The IMF delegation commenced its two-week regular annual mission on 22 April, with an aim of being acquainted with the current state of affairs in Croatia, notably on the economic, financial and social welfare fronts.
As far as projections are concerned, the IMF staff projects real growth of about 0.5% in 2015 and 1.5%-2% in subsequent years, according to the Concluding Statement released on Wednesday.
"Still, the economy is not out of the woods, and several structural factors weigh on the recovery going forward. Corporate investment continues to contract as many companies struggle with high debt levels."
However, there are positive signs for Croatia's economy.
"Private consumption appears to have bottomed out, as evidenced by robust retail sales."
"Corporate profits are recovering, including for state-owned enterprises."
The statement reads that "most encouraging, both exports and foreign direct investment are showing signs of improvement".
This suggests that "the economy's shift from inward orientation towards the tradeable sector is finally making progress".
"Improved economic performance has been helped by a favourable external environment: lower energy prices that support consumption, stronger euro area growth that helps exports, and ample domestic and external liquidity that contain debt servicing costs."
On the other side, when it comes to the risks to the outlook of +0.5% growth in 2015 and 1.5%-2% in subsequent years, the IMF mission warns that "tailwinds from a favourable external environment may not last, with higher commodity prices, a stronger euro (and therefore kuna), and increased financial strains affecting funding conditions: all distinct possibilities".
The IMF warns that "domestic political risks feature large ahead of parliamentary elections, and harbour then potential for popular but destabilising policies."
To foster durable growth and generate employment ,"vigorous efforts remain critical".
These reforms include strengthening debt workout frameworks, improving the governance of state-owned enterprises, including privatisation of some of those enterprises, comprehensive reform of public administration at the state and local level, streamlining of social benefits so as to avoid their overlapping and further increase of the penalty for early retirement.
"Another helpful measure would be to merge the land registry and the property cadastre," the IMF mission suggests.
The IMF mission also sees the fiscal consolidation as imperative considering Croatia's high budget deficit and growing public debt.
The consolidation should be gradual, and the IMF estimates that "the fiscal stance reflected in Croatia's 2015 convergence program with the EU contains net consolidation measures of 0.5-1 percent of GDP (a precise assessment is not possible as several measures are not yet fully specified), yielding a headline deficit of 5-5.5 percent of GDP."
"In terms of the quantity of fiscal adjustment, this appears broadly appropriate."
Regarding the monetary stability, the IMF statement focuses on non-performing loans and problems arising from "the surprise Swiss Franc (CHF) appreciation in early 2015"
Croatia's banking system is described as stable.
"Given banks' large capital buffers, the stock of NPLs (non-performing loans) presents no systemic risk to financial stability."
"However, clearing out NPLs at a faster pace appears desirable, not least to allow borrowers a fresh start."
"A task force with representatives from tax authorities, the accounting and legal professions, banks and regulators should seek to identify and remove obstacles to NPL write-offs and sales."
As for borrowers whose loans are indexed to the Swiss franc, the IMF staff believes that "the negotiations should focus on needy borrowers that lack capacity to pay."
" Across-the-board bailouts -- that would benefit large investors with speculative carry-trade positions -- should be avoided for several reasons", as this would put pressure on already "modest FX reserves and thus endangering financial stability".
"The economy's perception could suffer if an impression were to take hold that politicisation is a means of avoiding contractual obligations," the statement concludes.