ZAGREB, Oct 3 (Reuters) - Croatia, only nine months away from joining the European Union, must speed up "long overdue" structural reforms to mend its economy after four years of recession, the International Monetary Fund said on Wednesday.
In its report after a regular two-week visit, the IMF said it expected Croatia's economy to contract 1.5 percent this year and to reach a mild recovery of 0.8 percent in 2013.
"However, further efforts are needed in 2013 and beyond to return to fiscal sustainability," the IMF said in a statement.
"In the medium term, without fundamental policy changes, sluggish growth and elevated vulnerabilities will further weaken the economy's ability to withstand shocks."
The IMF said it saw gross domestic product growing next year due to expected sizeable public investments and modest improvement in external demand. The government hopes for growth of 1.8 percent.
The IMF commended the efforts of the centre-left government, which took office last December, in consolidating public finances and said that its deficit target this year was within reach.
The government plans to cut the general budget gap this year to 3.4 percent of GDP from 4.5 percent in 2011.
The IMF warned that structural reforms were critical for resuming sustainable growth and raising the potential of the economy that is scheduled to join the EU on July 1, 2013.
"Reforms in important areas remain to be fully developed and articulated to the public ... Structural impediments and weak competitiveness hamper medium-term prospects. Without significant progress in structural reforms, potential growth will remain modest," the IMF said.
It said key reforms, besides cutting public expenditure, included improving labour market flexibility, reducing bureaucratic barriers for businesses and an increase in a retirement age.
"A strong reform agenda to address these problems is long overdue," the IMF said.
Croatia's EU membership offers a boost to growth, but this depends on how efficiently and fast Croatia will manage to use the EU development funds and reduce barriers for investments.
Croatia is rated just a notch above a speculative grade by the three leading rating agencies. Fitch last month revised its outlook to stable from negative, citing noticeable efforts in fiscal consolidation.
(Reporting by Igor Ilic; editing by Stephen Nisbet)
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Keywords: CROATIA IMF/