euro adoption, Directors welcomed the authorities’ strong commitment to observe the convergence criteria and to improve the AML/CFT framework and SOE governance.

Directors stressed the need to remain vigilant to financial and banking sector risks with the expiration of the regulatory easing introduced in line with the European Banking Authority guidelines to mitigate the impact of the pandemic. They welcomed the decision to facilitate write-offs of NPLs and efforts to strengthen the insolvency framework. Directors urged the authorities to remain particularly vigilant over credit developments in the real estate market and stand ready to absorb excess liquidity and impose adequate macroprudential measures if needed.

Croatia: Selected Economic Indicators, 2016-26

2016

2017

2018

2019

2020

2021

2022

2023

2024

2025

2026

Proj.

Output, unemployment, and prices

(Percent change, annual average, unless otherwise indicated)

Real GDP growth

3.5

3.4

2.8

2.9

-8.0

5.4

5.8

4.0

3.3

3.2

3.1

Contributions:
Domestic demand

3.2

4.2

4.6

2.7

-2.3

3.9

6.5

4.9

3.1

1.7

1.7

Net exports

0.3

-0.7

-1.9

0.2

-5.8

1.5

-0.7

-0.9

0.2

1.5

1.4

Unemployment

15.0

12.4

9.9

7.8

9.0

8.5

8.0

7.7

7.2

7.0

6.8

CPI inflation (avg.)

-1.1

1.1

1.5

0.8

0.1

1.8

1.9

2.0

2.0

2.0

2.0

Saving and investment (percent of GDP)
Domestic investment

21.0

22.0

23.4

22.6

25.6

26.4

27.2

28.0

28.5

27.6

27.0

Domestic saving

23.2

25.5

25.3

25.7

25.3

25.8

25.9

26.8

27.7

27.2

26.8

Government

3.5

4.4

5.0

5.7

-1.1

1.4

2.6

3.5

4.3

4.9

5.1

Nongovernment

19.7

21.1

20.2

20.0

26.3

24.4

23.4

23.2

23.4

22.3

21.7

Government Sector (ESA 2010 definition)
General government revenue

46.5

46.0

46.2

47.5

48.0

51.2

52.4

52.1

50.5

48.8

48.1

General government expenditure

47.4

45.2

46.0

47.2

55.4

55.3

55.3

54.1

51.7

49.4

48.5

General government balance

-1.0

0.8

0.2

0.4

-7.4

-4.1

-2.9

-1.9

-1.2

-0.5

-0.4

Structural balance 1/

-1.0

0.8

1.5

0.5

-5.7

-3.2

-2.6

-1.8

-1.1

-0.5

-0.4

General government debt 2/

80.8

77.5

74.2

72.8

88.7

87.6

84.4

81.6

78.9

76.1

73.3

 
Balance of payments (percent of GDP)
Current account balance

2.2

3.5

1.8

3.0

-0.4

-0.6

-1.2

-1.2

-0.8

-0.4

-0.2

Capital and financial account

-2.3

1.5

0.8

-1.0

2.4

7.0

4.3

3.6

2.0

0.9

0.5

FDI, net

4.3

2.3

1.6

6.3

1.6

1.9

1.8

1.8

1.8

1.8

1.8

 
Debt and reserves
Gross official reserves (billions of euros)

13.5

15.7

17.4

18.6

18.9

22.3

24.0

25.4

26.1

26.4

26.6

IMF metric (percent) 3/

88.5

102.0

112.4

103.4

125.6

138.9

143.2

147.2

146.9

145.7

144.4

In months of imports in goods and services (based on next year level)

7.5

7.8

7.9

7.9

9.3

9.7

8.8

8.6

8.3

8.0

7.6

Total external debt (percent of GDP)

95.8

88.4

81.9

74.2

81.3

79.4

75.0

71.0

67.9

65.3

63.1

 
Money and credit

(End of period, change in percent)

Broad money (M4)

4.7

2.1

5.5

2.9

9.3

7.0

5.0

4.5

4.0

4.0

4.0

Claims on other domestic sectors 4/

-3.4

-0.8

1.8

2.6

3.3

 
Interest rates
Average 12-month T-bill interest rate (in kuna)

1.0

0.4

0.1

0.1

0.1

Kuna credit rate (unindexed, outstanding amount)

6.5

6.0

5.7

5.2

4.8

 
Exchange rate
Kuna per euro

7.6

7.5

7.4

7.4

7.5

Real effective exchange rate (percent, “-” = appreciation)

0.3

0.7

1.9

-1.4

Memorandum items:
Nominal GDP (billions of euros)

46.6

49.3

52.0

54.3

49.3

52.4

56.2

59.8

63.0

66.0

69.1

Sources: Croatian authorities; and IMF staff estimates. Unemployment rate is from Croatian Bureau of Statistics and Haver Analytics.

1/ Based on a simplified approach to the cyclically-adjusted balance, in percent of potential GDP, excluding capital transfers to public enterprises and one-off investment retrenchment in 2015. The 2020 overall budget balance (-7.4 percent of GDP) minus the cyclical component (-1.7 percent of GDP) results in a cyclically adjusted budget balance of -5.7 percent of GDP. Includes the one-offs related to the COVID-19 package of -3.8 percent of GDP. For 2021, the overall budget balance (-4.1 percent of GDP) minus the cyclical component (-0.9 percent of GDP) results in a cyclically adjusted budget balance of -3.2 percent of GDP. Includes the one-offs related to the COVID-19 package of -2.5 percent of GDP.

2/ Gross debt as defined by the EU under the Maastricht Treaty.

3/ IMF, 2015, “Assessing Reserve Adequacy-Specific Proposals” IMF Policy Paper, Washington: International Monetary Fund.

4/ Comprises claims on households and non-financial corporations.

[1] Under Article IV of the IMF’s Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. A staff team visits the country, collects economic and financial information, and discusses with officials the country’s economic developments and policies. On return to headquarters, the staff prepares a report, which forms the basis for discussion by the Executive Board.

[2] At the conclusion of the discussion, the Managing Director, as Chairman of the Board, summarizes the views of Executive Directors, and this summary is transmitted to the country’s authorities. An explanation of any qualifiers used in summings up can be found here: http://www.IMF.org/external/np/sec/misc/qualifiers.htm .

Source – IMF: https://www.imf.org/en/News/Articles/2021/09/10/pr21258-croatia-imf-executive-board-concludes-2021-article-iv-consultation-with-croatia?cid=em-COM-123-43589