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Croatia Overview

    Context

    Croatia entered the European Union (EU) on July 1, 2013 as the 28th member state. The government has been striving to raise Croatia’s competitiveness to compete in the large EU market and maximize the opportunities that membership brings, especially the absorption of a large amount of EU Structural Funds.

    Before the global financial crisis of 2008-09, the Croatian economy grew at a healthy 4-5% annually, incomes doubled, and economic and social opportunities dramatically improved. The prolonged crisis is testing this progress, as well as Croatia’s aspirations, as the country is now entering its sixth year of recession, having lost over 12 % of its output.

    Gross Domestic Product (GDP) is estimated to fall by 0.5% in 2014. There is more optimism about the prospect for growth in 2015, with exports projected to pick up in the Eurozone and private investments expected to increase. The privatization of large state-owned enterprises (SOEs) and the availability of EU funds (in net terms about 2% of GDP per year) should also help growth prospects in the medium term. The structural reforms that the Government has launched for labor, pension, and social benefits - as well as areas in the investment climate -could help stimulate job creation, productivity, and social cohesion. However, the outlook for the short term in Croatia remains difficult.

    Unemployment rose to 17% at the end of 2013 and youth unemployment, at over 40%, remains one of the highest in Europe. The private sector has been bearing the brunt of the crisis with most jobs lost in manufacturing, construction, and trade. Public debt is estimated to have risen above 64% of GDP in 2013 and external debt will likely be close to 103% of GDP.  

    Before the recession, poverty was below 10% and mainly affected those without a job for more than three years and low-skilled workers but the protracted recession has led to an increase, and the poverty rate now stands at 18%. Today, due to the prolonged recession, the profile of the poor is changing, with normally economically active, better educated and younger people living in urban areas falling into poverty.

    The Croatian economy is less competitive than its peers. From 2007 to 2013, Croatia’s private sector share of GDP remained at 70% - lower than its EU peers. To achieve private sector-led growth and faster EU convergence, actions are needed to liberalize the labor market, jump-start enterprise restructuring and the kind of new business creation and old firm exits required for the economy to reorient itself toward one reliant on knowledge, innovation, and transit-related services to maximize its geo-economic advantage as Europe’s transport hub.

    Croatia spends 7.8% of it GDP on health, among the highest for new EU members. Like most other European countries, Croatia is expecting profound changes in its population structure over the next 50 years, as the elderly population grows and the need for health services and long-term care services rise. A challenge is to provide better health services and improve efficiency while reducing public spending on health.

    Substantial reforms and improvements have been made in the Croatian education sector, but advances have been slow in improving the efficiency and the quality of higher education to better respond to the needs of the labor market. While more children and youth are enrolling in school programs (60% at the pre-school level, near universal enrollment at the primary level, and 88% at the secondary level), Croatia’s enrollment levels remain below the EU and the Organization of European Cooperation and Development (OECD).

    Croatia has the geopolitical advantage of being situated along three pan-European transport corridors linking the EU and South East Europe and the Croatian authorities have invested heavily in developing this transport network. Prior to its accession to the EU, Croatia launched major reforms for the railway sector, in compliance with EU directives. However, the sector stil, faces numerous institutional and organizational issues and challenges. Croatia’s accession to the EU provides unique opportunities for the country to modernize its key international corridors through the use of EU Structural Funds, and to open up the railway sector to increased investment, market competitiveness, and efficiency.

    Croatia remains an ecological treasure in Europe, with 47% of its land and 39% of its sea designated as specially protected areas and areas of conservation. Croatia boasts 19 National and Nature Parks, with some- such as the Plitvice Lakes National Park - designated as United Nations Educational, Scientific and Cultural Organization (UNESCO) World Heritage sites. Croatia’s natural beauty draws in millions of tourists each year, with tourism revenues representing around 15% of the country’s GDP. Preservation of the environment is high on the development agenda and has been a requirement for European Union membership.

