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Croatia: IMF as Last Exit

Published: November 11, 2013; 19:49 · (Vindobona)

It is likely that the ailing country is seeking assistance from the IMF. Borrowing in 2014 is risky, Finance Minister Slavko Linic said.

Croatia: IMF as Last Exit / Picture: © Vindobona.org

In 2013, Croatia´s GDP will shrink for the fifth consecutive year. Due to the deep recession, Croatia is unable to sharpen the austerity measures. Already in spring, Linic underlined that the country would not absorb another fiscal contraction. In the past, austerity measures proved harmful, he said. As a result, a widening fiscal gap in the short term is the better alternative, he said.

In the last months, Croatia´s fiscal situation has deteriorated further. At the end of 2013, the debt-to-GDP quota is expected to exceed 66% of GDP. In October, Croatia had to revise its 2012 budget deficit from 3.4% to 5.0% of GDP. This year, Croatia´s budget deficit is estimated to range between 4.0% and 4.5% of GDP. Moreover, the youngest EU member country is expected to record a budget deficit of 5.5% of GDP in 2014. As a consequence, the EU Commission will introduce excessive deficit procedure against Croatia.

The pressure coming from Brussels is not the biggest problem for Croatia, tough. Next year, Croatia may not be able to cover its borrowing needs, Linic said. “Next year, Croatia´s borrowing needs become “very risky”, according to him. As a result, Croatia may turn to the International Monetary Fund, Linic indicated. In total, Croatia´s financial requirements amount to € 5.5bn next year. Croatia´s budget deficit is expected to reach € 2.0bn in 2014. Linic explained that borrowing costs ranging between 5.0% an 7.0% are too much for the country. A co-operation with the IMF would be more favorable than the current bond market conditions, Linic said.

For Croatia, applying for an IMF loan would cause a massive increase in reform pressure. In the last years, by contrast, the Croat government was repeatedly blamed for inactivity. „The government does not change its behavior and denies its responsibility. As the government fears to lose in popularity, there are no structural reforms. No ministry wants to cut spending. In the end, the economic situation does not improve.” The Croat economist Marushka Vizek said recently.

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