The World Bank in Croatia

Croatia is set to join the eurozone on January 01, 2023. Should there be no unforeseen obstacles, Croatia should also join the Schengen area next year. While these achievements are expected to strengthen the country’s resilience and bring long-term economic benefits, raising potential growth will still primarily depend on prudent national policies. 

Croatia’s relatively low productivity remains a key obstacle for faster convergence towards average EU income levels. This highlights the need to increase the dynamism of the Croatian business environment, reduce market inefficiencies, improve human capital, and promote investment. In addition, demographic forecasts suggest that strengthening long-term growth will also require policies to mitigate the negative economic impact of a declining and aging population. 

Additional challenges are related to the impact of the war in Ukraine, particularly rising energy and food costs, declining real incomes as a result of rising inflation, monetary policy tightening, rising financing costs, and uncertainty. In this challenging environment, EU structural and investment funds, as well as the new EU initiatives, represent an opportunity for Croatia to accelerate income convergence with the rest of the EU. 

The Croatian National Recovery and Resilience Plan (NRRP) serves as a plan for the Recovery and Resilience Facility funds. The Plan includes a bold reform agenda for the medium term and presents a unique opportunity to close some of the reform and investment gaps that are still holding the country back. If this plan is fully and efficiently implemented, Croatia can create better foundations for long-term growth, and create a more resilient, greener, and equal society.  

Last Updated: Oct 12, 2022

The World Bank has been a partner to Croatia for 29 years. During this period, the Bank has supported more than 50 projects totaling almost US$5 billion, produced numerous studies, and provided technical assistance to help strengthen institutions and support the design of policies and strategies. 

In May 2019, a joint strategy for Croatia, the Country Partnership Framework (CPF) 2019–24, was approved, defining the Bank’s engagement in the country over the next five years, while providing support to the country across three focus areas.

The first area seeks to improve the efficiency of public sector institutions and delivery of services to people, increase effectiveness of state-owned enterprises and create opportunities for people, focused on less developed regions and improving education and skills. The second area supports preserving and leveraging natural capital to address environmental and climate change challenges, including transitioning to a more sustainable energy mix and improving water and solid waste management. The third area aims to increase the role of the private sector in the economy by improving the business environment, promoting entrepreneurship, competition and innovation, and creating more and better jobs. 

The overarching goal of the Strategy 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 focuses on supporting the authorities with the implementation of the National Recovery and Resilience Plan (NRRP) in several areas, including public sector wage reform, modernization of the R&D framework, education, and pensions. The Bank program also provides lending and technical assistance in areas of transport, justice service delivery, business environment, land administration, solid waste management, and science and technology. In addition, the Bank is supporting post-earthquake reconstruction of key health and education facilities.

Last Updated: Oct 12, 2022

RECENT ECONOMIC DEVELOPMENTS

After a rebound in 2021, real GDP in Croatia continued to strongly increase in the first half of 2022. The country benefited from the reopening of economies after the COVID-19 lockdowns, while the high demand and consumer savings built up during the pandemic boosted tourism, the most important sector of the economy. Employment continued to increase with the largest job gains in tourism and ICT. Wages grew but not enough to offset the negative impact of inflation on real incomes (annual increase in Consumer Price Index (CPI) reached 12.3 percent in July).

Food and energy prices surged by around 20 percent as a result of the ongoing war and supply chain issues. The government introduced fiscal support schemes to ease the negative economic and social impact of soaring energy prices from April this year, which will add up to 1.0 percent of GDP. An additional support package worth 4.2 percent of GDP was announced in September, but its fiscal implications are expected to be contained. Improved fiscal performance and the increase in nominal GDP led to a reduction in the debt-to-GDP ratio to 74.3 percent in May 2022 compared to 79.6 percent at the end of 2021.

High food and energy prices have hurt consumers, especially the poorest and most vulnerable who spend above 60 percent of their budget on these essentials. Results from the World Bank’s Rapid Assessment Survey in April 2022 showed that more than 90 percent of Croatians expressed concerns, with nearly 80 percent of Croatians stating they would cut back spending. While economic growth is strong, poverty will decline only modestly from 1.9 percent in 2021 to 1.6 percent in 2022.

ECONOMIC OUTLOOK

With a strong economic performance in the first half of the year and indications that tourism could exceed pre-pandemic levels, GDP growth in 2022 is expected at 6.4 percent. However, economic activity is likely to slow down by the end of the year and the weak growth is projected to carry over to 2023, before returning to the pre-pandemic trend in 2024.

The strong growth in the export of goods and services witnessed in 2021 and 2022 is also expected to moderate with weaker growth prospects in the EU and globally. Personal consumption is likely to continue to increase next year but at a slower pace due to the erosion of real incomes, while investments will be supported by EU funds.

However, the country will continue to face high uncertainty, a slowing global economy and potentially costlier financing. Inflation is expected to decline gradually with improvements in the supply chain, but commodity price levels will remain elevated.

At the same time, the fiscal deficit is projected to stay below 2 percent of GDP, as additional increases of public sector wages, social benefits and the health care budget are expected. Positive economic growth projections will contribute to poverty reduction in the next couple of years. However, poverty is expected to decrease only marginally over the following two years, reaching 1.5 percent by 2024. The poorest Croatians remain vulnerable to the high level of food and energy prices.

Last Updated: Oct 12, 2022