This is the plan by which the Government intends to address macroeconomic imbalances

The Government announced on Thursday a plan aimed at resolving macroeconomic imbalances, which had threatened Croatia with the initiation of a corrective procedure by the European Commission. The plan outlines a series of reforms and measures along with deadlines for their implementation.

– The Government of the Republic of Croatia is aware of the significant macroeconomic imbalances in its economy, which require decisive action on our part. In this regard, an open and constructive dialogue has been initiated with the European Commission, resulting in a joint consensus regarding strong determination to implement a series of policies and measures necessary to ensure sustainable public finances, correct existing macroeconomic imbalances, and strengthen potential gross domestic product (GDP), states the announcement published on the Government’s website.

The Government’s economic program involves investing efforts in two key areas: stabilizing public debt and appropriate structural measures, it further states. The stabilization of public debt will be based on a three-pronged approach through fiscal consolidation based on reducing the budget deficit and its trajectory towards sustainable levels: activating state-owned assets that can directly reduce nominal debt and stimulating economic recovery.

– A particular challenge we are aware of is the need to precisely define economic policy measures in order to respect the principles of fiscal consolidation that do not negatively impact growth, the announcement states.

In this regard, the Government has made a series of decisions related to the new budget, despite existing fiscal challenges. Thus, in 2016, the Government decided to freeze all categories of expenditures that contribute to the fiscal deficit at the level of budget execution from 2015. These efforts will result in a planned reduction of the general government deficit, in accordance with the ESA 2010 methodology, to below 3 percent of GDP this year, thereby contributing to the stabilization of public debt as a share of GDP.

Furthermore, the Government will focus its priorities on a program of structural reforms primarily in areas such as public finance management, healthcare, labor market, public administration, improving the investment climate, and reducing the burden on businesses as well as increasing the absorption of EU funds.

Fiscal Responsibility Law in Q3

Regarding public finance management, the draft Fiscal Responsibility Law was submitted to the Commission’s services in July 2015, after which proposals and comments from the Commission followed in September. The relevant expert services will amend the existing version of the draft Fiscal Responsibility Law based on the aforementioned comments, particularly regarding strengthening the independence of the Fiscal Policy Committee and ensuring full consistency of domestic fiscal rules with the relevant framework of the European Union. The adoption of the Fiscal Responsibility Law is planned for the third quarter of 2016.

In July, the State Audit Law; in May, the Public Debt Management Strategy

The proposal for the State Audit Office Law, which prescribes sanctions for non-compliance with its recommendations, has already been prepared. A public discussion will begin in March 2016, and its adoption is planned for mid-July 2016, the announcement states. The proposal for the Law on Internal Financial Control in the public sector has been prepared and was adopted by the Parliament in July 2015, with application from January 2016. This law strengthens the internal financial control system in the public sector and expands its scope to companies owned by central and local government.

The Public Debt Management Strategy will be developed in May, following the submission of the Convergence Program and the National Reform Program, and will cover a three-year period, with regular updates every year, the Government announces. By the third quarter of 2016, the organizational unit for debt management will also be strengthened to ensure appropriate long-term planning.

– In this regard, we also plan to undertake a detailed analysis of the tax system, including the introduction of property tax. In this regard, an appropriate working group will be established in the next two weeks. Their initial results regarding preliminary analyses of the tax system and recommendations should be available in the third quarter of this year, the announcement states.

The Government reminds that it has also established an initial framework for asset valuation, which requires further elaboration and confirmation by appropriate regulations. Key actions to be taken this year include the adoption of a new Law on Communal Economy, which will harmonize the methodology by which local units set the amount of communal fees, and the adoption of regulations that define the methodology for asset valuation, both by the third quarter of 2016.

Start of healthcare reforms in two months

The healthcare system has been generating debts for many years, and they have mostly been resolved through a financial rehabilitation process funded by the state budget, it further states. The last round of financial rehabilitation was conducted in the amount of 3.2 billion kuna. However, the healthcare system continues to face numerous challenges that will be addressed through a series of measures to achieve savings and eliminate debts by the end of 2018.

