WB cautions Croatia: Dangers of external turbulence necessitate tighter fiscal control
ZAGREB (Reuters) -Croatia needs stronger fiscal consolidation and faster structural reforms to limit the impact of external turbulence on its macroeconomic stability, the World Bank said yesterday. Croatia, a European Union candidate country, has made a considerable fiscal adjustment in recent years, but based more on stronger revenues than on spending cuts. The government projected this year’s budget gap at 2.6 percent of gross domestic product, aiming to reach a balanced budget in the next few years, when it also hopes to join the EU. «It is an important factor for securing macroeconomic stability and reducing external vulnerabilities. However, this would need to be done through cuts in spending, given that the buoyant growth will not necessarily continue for long,» the World Bank said in a country report presented in Zagreb. This year Croatia’s economy is expected to expand some 6 percent from 4.8 percent in 2006. The conservative government, which faces elections later this year, promised growth of 7 percent or even more in the coming years. Similar figures are also mentioned by the opposition, but no party has put forward a clear reform schedule and priorities. «Such figures would need a more benign external environment and a more advanced pace of structural reforms,» the report said. Croatia took advantage of favorable conditions on the international financial markets to boost growth, but at the same time considerably increased external imbalances. Its foreign debt stands at -30.4 billion, or 85 percent of GDP, while this year’s current account deficit is expected to widen to above 8 percent of GDP from 7.6 percent last year. Subprime impact The World Bank said that the recent turbulence on global financial markets, related to the US housing and mortgage market, should be taken very seriously in the local economy. «If the EU economy slows down, Croatia’s export and growth will suffer. Even more so, as it is not sustainable in the long run to base growth on state investments and lending-based personal consumption as now,» said Sanja Madzarevic-Sujster, a leading World Bank economist for Croatia. «Croatia needs to undertake precautionary measures, which means even stronger contribution of the fiscal policy to cut the high public spending and speeding up key structural reforms to boost the private sector,» she also said. The bank said public sector wage bill, subsidies to ailing industries, welfare and health spending were still too high. Croatia is also under pressure from the EU to cut red tape, fight corruption and reform its inefficient judiciary. The World Bank also praised the tight monetary policy run by the central bank in recent years to keep a lid on credit expansion and foreign borrowing. «We hope that such a strict monetary policy will remain in place in 2008 and 2009 as well,» Madzarevic-Sujster said.
