A bold repositioning is underway in Croatia: despite continued rapid growth, the IMF sees mounting imbalances that require decisive policy action to prevent overheating and preserve stability.
The IMF Executive Board completed Croatia’s 2025 Article IV consultation and endorsed the staff's assessment on a lapse-of-time basis, with the authorities agreeing to publish the Staff Report.
What’s driving the concern? Croatia’s economy remains among the euro area’s fastest-growing, yet the surge is fueling clearer vulnerabilities. Higher public spending during buoyant times has lifted the fiscal deficit and added pressure on demand, contributing to inflation and a widening current account deficit. Credit expansion is robust and housing prices have climbed quickly. In the face of a weak external environment and elevated global uncertainty, staff projects growth to slow to about 3% in 2025–26, with inflation edging toward the ECB target by late 2026 or early 2027. The current account deficit is expected to widen in the near term before improving, while the fiscal deficit is projected to average just under 3% of GDP over the projection horizon.
Risks to growth and inflation are not symmetrical. Growth could fall short if external demand—especially tourism—slackens due to geopolitical or trade tensions or slower growth among Croatia’s trading partners. Global shocks could push up energy and food prices, lifting inflation. Domestically, overheating remains a risk if fiscal policy stays accommodative and wage and credit growth stay stronger than expected, potentially stalling disinflation. Conversely, faster reform implementation could relieve supply constraints and lift both actual and potential growth.
Executive Board assessment highlights the same theme: strong growth is straining imbalances that require restraint. The procyclical public spending is boosting demand, fueling inflation, and widening the current account. Croatia’s external position in 2024 is judged to be moderately weaker than fundamentals would imply. With a weak external backdrop and global uncertainty, growth is expected to settle around 3% in 2025–26, supported by private consumption and EU-funded investment. Inflation should move toward the ECB target by late 2026 or early 2027, and the current account deficit is likely to widen before improving. Risks to growth remain broadly balanced, while inflation risks tilt to the upside.
Policy path: stronger and faster fiscal consolidation is central to tamping down domestic demand pressures and easing inflation, thereby addressing the emerging imbalances early. This consolidation would also bolster competitiveness and build buffers against future shocks and large spendingneeds.
Short-term measures include: moderating public sector wage growth; improving VAT compliance; winding down remaining cost-of-living support programs; and tightening fiscal discipline at the local-government level. Medium-term priorities focus on broadening the tax base, rationalizing VAT exemptions and reduced rates, and shifting toward value-based property taxation. Expenditure reforms should target: (i) reigning in the high wage bill through a public-sector employment review; (ii) boosting the efficiency of spending—especially in healthcare and education—while better targeting social programs; and (iii) ensuring pension sustainability by gradually raising the effective retirement age. Corporate governance of state-owned enterprises (SOEs) should be strengthened, and public investment management improved.
On the financial side, heightened risks call for continued vigilance to preserve stability. The banking system remains profitable, well capitalized, and highly liquid, with stress tests indicating resilience under adverse scenarios. Nevertheless, authorities should keep monitoring macroprudential conditions and adjust as needed. If cyclical risks persist, tightening of macroprudential measures may be required. Given substantial cash-based home purchases and strong foreign demand, additional steps to lift housing supply and curb speculative demand are advisable, including higher property taxes and taxes on short-term rental income.
To support longer-run growth amid an aging population, labor shortages, and skill gaps, Croatia should pursue reforms to health and education to raise human capital without increasing costs. This includes reducing geographic disparities in healthcare access, promoting prevention, reassessing the central role of hospitals, and improving pharmaceutical distribution. Education reforms should aim to close skills gaps and expand adult learning participation. Easing labor market frictions through better integration of foreign workers would further boost growth and welfare.
Selected economic indicators (2020–2030) underscore the transition from acute shocks to a more balanced trajectory. Real GDP is projected to grow at roughly 2.5–3.5% per year through 2030, unemployment trending lower, inflation converging toward the ECB target, and external vulnerabilities gradually unwinding as debt declines and reserves stabilize. Structural reform and prudent fiscal management are the keystones for sustaining growth while containing risks.
Bottom line: Croatia faces a critical crossroads. Growth remains strong, but without disciplined fiscal policy and decisive reforms, the very imbalances that have accompanied this boom could derail the upside. The question for policymakers—and for observers—is whether Croatia will embrace the necessary tightening and reforms now to secure a steadier, more sustainable expansion, or wait and risk more abrupt corrections later. What are your views on the balance between fiscal restraint and growth-supporting investment in Croatia’s near future?
