Overview

CROATIA

2015

Population, million

4.2

GDP, current US$ billion

48.7

GDP per capita, current US$

11629

Poverty rate (US$5/day 2005PPP terms,  (2014)

9.4

Life Expectancy at birth, years (2014)

76.9

 

 

Prior to the 2008 global crisis, Croatia had achieved major development results, progressing on economic and social fronts. In parallel, the country completed the demanding process of becoming an EU member on July 1, 2013. Before the return of growth in 2015, Croatia had witnessed six years of recession, with GDP declining by 13%, unemployment doubling to over 17%, youth unemployment reaching 50%, and poverty rates on the rise.

Croatia’s immediate economic challenges include restoring macroeconomic stability while promoting private sector productivity and competitiveness to create jobs and growth. This will help provide a more stable basis for investment, at the same time that freeing the private sector from constraints will help promote productivity and ease the burden of high rates of unemployment.

An equally important issue is Croatia’s projected population decline and aging. Both present significant risks to growth and higher living standards, as well as to fiscal sustainability. The policy response needs to focus on investing in raising skills and promoting healthy aging to prepare Croatians for longer and more productive working lives while modernizing and rationalizing the social protection and health systems.

There is also a need to continue to upgrade public services, key institutions like the judiciary, the governance of state-owned enterprises (SOEs), and infrastructure to better support the needs of people and firms.

Number of Active Projects  8
Lending $606 million
IBRD 8 loans ($606 million) 
GEF 1 grant ($4.3 million)
Reimbursable Advisory Services 3 RASs ($6.4 million)

The World Bank’s activities in Croatia are guided by the Country Partnership Strategy (CPS) of June 2013, which covers the period until 2017.

With this strategy, the Bank has envisaged transitioning from a focus on projects and lending to a knowledge partnership. The program is still characterized by a large lending portfolio, and the Bank is gradually developing a stronger partnership in advisory services. The focus is on policy challenges, structural and institutional reforms to boost economic competitiveness, and institutional capacity building related to EU membership, particularly relevant to Croatia’s ability to absorb EU funds.

About half of the Bank’s financial engagement focuses on the transport sector (Rijeka port and railways), and about 30% of investments are in the health and social protection sectors. The remaining portfolio is aimed at innovation and venture capital, with a small intervention in the environment. The projects incorporate significant support to public administration, helping Croatia maximize the benefits of EU membership, including EU funds absorption (the portfolio finances the development of an EU project pipeline worth €500 million).

KEY ENGAGEMENT

Croatia has the important geopolitical advantage of lying along three pan-European transport corridors between the EU and Southeast Europe. For over a decade—and with more than half of its portfolio—the World Bank has been helping Croatia’s transport sector become more competitive and develop into an important engine of growth.

Most recently, the World Bank has been preparing a concept for the Modernization and Restructuring of the Roads sector, designed as a blend of an investment loan and guarantees and aimed at supporting the operational and financial restructuring of roads companies in Croatia. The loan portion is envisaged to fund the implementation of reforms, while the guarantee aims to help restructure liabilities to better match road-asset cash flows, reduce interest costs, and lengthen maturities.

Since mid-2015, the Bank has been working with three Croatian railway companies to improve their operational efficiency in order to deliver better services in a financially sustainable way. The Sustainable Croatian Railways in Europe project complements major investments in infrastructure on international corridors funded by the EU by focusing on overall sector restructuring and the sustainability of the public companies, which is in line with the Government’s EU agenda.

 It is also helping these companies implement their restructuring plans by providing financing for investments in critical bottlenecks in railway infrastructure and safety measures, the modernization of IT systems, the rehabilitation of the rolling stock fleet, the separation and management of assets, and staff right-sizing.

The World Bank has also been helping transform Croatia’s two largest international seaports in Rijeka and Ploce into gateways to Central and East Europe. The projects in Rijeka and Ploce are introducing long-term concessions by private investors and developing additional physical capacity in the ports, integrating them into existing and new transport corridors.

 

8 loans (€ 605.7)
8 loans (€ 605.7)

RECENT ECONOMIC DEVELOPMENTS

In the first half of 2016, growth strengthened for the seventh consecutive quarter to 2.8%, after six years of recession. This was the result of the growth in exports, increased private consumption, and a rebound of investment. Growth was broad-based, with an encouraging performance from industrial production and retail trade and robust tourist and construction activity.

