December 11 (SeeNews) - Croatia's government needs to focus on the restructuring of public administration, in order to dynamise the country's economy and transfer to a more efficient state, the International Monetary Fund (IMF) said.
"Durably fixing the healthcare and pension systems are two of the other important issues to tackle. Some welcome progress is being made on these fronts, but the momentum needs to be sustained, " the IMF said in a staff concluding statement following a 2018 Article IV mission late on Monday.
"Acting decisively now - under favorable conditions - would ensure higher living standards in the future."
An infusion of greater dynamism and resilience to the economy is needed to ensure its sustained strong growth, needed to catch up to the income levels of wealthier EU countries, the IMF said.
"Further integration into Europe via the entry into ERM II and the banking union will set the stage for the envisaged adoption of the euro. Yet, to enjoy the full benefits of the currency union, deeper structural changes are essential, as is continued careful management of the country’s public finances."
Compared with regional peers, Croatia currently has one of the largest expenditures on total public employment proportional to the size of its economy. Furthermore, many municipalities do not have sizable populations, making the scope significant to merge services thereby generating greater efficiencies. Decisive progress with reforms in this area will free up funds for investment in infrastructure and workers. It will also lead to better services for households and businesses.
"Our fiscal recommendations are motivated by two equally important medium-term goals - to rebuild room for fiscal policy maneuver that can be used in the event another recession hits the economy and to improve medium-term growth prospects. To achieve these results, we recommend steadily increasing the fiscal surplus towards 1% of GDP over the next five years, and thereby accelerating the reduction of public debt to below the Stability and Growth Pact (SGP) threshold of 60 percent of GDP by 2023," the IMF said.
Croatia's labour market participation rate remains one of the lowest in the EU, while structural unemployment, especially among youth and women, is high. Measures to increase child care access would incentivise greater participation from women. Improved targeting of all social benefits to those who are most in need is also likely to induce
greater labor force participation. There may also be merit in further reviewing social security contributions, so long as it is strictly subject to the realization of an offsetting increase in the participation in the system and does not endanger its overall solvency, the IMF added.
Croatia's central bank, CNB, continued to deftly navigate the environment of low interest rates and ample liquidity. Going forward, the CNB will need to pursue policies, which will allow the economy to accommodate potentially tighter external conditions and harness inflation expectations. Further corporate sector deleveraging would be welcome, including through making the bankruptcy procedures even more efficient, e.g., by facilitating out-of-court settlements.