Croatian prime minister Zoran Milanovic on Tuesday, May 6, sacked finance minister Slavko Linic, one day after a scandal went off in local media over Linic's role in an overvalued property deal that damaged the state budget, daily Poslovni Dnevnik reported.

Milanovic told an extraordinary news conference in Zagreb that Linic failed to explain adequately why the state budget suffered a HRK 27mn (EUR 3.6mn) damage due to a suspicious deal authorised by him. Under the deal, the state was compensated for the tax debt of privately-held timber producer Spacva via acquiring a land plot belonging to Spacva for HRK 33.5mn. However, a recent evaluation of the tax authority showed this land is actually worth only HRK 6mn.

Milanovic said that Linic, who signed the deal, has failed to explain the difference and therefore he no longer trusts Linic and it is not possible to continue the cooperation with him.

Linic will be replaced by his deputy Boris Lalovac, the PM said.

The controversial deal was part of Spacva's pre-liquidation settlement, under which the company was supposed to clear all its debt. In his defence, Linic has said that the new lower evaluation of the land given in exchange for Spacva's tax debt was against the legal rules.

The news about the transaction comes at a particularly hard time for Croatia, which entered its six consecutive year of recession in 2014. The government already had to revise twice this year's budget, seeking to make more savings after entering the EC's excessive deficit procedure (EDP) in January. The austerity is expected to further reduce domestic consumption and government spending on various development projects this year.

The EC said on May 5 it sees the Croatian economy contracting by 0.6% this year as domestic demand continues to weaken, overshadowing the positive growth impetus from exports. Croatia is under pressure to gradually reduce its budget gap to 2.7% of GDP in 2016 as part of the EDP. The Commission expects the general government deficit to improve to 3.8% of GDP in 2014 and 3.1% of GDP in 2015 from 4.8% of GDP in 2013.