EN   EN 
 
 
 EUROPEAN  
COMMISSION   
Brussels, 27.2.2019  
SWD(2019) 1010 final  
 
COMMISSION STAFF WORKING DOCUMENT  
Country Report Croatia 2019      
Including an In -Depth Review on the prevention and correction of macroeconomic 
imbalances  
Accompanying the document  
COMMUNICATION FROM THE COMMISSION TO THE EUROPEAN 
PARLIAMENT, THE EUROPEAN COUNCIL, THE COUNCIL, THE EUROPEAN 
CENTRAL BANK AND THE EUROGROUP  
2019 European Semester: Assessment of progress on structural reforms, prevention and 
correction of macroeconomic imbalances, and results of in -depth reviews under 
Regulation (EU) No 1176/2011  
{COM(2019)  150 final}   
 
 
1 Executive summary  4 
1. Economic situation and outlook  8 
2. Progress with country -specific recommendations  14 
3. Overall findings regarding imbalances, risks and adjustment issues  18 
4. Reform priorities  23 
4.1. Public finances and taxation*  23 
4.2. Private sector debt and financial sector*  30 
4.3. Labour market, education and social policies*  36 
4.4.  Competitiveness reforms and investment*  47 
Annex A: Overview Table  58 
Annex B: Commi ssion Debt Sustainability Analysis and fiscal risks  62 
Annex C: Standard Tables  63 
Annex D: Investment Guidance on Cohesion Policy Funding 2021 -2027 for Croatia  69 
References  74 
 
LIST OF TABLES  
Table  1.1: Key economic and financial indicators - Croatia  13 
Table  2.1: 2018 country -specific recommendations (CSRs) assessment  15 
Table 3.1: MIP matrix  21 
Table  4.2.1:  Financial soundness indicators, all domestic and foreign banks  33 
Table  A.1: 2018 country -specific recommendations (and subparts) assessment  58 
Table  C.1: Financial market indicators  63 
Table  C.2: Headline Social Scoreboard indicators  64 
Table  C.3: Labour market and education indicators  65 
Table  C.4: Social inclusion and health indicators  66 
Table  C.5: Product market performance and policy indicators  67 
Table  C.6: Green growth  68 
 CONTENTS  
 
 
2 LIST OF GRAPHS  
Graph  1.1: Real GDP growth by demand component  8 
Graph  1.2: Private  and public investment  9 
Graph  1.3: Current account composition, gross external debt and net international investment 
position  9 
Graph  1.4: Labour market developments  10 
Graph  1.5: Nominal wage growth: actual and predicted based on economic fundamentals  11 
Graph  1.6: Potential  output and components, 2017  11 
Graph  1.7: Regional convergence  12 
Graph  2.1: Overall multiannual implementation of 2014 -2018 CSRs to date  14 
Graph  4.1.1:  Drivers of change in the debt ratio  23 
Graph  4.1.2:  Structure of public debt  23 
Graph  4.1.3:  Drivers of change in government balance  24 
Graph  4.1.4:  Active government guarantees by companies, 2017  25 
Graph  4.1.5:  Public debt ratio baseline and scenarios  25 
Graph  4.1.6:  Distributional effects of changes to the PIT and contributions by income quintiles  26 
Graph  1: Tax rates on income by sources (lhs) and tourist beds per inhabitant by municipalitie s 
(rhs), 2017  27 
Graph  4.2.1:  Trading volumes at Zagreb Stock Exchange  32 
Graph  4.2.2:  Growth of new business loans (in annual volumes)  33 
Graph  4.2.3: Asset quality evolution  34 
Graph  4.2.4:  Evolution of NPL flows  34 
Graph  4.3.1:  Activity rate by age and educational attainment level, 2017  36 
Graph  4.3.2:  Reasons for inactivity by age and sex, 2016  36 
Graph  4.3.3:  Relative dispersion of employ ment rates of different skills groups in EU  37 
Graph  4.3.4:  Share of employers reporting labour shortages as the main factor limiting t heir activity 
by sector  37 
Graph  4.3.5:  Evolution (% change) of the population by municipalities, 2012 -2017  38 
Graph  4.3.6:  Population migration  39 
Graph  4.3.7:  At-risk-of-poverty or social exclusion rate and its components (AROP, SMD, LWI)  40 
Graph  4.4.1:  Labour productivity (GVA per worker) by sector, 2017  47 
Graph  4.4.2:  Real labour productivity in manufacturing and construction by firm size  47 
Graph  4.4.3:  Business and public R&D intensity  49 
Graph  4.4.4:  Final energy consumption in 2015  52 
Graph  4.4.5:  Registered unemployment rate (%) by county, 2017  54 
Graph  4.4.6:  Employment, unemployment and tertiary education rates, by level of urbanisation, 
2015 -2017  54 
 
 
 
3 LIST OF BOXES  
Box 2.1: EU funds and p rogrammes contribute to addressing structural challenges and fostering 
growth and competitiveness in Croatia  16 
Box 4.1.1: Taxation of labour, capital and property income of households  27 
Box 4.3.1: Monitoring performance in light of the European Pillar of Social Rights  41 
Box 4.3.2: The 2018 Pension System Reform  43 
Box 4.4.1: Investment challenges and reforms i n Croatia  50 
 
 
 
 
4 Ensuring durable economic growth is becoming 
a key challenge for Croatia.  While still above the 
EU average, the pace of economic growth is 
moderating and gradually nearing its potential rate, 
which is only slowly increasing. The stock of 
macroeconomic imbalances continued to be 
reduced, largely driven by the positive economic 
environment and prudent management of 
government finances. Using the still favourable 
economic outlook to step up structural reform 
efforts would help boost potential growth. Reforms 
need to be focused on susta ining the positive 
trends on the labour market, and on creating a 
business environment conducive to investment and 
higher productivity gains  (1).  
The economic recovery has continued, largely 
driven by robust domestic demand.  In 2018 
GDP growth is projecte d to have moderated 
slightly to 2.8  %, from 2. 9 % the year before. 
Private consumption remained strong as 
households enjoyed higher disposable incomes on 
account of the continued growth in employment 
and wages. Public capital formation remained 
subdued, dr agging on the overall investment 
activity. Exports of both goods and services 
continued to grow at record levels, but with signs 
of slowing and outpaced by the increase in 
imports.   
A full decade after the financial crisis, the 
economy is set to fully rega in the output lost 
during the recession.  Employment is expected to 
continue growing steadily. Coupled with 
continuing low inflation, also thanks to cuts in 
consumption taxes in 2019 and 2020, GDP growth 
is expected to remain driven largely by household  
consumption. However , investment will play a 
                                                           
(1) This report assesses Croatia’s economy in light of the 
European Commission’s Annual Growth Survey published 
on 21 November  2018  (European Commission, 2018d) . In 
the survey, the Commission calls on EU Member States to 
implement reforms to make the European economy more 
productive, resilient and inclusive. In so doing, Member 
States should focus their efforts on the three elements of 
the virtuous triangle of eco nomic policy — delivering 
high-quality investment, focusing reforms efforts on 
productivity growth, inclusiveness and institutional quality 
and ensuring macroeconomic stability and sound public 
finance . At the same time, the Commission published the 
Alert Mechanism Report (AMR ; European Commission, 
2018b ) that initiated the eighth round of the 
macroeconomic imbalance procedure. The AMR found that 
Croatia  warranted an in -depth  review, which is presented in 
this report.  gradually increasing role. In particular, the private 
sector is expected to continue benefiting from 
ample liquidity and declining interest rates. In the 
public sector, greater use of EU funding is 
expected as the end of the programming period 
nears. As a result of the continued deterioration of 
the balance of trade in goods, the contribution of 
the external sector to growth is projected to grow 
increasingly negative. In all, real GDP growth is 
forecast to moderate further to 2.7 % in 2019, and 
2.6 % in 2020.  
Boosting the economy’s growth potential 
require s investment s in transport , energy  and 
environmental infrastructure, skills  and 
research and innovation.  Croatia’s low level of 
capital investment , i.e. in equipment and 
infrastructure , affects the growth potential . The 
quality of service and connectivity of the transport  
infrastructure , in particular railway s, are 
underdeveloped.  Improving energy efficiency , 
water management and facilitating the tra nsition to 
a circular economy also require infrastructure 
investment.  Investment in public and private R&D 
and digitalisation would help to support the 
economy’s capacity to innovate , if acting in 
synergy with investment in the education system to 
improve people’s skills . Finally, there is a need for 
resources to get people into work and promote 
social inclusion.  Annex D identifies key priorities 
for support by the European Regional 
Development Fund, the European Social Fund Plus 
and the Cohesion Fund for t he 2021 -2027 period in 
Croatia, building on the analysis of investment 
needs and challenges outlined in this report.  
Croatia has made some progress in addressing 
the 2018 country -specific recommendations.  
There has been substantial progress in the 
following areas:  
 Prudent government spending and borrowing 
continued to support a fast decrease in the debt 
ratio. After a long delay, there has been 
progress in adopting measures to strengthen the 
institutional framework governing the public 
finances.  
 An important pension reform , aimed at 
promoting longer working lives and addressing EXECUTIVE SUMMARY  
Executive summary  
 
 
5 structural inconsistencies in the system , entered 
into force in January 2019.  
There has been some progress in the following 
areas:  
 Education and training reforms, long in the 
planning, have now been set in motion, while 
participation of vulnerable groups in policy 
measures to help them find or stay in work 
remains low.  
 Some measur es to make public administration 
more efficient have been initiated  but await 
implementation. The reduction of 
administrative burden is progressing, while the 
reduction of ‘parafiscal charges’  (non-tax 
charges)  has stalled.  
 Court backlogs have been reduce d, and 
measures are being gradually implemented  to 
improve the quality of the justice system . 
There has been limited progress in the following 
areas:  
 The introduction of a recurrent property tax is 
no longer planned, leaving in place the system 
of municipa l fees.  
 The consolidation of social benefits remains in 
preparation, while new legislation setting 
wages for civil servants has been postponed 
until 2019.  
 Measures to improve corporate governance in 
state-owned enterprises have been 
implemented, but less  progress has been made 
to dispose  of minority shares and other assets. 
Some unjustified barriers in the regulation of 
professional services have been removed, but 
many remain in place.  
Regarding progress towards the targets under the 
Europe 2020 strategy,  Croatia has reached its 
national targets in renewables (except in transport), 
energy efficiency, the employment rate, early 
school leaving, and poverty and social exclusion. 
Croatia is on track to reaching its target for 
lowering greenhouse gas emissions,  while it 
appears unlikely it will reach the target for 
increasing higher  education attainment. The country is still farthest from reaching the target for 
investment in research and development.  
Croatia faces several  challenges with regards to 
a number of indicators of  the Social Scoreboard 
supporting the European Pillar of Social Rights.  
The proportion  of people of working age who are 
in employment remains low. In addition, there are 
still challenges with ensuring the quality of 
education, both for young p eople and adults. The 
percentage of people at risk of poverty or social 
exclusion is declining but still above the EU 
average, and the capacity of social benefits to 
reduce poverty is limited.  
The main findings of the in -depth review 
contained in this repo rt and the related policy 
challenges are as follows.  
 In 2018, the public debt ratio is projected to 
have declined further.   
During the protracted recession, the general 
government debt more than doubled, driven by 
deficits and costs related to state -owned 
enterprises. The debt ratio started falling in 
2015, and has declined by more than 12 
percentage points since then, to a projected 
73.5 % of GDP in 2018. Its decrease has been 
driven by economic growth but also by 
restraint in spending. Croatia does not ap pear 
to face immediate risks of ʻfiscal stressʼ, 
despite remaining vulnerability to foreign 
exchange movements, and the lower sovereign 
risk has been reflected in the declining cost of 
servicing the debt. However, beyond a short 
term perspective  sustainability risks increase, 
under the impact of population ageing.  
 The level of corporate debt in proportion to 
GDP is decreasing and associated risks are 
moderating.    
 
Private debt continued to go down despite the 
strong recovery in lending. Economic g rowth 
was the main driver of the decrease in the 
private debt -to-GDP ratio, but a significant 
contribution also came from the appreciation of 
the domestic currency.  The high share of debt 
denominated in foreign currency points to still 
significant exchange  rate risks. The reduction 
of private sector debt slowed in 2018 due to a 
pickup in net credit flows. Both household and 
Executive summary  
 
 
6 corporate debt are within prudential levels, 
though still above the levels suggested by 
economic fundamentals. Corporate sector debt 
remains heavily concentrated and burdened 
with a high share of non -performing loans. 
Furthermore, it is high relative to corporate 
financial assets and equity, pointing to potential 
solvency risks for companies.  
 Economic growth and sustained current 
account surpluses are facilitat ing further 
reduction of liabilities  to foreign creditors 
and investors .   
 
Croatia's net liabilities to foreign creditors and 
investors declined significantly since their peak 
in 2011 but remain above prudential level and 
the level suggested by economic fundamentals. 
They are expected to move closer to more 
sustainable levels by 2020, on account of 
expected current account surpluses.  In addition , 
their composition, in particular the large share 
of direct foreign investments, signific antly 
mitigates  the refinancing risk.  
 There has been a rapid fall in the 
unemployment rate, but still too few people 
are working or looking for work .  
 
On the back of dynamic economic activity, the 
unemployment rate fell further  below  pre-crisis 
levels, b ut remains above the EU average. 
Long -term and youth unemployment also fell, 
but remain significant . What is more, the  
working age  population continues to contract 
due to emigration and population ageing . 
Despite some improvement , still too few 
people in t his age group are active in the labour 
market, mainly because of early retirement and 
care responsibilities. Many perform undeclared 
work . Despite still relatively high 
unemployment, labour shortages have appeared 
in some sectors of the economy, also becau se 
of skills gaps.   The involvement of social 
partners in the preparation and implementation 
of policies remains limited.  
 A cumbersome business environment and a 
strong presence of the state in the economy 
hinder competitiveness and investment.   
 
Although more state owned companies have been made eligible for sale and some measures 
to put non -productive assets to use have been 
introduced, no clear privatisation strategy is in 
place. The suboptimal  performance of the 
research, development and innovation syst em 
represents an additional barrier to increasing 
the competitiveness of Croatian businesses. 
Progress, even if modest, is being made in 
liberalising  regulated professions  and reducing 
administrative burden. However, ‘parafiscal 
charges’ remain a burden, e specially for 
smaller businesses. Substantial backlogs in 
courts reduce legal certainty, while 
inefficiencies in criminal justice hamper 
effective fight against economic and financial 
offences. Corruption is perceived to be 
widespread and effective tools to prevent and 
sanction it are lacking, particularly at local 
level.  
Other key structural issues analysed in this report, 
which point to particular challenges for Croatia’s 
economy, are as follows.  
 A well -capitalised and profitable financial 
sector, despi te the remaining large stock of 
non-performing loans, is facilitating the 
recovery in lending to the private sector.
   
Profitability of the banking sector in Croatia 
improved in 2018, as loan provisioning 
declined. Bank s’ capital levels remain 
significantl y above regulatory requirements. 
Ample liquidity provided by an expansionary 
monetary policy has allowed for a further 
lowering of interest rates. Furthermore, strong 
competition in the banking sector has eased 
lending conditions across the board. This has  
spurred growth in new loans to both 
households and corporations. The share of 
non-performing loans has been reduced 
significantly. While this share remains high and 
its reduction seems to be slowing, overall risks 
to the financial sector appear to be low.  
 Territorial fragmentation of the public 
administration affects its efficiency and 
exacerbates regional disparities .  
 
The powers granted to local government units 
often do not match their administrative and 
financial capacities. This results in an uneven 
Executive summary  
 
 
7 provision of public services, including social 
services, across financially strong and 
financially weak local units. Also, the capacity 
at central government level to design and 
implement policy and to use EU funding need 
to be strengthened. The wage -setting 
framework still lacks consistency across the 
public administration and public services.   
 Poverty and social exclusion are declining 
but remain above the EU average, while 
ensuring adequate pensions is a challenge.
   
Having someone in the household enga ged in 
paid work  offers strong protection against the 
risk of poverty or social exclusion, whereas the 
capacity of social benefits to reduce poverty is 
limited. Age, gender and disability are also 
factors that influence poverty levels. Ensuring 
that t he pe nsion system is adequate is a 
significant challenge, in part because people’s 
working lives are among  the shortest in the EU. 
This is partly being addressed by the recent 
reform of the pension system.  
 Structural weaknesses, in part addressed by 
ongoing ref orms, impact people’s skills and 
health.   
 
The region where people live and their 
socio -economic background influence the 
extent to which they have access to early 
childhood education and care and attain a given 
level of education. Vocational education and  
training and higher  education are not 
sufficiently aligned with the needs of the labour 
market. The school curriculum is being 
reformed on a pilot basis to improve the overall 
quality of education and teaching . Measures to 
rationalise hospitals are progre ssing slowly. 
With higher employment, more people are 
paying into the health system, but inadequate 
financing of hospitals continues to generate 
arrears in the system, albeit at a slower pace 
than in previous years.  
 Challenges  in network industries impact the 
environment and raise costs for consumers.  
Far too much waste is put on landfills and too 
little is recycled . There is further potential to 
increase the share of renewable energy. Losses in the water supply increase the use of 
resources  and cos ts for consumers . 
Competition is low in retail electricity and gas 
markets , which remain highly regulated. 
Inadequate urban transport system s in most 
cities and the underdeveloped railway network 
hinder worker mobility  and have negative 
effects on the competitiveness of businesses  
and the environment.  
 The reliability of statistics remains a matter 
of concern.   
 
Croatia has taken some steps towards 
improving the production of macroeconomic 
and government finance statistics, but issues 
with the ir complet eness, accuracy and 
timeliness persist.  
 
 
8 GDP growth  
Growth moderates as output finally approaches 
pre-crisis l evel.  Having peaked at the rate of 
3.5 % in 2016, real GDP growth slowed to 2.9  % 
in 2017 and is projected to have edged down to 
2.8 % in 2018. Domestic demand was bolstered by 
strong household consumption as well as dynamic 
private investment, as financin g conditions 
remained favourable and the uncertainties 
surrounding the restructuring of Agrokor 
(European Commission, 2018e ) wound down 
substantially  (2). By contrast, the 2018 data 
available so far suggest the start of a slowing trend 
in exports of goods and services. At the same time, 
imports of goods and services, while also slowing 
somewhat, continue to perform strongly, reducing 
further the contribution of net exports to growth 
(see Graph  1.1).  
Graph  1.1: Real GDP growth by demand component  
 
Year -on-year contributions are obtained as the moving 
average of four quarters GDP component compared to the 
moving average of the respective components in the same 
quarters of previous year.  
Source:  European Commission.  
Growth is expected to remain solid, while 
slowing gradually over the forecast period.  The 
strong momentu m in consumer spending is 
expected to moderate only mildly, supported by 
steadily rising disposable incomes as households 
                                                           
(2) On 26 October the High Commercial C ourt in Zagreb 
confirmed the settlement agreed by Agrokor's creditors in 
July 2018, clearing way for the process of the Group's 
financial and operational restructuring to start.  continue benefitting from increasing employment, 
rising wages and subdued inflation, also thanks to 
consumption tax cuts in 2019 and 2 020. 
Investment activity is expected to continue 
intensifying, mainly driven by a pick -up of public 
investment as the uptake of EU funding improves 
towards the end of the programming period. On 
the external side, export growth is set to moderate 
further, i n line with a slowing pace of market share 
gains, while strong domestic demand is projected 
to continue to sustain import growth. Overall, the 
Commission’s 2019 Winter Forecast (European 
Commission, 2019c) sees real GDP growth 
slightly down at 2.7 % in 201 9, and 2.6 %  in 2020 . 
Investment  
Gross fixed capital formation in proportion to 
GDP remains well below pre -crisis levels.  
Leading up to the crisis, investment was the key 
driver of growth, peaking at 28.1  % of GDP in 
2008 (see Graph  1.2). In that year, public 
investment, driven by large infrastructure projects 
(mainly motorways), made up more than 20  % of 
total investment. Financed by relatively expensive 
borrowing, public investment contributed to the 
build -up of sizeable external liabilities. In the 2 
years of the sharp adjustment that followed, 
investment activity contracted by almost a third, 
down to only 21  % of GDP in 2010. It continued 
declining even as the economy started recovering 
at the end of 2014. A mild recovery in investment, 
driven by the private sector, started in 2015 and 
intensified the following year. In 2017 gross fixed 
capital formation stood  at around 20  % of GDP, 
and public investment accounted for some 13.5  % 
of it, with no clear sign of recovery. Since EU 
accession, Croatia has increasingly relied on EU 
funding for public investment, containing the 
build -up of external liabilities. However , the 
take-up of EU funds remains limited (see 
Section  4.4). 
-15-10-5051015
07Q1
08Q1
09Q1
10Q1
11Q1
12Q1
13Q1
14Q1
15Q1
16Q1
17Q1
18Q1
19Q1
20Q1pps
Imports of goods and services Investment
Public consumption Private consumption
Exports of services Exports of goods
GDPforecast1. ECONOMIC SITUATION A ND OUTLOOK  
1. Economic situation and outlook  
 
9 Graph  1.2: Private and public investment  
 
Source:  Eurostat, own calculations.  
External position  
A weakening trade balance is set to decrease the 
current account surplus . In the absence of 
temporary effects on the primary income balance 
in 2018, such as loss of profits in the largely 
foreign -owned banking sector seen in previous 
years, the reduction of the current account surplus 
has been and is projected to continue being largely 
driven by the deteriorating trade balance. The 
current account balance is nevertheless forecast to 
remain positive, decreasing from a projected 
surplus of 2.5  % of GDP in 2018 to just below 2  % 
in 2020. In cyclically adjusted terms, the current 
account surplus is mu ch higher, at 4  % of GDP in 
2018.  
External imbalances narrow further, supported 
by the positive, albeit declining, current account 
balance.  Deleveraging of both the public and 
private sector continued in 2018. By June 2018, 
gross external debt declined by 1.8 pps to 80 % of 
GDP, while the net international investment 
position (NIIP) rose by 1.6 pps to -60.3 % of GDP 
(see Graph  1.3). The net external debt ratio is 
projected to remain on a declining path, thanks to 
solid GDP growth and current account surpluses.  Graph  1.3: Current account composition, gross e xternal 
debt and net international investment position  
 
Gross external debt is expressed in absolute terms.  
Source:  Eurostat, Croatian National Bank.  
Inflation and interest rates  
Rising energy prices pushed inflation up in 
2018.  Despite continued strong growth in 
employment and rising wages, core inflation has 
remained subdued. However, with unemployment 
shrinking steadily and demand for labour 
intensifying in some sectors, wage pressures are 
expected to grow stronger in 2019 and  2020. At 
the same time, the Value Added Tax ( VAT ) rate 
reduction on several products  (mostly unprocessed 
food)  in 2019 and the 1 pp. reduction of the 
standard VAT rate in 2020 are expected to exert 
downward pressure on prices. Energy prices are 
also expected to stabilise in mid -2019. As a result, 
after averaging 1.6  % in 2018, inflation is expected 
to moderate sli ghtly after that. Core inflation is 
expected to pick up towards the end of the forecast 
period.  
Interest rates continue declining amid abundant 
liquidity in the financial system and the 
improving country risk profile.  Interest rates on 
all new loans to hou seholds and non -financial 
corporations are decreasing, most notably on loans 
indexed in euros. The trend is expected to continue 
as Croatia's risk premium continues declining amid 
a positive economic and budgetary outlook. It has 
significantly improved in recent years, as reflected 
in the declining spread between the yield on 
Croatia’s sovereign debt and the German bund, 
which, while still higher than for most EU 
051015202530
020406080100
08 09 10 11 12 13 14 15 16 17
Share of private investment (% of tot. inv.)
Share of public investment (% of tot. inv.)
Total investment (% of GDP) (rhs)% of tot. inv. % of GDP
-120-100-80-60-40-200
-15-10-50510
08Q1
09Q1
10Q1
11Q1
12Q1
13Q1
14Q1
15Q1
16Q1
17Q1% of GDP % of GDP
Balance of primary and secondary incomes (other) (lhs)
Net investment income (lhs)
Balance of trade (goods and services) (lhs)
Current account balance (lhs)
NIIP (rhs)
Gross external debt (rhs)
1. Economic situation and outlook  
 