As the economy recovered, the labor market continued to improve, with the survey-based unemployment rate dropping to 15.4% in the first quarter of 2016 (from 16.1% in the fourth quarter of 2015). However, the activity rate went down to 51.1% and employment fell to 43.2%, far below the EU average. By June, real grow wages had gone up by 1.7%, partly because the emigration of workers escalated (over 9% of the unemployed left the country for jobs abroad). There are already shortages of low-skilled workers in construction, tourism, and other seasonal services.

Fiscal consolidation continued in 2016, with the general government deficit declining to 2.1% of GDP through March, due to rising tax revenues and social contributions and lower expenditures caused by the temporary financing in effect in the first quarter after the November 2015 general elections. At the end of May, public debt further declined to 83% of GDP.

The European Commission (EC) decided not to step up the Macroeconomic Imbalance procedure for Croatia because of a positive assessment of the country’s National Reform Plan (NRP) and Convergence Program. However, the EC strongly recommended five measures: (1) reducing the general government debt ratio, with a fiscal adjustment of at least 0.6 p.p. of GDP in 2017, and introducing a property tax and a debt management strategy; (2) penalizing early retirement, accelerating the transition to full retirement age, and consolidating social benefits; (3) reducing fragmentation and harmonizing wage-setting systems across the public administration system, reinforcing the monitoring of SOEs, and speeding up the process of divesting state assets; (4) reducing para-fiscal charges and administrative burdens on businesses and removing regulatory restrictions on professions; and (5) improving the quality and efficiency of the judicial system and the tax treatment of nonperforming loans.

ECONOMIC OUTLOOK

Growth is expected to remain solid in 2016–18, averaging 2.3%. However, there are risks related to fiscal consolidation and the sustainability of public debt, the high levels of private sector indebtedness, and the possibility of a further rise in the risk premium for emerging markets. A protracted formation of a new government after the September 2016 early elections may lead to more delays in the absorption of EU funds and another year of delays in the implementation of structural reforms.

Furthermore, financial volatility following the United Kingdom’s vote to leave the EU and monetary tightening in the United States could have negative effects on the borrowing costs of domestic sectors. Although with the current pace of consolidation Croatia sees the possibility of exiting the Excessive Deficit Procedure in 2017, its macroeconomic imbalances will require a robust response by the new government.

Active projects

PROJECT SPOTLIGHT

Supporting Research and Innovation to Improve Competitiveness and Productivity

Croatia’s research and innovation sector has undergone important reforms in recent years. Expenditures in research and development (R&D) were growing in the years preceding the 2008–09 financial crises, but they have stagnated since then and are now below the levels of the most successful countries in the EU. As part of the implementation of the Europe 2020 Strategy, Croatia set its goals in the research and innovation agenda, building on EU experience that shows that investments in R&D and innovation have led to increases in growth and productivity. The efficient use of EU funds to promote these goals is one of Croatia’s strategic decisions.

The Second Science and Technology (STPII) project is helping those involved in research and innovation, including public research institutions, scientific communities, high-performing scientists, and young researchers, to fully benefit from EU membership by increasing their capacity to apply for and implement EU-funded projects. This includes the Croatian agency for small and medium-sized enterprises (SMEs), Innovation and Investments (HAMAG-BICRO), which provides matching grants and soft loans for early seed and pre-commercial R&D projects, and the Unity through Knowledge Fund (UKF), which finances joint projects of local researchers and the scientific diaspora, thus improving the competitiveness of Croatian researchers and their integration into the European Research Area (ERA).

The €20 million STP II is expected to mobilize at least €200 million in EU funds and has been recognized by the Government as an opportunity to increase Croatia’s productivity, create jobs, and promote exports. 

So far the project has helped prepare the key innovation and R&D policy documents that are required for the absorption of EU funds. A pipeline of four research infrastructure projects is under preparation (an estimated €150 million to be funded from the European Regional Development Fund). The value of project applications to EU funding generated by the UKF Cooperability program exceeds €20 million, while the UKF has funded a total of 27 projects (26 projects under the Cooperability program and one project under the Young Researchers and Professionals program), totaling €3.1 million. 


LENDING

Croatia : Commitments by Fiscal Year (in millions of dollars)*

*Amounts include IBRD and IDA commitments