The World Bank in Croatia

Croatia's economic activity continues to show resilience, which is reflected in an accelerated convergence with average European Union (EU) incomes over the last three years. The country's GDP per capita is set to exceed 75% of the EU average in 2023, up by 9 percentage points. compared to 2019. The recent GDP growth acceleration is largely due to the booming tourism sector and the strong inflow of EU funds. Economic activity was also underpinned by supportive fiscal policy, strong labor market, and large inflows of workers’ remittances, which fostered robust personal consumption growth.

Over the last year, Croatia was, however, not spared from the adverse effects of inflationary pressures and tighter monetary policy, which weighed on business investments and external demand. Regardless of the significant economic progress, there remains ample room to improve the quality of the institutional framework and to address shortcomings in the business environment, two of Croatia's long-standing issues. Lifting potential growth through structural reforms that augment productivity over the next couple of years will be especially important in the context of possible reduction in EU funds available to Croatia in the post-2030 period. 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.

Last Updated: Apr 19, 2024

The World Bank has been a partner to Croatia for over 30 years. Since its first loan in 1994 for emergency reconstruction of war-damaged infrastructure, the World Bank has supported more than 50 projects, totaling almost $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 endorsed, defining the World Bank Group’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 opportunity,  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.

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 World Bank Group to respond flexibly to the country’s unforeseen and emerging needs.

The World Bank is finalizing 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 Strategy – the Croatia CPF 2025-2030.

The World Bank currently provides knowledge, technical assistance and financing in the areas of, 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, social policy, deinstitutionalization, pension system modernization, long-term care, and public administration.

Last Updated: Apr 19, 2024

RECENT ECONOMIC DEVELOPMENTS

Croatia’s GDP growth in 2023 reached 2.8%, one of the highest in the EU. The largest contribution came from private consumption, favorable labor market developments and falling inflation. Public sector investments financed by EU funds also contributed positively. On the other hand, business investments remained stubbornly low compared to EU peers. Services exports continued to provide strong support to growth, whereas goods exports declined. On the supply side, growth was primarily supported by the services sector and construction, while manufacturing activity was suppressed, consistent with sluggish growth in Croatia’s main trading partners. The labor market remained strong throughout 2023, with the strongest employment growth observed in sectors linked to tourism and construction. At the same time, nominal wage growth picked up, which, amid falling inflation, resulted in a strong rise in real wages. The significant rise in the government wage bill led to deterioration of the general government budget balance. Inflation steadily declined throughout 2023, and in January 2024 reached 4.8% but remains elevated for services price inflation. This reflects, the World Bank 2023 Rapid Assessment Survey report that most Croatians (78%) expected the increase in their total household income would not catch up with inflation. Poverty is expected to remain at 1.4% in 2023.

ECONOMIC OUTLOOK

Over the medium term, Croatia’s growth rate, at around 2.8%, exceeding the average for the EU. In 2024, growth is projected to accelerate to 3.0% reflecting positive carry-over effects from 2023, strengthening external demand, and expansionary fiscal policy. In addition, a strong labor market will further support an increase in real incomes. Personal consumption growth is expected to accelerate in 2024 and be the main driver of growth. The growth in services exports is expected to slow down given the strong performance in recent years and the reduced price-competitiveness of the Croatian tourism sector. Investment growth is expected to remain relatively strong, supported by EU funds and improved private sector investments. Improvements in the external environment, less restrictive monetary policy, and EU funds will continue to support economic activity. Inflation will continue to decline and gradually narrow towards the ECB target of close to 2% by 2025, but risks remain given upward wage pressures. At the same time, the fiscal balance is expected to worsen significantly in 2024, reflecting a rise of the wage bill and social benefits, but remain relatively contained over the forecast horizon. The public debt-to-GDP ratio is forecast to reach 56% at the end of 2026. Poverty is expected to gradually fall to 1.0% by 2026.

Last Updated: Apr 19, 2024