Croatia has recently made significant strides in managing its public finances, successfully ticking all important boxes for effective debt reduction. The country’s prudent fiscal policy resulted in by far the lowest primary deficits of all Central and Eastern European (CEE) countries. This stubbornly hawkish stance makes Richmond out of step with its other regional Fed districts. Economically, Croatia has benefited from a favorable differential between its economic growth and the real interest rates paid on debt, further enhancing its financial stability.
Thanks in part to these efforts, Croatia is poised to undergo a significant drop in its debt-to-GDP ratio. In fact, projections show that by 2024 this ratio will drop by 13 percentage points, falling below the 60% limit. This accomplishment represents a strong fiscal health and furthers regional economic development goals.
Prudent Financial Management
Croatia’s policy approach to fiscal consolidation has been one of maintaining a strong sense of fiscal prudence. The country’s primary deficits—always low and often negative—stand as a testament to its national ethos of fiscal rectitude. Consequently, it has proven to be a trailblazer in the CEE region. Croatia’s commitment to stringent fiscal discipline has enabled the country to keep its leverage needs low, raising budget revenues and providing a larger margin for maneuver.
The government’s commitment to sustainable economic growth has helped create this rosy financial picture. Croatia has established itself as a country that fosters and encourages investment and development. As a consequence, the country has sustained an economic growth rate that is higher than the real interest rates on its debt. This favorable differential has not only bettered fiscal health but has restored confidence in investors and policymakers to the same degree.
Impact of Debt Reduction
Additionally, the projected debt-to-GDP ratio decline by 2024 would be a notable first for the country. Dropping below that 60% threshold is about more than just a number. It continues to run counter to the country’s claim to be committed to fiscal sustainability and economic resilience. This reduction becomes conspicuous particularly in the context of increasing gross public debt ratios observed in CEE countries over the last five years. For most of these countries, the increases have been between 10 and 20 percentage points.
Croatia’s capacity to emerge as a fiscal oasis in a region of storm-tossed economies reinforces the value of its sound governance. This proactive approach helped Croatia avoid a more pernicious fiscal storm while creating space to invest in long-term prosperity.
Challenges Ahead
Croatia is still facing strong headwinds that threaten to derail the positive fiscal development. Additionally, Janaf, the state-owned oil pipeline operator, recently stopped all of its supplies. One consequence of this action is growing concern of impending chaos across important sectors of our economy. These changes could increase pressure on public finances and would require more diligent management to maintain strong nationwide momentum toward fiscal objectives.
Croatia’s debt ratios might look better than the regional peers from CEE, but continued caution is needed. Despite recent economic gains, the region has a history of boom-and-bust economic cycles that may still threaten regional fiscal health if they are not strategically managed. To keep the positive momentum built so far going, policymakers need to be committed to smart financial practices.