Countries which have been faster in implementing reforms have higher rates of economic growth, while Croatia is faced with a slower recovery because it has not implemented reforms for years, the World Bank chief economist for Croatia, Sanja Madjarevic Suster, said on Friday.

The World Bank has projected a 1.5 percent economic growth rate for Croatia in 2011, a forecast that should be viewed in the context of risks caused by a weak domestic demand, high unemployment, growing global prices of oil and food, and the crisis on the periphery of the Euro-zone.

It is therefore important for Croatia to maintain the stability of its financial sector, start fiscal consolidation and reduce the fiscal deficit, because without it, it cannot expect a decline in loan interest rates, said Madjarevic Suster.

Unfortunately, Croatia will not reach the pre-crisis GDP level in 2012 either, and since future growth can no longer be based on consumption growth, the time has come to launch serious reforms that will strengthen the competitiveness of the national economy in the long run, she said.

The inflow of capital in Croatia in 2010 was low due to the crisis and the contracting economy, but it led to a decline in imports which, in turn, reduced the external imbalance. This year, owing to a mild growth of the economy, capital demand is expected to recover and the deficit in the balance of payments current account is expected to increase. Also worrying is the growth rate of non-performing loans (12 percent in 2010).

Croatia should therefore embark on fiscal consolidation, which it avoided last year because it had enough liquid assets to finance the higher deficit, Madjarevic Sujster said.

It is good that the government has announced a bigger cut in the fiscal deficit in the next two years, to be achieved primarily by cutting spending, and even though the forthcoming parliamentary elections pose a certain risk, we hope that the enforcement of the Fiscal Accountability Act will prevent any departures from that plan, the World Bank official said.

The government's programme for economic recovery is yielding the first results, but now its more difficult segments need to be implemented more decisively. This refers primarily to the reform of the public administration and reduction of benefits, regardless of the fact that the experience of other countries shows that it is difficult to reach a consensus on such matters, Madjarevic Suster said.

A problem that is particular to Croatia is the fact that, unlike some other transition countries, Croatia has a low level of greenfield investments due to the current structure of its economy. Attracting investments requires developing industries such as informatics or biotechnology, but this takes a lot of work, including making changes to the education system, she said.

The EU10 Regular Economic Report, including a special supplement on Croatia, is published three times a year. It monitors macroeconomic and reform developments in the new member states of the EU and provides an up-to-date summary of economic developments and in-depth analyses of key current economic policy issues.