February 20 (SeeNews) - The International Monetary Fund (IMF) said it is affirming its previous forecast for Croatia's economic growth this year at 2.7%, while lowering its estimate for last year's growth to 2.9%, from 3.0% predicted in October.
The IMF has also increased its forecast for Croatia's 2021 economic growth to 2.5% from the previous 2.0%, it said in a statement on Wednesday, following the conclusion of the 2019 Article IV consultation of its executive board with the Croatian authorities.
The IMF noted that Croatia recorded solid growth for a fifth consecutive year in 2019, supported by private consumption and tourism, with higher absorption of EU funds promising to raise public investment in the coming years.
It said the 2019 state budget is estimated to be close to balance.
"Recently agreed wage increases in the public sector are expected to increase current spending in 2020. Even though revenues will remain buoyed by economic activity, the budget balance is expected to turn into a small deficit in 2020, in part due to additional tax cuts," the IMF said, adding contingent liabilities could also put pressure on the budget balances in the coming years.
Bank lending to households has continued to grow, with the excess liquidity in the system keeping interest rates low, while the central bank has warned domestic banks to be more cautious with long-term uncollateralised consumer lending, the Fund said.
It pointed out that Croatia is currently targeting ERM II entry in mid-2020, on its path to joining the euro area.
The Croatian authorities sent in July a letter of intent to join the European Exchange Rate Mechanism II (ERM II), the first formal step towards adopting the euro. The whole process of joining the euro area is expected to take at least four years to complete, including the two-year mandatory stay in ERM II.
The IMF, however, said that despite the economic expansion, strong budget management, falling public debt and unemployment, and growing wages, Croatia still needs to accelerate its convergence with the European Union, which it joined in July 2013.
"Croatia has barely reduced its distance with the EU average in terms of income per capita in the last decade, and emigration of the young continues to pose challenges," the Fund noted.
"A more dynamic state is vital for future economic prospects. The budget is currently too rigid and losing its capacity to spark economic growth. Staff recommends shifting spending priorities towards more and better public investment. Better absorption of EU funds could ease this shift in priorities but cannot substitute for deeper reforms to the cost structure of public administration, pensions and healthcare systems, and the fiscal and territorial relationships between different levels of government," the statement reads.
In addition, Croatia also needs to modernise the management and performance of state-owned firms to help them do more to support the economic productivity. The country should also speed up the digitalisation of public administration to make the state more dynamic.
"Croatia needs to focus on areas where its “hard” physical infrastructure needs improvement (e.g., railways for freight purposes, solid, and waste water treatment), while also upgrading its “soft” technological infrastructure to position itself attractively in the next generation of European value chains and broaden its economic base in the areas of ICT and business services," the IMF said.