10 countries, stayed below 200 basis points 
throughout 2018, as compared to 390 in mid -2016.  
Priva te indebtedness  
Private sector debt further decreased despite 
the recovery of bank lending, especially to 
households.  Consolidated corporate and 
household debt continued decreasing throughout 
the first three quarters of 2018. In September 2018 
corporate d ebt stood at 63.2  % and household debt 
at 34.1  % of GDP — some 20 and 8 pps below the 
peaks registered in 2010. The private sector debt 
ratio decreased on account of GDP growth and, to 
a lesser extent, valuation effects, as continued kuna 
appreciation redu ced the value of outstanding 
liabilities indexed to or denominated in foreign 
currency. New lending to the non -bank private 
sector (adjusted for sales and securitisation) from 
domestic credit institutions remained positive in 
2018 but declined by 3.2  % com pared to 2017 
despite a sharp pick -up in new loans to 
households. However, households continued 
decreasing their exposure to foreign currency and 
variable interest rate risk significantly. The private 
debt ratio is expected to keep decreasing.  
Public finan ces  
The general government balance improved 
further thanks to dynamic revenue growth and 
expenditure containment.  It recorded a surplus of 
0.9 % of GDP in 2017, a notable increase from a 
deficit of 0.9  % the year before. Revenues grew 
largely on account o f dynamic household 
consumption and an improving labour market. 
Expenditure growth was flat in nominal terms, 
largely through cuts in investment and declining 
interest expenditure, benefiting from the low 
interest rate environment. The headline balance in 
2018 is expected to decline under the impact of the 
materialisation of contingent liabilities, but remain 
in surplus. It would slightly increase in 2019, 
despite the impact of the planned cuts in taxes and 
social contributions, before decreasing again in 
2020 on account of investment and the reduction in 
the general VAT rate. In turn, continued mild 
surpluses and economic growth are expected to 
support the further reduction of general 
government debt. The ratio is expected to have 
declined to below 73.5  % in 2018, and should fall 
to 68.2  % by 2020.  Labour market  
Croatia’s labour market continues to improve 
on the back of the economic recovery.  Since 
2015, robust and broad -based economic growth 
has been accompanied by sustained employment 
growth. As a result  of job creation, as well as 
emigration and ageing, the unemployment rate has 
been declining rapidly over the same period. From 
11.0 % in 2017, it fell to 8.5 % in the first three 
quarters of  2018, and is expected to continue 
decreasing to 7.6  % in 2019. N evertheless, the 
activity rate (20 -64) remains very low (71.2  % in 
2017 vs 78.0  % for the EU) (see Graph  1.4). The 
share of temporary employees in total employment 
remains well above the EU average (17.5  % vs EU 
11.3 %), despite the increase in the share of 
permanent contracts in new hiring . 
Graph  1.4: Labour market developments  
 
Source:  Eurostat.  
After years of moderation, wage growth is 
resuming.  The different data sources offer a mixed 
picture on wage dynamics (3). According to 
national accounts, nominal compensation per 
employee continued to decrease by 1.1  %, in 2017. 
By contrast, administrative figures show the 
growth of average nominal gross wages resuming. 
The Commission ’s 2018 Autumn Forecast projects 
compensation per employee to have risen by 2  % 
in 2018, and to grow by a further 1.7  % in 2019, 
                                                           
(3) The difference between administrative data (on nominal 
gross wages) and na tional accounts (nominal compensation 
per employee) is due to inconsistency between (survey 
based) employment data and administrative records . 
(4) For the assessment of other reforms implemented in the 
past, see in particular Section 4.  
01020304050607080
08 09 10 11 12 13 14 15 16 17
Activity rate 20-64
Unemployment rate 15-74
Long-term unemployment rate 15-74
Youth unemployment rate 15-24
NEET rate 15-24%
1. Economic situation and outlook  
 
11 driven by the negotiated increases in the public 
sector wages  and the decline in unemployment. 
Nominal wage growth is projected to remain 
below the level consistent with the labour market 
conditions and slightly above that for cost 
competitiveness (see Graph  1.5). In real terms 
(GDP deflated), compensation per employee is 
projected to have declined by a further 0.3 % in 
2018 , and is expected to  stabilise in 2019.  
Graph  1.5: Nominal wage growth: actual and predicted 
based on economic fundamentals  
 
Source:  Eurostat, own calculations.  
Social developments  
The share of people at risk of poverty or social 
exclusion remains high.  Althou gh it has been 
declining since 2013, it remained high at 26.4  % of 
the resident population in 2017 (EU 22.5  %). The 
elderly, low -skilled and people with disabilities are 
particularly affected. Poverty in Croatia is closely 
related to the absence of work in come in the 
household, as in -work poverty is well below the 
EU average (see Section  4.3). Inequality, as 
measured by the S80/S20 income quintile share 
ratio, was just below the EU average in 201 7 for 
those under 65, but higher for older persons.  
Potential growth  
Croatia's real GDP growth is moving closer to 
its gradually increasing potential.  Following five 
years of negative rates, potential growth turned 
positive in 2014, and has been gradually increasing 
since. It is estimated to reach 2.4  % by 2020. 
Labour utilisation remains chronically low despite some positive developments on the labour market. 
Moreover, the working age population (15  – 64 
years) shrank by 4.8 pps between 2010 and 2017 
due to ageing and emigration. It is estimated that in 
2018 the negative contribution of labour to 
potential growth will have turned marginally 
positive tha nks to the projected higher 
participation rates. Total factor productivity (TFP) 
remains at relatively low levels, reflecting a 
below -par performance on measures of goods and 
service market efficiency and public sector 
governance. Overall, Croatia's potent ial growth, 
while gradually increasing, remains modest for a 
catching -up economy, and lowest among peer 
Member States  (see Graph  1.6). 
Graph  1.6: Potential output and components, 2017  
 
Potential output: production function approach.  
Source:  European Commission, own calculation.  
Statistical issues  
Concerns remain regarding the completeness, 
accuracy and timeliness of macroeconomic and 
government finance statistics.  Reliable statistics 
are a precondition to economic and budgetary 
surveillance and informed economic policy 
making. While close cooperation between the 
Croatian Bureau of Statistics and Eurostat  has led 
to some progress in producing national accounts 
and ensuring consistency between government 
finance statistics and national accounts, sector 
accounts have yet to be published.   
-6-4-2024681012
00 02 04 06 08 10 12 14 16 18
Prediction based on inflation, productivity and
unemployment
Actual nominal compensation growth
Nominal compensation growth consistent with constant
UCL-based REER% annual change
-1012345
RO PL BG CZ HU SK SI HR
TFP Contribution
Capital Accumulation Contribution
Total Labour (Hours) Contribution
PF Potential Growth% annual change
1. Economic situation and outlook  
 
12 Regional disparities  
There are significant regional disparities in 
Croatia.  GDP per capita (in Purchasing Power 
Standard ) remains well below the EU average in 
all the counties, with the exception of the capital 
region of Zagreb (see Graph  1.7). Over the 2000 -
2015 period disparities in GDP per capita have 
widened across the country. In 2015, GDP per 
capita ranged between 107  % of the EU average in 
Zagreb to 32  % in Virovitica -Podravina county in 
eastern Croatia. Population has been shrinking 
across the country since 2010, with the exception 
of the city of Zagreb. The phenomen on, however, 
is much more pronounced in the eastern regions of 
Croatia. Regional demographic developments are 
in fact correlated with the labour market outcomes 
which also display strong territorial disparities (see 
Section  4.4). 
Graph  1.7: Regional conver gence  
 
Year(s) of reference: GDP per head, 2015; GDP per head 
change, 2010 -2015; Population growth, 2010 -2016; 
Productivity, 2015.  
Source:  Eurostat, own calculations.  
 
20406080100120
GDP per head
GDP per head
change
Population
 growth
ProductivityIndex, 
EU28=100
City of Zagreb Other counties
EU28 HR
1. Economic situation and outlook  
 
13   
Table  1.1: Key economic and financial indicators - Croatia  
 
(1) NIIP excluding direct investment and portfolio equity shares.  
(2) Domestic banking groups and stand -alone banks, EU and non -EU foreign -controlled subsidiaries and EU and non -EU 
foreign -controlled branches.  
(3) The tax -to-GDP indicator includes imputed social contribution s and hence differs from the tax -to-GDP indicator used in the 
section on taxation          
Source:  Eurostat and ECB as of 31 -1-2019, where available; European Commission for forecast figures (Winter forecast 2019 for 
real GDP and HICP, Autumn forecast 2018 otherwise).  
 
2004-07 2008-12 2013-15 2016 2017 2018 2019 2020
Real GDP (y-o-y) 4.5 -1.9 0.6 3.5 2.9 2.8 2.7 2.6
Potential growth (y-o-y) 3.0 0.0 0.2 1.6 1.7 1.8 2.1 2.4
Private consumption (y-o-y) 4.4 -2.1 -0.8 3.5 3.6 . . .
Public consumption (y-o-y) 4.5 -0.1 0.4 0.7 2.7 . . .
Gross fixed capital formation (y-o-y) 6.6 -5.7 0.8 6.5 3.8 . . .
Exports of goods and services (y-o-y) 4.9 -1.3 6.2 5.6 6.4 . . .
Imports of goods and services (y-o-y) 6.2 -4.3 5.1 6.2 8.1 . . .
Contribution to GDP growth:
Domestic demand (y-o-y) 5.2 -2.6 -0.2 3.4 3.3 . . .
Inventories (y-o-y) 0.3 -0.7 0.3 0.3 0.2 . . .
Net exports (y-o-y) -0.9 1.3 0.5 -0.1 -0.6 . . .
Contribution to potential GDP growth:
Total Labour (hours) (y-o-y) 0.5 -0.6 -0.9 -0.1 0.0 0.1 0.3 0.5
Capital accumulation (y-o-y) 2.0 1.2 0.6 0.7 0.7 0.8 0.9 1.0
Total factor productivity (y-o-y) 0.5 -0.6 0.5 1.0 1.0 0.9 0.9 0.8
Output gap 3.1 -0.8 -3.5 -0.7 0.6 1.6 2.3 2.5
Unemployment rate 12.1 11.8 16.9 13.4 11.0 9.0 7.5 6.5
GDP deflator (y-o-y) 3.8 2.5 0.3 -0.1 1.1 2.3 1.7 1.6
Harmonised index of consumer prices (HICP, y-o-y) 2.8 2.9 0.8 -0.6 1.3 1.6 1.4 1.4
Nominal compensation per employee (y-o-y) 4.8 2.1 -2.0 1.3 -1.1 2.0 1.7 1.5
Labour productivity (real, person employed, y-o-y) 2.5 0.1 0.2 3.2 0.7 . . .
Unit labour costs (ULC, whole economy, y-o-y) 2.3 2.0 -2.2 -1.8 -1.8 1.5 0.9 0.2
Real unit labour costs (y-o-y) -1.5 -0.4 -2.4 -1.8 -2.8 -0.8 -0.8 -1.3
Real effective exchange rate (ULC, y-o-y) 1.9 -1.0 -3.2 -1.8 -1.1 1.2 -1.5 -1.9
Real effective exchange rate (HICP, y-o-y) 0.8 -0.7 0.1 1.2 0.4 2.6 -1.3 -1.0
Savings rate of households (net saving as percentage of net disposable 
income) . 6.0 . . . . . .
Private credit flow, consolidated (% of GDP) 14.8 3.6 -0.6 -0.1 1.2 . . .
Private sector debt, consolidated (% of GDP) 86.5 119.5 116.2 105.3 98.4 . . .
of which household debt, consolidated (% of GDP) 32.6 40.7 39.6 35.1 34.1 . . .
of which non-financial corporate debt, consolidated (% of GDP) 53.9 78.9 76.7 70.1 64.3 . . .
Gross non-performing debt (% of total debt instruments and total loans 
and advances) (2) . . 12.4 10.1 8.4 . . .
Corporations, net lending (+) or net borrowing (-) (% of GDP) . -1.0 . . . . . .
Corporations, gross operating surplus (% of GDP) . 19.3 . . . . . .
Households, net lending (+) or net borrowing (-) (% of GDP) . 3.5 . . . . . .
Deflated house price index (y-o-y) 9.8 -5.1 -3.1 2.1 2.8 . . .
Residential investment (% of GDP) 0.0* 0.0* 0.0* .0* .0* . . .
Current account balance (% of GDP), balance of payments -5.9 -3.3 2.4 2.5 3.9 2.5 2.0 1.8
Trade balance (% of GDP), balance of payments -6.6 -2.4 1.5 2.8 2.1 . . .
Terms of trade of goods and services (y-o-y) 1.3 0.5 0.3 1.4 0.2 1.1 0.3 0.5
Capital account balance (% of GDP) 0.0 0.1 0.4 1.4 0.6 . . .
Net international investment position (% of GDP) -66.5 -87.3 -83.3 -69.9 -62.4 . . .
NIIP excluding non-defaultable instruments (% of GDP) (1) -29.3 -47.5 -42.8 -25.5 -17.3 . . .
IIP liabilities excluding non-defaultable instruments (% of GDP) (1) 68.7 88.8 92.2 77.5 69.2 . . .
Export performance vs. advanced countries (% change over 5 years) 37.3 -4.3 -12.6 5.0 14.6 . . .
Export market share, goods and services (y-o-y) . . 2.7 7.9 2.5 . . .
Net FDI flows (% of GDP) -4.7 -3.1 -1.4 -4.1 -2.4 . . .
General government balance (% of GDP) -3.7 -5.6 -4.6 -0.9 0.9 0.2 0.4 0.1
Structural budget balance (% of GDP) . . -3.1 -0.8 0.7 -0.5 -0.7 -1.1
General government gross debt (% of GDP) 39.3 55.6 82.7 80.2 77.5 73.5 70.1 68.2
Tax-to-GDP ratio (%) (3) 36.7 36.0 36.8 37.8 37.8 37.9 37.4 36.9
Tax rate for a single person earning the average wage (%) . . 29.9 . . . . .
Tax rate for a single person earning 50% of the average wage (%) . . 22.7 . . . . .forecast
 
 
14 Since the start of the European Semester  in 
2014 , 51  % of all country -specific 
recommendations addressed to Croatia have 
recorded at least ‘some progress’ (4). The 
remaining  49 % of these CSRs recorded ‘limited’ 
or ‘no progress’ (see Graph  2.1). Reform action  in 
key structural policy areas stalled over the past 
years, also in the context of a protracted period of 
political instability. Most progress has been seen in 
the areas of fiscal policy , labour market and , 
recently, the  pension system.  
Graph  2.1: Overall multiannual implementation of 201 4-
2018 CSRs to date  
 
(1) The overall assessment of the country -specific 
recommendations related to fiscal policy excludes 
compliance with the Stability and Growth Pact . 
(2) The multiannual CSR assessment looks at the 
implementation until 2019 Country Report since the CSRs 
were first a dopted.  
Source:  European Commission.  
Having fully corrected its excessive general 
government deficit, Croatia continued with a 
prudent fiscal policy.  It exited the Excessive 
Deficit Procedure in June 2017 after having 
durably corrected its excessive deficit in 2016, 
with respect to  both the general government deficit  
and the debt rule. Prudent fiscal policy needed to 
decrease the public debt ratio continued in 2017.  
Croatia has taken measures to enhance 
flexibility of the labour market , while 
weaknes ses in the promotion of employability 
and social protection remain . Two successive 
reforms, implemented in 2013 and 2014, facilitated 
the use of fixed -term contracts and flexible types 
                                                           
(4) For the assessment of other reforms implemented in the 
past, see in particular Section 4.  of work (distance work, part -time work, seasonal 
work and agency work),  and simplified the 
procedures for terminating employment contracts. 
The coverage and effectiveness of active labour  
market policies however  remains  low. In 2015 , the 
assessment of disability claims was harmonised 
and moved to a new Single Expert Evaluatio n 
Body. There has been limited progress in 
consolidating social benefits and improving their 
poverty reduction capacity.  
Some steps have been taken to improve the 
judiciary, business environment and resilience 
of the financial sector.  Insolvency procedure s 
have been thoroughly revised, and the reformed 
judicial map is improving the efficiency of the 
system. Backlogs in the courts are decreasing, 
especially those of oldest cases, but remain sizable. 
The reduction of parafiscal charges has been slow 
while th e administrative burden on businesses 
from other impediments was reduced more 
significantly . In 2014, the comprehensive portfolio 
screening of the banking sector confirmed its 
robustness, and some identified weaknesses have 
been addressed. The Croatian Ban k for 
Reconstruction and Development has undergone 
an asset quality review indicating several areas in 
need of improvement , some of which are being 
addressed .  
Reforms of healthcare, state -owned enterprises 
and the implementation of EU fund ed projects  
have  progressed slowly.  The long -planned 
functional integration of hospitals, aimed at 
rationalising operations and improving access to 
healthcare, has started, while their inadequate 
financing has yet to be addressed. Some measures 
to improve corporate govern ance in state -owned 
enterprises have been implemented, but activation 
and sale of assets have advanced only slowly, 
without a clear privatisation strategy in place. 
Constrained administrative capacit y and 
insufficient strategic planning hinder a more 
efficient implementation of projects co -funded 
from EU funds, although there have been 
improvements over the past years, especially in 
terms of increased staffing.  
No Progress
19%
Limited 
Progress
30%Some Progress
32%Substantial 
Progress
12%Full 
Implementation
7%2. PROGRESS WITH COUNTR Y-SPECIFIC RECOMMENDAT IONS  
2. Progress with country -specific recommendations  
 
15 Croatia has made some  (5) progress in 
addressing the 2018 country -specific 
recommendations  (see Table  2.1). After a 
protracted period of reform standstill, policy action 
has picked up in 2018. Most notably the 
Parliament adopted a package of important pension 
                                                           
(5) Information on the level of progress and actions taken to 
address the policy advice in each respective subpart of a 
CSR is presented in the Overview Table in the Annex.  system reforms, which came into force in 2019. 
Similarly, the fiscal framework was strengthened 
at the end of 2018. Other policy measures in the 
area of public  sector governance and the business 
environment have been initiated and are at 
different stages of progress, awaiting full 
parliamentary adoption or effective 
implementation.  
 
Table  2.1: 2018 country -specific recommendations (CSRs) assessment  
 
Source:  European Commission.  
 
Commitments   Summary assessmen t 
CSR 1: Strengthen the fiscal framework, including 
by strengthening the mandate and independence of 
the Fiscal Policy Commission. Introduce a recurrent 
property tax.  (MIP relevant)   
 Croatia has made Some Progress  in addressing 
CSR  1: 
 Substantial progress  in strengthening the fiscal 
framework  
 No progress  introducing a recurrent property tax   
CSR 2: Discourage early retirement, accelerate the 
transition to a higher statutory retirement age and 
align pension provisions for specific categories with 
the rules of the general scheme. Deliver on the 
reform of the education and training system to 
improve its  quality and labour market relevance for 
both young people and adults. Consolidate social 
benefits and improve their poverty reduction 
capacity.  (MIP relevant)   
 Croatia has made Some Progress  in addressing 
CSR  2: 
 Substantial  in pensions system reform measures   
 Some progress  in delivering on the reform of 
the education and training system  
 Limited progress in consolidating social 
benefits  
CSR 3: Reduce the territorial fragmentation of the 
public administration, streamline the  functional 
distribution of competencies and enhance the 
capacity to design and implement public policies. In 
consultation with social partners, introduce 
harmonised wage -setting frameworks across the 
public administration and public services.  (MIP 
relevan t)  
 Croatia has made Limited Progress  in addressing 
CSR  3: 
 Some progress  in the public administration 
reform  
 Limited progress harmonising wage -setting 
frameworks in the public sector   
CSR 4: Improve corporate governance in state -
owned enterprises and intensify the sale of state -
owned enterprises and non -productive assets. 
Significantly reduce the burden on businesses 
arising from parafiscal charges and from 
cumbersome administrative and legisl ative 
requirements. Enhance competition in business 
services and regulated professions. Reduce the 
duration of court proceedings and improve 
electronic communication in courts. (MIP relevant)   
 Croatia has made Some  Progress  in addressing 
CSR  4: 
 Limited pr ogress  in improvi ng corporate 
governance and divestment in state -owned 
enterprises  
 Some progress  in reducing  the burden on 
businesses  
 Limited progress  in enhancing  competition in 
business services and regulated professions  
 Some progress  in the judicial system reform  
 
2. Progress with country -specific recommendations  
 
16 Box 2.1: EU funds and p rogrammes contribute to addressing structural challenges and 
foster ing growth and competitiveness  in Croatia  
Croatia is one of the largest beneficiaries of EU solidarity.  The financial allocation from the EU funds, 
aiming to support Croatia in facing development challenges, amounts to up to EUR 10. 7 billion for 2014 -
2020, potentially equivalent to above 3 % of GDP annually. The additional national co -financing will be 
approximately EUR 2 billion, so the country budget amounts to almost EUR 12.6 billion. As of the end of 
2018, some EUR 6. 8 billion (around 6 4 % of the total EU funds) was already allocated to specific projects. 
In addition to ESIF, EUR 424 million was allocated to specific projects on strategic transport networks 
through a dedicated EU funding instrument, the Connecting Europe Facility. Furthermore, nume rous 
Croatian research institutions, innovative firms and individual researchers benefited from other EU funding 
instruments, notably Horizon 2020 which provided EUR 62 million.  
EU funding is helping to address policy challenges identified in the 2018 CSR s. Primarily by investing 
in the establishment of VET centres of competence and providing support to the implementation of the 
integral curricular reform, ESI funds (including the European Social Fund) will further improve a link 
between vocational educati on and labour market needs. Through the pilot project e -Schools, elementary 
schools in Croatia have been equipped with LAN and two digital classrooms, with the intention of covering 
all elementary schools with the second phase of the project and establishi ng a system of digitally mature 
schools. In addition, ESIF also contributed to improving innovative performance of Croatia by supporting 
projects selected under the smart specialisation strategy. In environmental services, around half million 
people receiv ed access to newly built waste -management centres and around half million people already 
gained access to modern water treatment and supply services, all amounting to a cleaner and healthier 
environment for citizens. In transport, new sections of the road and rail network on the TEN -T are being 
developed alongside the improved island connectivity.  
In addition, the Commission can provide tailor -made technical support upon Member State's request 
via the Structural Reform Support Programme to help implement gr owth -sustaining reforms  to 
address challenges identified in the European Semester process or other national reforms. Croatia for 
example is receiving support to implement a curriculum reform . The Commission is also assisting the 
authorities in their effort s to remove unnecessary restrictions to regulated professions, to harmonise 
terminology and improve transparency of social benefits, and to monitor the implementation of restructuring 
plans for state -owned enterprises. In addition, in 2018, work has starte d on enhancing the administrative 
capacity of the tax authorities to detect fraud and conduct audits, on improving human resources 
management in the public administration and contributing to the efficient implementation of the public 
administration reform,  and on developing a strategy for Croatia's Bank for Reconstruction and Development 
(HBOR).  
EU funding contributes to mobilisation of private investment through both grants and financial 
instruments.  Around EUR 522 million (8.3 % of the total) is earmarked  to be delivered in the form of loans, 
microloans, portfolio guarantees and equity. The investments carried out via Financial instruments will be 
focused on SMEs and energy efficiency. Furthermore, the overall volume of approved operations by the EIB 
with the European Fund for Strategic Investment  backing amounts to EUR 20 3 million, which is set to 
trigger a total of EUR 903 million in additional private and public investments. Croatia ranks 1 2th as to the 
overall volume of approved operations as a share of  GDP. Under the Infrastructure and Innovation window, 
8 projects  financed by the EIB with EFSI backing were approved, for a value of about EUR 109 million in 
total financing set to trigger EUR 571 million in total investment. Under the SMEs component, 8 ag reements 
were approved with intermediary banks financed by the EIF with EFSI backing, for a total of EUR 94 
million set to trigger approximately EUR 332 million in investments. Some 1  178 SMEs and mid -cap 
companies are expected to benefit from improved access to finance. An example of EFSI -backed project in 
Croatia is "EL TO Zagreb", for which the EIB is lending Hrvatska Elektroprivreda DD EUR 150 million to 
build a new combined cycle gas turbine, heat and electricity cogeneration plant to replace less 
environmentally -friendly plants in Zagreb.  
EU actions strengthen national, regional and local authorities and the civil society.  EUR 522.6 million 
(from ESIF) has been allocated for strengthening capacity of public administrations at different levels by 
2. Progress with country -specific recommendations  
 
17 prompting close cooperation with stakeholders. The Catching up Regions Initiative delivers targeted 
technical assistance and financing for developing five counties in the Eastern Croatia – Slavonija, Baranja 
and Srijem Project. The importance of this project is twofold, on the one hand, it enables a more focused use 
of EU funds in the Slavonian counties, and on the other hand, it helps strengthening administrative capacity 
on local and regional level in order to prepare and implement projects needed for socio -economic 
development in the current programming period.  
More information at : https://cohesiondata.ec.europa.eu/countries/HR   
 
