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International Monetary Fund. European Dept.
This 2017 Article IV Consultation highlights that Croatia continued its third year of positive economic growth in 2017. Growth is expected to stay at similar levels in the near future but to decelerate over the medium term. Consumer prices increased at a moderate pace and wage growth was also moderate as unemployment remained high. The external current account is expected to record another strong surplus, underpinned by robust performance of exports and tourism and lower repatriation of profits as banks absorbed losses from Agrokor. The balance of risks has improved but vulnerabilities remain sizable as public and external debt levels are still high, and the full impact of the Agrokor restructuring is yet unknown.
International Monetary Fund. European Dept.

planned for January 2018, will be postponed as more time is needed to design an efficient and fair system. Monetary Policy and Financial Stability The monetary authorities will continue to pursue an accommodative monetary policy taking into account the anchor of exchange rate stability and risks to financial stability. The kuna liquidity of the banking system was further strengthened during the entire 2017 by foreign exchange interventions that alleviated appreciation pressures on the domestic currency. At the same time, the monetary authorities enabled easier

Mr. Bas B. Bakker and Mr. Christoph A Klingen

dropped sharply by 6¾ percent year-over-year during the first half of 2009. Policy Responses Croatia’s initial policy actions focused on supporting financial and exchange rate stability. Given the extent of the economy’s euroization and the adverse balance sheet effects associated with any sharp depreciation, the Croatian National Bank adopted a three-pronged approach: support for the kuna, liquidity maintenance in the interbank market, and alleviation of capital outflow pressures. In addition to tightly managing kuna liquidity in the interbank market, the

International Monetary Fund. European Dept.

economic recovery while working towards maintaining a stable kuna/euro exchange rate . Throughout 2018, the CNB has further supported the kuna liquidity of the banking system, which was predominantly spurred by the purchase of foreign exchange from banks, alleviating appreciation pressures on the domestic currency. This also contributed to a further build-up in gross international reserves, which reached EUR 17.4 billion at the end of 2018, enough to cover eight months of imports of goods and services. The highly accommodative policy stance continued to improve the

downturn. Growth-friendly fiscal consolidation; use FX intervention to smooth excessive exchange rate volatility when encountering disorderly market conditions. Encourage unhedged borrowers to shift to kuna loans at fixed rates and ensure availability of kuna liquidity from the central bank. Encourage further development of a market for hedging instruments. Weaker-than-expected global growth, especially Euro area/Medium term/ Medium Medium to High Weaker export performance, for example, with the largest trading partner Italy, would weigh on economic

International Monetary Fund. European Dept.

, triggered pressures in the government securities market. Finally, there were concerns about liquidity constraints due to continued expenditures but declining incomes by corporations, households, and the government. The CNB measures focused on: (i) maintaining the kuna/euro exchange stability and securing sufficient foreign exchange; (ii) increasing kuna liquidity at low interest rates to enable banks to continue lending; and (iii) mitigating the dysfunction of the government securities market. FX interventions at the beginning of the pandemic amounted to about 5

International Monetary Fund. European Dept.
This Article IV Consultation highlights that the economic expansion continues, driven primarily by private consumption and exports of goods and services. Discussions primarily focused on increasing the economy’s flexibility and resilience. Fiscal performance has been strong, however, the materialization of contingent liabilities from government guarantees is likely to reduce the overall surplus. Low public and private investment, and continued emigration appear to weigh on medium-term growth prospects. Downside risks in the near-term stem could be due to possible changes in regional or global economic and financial conditions, and the further realization of contingent liabilities. The IMF staff advocated for a moderately faster fiscal adjustment. The report recommends accelerating the pace of debt reduction that would build fiscal space and help reduce downside risks. The Central Bank may need to address potentially tighter external conditions while continuing with strong bank supervision and macroprudential policies. Additional measures to prevent excessive household borrowing could be considered if needed.
International Monetary Fund. European Dept.

conditions/Short term/ High Medium to High This causes higher debt service and refinancing risks; stress on leveraged firms, households, and vulnerable sovereigns; capital account pressures; and a broad-based downturn. Growth-friendly fiscal consolidation; use FX intervention to smooth excessive exchange rate volatility when encountering disorderly market conditions. Encourage unhedged borrowers to shift to kuna loans at fixed rates and ensure availability of kuna liquidity from the central bank. Encourage further development of a market for hedging instruments

International Monetary Fund. European Dept.
As other emerging economies reliant on tourism (about 25 percent total contribution of tourism-related industries in GDP and employment), Croatia has been hit hard by the pandemic and two devastating earthquakes, leading the economy to contract by 8.0 percent in 2020. Vaccinations have been rolled out to about 38 percent of the population (end-June 2021). Staff projects growth to bounce back to 5.4 percent in 2021, driven by a rebound in the services sector and investment, aided by fiscal and monetary policies, and bolstered by large EU grants over the medium-term.
International Monetary Fund. European Dept.

leveraged firms, households, and the sovereign. Growth-friendly fiscal consolidation; use FX intervention to smooth excessive exchange rate volatility. Accelerate private sector debt restructuring. Encourage unhedged borrowers to shift to kuna loans at fixed rates, and ensure availability of kuna liquidity from the central bank. Encourage further development of a market for hedging instruments. Structurally weak growth in key advanced economies/Medium term/ High Medium Weaker export performance would weigh on economic growth and perpetuate macroeconomic