The IMF & Structural Reforms in Croatia

On Friday October 28, the International Monetary Fund advised Croatia to accelerate the implementation of structural reforms to improve competitiveness and to induce economic growth. The IMF affirmed that if Croatia doesn’t actualize structural reforms then its economic growth levels will slow from 3.1 percent to 2.8 percent in 2018 and continually decline to 2 percent by 2020.

According to the IMF the Croatian economy is largely dependent on tourism and private consumption; there is a need for stronger foreign investments. The IMF urged Croatia “ to reform the public administration, to make it less costly and more efficient, improve the business environment, make labor regulation more flexible, use still idle state assets more efficiently and make legal processes simpler and faster”.

However, the IMF also applauded Croatia’s fiscal performance in 2017 for achieving a projected budget gap; meaning that the budget deficit was lowered, the government either had less expenditures or had a higher than expected revenue of 0.9 percent, which is lower than the government set target of 1.3 percent last year. Furthermore, assessing Croatia’s current standing, the IMF anticipates a 0.8 percent gap in 2018.

Khaled Sakr, the IMF mission chief, believes that Croatia already has a significant tax burden and instead should focus on reducing expenditures for fiscal consolidation – to reduce government deficits. Sakr advised decreasing wage bills and arrears – outstanding payments—in the healthcare sector. Sakr also urged the government to focus on losses in the pension system and to improve the welfare policy. “Social benefits should be streamlined and better targeted so that they are not obstacles to employment”.

The IMF also said that “any tax reduction must be revenue-neutral”, thus promoting for changes in tax laws that don’t change the amount of revenue coming from taxation. The IMF promotes the real estate tax as a way to compensate for a decrease in income tax or value added tax. The IMF predicts that such a shift in taxes will have a growth-inducing impact on the Croatian economy.

According to the IMF these reforms are necessary to minimize future financial risks, to generate more fiscal space- flexibility in the government’s spending choices- and to foster economic growth.