 
18 The 2019 Alert Mechanism Report concluded 
that a new in -depth review should be 
undertaken for Croatia to assess the persistence 
or unwinding of the imbalances (European 
Commission, 2018 b). In spring 2018, C roatia was 
identified as having excessive macroeconomic 
imbalances (European Commission, 2018 a). The 
imbalances identified related to high levels of 
public, private and external debt, all largely 
denominated in foreign currency, in a context of 
low potential growth. This chapter summarises the 
findings of the analyses in the context of the 
Macroeco nomic Imbalances Procedure  in-depth 
review that is contained in various sections in this 
report  (6). 
Imbalances and their gravity  
Government debt continues decreasing.  During 
the protracted recession, large budget deficits and 
costs induced by state -owned enterprises 
contributed to a significant accumulation of 
government debt, which peaked in 2014 at 84  % of 
GDP. Following that, robust growth and a prudent 
fiscal stance gradually reduced government debt to 
77.5 % of GDP in 2017. The steady kuna 
appreciatio n since 2014 also facilitated debt 
reduction by depressing the value of the significant 
portion of debt denominated in foreign currency. 
The decrease of public debt resulted in improved 
debt sustainability (see Section 4.1) and was 
picked up by credit agen cies, which rate Croatia’s 
long-term prospects with BB+, a rating just below 
investment grade, with positive outlook. 
Nevertheless, public debt remains high and 
exposed to interest and exchange rate risks.  
Private sector debt keeps decreasing despite the 
recovery in lending.  In the second quarter of 
2018, consolidated corporate and household debt 
amounted to 63.2  % and 34.1  % of GDP, 
respectively – some 20 and 8 percentage points 
below the peak registered in 2010. By mid -2018, 
                                                           
(6) Analyses relevant for the in -depth review can be found in 
the following sections : Government debt (Section 4.1; 
Private sector debt and the financial sector (Section 4.2); 
Labour market (Section 4.3); and Business environment, 
investment and public sector governance (Section 4.4). An 
asterisk indicates that the analysis in that section 
contributes to the in -depth review under the 
Macroeconomic Imbalances Procedure . both household and non -financi al corporations 
debt were below their respective prudential 
thresholds, but still above the levels suggested by 
fundamentals, indicating scope for further 
deleveraging. Furthermore, non-financial 
corporations’  debt is high relative to their gross 
financial  assets or equity, signalling solvency risks 
for the corporate sector. Exposure to the exchange 
and interest rate risk are moderating. The share of 
private sector debt exposed to foreign exchange 
rate risk decreased from 78  % in 2012 to 64.5  % in 
Q2 2018, as both corporates and households took 
advantage of high liquidity in the domestic 
financial sector to partially refinance their 
liabilities denominated in foreign currencies in 
national currency. Similarly, lower interest rates 
and non -interest charges du e to strong competition 
in the domestic banking sector allowed corporates 
and households to refinance their variable interest 
rate loans with cheaper loans of longer interest rate 
fixation periods.  
The ongoing deleveraging of both the public 
and private s ector is reflected in Croatia's 
continued current account surplus.  The current 
account surplus increased significantly in 2017 to 
3.9 % of GDP. This resulted largely from a one -off 
increase in the primary income balance as banking 
sector profitability was affected by higher 
provisioning associated with the Agrokor crisis. 
With strong domestic demand supporting import 
growth, the trade surplus declined slightly in the 
first half of 2018. In turn, the current account 
surplus also decreased to 3.3  % of GDP  (7). The 
net international investment position improved 
to -61.9 % of GDP in 2017 and declined further 
to -58.3 % by the second quarter of 2018, almost 
40 percentage points above its record low in the 
third quarter of 2011. By mid-2018,  gross external 
debt de creased to 80  % of GDP, over 
32 percentage points below its peak in 2015. While 
declining rapidly, in 2017 Croatia's net external 
liabilities were still significantly in excess of their 
prudential and fundamentals based benchmarks  (8). 
                                                           
(7) 4-quarter moving average  
(8) The country -specific prudential threshold denotes the NIIP 
level beyond which an external crisis becomes likely. The 
NIIP level explained by fundamentals represents the NIIP 
that would result if a country had run its current account in 
line with fundamentals since 1995. For Croatia, the 
prudential and fundamental -based benchmarks are 3. OVERALL FINDINGS REGARDING IMBALANCES , RISKS AND 
ADJUSTMENT ISSUES  
3. Overall findings regarding imbalances, risks and adjustment issues  
 
19 However, the net ext ernal position excluding 
non-defaultable instruments was only -15 % of 
GDP, similar to some of the peer countries and 
above its respective benchmarks.  
Croatia's potential growth is increasing, but 
remains relatively low for a catching -up 
economy.  After pl ummeting during the crisis 
years, potential output growth increased to an 
estimated 1.8  % in 2018, just above the EU 
average but well below that for other catching -up 
economies. Labour is no longer detracting from 
potential growth, mainly thanks to the dec line in 
the structural unemployment rate, but adverse 
demographic trends and low activity rates continue 
to restrain it. The contribution of total factor 
productivity remains relatively low compared to 
that recorded by the economies of Central and 
Eastern Europe. This is largely explained by low 
allocative efficiency, which is also related to the 
strong presence of state -owned enterprises in the 
economy (see Section 4.4.1). Furthermore, Croatia 
does not perform well on indicators of efficiency 
of goods and service markets, and public sector 
governance (see Section 4.4).  
Evolution, prospects, and policy responses  
Fiscal surpluses are expected to support the 
further reduction in public debt.  Public debt is 
projected to dip to 68.2  % of GDP by 2020. The 
governm ent balance is expected to remain in 
surplus in both 2019 and 2020 despite the expected 
shift towards a pro -cyclical fiscal stance and the 
materialisation of some contingent liabilities. A 
continued low interest rate environment should 
continue supporting the refinancing of maturing 
debt at lower interest rates and with longer 
maturities. The adoption of the new Fiscal 
Responsibility Act is expected to  improve 
Croatia's fiscal framework by giving more 
autonomy to the Fiscal Policy Commission, 
prescribing nu merical fiscal rules and 
strengthening the short and mid -term budgetary 
framework at central and local level.  
Private sector debt is expected to continue 
decreasing despite the expected stronger credit 
growth. Debt reduction in the private sector in 
                                                                                   
estimated to have been around -38 % and -23 % of GDP in 
2017,  respectively.  
 2017 a nd throughout 2018 was driven by nominal 
GDP growth and the moderate appreciation of the 
kuna. Write -offs also contributed to debt reduction. 
At the same time, credit flows turned positive in 
2016 for households and further strengthened in 
2017 and 2018. N ew lending was driven by 
kuna -denominated non -housing loans. Credit flows 
to non -financial corporates have resumed as well, 
whereby some firms  have been partially 
refinancing their external debt through domestic 
borrowing. Non -financial sector credit growt h will 
likely remain moderate given the still high 
debt-to-gross financial assets and the 
debt-to-equity ratios of Croatian corporates. 
Furthermore, many corporates remain burdened 
with high non -performing loans (20.5  % of total 
loans to non-financial corporations), especially in 
the construction sector (47.6  %). The agreement 
between Agrokor's creditors, confirmed by the 
High Commercial Court in Zagreb in October 
2018, should lead to an orderly restructuring of the 
conglomerate. Large risks to the financia l and 
private sector from Agrokor thus appear to be 
contained. The operational and financial stability 
of the company and its suppliers now depend on 
the successful implementation of the agreement.  
Croatia's current account surplus is expected to 
continue supporting the reduction in external 
imbalances.  According to the Commission 2018 
Autumn Forecast, the current account surplus is 
projected to gradually decline to 1.8  % of GDP by 
2020. The trade surplus is expected to narrow, with 
strong domestic demand f uelling imports and 
export market share gains declining. Nevertheless, 
the expected current account balances will remain 
significantly above the level suggested by 
fundamentals –estimated at around -0.6 % of GDP 
in 2017. This should enable the continued ra pid 
reduction of external imbalances. Even with 
gradually slowing growth, the net international 
investment position is expected to rise 
above -50 % of GDP by 2020, and move closer to 
more sustainable levels e.g. the levels suggested by 
the prudential and f undamentals -based benchmarks 
(-39 % of GDP and -22 % of GDP, respectively, in 
2018).   
Potential growth remains relatively low to 
support fast convergence.  Since peaking in 
mid-2013, the unemployment rate is estimated to 
have fallen to its pre -crisis level s, 9.1  % in 2018. It 
is expected to decline further to 6.6  % by 2020, 
3. Overall findings regarding imbalances, risks and adjustment issues  
 
20 also due to persistent employment growth. 
However, ageing and emigration will continue to 
detract from the labour contribution to potential 
growth. The ageing impact should be partially 
offset by the adopted pension reform, which will 
extend working lives. The contribution of total 
factor productivity to potential growth remains low 
compared to peers  (9). However , the proposed 
streamlining of government agencies, the reduction 
in the back log of court cases and improvements in 
the management of state -owned assets could 
contribute to higher productivity gains. Overall, 
the positive output gap is projected to further 
expand by 2020, supported by pro -cyclical tax cuts 
and an expected recovery of public investment 
towards the end of the multiannual programming 
period for EU funds.  
Overall assessment  
The private and public sectors are continuing to 
reduce their debt and its exposure to currency 
and interest rate risks.  High debt levels still 
burden the economy, although the situation has 
been improving substantially with private debt 
falling below prudential levels and public debt 
following a sustained declining path. However, the 
corporate sector remains over -leveraged and 
burdened by non -perform ing loans. External 
imbalances narrowed due to high current account 
surplus. Overall foreign currency denominated 
liabilities are decreasing, implying lower exposure 
to exchange rate risk. The unemployment rate has 
reduced sharply, also but not exclusively  due to 
employment growth. However, labour market 
participation lags significantly behind the EU 
average.  
Low potential growth hampers a durable 
adjustment of imbalances.  Economic growth is 
projected to be robust over the forecast horizon. 
Nevertheless, lo w potential growth limits Croatia’s 
shock absorption capacity. To increase its growth 
potential, Croatia needs to increase labour 
utilisation and address its weak productivity 
growth.  
Recent policy actions should help to address 
Croatia's structural weakn esses but their 
implementation remains crucial. The adopted 
pension reform could contribute to higher labour 
                                                           
(9) Slovenia, Hungary, the Czech Republic, Slovakia, Poland  utilisation while several policy initiatives, in 
different stages or preparation, aim at improving 
public sector governance and the business 
enviro nment. The ambitious reform agenda 
presented by the authorities could help increase 
potential growth, although thorough 
implementation of the planned reforms remains 
crucial to achieving growth rates and accelerating 
the process of real economic convergenc e. 
3. Overall findings regarding imbalances, risks and adjustment issues  
 
21   
Table  3.1: MIP matrix  
 
 
(Continued on the next page)  
 Gravity of the challenge  Evolution and prospects  Policy response  
Imbalances (unsustainable trends, vulnerabilities and associated risks)  
Public debt  In 2017 the government debt ratio 
decreased to  77.5 % of GDP, which is 
still above the Treaty reference  value 
of 60 %. A large portion  of the debt is 
exposed to foreign currency  risk. The 
debt sustainability analysis indicates  
low risks in the short term but 
medium risks in the medium and long 
term . Between 2008 and 2014, public 
debt rose from 39 to 84 % of GDP 
on account of large government 
deficits and changes in the scope  of 
general government . The debt ratio 
started declining in 2015, thanks to 
substantial improvements in the 
government balance  and 
recovering GDP growth.  
The general government bala nce 
recorded a surplus of 0. 9 % of GDP 
in 2017. The budget balance is 
expected to remain mildly positive 
throughout 2020 , allowing the debt 
ratio to continue decreasing.  
The Commission 2018 autumn  
forecast expects the debt -to-GDP 
ratio to decline to 73.5  % of GDP in 
2018  and to reach 68.2 % of GDP by 
2020 .  In 2018 debt continued to be 
refinanced at lower rates, lowering 
debt servicing costs. M aturities were 
extended and the share of debt issued 
in foreign currency declined . 
Household and 
corporate debt and 
the financial sector  In 2017, consolidated corporate and 
household debt stood at 64. 3 % and 
34.1 % of GDP, respectively, down 
from 70. 1% and 3 5.1% in 2016. Both 
decreased further in the first half of 
2018 and stand below prudential 
thresholds but still above the levels 
suggested by fundamentals  
Around 48 % of household debt and 
approximately 76 % of (domestic 
and external) corporate debt was 
exposed to foreign currency risk  
(predominantly EUR ) in mid -2018. 
In the second  quarter of 2018, the 
NPL rate in the Croatian banking 
sector reached  8.7 %, down from 
11.7% one year earlier and slightly 
below 8.9% in the previous quarter . 
The rate is still relatively high in both 
the corporate and household sector 
– 20.7  % and 7.6 % respectively.  
 The pace of deleveraging in both 
the household and corporate 
sector is set to continue but 
abate, as credit flows turned 
positive.  
Despite improvements, the still 
high exposure to currency risks 
and interest rate hikes may put at 
risk the repayment capaci ty of 
some households and non -
financial corporations and 
translate into credit risk for the 
banking sector.  
Non-performing loans in the 
corporate sector decreased 
markedly in 2017 , thanks to their 
sales  and improving economic 
conditions . However, fi gures by 
the Croatian National Bank for 
September 2018 show a 
slowdown in NPL sales compared 
to 2017 and a lower reduction of 
overall NPLs .  The revised corporate insolvency 
legislation led to the closure of 
thousands of illiquid companies 
without assets. The authorities also 
plan to enhance the monitoring of 
the reformed personal insolvency 
framework.  
In July 201 8 a settlement between 
Agrokor 's creditors was reached and 
on 26 October 2018, the Croatian 
High Commercial Court dismissed all 
of the appeals lodged by several of 
the remaining debtholders, 
effectively removing the final 
obstacle on the implementation of 
the deal. A smooth i mplementat ion 
of the agreement remains crucial for 
the operational and financial 
recovery of the firm  and its 
suppliers.  
 
3. Overall findings regarding imbalances, risks and adjustment issues  
 
22 Table (continued)  
 
 
Source:  European Commission.  
 
External liabilities 
and trade 
performance  The NIIP improved to -62.4 % of GDP 
in 2017, but remained well below its 
fundamental level and prudential 
threshold s. However, the stock of 
foreign liabilities net of less risky 
financial instruments (NENDI) is 
estimated at  only - 15 % of GDP  in 
2018 , above both benchmarks . The 
current account balance stood at 
3.9 % of GDP in 2017. It decreased 
to 3 .3 % of GDP in the first half of 
2018.  Gross external debt declined 
below 80 % of GDP by June  2018.  The NIIP continued improving in 
the first half of 2018 , rising to —
58.3  % of GDP , more than 30 pps  
above its record low in 2010. The 
NIIP is projected to keep 
improving on account of 
continued current account 
surpluses and GDP growth.  
The current account has moved 
from a record deficit of 9 % of GDP 
in 2008 to a surplus in 2013. After 
reaching 3. 9 % of GDP in 2017 it is 
expected to start declining again 
to 2.5 % of GDP in 2018 . 
Nevertheless, it should remain in 
a surplus throughout the forecast 
horizon, also thanks to continued 
strong performance of exports.  
The economy has more than 
recovered the pre viously lost 
market shares, while tourism 
boasts record physical indicators 
year after year despite  signs of 
capacity constraints.  Croatian firms still  have to bear a 
high administrative burden .  
Persisting weaknesses in the 
business environment result in 
limited attractiveness of Croatia for 
FDIs and high costs of doing 
business for Croatian enterprises.  
Many reform initiatives aimed at 
improving the business 
environment are in the pipeline . 
Potential output  The unemployment rate has 
contracted to 9.1 % in 2018. 
However, at 70. 9 % and 6 5.4 % in 
Q2 2018, activity and employment 
rates remain among the lowest in 
the EU.  
The contribution of total factor 
productivity to potential growth 
remains low for a catching -up 
economy.  
Low potential growth undermin es 
the durability of the adjustment 
process.  After having attained a record high 
of 17.6 % in early 2014, 
unemployment continues to 
reduce rapidly. Until 2018, part of 
the reduction was driven by the 
shrinking population of working 
age, due to negative migration 
flows and population aging. 
Following the rapid growth rates in 
pre-crisis years, wages stagnated or 
decreased in the post -crisis period. 
They have started growing again in 
2017,  under the impact of the 
stipulated increase of public wages. 
They a re expected to continue 
growing as the labour market 
tightens.  A comprehensive pension system 
reform entered into force in 2019, 
which among other s, will extend 
working lives thus contributing to 
higher labour utilisation . Active 
labour market measures rem ain 
largely un derutilised.   
Some m easures addressing the 
efficiency of the public 
administration have been initiated , 
while  the harmonisation of the 
wage -setting system across the 
public administration  is planned 
for early 2019 .  
Some steps have been taken to 
simplify the business environment, 
with regards to the administrative 
burden and regulated professions, 
while the reduction of parafiscal 
charges has stalled.  
 
Conclusions from IDR analysis  
 Private sector debt declined substantially,  however some corporates are still overleveraged and burdened with NPLs. Also 
Government debt is also on a downward path, thanks to sustained GDP growth and a prudent fiscal policy, but sustainability risks 
in the medium and long term  remain at medium level . Vulnerabilities to potential currency and interest rate shocks are being 
contained due to an increasing  share of fixed interest rate loans and domestic currency loans . A well-capitalised  financial sector 
with improved profitability  facilitates the recovery of lending to the private sector . The net international investment position is 
improving, but remains at levels that exceed the prudential threshold , although net of less risky financial instruments it reached 
prudential levels . Persistently low activity rates and the shrinking labour force hold back the growth potential.  
 The robust  economic growth is  expected to contribute to a further reduction in the private and public debt -to-GDP ratio s. The pace 
of private sector deleveraging is set to abate as credit activity intensifies, supporting investment. The current account is expected 
to remain in surplus , supporting a further narrowing of  external liabilities . In the medium term , low potential growth limits Croatia's 
shock absorption capacity.  
 Recently undertaken policy actions  and planned measures in the areas of business environment, public administration and the 
pension system should  help increase potential growth. A  thorough implementation of  reforms remains cr ucial for supporting  the 
process of real economic convergence.  
 
 
 
23 Croatia's public debt ratio has been decreasing 
strongly for 3 years in a row as a result of a 
prudent fiscal policy and robust GDP growth.  
The debt -to-GDP ratio rea ched 74.5  % in the third 
quarter of 2018, from a 2015 -Q1 high of 86.2  %. 
The decrease was mainly driven by a combination 
of GDP growth and significant improvements in 
the general government balance (see Graph 4.1.1 ). 
With a structural surplus of 0.7  % of GDP in 2017, 
Croatia remained well above its medium term 
budgetary objective ( -1.75 % of GDP). However, 
the activation of contingent liabilities is expected 
to have a strong (in excess of 1  % of GDP) yet 
temporary negative effect on the government 
balance over 2018 and 2019, adding also to the 
debt. In addition, as the government uses fiscal 
space to cut tax es, fiscal policy is expected to shift 
towards a pro -cyclical stance. Still, the decrease in 
the debt ratio is expected to continue – albeit at a 
slower pace – dipping to 68.2  % in 2020, driven by 
small surpluses and GDP growth.  
Graph  4.1.1:  Drivers of cha nge in the debt ratio  
 
Stock -flow adjustments include differences between cash 
and accrual recording, the (net) accumulation of financial 
assets, valuation effects and some remaining statistical 
adjustments (e.g. sector reclassifications).  
Source:  AMECO , European Commission 2018 autumn 
forecast, own calculations.  
The structure of Croatia’s debt has improved in 
many respects.  In recent years, Croatia used the 
low interest rate environment to refinance 
maturing bonds and loans at lower interest rates. In 
2017, the implicit interest rate on public debt was at a record low of 3.4  %, down from 4.2  % in 
2015. In addition, an extens ion of the average 
maturity of outstanding debt and increased 
issuances of debt in national currency have 
somewhat decreased the vulnerabilities associated 
with government debt. Similarly, the share of 
fixed -rate debt increased, reducing exposure to 
intere st-rate shocks.  
Graph  4.1.2:  Structure of public debt  
 
(1) Other CG (central government) includes mainly PPPs.  
(2) EB users = extra -budgetary users classified under central 
government . 
Source:  Croatian National Bank, Ministry of Finance, own 
calculation s. 
Expenditure restraint was driven by cuts in 
investment and savings in interest spending.  
The improvement in the general government 
balance in 2017 was achieved by a combination of 
growing revenues and a minor decrease in total 
expenditure in nominal te rms, in spite of public 
sector wage hikes. Most notably, public investment 
was cut by more than 12  % while savings in 
interest paid amounted to almost 10  % compared 
to 2016. Since public investment as a share of 
GDP is at a record low of 2.7  % and interest  rates 
are projected to rise, creating fiscal space through 
these categories in the coming years is unlikely to 
be possible.  
-8-6-4-2024681012
1112131415161718% of GDP
Stock-flow
adjustment
Denominator -
inflation
Denominator -
real GDP growth
Interest
Primary surplus
Total changeforecast
DomesticExternal
State 
budget 
usersSOEsEB usersHBOROther CGLocal gov 't
LT securitiesST securitiesLT loansST loans
EURHRKUSD
020406080100
15  17 15  17 15  17 15  17
By debtholder
residenceBy
government
levelBy maturity
and
instrumentBy currency%4. REFORM PRIORITIES  
4.1. PUBLIC FINANCES AND TAXATION*  
4.1. Public finances and taxation*  
 
24 Graph  4.1.3:  Drivers of change in government balance  
 
Source:  AMECO, own calculations.  
Long delayed measures aimed at strengthening 
the fiscal framework are progressing.  In 
December 2018, the Parliament adopted t he Fiscal 
Responsibility Act while  the State Audit Office 
Act was passed for the second reading in January 
2019 . The new Fiscal Responsibility Act is aimed 
mainly  at reinforcing the set -up and mandate of the 
Fiscal Policy Commission and laying down 
numerical fiscal rules, including a structural 
budget balance rule. The new State Audit Office 
Act aims to address the low implementation of its 
instructions and recomme ndations by introducing 
sanctioning mechanisms. It also increases the 
scope of the State Audit Office audits, includi ng 
the Croatian National Bank. The Budget Act — 
aimed at specifying the short and mid -term 
budgetary framework at central and local level — 
is scheduled for adoption b y the government in 
early 2019.  
Budgetary control is set to tighten at the central 
level and ease at the local level.  The planned 
rationalisation of government agencies and 
harmonization of wage setting (see section 4.4.4) 
have the potential to strengthen budgetary control 
at central government level. On the local level, the 
fiscal capacity of government units was 
strengthened by the new law on the financing of 
local government units, which streamlined the 
system of central gover nment transfers and 
introduced a new system of fiscal equalisation. The 
new system is no longer based on geographical 
criteria, but on the fiscal capacities of the local units. However, it no longer ties revenue allocation 
for decentralised functions to th e number of 
functions a unit commits to perform.  
Debt sustainability analysis and fiscal risks  
Croatia faces low fiscal sustainability risks in 
the short term in spite of the expected calls on 
government guarantees.  Based on the S0 
indicator  (10), Croatia faces low fiscal risks mainly 
due to its solid primary balance, declining debt and 
financing needs (see Annex B). The sovereign 
yield spread, although higher than in most member 
states at 150 -200 basis points, has been decreasing 
steadily. The improved per ception of Croatia’s 
sovereign credit risk was also reflected in rating 
agencies’ reports. Although the ratings remain a 
notch below investment grade, the outlook is 
deemed positive by most agencies.  
While significant, the expected materialisation 
of conti ngent liabilities in the shipbuilding 
industry should not substantially increase 
short -term risk.  (11) However, the fact that also 
the guarantees pertaining to projects still in the 
early stages were called, points to flaws in the 
monitoring of the proper u se of issued guarantees. 
As a result of these guarantee calls, the stock of 
active guarantees is expected to halve in 2019 
compared to 2017 (see Graph 4.1.4 ), thereby also 
reducing the concentration of remaining 
guarantees (12). 
                                                           
(10) An early -detection indicator  of short-term fiscal stress 
stemming from the financial -competitiveness or the fiscal 
side of the economy.  
(11) The S0 indicator takes into account  the Commission's 2018 
Autumn Forecast (European Commission, 2018j), which 
projects the materialisation of contingent liabilities to occur 
in both 2018 and 2019. The S0 indicator by design captures 
the effect in 2018, but not 2019. Nevertheless, Croatia's 
performance across indicators leaves substantial margin.  
(12) The Herfindahl –Hirschman concentration i ndex  should 
improve to around 0.14  in 2019  from 0.28 in 2017 . The 
index is calculated as the sum of the square s of shares and 
ranges from 0 to 1, where lower values mean less 
concentration.  
-1.5-1.0-0.50.00.51.01.52.02.53.03.5
14 15 16 17 18% of GDP
Revenue growth
Interest
Public
investment
Social benefits
Capital transfers
Other
expenditure
Total changeforecast
4.1. Public finances and taxation*  
 
