The World Bank (WB) has revised upward its growth projection for Croatia for 2016 to 2.4% from 1.9% and maintained its forecast for 2017 at 2.0%, recommending that the future government launch necessary structural reforms at the start of its term to strengthen competitiveness and stabilise public finances.
Presenting the World Bank's "EU Regular Economic Report: Growth, Jobs and Integration: Services to the Rescue" in Zagreb on Wednesday, WB Senior Country Economist Sanja Madzarevic-Sujster said that the first steps by the new government should be directed at fiscal consolidation and boosting competitiveness through measures such as legislative reforms, strengthening the justice system and managing public companies.
I think Croatia should be growing faster, but this growth should be more sustainable and over a longer term. This rate of 2.4% which we are forecasting for this year is quite robust, given that Croatia will finally get back on the path of convergence above the EU average, which is one of the positive messages for 2016. What needs to be done, and the new political cycle makes it possible, is to step up efforts to strengthen the competitiveness of the Croatian economy and stabilise public finances, and we hope to see that in the new government's programme, she said.
The WB expects Croatia's economic growth to slow to 2.0% in 2017.
Madzarevic-Sujster said that conditions for stronger growth had not been created yet, given the risks that were already affecting the economy of the European Union as a whole, such as Brexit, a potential escalation of geopolitical tensions, and a tightening of monetary policy by the US Federal Reserve.
These are the risks that will be felt by our trading partners and will spill over to the Croatian economy as well, Madzarevic-Sujster said, noting that external factors were only some of the risks to the Croatian economy.
Speaking of internal risks, she cited possible consequences of the agreement with trade unions on a 6% increase of public-sector wages and arbitration over the conversion of loans denominated in Swiss francs.
That would mean that Croatia would not be able to exit the Excessive Deficit Procedure, which would be a lost opportunity, Madzarevic-Sujster said, adding that at a time of heightened risks the new government should step up work on reducing vulnerabilities.
She said she was also concerned about a large amount of central government debt refinancing due next year, with foreign debt accounting for over 3.5 billion euros. She added that the road sector also faced repayment of a large amount of debt next year.
Madzarevic-Sujster said she expected the new government to address the consolidation of public finances more seriously. This is indeed an opportunity to tackle certain vulnerabilities in the new political cycle and would enable Croatia to refinance its debt more easily over the long term, she added.
She expressed hope that the long-awaited growth would not be spent too soon, as happened in 2006 to 2008 when we spent our growth, ran up debts and then suffered the deepest recession in the EU.