The consultations were part of regular bilateral discussions on the economic development and policy which the Fund holds once a year with its members.
According to the conclusions "the global economic and financial crisis has significantly affected the Croatian economy."
"With reduced capital inflows, subdued export demand, and tight credit conditions on the domestic front, real GDP fell by 5.8 percent in 2009, and unemployment rose sharply to 17 percent."
"While exports plunged, an even larger contraction in imports resulted in a near-halving of the current account deficit to 5 percent of GDP."
"The economy remained in the midst of a severe downturn in the early part of 2010, and positive growth is expected to resume gradually in the second half of the year, with a forecast for zero growth in 2010."
The IMF also praises the swift response of the authorities to the crisis.
It commends the Croatian National Bank (CNB) for having "appropriately addressed liquidity shortages in the banking sector in 2009 through relaxation of regulatory requirements, repo auctions, and simplification of rules for banks to access CNB"s emergency liquidity assistance."
"The authorities also took strong fiscal actions in 2009 to offset plunging revenues and contain the 2009 budget deficit to financeable levels. Three supplementary budgets were adopted with a number of short-term measures that included expenditure cuts, a wage and pension freeze, a VAT rate hike, and the introduction of a temporary "solidarity tax" on incomes and pensions. These measures helped, but the fiscal deficit nevertheless widened to just under 4 percent of GDP (including the payment for a called guarantee of a public shipyard). Public debt also rose sharply to 50 percent of GDP including the guaranteed stock."
IMF Directors note that "the incipient recovery faces considerable downside risks given the uncertain global outlook, unsettled regional financial markets, and significant domestic economic vulnerabilities."
"Well-focused medium-term fiscal consolidation and ambitious structural reforms will be needed to increase competitiveness and attract investment to bring about stronger and more balanced growth," the IMF Board said in its assessment.
According to IMF directors assessment "the burden of demand management falls largely on fiscal policy, given the stable exchange rate policy."
It is concluded that "a cyclically-balanced budget over the medium-term would provide needed policy room and ensure debt sustainability."
Directors suggest that "fiscal adjustment could be best achieved through expenditure measures, including reductions in the public sector wage bill and public enterprise subsidies, rationalization of pension and health expenditure, and better targeting of social assistance expenditure."
The inclusion of many of these measures in the Economic Recovery Programme (ERP) is welcomed.
It is also recommended that "expenditure reforms should precede the envisaged tax cuts."
"While recognizing the difficult trade-offs, Directors considered that maintaining a broadly stable exchange rate provides an appropriate anchor given market volatility and high financial euroization."
The importance of structural reforms is highlighted "to improve competitiveness, including by removing inefficiencies in the labor market and business environment, and pursuing appropriate income and wage policies to achieve internal adjustment of the economy."
Directors call for "greater flexibility in employment policies and social benefits to remove adverse incentives for labor force participation."
"They also observed that improving the business environment would require privatization, reduced para-fiscal fees, and simplified business entry requirements."
Directors welcome the recent introduction of reforms in many of these areas under the Economic Recovery Programme, "noting that speedy, well-sequenced and full ERP implementation would be instrumental in strengthening market confidence and assisting Croatia in entering the European Union from a position of strength."
They call for "continued vigilant monetary and financial sector policies, as banks remain vulnerable to credit and liquidity risks."
"While noting safeguards to prevent weakening of credit underwriting standards, Directors recommended close supervision of the quality of loans issued under the credit support measures. They expressed concerns about the recapitalization of public banks from the deposit insurance fund," according to conclusions.