The World Bank in Croatia

After a contraction of 8.1 percent in 2020 due to the COVID-19 pandemic and two devastating earthquakes, the country recorded an annual GDP growth of 10.4 percent in 2021, reaching the pre-crisis level of economic activity already by mid-year. Although risks related to the pandemic seem to be declining, the Russian invasion of Ukraine brings new challenges, including weaker external demand (both through direct trade linkages with Russia and Ukraine and indirectly via the impact on Croatia’s main trading partners) and higher food and energy prices, which will have negative effects on real disposable incomes and business and consumer confidence. Croatia quickly responded to the humanitarian crisis, organizing reception centers for refugees and setting up a special task force to coordinate the arrival and integration of displaced persons.

In this challenging environment, European Union (EU) structural and investment funds, as well as the new EU initiatives, represent an opportunity for Croatia to accelerate its income convergence with the rest of the EU. The Croatian National Recovery and Resilience Plan (NRRP) serves as a strategy for the Recovery and Resilience Facility funds. The Plan includes a bold reform agenda for the medium term and provides the country with a unique opportunity to close some of the reform and investment gaps that are still holding it back. If this plan is fully and efficiently implemented, Croatia can accelerate its convergence with the EU, create better foundations for long-term growth, and develop a more resilient, greener, and equal society. 

Last Updated: Apr 18, 2022

The World Bank has been a partner to Croatia for over 28 years. During this period, the Bank has supported more than 50 projects worth almost US$5 billion, produced numerous studies, and provided technical assistance to help strengthen institutions and support the design of policies and strategies. 

The current Country Partnership Framework for the 2019–24 period is aimed at supporting Croatia on its path toward an inclusive society where communities, businesses, and regions can prosper for the benefit of all Croatians; where public institutions provide effective and efficient services; and where Croatia’s rich natural capital is preserved and used in a sustainable manner.

The Bank’s current program is focused on the mitigation of the economic and social impact of COVID-19, post-earthquake reconstruction, transport, the judicial system, innovation, the business environment, land administration, science and technology, education, and the economic development of the Pannonian region.

KEY ENGAGEMENT

The latest approved operation is a €25 million project aimed at improving the learning environment in selected primary schools and supporting a systemic transformation of Croatia’s basic education sector. The Croatia: Towards Sustainable, Equitable and Efficient Education Project (SEE Education) will help introduce the whole-day school (WDS) model in 50 demonstration schools, designed to improve student learning outcomes, particularly among disadvantaged students, through increased instructional hours and improved teacher training and school infrastructure. Croatia’s number of instruction hours is among the lowest in the EU, and most schools still operate in double shifts. Since school days will be better aligned with common working hours, young mothers and fathers of children attending WDS will find it easier to participate in the labor market and thereby increase their earnings.  

The capacity built as a result of these efforts will help the Ministry of Science and Education to introduce the WDS model at the national level. It will also help the authorities to implement other needed sector reforms that Croatia has committed to in the NRRP 2021–2026, with the aim of modernizing and improving the education system and responding to the learning challenges exacerbated by the COVID-19 pandemic and the two large earthquakes that struck the country in 2020.

The direct beneficiaries of the project will include approximately 32,500 students, their parents, and teaching and administrative staff. The project will also support the design of new infrastructure standards for Croatian schools, incorporating seismic resilience into building upgrades and best practice OECD-EU climate, environment, and energy-efficiency benchmarks and thereby contributing to the European Green Deal agenda.

Last Updated: Apr 18, 2022

RECENT ECONOMIC DEVELOPMENTS

After a contraction of 8.1 percent in 2020, real GDP in Croatia increased by 10.4 percent in 2021. Private consumption and investment activity provided strong support to overall growth, underpinned by favorable financing conditions and the inflow of EU funds. However, domestic demand lost some steam in the last quarter of the year, partly due to the worsening epidemiological situation and the buildup of inflationary pressures. The contribution of net exports in 2021 was positive due to a sharp recovery in tourism and an increase in exports of goods. 

Favorable economic trends were followed by an increase in employment and wages, and in some sectors, notably construction, worker shortages were mitigated by foreign labor. Inflation intensified toward the end of 2021, fueled by food and energy prices, reaching 6.3 percent in February 2022. The general government deficit is estimated to have more than halved to around 3.5 percent of GDP, and public debt at the end of November 2021 declined to 80 percent of GDP. Spikes in food prices have put a burden on the poor and vulnerable as they spend nearly 50 percent of their budget on necessities. Poverty, measured as the share of the Croatian population living on less than US$5.5 a day at 2011 revised purchasing power parity prices, is estimated to have declined to 1.6 percent in 2021.

ECONOMIC OUTLOOK

The Croatian economy could grow on average by 3.5 percent per year in 2022–24. However, there are significant downside risks related to the war in Ukraine and the pandemic. Investment activity, underpinned by the inflow of EU funds, is expected to pick up strongly in 2022, though this heavily depends on the implementation of government investment plans. The pace of export growth is expected to ease as tourism returns to pre-crisis levels and foreign demand moderates. The positive effects of wage increases on personal consumption will be offset by higher inflation. Inflation in 2023 and 2024 is projected to slow down due to the easing of global supply bottlenecks. However, commodity price levels will remain elevated. 

The general government deficit is likely to fall below 3 percent of GDP as of 2023, and the public debt-to-GDP ratio is expected to continue to decline. Intensifying conflicts in the region are putting additional pressure on food and energy prices. Regardless of mitigation measures to cap rising gas prices, they will still increase by an average of 20 percent. Moreover, regional political uncertainty and global supply disruptions could have adverse impacts on remittances and the income of Croatians at home. Nevertheless, poverty is expected to fall to 1.3 percent by 2024 from 2.4 percent in 2020.

Last Updated: Apr 18, 2022