World Bank advises Croatia on how to accelerate growth, reduce deficit

By bne IntelliNews December 17, 2014

The World Bank has made Croatia a few recommendations on how to accelerate its economic growth and adjust fiscal deficit, the bank said on December 16 in its Public Finance Review: Restructuring Spending for Stability and Growth report.

The World Bank considers chances that Croatia would return to pre-recession growth rates are slim provided the country does not address structural weakness of its economy. The report notes that reducing the fiscal deficit and restructuring public spending along with absorbing EU funds would back a sustainable long-term growth.

According to World Bank senior country economic for Croatia Sanja Madzarevic Sujster, a fiscal adjustment of 4pp of GDP will be needed over the medium-term. The adjustment should be made through expenditure measures that will not only reduce fiscal deficit and public debt, but will also improve the efficiency of the public sector.

The World Bank recommended Croatia to maximize the efficient use of EU funds which could help recovery on the short-term and increase the long-term growth potential. According to the report, Croatia will have to access EU funds averaging 3.7% of GDP per year and at the same time will have to transfer around 1.8% of GDP to the EU budget during 2014-2020.

The World Bank suggested Croatia should create more revenue by modernizing the country’s property taxation, broadening the tax base and reducing high levels of social contributions.

The report added that some 2% of GDP in savings could be made through staff rationalization in local governments and through a reform of the wage system. Also, some 2%-3% of GDP could be achieved over the medium-term if the country improved efficiency of social spending.

The World Bank added that inefficient subsidies should be reduced or abolished, a move which would provide opportunities to provide state aid to growth-making sectors such as research and development (R&D).

The World Bank has supported 53 operations amounting to $3.5bn and approved 53 grants with a total value of $70mn in Croatia.

The Adriatic country is likely to face its sixth consecutive year of economic decline in 2014. Moreover, it has entered the European Commission excessive deficit procedure in January and is under pressure to reduce the deficit to 2.7% of GDP until 2016 from nearly 5% in 2013. For this year, the Adriatic country targets a general budget deficit of 5% of GDP.

 

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