EBRD: The Prospects for Croatia’s Recovery Are Not Encouraging

Croatia should continue with reforms next year to stimulate economic growth and prepare for membership in the European Union, stated the European Bank for Reconstruction and Development in its transition report.

The completion of accession negotiations with the European Union is a key milestone for Croatia, notes the EBRD in this year’s Transition Report, pointing to the need to strengthen institutional capacities for ‘drawing’ funds from EU sources.

It is also necessary to improve the competitiveness of the Croatian economy by alleviating “certain restrictive practices that make the labor market inflexible and the establishment and management of businesses difficult,” warns the EBRD.

They also highlight the need for improved payment discipline among public enterprises.

The next priority for 2013 is further regional integration in the energy sector. The EBRD also notes that there is room for further development of transmission and distribution networks for electricity to adapt to increased electricity production from wind energy.

They highlight the “successful privatization in the financial sector which could send an important signal of readiness to reduce the state’s share.” They remind that the Croatian government has announced that it hopes to raise two billion kuna from the sale of assets, such as Hrvatska poštanska banka and Croatia osiguranje.

Among the main results in the past year, the EBRD emphasizes – along with the conclusion of negotiations on Croatia’s accession to the European Union – progress in implementing reforms in the transport sector. The reform of the road sector has significantly advanced in recent years, they state. They also highlight the awarding of the concession for Zagreb Airport and the initiated restructuring of the railways.

However, they warn that the state of the Croatian economy remains extremely weak. Last year, activities stagnated after two years of negative growth, and this year they are again recording a decline, largely due to unfavorable external developments, the report warns.

The prospects for the recovery of the Croatian economy are not encouraging, given the prolonged debt crisis in the eurozone. The risks for weakening economic activity are quite high, they note.

According to recently published downgraded forecasts by the EBRD, the Croatian economy will record a decline of 1.9 percent this year, while a return to growth is expected in 2013, at a rate of 1.2 percent.

In the medium-term perspective, it is possible that EU membership will provide a boost to Croatia, as well as the initiation of long-awaited reforms in public administration and the labor market, and the restructuring of public enterprises, they conclude.