ECONOMY

Croatia needs to start structural changes now

ZAGREB (Reuters) – Croatia must start key structural reforms in the next few months if it wants to reach a balanced budget by 2011 and be prepared for EU membership, a senior World Bank official said yesterday «I hope the government will start dealing with the most important structural reforms in the coming months. It is crucial for reaching a balanced budget in 2010, which is a very good goal in itself,» the Bank’s country manager for Croatia, Andras Horvai, told Reuters in an interview. Parliament adopted the 2008 budget on Wednesday, with the gap at 2.3 percent of gross domestic product. For next year, the government tentatively plans a deficit of 1.4 percent of GDP. «This year’s deficit plan is an appropriate one as it follows fiscal consolidation plans and ambitions,» Horvai said. «However, reducing public expenditure is necessary and that cannot happen without structural reforms. And this is the right time to implement them,» he said. The World Bank is involved in almost all areas where major reforms are necessary – public administration, judiciary, social policy, restructuring loss-making industries like shipbuilding and efforts to improve the business climate. Horvai said the government had recognized reform priorities but their implementation was difficult and socially sensitive. «There has to be work-force reduction in some sectors, but I believe that restructuring, if properly managed, will not create massive layoffs. On the other hand, a boosted private sector should create new jobs,» Horvai said. «I hope Croatia will land in the EU with a properly reformed economy to avoid post-accession shocks.» Zagreb wants to wrap up EU entry talks by mid-2009 but most analysts believe it can be done only if reforms gather pace. The government has made a considerable effort to reduce the budget deficit in recent years, largely on the back of overperforming revenues, while public expenditure still amount to almost 50 percent of GDP. «It’s too high and there is certainly room to reduce it for at least several percentage points,» Horvai said. He said public spending cuts will bring benefits, like a lower tax burden and social contributions for citizens and companies and more space for the private sector to prosper. »Now, the private sector has a 70 percent share in GDP but there is room for more. It would help a lot for creating sustainable long-term growth at decent levels and to reduce external vulnerabilities,» Horvai said.