World Bank: The way out of the crisis is strong growth and strict fiscal measures

The Croatian Government’s economic recovery program is encouraging, but the rapid and strong implementation of measures is crucial, in which Croatia can count on the support of the World Bank, said Peter Harrold, a senior official of the Bank responsible for Croatia, on Friday.

"We have just received the translation. Our initial reactions are that we encourage this, these are the right issues to address. Perhaps the budget deficit should be reduced a bit faster, it seems a long way to get to three percent," Harrold said for Hina, the director of the department for Central European and Baltic countries, which includes Croatia.

"It is certainly encouraging, but it is a piece of paper and what we must hope for is the rapid implementation of these important reforms," he added. He emphasized that Croatia needs strong economic growth and a reduction in the budget deficit to return to stability.

"It is very important to reduce the deficit as quickly as possible. If the deficit is greater than growth, then debt increases, that is a simple rule. Now you have a deficit of 6 percent and zero growth, which means that debt will increase significantly. Economic growth needs to return to 4.5 percent and the deficit needs to be reduced to three percent, and then stability will start to be noticeable," Harrold said. "The way out of the crisis is strong growth and strict fiscal measures," he emphasized.

When asked about the World Bank’s assistance to Croatia, he noted that this assistance tripled in 2009, from the usual 150 to 200 million dollars annually to 500 million dollars. "The stronger the government’s reform measures, the more the Bank will be able to respond," Harrold said, adding that the World Bank will support Croatian reforms because it is a "key issue."

He assessed that 2009 was a very difficult year for Croatia with significant economic contraction and rising unemployment, while this year, at best, sees a "very moderate recovery," but the situation remains "very difficult." He expressed hope that the worst is over for Croatia and that things are getting better, meaning it is better than in 2009.

When asked to compare the situation in Croatia with Greece, Harrold said that "Croatia is not in the same situation, but there are some similarities – a higher public debt than most European countries and a high budget deficit." "We do not think that Croatia is the next Greece, it has a better debt structure, much more long-term and commercial borrowing than government bonds, but learn from this. Do not allow yourself to become the next Greece, with an even larger budget deficit and even greater public debt," Harrold warned.

Philippe Le Houreou, Vice President of the World Bank for Europe and Central Asia, when asked about the quality of Croatia’s fiscal and monetary policy in the current crisis, given the absence of stimulus measures for businesses and citizens, and the increase in tax burden, said that the question is "how much fiscal maneuvering space Croatia has had." He emphasized that Croatia was "strong in the financial sector and trade," but could have done better in fiscal policy, as it increased the deficit with which it entered the crisis.

World Bank Chief Economist Indermit Gill pointed out that Croatia’s problem is "high spending on pensions and other social benefits." Le Houreou and Gill warned at a briefing at the World Bank that 30 countries in the Eastern Europe and Central Asia (ECA) region expect a difficult 2010 and a slow recovery from the global economic crisis.

"ECA countries are the hardest hit by the global economic crisis and are likely to restore economic growth the slowest," Le Houreou said, predicting an average economic growth of 3 percent this year, and 3 to 4 percent in the period from 2011 to 2013. They emphasized that countries in the region, faced with significant fiscal pressures, must take care of targeted social spending for the most vulnerable groups of citizens and those in greatest need. (H)