World Bank Reviews Public Spending With Croatia to End Downturn

The World Bank is helping Croatia review spending and urging it to deal with high unemployment and public debt to avert “irreversible changes” after six years of recession, the bank’s representative in Croatia said.

Croatia’s Finance Ministry has shown “seriousness and intent” to increase the public administration’s efficiency, though more effort is needed to turn the economy around and provide more jobs, Carlos Pinerua, the World Bank’s new representative in Croatia, said in an interview in Zagreb yesterday.

Croatia, the newest member of the European Union, saw its economy shrink 12 percent since 2008, the second-biggest contraction after Greece. The economy is forecast to contract another 0.5 percent this year, the Washington-based lender said in July. Prime Minister Zoran Milanovic, a Social-Democrat, earlier this week told Parliament the government has chosen “a slower, but less traumatic reform path.”

“There seems to be clarity in the government, in the private sector that reforms are needed, that something needs to be done,” Pinerua said. “There are issues that need to be solved in the public administration, in health and labor market, and we are here as partners with the government to offer assistance.”

The Adriatic nation, whose fiscal discipline is being monitored by the European Commission, has vowed to cut the deficit to below the EU limit of 3 percent of economic output in 2016 from 4.4 percent this year. Finance Minister Boris Lalovac said the cabinet will review this year’s budget in October, following a weak tourist season.

Jobs, Pensions

“Croatia needs a social and political dialogue among all the stakeholders because it cannot go on for much longer like this,” Pinerua said. “It has a recession for almost six years, it has a high level of unemployment, particularly among the young, and this should give people a sense of urgency.”

Overall unemployment rate was 17.5 percent in August, jobless young adults in Croatia account for just below 50 percent, the third-highest rate in the EU after Greece and Spain, according to Eurostat. Almost 60 percent of Croatia’s unemployed youth have elementary education, making their prospects the worst in the bloc.

“How do you keep the stability and the social contract in a country that is aging fast?,” Pinerua said. “Who’s going to pay for pensions, if the people who will eventually pay for it don’t have jobs, or if they do, they don’t have productive jobs? These are the key questions for the society, because at some point the equilibrium is going to be shaken.”

Ukraine, Debt

Croatia’s exposure to a possibly prolonged crisis in Ukraine remains limited, as it sends only 3 percent of its exports to Russian and Ukrainian markets and isn’t highly dependent on Russian gas, Pinerua said.

Public debt will increase to about 70 percent of gross domestic product this year from 45 percent in 2010, according to EU estimates, which makes the country vulnerable to external shocks, Pinerua said.

While borrowing remains cheap, “it takes just a little bit to change that, and then everyone has to run,” he said. “This is another reason while Croatia in its present state can hold for a while, but not for a long time.”

Croatia doesn’t need a bailout and is able to service its obligations alone, Finance Minister Boris Lalovac said on Sept. 16.

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