The World Bank in Croatia

Croatia's process of economic convergence continues, with GDP per capita (in Purchasing Power Parity) in 2022 reaching 73% of the average European Union (EU) member states’ level. The country has recorded the highest post-pandemic recovery of all EU member states (with the notable exception of Ireland). This solid performance is largely due to the post-COVID revival of global demand for travel, but also robust goods exports and personal consumption. However, as this high level of demand for services in tourism is unlikely to be sustained in the medium to long run, it will be important to address key structural challenges to increase productivity and accelerate long-term growth.

These challenges are linked to low levels of Research & Development (R&D) investments, innovation and technology adoption, weaknesses in managerial and organizational practices, administrative capacity and judicial quality and efficiency. In addition, negative demographic trends and a tight labor market call for improvements in education and labor market policies to increase the labor supply and improve the quality of human capital.

On the upside, in January 2023, in the 10th year of EU membership, Croatia became the 20th EU member state to join the euro area and has entered the Schengen Area, achieving further integration with its European partners and achieving its key strategic objectives.  

Last Updated: Oct 10, 2023

The World Bank Group celebrates 30 years of partnership with the Republic of Croatia in 2023. Since its first loan in 1994 for emergency reconstruction of war-damaged infrastructure, our institution  has supported over 100 projects worth $6.5 billion and provided knowledge and technical assistance to help strengthen institutions and support policymaking through more than 330 reports and studies.

In May 2019, a joint strategy for Croatia, the Country Partnership Framework (CPF) 2019–24, was approved, defining the World Bank’s engagement and focusing on building essential institutional capacity while providing support across three areas:

(i): improving the efficiency of the public sector institutions and delivery of services to people, creating opportunities for people, focusing on less developed regions and improving education and skills;

(ii) preserving and leveraging natural capital to address environmental and climate change challenges including improving water and solid waste management;

(iii) increasing the role of the private sector in the economy by improving the business environment, promoting entrepreneurship, competition and innovation, creating more and better jobs. 

The overarching goal of the CPF supports 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. On April 7, 2023, the World Bank’s Board of Directors approved the Performance and Learning Review (PLR) of the Croatia CPF 2019-24, confirming that the strategy continues to be relevant as it allows the World Bank Group to respond flexibly to the country’s unforeseen and emerging needs.

The World Bank is currently preparing the Croatia Systematic Country Diagnostic Update (SCD), a country engagement document, aiming to identify key binding constraints and priority actions for Croatia to achieve inclusive, resilient, and sustainable growth. The SCD will serve as the analytical basis for the design of the next Croatia CPF for 2025-2030.

The World Bank program currently provides knowledge, technical assistance and financing in the areas of transport, digital transformation and the green transition of the economy, justice service delivery, education, business environment, land administration, science and technology, post-earthquake reconstruction of key health and education facilities, deinstitutionalization, pension system sustainability, and public administration.

Last Updated: Oct 10, 2023

RECENT ECONOMIC DEVELOPMENTS

Croatia's economy grew further in the first half of 2023, owing to the recovery of personal consumption and strong growth of tourism. In this period, the annual real GDP growth rate averaged 2.7%, well above the EU average of 0.6%. Personal consumption recovered after a marked decline at the end of 2022 following favorable labor market developments and recovery in consumer optimism.

Fiscal policy continued to play an important role in supporting economic activity by extending measures aimed at easing inflationary pressures. Inflation, while declining, remains among the highest in the EU. However, the impact of the European Central Bank (ECB) increase of key interest rates on financing conditions in Croatia was less pronounced compared to other euro area countries.

While the combination of strong economic growth and the rebound of the labor market improved household total income, high inflation eroded household real purchasing power. Poverty is estimated to have declined modestly from 1.4% in 2022 to 1.3% in 2023. Preliminary findings from the World Bank rapid assessment survey in June 2023 showed that one in every two Croatian households (and 75% of the poorest 40%) reported having some difficulty to make ends meet.

ECONOMIC OUTLOOK

Economic activity is expected to moderate in the second half of 2023, as demand for tourism services slows down and goods exports remain suppressed. Nonetheless, thanks to the relatively strong performance during the first six months, real GDP is set to grow by 2.7% in 2023, and growth is expected to take a slight uptick by the end of the forecast horizon. Personal consumption is projected to remain robust, as recovery in real incomes continues due to falling inflation and strong labor demand. Furthermore, EU funds are expected to continue supporting investment activity, especially government investments, while private sector investment growth might slow in the near term before strengthening towards the end of 2025 as monetary policy normalizes. Inflation is expected to remain elevated over the near term but could decline towards the ECB target of close to 2% by the end of the forecast horizon.

The fiscal deficit is set to remain contained, as growth continues and the need for fiscal support declines. This will allow for further reduction in public debt which is expected to fall below 60% of GDP by the end of 2025. Poverty is projected to decline marginally to 1.2% by 2025. Over the medium -term, the uncertainty linked to Russia’s invasion of Ukraine and developments in energy and food commodity prices remain the key risk to the outlook.

Last Updated: Oct 10, 2023