EBRD: Croatia's key priority is credible reform programme

The completion of EU accession negotiations is a key milestone for Croatia. The country is scheduled to join the European Union on 1 July 2013 after a convincing endorsement of the Accession Treaty in a referendum and subsequently by parliament. "Important progress has been...

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EBRD: Croatia's key priority is credible reform programme



EBRD - 08.11.2012

The completion of EU accession negotiations is a key milestone for Croatia. The country is scheduled to join the European Union on 1 July 2013 after a convincing endorsement of the Accession Treaty in a referendum and subsequently by parliament. "Important progress has been made in the transport sector. Road sector reform has advanced significantly over the years, a concession for Zagreb airport has been awarded and restructuring of the railways is under way." Economic performance remains exceptionally weak. Economic output remained constant in 2011 after two years of negative growth, but is falling again in 2012, largely due to adverse external developments. However, efforts are being made to shore up the fiscal position and reduce the government deficit. 
KEY PRIORITIES FOR 2013 The key priority is the implementation of a credible reform programme to boost growth prospects and prepare the country for EU membership. This will require strengthening the institutional capacity to absorb EU funds, enhancing competitiveness by overhauling some of the restrictive practices that make the labour market inflexible and hinder the smooth setting-up and running of businesses, and improving payment discipline in public sector companies. " Regional connections in the energy sector need further development. In addition, there is scope to develop further the power transmission and distribution network in order to adapt to increased wind power generation. " Successful privatisations in the financial sector could send an important signal about the willingness to reduce the size of the state. The sale of the postal bank and a major insurance company could attract investments and strengthen competition and the provision of services in these sectors. 
MACROECONOMIC PERFORMANCE The economy is back in recession. Croatia experienced one of the most protracted recessions in the region as a result of the global financial crisis. After two years of declining output in 2009-10, and zero growth in 2011, GDP declined by 1.3 and 2.1 per cent respectively in first and second quarters of 2012 on the back of weak domestic demand and a decline in gross fixed capital formation. These trends reflect both spillovers from the ongoing eurozone crisis and the persistence of deep structural problems. Inflation has been rising since March 2012 and stood at 4 per cent year-on-year as of August 2012. The increase was partly related to a rise in the VAT rate by two percentage points to 25 per cent, which became effective in March, and partly to further deregulation of energy prices. Economic difficulties have resulted in pressure on the kuna this year, and the Croatian National Bank has intervened several times on FX markets to prop up the currency. The government has begun to implement a fiscal consolidation plan. Changes in the tax system have been introduced. In addition to the aforementioned increase in the VAT rate, the government implemented a new tax on dividend payouts and abolished a tax on reinvested profits. Proposals for the introduction of property, capital gains and dividend taxes are also planned for later this year. The general government deficit in 2011 was 5.1 per cent of GDP (on ESA methodology), slightly below target. In 2012 the government is targeting a narrower deficit of 3.9 per cent of GDP, but given the worsening economic outlook and the GDP figures for the first quarter, this target will be difficult to achieve. The prospects for recovery are bleak. The outlook is very uncertain given the protracted crisis in the eurozone and the risks on the downside are high. Under current baseline projections, Croatia will be in recession again in 2012, with output falling by around 1 per cent, and only a modest recovery is likely to take place in 2013. Over the medium term, however, there are hopes that the country will be boosted by EU accession and perhaps by the introduction of long- awaited reforms to public administration and the labour market, as well as the restructuring of publicly owned infrastructure companies. 
Source: bne


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