World Bank forecasts show that Croatia's GDP will drop one percent and that state borrowing will continue in 2012, it was said at a presentation of the World Bank's regular economic report for the EU 10, including a supplement on Croatia.
While Europe is sinking into a recession, Croatia's economy, which relies on the European Union, after this year's negligible growth of 0.5 percent, will continue to contract next year. In such conditions, it will be very difficult to reduce the fiscal deficit by one percent, which is why the state will continue to increase the public debt to up to 60 percent of GDP, a senior economist at the World Bank's Croatia Office, Sanja Madzarevic Sujster, said at the presentation.
The 2011 general government fiscal deficit will probably rise, for the third consecutive years, so urgent measures are needed to implement the fiscal adjustment of public spending so as to decrease the risk of refinancing and protect the country's credit rating, Madzarevic Sujster said.
The regular economic report for the EU 10 countries - Bulgaria, the Czech Republic, Estonia, Latvia, Lithuania, Hungary, Poland, Romania, Slovenia and the Slovak Republic - shows that they are all stepping up fiscal consolidation in order to adjust to a challenging external environment, with Europe expecting a weakening of exports, a decline in loans and investments, and the continuation of high unemployment.
The main challenge for Croatia is the restoration of sustainable public finances, so the new government is expected to launch reforms which should include issues of the efficiency and sustainability of the wage budget in the public sector, of the pension and health systems and the system of social care, according to the World Bank.
Apart from cuts in the public sector, Croatia is expected to make its labour legislation more flexible, which World Bank experts believe is too rigid, as well as cut the costs of employment and dismissal which are too high compared to most European countries.
More flexible labour laws enable better employment prospects, as evidenced by some of the most successful European countries such as Sweden, Denmark or Belgium, said Madzarevic Sujster.
Croatia is also expected to reform its pension system on which 10.7 percent of GDP is spent, including 1.9 percent on pensions obtained under special conditions.
The World Bank also proposes annulling differences between pensioners who retired before and those who retired after 1 January 1999, prolonging years of service, increasing contributions to the second pension insurance pillar, and reducing special, early and minimum pensions.
