IMPACT OF THE PUBLIC DEBT OF THE REPUBLIC OF CROATIA ON THE CROATIAN EXPORT SECTOR

The competitiveness of the Croatian export must be observed in the context of public and external debt of the Republic of Croatia. Increased government spending generates public debt on domestic and foreign markets. State debt on the domestic market limits the private sector’s access to capital. With high amounts of debt on foreign markets, the state affects the increase in the risk premium for Croatia at the national level, which increases the price of money and reduces the return on investment. This in turn significantly affects the export sector and limits the financial capacity for technological innovation. Exposure of the state to the debt in foreign currencies causes a restrictive exchange rate policy based on a fixed exchange rate. This prevents economic operators from using exchange rate policy as leverage. For an EU economy outside the euro zone, such as Croatian, this could play a key role in the battle for price competition on the EU market. Public debt has been growing fast since 1999, and rapidly since the crisis began in 2009. Borrowing is financing public spending not covered by revenue budget, which serves to maintain the current economic model based on state and para-state sector, existing from the expansion phase of the economy up until 2008, which relied on large infrastructure projects financed with public money. The decline in budget revenues during the crisis was tried to be replaced with higher tax burden, which resulted in a drop of competitiveness of the private sector and disturbances on the money markets. The high cost of government borrowing has resulted in high interest costs that, in the medium term, will amount to about 3 percent of GDP, which will adversely affect the competitiveness of the economy.