Croatia seen in need of coherent strategy

ZAGREB (Reuters) – Croatia has so far lacked a coherent economic strategy and sufficient political will to push through the most vital reforms, making its objectives harder to achieve. Croatia, a European Union candidate which hopes to start entry talks by the end of the year, has been struggling in recent years to make its economy more competitive, but despite some progress key reforms have yet to be tackled. «Economic goals are laid out in a deal with the International Monetary Fund and are part of efforts to join the EU. However, what’s been missing is a clear idea of how to achieve them and what should be the dynamics of reforms,» said Goran Saravanja, an analyst at CAIB investment bank. Last year Croatia signed a 20-month standby deal with the IMF aimed primarily at reducing the fiscal gap and taming the high foreign debt. But the 2004 fiscal deficit target ended at 4.9 percent of gross domestic product instead of 4.5 percent. Due to problems in revenue collection and delays in reforms, the goal for this year had to be revised to 4.2 percent from 3.7 percent of GDP. The general plan is to cut the deficit below an EU requirement of 3 percent in 2007. «The government has apparently focused on fiscal consolidation. It wants to decrease the portion of public sector in GDP,» said Hrvoje Dolenec of Raiffeisenbank. The private sector accounts for only some 40 percent of the Croatian GDP and the World Bank has urged Croatia to push through reforms that would make the private sector more active. Recent research prepared by the Vienna-based Institute for International Economic Studies said Croatia would need higher and sustainable growth with a stronger contribution from the private sector to achieve the growth levels of other transition countries. Croatia’s economic growth has slowed in the last several quarters and expanded only 1.8 percent in the first quarter of 2005 over the same period a year ago. It was the slowest quarterly increase in the last four years. «The government has stated its intention to promote small and medium-sized businesses but we do not see measures which would significantly improve environment for such businesses to thrive,» Dolenec said. Even on the fiscal front, analysts said the government was drawing its feet in tackling key reforms that would relieve state finances in the longer run. «In many cases we see the government searching for solutions on ad hoc basis. We can hardly see the long-term perspective and most difficult reforms seem constantly to be off the agenda,» Saravanja said. The IMF recently urged Croatia to change the pension indexation formula, reform the ailing health sector, cut subsidies to loss-making companies and speed up privatization, in order to boost fiscal consolidation. Government officials have vowed to face those issues, but it remains unclear what pace they would take, especially in view of the growing social discontent. Accession talks with the EU are expected to boost the reform drive, but their start is also unclear. It hinges on how successful Zagreb is in resolving the case of a fugitive general indicted by the U. N. war crimes tribunal in The Hague. «Croatia has tackled reforms with varying success. It will take time to sort out more demanding areas such as health or education, but the prospect of EU membership should provide a very good motivation,» said Zarko Miljenovic, chief economist of Zagrebacka Banka.

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