‘You Are Not Competitive Enough and Have a Large Public Sector’

The European Bank for Reconstruction and Development (EBRD) plans to invest 230 million euros in Croatia this year, following last year’s 210 million, focusing on small and medium-sized enterprises and infrastructure development, the bank announced.

Accession to the European Union will lead to strengthening the Croatian economy in the medium term, which has already benefited from the long and strict accession preparation process, EBRD states, emphasizing that Croatia will also have access to EU structural funds.

– To increase the potential for economic growth, further public administration reforms should be encouraged and competitiveness increased – states the EBRD analyst’s commentary on Croatia’s EU accession.

It is noted that the Government has proposed a series of important reforms.

– Effective implementation will be a challenge, especially in the area of the labor market and reducing the role of the public sector in the economy – states the EBRD commentary, adding that the Croatian business environment leaves significant room for improvements and increased efficiency.

According to EBRD estimates, the Croatian economy will weaken by 0.3 percent this year. The reasons for this are the impact of the eurozone crisis and domestic structural problems, EBRD notes, reminding that household consumption continues to decline, as do investments and goods exports.

By adjusting expenditures, the budget deficit has been reduced to 3 percent of GDP, reflecting the Government’s efforts to convince markets of its determination to reduce the deficit after two of the three major rating agencies recently downgraded the rating of Croatian government debt, EBRD analysts state.

They also believe that the banking sector is well-developed, liquid, and well-capitalized, with an average capital adequacy ratio above 20 percent.

– However, the growth of loans has continued to slow, the level of non-performing loans is increasing, while cross-border deleveraging continued throughout 2012 – states EBRD.

It adds that the economy is exposed to numerous vulnerabilities, such as insufficient competitiveness, a large public sector, significant foreign debt, and high euroization of the economy.

EBRD believes that Croatia has a well-developed financial sector and has made significant progress in infrastructure development.

– However, the role of the state remains large, and large enterprises and financial institutions still rely on state subsidies. There is room for improvements in the business sector, from speeding up the permitting process to enforcing court decisions. The implementation of credible reform programs will be a key challenge to stimulate economic growth. This should include greater private sector participation in infrastructure and energy, as well as successful privatization in the financial sector – conclude EBRD analysts.