Croatia’s 2015 Growth Capped by Fiscal Adjustments, Grcic Says

Government spending cuts this year will drag on Croatia’s economic growth, Deputy Premier Branko Grcic said, blunting a recovery after six years of recession.

European Union-endorsed cost-cutting may shave as much as 0.2 percentage points from the government’s 0.5 percent growth forecast for 2015, Grcic said in an interview in his office in Zagreb on Tuesday. The Adriatic nation’s economy will expand by as much as 1 percent in 2016, fueled by industrial production, exports and the start of more than 1 billion euros ($1.1 billion) in EU-funded infrastructure projects, he said.

“Though the fiscal consolidation efforts are putting pressure on the growth, we believe the recession will be over this year,” Grcic said. The government will probably submit a convergence program to the EU next week, he added.

With more that 12 percent of its economy wiped out since 2010 -- the third worse contraction in the EU after Greece and Cyprus -- Croatia is at risk of becoming the bloc’s first member to be penalized under the union’s economic imbalance procedure.

As part of its convergence program, the government will announce new measures to expand on 2 billion kuna ($288 million), or 0.6 percent of gross domestic product, of tax increases and spending cuts adopted last week aimed at reining in the budget shortfall. The EU’s executive commission, which called in March for the former Yugoslav republic to take “decisive policy action,” will assess the program on May 13.
Excessive Imbalances

Grcic’s prediction of lower growth follows an announcement by Central bank Governor Boris Vujcic on Monday that the regulator will raise its 2015 growth forecast next week from the current 0.2 percent.
The country is under pressure from the European Commission, which said in March that the newest EU member must address “excessive macroeconomic imbalances” stemming from low growth, high public debt, declining exports and indebted private sector.

Croatia’s government aims to narrow the 2015 budget deficit to “definitely under 5 percent” of GDP from 5.7 percent last year, Finance Minister Boris Lalovac told reporters last week.
At the same time, Prime Minister Zoran Milanovic’s ruling Social Democrats have passed laws to erase the debt of Croatia’s poorest citizens, including to state-owned utilities, after easing labor law rules and lowering income tax brackets. With a general election approaching in less than a year, the government also scrapped plans to outsource non-essential workers in public companies and reduce obligatory health contributions by employers.

In addition, Milanovic’s administration canceled a tender to lease operations of the country’s indebted highway system to international investors for 3 billion euros ($3.3 billion) after highway union workers called for a referendum.

Croatia instead plans an initial public offering for the highway companies, with a target of raising about 1.5 billion euros, Grcic said. The companies will be offered to pension funds and citizens, he said.

(Jasmina Kuzmanovic and James M. Gomez / Bloomberg)

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