• Government plans spending cuts of 2.5 billion kuna this year
  • Country may enter pre-euro exchange rate mechanism by 2020

Croatia plans to cut spending and reduce the budget deficit as part of an economic overhaul that the government expects to pave the way for euro adoption.

The cabinet in Zagreb plans to reduce expenditure by 2.5 billion kuna ($378 million) this year, including cost cuts in public administration as well as in health care and pensions, Finance Minister Zdravko Maric told reporters on Thursday. The government forecasts the budget deficit will narrow to 2.6 percent of economic output this year from 3.2 percent in 2015 and it sees public debt declining to 86 percent of gross domestic product from 87 percent last year.

The European Union’s newest member is sticking to preparations for joining the euro area even as the Greek debt crisis has curbed the common currency’s appeal among other post-communist members of the trading bloc. The Balkan nation may enter the exchange rate mechanism, which tests an applicant state’s currency stability before a switch to the euro, by the end of the current government’s term in 2020, Maric said.

“If our scenario of narrowing the public deficit materializes, and if the European Commission and the European Central Bank see it as a positive effort,” then Croatia “may be in the ERM-2 by the end of our mandate,” Maric said in an interview after the cabinet meeting.

Lower Debt

The administration of Tihomir Oreskovic, Croatia’s first non-partisan prime minister who took office in January, expects the fiscal deficit to narrow to 2 percent of GDP in 2017 and decline further to 1.6 percent in the following year. Public debt should fall to around 83 percent of GDP in 2018, according to government forecasts published on Thursday.

Croatia is seeking to preserve nascent economic growth after a six-year recession that wiped 12 percent off GDP before it ended in 2015. The government’s program also includes plans to sell assets it valued at about 30 billion euros ($34 billion) and repaying debts.

The reform plan will be submitted to the European Commission by the end of the week. The EU’s executive arm said in March the Adriatic country needed “deep structural reforms” to tighten budget costs, stabilize public debt, improve public sector efficiency and reduce unemployment.

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