(Updates with GDP forecast in fifth paragraph.)
Oct. 21 (Bloomberg) -- Croatia’s government, preparing to join the European Union in July 2013, needs to cut more waste from government administration spending to avoid an economic crash, central bank Governor Zeljko Rohatinski said.
The fiscal deficit of the former Yugoslav republic will widen to 6.2 percent of gross domestic product this year, Rohatinski said at a conference today in the seaside town of Rovinj, Croatia. That is higher than his last estimate of 6 percent of GDP, made in May.
“We cannot exit the crisis without key reforms, contrary to unrealistic expectations that global economy and EU accession will act as an engine that will pull Croatia without painful cuts,” he said.
Croatia’s recover from a two-year recession, will be hampered by the effect of Europe’s sovereign debt crisis that is cutting demand for Croatian goods and hampering investment needed before the country joins the EU in July 2013. Concerns are also rising about expensive campaign promises before Dec. 4 general elections, in which the Social Democrats leads an alliance to oust Premier Jadranka Kosor.
The economy expanded 0.8 percent in the second quarter of 2011 from a year earlier, after a 0.8 percent contraction in the first three months, though it is not based on “real development,” he said.
GDP, which is at a “stage of stagnation,” will expand 0.5 percent this year and be affected by events in the euro region in the following 12-month period, Rohatinski said.
Foreign Demand Down
Foreign direct investment, a driver of the economy, fell to $583 million in 2010 from $6 billion in 2008, while falling demand for Croatian goods has is driving exports 1 percent lower, he said. The inflow of foreign capital this year is half of last year’s inflow at a time the country was approved for EU entry.
Investments this year will fall 6.5 percent this year because of pressure to depreciate the kuna and a dearth of “quality” projects, even after a government recovery program, Rohatinski said. The central bank’s monetary policy targets a price of 7.5 kuna to the euro, he said.
Croatia has one of the lowest labor-force participation rates in Europe, at about 50 percent, according to the International Labour Organization in Geneva.
In the country of 4.5 million people, there are 1.4 million employed persons supporting 1.1 million retirees, in addition to providing benefits for welfare recipients and war veterans, according to the data released in August by the national statistics office.
“The widening of the fiscal deficit and the unwillingness to execute reforms are the biggest obstacle to recovery,” Rohatinski said.
The World Bank on Oct. 14 urged Croatia to overhaul its welfare system so that benefits are based on needs, not entitlement. The Washington-based lender lowered its 2011 economic growth forecast to 0.8 percent from 1 percent, World Bank Croatian representative Hongjoo Hahm said in an interview in Zagreb. An “optimistic scenario” sees gross domestic product growing 1.5 percent in 2012, he said.
--Editor: James M. Gomez
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