Croatia Watch: Significant rise in public debt

In 2020 public debt reached 89.1% of GDP. Based on the recovery, the 2021 fiscal metric is projected to improve and return within the Maastricht criteria. The uptake of the EU funds should significantly mitigate a stronger blow to public finances in the upcoming years.

Public debt spikes in 2020​​​​​​​

HNB, RBI/Raiffeisen Research

At the end of 2020, the total debt of all general government subsectors (domestic and foreign central government debt, social security funds and local government debt) amounted to HRK 329.7 bn, which represents a growth of HRK 36.8 bn or 12.6% compared to the end of 2019.

Seen in relative terms, the total general government debt recorded 89.1% of annual GDP at the end of 2020, rising from 72.8% as recorded the year before, and ending the trend of a declining public debt that lasted from 2014 when it was at the level of about 85% of GDP.

The strongest contribution to the growth of the general government debt in 2020 came from the domestic component, that increased by 13.2% compared to the end of 2019. On the other hand, at the end of 2020, the foreign component recorded a growth of 11.3% yoy. Noting that the data regarding the structure of general government debt by main debt instruments and debt futures are available only for the unconsolidated general government debt, the debt structure is dominated by long-term debt instruments (64.4%), which are followed by long-term loans (29.1%) and short-term loans and securities (together 6.5%).

Budget balance
MF, RBI/Raiffeisen Research

Challenging Times Continue

The ratio of general government debt to GDP should return to a downward trajectory this year. While the European Commission has confirmed that this year, and most likely in 2022, the general escape clause will remain activated, by which full flexibility of the Stability and Growth Pact was approved in March 2020, the Ministry of Finance plans to meet the budget deficit criteria as early as this year. Likewise, according to the MoF projections on public debt movements, the three-year budget plan foresees a permanent reduction of the debt level relative to GDP by 2 percentage points each year, which is in line with the Maastricht criteria. The permissible deviation from the mid-term budget target or from the appropriate adjustment path puts Croatia in a better position, in particular, taking into account the high aspiration to join the euro area. However, this does not address the need for fiscal consolidation and the return of fiscal metrics to a sustainable path.

The availability and use of the EU money should significantly soften the impact on public finances in this and in the coming years. The withdrawal of contracted funds from the current Multiannual Financial Framework (2014-2020) is expected to accelerate, and on the other hand, new funds from the Multiannual Financial Framework (2021-2027) are also foreseen, from this new Framework Croatia has around EUR 9.15 billion at its disposal. Furthermore, the Government's fiscal projections also include the use of funds from the Next Generation EU instrument aimed at boosting recovery of the economy from the pandemic and making it more resilient to future crises. Given the significant growth in public debt as a result of the corona crisis, financing state needs with the EU funds is encouraging, as any additional growth in public debt, i.e. any additional borrowing, would potentially signify a deterioration in the financing conditions in financial markets, i.e. higher interest rates, which could then lead to a crisis in public finance.