Deputy Prime Minister and Minister of Economy Martina Dalić stated on Wednesday that structural reforms are not simple and that the reforms were prepared last year, and alongside a package of laws related to changes in the judiciary, she announced laws concerning the more efficient functioning of state administration, as well as the Government’s focus on more intensive and faster use of EU funds.
Commenting on the report published today by the European Commission (EC) on excessive economic imbalances in Croatia and the analysis of last year’s recommendations, Dalić assessed that the EC report is largely in line with the Government’s expectations and recognizes the results in economic growth achieved last year and in budget discipline, the reduction of the budget deficit, and public debt.
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“To a certain extent, it recognizes the reform efforts that have been made, and of course, it also gives a warning and calls for an acceleration of efforts primarily in implementing structural reforms,” Dalić emphasized in a statement to reporters in Banski Dvori.
The Commission predicts that the Croatian economy will grow by 2.8 percent this year, while it estimates the potential growth rate at 1.4 percent. In the following year, it predicts an economic growth rate of 2.7 percent, while the potential is estimated at 1.9 percent.
Year of Reforms
Noting that structural reforms are not simple and that time is needed for their preparation, Dalić stated that last year was spent on their preparation.
“We are in a year that the Prime Minister himself said is the year of reforms,” she stated, adding that a package of laws concerning changes in the judiciary is in the Parliament and that a series of laws concerning the more efficient functioning of state administration, primarily laws concerning the unification of inspection services, can be expected in a very short time.
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The Ministry of Labor and Pension System and the Ministry of Administration are finalizing laws concerning rewards in public administration, and Dalić announced that during this month, individual discussions with certain ministries and ministers related to the preparation of a new national reform plan will be intensified.
“The Government, in its efforts to strengthen economic growth, is focused on more intensive and faster use of EU funds. Last year brought a significant increase in contracted funds,” Dalić stated.
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She supported this with the data that the percentage of contracted funds has increased to 39 percent, which means that at this moment, 3.9 billion euros is ready to enter the Croatian economy from EU funds through contracted projects in various sectors, while an additional two billion is in the contracting process.
“These European funds are sources of financing that are expected to significantly contribute to the growth of investments, as one of the most significant and healthiest sources of economic growth,” she conveyed.
The speed and dynamics are determined by societal acceptance
In response to a journalist’s question about the EC’s remarks that Croatia is the weakest regarding the measures it announced itself and why there is so much delay, Dalić reiterated that a certain effort and coordination among ministries is needed for quality preparation of reforms.
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“I would also like many of those measures to go faster, but changes and reforms can only proceed at the speed and dynamics that society can accept,” Dalić said, reiterating that the Government wants the prepared measures to be implemented through legislative activities and that it wants to accelerate the use of EU funds.
Tax reform deepened inequality
In response to the Commission’s remarks about the tax reform that deepened inequalities in society, Dalić replied that the tax reform brought a reduction in the tax burden for all citizens and that 500,000 citizens were exempted from paying taxes due to the increase in the non-taxable part of wages.
She added that for citizens who are not in the “tax scissors” and did not benefit from the tax reform, the amount of the minimum wage has been increased.
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The essence of the tax reform is to contribute to economic growth, accelerate economic growth, and enable the spillover of growth to every citizen. The best way to reduce social inequality is economic growth, she stated.
She also reminded that statistics show that last year brought a growth of net wages of about five percent.
“We must keep in mind that Croatia was in recession for a long time, almost six years. Despite the Government’s efforts to improve standards faster and more, it is not easy to compensate for the consequences of such a prolonged recession,” Dalić said.
“I would also like many of those measures to go faster, but changes and reforms can only proceed at the speed and dynamics that society can accept,” Dalić said.
Economic reality
When asked what the main cause of the predictions of weaker economic growth is, Dalić explained that the so-called potential growth rate is highlighted as a problem, which signals the economy’s ability to grow in the long term.
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“Our economic reality is such that the actual growth rate we achieve is above that potential, which shows that we have possibilities, that we have the capacity to increase that long-term growth rate. The measures we are talking about, improving the efficiency of EU funds, numerous measures aimed at improving the economic climate, one of which will be on the Government’s agenda tomorrow, concerning the action plan for further reducing administrative burdens and business costs, as well as horizontal reforms concerning the functioning of the institutional system, judiciary, and state administration are ways that will increase that potential growth rate,” she stated.
The deepest structure of reform – Agrokor
In response to journalists’ questions about structural reforms, Dalić mentioned the reform of the judiciary as one of the reforms that structurally change the economy.