The first measure in this regard relates to the reform of emergency services and better alignment of access to emergency services with access to primary healthcare. The implementation of this measure will begin in two months, the announcement states. The second measure relates to the reform of the hospital system to increase efficiency and quality of service. The implementation of this measure will begin in nine months, the announcement states. The third measure relates to the modification of existing supplementary health insurance and the introduction of a new type of insurance for non-standard health services, in consultation with relevant interest groups.

– Furthermore, we also plan to rationalize and reorganize non-health activities, i.e., administrative, financial, technical, and security services by the beginning of next year. Moreover, additional reform efforts we intend to implement will focus on further rationalizing expenditures, with an emphasis on hospitals. The main instruments that will support this goal are: centralized public procurement in hospitals, stricter control of sick leave and issuing prescriptions for medications, and the informatization of the system, the announcement states.

Penalization of early retirement by the end of the year

The Government intends to implement pension system reform to ensure greater differentiation for those seeking early retirement.

– We plan to increase the penalization for early retirement by the end of the year. We will finalize the list of occupations defined as demanding and dangerous professions and ensure consistency of criteria related to the definition of disability and applicable pension benefits. Both activities will be undertaken by the end of the year, the Government announces from the Ban’s Court.

Furthermore, it is planned to accelerate the process of equalizing the retirement age for men and women with legislative changes by the end of the year. Measures of the Active Labor Market will also continue.

– Along with these measures, we plan to work with the Croatian Employers’ Association to prepare lifelong learning programs and retraining schemes that will strengthen employment in key sectors. These initiatives will be activated in the next six to nine months. We will also strengthen monitoring and control mechanisms to reduce and deter undeclared work, the announcement states.

Increasing the efficiency of social benefits, minimum benefits

The Government plans to continue with reform measures aimed at increasing the efficiency of the social benefits system, encouraging the activation of inactive and unemployed individuals, strengthening the transparency of the system, and increasing the appropriateness of social welfare benefits. The reform will rely on the introduction of an asset test as one of the criteria for granting benefits, it states.

It will also focus on consolidating the social benefits system through the introduction of a guaranteed minimum benefit. Efforts in this area will be further deepened through additional consolidation of benefits, standardization of criteria for obtaining benefits, linking official records for all relevant institutions at the central and local levels, and through the establishment of a one-stop-shop system. These initiatives are planned for the third quarter of 2016, the announcement states.

Action plans for public administration reform by the end of April

Regarding public administration reform, the Government reminds that it has adopted a Decision on the implementation of reform measures to improve public administration. It stipulates that the reform will be implemented in three main areas: effective public administration focused on users/clients, developed human resources for effective public administration, and digitalization of public services. In order to define reform goals into specific action plans, three committees have been established, which should prepare detailed action plans for the implementation of reform measures. The Government is expected to adopt them by mid-April, the announcement states.

– Reforms in this area will particularly focus on completing the first wave of reductions for nine agencies by the end of the second quarter of 2016. At the same time, we will work on further identifying additional agencies whose number must be reduced by the end of the year, the Government announces.

The Government will also undertake a comprehensive analysis and assessment that will result in the redistribution of competencies and responsibilities between units of local and regional self-government concerning their fiscal capacities. This process will improve efficiency across the entire public sector, the announcement states. Additionally, a minimum set of criteria for the number of local and regional self-government units will be established by the fourth quarter of 2016.

Aligning gas market regulations with EU regulations

The Government will also implement necessary changes in legislation related to energy, namely the Gas Market Act and associated secondary regulations, in order to align with EU legislation. Drafts of these laws should be prepared by the second quarter of 2016, and implementation should follow from the second quarter of 2017. The development of a new Public Procurement Act is planned for the second quarter of 2016, which will ensure compliance with new EU directives on public procurement, aimed at simplifying formal procedures for conducting public procurement processes. This Act should assist small and medium-sized enterprises in overcoming difficulties related to contract size, ensuring electronic access to all relevant information, and reducing administrative burdens.

Removing barriers to investment

Improving conditions for investment opportunities by removing remaining regulatory and administrative barriers for private investors and enhancing the overall business climate will be carried out in agreement and coordination with other relevant Government institutions, it further states. The Government has also taken the first concrete steps to reduce fiscal and administrative burdens on business.

