ZAGREB (Reuters) - The International Monetary Fund (IMF) urged Croatia on Friday to accelerate the pace of structural reforms to improve competitiveness and mid-term growth prospects.

FILE PHOTO: People sit in the sun at the harbour in the heart of Dubrovnik, southern Croatia October 18, 2011. REUTERS/Dylan Martinez

“There is a need for more ambition in reforms,” the IMF mission chief Khaled Sakr said at the end of a 10-day visit as part of regular annual consultations between the IMF and the member states.

The IMF said there was a need to reform the public administration to make it less costly and more efficient, improve the business environment, make labor regulation more flexible, use still idle state assets more efficiently and make legal processes simpler and faster.

“Unless critical reforms are implemented, growth is projected to decelerate over the medium term towards around two percent,” it said in a concluding statement.

The IMF projects Croatia’s growth this year at 3.1 percent slowing down to 2.8 percent in 2018.

“Growth is mostly driven by private consumption and tourism, but (stronger) investments are also needed for higher growth,” Sakr said.

The IMF praised Croatia’s recent fiscal performance projecting this year’s budget gap at 0.9 percent of gross domestic product. Croatia set a target at 1.3 percent, from 0.9 percent last year, but the government has since said it expected the figure to come below its target.

For next year the IMF predicted a tentative figure of a 0.8 percent gap, but added there were more details needed for a final assessment. Croatia is likely to approve next year’s budget in November or early December.

Sakr said that Croatia already had a considerable tax burden and future fiscal consolidation should focus around lowering the expenditure side by reducing the wage bill and arrears in the health sector, addressing losses in the pension system and better managing welfare policy.

“Any tax reduction must be revenue-neutral,” the IMF said advocating the real estate tax as a possible compensation for a growth-friendly reduction in income tax or value added tax.

The IMF warned that reforms were crucial not just for higher growth, but also for mitigating risks and creating more fiscal space in the future in case of any downturns in the global or European economy.