Recent Economic Developments and the Competitiveness of the Croatian Manufacturing Industry

1
Croatia Growth Slowdown and Policy
Alternatives Hermine Vidovic and Vladimir
Gligorov
2
Topics to be discussed

• Fiscal developments
• Foreign debt
• Policy choices

3
GDP per capita (PPP), 2004
EU (25) 100
EUR at PPP
Czech Republic 15647 Hungary 13623 Poland 10474
Slovakia 11645 Slovenia 17416 Bulgaria
6681 Romania 7071 Croatia 10289 EU (25) 22371
70 61 47 52 78 30 32 46
4
Croatia in comparison, 2004Austria 100
wages in industry
GDP per capita (PPP)
ULC in industry
Czech Republic Hungary Poland Slovakia Slovenia
Bulgaria Romania Croatia
58 50 39 43 64 25 26 38
34.9 27.7 31.9 29.3 90.8 18.5 25.6 63.2
18.9 19.5 16.3 15.3 33.7 4.9 6.3 25.1
5
Overview developments 2003-2004 and outlook
2005-2006
6
Overview developments 2003-2004 and outlook
2005-2006
7
Fiscal developments

• High and persistent public expenditures
• High deficit and sustainability problems

8
General government expenditures share of GDP,
1998-2004
9
General government revenues and expenditures,
share of GDP, 1998-2003
10
General government expenditures, share of GDP,
1998-2003
11
Central government budget 2003 functional
classification, of GDP
12
General government budget functional
classification, 2003 of GDP
Note HR Data 2002
13
General government budget balance of GDP
14
Public debt in of GDP, comparison
15
Public debt in of GDP, comparison
16
Foreign debt

• Steady increase of foreign debt
• Steady worsening of debt indicators

17
Current account, 2000-2004 of GDP
18
Gross external debt in of GDP (EUR)
19
Current accountin mn EUR
20
External debt by domestic sectors in of total
debt
21
External debt by domestic sectors share in total
annual increase
22
Debt indicators, comparison 1998-2004Debt to GDP
ratio (USD)
23
Debt indicators, comparison 1998-2004Debt in
of goods and services exports
24
Debt indicators, comparison 1998-2004Debt
service in of goods services exports
25
Conclusions

• Growth slowdown
• Persistent internal and external imbalances
• High borrowing
• Sustainability problems

26
Policy choices

• Targeting sustainability
• Soft lending through less consumption and
  investment based on restrictive fiscal and
  monetary policies
• Gradual change in costs and relative prices
  relying primarily on income policy

27
Monetary Policy

• Monetary Policy
• Restrictive monetary policy, if effective, should
  push up interest rates that may increase rather
  than decrease foreign currency inflows
• Inflation targeting is an alternative but
  credibility of the central bank a problem

28
Fiscal Policy

• Targeting fiscal deficit likely to be ineffective
  and unsustainable
• Alternative on the expenditure side
  intergenerational justice and investments in
  development
• Alternative on the revenue side lower taxes