World Bank calls on Croatia to press on with reforms

Elisabetta Capannelli, the World Bank country manager for Croatia, has welcomed Croatia’s ambition to adopt the euro, but warned that the way ahead would be demanding. “For Croatia being part of the Eurozone would be beneficial, but not before the country’s economy becomes resilient by implementing the bold reforms,” Capannelli told Reuters.

Croatia’s Prime Minister Andrej Plenkovic announced in late October the goal of adopting the euro within 7-8 years in a country where a majority of loans and deposits are denominated in the single currency.

Capannelli said Croatia’s reformist drive had subsided since the country joined the EU in 2013. “The momentum has pretty much been lost. Croatia is heavily reliant on tourism and has a very large and inefficient public sector. The private sector is small and insufficiently dynamic. Reforms are also needed for better growth prospects,” she said.

The World Bank is a key international player in Croatia providing assistance to make the economy more robust. On a visit to southern Croatia, Plenkovic acknowledged it was necessary to work more on boosting productivity and structural reforms.

“It is important to make a major move forward in 2018,” he said. Croatia’s economy is seen growing around 3% in 2017, which is below most of its EU peers in the CSE. Many analysts warn that the country’s longer-term growth prospects hardly surpass 2%, a figure too low to efficiently deal with its debt problem. Croatia’s public debt is slightly above 80% of gross domestic product and the government wants to reduce it to below 70 percent by 2020.

“The private sector is still burdened by high taxes and various par fiscal charges. There is much uncertainty in the way the judicial system works, labor productivity is rather low, loss-making health and pension systems must be tackled. Making changes at one step at the time is not enough,” Capannelli said. She added the figures showed good fiscal performance in the last two years, but the efforts on the fiscal front were still lacking major action on the expenditure side. In the last two years Croatia managed to reduce the budget deficit to 0.6 percent of GDP from more than 5%, but largely on improved revenues. Capannelli welcomed the government’s promise to make 2018 a year of dealing with economic reforms seriously. “There is awareness among top policy-makers about what needs to be done. The question is who and when will get the ball rolling,” she said.

Croatia gets almost 20 percent of its gross domestic product from tourism – but in stark contrast, it has practically no electricity production from solar power. The government is drafting a new strategy aimed at reducing energy imports which is likely to be completed next year. “I set myself a target to promote solar power in that context as much as possible,” an official involved in the work, who asked not to be identified, told Reuters.

According to the International Renewable Energy Agency, Croatia, which imports nearly 40 percent of its energy needs, could develop 3,200 megawatts (MW) of solar power by 2030, but the lack of a supportive legal framework has deterred investors.

Croatia has installed power of 4,500 MW, mostly from coal and hydroelectricity. Renewable power accounts for 28% of production. Croatia has only 52 MW of installed power in solar panels, some six times less than smaller neighbor Slovenia.

There are no new preferential contracts with investors due to the lack of a legal framework to implement the 2016 renewable energy law. In addition, last month the government had to raise electricity prices due to high subsidies for renewables.

Stjepan Talan from the Solvis company, the only producer of solar panels in Croatia, started his business in 2008 planning to sell around half of its products at home and export the rest. “Now we export virtually everything we produce to countries like Germany, France, the Netherlands, Italy, Austria  as there is in fact no developing local market,” he said.

Greenpeace has started a campaign to raise awareness that Croatia can make a significant leap towards energy independence by investing in green electricity from solar panels. “Croatia has fewer solar panels than the Slovenian city of Maribor and 50 times less installed capacity than Greece, for example. It’s a shame,” said Zoran Tomic of Greenpeace Croatia.

A decade ago Croatia introduced feed-in tariffs for renewable electricity, but set low quotas for photovoltaic panels due to the technology’s relatively high cost at the time. Since then, investment costs for solar panels have dropped significantly but Croatia has failed to adopt. “Maybe it would have been more interesting for investors to see lower price incentives, but higher quotas,” said Dubravka Brkic from the Croatian Energy Market Operator. Edo Jerkic, an energy consultant, also said state power board HEP must be forced to ease and cheapen grid-connection procedures for producers of solar power.

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