According to the Deputy Prime Minister, one of the deepest structural reforms for the private sector is currently underway, which is the extraordinary administration process in Agrokor.
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“Because this process has ensured that in a significant part of the private sector we have regulated payment deadlines, that payments are made on time, that contractual relations are respected, and that trade relations are respected. And this is one of the structural reforms that we may not have planned, that we did not want, but a problem we reacted to in a way that will leave significant positive and structural consequences on the economy,” Dalić emphasized.
EC: Croatia is one of three EU members with excessive macroeconomic imbalances; the situation is improving
The European Commission announced on Wednesday that Croatia is one of three member countries that still have excessive macroeconomic imbalances, although these imbalances are decreasing.
“Cyprus, Croatia, and Italy have been identified, as in 2017, as countries with excessive macroeconomic imbalances. Imbalances are decreasing in Croatia and Italy, aided by a combination of reforms, favorable economic conditions, and reduced risks in the banking sector. However, there is a need for more decisive implementation, especially in Croatia,” the Commission states.
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“Croatia has excessive imbalances. Weaknesses are related to a high level of public, private, and external debt, which are largely denominated in foreign currency, in the context of low potential growth. Strong growth above the estimated potential rate helps reduce imbalances: public, private, and external debt are falling rapidly. The negative external net position remains high, but is improving thanks to a surplus on the current account,” the Commission emphasizes.
The Commission adds that strong growth has contributed to further debt reduction, but predicts a slower pace of deleveraging as household and business loans begin to rise.
“The state debt peaked in 2014, and is now on a downward trajectory, due to strong GDP growth and reduced deficits. The banking sector is becoming increasingly profitable, and the number of non-performing loans continues to decrease. However, exposure to foreign currency (mainly euros) for corporations and households remains a source of weakness. While the economic environment is improving, there has been little progress in adopting political measures to address macroeconomic imbalances, including still low potential growth,” the report states, among other things.
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The Commission predicts that the Croatian economy will grow by 2.8 percent this year, while it estimates the potential growth rate at 1.4 percent. In the following year, it predicts an economic growth rate of 2.7 percent, while the potential is estimated at 1.9 percent.
Within the potential for growth, the EC states that negative migration flows and an aging population, in the context of one of the lowest employment rates in the EU, negatively affect the size of the working-age population, which, in turn, has a negative impact on long-term employment growth prospects. In the absence of policies that would increase employment, the reduction of the workforce will continue to diminish the potential growth of the Croatian economy, the Commission estimates.
‘Something is always being postponed, like pension reform, property tax, although we understand that some of these reforms are not popular,’ say Commission experts.
EC: No structural reforms
In a separate report by the Commission assessing progress in implementing recommendations, it is stated that Croatia has made limited progress in implementing last year’s recommendations from the European Commission, but structural reforms have not progressed.
“Croatia has made limited progress in implementing the recommendations from 2017. Fiscal policy, supported by favorable macroeconomic conditions, has ensured a reduction in the debt ratio, but structural reforms have not progressed,” the Commission states.
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In May last year, the Commission issued five recommendations for Croatia, which relate to public finances and taxation, pensions, the labor market and social protection, wage determination, public administration and state-owned enterprises, as well as the service sector and the judiciary.
“The laws needed to strengthen the fiscal framework have not been adopted, while the implementation of the property tax law has been abandoned. Some steps have been taken to rationalize the healthcare system, especially hospitals. However, overdue debts in healthcare continue to grow. The measures planned in the social system have been reduced in scope, while the pension system reform package has been postponed again. Active political measures for low-educated individuals and the long-term unemployed are largely unused, while the education system reform is still pending, despite some encouraging steps. A major public administration reform is largely stalled,” the Commission’s report states.
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Regarding measures to improve the business environment, it was assessed that they have “somewhat” progressed in terms of reducing administrative burdens and parafiscal levies. Progress has been made in selling minority stakes in state-owned enterprises and activating state assets, while overdue cases in courts have marginally decreased. Some measures have been adopted to address non-performing loans, the Commission states.
Commission experts responsible for Croatia say it is desirable in this case to look at what those countries that have exited excessive macroeconomic imbalances have done. “They are no better than Croatia, but they have implemented what they announced, while Croatia is the weakest in fulfilling the measures it announced itself,” the experts say.
“Something is always being postponed, like pension reform, property tax, although we understand that some of these reforms are not popular,” they add.