25 Graph  4.1.4:  Active government guarantees by companies, 
2017  
 
(1) ‘Uljanik (total)’ does not include guarantees issued to the 
‘3. Maj shipyard’  
Source:  Ministry of Finance, 2017 Budget execution report.  
In the medium and long term, Croatia faces 
medium fiscal sustainability risks.  The medium -
term sustainability gap indicator S1  (13) has a value 
just above the medium risk threshold (0.2  % of 
GDP), which m eans that a small additional effort 
would be needed on top of current policies to bring 
the debt ratio down to 60  % of GDP in 2033. The 
sustainability gap indicator S2 (14) indicates low 
risks in the long term on account of the projected 
decrease in ageing -related expenditure, in 
particular pension benefits. The debt sustainability 
analysis also points to medium risk, mainly related 
to the high stock of debt and the unfavourable debt 
projections under alternative scenarios, in 
particular historical (see grap h 4.1.5 ). Therefore, 
the DSA confirms the medium risk assessment 
produced by the S1 indicator for the medium term 
and drives the overall assessment of medium risk 
in the long term.  
                                                           
(13) The medium -term indicator which shows the cumulat ive 
improvement in the structural primary balance over five 
years (starting from 2021) required  to reach a 60  % debt -
to-GDP ratio by 2033 . 
(14) The long -term fiscal s ustainability indicator which  shows 
the upfront adjustmen t of the current structural primary 
balance (kept constant thereafter ) required to stabilise the 
debt-to-GDP ratio.  Graph  4.1.5:  Public debt ratio baseline and scenarios  
 
(1) SCP scenario is based on the projections presented in 
Croatia's 2018 Convergence programme.  
(2) SGP scenario is  based on the provisions of the Stability 
and Growth Pact.  
Source:  European Commission, Debt Sustainability Monitor 
2019.  
The pension reform is set to improve pension 
adequacy while not endangering long -term 
sustainability.  While the aforementioned S2 
indicator does not take into account the 2018 
pension reform, based on a preliminary 
assessment, the reform does not involve severe 
risks to Croatia’s long -term fiscal sustainability. 
Namely, the 2018 Ageing report’s baseline 
scenario projected a steady decre ase in public 
pension expenditure by as much as 3.8  % of GDP 
in 2070 compared to 2016. Although the 
supplement granted to multi -pillar perspective 
pensioners will increase public pension spending 
compared to that baseline, the long -term 
downward trend appe ars confirmed. At the same 
time, the supplement is projected to somewhat 
improve the low pension adequacy, which should 
also improve as longer working lives result in 
higher benefits (see Section 4.3).  
Taxation  
After the tax reform that entered into force  in 
2017, the authorities will enforce further tax 
cuts effective largely as of 2019.  The cuts are 
projected to cost roughly 0.6  % of GDP in 
foregone revenue. Most notably, they entail a shift 
of several foodstuff s from the standard (25  %) to 
the reduced ( 13 %) VAT rate, a slight decrease 
(-0.7 pp)  in social insurance contributions and a 
Uljanik 
(total)
Plinacro
Port 
authority 
Zadar
0.00.20.40.60.81.01.21.41.6% of GDP
55606570758085
1617181920212223242526272829
Baseline
SGP scenario
SCP scenario
Lower interest rate scenario
Higher interest rate scenario
Lower GDP growth scenario
Higher GDP growth scenario% of GDP
4.1. Public finances and taxation*  
 
26 widening of the first personal income tax bracket 
(24 %). In 2020, the standard VAT rate should be 
reduced from 25  % to 24  %. In addition, the 
government has abandoned plan s to introduce a 
recurrent tax on immovable property, while the 
real property transfer tax will be reduced from 4  % 
to 3 %. At the same time, the maximum amount at 
which local governments can set the tax on short -
term accommodation rentals has been increas ed. 
The tax cuts should spur consumption and 
slightly increase households' disposable income.  
The decreases in VAT rates are expected to 
support consumption to the extent that they are 
passed through to consumers. In addition, being 
largely concentrated on  essential goods, the 
reductions have the potential to particularly benefit 
(in relative terms) lower income households. 
Euromod simulations (15) show that the changes to 
the personal income tax  and social insurance 
contributions should marginally increase mean 
disposable income for households in all income 
deciles. The increase in disposable income will be 
the highest in upper income quintiles, although 
still very small (see Graph 4.1.6 ). This is a result 
of the fact that lower income households in most 
cases already pay no personal income tax . As a 
result of these changes, the progressivity of the 
personal income tax  and social insurance 
contributions  (as measured by the Kakwani index) 
is projected to decline very slightly, but remain 
relatively high in comparative terms. Meanwhile, 
the positi ve effects of the changes to social 
insurance contributions  and personal income tax  
on employment may be limited , as they do not 
appear to be sufficiently targeted at making work 
pay and insofar as employment growth is 
restrained by other factors unrelated  to labour 
income taxation (e.g. skills mismatches and the 
availability of alternative sources of income). In 
this context, the proposed increase in the ceiling 
for the tax on short -term accommodation rentals 
could help reduce the large discrepancy between  
the tax burdens on different sources of income (see 
Box 4.1.1 ). After the 2014 abolition of tax 
                                                           
(15) Simulations were  done by the European Commission Joint 
Research Centre, based o n the EUROMOD  model using 
2016 EU -SILC data.  EUROMOD is the tax -benefit 
microsimulation model for the EU  which can simulate  
individuals' and households' benefit entitlements and tax 
liabilities (including social security contributions) 
according to the rul es in place in each Member State. 
Incomes reported in the EU -SILC of 2016 refer to 2015.  incentives for R&D (which were not in line with 
EU State aid rules), new input -based tax 
incentives  (16) were legislated in July 2018. They 
are expected to have a positive impact on R&D 
performance and innovation as they focus on the 
most s egments with the most pronounced deficit of 
R&D investment – SMEs and basic research (see 
section 4.4).  
Graph  4.1.6:  Distributional effects of changes to the PIT and 
contributions by income quintiles  
 
Source:  European Commission Joint Research Centre, 
calculations based on the EUROMOD model based on EU -
SILC 2016.  
Dealing with taxes in Croatia remains 
burdensome . The time it takes to comply with 
corporate, labour and consumption taxes in Croatia 
was the 9th highest among EU countries in 
2017  (World Bank,  2018a ) and has remained 
unchanged since 2014 while the average for the 
other 27 EU MS has been reduced by about 3  %. 
Nonetheless, the number of payments required per 
year decreased from 35 in 2016 to 24 in 2017. By 
further digitalizing its tax administration, Cr oatia 
could reduce both the number of payments 
required and average hours needed to comply.  
 
                                                           
(16) The maximu m tax relief: 100  % of eligible R &D costs for 
basic research, 50  % for industrial research and feasibility 
studies and 25  % for experimental development.  There are 
ceilings  per project and entity, and deduction rates can be 
increased by 20 percentage points for small enterprises and 
10 percentage points for medium sized enterprises . 
0.000.050.100.15
02468101214161820
1 2 3 4 5% grow th% of 
taxpayers 
Share of winners in quintile (lhs)
Average increase in disposable income (rhs)
4.1. Public finances and taxation*  
 
27 Box 4.1.1: Taxation of labour, capital and property income of households  
There is a substantial variation in the tax burden on Croatian households depending on the source of their 
income. With one of the highest home ownership rates in the EU  (1), Croatian households appear heavily 
skew ed towards owning and investing in immovable property at the expense of more liquid and tradable 
asset classes. This may be partly linked to historical causes and low financial literacy, but it may also owe to 
the relatively low costs of property ownership . Tax rates on income earned from immovable property are 
substantially lower than on capital or labour (see Graph 1).  
In particular, revenue from short -term accommodation rental is only subject to a lump sum per -bed tax, and 
is not added to the base for standard personal income tax or contributions. In addition to being highly 
regressive, it may provide a  disincentive to work. Such a framework further narrows the already constrained 
long-term property rental market, particularly in the coastal areas. This disproportionately affects 
lower -income households and young families, and harms worker mobility. Furt hermore, it incentivises the 
already booming private accommodation sector, crowding out investment in hotels (2), the segment with 
higher added value and lower seasonality. Similarly, the design of this tax provides a disincentive to scaling 
up (3).  
Graph  1: Tax rates on income by sources (lhs) and tourist beds per inhabitant by municipalities (rhs), 2017  
 
Effective tax rate on short -term  accommodation rental equals the sum of flat -rate tax per bed and the sojourn tax, 
divided by gross revenue.  
Source:  EUROMOD simulation 2017, Croatian Tourist Board, Ministry of Finance, Croatian Bureau of Statistics, own 
calculations.  
In addition to addressing the aforementioned drawbacks, a more balanced approach in the taxation of income 
from immovable property (co mpared to labour and capital) could also help reduce regional disparities in the 
taxation of household income  and housing prices . The tax reform passed in 2018 brought some changes, but 
retained the lump -sum approach: since 2019, local government units are  allowed to establish the per -bed tax 
on their own, albeit within broadly pre -set limits, which makes the effects of this change difficult to forecast.   
 
(1) In 2016, 89.9  % of Croatian nationals residing in the country lived in their own home, equal t o Slovakia, and second 
only to Romania (95.6  %)  
(2) In 2017, households accounted for almost two thirds  of all tourist accommodation capacity in Croatia. The share of 
tourist overnight stays in hotels is by far lower than in any of Croatia’s competitors i n the Mediterranean, and is 
decreasing.  
(3) If a taxpayer registers more than 20 beds, the lump sum per -bed tax is replaced with the standard personal income tax, 
i.e. the income adds to the tax base.  

4.1. Public finances and taxation*  
 
28 Healthcare   
The healthcare system remains a source of risk 
for public finances.  While the number of 
contributing individuals is increasing steadily, still 
only around one third of those entitled to use the 
public health system pay full premiums, which 
reflects the low employment rate. Insurance for 
non-paying individuals (some 42  % of all insured) 
is covered through state budget transfers, which , 
however, have been consistently below the levels 
required for full coverage, adding to accumulation 
of debt in the healthcare system. In September 
2018, the total debt was some 4  % higher tha n the 
year before, with roughly half classified as arrears.  
A higher health insurance premium is expected 
to improve the financial situation of the health 
care system.  Since January 2019, the health 
contribution rate has increased by 1 p ercentage 
point, increasing the reliance of the system’s 
financing on the working population. According to 
the authorities’ estimates, this should raise 
contribution revenue by 0.4  % of GDP (an increase 
of roughly 6  % of the Croatian Health Insurance 
Fund’s total revenue). No measures are currently 
planned to broaden the base of paying users. 
Similarly, no specific plans have been disclosed to 
address the current stock of arrears.   
Expenditure on health care in Croatia remains 
well below the EU average.  In 2016, total health  
expenditure in the country was 7.2  % of GDP, 
compared to 9.9  % on average in the EU. When 
considering only public expenses, the amounts 
were 5.6  % vs  7.9 % of GDP. In recent years, the 
decreasing trend in total per -capita spending on 
health was reversed, but, at EUR 1  307 in 2017, 
the level remains less than half the EU average.  
Health outcomes are generally below average in 
the EU.  At 78.2, life expectancy in Croatia is 
substantially shorter than the EU average (81). 
Healthy life expectancy at the age of 65 is 5 years, 
which is one of the lowest in the EU. Smoking and 
alcohol consumption are above the EU average, 
which is reflected in cardiovascular and cancer 
mortalities being responsible for around 75  % of 
all deaths in the country. In access to health care, 
Croatia fares better than many other Member 
States. In 2017, the proportion of reported unmet 
medical needs due to waiting ti mes, cost or 
distance was at the EU average.  However, the high proportion of unmet needs only due to distance 
(much greater than the EU average) remains a 
concern.  
The system’s structure appears misaligned with 
the needs of the population.  Expenditure on 
outpatient pharmaceuticals and other medical 
goods is well above the EU average (25  % vs 19  % 
of total health expenditure), which contradicts the 
relatively high number of patients referred to 
hospitals. By contrast, inpatient care accounts for 
25 % of tot al expenditure, 5  percentage points 
lower than the EU average, but the number of 
hospital beds per inhabitant is higher ( European 
Commission, 2018 e). Some hospitals in the 
country provide services in excess of the limits set 
by the Croatian Health Insuranc e Fund, while 
some maintain capacities greater than the needs of 
the population they serve. While the authorities 
have announced plans to increase the spending 
limits in hospitals across the board, the system is 
likely to remain prone to accumulation of ar rears 
as long as the spending limits are not brought 
closer in line with types and amounts of services 
provided in each of the hospitals.  
 
The National Hospital Development Plan was 
finally adopted in September 2018.  Building on 
a previous document for 20 15-2016, it sets 
functional integration as one of the main principles 
in facilitating modernisation and restructuring of 
hospitals, as well as in improving the quality of 
care they provide. Initiated already in 2017, the 
functional integration has progress ed slowly and is 
set to continue without a specific timeline. 
Furthermore, this reform of the hospital system 
does not take full consideration of the parallel 
initiatives in strengthening outpatient care (see 
below). The two processes do not appear to be w ell 
coordinated, posing risks of unsatisfactory 
outcomes.  
The primary care strengthening is on the 
government’s agenda.  Recent amendments to the 
Health Care Act give the counties possibility to 
buy certain types of equipment for the health 
centres on thei r territories. The intention is to give 
these centres a crucial role in the health care 
system in Croatia. Other measures include 
increasing the number of general practitioners, 
which is currently below the EU average (17  % of 
all medical doctors vs 23  % i n the EU). 
4.1. Public finances and taxation*  
 
29 Specialisation will be paid for general practitioners 
who remain in specified locations in the country 
for at least 5 years. This should contribute to 
addressing the problem of uneven distribution of 
health resources in Croatia and the resulting  
difficult geographical access.  
E-health solutions have the potential to improve 
the efficiency of the health care system in 
Croatia.  There are projects like e -prescriptions, 
which have been already operational and 
successful — 80 % of prescriptions in com munity 
pharmacies are electronic. On the other hand, 
e-referrals or electronic health records (the latter 
used by only 3  % of general practitioners) are still 
under development. Investment in equipment 
planned in the health centres is expected to 
improve t he system’s capacity for further 
development of e -health services.  
Croatia lacks a long -term care strategy that 
would cater to the needs of older people.  The 
currently low public expenditure (0.88  % of GDP 
in 2016) on long -term care is projected to rise t o 
1.22 % in 2070 ( European Commission, 2017h ), as 
a result of the rapidly aging population. The 
number of people experiencing problems in 
everyday life increases with age. In the younger 
elderly group (65 -74 years ) the share is 38.4  %, 
while in the older e lderly group (85+) this share is 
as high as 67.9  %. Taking into account all state and 
county homes for the elderly, other homes and 
foster care, there are places for only 3.68  % of 
those older than 65. In addition to long waiting 
lists, differing prices in  state, county and private 
homes, there is an uneven regional distribution of 
available places. Since 2012, the main ’assistance 
at home’ service has been steadily decreasing (17). 
As a result, the burden of care falls mainly on 
family members, both as a fi nancial cost and a 
barrier to gainful employment.  
 
                                                           
(17) In 2015 it was provided to 3  300 persons older than 65, 
compared to 15  500 beneficiaries in 2012.  
 
 
30 Corporate debt  
The consolidated debt -to-GDP ratio of the 
corporate sector has declined by more than 20 
percentage points since 2010.  Following a sharp 
contraction by 5.9 percentage points in 2017, the 
corporate debt -to-GDP ratio further decreased by 
1.1 percentage points in the first half of 2018, to 
63.2 % of GDP, still highest among peer countries. 
Since 2016, the reduction has been driven 
primarily by a significant contraction of the 
external debt of both private and public 
non-financial corporations (by 4.2 percentage 
points of GDP and 1.4 percentage points, of GDP 
respectively). With an improved sovereign risk 
premium and the credible exchange rate 
management and stabilisation policies pursued by 
the Croatian National Bank, reduced overall 
exposure to external financing h as mitigated the 
foreign exchange rate risk of the non -financial 
corporations.  
Several other factors have contributed to the 
reduction in corporate debt since 2016.  
Economic growth continued facilitating the 
reduction in corporate debt, supported by the 
pick-up in inflation, along with stock -flow 
adjustments, in the form of debt write -offs and the 
continued appreciation of the domestic currency. 
Sales of non -performing loans reduced the 
indebtedness of non-financial corporations  towards 
the domestic banking  sector. However, 
non-performing loans sales seem to have slowed in 
2018 due to both supply and demand factors.  
Lending transactions by the domestic banking 
sector to non-financial corporations  turned positive 
in 2016  and throughout 2017 and 2018. A large 
roll-up loan to Agrokor agreed during the 
settlement preparation process and the widespread 
refinancing of the external debt of non-financial 
corporations  in the domestic market supported 
recovery of debt transactions.  
Financing conditions for enterprises  continued 
improving in 2018 and are expected to remain 
favourable.  Ample liquidity provided by an 
expansionary monetary policy allowed for further 
reduction of interest rates on new loans to 
enterprises. In September 2018, interest rates on 
new loans to non-financial corporations  across 
almost all maturities, loan sizes and currency 
denominations were on average 50 basis points 
lower than at the end of 2017. However, owing to the still relatively high -risk premium for Croatia, 
interest rates for non-financ ial corporations  remain 
above those in some peer countries, despite the 
gradual reduction in country spreads for both 
long-term and short -term loans. Furthermore, 
reduction in bank margins and non -interest charges 
due to strong competition in the banking s ector led 
to a strong increase in new business loans. Overall, 
the volume of new business loans to non-financial 
corporations  grew by 12  % year -on-year in the 
12-months up to September 2018, driven primarily 
by foreign currency loans and the loans 
denomina ted in a foreign currency. A significant 
share of these loans was used to refinance older 
loans, now under more favourable terms. This 
partially explains the negative  nominal growth of 
the total non -financial corporation loan -stock of 
2.0 % in the same per iod.   
Corporate debt level is decreasing, but remains 
high with a number of vulnerabilities . Overall, 
by mid -2018 the corporate debt ratio was 6.8 
percentage points below its prudential threshold 
but 18.2 percentage points above the level 
suggested by fun damentals (18), indicating 
remaining risks. Foreign currency exposure of 
non-financial corporations  remains significant; 
around 76  % of overall corporate debt (48.2  % of 
GDP) is either contracted abroad, or denominated 
in foreign currency. However, given am ple loan 
refinancing options due to currently favourable 
financing conditions this risk should be 
manageable even for non -exporting firms with 
larger open foreign currency positions. Interest rate 
risk further subsided as average fixation periods 
for new l oans increased in 2017 and throughout 
2018. The share of new loans issued with a 
variable interest rate or with a fixation period up to 
3 months fell from 93  % in 2012 to 67  % during 
the first three quarters of 2018. However, the 
‘debt -to-gross financial a ssets’ and the 
‘debt -to-equity’ ratios of the non -financial 
corporate sector remain relatively high, 
highlighting potential solvency risks.  
                                                           
(18) Fundamentals -based benchmarks are derived from 
regressions capturing the main determinants of credit 
growth and taking into account a given initial stock of debt. 
Prudential thresholds represent the debt threshold beyond 
which the probability of a banking crisis is relatively high, 
minimising the probability of missed crisis and that of false 
alerts. Methodologies are describe in European 
Commission (2017 b) and updates to the methodology have 
been subsequently proposed in European Commission 
(2018 l). 4.2. PRIVATE SECTOR DEBT AND FINANCIAL SECTOR * 
4.2. Private sector debt and financial sector*  
 
31 Household debt  
Household debt as a percentage of GDP 
stagnated in 2018 as new borrowing picks up.  
By June 2018, the debt-to-GDP ratio of the 
household sector stood at 34.2  %, 7.7 percentage 
points below its 2010 peak value. Since 2017, the 
debt level has largely stagnated despite strong 
economic activity, due to a moderate upswing in 
credit flows. In the first 9 months of 2018, new 
credit to households increased by 3  %. Unlike in 
2017, credit standards for granting housing and 
consumer loans tightened in 2018, because of 
legislative changes to the enforcement framework. 
However, strong competition in the banking sector, 
decreasing costs of bank financing, and growth 
expectations still facilitate credit supply.  Demand 
for household loans remained strong in 2017 and 
throughout 2018 as the improving labour market 
and rising wages helped to strengthen consumer 
confidence.  
The foreign exchange and variable interest rate 
exposure of households has substantially 
changed in the last 5 years.  In September 2018, 
the share of outstanding kuna denominated loans 
stood at 51  % of total loans, double their share at 
the end of 2013. Durin g the same period, the share 
of kuna loans in new loans rose from around 40  % 
in 2013 to 73  % in 2018. The shift started 
following the Swiss franc loan conversion, when 
many clients refinanced their newly converted euro 
denominated loans with kuna denomina ted ones. 
With the overall fall in interest rates, households 
seem to be less willing to take on exchange rate 
risk. This is especially noticeable for non -house 
purchase loans. Interest rate spreads for such loans 
between loans in kuna and those denominate d in 
foreign currency were around 30 basis points 
higher in 2018 than in 2013. On the other hand, 
availability of kuna financing for banks, due to 
expansionary monetary policy, and a noticeable 
shift in the composition of deposits towards 
short -term kuna d eposits, allowed banks to 
increase the supply of kuna loans significantly. 
Households also reduced their exposure to interest 
rate risk. Average interest rate fixation periods for 
new house purchases loans are estimated to have 
increased by around 32 month s between 2013 and 
2018. Similarly, the share of new long -term 
consumer and other purpose loans with interest 
rate fixation periods of up to 1 year fell from 46  % 
to 29  %.  The household debt ratio is not particularly 
high and its risk profile is improving . In 
mid-2018, the household debt ratio was almost 20 
percentage points below the prudential 
country -specific threshold (54  % of GDP), but was 
still around 8 percentage points above the 
fundamentals -based benchmark (26  % of GDP), 
suggesting that risks are limited, although there 
remains scope for some deleveraging. Despite 
improvements, a significant share of the stock of 
loans is still exposed to exchange rate shocks or 
interest rate hikes. Following recommendations to 
credit institutions issued by the Cro atian National 
Bank in September 2017, banks have been 
extending their offer of loans at fixed rates and 
minimising the cost for consumers of refinancing 
existing loans at variable rates into loans with 
fixed rates. Interest rates have been decreasing 
since the end of 2015 and are expected to stay at 
low levels. Credit risk remains moderate given the 
relatively low level of households’ non -performing 
loans and still moderate aggregate credit growth. 
However, consumer lending, especially kuna cash 
loans, hav e been growing at a much higher rate.  
Housing market  
Despite a strong recovery in 2017, real housing 
prices remain significantly below the peak in 
2007.  Because of strong growth since 2016, real 
housing prices recovered to 2012 levels, but in 
June 2018, t hey were still more than 25  % below 
the peak in 2007. Average real house prices in 
Croatia grew by 6.6  % in 2017. However, in the 
first half of 2018 prices stagnated, despite a 
continued drop in interest rates for housing loans. 
Prices of existing dwelling s have grown 
significantly faster since 2016 than prices of newly 
built ones, 7.4  % and 2  % respectively. According 
to the price -to-rental indicator, housing prices are 
still significantly below their long -term average in 
Croatia. This can partly be explai ned by a 
combination of negative demographic trends and 
an already high rate of home ownership.  
There are significant regional disparities in 
housing price developments.  In the 18 months up 
to June 2018, housing prices in Zagreb grew by 
11.8 %, followed b y prices along the Adriatic 
coast, which grew 5.9  %. The rest of the country 
recorded an average 1.1  % decline in housing 
prices. The number of recorded housing purchase 
transactions also confirms large regional 
4.2. Private sector debt and financial sector*  
 