    With EU membership, Croatia became party to the 2020 Climate and Energy Package, a set of binding legislation that aims to ensure that the EU meets its ambitious climate and energy targets for 2020 Croatia is doing well on greenhouse gas emissions (GHG). Today these emissions are smaller compared to the baseline of 1990 - amounting to less than 0.1 percent of global emissions. On the other hand, Croatia needs to put more effort into scaling-up renewable energy resource (RER) and energy-efficiency (EE) programs to alleviate energy security concerns and improve access to reliable and affordable energy imports

    LENDING
    Croatia : Commitments by Fiscal Year (in millions of dollars)*
    *Amounts include IBRD and IDA commitments
    Strategy

    The World Bank Group is now transitioning from a focus on projects and lending in Croatia to a knowledge partnership. This strategy continues to help the country maximize the benefits of EU membership and implement structural and institutional reforms that would boost competitiveness and institutional capacity-building related to EU membership. At the same time, the engagement will focus on boosting the income growth of the bottom 40% of the population—that is, looking at whether the welfare of the poorest segment of society is improving and whether the prosperity is being shared among all segments of society. Tactics for this effort include:

    • supporting fiscal consolidation to speed up sustained growth, with an emphasis on expenditure rationalization to ensure fiscal sustainability over the medium-term
    • improving Croatia’s competitiveness, centering on the needed structural, institutional, and governance reforms, so that Croatia can catch up with its EU peers
    • helping Croatia maximize the economic benefits of becoming an EU member state by increasing the country’s capacity to implement harmonized policies, to absorb the large increase in EU Funds, and help use these resources effectively

    The World Bank’s activities in Croatia are guided by the Country Partnership Strategy (CPS), agreed on by the government in 2013 and covering the period from 2014-2017. This Strategy prioritizes aspects of the Europe 2020 ‘smart, sustainable, and inclusive growth’ strategy and the Government’s reform agenda that focuses on the fundamentals of economic management, state institutions, the business environment, and responsibility toward shared regional resources. This is coupled with supporting Croatia in making good use of large amounts of EU grants that have come with membership.

    Since joining the World Bank in 1993, Croatia has received support from the World Bank Group in the form of financial and technical assistance, policy advice, and analytical services. To date, the Bank has supported 50 projects in the amount of $3.3 billion and has approved 52 grants with a total value of $70 million. The total active lending portfolio as of April 2014 consists of 10 projects, totaling $696 million.

    Croatia became a member and shareholder of the IFC in 1993. Since then, IFC’s investment in Croatia has totaled $1.1 billion, including $292 million in syndicated loans in 31 projects across a variety of sectors. IFC’s committed investment portfolio in Croatia as of December 31, 2013 was $287 million. In FY13, IFC invested $150 million in Croatia - including $56 million in syndicated loans.

    IFC’s investments have financed projects in the financial markets, general manufacturing, tourism, and agribusiness sectors. Across all sectors, IFC prioritizes investment in Croatia’s less-developed regions and in projects that contribute to greater economic diversification and regional integration.

    LENDING
    Croatia : Commitments by Fiscal Year (in millions of dollars)*
    *Amounts include IBRD and IDA commitments
    Results

    Since Croatia joined the World Bank in 1993, projects have supported reforms in areas such as agriculture, judiciary, tax administration, land registry and cadastre, infrastructure, transportation, the environment, emergency medical services, improving social welfare, and job creation. Current operations are supporting the country’s accession efforts and mitigating the impact of the global economic crisis.

    Project highlights include:

    Unexpected Outcomes: Discovering Croatia’s Past by Building for the Future

    A wastewater management project along Croatia's Adriatic Coast recently uncovered a 2,000-year-old vessel in the town of Pula. Funds were made available to help excavate and preserve this archeological relic. Following the excavation of this ship - which paired international experts with their Croatian counterparts - efforts are now underway to desalinize the vessel and preserve it so that generations to come can glimpse into the past of this seafaring community.


    In Croatia: Upgrades to the Emergency Medical System Saves Lives
    An emergency medical system is finally in place in Croatia, where for years there were no separate facilities for urgent medical treatment. Under the system, hundreds of technicians are now on 24-hour call across the country, able to explain to often panic-stricken callers what steps to take until emergency aid arrives.  

    In Croatia: Helping Farmers Comply with EU Standards
    The pollution control project aims at promoting better and safer agricultural practices in Croatia. The World Bank-supported project, financed by the Global Environmental Facility, is helping the country meet European Union standards, in part by implementing controls on the nitrates and other minerals involved in farming, which can be harmful when they enter the country’s water system. Under the project, agricultural specialists are out sampling the water deep beneath the soil of some 1,400 hectares of Croatia’s fields and orchards.  

