Croatia needs more economic reforms for a sustained recovery from recession, the International Monetary Fund (IMF) said Friday.
The IMF board of executive directors welcomed Croatia's progress towards EU accession but noted "significant challenges remain to be addressed to secure a sustained recovery," a statement said.
"To improve the medium-term growth prospects of the economy, directors stressed the need to tackle structural rigidities and weak competitiveness. Action is also needed to reduce the vulnerabilities arising from large external and foreign-currency debt and deteriorating public finances," it added.
Croatia, set to become the 28th EU member in mid-2013, has been hard hit by the global economic crisis, its economy in recession since the beginning of 2009.
Last year, Croatia's economy shrunk by 1.2 percent, contracting by 0.8 percent in the first quarter this year.
The IMF directors "emphasized that the implementation of comprehensive reforms to restore competitiveness and put the economy on a more sustainable footing is a priority," the statement said.
The IMF recommended an internal devaluation through a reduction of prices and wages to more competitive levels, despite a risk that this could weaken growth prospects.
Welcoming "progress made in some areas" of the government's economic recovery programme, the IMF called for a "more decisive reform effort".
This should be focused on "increasing labor market flexibility and labor force participation, reducing the size of public administration, privatization of public companies, and further improving the business climate," the statement said.
According to IMF figures, Croatia's total external debt has increased from 77.7 percent of gross domestic product (GDP) in 2007 to 97.6 percent in 2011.
The IMF and the National bank of Croatia have forecast one percent GDP growth for 2011. Analysts expect modest growth in the second half of 2011, thanks to income from tourism on which Croatia's economy depends heavily is very dependent.