IMF: Macroeconomic developments positive despite substantial risks

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The latest macroeconomic developments in Croatia are relatively positive but there are still substantial risks, and deterioration in the external environment or delays in the implementation of fiscal and structural reforms could weaken confidence and affect growth and job creation, an International Monetary Fund mission said on Wednesday at the end of a visit to Zagreb.

“The improvements in macroeconomic indicators starting in late-2014 and the broad-ranged policy agenda of the new cabinet are encouraging. Speedy implementation of structural reforms will be essential to sustain durable growth and employment, as well as to reduce vulnerabilities and safeguard against downside risks,” mission chief Khaled Sakr said in a statement.

The mission, led by Sakr, visited Zagreb on February 17–23 and met with the ministers of finance, the economy, public administration, labour and pension systems, and health, the Croatian National Bank governor, other senior officials, and representatives of the civil society as well as the private sector.

“Real GDP is estimated to have grown at close to 2 percent in 2015, driven by strong exports, and some recovery in private consumption and public investments. Headline inflation remained in low negative territory, mostly due to the decline in energy prices. The external current account surplus is estimated to have improved to almost 5 percent of GDP, compared to about 1 percent of GDP in 2014. However, about two percentage points of this is due to one-off effects related to the conversion of Swiss franc loans,” Sakr said.

“The general government budget deficit (ESA2010 definition) is preliminarily estimated to have narrowed to about 4 percent of GDP, compared to 5.6 percent of GDP in 2014. This was the result of both the cyclical upturn in revenue and some consolidation measures, such as enhanced spending control and the increase in excises on fuel and tobacco. Further fiscal consolidation is required to reduce the large public debt, and should be designed to be growth friendly to the extent possible. In this context, it would be important to expedite the plans to enhance the absorption of the EU structural and cohesion funds. Steps are also needed to streamline the multiple layers of government and public agencies, enhance the targeting of social benefits, and improve the efficiency of the public sector and administration,” Sakr said.

“Monetary policy remains focused on preserving financial stability. The recent introduction of the four-year repo facility provides banks with long-term kuna funding and could help encourage bank lending in kuna and thus contribute to a gradual decline in euroization. Structural reforms, including facilitating the ongoing repair in private sector balance sheets, would help gradually transform the currently ample liquidity in the banking system into sustainable lending to the private sector,” Sakr said.

“The stability of the banking sector has been maintained despite the drawn-out recession. On average, banks are liquid, well-capitalized, and have been profitable until 2015, when one-off losses from the conversion of Swiss franc household loans into euro drove their profits into negative territory. There are preliminary indications that the high non-performing loan (NPL) ratio has started to decline, as the inflow of new NPLs has fallen, while the process of banks’ balance sheet clean-up has continued,” Sakr said.

“Although recent macroeconomic developments have been relatively favorable, the outlook remains subject to substantial downside risks. In particular, deterioration in the external environment or delays in fiscal and structural reform implementation could weaken confidence and adversely impact growth and job creation. On the other hand, expediting reforms could further support growth and competitiveness, reduce vulnerabilities, and unleash the large unutilized potential of the economy,” Sakr said in the statement.

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