It was issued at the end of a May 24-29 visit by an IMF staff team which reviewed recent economic developments and presented analytical work on how to increase potential growth and reduce external vulnerabilities.
The IMF noted that Croatia had achieved much on the fiscal front in recent years, notably a significant reduction in the fiscal deficit and improved budgetary processes and transparency, and recommended saving government revenue overperformance this year, for several reasons.
"With monetary policy constrained by the tightly managed exchange rate, and private sector spending growing at a strong pace, fiscal policy has to take the lead in dampening domestic demand to address external vulnerabilities related to the high and widening current account deficit and expanding external debt," read the statement.
"Revenue overperformance provides as an excellent opportunity to press ahead with a much-needed continuation of fiscal adjustment in the medium term, at a time when additional pressures on the current account have emerged," the statement said.
"Permanent expenditure commitments above this year's budgeted levels would make the task of lowering the deficit in future years much more difficult, all the more so if made on the basis of cyclically high, and therefore temporary, revenues," the IMF said, adding that satisfying recent demands to offset the effects of the pension system reform could damage the solid foundations of public finances in the long-term.
"Finally, Croatia should be reducing the level of general government spending, which is already high and well above the average of new EU members," the statement said, adding that the IMF's analysis indicated that this was a key element in the long-term acceleration of economic growth.
The IMF also said that GDP and domestic growth rates were significantly higher than projected and that this would likely remain so in the near term. "Moreover, faster growth has contributed to government revenues this year that have been well above expectations through most of May."
However, the current account deficit can be expected to widen this year, and the external debt to GDP ratio has yet to stabilise, despite the fact that its growth rate has recently slowed, said the statement.
The IMF also suggested accelerated structural reforms if Croatia is to strengthen competitiveness, boost exports, attract greater greenfield foreign direct investment, and sustain GDP growth. Otherwise, surges in growth to above 4-4.5%, as the IMF estimates, "will be accompanied by risks of a larger current account deficit and higher external debt," the statement said, underlining the importance of reforms to reduce the role of the state in the economy and to improve the business environment.