May 23 (SeeNews) - Croatia must revitalise structural reforms to accelerate convergence to EU income levels and support its ambition to join the euro area, the IMF said on Wednesday.
Croatia’s economic growth continues to benefit from record-high tourism activity, solid merchandize exports, and strong domestic consumption. However, structural reforms are needed to improve the business environment, and in turn boost growth and create more jobs, the IMF said in a statement following its staff visit to the country.
Croatia's economic growth is expected to remain at about 2.8% in 2018, before decelerating gradually over the medium term toward 2%, the IMF noted.
Unemployment is still high at around 10%, while inflation is projected to remain within 1.5-2% range over the medium term, the Fund added.
The IMF praised Croatia on its general government surplus of 0.8% of the GDP in 2017, the country's first since its independence. It believes that a surplus was the result of strong revenue collection, general spending restraint, and moderate public investment, and across-the-board reduction in current expenditure.
Given the favourable cyclical position, the IMF judged, Croatia should preserve its fiscal gains in order to reduce the still high public debt and create space that can be used in future downturns.
"Maintaining a small surplus over the medium term and resisting pressures to increase expenditure are also warranted in view of the various fiscal risks, including the contingent liabilities of the public sector and the persistent arrears in the health sector," the Fund said.
The IMF also urged Croatia to improve the structure of spending by reducing current expenditure while increasing quality public investment and accelerate utilization of EU funds. Public wage increases should be accompanied by civil service reform, while the pension system also needs to be altered, the IMF noted.
With regards to the medium-term budget framework, it added that the adopting the Fiscal Responsibility Law and the Budget Act will help align Croatia’s fiscal rules and institutions with European standards.
In terms of the banking sector, the Fund noted that overall it continues to be in good health despite the crisis in the ailing Agrokor concern.
It concluded that continued vigilant monitoring of the banking sector is, however, warranted in view of the expected tightening in global financial conditions, and the overall credit risk arising from any remaining uncertainties related to Agrokor.
An IMF mission led by Khaled Sakr visited Zagreb during May 14-18, 2018, and met with finance minister Zdravko Maric, central bank governor Boris Vujcic, other senior officials, and representatives of academia and the business community.
Croatia's government said earlier this month it has adopted a strategy for introduction of the euro and has established a national council to lead the process.