– We plan to continue with structural reforms in this area by continuing the implementation of the Standard Cost Model measurements in six regulatory areas – starting with business, construction, occupational safety, renewable energy, sanitary and health inspections – and committing to achieving a 20 percent reduction in these areas in 2016. We will continue to work on easing restrictions for regulated professions. The Government has also firmly decided to implement additional cuts and reduce non-tax burdens on businesses by eliminating parafiscal levies, the announcement states.

Judicial reforms by the end of 2016

Regarding improving the efficiency of the judiciary system in 2016, following an initial analysis, the emphasis will be on amending procedural rules aimed at harmonizing judicial practice, freeing judges from performing non-judicial tasks, reducing the inflow of new cases, shortening the duration of processes, and reducing the number of unresolved cases.

– We expect to ensure higher quality court rulings with increased expertise and faster processing by strengthening management skills as well as coordination of judicial bodies’ administrations, and enhancing work control and accountability. By the second quarter of 2016, we plan to introduce the ICMS system for the High Commercial Court, which should improve the efficiency of workload distribution in that court. The same system will be introduced at the Supreme Court by the end of 2016. The completion of the introduction of a common information system for land registries and cadastres will lead to complete electronic communication in land registry procedures by the end of 2016, which will accelerate and assist many other state approval processes, thereby providing faster services to everyone, the Government states.

Simplifying procedures for obtaining EU funds

The Government is aware that the effective use of EU funds, and strengthening their utilization is crucial for stimulating investment and removing barriers to growth and employment.

– Our plans are to increase the absorption rate of EU funds by urgently simplifying administrative procedures and providing support to various bodies in the preparation and implementation of EU projects through the simplification of various business processes, especially those related to the selection of activities and priorities as well as management certification. The next step is to further simplify standardized procedures used by bodies in the management and control system, and to adopt a new version of the Common National Rules in March 2016, the Government states.

One of the Government’s priorities is also to create a Fund for investments in small and medium-sized enterprises of at least 500 million euros, utilizing approximately 250 million euros of the planned contribution for European Structural and Investment Funds from the Operational Program Competitiveness and Cohesion 2014-2020.

Focus on non-performing loans

Regarding the financial system, one of the key priorities is addressing the high level of non-performing loans.

– The Croatian National Bank will address this issue through three key processes. On one hand, it will focus on continuing prudential accounting and supervisory policies, increasing the coverage ratio of non-performing loans, so that banks are motivated for more active collection or sale of non-performing loans. Furthermore, it is planned to reopen discussions with tax authorities and banks to find a satisfactory solution for taxing banks on loan write-offs. The solution should encourage banks to resolve a significant portion of their portfolios through write-offs. Finally, the CNB will work with banks to find ways to increase liquidity in the real estate market, both residential and commercial, the announcement states.

Liquidity is currently extremely low and should be improved by achieving a new ‘market clearing’ solution, the Government states. Targeted improvements in conditions should also help increase people’s willingness to accept the risk of long-term financing.

– Such improvements, such as non-recourse housing loans, interest rate risk-sharing products, limited insurance of repayment ability (unemployment, disability, etc.), should receive regulatory support, encouraging banks to use them and more frequently put them on the market.

Reducing public debt by activating state assets

The Government plans to activate around 500 million euros of capital through the Office for State Asset Management (DUUDI) and use those revenues to reduce debt. It is stated that there are approximately 4,500 apartments/offices, land, and around 1,300 state-owned companies within the state portfolio.

– We will strive to sell land and apartments/offices by the third quarter of 2016 to activate that ‘inactive’ capital. Additionally, we will undertake segmentation to identify and analyze which of the 1,300 state-owned companies are strategic and should be privatized. Along with this, we will establish an organizational unit that will monitor implementation compared to targets for all state companies. A management and governance policy will be established, focusing on the roles of the Board of Directors and Management Teams for all state-owned enterprises by the fourth quarter of 2016.

All the aforementioned reform measures are visible in the proposed budget for 2016, which the Government adopted on Thursday, and will be further elaborated within two key strategic documents – the Convergence Program and the National Reform Program, which the Government will submit to the Commission in April, the announcement concludes.