Croatia plans to implement major economic reforms in 2017 that its government hopes will pave the way for stronger growth and a better business climate, Prime Minister Andrej Plenkovic said on Wednesday. Croatia has largely been shunned by investors because of its red tape, unstable regulatory framework and high taxes. But the new conservative-led government, which took office last month, aims to change that.
Its first step is a proposed tax reform that is expected to take effect from January. The next step will be reducing its budget deficit, Plenkovic said. "The next signal towards that goal will be the 2017 budget, targeting a deficit of 2 percent of gross domestic product," Plenkovic told an economic conference in the northern Adriatic resort of Opatija. "We believe that the steps we take can lead us towards winning back the investment credit rating."
The budget for next year is expected to be approved in early December at the latest. This year, the deficit is expected to come in around 2.5 percent of GDP. That would be the first time in almost a decade that Croatia has reduced the deficit to below the European Union's tolerance level of 3 percent of GDP. "However, we know that tax reform would not be enough without measures to improve the regulatory framework and administrative environment, as we are aware it has been putting off the investors. We want to win back investor confidence," Plenkovic said.
He said the new government wanted to reduce or scrap various non-tax fees now imposed on businesses but otherwise provided few details of the other reforms he wanted to implement. Those reforms will take place next year, he said. Croatia, an EU member since 2013, is now ranked two notches below investment grade by three major rating agencies. Plenkovic said his government's goal was to win back investment grade ratings and escape the EU's excessive deficit procedure, a tool Brussels uses for fiscal discipline in member states.
Finance Minister Zdravko Maric said he hoped to escape the EU's monitoring as soon as next year. "Our goal is to achieve that in 2017 and reduce the borrowing costs by gradual improvement of the credit rating," Maric said. Currently, Croatia spends some 3.5 percent of GDP just for servicing interest rate payments.
Plenkovic also said his government aimed to improve management of public firms, many of which lose money. "It should be beneficial both for growth and public finances," Plenkovic said. The central bank governor, Boris Vujcic, also urged the government to implement growth-boosting measures as soon as possible. He said the central bank would continue with expansive monetary policy, but at the same time warned: "It is uncertain for how long the situation on the international markets will allow the current level of expansive policy. That's why it is paramount to correct macroeconomic and fiscal imbalances and implement reforms to boost exports and growth."