October 27 (SeeNews) - The International Monetary Fund (IMF) said on Friday that Croatia must speed up the implementation of structural reforms, in order to improve its competitiveness and ensure faster income convergence to average EU levels.
"In order to boost investment (including FDI), potential growth, and employment creation, it is critical to reduce the administrative burden on doing business, increase the flexibility of the labor market, improve the efficiency of the public sector, and enhance property rights and the judicial process", the IMF said in a staff concluding statement following a 2017 Article IV Mission.
The IMF mission projects that Croatia's gross domestic product (GDP) will grow by 3.1% in 2017 and 2.8% in 2018, mostly on the back of private consumption and tourism. It warned, however, that although the impact of the crisis in Agrokor has thus far been contained, the restructuring of the ailing concern is ongoing and there could still be downside risks.
Other downside risks include further delays in structural and fiscal reforms, while external and public debt and financing needs are projected to continue to decline, the IMF mission noted.
In terms of Croatia's fiscal policy, the IMF staff projects the 2017 general government deficit at about 0.9% of GDP.
A successful implementation of the 2018 budget would result in a broadly similar overall fiscal deficit of 0.8 percent of GDP, the IMF mission noted, adding that gradual consolidation would eventually turn the deficit into a slight surplus and reduce public debt to close to 65% of GDP by 2022.
"Given the relatively strong outlook for growth in the short run, it would be advisable to aim at a faster reduction in the still sizable public debt over the near term due to downside risks," the IMF said.
It, therefore, recommended that Croatia implement additional measures over the medium term, which would reduce the public debt to below 60%of GDP by 2022.
The IMF also noted that Croatia's banking sector remains on average well capitalized, profitable, and liquid.
"The quality of the loan portfolio has generally improved and prudential limits on exposures have helped contain the impact of the Agrokor crisis," the IMF said, adding that the country's central bank should continue to maintain conservative prudential policies and banking supervisory vigilance.
Touching on Croatia's decision to begin the process of joining the Eurozone, the IMF said that to maximise its benefits and minimise the risks, the country must increase the dynamism and resilience of its economy by accelerating structural reforms.
"It is also necessary to rapidly reduce public debt in order to create the fiscal space that can be used to support growth in future downturns," the IMF said.
The IMF mission concluded its statement by encouraging Croatian authorities to enhance corporate governance.
It said that while bankruptcy legislation for large corporates has been improved in response to the Agrokor crisis, it would be useful to identify and address any remaining gaps that may be impacting corporate governance, accounting and auditing standards, and insolvency and creditor rights.
"In the meantime, with a view to limit the impact of the Agrokor challenges, it is important to continue to make progress on its resolution and to communicate such progress to the public in a timely and transparent fashion," the IMF mission added.