Macroeconomic conditions in Croatia continue to be positive and fiscal performance is good despite sizable recent shipyard guarantee payments, but a possible slowdown in main trading partners may affect these conditions, reads a statement by an International Monetary Fund (IMF) team released on Thursday, after the team's recent visit to Zagreb.

“Macroeconomic conditions have remained positive. Growth is gradually moderating from its recent highs, inflation remains subdued, international reserves have increased, and public debt has been declining,” reads the statement.

The IMF expects Croatia’s GDP growth rate this year to be at 2.6% and inflation at 1.5%.

“Fiscal performance has been strong despite sizable recent shipyard guarantee payments. Private demand and tourism continue supporting economic activity which is also underpinned by the CNB’s (Croatian National Bank) continued accommodative monetary policy. Overall, the banking sector is liquid, profitable, and well-capitalized.”

“However, a possible slowdown in main trading partners may affect these benign conditions. If a slowdown were to emanate from Europe, the authorities are encouraged to let the social safety net work, before considering fiscal stimulus,” reads the statement, published on the Croatian National Bank’s website.

“For the last three years, macroeconomic imbalances and vulnerabilities have been steadily declining. The recently approved Convergence Program for 2019-22 projects further reduction of public debt, which is welcome. Achievement of the underlying surpluses will require continued restraint with current expenditures. EU funds need to be increasingly utilized to ramp up public investment.

“Yet, reducing macroeconomic vulnerabilities is only half the task. There is another equally important half on which significantly greater progress is called for – to raise living standards durably and make the economy more dynamic through structural reforms… These reforms must be pursued while favorable economic conditions last, to derive the maximum benefits of Euro adoption,” IMF officials say.

Streamlining state, preserving sustainability of pension, healthcare systems…

In that regard, they consider as being of central importance efforts to streamline the state, increase labor force participation, improve business conditions, preserve the sustainability of the pension system and make the healthcare system financially self-sufficient.

As for making state administration more efficient, the IMF team says that merit-based civil servant compensation complemented by an appropriate reduction in total public employment expenditures could create room for higher public sector wages.

It also notes that decisive action is needed to divest non-essential state assets and strengthen the financial management of essential ones.

As regards an increase in labor force participation, IMF officials say that modernizing labor contracts would improve employment prospects for the young and reduce the incentive to emigrate.

“Improved child care access would facilitate higher participation from women. Reforms in education and training policies would alleviate skills’ mismatches, reduce labor shortages, and generate more jobs,” reads the statement.

“It is encouraging to note recent initiatives to reduce parafiscal fees and simplify the process of starting a business. However, uncertainties and back-logs associated with legal processes are impediments to enhancing the business climate,” the team says with regard to the recommendation on improving business conditions.

As for the pension system, the IMF team says that longer life-spans come with inescapably higher pension costs and that the recently passed pension reform was a vital step in acknowledging realities that cannot be put off any longer.

“Without an increase in retirement age, the State would incur sizable debts, for which the youth of today will have to pay. Alternatively, the elderly would be consigned to living on lower pensions. If the pension system is not aligned with today’s life expectancy, the range of the country’s choices will be limited between these two outcomes.”

As for making the healthcare system financially self-sufficient, IMF experts say that despite increasing healthcare contributions, the buildup of arrears continues.

“Concerted actions to increase cost efficiency are compatible with maintaining the existing quality of the healthcare system and need to be pursued with urgency.”

The IMF team, headed by Srikant Seshadri, visited Croatia on April 23-30 for regular talks on the latest macroeconomic and political developments. They met with Finance Minister Zdravko Maric, Croatian National Bank Governor Boris Vujcic and other state officials, representatives of the private sector and civil society organisations.

The next round of consultations on Article IV of the IMF Statute for 2019 is scheduled for this autumn.