(Andrew Holmes, CC BY-NC)
By the end of 2017, the share of public debt in GDP at a global level, according to the IMF data, was 82.4 per cent, which is 0.7 per cent lower than in the previous year, but it still continues to be too high. Namely, the public debt of developed countries was 105.4 per cent of GDP (generally the debt sustainability for that group of countries becomes risky above levels up to 85 per cent of GDP) and was decreased by 1.5 percentage points in the previous year. At the same time a debt of middle-level developing countries amounted to 49 per cent of GDP (the risk-value limit was 60 per cent). Compared to the previous year it increased by two percentage points, while the share of public debt in GDP in low income countries increased by 3.5 per cent to 44.3 per cent of GDP. One third of the developed countries, a fifth of middle-income developing countries and a fifth of low-income countries had the share of public debt in GDP higher than the marginal values above which it is considered risky.
Economic growth supported by favorable external and internal conditions in Croatia in 2017 continued positive developments in the area of general government indebtedness. It is primarily because of the impact of successful budget developments that have resulted in the first surplus and therefore the reduced need for state borrowing. In addition, the continuation of historically low interest rates worldwide and on the domestic financial market provided a chance to improve the structural characteristics of public debt, and by refinancing their liabilities the interest rates are reduced.
A more favorable indication of the indebtedness was partly influenced by statistical data correction in the sense of consolidation at the level of debt securities instruments, which is resulting in a reduction of the recent debt level and strengthening of the HRK against the EUR with the return of inflation. Directing greater attention to public finances with the pursuit of better implementation of policy in addressing the problem of budget balance and public debt resulted in the adoption of the Debt Management Strategy by early 2017, which is a primary document for the public debt for the period 2017-2019. It specifies the determinants of more efficient public debt management to improve sustainability of total public debt and mitigation of related risks.
In such circumstances, the total public debt at the end of 2017 amounted to HRK283.3bn (EUR38.2bn), which is HRK1.6bn or 0.6 per cent more than by the end of 2016. Although this was less than in 2016, when public debt was reduced by 3.5 percentage points as the GDP share, or by HRK2.5bn/EUR3.3m, it is more than expected, as the move decreased the public debt share in the GDP by an additional 2.7 per cent and is now 77.5 per cent. The results achieved are better than planned in the budget plan (which expected the public debt to be 79.8 per cent of GDP), but also in the proportions of consolidation demanded by the European Commission, which confirms the success of the implementation fiscal policy.
This is the first time after 2012 that public share debt in GDP fell below 80 per cent, with continuity of reduction for the last three years with a positive effect on the macroeconomic stability of the country. Reducing the burden of public debt has contributed to improving country’s credit ratings and thus influenced the more favorable terms of borrowing. Therefore, the state in 2017 has managed to borrow from the most favorable interest rates so far and issue bonds with the longest maturity, which has improved the structure of the general debt in the state. Good borrowing conditions have been utilized to restructure a part of unfavorable debts, especially in the road sector. In such circumstances, the burden of servicing the public debt, measured by the share of interest expense in GDP, was significantly reduced (from 3.1 per cent in 2016 to 2.7 per cent in 2017), which made Croatia more successful in Europe — only Slovenia, Hungary and Belgium were equally successful.
With the share of public debt in GDP of 77.5 per cent by the end of last year, Croatia is still positioned somewhat below but close to the European Union average (81.6 per cent) and is among the 13 countries that do not meet Maastricht criterion of 60 per cent. All other countries have a significant record in the lower public debt share in GDP from Croatia (Bulgaria with 25.4 per cent, Czech Republic with 34.6 per cent and Romania with 35 per cent, and Hungary and Slovenia are the closest with 73.6 per cent). It encourages the dynamics of decreasing the share of public debt in GDP in 2017 (by 2.7 percentage points), as Croatia is more successful than the average EU achievement (a decrease of 1.7 percentage points), whereas eleven European countries recorded a stronger decline indicator than Croatia.
In the recent years Croatia has successfully implemented fiscal consolidation, which confirms the achievement of the budget surplus and the continuity of the reduction of public debt share in GDP. The convergence program of Croatia for the period 2018-2021 envisages a continuation of the reduction of the share of public debt in GDP to 75.1 per cent in 2018, 72.1 per cent in 2019, 69.1 per cent in 2020, and 65.9 per cent in 2021. The reality of such forecasts is confirmed by the forecasts of the European Commission, which envisages the fall of the public debt as GDP share to 69.7 per cent in 2019. That decrease will create preconditions for further reduction of macroeconomic imbalances and loads of debt, which will have a positive impact on the ability to improve credit rating of the country and implementation of the planned introduction of the EUR.
Vedran Obućina is an analyst and a journalist specializing in the Croatian and Middle East domestic and foreign affairs. He is the Secretary of the Society for Mediterranean Studies at the University of Rijeka and a Foreign Affairs Analyst at The Atlantic Post.