    Clean Water Cleans Sea on Croatia’s Famed Coastline
    21 regions along Croatia’s Adriatic coastline are participating in the project, which expects to triple the number of the costal area’s households and businesses that are connected to sewage treatment services. 

    In Croatia: Helping Exports Expand
    More than €72 million in credit have been distributed so far under the government’s export finance project, which is backed with World Bank funds. The project’s objective is to support the preservation and growth of Croatia’s exports, through providing medium- and long-term capital to exporters and foreign exchange earning companies.

    Ensuring that Croatia’s Vulnerable are Better Served and Protected
    Drawing on World Bank funding and expertise since 2006, Croatia has improved the delivery and quality of social services for nearly 13,500 beneficiaries (children, youth, elderly, disabled), financed start-up costs for 34 innovative community-based social services projects, improved living and working conditions in 45 residential institutions, and initiated the development of the first social welfare information management system.

    The Social Welfare Development Project (SWDP) was designed to assist the Ministry of Health and Social Welfare in modernizing the quality and delivery of social services to the most vulnerable and needy in Croatian society, and to improve the administration of the overall social welfare system, including the living and working conditions in the social welfare institutions.

    Transforming Croatia's Rijeka Port and City
    Rijeka has been an important port over the centuries, changing hands as it changed rulers, and cycling through boom and bust. In the past decade, Rijeka has been in need of an economic boost, and is getting one thanks to a public-private partnership involving government authorities and one of the largest private terminal operators in the world, International Container Terminal Services (ICTSI).

    The long-term plan is to make the port—a gateway to Central Europe—competitive for handling containers and other maritime traffic, while making the city more livable for its citizens and more attractive to tourists.

    The ambitious and massive overhaul of Rijeka's port is a project of the government—through the state-run port authority and the roads company—and the municipality of Rijeka, with close support from the World Bank.

    Restoring Livelihoods in Croatia
    Fifteen years after the end of hostilities in Croatia, some people still live in areas where roads, buildings and the water supply are destroyed and the land is littered with mines. Jobs are scarce.

    But 84,000 people in parts of the country affected by war or underdevelopment have had help catching up with more developed areas thanks to the Social and Economic Recovery Project, which created 1,341 new jobs, almost half of which were filled by women. EUR 11 million was generated by small businesses, crafts and cooperatives and since 2005 some 12 square kilometers of mine-contaminated land has been cleared allowing people to use their land safely without fearing for their lives or property.

    In addition, the project funded more than 400 smaller initiatives: kindergarten and school construction, water supply, community centers, treatment centers for drug abusers, olive grinding machines, and landmine clearing equipment.

    Other recent achievements:

    • The World Bank contributed to Croatia’s efforts in fiscal consolidation and mitigation of the social impact of the financial crisis through two development policy loans in 2010 and 2011 and a third one is under preparation
    • Jobs and exports are being preserved through loans to private companies for working capital and new investments through a €150 million loan to the Croatian Bank for Reconstruction and Development.
    • The Agriculture Acquis Cohesion Project has helped Croatia meet the EU accession requirement in the agriculture and rural development areas by building capacity of civil servants to manage EU pre-accession and accession funds for rural development programs.
    • The Science and Technology Project’s “Unity Through Knowledge Fund” backed 55 Research & Development (R&D) projects with Croatian companies and institutions, through collaboration with the diaspora in the fields of scientific and technology projects. Over 80 science and research institutes and more than 200 researchers from Croatia and abroad worked on joint projects. A Second Science and Technology Project is ongoing.

    Since 2010, half a million people per year, including tourists, benefit from cleaner seawater and improved living conditions through construction of wastewater treatment plants along the Adriatic coast as a result of the first phase of the Coastal Cities Pollution Control Program. A second phase is ongoing.

    LENDING
    Croatia : Commitments by Fiscal Year (in millions of dollars)*
    *Amounts include IBRD and IDA commitments
Country Office Contacts
10 000 Zagreb, Croatia, Tel: +385 1 2357-230

Radnicka cesta 80/IX

vfrajtic@worldbank.org
Washington, +1 202 458-2736, Europe and Central Asia Region

1818 H Street NW, Washington, DC 20433

kschrader@worldbank.org