32 disparities, as more than 76  % of transactio ns 
occurred within only five counties and the city of 
Zagreb (Tkalec and al. , 2018 ). Furthermore, the 
analysis of housing affordability suggests higher 
housing prices relative to income in the coastal 
areas and the city of Zagreb. This is in line with 
expe ctations given the large share of housing used 
for renting to tourists along the coast (see Box 
4.1).  
Access to finance  
Access to bank loans is improving, also for 
small and medium -sized  enterprises.  Bank 
lending traditionally represents the most important 
source of external financing for enterprises in 
Croatia. However, it remains subdued, especially 
for small and medium -sized enterprises , despite 
improvements in lending conditions. According to 
the ba nk lending survey, credit standards on loans 
to enterprises have continued to ease throughout 
2018, especially for short -term loans and loans to 
small and medium -sized enterprises . According to 
the latest findings from the Survey on the Access 
to Finance o f Enterprises, access to finance 
remained a challenge for enterprises in Croatia in 
2018.  Around 11  % of small and medium -sized 
enterprises  in Croatia reported access to finance as 
their most important problem, compared to the EU 
average of 7  %. Around 67  % of the companies 
that applied for a bank loan were granted a loan of 
a full requested amount, compared with the EU 
average of 73  %. Furthermore, 7  % of all surveyed 
small and medium -sized enterprises  did not apply 
for a bank loan due to fear of rejection , compared 
to the EU average of 5  %. The Croatian Bank for 
Reconstruction and Development and the Croatian 
Agency for small and medium -sized enterprises , 
Innovations and Investments help improve access 
to finance by providing c redit lines with subsidised 
interest and specific loans for innovation and 
innovation  commercialisation .  
Croatian bond markets remain underdeveloped 
and the stock market has been characterised by 
relatively low turnover.  The corporate bond 
market remains very small, limited to a few large 
issuers. At the end of 201 8, there were seven  
active corporate issuers, including financial 
institutions, which had bond listing on the  on the 
Zagreb Stock Exchange, with an average market 
capitalization of about 1 % of GDP. The 
outstanding governmen t bonds, in turn, had a market capitalization of around 25 % of GDP. The 
average market capitalization of the local stock 
exchange represents a healthy share of 35 % of 
GDP in 201 8, despite Agrokor related losses. 
However, average turnover was low, around 
0.75 % and investors held only one third of the 
listed shares as portfolio investments.  
Graph  4.2.1:  Trading volumes at Zagreb Stock Exchange  
 
Source:  Zagreb Stock Exchange, own calculations.  
Other sources of financing for companies are 
being developed.  In 2018, the Zagreb Stock 
Exchange launched a new market, with less 
restrictive listing and reporting requirements, for 
small and medium sized enterprises. This market 
enables small and medium -sized enterprises  to 
make initial public offerings i n order to finance 
inclusive, long -term growth and development. 
With the establishment of the equity crowdfunding 
platform for small firms and start -ups, the Zagreb 
Stock Exchange has become a company -financing  
hub providing its services to companies at al l 
stages of development.   
Several new initiatives should help increase the 
availability of venture capital financing.  Over 
the past few years, there has been little progress in 
developing new venture capital funds in Croatia. 
This could be explained in par t by the small size of 
the Croatian market, as well as the financial crisis. 
However, raising funds on the  capital markets is 
particularly relevant for innovative start -ups with 
high growth potential. The recently established 
Venture Capital Fund suppor ted by EUR 35 
million from the European Regional Development 
05101520253035
0809101112131415161718
Total value of transactionsbillion HRK
012345678
0809101112131415161718
Total volumebillion 
020406080100120140160
0809101112131415161718
Market capitalisation
(shares)billion HRK
0123
0809101112131415161718
Average daily number of
transactions (shares)thousand transactions
4.2. Private sector debt and financial sector*  
 
33 Fund, should help improve access to the equity 
funding for start -ups (19). However,  the selection 
of the fund manager was delayed. The recently 
adopted pension reform allows mandatory pension 
funds (Pillar II) to invest part of their managed 
assets into funds supporting small and medium 
enterprises and start -ups. Exposure to such 
investments is limited to 0.2  % and 0.1  % of the 
total assets of A and B -risk category funds 
respectively. This should f ree up around 100 
million kuna for investment in venture capital. 
Moreover, EU funding from COSME has recently 
supported two private equity fund initiatives that 
are currently raising funds focusing on small and 
medium enterprises in Croatia and the region . 
Financial sector  
Croatian banks' profitability and solvency have 
continued to improve since 2015.  With a return 
on equity of 5.9  % at end -2017, banks' profitability 
was lower than in end -2016, largely because of 
losses on exposures to the Agrokor Group (see 
Table  4.2.1 ). Profitability increased again in the 
first half of 2018, as provisioning levels are 
returning to levels comparable to those of 2016. 
While healthy profits and local rules continue to 
help banks maintain relatively high solvency 
ratios, the ending of the preferential 0  % risk 
weighting for the non -kuna exposures to the 
Republic of Croatia at end -2017 led to a one -off 
reduction in capital ratios in early 2018. The share 
of direct bank financing from mother banks, 
predominantly in Italy and  Austria, is low and 
                                                           
(19) Croatia is in 20th position in the EU (C yprus , Malta not 
included) for Venture Capital as  a % of GDP  (Invest 
Europe, 2018) . decreasing while domestic sources of financing, 
mostly deposits, increase. Lending to the private 
sector, excluding financial corporations, grew in 
the 12 months up to September 2018 on a 
year-on-year basis, reversing its downward tren d 
since 2017. In particular, the overall annual credit 
growth rate was driven by renewed growth in new 
loans to non-financial corporations ; especially 
non-kuna loans (see Graph  4.2.2 ). 
Graph  4.2.2:  Growth of new business loans (in annual 
volumes)  
 
New business loans only cover all contracts that specify for 
the first time the interest rate of the loan, including 
renegotiations of the terms and conditions of existing loan 
contracts. The data includes all loans other revolving loans, 
overdrafts, and credit card claims.  
Source:  Croatian National Bank.  
Progress in reducing non -performing loans has 
been significant.  In September 2018, the stock of 
-15-10-5051015
14Q1 15Q1 16Q1 17Q1 18Q1
HH NFC HH+NFC% y-o-y 
Table  4.2.1:  Financial soundness indicators, all domestic and foreign banks  
 
(1) Defined as accumulated impairments / NPLs.  
(2) For comparability reasons, annualized values are presented.  
Source:  ECB - CBD2 - Consolidated Banking data; own calculations.  
 
2014 2015 2016 2017q1 2017q2 2017q3 2017q4 2018q1
NPL ratio (all sectors) 13.6 13.0 10.7 12.1 11.7 10.8 8.8 8.9
NPL ratio (NFC and households sectors) 20.0 19.1 16.0 17.3 16.5 15.8 13.6 13.6
NPL ratio (NFC sector) 31.2 29.9 24.2 26.7 26.3 25.0 21.2 21.1
NPL ratio (household sector) 12.0 11.8 9.7 9.9 8.8 8.4 7.7 8.0
Coverage ratio(1)54.3 59.1 65.8 62.7 60.5 61.3 62.6 61.2
Return on equity(2)3.9 -6.8 8.9 3.5 4.3 6.1 5.9 11.0
Return on assets(2)0.5 -0.9 1.2 0.5 0.6 0.8 0.8 1.5
Total capital ratio 20.4 19.2 20.8 21.0 20.9 20.2 21.4 20.7
CET 1 ratio 19.4 17.7 19.4 19.7 19.6 19.1 20.2 19.6
Tier 1 ratio 19.4 17.7 19.4 19.7 19.6 19.1 20.2 19.6
Loan to deposit ratio 92.0 89.2 85.3 85.2 85.0 84.8 82.1 82.4
4.2. Private sector debt and financial sector*  
 
34 locally defined non-performing loans (20) stood at 
HRK 26.1 billion, representing 10.3  % of gross 
loans, down from HRK 32.5 billion, or 12.5  % of 
gross loans, a year ago (see Graph  4.2.3 ). Most of 
this reduction has been thanks to loan sales in 
2017, and despite the inflow of non-performing 
loans from Agrokor and related exposures (see 
Graph  4.2.4 ). Two -thirds of this stock continues t o 
be concentrated in the non -financial corporate 
sector, resulting in a non-performing loan ratio of 
20.5 %, down from 25.9  % a year ago. Among the 
various corporate sectors, the construction sector 
continues to account for a significant proportion of 
the non-performing loans stock, with a 
non-performing loan ratio of 47.6  %, down from 
63 % a year ago. The non-performing loan  ratio for 
the household sector is 7.3  %, down from 8.1  % in 
2017.  
Graph  4.2.3:  Asset quality evolution  
 
NFC: non -financial corporations. Local NPL definition is used.  
Source:  Croatian National Bank.  
Despite these improvements, there are signs 
that non -performing loans reduction may be 
slowing down.  Non-performing loan reduction  
slowed down in early 2018, due to two key factor s. 
First, there are early indications of reduction in the 
                                                           
(20) Up to 2017 the non -performing loans definition was based 
on the local loan classification rules . Non -performing loans 
cover partly recoverable loans (i.e. loans for which there 
exists objective evidence of partial impairment) and fully 
irrecoverable loans (i.e. loans for which there exists 
objective evidence of full impairment) in line with IAS39. 
In 2018 IFRS9 was introduced and local rules were fully 
aligned with EBA reporting requirements for non -
performing loans (ITS 680/2014)..  volume of non-performing loan sales, (see Graph ). 
This is partly due to the reduced willingness of 
banks to sell and the investors to buy the 
remaining assets on the banks’ balance sheets, 
which inc lude assets that are easier to work out 
and thus with a lower internal rate of return. More 
importantly, a number of measures that entered 
into force on 1 January 2018 have lowered the 
provisioning coverage ratio and resulted in the 
recognition of new non-performing loans . While 
the later factor is clearly a one -off, slowing sales, 
if sustained, raises concerns that the 
non-performing loan ratio may remain moderately 
high for an extended period.  
Graph  4.2.4:  Evolution of NPL flows  
 
Local NPL definition i s used.  
* June 2018.  
Source:  Croatian National Bank.  
The impact of the Agrokor crisis on the 
banking system appears to be contained for the 
moment.  In particular, most of the non -performing 
loans arising from Agrokor’s difficulties in paying 
its creditors  and suppliers have been incorporated 
in 2017 results. A settlement was agreed in July 
2018 by the firm’s largest creditors, representing 
nearly 80  % of the outstanding debt. On 26 
October 2018, the Croatian High Commercial 
Court dismissed all of the appea ls lodged by 
several of the remaining debtholders, effectively 
removing the final obstacle to implementation of 
the deal. The settlement involves a debt -to-equity 
swap applicable to most of the firm’s outstanding 
debt, and corresponding write -offs to ensur e that 
the firm remains solvent. This has not resulted in a 
significant rise in non -performing loans, since 
020406080
09 10 11 12 13 14 15 16 17 18% of loans
Coverage ratio NPLs: Households
NPLs: NFCs NPLs: All
-12,000-8,000-4,00004,0008,00012,000
10 11 12 13 14 15 16 17 18*HRK mln.
NPL sales
Other NPL flows
Change in NPLs from prior period
4.2. Private sector debt and financial sector*  
 
35 most banks had already provisioned for such 
losses. However, the refinancing of Agrokor’s 
remaining debt, which was issued after the Law on 
Emergenc y Administration in Companies of 
Systemic Importance for the Republic of Croatia in 
April 2017, nevertheless remains a concern.    
The interest rate exposure of households 
remains high, but continues to subside as 
fixed -rate loans become increasingly common.  
The share of loans with fixed rates is increasing. 
At end -2017, 39  % of outstanding loans granted to 
households were loans with fixed interest rates, up 
from 25  % 3 years ago. This is in line with 
recommendations published by the Croatian 
National Bank in October 2017 to mitigate the 
exposures of consumers to interest rate risk by 
offering them the possibility to switch to fixed -rate 
loans. The wider use of fixed -rate loans, however, 
has shifted the interest rate risk to banks. Some 
banks are hedgin g against potential losses from 
higher interest rates. However, interest rate 
hedging derivatives in kuna remain scarce and 
costly.  
Banks are exposed to indirect credit risk, 
stemming from the significant currency 
mismatches in the private sector balance s heets. 
While the earnings of most households are in kuna, 
in June 2018 nearly half (49  %) of their 
outstanding loans was either in a foreign currency 
or indexed to a foreign currency, mostly euro. 
Households do have significant foreign currency 
deposits, r epresenting two -thirds of the total, 
which, if matched, could lower risks. However, 
foreign currency deposits have been declining; 
down from 75  % at end -2014, sight kuna deposits 
have become increasingly popular as a result of 
lower interest rates on term and savings accounts. 
In turn, the open financial positions of 
non-financial corporations are quite large, with 
non-kuna loans and deposits amounting to 67  % 
and 36  %, respectively.  
The Croatian Bank for Reconstruction and 
Development is taking a number of  measures to 
implement recommendations from the 2017 
Asset Quality Review  
(PricewaterhouseCoopers, 2017)  exercise, but 
there are no immediate plans to address 
deficiencies in its supervisory framework.  The 
management of the Croatian Bank for 
Reconstruction  and Development  is currently implementing some of the issues identified as 
operational inefficiencies during last year’s ‘asset 
quality review ’ exercise. Along these lines, the 
Croatian Bank for Reconstruction and 
Development  has taken a number of measures to 
improve its core IT system, implement 
International Financial Reporting Standard 9 and 
the European Banking Authority guidelines on 
non-performing loans, and introduce a new credit 
risk management procedures, including collateral 
valuation. The  ongoing project, which was kicked 
off in early October 2018, also aims to help 
produce a mid -term strategy and ensure that the 
institution has tools to identify market gaps and 
prevent any competition with commercial 
institutions. Despite these developmen ts, 
authorities have not yet engaged in any concrete 
plan to subject the Croatian Bank for 
Reconstruction and Development  to prudential 
supervision.  
The conversion of CHF -loans remains subject 
to legal challenges . Following Croatia's Supreme 
Court ruling i n October 2017, the High 
Commercial Court upheld in July 2018 the ruling 
on the legal nullity of: (i) unilateral interest rate 
increases, and (ii) the foreign currency clause in 
the case of the Swiss franc -indexed loans. 
Questions arise as to how lower -instance courts 
will interpret the ruling. For example, it is not clear 
whether it applies only to non -converted Swiss 
franc -indexed loans or more broadly. Moreover, it 
is not clear whether the decision covers only the 
outstanding or also the paid out loans. These 
sources of uncertainty may affect the operating 
environment for banks.  
 
 
36 4.3.1.  LABOUR MARKET DEVELO PMENTS  
The labour market has further improved with a 
rapid fall of the unemployment rate.  On the 
back of solid GDP growth, the unemployment rate 
in Croatia fell further over the past year – to 7.8 % 
in Q4 2018 – almost reaching its pre -crisis level. In 
2018, long -term unemployment dropped compared 
to the previous year, reaching 3.3  % in Q3 2018 . 
The youth unemployment rate and the share of 
young people (aged 15 -24 years) not in 
employment, education or training also decreased 
considerably, but remain high (at 2 2.7 % in Q4 
2018  and 15.4  % in 2017, respectively). Overall, 
despite the recent positive developments, Croatia 
still displays high unemployment rates relative to 
the EU average, especially for young people.  
Graph 4.3.1:  Activity rate by age and educational 
attainment level, 2017  
  
Low reliability of data for low -skilled between the ages 20 -29 
in Croatia.  
Source:  Eurostat.  
Activity and employment rates in Croatia 
remain low, especially for certain groups.  In 
2017, the overall activity and employment rates 
(for people aged 20 -64 years) were at 71.2  % and 
63.6 % (64.9  % in Q3 2018) , respectively, well 
below the corresponding EU averages of 78.0  % 
and 72.1  % (73.2  % in Q3 2018) . Labour market 
participation is  low among both men and women, 
with a gender activity gap of 10.6 p ercentage 
points in 2017, which is still below the EU average 
(12.1  percentage points). High -skilled workers are 
more active in the labour market than on average 
in the EU. By contrast, at 43.4 % in 2017, the activity rate of low -skilled workers is one of the 
lowest in the EU and has even declined over the 
period 2014 -2017. Low -skilled workers have 
significantly lower participation rates than medium 
and high -skilled workers across all age gr oups. 
Among medium skilled workers, those aged over 
40 years display much lower activity rates 
compared to the EU average. Since the medium 
skilled represent a much larger share of the 
working -age population than on average in the EU, 
this largely drives t he overall lower activity rate in 
Croatia, as well as the much lower activity rate of 
older workers (55 -64), which remains at 43.6  % 
(compared to an EU average of 60.6  %), despite 
some improvement in recent years. There are also 
marked differences in emplo yment rates of the 
low-skilled as compared to medium - and high -
skilled, and this gap keeps increasing  (21) (see 
Graph 4.3.3 ).  
Graph  4.3.2:  Reasons for inactivity by age and sex, 2016  
  
Source:  LFS, own calculations.  
Early labour market exits and care 
responsibilities play an important role for 
inactivity.  According to Labour Force Survey data 
on self -declared reasons for not seeking work, the 
main reason for low activity of older inactive 
people (55 -64 years) in 2016 was early retirement 
(see Graph 4.3.2 ). For older women, personal, 
family or care responsibilities also played a role 
(22 %). Disabilit y or illness is a frequent reason 
across all age groups for both sexes, while 
                                                           
(21) The employment rate of low -skilled was at 34.7 % in 2017 
significantly lower than the employment rates of medium - 
(64.1 %) and in particular high -skilled persons (81.5 %).  
0102030405060708090100
20-24 25-29 30-34 35-39 40-44 45-49 50-54 50-54 60-64
EU28 Low EU28 Medium EU28 High
HR Low* HR Medium HR High%
020406080100
M.W. M.W. M.W. M.W.
25-34 35-44 45-54 55-64
Other Disability or illness
Perso., fam. or care resp. Education
Retirement Discouraged%4.3. LABOUR MARKET, EDUCA TION AND SOC IAL POLICIES*  
4.3. Labour market, education and social policies*  
 
37 personal, family or care responsibilities are the 
main reason for inactivity of women in the age 
group 25 -54. At 35  %, the employment rate of 
people with disabilities is well bel ow EU average 
(48.1  %).  
Graph  4.3.3:  Relative dispersion of employment rates of 
different skills groups in EU  
  
(1) Annual indicator based on the average of four quarters.  
(2) The relative dispersion of employment rates is equal to 
the ratio of the abs olute dispersion and the overall 
employment rate. The absolute dispersion of employment 
rates is measured as the sum of the differences of 
employment rates for each skill group from the overall 
employment rate, weighted by the size of each group.  
Source:  Eurostat, own calculations.  
Undeclared work absorbs part of the labour 
input.  Estimates of the size of the shadow 
economy in Croatia vary across studies (22). A 
substantial share of the shadow economy is related 
to a rather large incidence of undeclared wor k, 
which refers to wages that workers and businesses 
do not declare to avoid taxes and social 
contributions or labour market regulation. 
Undeclared work not only negatively affects 
government revenues (in terms of uncollected 
taxes and social contributions ) and businesses by 
affecting the level playing field, but also 
individuals through breaches of workers’ rights (23) 
                                                           
(22) According to Stefanov et al. (2017),  the shadow economy 
accounted to 27.7  % of GDP in 2015, the third highest 
share in the EU. Medina and Schneider  (2018) estimate  the 
shadow economy to account for between 17.2  % and 
26.5 % of GDP in 2017, the second highest share among 
EU members.  
(23) 61 % of  employees receiving envelope wages in 2015 were 
asked to accept additional work conditions to those stated 
in the written contract  or terms of employment , such as 
longer working hours (34 %), additional tasks (27 %) and (Williams and Horodni ć, 2017). It ranges from 
work with partly undeclared pay (envelope wages 
(24)) to fully undeclared employment. Despite 
efforts by the authorities to address the issue  (25), 
in the private sector undeclared work accounted 
for 14.2 % of total labour input in 2013, of which 
66 % referred to employees and 34  % to the self –
employed (Williams and Horodni ć, 2017).  
Graph  4.3.4:  Share of employers reporting labour shortages 
as the main factor limiting their activity by 
sector  
 
Source:  European Business and Consumer Survey, European 
Commission.  
Employers increasingly report labour 
shortages, despite the still relatively high 
unemployment rate.  The share of employers 
reporting labour shortages as a major factor 
constraining their production has increased 
substantially (European Business and Consumer 
Survey). In 2017, this share was 16.9  %, compared 
to only 1.9  % in 2013, but it  is broadly in line with 
the EU average of 16.8  % (in 2017) (26). Over the 
same period, the number of vacancies recorded by 
                                                                                   
underutilisation of statutory entitlement to annual leave 
(19 %). 
(24) In Croatia, in 2015 at least 6.6 % of declared employees 
receive d an additional undeclared  ('envelope ') wage from 
their formal employer. The officially declared wage of 
nearly half of these workers was the minimum wage 
(Stefanov et al. 2017 ). 
(25) Targeted incentives to register employees, seasonal work 
vouchers, awareness -raising campaigns on t he harmful 
effects of undeclared work on the economy and 
simplification of registration procedure s (European 
Commission, 2016e; Williams et al. 2017b) . 
(26) Average of three sectors (industry, construction and 
services sector), weighted by their share in em ployment.  
0.000.050.100.150.200.250.30
PT
NL
DK
EE
AT
DE
LV
CZ
SI
FI
SE
CY
LU
EL
MT
ES
RO
PL
HU
LT
FR
SK
IE
IT
BG
HR
BE
2017 2010 2014
01020304050
13 14 15 16 17 18
Industry Construction Services% of employers
4.3. Labour market, education and social policies*  
 
38 the Croatian Employment Service also increased 
substantially, from 143  000 to more than 250  000. 
As illustrated by Graph 4.3.4 , labour shortages are 
most pro nounced in the construction sector and in 
industry. Within services, evidence points at 
shortages in tourism and IT.  
Graph  4.3.5:  Evolution (% change) of the population by 
municipalities, 2012 -2017  
 
The population estimates are based on administrative data.  
Source:  Croatian Bureau of Statistics, own calculations  
Various factors contribute to the increase of 
labour shortages.  The increased labour demand 
induced by the pickup in economic activity is not 
matched by labour force growth, also due to 
combine d effects of ageing and emigration. Skills 
gaps also appear to be an important driver of the 
shortages. Finally, low job quality may also play a 
role in discouraging labour supply. Indeed, Croatia 
has the highest share of employees in the EU with 
a contrac t not exceeding a duration of three months 
(7.1 % vs EU28: 2.3  % in 2017), likely reflecting 
also the relevance of the (very seasonal) tourism 
sector in the economy. The emerging labour 
shortages are expected to contribute to upward 
pressure on wages (see Chapter 1). Addressing 
these challenges calls for prioritising investment 
aimed at improving access to employment for all 
jobseekers and to anticipate skills needs.  
Increasing emigration flows contribute to the 
challenges in the labour market.  The negativ e 
net migration flows over the last decade ( see 
Graph 4.3.6 ) have become more pronounced after 
Croatia 's accession to the EU in 2013, as it 
happened for other Central and Eastern European 
Countries  in the early 2000s. This phenomenon appears to affect the country unevenly (see Graph 
4.3.5). Between 2012 and 2017, most counties 
recorded negative population change, presumably 
also as a result of emigration. Some parts of inland 
Croatia and the eastern counties lost 25  % or more 
of their resident population. By contrast, some 
municipalities from the coastal counties and the 
city of Zagreb recorded an increase in their 
population. Labour Force Survey data  show that in 
2017 Croatians living abroad had a higher 
employment rate than Croatian residents (79.8  % 
and 63.6 %, respectively); they also had a lower 
share of tertiary educational attainment (17.4 % 
and 22.4 % respectively), which is not a common 
feature among migrants from other Member States. 
A combination of factors influences mobility 
flows, including differences in per capita income 
levels, quality of institutions, and employment 
prospects (Atoyan and al. 2016).  In addition, 
Croatia has one of the highest shares of its working 
age population (20 -64) living in another EU 
Member State (14 % vs 3.8  % average of EU 
Member States, in 2017), which may also play as a 
pull factor. The migration outflows clearly 
contribute to, and are set to aggravate if they 
continue, the emerging labour shortages discussed 
in the paragraphs above. While there is awareness 
at political level of the challenges posed by the 
current migration trends and demographic 
developments, a coo rdinated policy response is 
still missing, with current measures mostly focused 
towards improving the situation of young families 
and their children.  
Concerns remain on the efficiency of active 
labour market policy measures in reaching 
vulnerable groups.  In 2016, the coverage of 
active labour market policies remained low, at just 
7 % of persons wanting to work . Similarly, the 
coverage of unemployed youth remains very low 
and worsened in 2017, when the share of people 
not in employment, education or training  (aged 
under 25 years) supported by the Croatian Youth 
Guarantee scheme declined to 45  %, 9 p ercentage 
points less than the previous year. The 2018 
package of active labour market policies 
introduced a number of improvements, including 
increased subsidies for employment and self -
employment and simplifications in procurement 
procedures for the provision of education and 
training. Access to " occupational  training for work 
without commencing employment", originally 
designed for young people aged 18 -29 years, h as 

4.3. Labour market, education and social policies*  
 
39 been extended to people aged 30+ without work 
experience  targeting occupations in social care, 
education, health and culture . Overall, however, 
some of the most used measures (such as public 
works), as well as the underutilised 
reskilling/upskilling mea sures, have not yet proven 
to significantly increase the employability of their 
participants, which may indicate lack of efficient 
targeting (27) (Munta , 2018). The capacity of the 
Croatian Employment Service to provide adequate 
assistance to vulnerable gro ups remains limited 
(28). There is no structured cooperation between 
employment and social services in the provision of 
integrated support. Further support to active labour 
market policy measures and investments in 
modernising labour market institutions hav e a 
potential to improve access to em ployment for 
vulnerable groups.  
While showing signs of improvement, the 
impact of social dialogue on policy preparation 
and implementation exhibits weaknesses.  Social  
dialogue within the framework of the National 
Econom ic and Social Council is an established and 
gradually developing practice. However, it appears 
of mostly formalistic nature, with low impact of 
social partners on design and implementation of 
legislative proposals (Eurofound, 2018). Not all 
relevant regula tions and policies are included in 
the work plan of this Council and social partners 
are sometimes excluded from working groups on 
topics of interest (e.g. legislation on student 
employment). The fragmentation of trade unions 
also poses a challenge and lim its their capacity to 
engage efficiently in social dialogue.  
 
