Croatia's economy is yet to show signs of the sustainable recovery from the economic crisis, according to assessments of executive directors of the International Monetary Fund who say that it is necessary to remove structural rigidities and improve competitiveness in order to improve medium-term prospects for the growth.

The IMF on Friday published on its web site a report regarding the 24 June consultations of the IMF Executive Board in connection with the IV Article of the IMF statute after the Fund's mission visited Croatia and held talks with the country's officials in May .

The report notes that Croatia's GDP in 2010 really contracted by 1.25% ant that short-term prospects for the country's upturn are still week.

The Fund projects Croatia's growth rate at 1% this year, with medium-term prospects for recovery being limited by weak competitiveness.

Executive directors have generally agreed with the assessments made by the mission's members and welcomed progress Croatia has made in efforts to join the European Union.

They also call for measures to be taken to reduce vulnerabilities which emanate from a high external debt stock, large financing needs and limited reserves.

Despite efforts, the Croatian authorities failed to prevent the deterioration of the fiscal position in 2010. The general government debt rose to 5% of GDP, total public debt reached 41% of GDP and external came to 100% of GDP.

The IMF calls for comprehensive reforms aimed at recovering competitiveness and putting the economy on more viable foundations.

"Reducing external indebtedness of the economy requires policies that enhance competitiveness and growth potential, and lower reliance on debt-financed and domestic absorption-driven growth. This, in turn, requires corrective wage and structural policies that would increase tradable sector’s contribution to growth, enhance economy-wide productivity, and allow financing of external current account deficits through higher non-debt creating flows," the report reads.

The directors welcomed progress made in some areas of the government's Economic Recovery Programme, urging more resolute efforts aimed at enhancing the flexibility on the labour market and reduction of public administration as well as at privatisation of public companies and further enhancement of business climate.

They call on the Croatian authorities to conduct fiscal consolidation to maintain the market confidence and keep interest rates under control

"Going forward, an expenditure-based fiscal consolidation and a sound debt management strategy remain crucial to reducing vulnerabilities in the public sector. The recently-adopted Fiscal Responsibility Law (FRL), which intends to reduce expenditure by one percent of GDP annually until a primary balance is reached, is a move in the right direction. However, to ensure debt sustainability, fiscal consolidation should aim to achieve a cyclically-adjusted balanced budget in the medium term. The authorities’ current debt management strategy, which aims to reduce the share of external and flexible rate debt, remains appropriate but should be strengthened to take account of the guaranteed debt. In addition, policies to increase domestic currency finance of public debt would be important to reduce exchange rate related risks," reads the report.