The IMF Executive Board completed the consultation on June 22 based on a report submitted by an IMF mission which visited Croatia in May.
"Croatia has been gradually recovering from a six year recession, mostly on the back of strong exports, tourism activity, and private consumption. These factors, as well as better absorption of EU structural and investment funds are expected to give a further moderate boost to economic growth in 2016. However, GDP remains well below its pre-crisis level and unemployment is very high," the press release said.
The IMF projects that real GDP will increase at the rate of 1.9% this year, 2.1% in 2017, and between 2 and 2.5% in the medium term.
"Although some modest structural reforms have been implemented in recent years, Croatia is still lagging behind most EU countries, when comparing standard business environment indicators," the press release said.
IMF executive directors "welcomed Croatia's ongoing economic recovery and the reduction of the fiscal deficit in 2015. Nonetheless, important challenges remain, including high public and external debts and elevated unemployment. Directors emphasized that decisive and timely implementation of the new National Reform Program will be crucial to further reduce vulnerabilities and boost growth and job creation."
Directors "suggested avoiding reliance on across-the-board expenditure cuts and focusing on durable and targeted measures. They welcomed the plan to simplify the tax system (and) supported plans to introduce a modern real estate tax, implement pension reforms, streamline social benefits, improve the efficiency of the healthcare system, and make part of civil servants’ compensation performance-based."
"Directors agreed that monetary policy is appropriately accommodative within the limitations of the quasi-peg exchange regime, which remains an adequate monetary anchor at this juncture in the context of euroization. They called for continued efforts to achieve gradual de-euroization and to safeguard financial stability until the euro can be adopted," the press release said, adding that directors encouraged the Croatian National Bank (HNB) "to smooth any sharp fluctuations in the foreign exchange market and look for opportunities to boost reserves."
The IMF directors said the HNB "has continued to reduce its key policy rates and ensure ample liquidity in the banking system. Bank lending, nevertheless, has contracted further, as enterprises and particular households continued to deleverage. The banking sector has remained stable and, on average, liquid and well-capitalized. The system remained profitable during the recession, with the exception of 2015 due to losses from the Swiss franc loan conversion."
"Directors noted that across-the-board bailouts similar to the conversion of the Swiss franc loans in 2015 should be avoided in the future, as they increase the risk of moral hazard and could adversely affect investor confidence," the press release said.
"Directors noted the importance of building political consensus to ensure broad support for the reforms" and that inflation "was negative over the past two years, mainly due to lower energy and food prices."
"The current account surplus increased significantly in 2015, but almost half of this increase was due to a one-off decline in profits of foreign-owned banks related to the conversion of Swiss franc loans. Vulnerabilities remain high due to elevated public and external debt levels," the press release said.
"The 2015 general government deficit was substantially smaller than anticipated. This was due to a cyclical upturn in revenue, under-execution of public enterprise investment in the fourth quarter during the care-taker government, and some consolidation efforts."