The World Bank in Croatia

In January 2023, Croatia became the 20th EU Member State to join the euro area and has entered the Schengen zone, achieving further integration with its European partners and achieving its key strategic objectives.  Yet economic convergence is far from complete. GDP per capita (in Purchasing Power Parity nominal terms) reached 70 percent of the average EU27 level in 2021 and further improvements in living standards are highly dependent on productivity improvements.

Croatia’s productivity is lagging behind its regional peers and is far from the best performing European Union members. This reflects low levels of Research & Development (R&D) investment, innovation and technology adoption, weaknesses in managerial and organizational practices, and constraints on competition. In addition, while the quality of services delivery and efficiency of institutions has improved, some lingering structural constraints remain, especially regarding administrative capacity, red tape, and judicial quality and efficiency. 

Additional challenges are related to the impact of the war in Ukraine, should geopolitical tensions further amplify. 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. If the NRRP 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: Apr 13, 2023

The World Bank has been a partner to Croatia for 30 years. During this period, the Bank has supported more than 50 projects, worth over 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 focusing on building essential institutional capacity while providing support to the country across three areas. The first area is seeking to improve the efficiency of the public sector institutions and delivery of services to people, increase effectiveness of state-owned enterprises and creating opportunities for people, focusing 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, 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. On April 7, 2023, the 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 WBG to respond flexibly to the country’s unforeseen and emerging needs. 

The Bank’s current program focuses on supporting the authorities with the implementation of the NRRP in several areas, including public sector wage reform, modernization of the R&D framework, education, deinstitutionalization, and pensions.  The Bank program also provides lending and technical assistance in areas of transport, justice service delivery, business environment, land administration, and science and technology. In addition, the Bank is supporting post-earthquake reconstruction of key health and education facilities.

Last Updated: Apr 13, 2023

RECENT ECONOMIC DEVELOPMENTS

Croatia's real GDP growth in 2022 was strong, at 6.3 percent, supported by robust personal consumption and investments. Favorable developments were, however, concentrated in the first half of the year. Rising inflation, a decline in real disposable incomes, and elevated uncertainty surrounding Russia’s invasion of Ukraine led to a sharp decline in personal consumption at the end of the year.

In 2022, employment growth continued, and the labor market remained relatively tight, but wages failed to keep up with rising inflation. Consumer prices in Croatia accelerated throughout 2022, with year average inflation of 10.7 percent. Price pressures somewhat eased at the beginning of 2023 with moderation in energy and food prices. Croatian authorities prevented stronger spillovers from high wholesale energy prices by adopting relatively generous stimulus packages at the beginning of the fourth quarter last year. Economic growth and fiscal adjustment led to a marked decline in public debt, which is estimated to have declined to around 68 percent of GDP at the end of 2022.

Poverty is estimated to have declined modestly from 1.7 percent in 2021 to 1.4 percent in 2022. However, rising inflation dampened household purchasing power, especially for the poorest. Namely, the poorest fifth of the population faced estimated inflation that was 2 percentage points higher than the richest fifth of the population due to the composition of their consumption basket.

ECONOMIC OUTLOOK

Growth in Croatia is projected to decelerate to 1.3 percent in 2023 before strengthening to an average 2.9 percent in the 2024-2025 period. Personal consumption growth in 2023 is also expected to slow down but is projected to remain positive as real incomes improve, supported by a catch-up in real wage growth, resilience of labor markets, and continued fiscal support. At the same time, investment growth is expected to be supported by an increase in government investments, largely financed by EU funds.

Despite a worsening external outlook, exports, mostly based on tourism, are also expected to grow further as demand for travel remains strong. Beyond 2023, Croatia's economic growth is heading toward a gradual recovery as uncertainty declines – with the expectation that energy market prices normalize, remaining supply bottlenecks are resolved, and the external environment improves. This is also expected to have positive effects on labor market developments, with employment growth picking up, and the unemployment rate falling to below 6.5 percent by 2025.

Inflation is projected to gradually decline over the forecast horizon towards the European Central Bank's (ECB) target level of close to 2 percent. Public debt is expected to fall below 60 percent of GDP in 2025. Progress in poverty reduction is projected to stall with the poverty rate remaining stagnant in 2023 before declining marginally over the next two years, to 1.2 percent in 2025.

Last Updated: Apr 13, 2023