Fiscal slippage as the economy remains weak
Overview:
While there are signs that the worst is past, the Croatian economy is one of the few in the region that has yet to return to positive GDP growth. Inflation may be subdued and the current account deficit falling, but a weaker than anticipated recovery has resulted in the fiscal situation turning out rather worse than expected. The government has no particular difficulty in financing this larger deficit as the recent Eurobond issue has demonstrated. However, continued large fiscal imbalances will add to concerns over the already very high external debt to GDP ratio. The semi-fixed exchange rate against the Euro aids financial stability however questions remain over the competitiveness of Croatian industry. The tourism sector provides huge revenues for the balance of payments but also keeps wages high by regional standards.