Overview

The World Bank’s activities in Croatia are guided by the 2013–17 Country Partnership Strategy (CPS), and a new Strategic Framework is currently under preparation.

The Bank’s activities are centered on supporting Croatia’s economic convergence with the EU. During the initial stages, the engagement focused on promoting reforms in support of fiscal adjustment, enhancing competitiveness, and maximizing the economic benefits of EU membership. The Bank has also been emphasizing institutional capacity building related to EU membership, particularly relevant to Croatia’s ability to absorb EU funds.

The Bank’s current financial commitment focuses on the transport sector, with projects in health, innovation, and land administration. These projects incorporate significant support to public administration through building capacity in the public sector. The CPS has financed the development of an EU funds project pipeline worth €500 million. The focus of the advisory services program is twofold: helping to improve the business climate and the competitiveness of the economy and creating an evidence base for cross-sectoral policies and interventions to address social and regional disparities.

KEY ENGAGEMENT

Situated along three pan-European transport corridors between the EU and Southeast Europe, Croatia has an important geopolitical advantage. 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. 

Since the beginning of the early 2000s, the Bank has been supporting the development of Croatia’s key port in Rijeka through the Rijeka Gateway Program. The current program aims to develop the capacity, financial performance, and quality of services of the port of Rijeka through public-private partnerships to meet growing traffic demand. It will improve port competitiveness by modernizing strategic port facilities and private sector involvement.

The World Bank, the Ministry of the Sea, Transport and Infrastructure, and three roads companies launched the Modernization and Restructuring of the Roads Sector Project in April 2017. Designed as a blend of an investment loan and a guarantee, this intervention is supporting the operational and financial restructuring of the roads companies in Croatia. The loan portion is funding the implementation of the companies’ operational restructuring, while the guarantee is available to support the restructuring of liabilities to better match road-asset cash flows, reduce interest costs, and lengthen maturities. 

The Bank has been working with the 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 public companies. This includes select financing of 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.

Last Updated: Apr 19, 2018

RECENT ECONOMIC DEVELOPMENTS

In the last quarter of 2017, economic growth decelerated, with a decrease in the 2017 GDP growth rate to 2.8% from 3.2% in 2016. The slowdown was due mainly to a deceleration in

government investment and a rebound in imports. Exports were the main driver of growth with a strong contribution from tourism, as overnights by foreign tourists rose by over 11%. Private consumption also made a strong contribution to growth, supported by favorable labor market developments, cuts in the personal income tax rate, and a slight recovery in consumer confidence. Finally, investment growth decelerated markedly due to the weaker absorption of EU funds, leading to a sharp fall in government investments. 

The economic recovery resulted in rising employment, which, coupled with high levels of out-migration, led to a notable decline in the unemployment rate to an estimated 11% in 2017 (2.1% lower than in 2016). The broad-based growth contributed to a further reduction in absolute poverty, bringing the poverty rate (measured at US$5.5 2011 PPP per capita) down to 5.8% in 2015 from 7.3% in 2013.

Fiscal consolidation continued in 2017 with an estimated budget surplus of 0. 1% of GDP, down from a deficit of 0.9% in 2016. External debt declined to 84.2% of GDP in November 2017, 5.6% lower than 2016, driven by the continued deleveraging of banks and the private corporate sector. 

ECONOMIC OUTLOOK

Growth is expected to slow to 2.6% in 2018, following an expected fall in private consumption due to the end of the favorable tax reform effects and slowing wage growth. Exports of tourist services, after exceptionally strong growth estimated at around 6.5% in 2015–17, are expected to slow down in 2018, due also to capacity constraints. On the other hand, a better absorption of EU funds will give a boost to investment spending and eventually raise economic growth to an average of 2.8% in 2019–20. Although a further nominal consolidation is foreseen in 2018, the structural budget balance is expected to worsen, pointing to a moderately pro-cyclical fiscal stance. The government balance is expected to stay in surplus and may reach 1% by 2020, leading to a further decline in public debt to below 70% of GDP.

Positive labor market developments are expected to support the growth of disposable income for all segments of the welfare distribution, and the absolute poverty rate is expected to fall further to 4.0% in 2020.

Downside risks have moderated but are still present. As the operational restructuring of Agrokor Group unfolds in 2018, the negative effects on investment activity and private consumption might be greater than currently envisaged. The still high level of public debt makes Croatia vulnerable to interest rate shocks and worsening external financing conditions. There is also a risk that the cyclical upturn and stronger fiscal position may result in complacency and diminished reform momentum, which would have an adverse effect on growth over the medium term. Croatia’s prospects for reinitiating real convergence and promoting inclusive growth remain weak. 

The currently low growth potential calls for a strong structural reform agenda. Substantial economic, social, and institutional weaknesses should be addressed to boost private sector productivity and competitiveness, raise the quality of human and physical capital, and modernize public services. This should also lead to increasing economic activity and employment, which is crucial for a further reduction in poverty.

Last Updated: Apr 19, 2018

Active projects

PROJECT SPOTLIGHT

Modernization and Restructuring of the Road Sector Project (MARS)

A safe and well-managed road network is essential for Croatia’s economic growth, and the road network is possibly the country’s largest infrastructure asset. But the road sector has accumulated an excessive debt of over €5.2 billion and the road companies—Croatian Roads (Hrvatske ceste, HC), Croatian Motorways (Hrvatske autoceste, HAC), and Rijeka-Zagreb motorway (Autocesta Rijeka-Zagreb, ARZ)—are not able to reimburse these funds through their current revenue streams. 

The Croatian Government has embarked on an ambitious program, based on a Letter of Sector Policy, to lower the macro-fiscal impact of the road sector on the economy and to improve the performance and planning of the road sector and the operational efficiency of the sector’s state-owned enterprises. 

This process is being supported by a World Bank loan (of €22 million) and a guarantee (of €350 million) under the Modernization and Restructuring of the Road Sector project (MARS). 

The project is being successfully implemented and several actions have been completed. Regarding sector optimization, toll tariffs have been modified, which has led to a substantial increase in revenue (12% year-on-year); staffing has begun to be rationalized, leading to a staff reduction of 8% by early 2018; a ceiling on investment has been adopted; and HAC and operator HAC-ONC have merged. 

With regard to financial optimization, a €1.275 million sovereign bond was raised and on-lent to the road companies to refinance their existing short-term, high-interest loans on what was the cheapest and longest capital raising ever achieved by Croatia on international capital markets. A further amount of €1.8 billion of existing commercial debt was renegotiated with domestic commercial banks. Now, 60% (€3.1 billion) of the debt has been refinanced, with visible financial benefits. Savings on interest payments for the sector will likely exceed €400 million over the next 10 years. Although drawing on the Bank’s guarantee has not been necessary, it remains available to support further road sector debt optimization, as and when the Government determines that support would be most beneficial.

Once reforms are completed, the cost of motorway operations will decline by 30% compared to 2016, and the road companies will cover costs from their own revenues, freeing up state resources that, without restructuring, would have been needed to bail them out. These funds will instead be available to invest in other important areas of Croatia’s development.