Croatia debt worries EU, experts

29/01/2014

Croatia's debt could become more manageable under the EU's excessive debt procedure, experts say.

By Kruno Kartus for Southeast European Times in Osijek -- 29/01/14

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Croatia spent more than 400 million euros to rehabilitate its public health service to meet EU standards. [AFP]

The European Commission is proposing that the EU launch an excessive deficit procedure against Croatia due to the country's high deficit and public debt -- an action that some experts agree should be taken.

Under an excessive deficit procedure, the government will have to reduce its deficit to less than 3 percent of GDP by various measures, including reducing public spending.

According to the ministry, the total deficit in the state budget at the end of August 2013 amounted to 1.8 billion euros, which is about 3.8 percent of GDP. The deficit for 2012 was 5 percent of GDP, while government debt was 55.5 percent of GDP.

The commission is concerned about predictions the deficit will remain more than 3 percent until 2015, and public debt is expected to exceed 60 percent this year.

"By 2016 we need to reduce the deficit below 3 percent of GDP," economic experts Anto Bajo and Marko Primorac from the Institute of Public Finance said in a statement.

The deficit in 2014 should be 450 million euros less than what is predicted by the government, for 2015 it should be reduced by nearly 523 million euros, and in 2016, by 392 million euros.

"We need to cut 1.5 billion euros from estimations from 2014 to 2016," Bajo and Primorac said.

Croatia Minister of Finance Slavko Linic said the EU measure is expected, but that Croatia has reduced its debt in the last two years. Croatia decreased the deficit by 650 million euros from 2011 to 2012, Linić said in an interview with Slobodna Dalmacija.

The problem is partly due to the fact that Croatia spent more than 400 million euros to rehabilitate its public health service to meet EU standards. In addition, from 2006 to 2011, the state spent 3.7 billion euros to economically recover the country's shipyards.

"Consequently, the budget deficit for this year rose to more than 2 billion euros, and next year it is projected to be more than 2 billion euros. In addition, 2014 expenditures are expected to increase due to the cost of membership in the European Union," Linic said.

This year, EU membership will cost the country between 450 and 500 million euros.

"The problems of Croatia's debt are more serious than they look. The share of debt to GDP is not a good indicator of indebtedness. Much more relevant is the indicator of the ability to repay debt is the debt and budget revenues, because only budget revenues reflect available financial potential to cover expenses," Primorac, a professor at the University of Zagreb Faculty of Economics, told SETimes.

"Due to the high costs of borrowing, interest also increases, and the deficit becomes larger. Investor confidence decreases, and the cost of borrowing is greater than the cost of debt that caused the deficit," Primorac said.

According to the World Bank, the excessive debt procedure will help the country bring its debt to a more manageable scope.

"The excessive deficit procedure is a good disciplinary tool for restoring macro-stability and reducing macro-imbalances. If it does not solve its economic weakness through sustainable fiscal adjustment and institutional reforms, Croatia will not fully benefit from EU membership, and the search for future prosperity may prove unsuccessful," the World Bank office in Zagreb said in a statement to SETimes.

Two of the government's priorities are to fix fiscal sustainability and competitiveness. This requires prioritising and reducing spending, while strengthening revenue collection and investments.

"Croatia should enable investment by reducing bureaucracy and economic dominance of the state and state-owned enterprises to establish more robust and sustainable growth over the medium-term period," the World Bank said in the statement.

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Mamta Murthi, World Bank regional director for Central Europe and the Baltic Countries, agreed.

"The government is facing a very challenging task of having to tame public debt growth and reduce public expenditures, while at the same time trying to protect the vulnerable. This is never easy, especially as the results of reforms on economic growth and competitiveness take several years to have full effect," she said during a recent visit to Zagreb.

"Sustaining and pushing forward with the reform efforts to restore macro stability, but equally promote sustainable growth and employment, is a priority."

What steps can Croatia take to reduce its public spending? Tell us your thoughts below.

This content was commissioned for SETimes.com.
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