Croatia - Restructuring Public Finance to Sustain Growth and Improve Public Services : A Public Finance Review

Abstract

The year 2000 was a turning point in
 Croatian history, marked by closing the chapter of the war
 and the first phase of transition. With that, the country
 turned its attention to the "second
 transition,"the principle goal of which is to place
 Croatia on a path to the European Union (EU). While opening
 the economy to global markets through World Trade
 Organization (WTO) and CEFTA memberships and reestablishing
 cooperation with its Southeast European neighbors, the
 signing of the Stabilization and Association Agreement (SAA)
 marked the first firm milestone on Croatia's path to
 EU. In October 2005, Croatia opened EU accession
 negotiations, with the screening phase concluded a year
 after. Benefiting from successful economic transformation
 and the EU accession negotiations, growth has remained
 solid, and is roughly on par with the average for the
 European transition countries. Inflation has been modest
 despite higher prices for imported oil, and has been kept in
 check partly due to exchange rate appreciation. In fact, the
 central bank has intervened to prevent stronger appreciation
 in the face of robust capital inflows. However, the oil and
 commodity price increases and the aggregate demand pressures
 have contributed to a widening of the current account
 deficit in 2005-2007, despite somewhat tighter fiscal
 policy. Building on this foundation, the Government has an
 unparalleled opportunity to place Croatia on a sustainable
 growth path to achieve better living standards for all and
 to integrate into EU. To seize this opportunity, Croatia
 needs to sustain macroeconomic stability and continue
 creating a better climate for investment. In this context,
 key priorities for the public sector will include: reducing
 the size of the state and the fiscal deficit, and thereby
 helping to increase private sector productivity and
 competitiveness; and improving public sector efficiency and
 effectiveness. This report will suggest ways in which these
 twin priorities may best be addressed.