                                                           
(27) For example, in 2017 public works, which are primarily 
intended for the low -skilled and the long term unemployed, 
saw increased participation  by medium skilled unemployed 
persons and by people with shorter unemployment spells.  
(28) Croatia has one of the highest rates of registration and 
utilization of job searching services offered by the Public 
Employment Service (PES). Still, the percentage of total 
PES staff directly servicing clients is low (at 64  %). Next 
to that, there are large regio nal disparities in the capacity of 
local PES offices  and quality of services offered by them .  Graph  4.3.6:  Population migration  
 
The migrations are registered at local level. Emigrants 
include persons who left permanently the country or who 
were absent for more than one year from their permanent 
residence and who reported their absence. However, 
based on data collected in the main recipient countries, it 
appears that the figures provided by the CBS probably 
underrepresent the actual migration numbers, even taking 
into account the d ifferences between nationality and 
country of previous residence.  
Source:  Croatian Bureau of Statistics, own calculations.  
4.3.2.  SOCIAL PROTECTION SY STEM  
The proportion of the population at -risk-of 
poverty or social exclusion is declining, but 
remains ab ove the EU average.  In 2017, it stood 
at 26.4  %, compared to 22.5  % in the EU, 
following improvements in the two sub -indicators 
on severe material deprivation and people working 
in low work intensity households ( see Graph 
4.3.7 ). The poverty gap (29) and the persistent at -
risk-of poverty rate (30) remain steadily high (in 
2016, at 30.7  % and 14.5  %, respectively). The 
capacity of social transfers (other than pensions) to 
reduce poverty decreased from 35.5  % in 2015 to 
24.8 % in 2017. As labour market conditions 
improved, household incomes and their relative 
poverty threshold increased, whereas social 
benefits remained largely unchanged over the 
period. Government spending on social protection 
amounted to 15.3  % of GDP in 2015 (EU average:  
                                                           
(29) The poverty gap measures ' how poor ' the poor actually are . 
It is calculated as the difference between the median 
equalized disposable income of people below the at -risk-
of-poverty threshold and the  at-risk-of-poverty threshold.  
(30) Share of people who are currently poor and were poor also 
two out of the three previous years.  
-50000-40000-30000-20000-1000001000020000
08 09 10 11 12 13 14 15 16 17
Immigrants Emigrants Net migration
4.3. Labour market, education and social policies*  
 
40 19.1 %). The largest fraction is spent on 
contributory social insurance benefits (disability 
pensions, sickness benefits and old age pensions), 
whereas less than 10  % of total social protection 
expenditure is available for non -contributory 
programs (families and children, housing and 
social exclusion). Investments to  foster active 
inclusion could play an important role in 
promoting equal opportunities and addressing 
material deprivation.  
Labour market outcomes are important 
determinants of poverty in Croatia.  In-work 
poverty stood at 5.5  % in 2016 and is below the 
EU average (9.6  %) indicating a strong negative 
correlation between the presence of some work in 
the household and its exposure to the risk of 
poverty. In 2016 the at -risk-of-poverty rate for 
households with low work intensity was 30  % in 
Croatia (EU average of 40.1  %), and much higher 
for households with very low work intensity 
(63.4  % in Croatia vs 57  % EU average) (31). The 
labour market therefore continues to be an 
important channel for escaping poverty: more than 
70 % of poor people who get a job also esca pe 
from poverty, and this is the highest transition rate 
in the EU (based on 2011 -2013 data, ESDE, 2016). 
The Croatian unemployment benefit (calculated 
for people previously earning 67  % of the average 
wage) does not appear to provide adequate 
protection f rom poverty, given its short duration 
and its reduction by more than 50  % after 6 months 
of unemployment.  
Age, gender and disability are factors that have 
an impact on poverty levels.  The poverty rate is 
higher in households where a woman is the only 
earne r of labour market income. The at -risk-of 
poverty or social exclusion rate for persons above 
65 in Croatia is much higher compared to the EU 
average (32.8  % vs 18.2  %, respectively), 
especially for women, pointing to the adequacy 
challenge of current and f uture pensions. Persons 
with disabilities face one of the highest at -risk-of 
poverty or social exclusion rates in the EU 
(38.8  %), probably reflecting their very low 
                                                           
(31) Very low work intensity is defined as working less than 
20 % of the total work pot ential of a household during the 
past year. Low work intensity 20 -45 %; medium 45 -55 %; 
high 55 -85 % and very high 85 -100 %. employment rate compared with the EU average 
(35 % in Croatia vs. 48.1  % in the EU). Measu res 
aimed at including persons with disabilities in the 
labour market or education should be stepped up . 
Graph  4.3.7:  At-risk-of-poverty or social exclusion rate and 
its components (AROP, SMD, LWI)  
 
Detailed definitions of the indicator and its components are 
available in annex C.  
Source:  Eurostat.  
The poverty reduction capacity of the 
Guaranteed Minimum Benefit remains weak . 
The income of a Guaranteed Minimum Benefit 
beneficiary, expressed as a share of the poverty 
threshold, was at 55  % in 201 6 (32). The benefit 
does not appear to pose financial disincentives to 
work, as the income of a beneficiary was 41  % of 
an average low wage earner (vs 46.1  % EU 
average). The beneficiaries, on average, have low 
levels of educational attainment and modest 
employment experience. Based on 2015 data, only 
one quarter of Guaranteed Minimum Benefit  
recipients found a job within one year, reflecting 
the need for more targeted support to facilitate 
labour market inclusion and better coordination 
between social ser vices providers and the Croatian 
Employment Service. The likelihood of 
transitioning into employment is almost double for 
recipients who have 3 -year vocational education 
(Matkovi ć and Caha, 2017).  
                                                           
(32) According to the Benchmarking Framework on Minimum 
Incomes conducted within the SPC Committee. For details, 
see European Commis sion, 2018g.  
05101520253035
10 11 12 13 14 15 16 17
At-risk-of-poverty-or-social-exclusion rate
At-risk-of-poverty rate
Severe material deprivation
People living in low work intensity households%
4.3. Labour market, education and social policies*  
 
41 Box 4.3.1: Monitoring performance in light of the European Pillar of Social Rights  
The European Pillar of Social Rights is designed as a compass for a renewed proce ss of upward convergence 
towards better working and living conditions in the European Union  (1) . It sets out twenty essential principles 
and rights in the areas of equal opportunities and access to the labour market; fair working conditions; and 
social pr otection and inclusion.  
 
Croatia faces several  challenges  with regards 
to a number of indicators of  the Social 
Scoreboard supporting the European Pillar of 
Social Rights. Despite improvements in the 
labour market as reflected by a decreasing (long -
term) unemployment rate, challenges related to 
equal opportunities, access to the labour market 
and social protection and inclusion remain. The 
employment rate is still critically low, in 
particular for youth, older workers, low skilled 
and people with disabilit ies. This reflects the 
widespread use of early retirement and challenges 
regarding the efficiency of active labour market 
policies. Although the share of early school 
leavers in Croatia is well below the EU average, 
challenges remain with regard to the qua lity of 
education, both for young people and adults. 
While improving, the share of people at -risk-of 
poverty or social exclusion is still above the EU 
average, partly related to the limited poverty 
reduction capacity of social benefits.   
 
Although improvin g, the rate of young people 
(15-24) not in employment, education or 
training (NEET) remains very high.  The share 
of NEETs increased between 2014 and 2017, 
further distancing this population from the labour 
market. The majority of NEETs in Croatia have 
secondary education, in particular from vocational 
schools. There is no national tracking system for 
VET graduates which could help analyse the 
performance of new graduates in the labour 
market, identify skills needed and ultimately help 
improving the quality and labour market 
relevance of VET programmes. The introduction 
of such system, together with the already established Career Guidance Centres (CISOK centres) and the local 
level youth organizations would allow designing prevention activities and targeting specific interventions.  
 
The implementation of the curricular reform takes first steps with the pilot initiative School for Life in 
the year 2018/2019.  The experimental implementation of the curricular reform was launched in March 2018 
with the selection o f 74 pilot schools (around 6 % of all schools in Croatia). During the pilot period, Croatia 
will invest around EUR 25 million in school equipment upgrades, part of which comes from EU funds, and 
the reform rollout will include new textbooks to be delivered  in both paper and digital format. The new 
curricula, developed through a comprehensive drafting and assessment process, adopt the 'learning outcomes 
approach', which shifts the classroom focus to the pupils’ experience.   
 
(1) The European Pillar of Social Rights was proclaimed  on 17 November 2017 by the European Parliament, the Council 
and the European Commission : https://ec.europa.eu/commission/priorities/deeper -and-fairer -economic -and-monetary -
union/european -pillar -social -rights/european -pillar -social -rights -20-principles_en   
  

4.3. Labour market, educ ation and social policies*  
 
42 The authorities have taken steps to categorise 
social benefits provided at the local level.  Social 
protection expenditure of sub -central gov ernment 
units, at local and county level, accounted for less 
than 0.9 % of GDP in 2017. However, there are 
large differences in per capita social spending 
across counties, reflecting different fiscal 
capacities of the local government units. Around 
60 % of  total expenditure was allocated to finance 
pre-school education, whereas less than 20  % was 
spent on cash or means -tested benefits. The 
authorities are aligning the classification of data on 
social benefits at the local level with the 
nomenclature of the European System of 
integrated Social Protection Statistics. This would 
result in an improved information flow and more 
efficient monitoring of the benefits administered at 
the local and the central level, in turn allowing a 
more efficient distribution of f unds and better 
targeted social policies.  
The move from a model based on institutional 
care to one relying on support for family - and 
community -based care for children who cannot 
stay with their families and the disabled faces 
challenges.  In 2017, there was an increase in the 
number of children deprived of a family 
environment or with families in socio -economic 
hardship who were living in residential care 
institutions, as the number of adoptions 
decreased  (33). The newly adopted Act on Foster 
Care is expected to improve the situation. Some 
progress has been made in the 
deinstitutionalisation of adults, including of those 
with disabilities. However, relevant legislative 
initiatives such as the Family Act and the Act on 
Social Welfare have  not yet been adopted. The 
main concerns with respect to the 
deinstitutionalisation process relate to the co -
operation between health, education and social 
services (in particular at the local government 
level) and the long -term sustainability of 
community -based care services, which require a 
more efficient funding model. Further challenges 
                                                           
(33) This refers also to the age category below 3, despite the 
law stating that children below the age of 3 should be 
placed in institutions only exceptionally and for the 
shortest period of time. The average duration of placement 
for children lasts four years.  relate to establishing a systematic approach to 
deinstitutionalisation, rather than implementing 
individual projects, and to the need for increased 
investments.  
The Croa tian pension system faces a significant 
adequacy challenge, partly addressed by the 
recent pension system reform.  According to the 
Croatian Pension Insurance Institute, the ratio of 
contributing workers to pension beneficiaries was 
very low, at 1.2 in Augu st 2018. This reflects the 
unfavourable demographic trends (ageing and 
emigration) as well as the existence of many 
pathways to early retirement (34). Around 41  % of 
pensioners have less than 30 years of service, 
whereas less than 15  % of them in 2016 recei ved a 
pension based on 40 or more qualifying years. The 
benefit ratio (average pension as a share of the 
average wage) is set to decline from 32  % in 2016 
to 22  % in 2070 ( European Commission , 2017h ). 
Moreover, in 2017, the aggregate replacement ratio 
(35) stood at 41  %, one of the lowest in the EU. 
This results in a significant drop in pensioners' 
living standards upon retirement, as reflected in a 
high risk of poverty or social exclusion. The net 
theoretical replacement rate of pensions is 
expected to furt her decrease by 2056 (36). For an 
average earner with as many as 40 years of 
contributions, their rate will have fallen by 16.4 pp 
(from 56.6  %). Two additional working years 
would increase the theoretical replacement rate by 
1.6 p ercentage points . Therefor e, an increase in 
retirement age and career length results in higher 
pension entitlements. The pension system reform 
adopted in December 2018, among other 
objectives, aims at increasing the length of 
working lives – see Box 4.3.2.  
 
                                                           
(34) Employment rate of older workers (55 -64) at 40.3  % in 
2017 is far below the EU average of 57.1  %. 
(35) The ratio of income from pensions of persons aged 
between 65 and 74 years and income from work of persons 
aged between 50 and 59 y ears. 
(36) Theoretical replacement rates are calculated as the level of 
pension income in the first year after retirement as a 
percentage of individual earnings at the moment of take -up 
of pensions. F or further details, see European Commission, 
2018m . 
4.3. Labour market, education and social policies*  
 
43 Box 4.3.2: The 2018 Pension System Reform  
In December 2018, the parliament adopted an important package of pension system reforms 
that entered into force in 2019. The purpose of the reforms is multifaceted and can be 
summarised in three main objectives: first, addressing structural design inconsistencies , which 
resulted in an unfair treatment of certain cohorts of pensioners; second, improving pension system 
adequacy through longer working lives; and third, strengthening the institutional setup and 
performance of the 2nd pillar. On the first objective, the  government proposes to extend the 27  % 
supplement of the pension entitlement (that is currently paid out to individuals receiving a pension 
from the 1st pillar only) to all pensioners in a proportional way (1), while retaining the possibility 
for all to o pt-out of the 2nd pillar and shift savings to the 1st pillar at retirement. The aim of the 
authorities was to find an equitable solution that would avoid severely undermining the 2nd pillar. 
According to government's estimates , mainly low -wage earners woul d find it convenient to move 
back to the 1st pillar, as well as workers that have a short contributory period under the 2nd pillar. 
The authorities also plan to increase the minimum pension by 3.13  % from mid -2019, and enable 
the accumulation of a suppleme ntary contribution period of six months per child for the 
calculation of the pension entitlement of the parent . On the second objective, the reform proposal 
includes: (i) accelerating the planned increase in the statutory retirement age to 67, bringing it 
forward from 2038 to 2033; (ii) accelerating the equalisation of retirement age for m en and 
women, brought forward to year 2027; (iii) increasing penalties for early -retirement and bonuses 
for deferred retirement, while retaining the relatively large gap o f five years between early and 
statutory retirement age; (v) widening  the possibility to work part -time while receiving a pension; 
and (vi) streamlining the list of arduous and hazardous professions benefitting from more 
favourable pension entitlements, wh ile preserving a number of special pension schemes (e.g. for 
military personnel and police).  
 
A dedicated set of measures addresses the design of the compulsory funded 2nd pillar.  The 
measures aim at increasing the efficiency and performance of the compuls ory funded 2nd pillar, as 
well as the voluntary 3rd pillar. The legislative acts introduce more stringent rules to tackle 
potential conflict of interest arising in the private funds and lower caps on membership 
management fees paid by 2nd pillar members. T he amended Acts also modify some of the 
investment rules, introducing a new investment category , which allows pension funds to invest in 
infrastructural projects in Croatia within prescribed limits. Furthermore, all 2nd pillar members can 
choose the risk p rofile of their pension fund (2), though a new default option is foreseen for those 
who do not express their choice upon first employment. The amended Acts enable the Croatian 
Pension Insurance Institute to establish a public pension insurance company that  would be in 
charge of the payout  of annuities from the 2nd and 3rd pillar. On pension insurance companies, the 
proposed legislation also introduces new governance rules for cross -border transactions and for 
managers (in terms of fitness and probity), new requirements in terms of capital shares and 
technical reserves, a cap on certain administrative costs and the obligation for the insurance 
companies to adjust the annuity payments to the consumer inflation rate twice a year. The new 
legislation allows life  insurance companies to pay -out 3rd pillar annuities (under certain conditions 
of compliance with the relevant legislative rules). Furthermore, among other measures, 2nd pillar 
pensioners can request a lump -sum payment of 15  % of their 2nd pillar  savings u pon retirement, 
provided their pension is at least 15  % higher than the 1st pillar minimum pension.   
 
(1) Pensioners covered by both the 1st and 2nd pillar would receive a supplement 27 % for the contribution period until 
December 2001  and a supplement of 20.25  % for the years after 2002 when they started paying also into the 2nd pillar. 
For an explanation of how the 27  % supplement in the current sys tem works , see European Commission 2018e and 
2018f .  
(2) Under the 2nd pillar, pension funds in Croatia are required to offer three different funds knowns as A, B and C  
categories. They  differ by their investment and risk profile with A -funds having the hi ghest risk level and C -funds the 
lowest .  
 
4.3. Labour market, education and social policies*  
 
44 4.3.3.  EDUCATION, TRAINING AND SKILLS  
There are pronounced systemic regional 
differences in the coverage of early childhood 
education and care in Croatia . In the period 
between 2014 and 2016, 7.2  % of all kindergarten -
aged children in Croatia lived in municipalit ies 
that did not have a kindergarten programme, and 
this was the case for 17.4  % of all nursery -aged 
children (Dobrotić et al. 2018). In 2016, formal 
childcare enrolment in Croatia for the 0 -3 age 
group stood at 15.6  %, one of the lowest in the EU 
(29.9  % EU average), and for children 4 -6 years 
old it was 75.1  % (EU average of 95.5  %). Croatia 
has earmarked investments in the area of early 
childhood education and care from both national 
and EU funds. Yet, the challenge will be to ensure 
a lasting effect of these investments, particularly in 
areas that do not have sufficient resources to 
provide early childhood education and care to all 
children in need. Given the current trends, in the 
absence of a review of the early childhood 
education and care funding mod el, Croatia is likely 
to remain below the 95  % Education and Training 
2020 benchmark (37). 
Educational attainment in Croatia is influenced 
by socio -economic differences as well as by 
disabilities.  The variation in scores in science of 
Croatian 15 -year-olds, by the educational 
background of parents, was relatively limited, 
according to the OECD’s Programme for 
International Student Assessment. However, a 
number of other indicators show a significant  link 
between the socio -economic status and educational 
attainment (European Commission, 2018 h). In the 
assessment, the share of pupils who had 
participated in early childhood education and care  
is 20 pp. lower for families with low education 
levels compar ed to that of families with at least 
one highly -educated parent (the gap at the EU 
average is 7 pp) ( European 
Commission/EACEA/Eurydice/Eurostat , 2014). 
The gap between the at -risk-of-poverty or social 
                                                           
(37) Kindergarten costs account for, on average, more than 
80 % of the expenditures under the relevant function in 
cities and municipalities. However, there are significant 
differences in kindergarten expenditures , particularly 
among municipalities from develop ed and less developed 
counties. In the most developed counties, municipalities 
spend more than 90 % of their Family/Children 
expenditures on kindergartens, while this share drops to 
less than 30 % in municipalities from the poorest counties.  exclusion rate for children by educational 
attainment of their parents, at 70.9  pp. in 2016, is 
one of the highest in the EU, indicating substantial 
inequality of opportunity (38). The early school 
leavers' gap between people with and without 
disabilities remains higher than the EU average 
(15.7  %. vs the EU a verage of 12.6  %). In higher 
education, students from better -educated  family 
backgrounds tend to be overrepresented in the 
student population (Doolan et al. 2018) . However, 
the number of students with lower socio -economic 
status has increased and measures to increase it 
further have been outlined for 2019 -21 in 
‘National Plan for Promoting the Social 
Dimension in Higher Education adopted by the 
Government on 3 January 2019 . Further funding of 
e.g. scholarships, transportation or infrastructure 
for tertiary education would support access that is 
more equal . Additional investments would be 
required, in particular for vulnerable groups and in 
less developed areas to ensure equal access to and 
provision of quality education at all levels.  
The implementation of t he curricular reform 
has been launched in the form of a pilot project.  
In order to  increase the overall quality of education 
and teaching, a set of reformed general education 
curricula have been introduced in 74 schools in 
Croatia as part of the pilot proj ect ‘School for 
Life’ , and 36,000 teachers have already received 
online and face -to-face training . The results of the 
pilot phase are monitored and evaluated on the 
‘School for Life’  website and t he national rollout 
of the reform is planned for autumn 2019 . 
Investing in teachers’ training and increasing the 
attractiveness of the profession is needed to ensure 
their engagement in planned school reforms, and 
especially to enable the necessary increase of 
teaching staff where needed . In terms of digital 
skills , Croatia ranks as one of the lowest in the EU. 
Despite recent improvements and government 
initiatives  (39), further efforts will be needed in this 
area.  
                                                           
(38) The gap i s calculated as the percentage point difference 
between the AROPE for children of low -skilled parents 
(less than primary, primary and lower secondary education) 
and of children whose parents are high -skilled (have 
tertiary education). This calculation is a ffected also by the 
employment levels of parents, which are lower for the low -
skilled.  
(39) According to LFS data, the proportion of ICT specialists in 
total employment remained stable at 3.3  % in 2017 after 
having increased from 2.7  % in 2015. The share of  
4.3. Labour market, education and social policies*  
 
45 Fragmentation and lack of transparency hinder 
the efficiency of the tertiary education system.  
Croatia  has among the highest numbers of tertiary 
education institutions per capita in the EU 
(European Commission/EACEA/Eurydice, 2018). 
Despite the efforts made through the Croatian 
Qualifications Framework, the link between labour 
market needs and tertiary edu cation enrolment 
remains weak. The legal framework that regulates 
admissions grants autonomy to universities, which 
have an incentive to keep enrolment quotas high 
because of tuition fee s revenues. In addition , 
faculties and universities have no obligation  to 
report the use of their budgets  beyond what is 
needed for national account s reporting , which 
reduces the capacity of the government to target 
investments in tertiary education and reduces the 
systems’ efficiency , despite the effort s made 
through the pe rformance agreements and 
scholarship schemes . 
Vocational education and training is not aligned 
with labour market needs . In 2016, the share of 
vocational education and training  students at upper 
secondary level remained stable at 70  %, 20 pp. 
above the EU average. However, the employment 
rate of vocational education and training  graduates 
decreased from 70.3  % in 2016 to 59.4  % in 2017 
(despite an overall improvement of the labour 
market in this period), pointing to the need of 
modernising the vocational ed ucation and training  
sector in Croatia. In 2016, the percentage of 
students undertaking programs , which included 
work  based learning was at 27.3  %, in comparison 
to the 43.8  % EU average. Amendments to the 
Vocational Education and Training Act were 
adopted  in March 2018 . They introduced a new 
national framework for Vocational Education and 
Training  curricula , foreseeing the National 
curriculum for vocational education and training , 
adopted in July 2018 , the development of modular 
and outcome -based sectorial  curricula and greater 
autonomy for vocational education and training  
schools in the design of school -level curricula. The 
establishment of 25 sectoral councils is supporting 
the implementation of the Croatian Qualifications 
Framework. In particular, stepp ing up the adoption 
                                                                                   
graduates in Science, Technology, Engineering and 
Mathematics (STEM) in the 20 -29 years old cohort went 
up, (17.1 graduates per 1000 individuals (CBS, 2016), 
compared to EU average of 19.1 (2015)). To improve 
further, Croatia plans to offer 17 000 STEM sc holarships 
by the end of 2021.  of occupation and qualification standards should 
lead to the creation of new programmes better 
aligned with labour market needs.  
Reform efforts in vocational education and 
training include the establishment of regional 
competences centres and a pilot project of dual 
vocational education and training . In May 2018, 
the authorities established a national Network of 
Regional Centres of Competence s in vocational 
education and training . Their objective is to 
designate places of excellence that will offer 
regular vocational education and training  
programmes, but also lifelong learning and other 
forms of formal and non -formal education . 
Following adoption of the Network, in July 2018, 
25 vocational education and training schools were 
appointed to the Regional Centres of Competences 
(40). A strong cooperation with vocational 
education and training  schools from the regular 
network and employers at the local level will be 
important to ensure the long -term sustainability of 
the centres. In addition, the authorities have also 
presented a new model for the Croatian dual 
education and an experimental programme called 
"Dual Education in VET". The progr amme is to be 
delivered in 11 vocational education and training  
schools across Croatia and aims at addressing 
challenges related to inadequate practical training 
and insufficient attention to entrepreneurial 
competences.  
Challenges related to the quality and access to 
adult education have not been addressed.  
Croatia performs below the EU average within the 
benchmarking framework on adult skills and 
learning. The participation rate in adult education 
is steadily decreasing, at 2.3  % in 2017, compared 
to the  EU average of 10.9  %. In particular, there 
are extremely low participation rates for those 
most in need of additional education, such as low -
qualified (0.6  %) and unemployed persons (1.5  %). 
In line with the objectives of the EU Council 
Recommendation on Upskilling Pathways, there is 
a need in Croatia to establish a framework for the 
assessment, provision and validation of skills 
aligned with labour market needs, including a clear 
re-definition of responsibilities across public 
                                                           
(40) They will cover the following sectors / sub -sectors Tourism 
and Hospitality, Mechanical Engineering, Electrical 
Engineering and Computing, Agriculture and Health,  the 
aim being to achieve a balance between regional presen ce 
and high levels of quality.  
4.3. Labour market, education and social policies*  
 
46 institutions. However, the a doption of the Adult 
Education Act, aimed at addressing some of these 
challenges, has been further postponed. It is 
foreseen for the Act to regulate the self -assessment 
and external evaluation of adult education 
institutions, the professional licensing sys tem for 
teaching staff, the development of adult education 
programmes (in line with the Croatian 
Qualifications Framework), and non -formal and 
informal learning programmes.  
4.3.4.  INVESTMENT NEEDS  
Increased investment in skills, education and 
training, ai med at promoting employability and 
social inclusion are important for raising 
Croatia’s productivity and long -term inclusive 
growth. Employment rates remain low, especially 
for vulnerable groups, pointing to the need to 
improve access to employment for all  jobseekers 
and to anticipate skills needs. This also includes 
aligning education and training with the labour 
market needs. The share of the population at risk 
of poverty or social exclusion remains high 
emphasising the need to foster policies of active 
inclusion with a view to reducing poverty and  
promoting equal opportunities with regard to child 
and long -term care services.  
 
