The International Monetary Fund has completed its comprehensive annual economic review of Croatia, highlighting both achievements and emerging challenges facing the Balkan nation. This detailed assessment examines Croatia’s rapid economic growth trajectory while identifying potential risks that could threaten future stability. The evaluation comes at a critical juncture as Croatia continues its convergence toward advanced European economic standards.
Croatia: Strong growth continues despite emerging imbalances
Croatia has maintained a fast-paced economic growth momentum, with some of the strongest growth performance rates in the eurozone, while realizing significant enhancements in living conditions. The strong absorption capacity of funds from the Recovery and Resilience Fund has contributed greatly to this economic performance during the entire review period. However, the emerging imbalances need urgent attention due to the effects of fiscal expansion during periods of strong growth, resulting in increased deficits, inflation, and current account positions.
The increase in the expansion of credit has been quite fast, while the rise in housing prices has been significant. The Croatian National Bank has responded well to this situation by implementing borrower-based macroprudential policies to mitigate excessive borrowing by households and reduce pressures on inflation. Such policies can ensure the stability of the financial sector while promoting economic growth in a more complex international setting.
Growth forecasts remain optimistic despite global uncertainty
According to IMF staff, real GDP growth is expected to slow down from nearly 4 percent in 2024 to a strong 3.1 percent in 2025 and further to 2.7 percent in 2026, fueled by domestic demand and EU investment expenditures despite high global uncertainty and sluggish growth performance of trading partners. In the medium-term projection, economic growth will be close to its potential of 2½ percent, as investment driven by the National Recovery and Resilience Plan offsets the effects of demographic factors, while inflation converges to ECB targets.
Fiscal consolidation is identified as a high priority for sustainability
From the IMF assessment, it can be observed that the fiscal deficit in Croatia has been steadily rising since 2023 to almost 3 percent of the GDP due mainly to the rise in employment and social spending. The fiscal deficit is expected to stay slightly below 3 percent of the GDP from 2025-30, while the debt-to-GDP ratio will slightly rise to 60 percent of the GDP in 2030. From staff estimates, the impact of fiscal expansion, particularly public wage structure changes, has significantly influenced inflation since 2024.
The Fund encourages the adoption of more aggressive fiscal consolidation policies to reach the structural primary balance position by 2030. Lowering the rates of public wage and social expenditure growth is core to the adoption of fiscal consolidation policies. The pursuit of greater efficiency in public spending and broadening the tax base are key priorities for the Fund to ensure that prudent fiscal policies are pursued in the country. The rising rigidity is a result of the permanent increase in wages and social benefits.
Key fiscal recommendations include:
- Reducing the general government deficit to 2.5% of GDP in 2026
- Ending remaining cost-of-living support measures
- Strengthening fiscal discipline at the local government levels
- Improving VAT compliance and enforcement
Structural reforms are essential for long-term competitiveness
Croatia should take advantage of the current economic boom and make efforts to promote structural policies that could increase productivity and potential growth, especially in terms of human capital development. The healthcare and education sectors require drastic efficiency reforms to reduce expenditures while achieving maximized outcomes because Croatia spends a larger share of resources compared to other countries, but it achieves lower outcomes for its efforts.
This thorough analysis not only emphasizes the outstanding economic performance of Croatia but also identifies and focuses on key areas requiring urgent policy action. The guidelines issued by the IMF serve as a tool for Croatia to continue its successful process of economic convergence with high-standard economies in Europe while preparing itself to face future challenges.
