IMF warns of risks as Croatia’s growth stays among Eurozone’s highest

Split

ZAGREB, 12 December 2025 (Hina) – Croatia’s economy continues to expand at one of the fastest rates in the euro area, but growing imbalances are emerging, the International Monetary Fund (IMF) has warned in its latest Article IV report.

Rising fiscal deficits driven by robust consumption during the boom period are adding pressure to domestic demand, contributing to higher inflation and a widening current account deficit, the Fund noted.

The IMF’s Executive Board concluded its annual consultations with Croatia without a formal meeting, endorsing the findings of the IMF Mission. These consultations, held with every member country, involve a detailed review of economic conditions and policy settings.

Growth to Remain Solid, Inflation to Ease Gradually

Despite an unfavourable global environment and heightened uncertainty, the IMF expects Croatia’s economic growth to moderate but remain solid at around 3% in 2025 and 2026. Inflation is projected to converge towards the European Central Bank’s target by late 2026 or early 2027.

The current account deficit is expected to widen in the short term before improving, while the fiscal deficit is forecast to average just under 3% of GDP over the projection period.

Risks Tilted Towards Higher Inflation

According to the IMF, risks to growth are broadly balanced, but inflation risks are “tilted to the upside”. A sharper slowdown in external demand, particularly in tourism, or rising geopolitical and trade tensions could weigh on growth.

Global shocks, especially through higher energy and food prices, could also push inflation back up.

Domestically, the IMF cautions that the economy may overheat if fiscal policy remains expansive and if wage and credit growth continue to outpace expectations. On the upside, faster progress on structural reforms could ease supply-side constraints and boost both actual and potential growth.

IMF Calls for Faster Fiscal Consolidation

Stronger and quicker fiscal consolidation is essential to relieve demand-side pressures and contain inflation, the IMF stresses. This would also help strengthen competitiveness, build buffers against future shocks, and address rising spending needs.

In the short term, consolidation could be supported through limiting public sector wage growth, improving VAT collection, phasing out remaining cost-of-living support measures, and tightening fiscal discipline at local government level.

Over the medium term, the Fund sees scope to broaden the tax base and improve the tax system by reviewing reduced VAT rates and exemptions, and by introducing value-based property taxation.

On the expenditure side, the IMF recommends measures to reduce the high public wage bill, improve efficiency, especially in healthcare and education, and safeguard pension sustainability by raising the effective retirement age.

Banking System Strong but Vigilance Needed

Croatia’s banking sector remains highly liquid, well-capitalised and profitable. Stress tests indicate that the system would remain broadly resilient even under adverse scenarios.

However, the IMF warns that vulnerabilities are accumulating, particularly in the residential property market, and highlights structural risks linked to strong bank-sovereign ties and loan concentration.

The Fund acknowledges that Croatian authorities have appropriately tightened macroprudential measures, but notes that further action—particularly on borrower-based measures—may be needed if cyclical risks persist.

Property Market: IMF Recommends Tighter Taxation

Given the high share of cash-financed property purchases and strong foreign demand, the IMF strongly supports complementary measures to increase housing supply and curb speculative demand. These include higher taxation on property and income from short-term rentals.

Reforms Needed to Support Long-Term Growth

To boost potential growth amid an ageing population, labour shortages and skills mismatches, the IMF calls for deeper reforms in healthcare and education.

Healthcare reforms should address regional disparities in access to services, strengthen prevention, reassess the central role of hospitals, and improve the use and distribution of pharmaceuticals. Education reforms should focus on reducing skills mismatches and expanding adult education.

Better integration of foreign workers would also support long-term prosperity.

The report concludes that sustained reform efforts will be key to maintaining Croatia’s strong growth momentum while safeguarding stability.