 
 
47 4.4.1.  PRODUCTIVITY  
Croatia's labour productivity is still low in most 
sectors.  Labour productivity in professional, 
scientific and technical activities, ICT and finance 
is broadly in line with that of peers, though below 
the EU average (see graph 4.4.1 ). By contrast, 
labour productivity in manufacturing lags behind. 
However, it has improved in recent years, and in 
parallel with employment growth, underscoring 
genuine improvements in the efficiency of 
production. Measured productivity in agriculture 
has also been rising, but mostly on account of a 
strong decline in employment.  
Graph  4.4.1:  Labour productivity (GVA per worker) by 
sector, 2017  
 
(1) NACE sectors: C = Manufacturing; F = Construction; G -I = 
Trade, transport; J = ICT; K = Finance and M -N = Professional, 
scientific and technical activities  
(2) Peers: SI, HU, SK, CZ, PL  
Source:  Eurostat, own calculations  
At firm level , productivity slumped during the 
crisis in the largest and most productive firms 
and has not yet recovered.  In manufacturing and 
construction, labour productivity peaked in 2007 in 
real terms across the entire distribution of firm 
sizes, particularly in the largest firms, which tend 
to be the most productive ones (see graph 4.4.2 ). 
Following the financial and economic crisis, it 
declined year -on-year for  almost a decade. The 
largest productivity losses took place among the 
most productive firms, leading to a gradual 
downward convergence of firm -level productivity.  
Obstacles to productivity growth in the least 
productive sectors and to re -allocation of lab our and capital away  from such sectors  result in low 
productivity growth.  Productive resources are 
concentrated in sectors with relatively low labour 
productivity, as reflected in one of the lowest 
scores in the efficiency of labour allocation in the 
EU (E uropean Commission, 2018 c). This means 
that overall labour productivity could be 
substantially improved by fostering productivity 
growth in such sectors and by facilitating labour 
reallocation to more productive sectors. Structural 
impediments to the reall ocation of the factors of 
production, ranging from skill gaps to the high 
presence of the state in the economy and excessive 
product and service market regulation, help 
explain Croatia's low allocative efficiency score.  
Graph  4.4.2:  Real labour productivit y in manufacturing and 
construction by firm size  
 
(1) Average real GVA by employee in selected quantiles of 
the firm size distribution, from smallest firms (P5) to largest 
ones (P95), through median -sized firms (P50).  
(2) Construction (right graph), manufacturing (left graph)  
Source:  CompNet.  
Business environment and digitalisation  
Croatia largely maintained its level of 
competitiveness but continues to lag 
significantly behind peers. The real effective 
exchange rate  (41) appreciated by 4.2 % since 
2016, largely driven by continuous nominal 
exchange rate appreciation. Nevertheless, 
substantial cost competitiveness gains made during 
the recession  are largely preserved as the real 
effective exchange rate remains significantly 
below its pre -crisis level. Nominal unit labo ur 
costs increased in 2018 for the first time since 
2009 reflecting modest productivity growth and 
rising wages due to labo ur market pressures. 
Furthermore, the sharp growth in export market 
shares (by 19.9 % cumulatively in the five years  
                                                           
(41) The real effective exchange rate is a measure of  a country's 
price competitiveness relative to its principal competitors. 
It is deflated by the HICP  index against a panel of 42 
countries . A rise in the index means a loss  of 
competitiveness.  
020,00040,00060,00080,000100,000120,000
C F G-I J K M-N
Peer min. Peer av. Peer max. HR EU 28in 2010
EUR
-20020406080100120140160
02 04 06 08 10 12 14 16
p5 p25 p50 p75 p95k EUR
-20020406080100120140160
02 04 06 08 10 12 14 16
p5 p25 p50 p75 p95k EUR4.4. COMPETITIVENESS  REFORMS AND INVESTME NT* 
4.4. Competitiveness reforms and investment*  
 
48 since 2012), slowed to 0.4 % in 2018, reflecting 
the fading impact of Croatia’s EU accession. The 
World Economic Forum's Global Competitiveness 
Index, which looks at the broader non -cost 
competitiveness of countries, shows Croatia is 
significantly less co mpetitive compared to peers. 
This implies that Croatia’s institutions, labo ur 
market and business dynamism are particularly in 
need of improvement.    
Croatia's business environment remains 
burdensome, but the identified best practices 
within the country of fer scope for improvement.  
When looking at the subnational indicator of 
Doing Business in Croatia, there are substantial 
differences in regulatory performance among the 
five studied cities (Zagreb, Rijeka, Split, Varaždin 
and Osijek). Therefore there is po tential to lift the 
national average by replicating good identified 
practices within the country, such as starting a 
business in Split or dealing with construction 
permits in Varaždin (42). As part of the efforts to 
facilitate doing business in Croatia, the  authorities 
have committed to reducing the administrative 
burden on companies. Based on the Standard Cost 
Model, the burden in the economy is estimated to 
correspond to 3  % of GDP. The completion of the 
burden reduction in 2019 is expected to lift around 
20 % of the cost -equivalent burden.  
Croatian enterprises are slowly integrating 
digital technologies. With 1 5.5 % of enterprises at 
a high and very high level of digital intensity, 
Croatia is behind the EU average of 18 %. 
However, Croatian companies are a bove -average 
users of cloud technologies and take advantage of 
the opportunities offered by online commerce: 
17.1 % of small and medium -sized enterprises sell 
online, similar to the EU average of 17.2  % 
(European Commission, 2019a) . Croatia is taking 
sever al initiatives that will help small and medium -
sized enterprises  digitise further (such as eBusiness 
and eFees), for example by enabling electronic 
payment of administrative fees and charges and 
access to tax administration files, health insurance, 
the pen sion system. More investment efforts could 
be made to foster digitisation among small and 
medium -sized enterprises , including by ensuring 
that the education and training system responds to 
                                                           
(42) Doing Business in the European Union 2018 (Subnational 
series): Croatia, the Czech Republic, Portugal and Slovakia 
(World Bank, 2018 a). See also Section 4.4.3.  the growing need for information technology 
specialists expressed b y small and medium -sized 
enterprises  (European Commission, 2019a)  (see 
Section 4.3).  
State -owned enterprises  
Slow progress in management and disposal of 
state -owned enterprises entails their continued 
strong impact on the economy.  Their large 
presence in m any sectors of the economy 
continues hampering allocative efficiency and 
productivity growth ( European Commission, 
2017 c). The new act on the management of 
state-owned assets was adopted in June 2018. 
However, the substantial delay in its adoption 
postpone d the planned introduction of measures 
aimed at speeding up the activation of assets and 
disposal of minority shares in state -owned 
enterprises. In 2018, the sale of assets has thus 
continued mostly through standard public 
tendering procedures, with fewer successfully 
completed calls and lower revenue than the year 
before.  
The list of companies ineligible for privatisation 
has been reduced and streamlined.  These 
companies are now included in a single list of 39 
entities of special interest. Most of them mai ntain 
strong presence, and even dominant positions, in 
their sectors. In particular, state -owned companies 
fully dominate the rail sector;  where there is large 
scope to improve efficiency, productivity and 
quality of services (see Section 4.4). The number 
of companies eligible for privatisation continues 
expanding, but no clear privatisation strategy is in 
place. This has resulted in companies being 
privatised only as a measure of last resort at times 
of severe financial distress or need for 
recapitalisatio n. 
Measures to improve corporate governance in 
state -owned enterprises are progressing slowly. 
The new Code of Corporate Governance has been 
adopted in all majority state -owned enterprises, 
and mid -term planning and performance reporting 
have been made ob ligatory. Yet, a clearer 
commitment to improving governance in 
state-owned enterprises is needed, as their 
performance remains weak.  
4.4. Competitiveness reforms and investment*  
 
49 Research and development  
Croatia’s R&D intensity is low and its small 
and medium -sized enterprises are weak 
innovators.  The overall R&D intensity in 2017 
amounted to 0.86  % of GDP, equally split between 
the public and private sectors. Based on recent 
trends, Croatia will not reach its national target of 
1.4 % of GDP by 2020, though the reintroduction 
of tax breaks for R&D in 2018 (see section 4.1) 
may contribute to filling the gap. Business 
investment in R&D is low and largely 
concentrated in large companies in pharmaceutical, 
telecommunications, agriculture and food 
industries. Meanwhile, the 2018 European 
Innovation Scoreboa rd shows a decline between 
2010 and 2017 in all three aspects of small and 
medium -sized enterprises  innovation : product and 
process innovations; marketing and organisational 
innovations; and small and medium -sized 
enterprises  innovating in -house. As a resu lt, the 
overall score of Croatia in this area was 72  % of 
the EU level in 2017 (European Commission, 
2018k).  
Graph  4.4.3:  Business and public R&D intensity  
 
R&D intensity measures spending on research and 
development as a share of GDP.  
Source:  Eurostat, own calculations.  Excessive fragmentation of the science base and 
policy shortcomings affect the quality of public 
research.  The share of Croatia's total scientific 
publications that are among the top 10  % most 
cited publications worldwide is r ising slightly, but 
compared to the EU average (11.1  %) it remains 
very low at 4.2  %. Lack coordination and effective 
management in research and innovation policies 
leads to poor targeting and inadequate 
prioritisation of support instruments. In addition, 
some of the undertaken reforms of public research 
institutes and universities remain unfinished. With 
every faculty having a separate legal entity status, 
it is difficult to develop a university -wide vision or 
set a strategic direction ( Kralj and al. , 2011 ). 
Performance criteria for institutional funding, 
formally introduced in 2013, are still not being 
used, and as a result,  project -based funding 
allocation is not competitive. Internationalisation 
and international co -publications are rare (43). Still, 
some  excellence niches in ICT, biomedical and 
natural sciences exist at the Universities of Zagreb 
(Faculty of electrical engineering), Rijeka and the 
Ruđer Bošković Institute, and the increasing 
numbers of graduates in the field of computing 
places Croatia am ong the best performing Member 
States (44). The Ericsson -Nikola Tesla partnership 
with the University of Zagreb on ICT is a good yet 
isolated example of science -business cooperation.  
                                                           
(43) Croatia ranks 24th in the EU  by i nternational co -
publications as a share  of total  (European Commission , 
2018k).  
(44) Croatia ranks 9th in the EU by computing g raduates per 
thousand population aged 25 -34 (Eurostat)  
0.00.20.40.6
02030405060708091011121314151617
Public R&D intensity (GOVERD + HERD)
Business R&D intensity (BERD)% of GDP
4.4. Competitiveness reforms and investment*  
 
50 Box 4.4.1: Investment challenges and reforms in Croatia  
Macroeconomic perspective  
The protracted recession made a lasting effect on investment activity in Croatia, in both the private and 
public sector. While still well below the pre -crisis level, private investment has been recovering steadily 
since 2015, in line with the positive macroeconomic outlook and supported by increasingly favourable 
financing conditions. With the halting of the l arge infrastructure campaign in the aftermath of the financial 
crisis, public investment has been more than halved to date, and is expected to continue relying on the so -far 
limited absorption of EU funding. Overall, investment in Croatia is expected to co ntinue recovering at 
moderate pace over the forecast horizon.   
Assessment of barriers to investment and ongoing reforms  
 
As broadly positive macroeconomic trends continue, the business environment remains insufficiently 
conducive to investment. Fragmented  public administration, as well as insufficient administrative capacity at 
regional and local level, weighs on the overall capacity to attract and implement investment, particularly as 
regards the absorption of EU funding (see Section 4.4). The high corpor ate sector debt still constrains 
financing, while capital  markets remain underdeveloped and alternative sources of equity financing are 
largely underutilised (see Section 4.2).  
Selected barriers to investment and priority actions underway  
(1) Some measur es have been implemented to reduce parafiscal charges and administrative burden, but the 
persisting weaknesses in the public administration and the judiciary hamper service delivery to businesses, 
including the still cumbersome business registration and le ngthy proceedings in civil and commercial 
litigation. (2) Investment in the digital economy is constrained due to low take -up of high -speed broadband, 
despite wide availability, and extremely low take -up of ultrafast broadband.   
In Croatia, the national development bank is Hrvatska banka za obnovu i razvitak  (HBOR). Its main 
activities include promoting exports and supporting the development of SMEs. Roughly,  76 % of newly 
approved loans in 2017 were used to finance investment. HB OR’s loan portfolio amounted to around 6.8  % 
of GDP in Q12018.   
Measures to reduce fragmentation and improve 
the efficiency  of research and innovation 
policies are lagging.  As a precondition to access 
ESIF -funding, in 2016 Croatia introduced the 
'smart specialisation' strategy 2016 -2020  (RIS3) , aimed at fostering innovation, overcoming 
fragmentation in the system and  ensuring that 
R&D activities are organised around key economic 
priorities. However, its implementation is lagging. 
Centres of Competence and Centres of Excellence 

4.4. Competitiveness reforms and investment*  
 
51 are in the process of being established or are still to 
deliver clear outcomes. Both schemes  
implemented along other measures, which are 
lagging behind are  intended to improve 
connections between academia and businesses.  As 
a result, the funding for policies to support 
businesses and innovation (EUR 1.665 billion 
from the ERDF) has not yet been u sed in full (45). 
In an effort to overhaul the RIS 3 governance, in 
July 2018, an inter -ministerial National Innovation 
Council was set up to oversee its implementation. 
Thematic Innovation Councils formally established  
in September 2018 are yet to bring any concrete 
results . In addition, there is the intention to 
strengthen the monitoring of smart specialisation 
strategy  and other policy instruments with a view 
to creating a basis for evidence -based 
policymaking. Recent  analysis done by the 
Croatian government together with the World 
Bank could be used to prioritise interventions 
under  the smart specialisation strategy  and reform 
innovation environment.  
4.4.2.  MARKET FUNCTIONING A ND INVESTMENT  
Investment gaps are pronoun ced in research 
and development, environment and transport.  
Better -targeted  government investment in research 
and development can spur progress towards a more 
innovative economy. Similarly, investments are 
required to improve the quality and connectivity o f 
the underdeveloped railway infrastructure, but also 
urban transport. Croatia also requires substantial 
investment in waste and water management, which  
are underdeveloped.  
Regulated professions and business services  
Some restrictions in the regulation of  
professional services are being relaxed.  
Commission analysis (European Commission, 
2016z) shows that restrictiveness of regulation in 
Croatia remains higher than the EU average for six 
of the seven analysed professions. This is 
especially the case for law yers (most restrictive in 
the EU) , architects  and engineers . Some reform 
measures, such as the loosening of marketing 
restrictions for lawyers, abolition of exclusive 
                                                           
(45) Only 5.5 % of ERDF allocations earmarked for the 
implementation of RIS3 have been spent by beneficiaries 
by the end of 2018 (SFC 2014 reporting system).  rights for architects and a significant liberalisation 
of taxi services have been impleme nted recently. 
Also, residence restrictions for certified tax 
advisors have been removed and the 2017 
accounting law, which introduced compulsory,  
licensing for accountants was repealed. Finally, 
Croatia is now working with the World Bank on 
the preparatio n of two national action plans 
covering a round 20  regulated professions. 
Meanwhile, the key big restrictions remain in 
place.  
Environment and energy   
The shift away from landfilling towards 
separate collection and recycling is slow.  
Landfilling of municip al waste accounts for 77  % 
of total waste, considerably above the EU average 
(24 %). Croatia also scores low in terms of 
recycling, with only 21  % of waste materials 
recycled, compared to a n EU average of 46  % 
(Eurostat). Therefore, Croatia is at risk of n ot 
reaching the 50  % preparation for re -use/recycling 
target on municipal waste by 2020  (European 
Commission, 2016x) . Reaching the even more 
ambitious and binding target of 65  % by 2035 will 
require shifting investments further up the waste 
hierarchy. In 2 017, the long -awaited national 
Waste Management Plan 2017 -2022 was  adopted, 
but its implementation faces delays. Improving 
Croatia's performance in waste management 
requires substantial investment in waste 
infrastructure.  
While water supply networks are r elatively 
developed, sanitation in general is lagging.  Data 
available only up to 2011 shows that around 86  % 
of the population was connected to the public 
water supply system (Eurostat). The key issue 
remains a high leakage rate, at 44  % compared to 
the EU  average of 23  % (European Commission, 
2017w). Moreover, some areas do not meet the 
quality requirements for drinking water, for 
instance Eastern Slavonia. The development of 
public sewage systems lags considerably behind as 
in 2015 only 54.6  % of the popu lation was 
connected to the sewage systems (Eurostat). The 
estimated investment needed to ensure appropriate 
collection and treatment of wastewater is 
considerable (around 2.9 billion euro) (European 
Commission, 2017y). The size of the challenge 
calls for an effective prioritization strategy (within 
a National Investment Plan).  
4.4. Competitiveness reforms and investment*  
 
52 The economy in general and tourism in 
particular depend on the sustainable 
management of natural resources.  With its 
advantageous location and natural attractions, 
Croatia is an impo rtant tourist destination. 
Excessive reliance on tourism, however, can have 
negative impact on the environment, in turn 
affecting the sector and the economy as a whole  
(Orsini and Ostoji ć, 2018).  Croatia has the second 
largest Natura 2000 -protected network  in the 
European Union, covering more than one third of 
its terrestrial surface, as well as a significant 
marine area of 4986 km². The management of 
Natura 2000 sites will require efficient cooperation 
across economic sectors  to optimise and channel 
the ne cessary investments into concrete site -level 
conservation measures,  
Croatia is increasingly vulnerable to climate 
risks.  With average annual damage costs from 
extreme weather (Jelavić  and EKOBERG , 2017) 
estimated at 80 million EUR in the period from 
1980 to 2016, climate change is likely to pose 
increasing challenges. It exacerbates the threat of 
flooding in the Danube river basin and of storm 
surges on the coast, while heightening Croatia's 
vulnerability to forest fires. The recently 
developed climate cha nge adaptation strategy 
(Trumbi ć and al. , 2017) has identified priority 
sectors in need of further action. The 
decarbonisation of Croatia`s economy will require 
significant investment as well as a structural shift 
of activities especially in the energy and  transport 
sectors. In its National Energy and Climate Plan to 
be adopted by end of 2019, Croatia will provide an 
overview of its investment and policy needs until 
2030 for renewable energy, energy efficiency, 
security of supply, and climate mitigation and  
adaptation.  
Increasing energy efficiency is crucial to reduce 
energy intensity . Croatia uses a third less energy 
per capita than the EU average, but its energy 
intensity (energy use as a share of GDP) is 61  % 
higher. In 2015, the residential sector accoun ted 
for 36.7  % of total energy consumption, well 
above the EU average (25.4  %). While this is 
largely due to the smaller share of the energy -
intensive industry sector in the economy, it must 
be noted that the majority of the 1.42 million 
dwellings in Croat ia are older than 20 years and 
thus tend to be less energy efficient. Croatia is the 
third biggest consumer of energy for cooling in the EU (Eurostat). All of the above indicates potential 
to scale up energy efficiency (World Bank, 
2018b), in particular by  increasing efficiency of 
district heating and supporting smart grids and 
metering.  
Croatia has reached its 2020 target for 
renewable energy, but there is potential to 
further exploit wind and solar power.  In 2016, 
the share of renewable energy was 28.3  % (against 
17 % on average in the EU), notably thanks to 
Croatia's strong hydropower industry. The 2020 
target for the share of renewable energy in energy 
consumption (20  %) ha s therefore been reached. 
Still, Croatia has potential to further develop 
renewabl e energy sources in a cost -effective way, 
as in 2016 intermittent wind and solar capacity 
accounted for just 11  % of installed grid -connected 
power generation capacity (against a EU average 
of 26  %). Developing renewables could in 
particular benefit Croati a’s island regions.  
Graph  4.4.4:  Final energy consumption in 2015  
 
Source:  Eurostat, own calculations.  
There is further scope to increase competition 
and customer choice in retail electricity and gas 
markets . Starting from 2016, energy price 
regulation for households for electricity has been 
phased out. Further liberalisation notwithstanding, 
price regulation for gas still exists for retail 
consumers, while it will be phased out at 
wholesale level in 2021. Th e retail market remains 
highly concentrated, in particular in the electricity 
sector, where most of the new entrants have 
0 10 20 30 40OtherAgriculture /
Forestry /
FishingServicesResidentialTransportIndustry
EU HR
4.4. Competitiveness reforms and investment*  
 
53 already exited the market, citing as reasons lack of 
access for them to generation capacity, anti -
competitive practices by the incumbe nt and lack of 
a stable investment environment in particular due 
to frequent changes in the support framework for 
renewable energy sources. The independence and 
capacity of the National Energy Regulatory 
Authority is key to improving competition.  
The Proj ects of Common Interest currently 
being developed, in particular the Krk LNG 
terminal and the SINCRO large -scale smart 
grid project, are essential to Croatia’s security 
of supply of electricity and gas.  In this context, 
the implementation of bidirectional capacity gas 
projects with the neighbouring counties – Hungary 
in particular – is of great importance for the 
viability of the Krk LNG project and for security 
of supply of the region  in general . This requires a 
consistent regional approach with neighbouri ng 
countries.  
Transport and connectivity  
The transport network is unbalanced, with 
railway infrastructure lagging significantly 
behind the EU average . Completion of the core 
TEN -T rail network in Croatia stands at just 5 -6 %, 
compared to the EU average of 60 % (European 
Commission, 2018p). The outdated and limited rail 
infrastructure results in low competitiveness, low 
quality of service and a general preference for 
other transport modes, in particular road transport. 
Based on an analysis of the comprehensi ve traffic 
model and the investments taking place in the 
2014 –2020 period, the most critical missing 
components of the rail TEN -T corridors are 
Zagreb –Rijeka, development of the Zagreb node 
and the Dugo Selo –Novska section. By contrast, 
the quality of road  infrastructure is overall good as 
intensive investments have resulted in a dense 
motorway network of high quality (46). At the 
same time, there remain bottlenecks on state roads , 
which  are often exacerbated by peaks in the tourist 
season. Finally, while ro ad deaths were reduced by 
28 % between 2010 and 2016, Croatia remains 
among the worst performing Member States in 
terms of road safety (European Commission, 
2017 a). 
                                                           
