On behalf of the Croatian authorities, we thank Mr. Seshadri and his team for the insightful report and the fruitful policy discussions during the Article IV mission. The authorities broadly agree with staff’s appraisal and appreciate their valuable policy recommendations.
Amid the pandemic and two large earthquakes, the Croatian economy showed resilience. Although the 2020 economic contraction of 8.0% was one of the largest in Croatian history, it has not been as severe as those experienced by many other economies with an equally strong tourism component. This was mainly due to the swift and ample policy support, including subsidy and job retention schemes, tax relief and deferrals, the opt-in limited time debt service moratorium, and guarantees and grants given to businesses. Thus, the highly expansionary fiscal and monetary policy stance successfully mitigated negative consequences of the pandemic as reflected in the mild effects on the labor market, the stable exchange rate, and the return to pre-pandemic low yields.
EU funds support the authorities’ ambitious reform agenda to kickstart a green and digital recovery. The European Commission has recently approved Croatia’s National Recovery and Resilience Plan (NRRP), unlocking 12% of GDP of EU grants to be utilized until 2026. 40% of the available funds will be utilized to foster a green transition, 20% for digitalization, and the remainder for reconstruction after the earthquakes, and public administration, labor market and healthcare reforms. Structural reforms complement the authorities’ primary strategic priority – the euro adoption, which is planned for the beginning of 2023.