Increasing the retirement age to 67, improving labour market flexibility, increasing the zero VAT rate on certain products to 10 percent rather than the minimum admissible 5 percent, rationalising bloated public employment and remuneration, and revamping the unaffordable pension and health systems are some of the recommendations from a concluding statement of an International Monetary Fund mission after visiting Croatia as part of regular annual consultations.
Economic prospects are weak and risks large, Croatia is in recession, gross domestic product is set to contract further by 1.5% in 2012, only modestly picking up by 0.75% in 2013, so "far-reaching reforms are needed to return to robust medium-term GDP growth and reverse the sharp increase in unemployment and a strong reform agenda to address these problems is long overdue," the mission said in Tuesday's statement.
"The structural reform program –– critical for resuming growth and raising the economy's potential –– is being launched, but reforms in important areas remain to be fully developed and articulated to the public. Key policy priorities are to design, announce, and implement a credible and balanced fiscal consolidation package to ensure medium-term fiscal sustainability; initiate far-reaching structural reforms to improve competitiveness and growth prospects; and maintain financial stability by containing funding and credit risks," the statement said.
"Vulnerabilities remain high. Debt rollover risks are significant with external, mostly private debt of about 100 percent of GDP, and an external financing requirement of 30 percent of GDP in 2012," it added.
Policies should continue to focus on rationalising bloated public employment and remuneration, revamping the unaffordable pension and health systems, and reducing overly generous subsidies, the statement said.
The planned large investment projects by state-owned enterprises could support growth, but should be subjected to a careful cost-benefit analysis. The large projects in the energy sector and water supply, as well as public-private partnerships in education and health care could underpin growth, reduce costs, and raise the economy's capacity in the medium term, but they should be accompanied by restructuring of the involved state-owned enterprises to ensure efficient implementation, the mission said, recommending a careful assessment of their benefits for long-term growth versus financial cost.
The statement said "only limited reforms have been launched to foster labor market flexibility, improve the business climate, and reduce the size of the public sector."
The mission also recommends improving "labor market flexibility by reducing hiring and dismissal costs, including for poor performance, and allowing firms to opt out from onerous sector-level collective agreements, while ensuring that the envisaged single open-ended contract does not impede flexibility."