(46) At 23.1 km of motorway per thousand km2, Croatia is 
above EU average (17 km) (Eurostat) . Urban transport is developed only in a few 
major cities, while others lack even basic 
infra structure.  In 2014 –2020, investments are 
taking place in Zagreb and Osijek, but public 
transport in two other major cities, Split and 
Rijeka, as well as smaller cities, remains outdated 
and unable to satisfy existing needs, let alone 
increased future deman d, or cope with seasonal 
fluctuations.  
The share of renewable energy sources in the 
transport sector (1.3 % in 2016) is one of the 
lowest among EU Member States and below the 
2020 target of 10 %.  In 2018, the Croatian 
Government introduced incentives to th e purchase 
of electric cars. Additional efforts and investments 
are nonetheless needed to effectively reduce the 
high share of fossil fuel passenger cars, promote 
inter-modality and more generally curb the rising 
GHG emissions in the transport sector.  
Take -up of broadband is low in Croatia.  In 
2018, broadband connections were  available to 
80 % of households – an improvement from 2017 
(77 %) towards the EU average (8 6 %). 
Meanwhile, the fast broadband take-up also 
improved a lot (from 14 % to 1 9 % of households), 
but remains well below the EU average ( 41 %) 
(European Commission, 2019x). Factors 
contributing to the low take -up include low 
internet use and high prices for (fast) broadband.  
Achieving the European Gigabit Society targets for 
2025 (European  Commission, 2016q) is uncertain 
without public support. Effective deployment of 
the 5G networks could improve fast connectivity 
in rural and remote areas.  
4.4.3.  REGIONAL DISPARITIES  
Croatia is characterised by marked territorial 
disparities.  Similarly to  the great variation of GDP 
per capita across the territory (see Chapter 1), 
labour market outcomes also display large 
territorial differences, with the unemployment rate 
in 2017 ranging from a 4.6  % low in Istria county 
to a high of 26  % in Sisak -Moslavin a county (see 
Graph 4.4.5). Almost 40  % of the country’s 
unemployed population live in Eastern and Central 
Croatia, even though these regions only host a 
quarter of Croatia's total population, also as a 
4.4. Competitiveness reforms and investment*  
 
54 result of strong emigration flows (47). In addition, 
similarly to other Member States, the urban -rural 
divide is marked, as cities offer better labour 
opportunities and attract higher skilled individuals. 
Namely, 69.5  % of the workforce in cities is in 
employment, contrary to a 59.2  % in rural areas. 
Only 18. 8 % of the rural areas population has 
tertiary education, compared to a 43.5  % in cities, 
which is higher than the EU average (see 
graph  4.4.6).  
Graph  4.4.5:  Registered u nemployment rate (%) by county, 
2017  
 
Source:  Croatian Bureau of Statistics.  
Significant regional differences in terms of 
resource endowments suggest different 
investment needs across the territory.  Industrial 
production is highly concentrated in the Zagreb 
and Primorje -Gorski Kotar counties (World Bank, 
2018b), while large cities (Zagreb, Split, Rijeka, 
Osijek) display the highest potential for 
innovation, including poles of world class 
excellence in information and communication 
technology, biomedical and natural sciences in 
both the capital and Rijeka. Eastern Croatia relies 
on a griculture and wood industry and its 
geographical proximity to Central Europe could be 
used as a competitive advantage. Regions from the 
Adriatic coast and islands draw most of their 
relative prosperity from tourism. They face 
problems with connectivity an d access to clean 
                                                           
(47) The population in Central and Eastern Croatia's seven 
counties has shrunk by more than 5  % in the period 
2014 -2017, compared to a national decline of 2  %. energy, water and wastewater  services and natural 
protection in islands, which are exacerbated during 
seasonal population influx peaks.  
Investment decisions supported by EU funds 
need to take due consideration of regional 
specificities . Targeted investments with a focus on 
human capital and competitiveness would help to 
strengthen the endogenous growth potential of 
lagging regions. They could address weaknesses in 
terms of transport connectivity (islands) and/or 
access to healthcare and qu ality social services 
(border regions). However, experience in 
implementing sustainable urban development 
strategies (48) with EU funded assistance is so far 
inconclusive. Cities have made valuable efforts to 
define strategies integrating the wider needs of  
their neighbouring municipalities, but there have 
been considerable delays in their implementation. 
Furthermore, the absence of a comprehensive 
national urban policy framework over the past 
years resulted in multiple standalone projects in 
cities, with li mited impact. Cities could in the 
future strengthen their role of engines of growth at 
regional level.  
Graph  4.4.6:  Employment, unemployment and tertiary 
education rates, by level of urbanisation, 2015 -
2017  
 
Source:  Eurostat, own calculations.  
                                                           
(48) In Zagreb, Osijek, Rijeka, Split, Zadar, Slavonski Brod and 
Pula 
20406080100120
Employment rate Unemployment
rateTertiary
educatedIndex, 
EU28=100
EU28 HR
Cities Towns and suburbs
Rural areas
4.4. Competitiveness reforms and investment*  
 
55 4.4.4.  PUBLIC ADMINISTRATIO N 
Regional disparities are exacerbated by a high 
degree of fragmentation in the efficiency of the 
public administration.  Previous country reports 
highlighted that many small local governments 
units have devolved competencies and 
respons ibilities in providing public services, but  
often lack the adequate financial, administrative 
and personnel resources to carry out their duties. 
This creates large disparities in public service 
provision between financially and administratively 
strong and weak local units across Croatia. The 
situation is aggravated by the fact that the division 
of competencies and responsibilities in terms of 
service provision by local units (municipalities, 
cities, counties) are not clearly spelt out ( European 
Commission, 2016b ) (49). The current territorial 
organisation raises costs and reduces the quality 
and effectiveness of the services delivered  (World 
Bank, 2018b) .  
Efforts are being made to improve coordination 
within the central level state administration.  
The 2015 S trategy for Public Administration, 
setting out a number of objectives for the 
modernisation of the state administration, has been 
implemented only in few areas. In particular, 
measures related to upgrading human resources 
management and introducing modern systems for 
the improvement of service quality are lagging. 
Similarly, inter -ministerial coordination of policy 
proposals has until recently been limited, as is the 
involvement of academic experts in the 
policymaking process (Petak et al. 2018). The 
2018 c ountry report recognised also the need to 
strengthen the administrative capacities related to 
design and implementation of public policies, as 
well as more efficient and effective use of EU 
funds. In order to strengthen policy -making, 
coordination and impl ementation, the authorities 
are preparing a National Development Strategy 
2021–2030.  The Strategy should result in the 
streamlining of many small and non -aligned 
sectorial and territorial strategies, and help to 
                                                           
(49) The abse nce of clear national standards, applicable by all 
local units, is felt particularly in the field of social policy. 
Here, the implementation of central  government regulation 
has differed strongly among municipalities. In some cases, 
legal requirements such as the provision in the Act on 
Social Welfare that municipalities should use 5  % of their 
budgets for housing allowances for socially marginalized 
groups  have not been complied with . establish clear connections between prioriti es and 
goals on the one hand, and budget planning on the 
other. It will include a shared IT platform securing 
transparency and facilitating aggregation of data 
and information and reporting.  
A number of other measures addressing the 
efficiency of the publi c administration are 
making progress.  In August,  the government 
adopted a Decision on a substantial rationalisation 
of the cumbersome state agencies system, which is 
a step towards simplification and efficiency. A 
total of 54 state agencies, state institut ions and 
state-owned enterprises will be either suppressed 
or merged with agencies or within line ministries. 
For the remaining agencies, the authorities plan to 
establish a new framework introducing a higher 
degree of homogeneity across the system. The 
authorities have also prepared the legislation for 
the transfer of competences from branch -offices of 
the central administration (e.g. ministries) 
operating at local level to the county -level 
administration. The legislation is planned for 
adoption in April 2 019 (and implemented in 2020), 
and it would in part address the fragmentation of 
the state administration system. The impact of 
these measures however remains highly dependent 
on their effective implementation. Finally, the 
provision of e -public services h as improved with 
the further development of the eCitizens systems 
(currently, 5 4 electronic services available), 
eIDAS (electronic Identification, Authentication 
and trust Services) and various other eGovernment 
systems (50). 
New legislation on civil servic e wage -setting is 
planned for the first quarter of 2019.  The new 
legislation, which has been postponed several 
times by the government, will cover civil servants, 
while wages of other public sector employees will 
be addressed in a second phase. The aim of the law 
is to achieve a greater harmonisation of wage 
setting across the public administration through the 
introduction of common wage grids and job 
complexity coefficients, based on more consistent 
job descriptions and competences frameworks. The 
                                                           
(50) eGovernment includes  eNewborn (online registration of 
children), eTax (various tax -related activities). mSignature 
and mStamp (electronic signing, stamping or validation of 
documents)  are planned to be developed. With the 
establishmen t of the Shared Services Centre , all public 
sector bodies will be able to use joint, reliable and scalable 
infrastructure on the ‘cloud’ paradigm.  
4.4. Competitiveness reforms and investment*  
 
56 new legi slation would also cover areas of the 
employment relationship of civil servants that are 
currently negotiated through collective bargaining, 
conditional upon the implementation of a new 
performance evaluation system for civil servants. 
As for state -owned e nterprises, for the time being 
no further steps have been taken in setting up a 
coordinated system for collective bargaining.  
The overall institutional setup for public 
procurement needs strengthening . A State Audit 
report in 2018 ( State Audit Office , 2018 ) noted 
overall delays and shortages of staff in most 
institutions involved in public procurement, 
including the Central State Office for Public 
Procurement and the bodies working in the area of 
ESIF. The report emphasised the key role of the 
Central Finan ce and Contracting Agency and other 
second level intermediate bodies (51) as dedicated 
services to provide non -obligatory checks and 
input to draft tender documents. These services are 
understaffed yet they are crucial in assisting the 
final beneficiaries o f EU funds and must maintain 
a high level of technical knowledge and resistance 
to corruption and undue influence. Further work in 
public procurement could include wider 
development and implementation of policies (some 
existing in specific cases) using pub lic 
procurement as a strategic policy instrument 
(social, green and innovative procurement).  
Justice system  
Despite progress in the reduction of backlogs, 
the quality and efficiency of the justice system 
and the personal insolvency framework remain 
to be i mproved.  With the exception of the High 
Commercial Court, the continued reduction of 
backlogs (52) was mainly due to a lower caseload. 
The focus on resolving the oldest cases (10 years 
and older) was effective, but the 2019 EU Justice 
Scoreboard (European C ommission, forthcoming) 
shows that the duration of court proceedings and 
backlogs in Croatia remain among the highest in 
the EU. As of 1 January 2019, the Financial 
Agency will be authorised to initiate ex officio  
certain personal insolvency cases (e.g. fo r people 
with blocked accounts) and the mediation before 
                                                           
(51) Bodies in direct charge of grant contracts of ESIF projects  
(52) 18 % in first instance litigious civil and commercial and 
enforcement cases  and 23  % in the High Commercial Court 
(2018 compared to 2017)  (Ministry of Justice)  FINA is no longer a procedural step before 
reaching the court. While this is expected to lead to 
an increased use of the personal insolvency 
procedures and help reduce the over -indebtedness 
of some h ouseholds, the average duration of 
insolvency and restructuring proceedings further 
increased in all categories.  
Electronic communication in courts and 
implementation of the judicial map reform are 
advancing.  All commercial courts are now 
equipped for e -communication with lawyers, 
notaries and prosecutors. The same is expected to 
follow for insolvency administrators, court experts 
and municipal courts. Online payment of Court 
fees are being incentivised by offering a 50  % 
discount in case of immediate payme nt and online 
submission of a claim. As of 2019, personal and 
corporate insolvency documents should be 
delivered from the Financial Agency to the courts 
electronically. A pilot project is testing the central 
postal delivery of court documents. The Supreme 
Court has fully adopted the e -case system and 
plans to increase the number of published first and 
second instance court rulings, also to improve the 
consistency of case law. The reform of the judicial 
map (in force from January 2019) will merge 
nearly all misdemeanour courts into municipal 
courts. This is expected to increase efficiency and 
quality by better distributing workload.  
Challenges in efficiency and quality in criminal 
justice may hamper effective fight against 
economic and financial crime.  Backlo gs 
increased at all criminal court instances and 
proceedings remained lengthy (650 and 400 days 
at Municipal and for first instance cases at County 
courts, respectively). The State Attorney's Office 
received some additional human resources, but its 
capacit y to fight economic and financial crime 
remains limited.  
Concerns about judicial independence remain . 
According to a ruling by the Constitutional Court 
(Constitutional Court  of the Republic of Croatia , 
2018), the State Judicial Council did not provide 
sufficient reasoning in certain decisions on the 
career of judges, which led to legislative 
amendments that decreased the Council's power in 
selecting judges and could interfere with its 
institutional role. A Eurobarometer survey shows 
that the perceived judi cial independence in Croatia 
decreased further from an already very low level 
4.4. Competitiveness reforms and investment*  
 
57 (European Commission 2019 b).  
Fight against corruption  
Corruption is perceived to be widespread.  
Croatia is amongst the worst performing Member 
States in terms of perception and control of 
corruption, with no improving trend (53). Over half 
of respondents to the 2017 Special Eurobarometer 
on Corruption feel affected by corruption in their 
daily lives (59 %) and Croatia has the largest 
proportion of respondents (16  %) exposed to 
corruption of all Member States (European 
Commission, 2017g) . Similarly, the 2017 
Eurobarometer survey on businesses' attitudes 
towards corruption in the EU (European 
Commission , 2017d) reports that Croatia registered 
the lowest proportion of businesses (5 %) of the 
view that people who take bribes are adequately 
punished, a drop of 14 percentage points compared 
to previous results. Also, only 15 % of businesses 
agree that measur es against corruption are applied 
impartially and without ulterior motive, a 
considerable drop by 24 percentage points from 
2015 (54). 
Some legislative initiatives do not offer 
adequate enforcement tools against corruption . 
Despite some progress through the  partial 
implementation of the anti -corruption action plan, 
Croatia's capacity to prevent and sanction 
instances of corruption remains limited. Two 
legislative proposals, on the protection of whistle -
blowers  and on the prevention of conflicts of 
interests,  are pending adoption by Parliament (55), 
but the latter does not fully address post -
employment issues ("revolving doors") . The draft 
law also makes it difficult for  the Commission for 
Determining Conflicts of Interest to initiate 
proceedings and impose san ctions on officials who 
submit inaccurate asset declarations. It also does 
not apply to chairmen and board members of 
companies majority -owned by local government 
units, which manage significant financial resources 
and thus could be exposed to corruption. Finally, 
no progress has been made on the adoption of a 
                                                           
(53) Transparenc y International, Corruption Perceptions Index; 
World Bank,  Control of Corrup tion Indicator . 
(54) Question:  "To what extent are public officeholders 
prevented from abusing their position for private 
interests?"  (Petak and al. 2018).  
(55) The laws are planned for adoption by end of 2018.  code of ethics for Members of Parliament and 
plans to regulate lobbying have stalled .   
Control and sanction mechanisms at the local 
level are weak.  Changes to the framework for the 
functioning of loc al government units are not 
accompanied by improvements to control 
corruption at the local level. The Law on Local and 
Regional Self -Governance gives elected local 
officials considerable discretion in decision -
making. Their discretionary powers to decide o n 
disposing of assets and finances of up to HRK 1 
million and to appoint board members of public 
local companies  are considerable risk factors as 
these board members are not subject to the same 
form of oversight . The 2017 Special 
Eurobarometer on corruptio n shows that 90  % of 
Croatians think that corruption is present in local 
or regional public institutions, and 72  % of 
companies think corruption is widespread in public 
procurement managed at the local or regional 
level, an increase by six percentage point s from 
2015. Studies also indicate that competitive 
advantage on the market at local level is achieved 
mainly because of political connections rather than 
competence (Vuković, 2017).  
Strengthening ex -ante scrutiny and e -
procurement can support the fight ag ainst 
corruption . E-procurement in Croatia is advanced 
and provides a good basis for further developments 
in transparency through further use of data, 
integration with other e -government solutions, and 
deployment of emerging technologies. Positive 
steps we re taken with the development of the 
contract register and the possibility to lodge 
complaints electronically before the State 
Commission for Supervision of Public 
Procurement Procedures (56). 
                                                           
(56) This will soon become mandatory and it is crucial that 
adequate resources be dedicated to any technical 
challenges.  
 
 
58 CSR 1:  Strengthen the fiscal framework, 
including by strengthening the mandate and 
independence of the Fiscal Policy 
Commission. Introduce a recurrent property 
tax.  Croatia has made Some Progress  in addressing 
CSR  1 
Strengthen the fiscal framework, including 
by strengthening the mandate and 
independence of the Fiscal Policy 
Commission.  Substantial Progress  in str engthening the fiscal 
framework. After a long delay, in December 2018 the 
Parliament adopted a new Fiscal Responsibility Act 
and a new State Audit Office Act. The adoption of 
the new Budget A ct remains delayed.  
Introduce a recurrent property tax.  No Progress  The introduction of a recurrent value -
based property tax is no longer planned.  
CSR 2:  Discourage early retirement, 
accelerate the transition to a higher statutory 
retirement age and align pension provisions 
for specific categories with the rules of the 
general scheme. Deliver on the reform of the 
education and training system to improve it s 
quality and labour market relevance for both 
young people and adults. Consolidate social 
benefits and improve their poverty reduction 
capacity.  Croatia has made Some Progress  in addressing 
CSR  2 
Discourage early retirement, accelerate the 
transition to  a higher statutory retirement 
age and align pension provisions for specific 
categories with the rules of the general 
scheme.  Substantial Progress . In December 2018 the 
parliament adopted an important pa ckage of pension 
system reforms aimed at addressing design 
inconsistencies in the system, improving pension 
adequa cy through longer working lives, and  
strengthening the institutional setup and performance 
of the 2nd mandatory pillar.  
Deliver on the reform of the education and 
training system to improve its quality and 
labour market relevance for both young 
people and adults.  Some Progress in delivering on the reform of the 
education and training syst em. A number of  
measures have been set in motion, such as the launch 
of newly developed general education curricula as a 
pilot project. Other objectives set in the Education 
and Training 2020 Strategic Framework await 
adoption and implementation . 
Consolidate social benefits and improve 
their poverty reduction capacity.  Limited Progress in consolidating social benefits.  A 
categorisation of the types of benefits granted at the 
local government level following the European 
System of integrated Social Protection Statistics  
nomenclat ure was com pleted.  However, most policy 
measures remain in a preparatory phase.   ANNEX A : OVERVIEW TABLE  
 
Table  A.1: 2018 country -specific recommendations (and subparts) assessment  
 
 
 
A. Overview Table  
 
59 CSR 3:  Reduce the territorial fragmentation 
of the public administration, streamline the 
functional distribution of competencies and 
enhance the capacity to design and implement 
public policies. In consultation with social 
partners, introduce harmonised wage -setting 
frameworks across the public administration 
and public services.  Croatia has made Limited Progress  in addressing 
CSR  3  
Reduce the territorial fragmentation of the 
public administration, streamline the 
functional distribution of competencies 
and enh ance the capacity to design and 
implement public policies.  Some Progress in the public administration reform . 
A substantial rationalisation of the c umbersome state 
agencies system  – as a step towards simplification 
and efficiency  – is ongoing . The territorial 
fragmentation at the local government level remains 
a challenge.  
In consultation with social partners, 
introduce harmonised wage -setting 
frameworks across the public 
administration and public services.  Limited Progress in harmonising  wage-setting 
frameworks across the public administration and 
public services , as the relevant legislation remains in 
a preparatory phase  
CSR 4: Improve corporate governance in 
state-owned enterprises and intensify the sale 
of state -owned enterprises and no n-productive 
assets. Significantly reduce the burden on 
businesses arising from parafiscal charges and 
from cumbersome administrative and 
legislative requirements. Enhance competition 
in business services and regulated professions. 
Reduce the duration of c ourt proceedings and 
improve electronic communication in courts.  Croatia has made Some  Progress  in addressing 
CSR  4  
Improve corporate governance in state -
owned enterprises and intensify the sale of 
state-owned enterprises and non -
productive assets.  Limited Progress . A new Corporate Governance 
Code has been implemented, and obligatory 
reporting on business plans and performance has 
been introduced in all major state -owned enterprises. 
Disposal of state assets  has progressed slowly due to 
delays in adopti on of required legislation.  
Significantly reduce the burden on 
businesses arising from parafiscal charges 
and from cumbersome administrative and 
legislative requirements.  Some  Progress  in reducing the burden on business. 
There has been some progress with  the continuation 
of removal of identified administrative burden and 
limited progress with the removal of parafiscal 
charges.  
Enhance competition in business services 
and regulated professions.  Limited Progress in enhancing  competition in 
business services and regulated professions . The 
implementation of some measures to remove 
excessive restrictions has finally started, most 
notably in passenger transport, audit and education.   
A. Overview Table  
 
60 Reduce the duration of court proceedings 
and improve electronic communication in 
courts.  Some Progress in the judicial system reform.  
Backlogs in courts h ave been reduced and progress 
was made with implementation of electronic 
communication. Mergers of courts effective as of 
January 2019 are expected to increase efficiency.  
The following categories are used to assess progress in implementing the country -specific recommendations (CSRs):  
No progress:  The Member State has not credibly announced nor adopted any measures to address the CSR. This c ategory 
covers a number of typical situations to be interpreted on a case by case basis taking into account country -specific conditions. 
They include the following:  
 no legal, administrative, or budgetary measures have been announced  
 in the national reform  programme,  
 in any other official communication to the national Parliament/relevant parliamentary committees or the European 
Commission,  
 publicly (e.g. in a press statement or on the government's website);  
 no non -legislative acts have been presented by the  governing or legislative body;  
 the Member State has taken initial steps in addressing the CSR, such as commissioning a study or setting up a study 
group to analyse possible measures to be taken (unless the CSR explicitly asks for orientations or explorato ry 
actions). However, it has not proposed any clearly -specified measure(s) to address the CSR.  
Limited progress:  The Member State has:  
 announced certain measures but these address the CSR only to a limited extent; and/or  
 presented legislative acts in the  governing or legislative body but these have not been adopted yet and substantial 
further, non -legislative work is needed before the CSR is implemented;  
 presented non -legislative acts, but has not followed these up with the implementation needed to addres s the CSR.  
Some progress:  The Member State has adopted measures:  
 that partly address the CSR; and/or  
 that address the CSR, but a fair amount of work is still needed to fully address the CSR fully as only a few of the 
measures have been implemented. For instance, a measure or measures have been adopted by the national Parliament 
or by ministerial decision but no implementing decisions are in place.  
Substantial progress:  The Member State has adopted measures that go a long way towards addressing the CSR a nd most of 
them have been implemented.  
Full implementation:  The Member State has implemented all measures needed to address the CSR appropriately.  
A. Overview Table  
 
61 Europe 2020 (national targets and progress)  
Employment rate (age group 20 – 64) target 
set in the NRP: 65.2 % The employment rate in Croatia has been slowly and 
steadily increasing (from 58.3% in 2013 to 66.3  % in 
Q3 2018). Croatia has achieved its national target, 
but the employment rate is still among the lowest in 
the EU, and well below the EU average.  
R&D target set in the NRP: 1.4  % of GDP  In 2017, R &D intensity in Croatia was 0.86% of 
GDP composed of 50% private investment (0.43% of 
GDP) and 50% public investment (0.43% of GDP).  
Croatia is not on track to meet the target.   
Greenhouse gas emissions, national target:  
+11% between 2005 and 2020  Total GHG emissions in Croatia were reduced by 
23.3% from 1990 to 2017. Based on the latest 
national projections submitted to the Commission, 
and taking into account existing measures, Croatia is 
expected to mee t its GHG emission target by a wide 
margin ( -12.5 % between 2005 and 2020).  
2020 renewable energy target: 20 %  
2020 renewable energy source (RES) in 
transport target: 10 %  With a renewable energy share of 28.3 % in 2016, 
Croatia is well above its target for 2020.  
With a 1.3 % share of RES in transport in 2016, 
Croatia is well below its 2020 target.  
Energy efficiency, 2020 energy consumption 
targets:  
 11.2 Mtoe (primary energy consumption);  
 7 Mtoe (final energy consumption).  Croatia's primary and final en ergy consumption 
remains below the country's 2020 energy efficiency 
targets.  
 8.07 Mtoe (primary energy consumption, 2016)  
 6.64 Mtoe (final energy consumption, 2016)  
Early school leaving (ESL) target: 4  % At 3.1  % Croatia remained among the leading EU 
Member States in ensuring that its young people 
complete secondary education. Both the national 
target of 4  % and the EU -level target of 10  % were 
comfortably met.  
Tertiary education target: 35  % Croatia's tertiary education attainment rate has been 
slowl y declining since 2014 and stood at 28.7  % in 
2017. The enrolment rates of the corresponding 
student cohort, together with the overall drop -out 
rates, make it unlikely that Croatia will meet its 
national target by 2020.  
Target for reducing the number of p eople at 
risk of poverty or social exclusion, expressed 
as an absolute number of people: by 150 000.   The number of people at risk of poverty or social 
exclusion fell from 1.384 million in 2011 to 1.085 
million in 2017. Therefore, the national target has 
already been met.   
 
 
 
62 
General Government debt projections under baseline, alternative scenarios and sensitivity tests
2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029
Gross debt ratio 77.5 73.5 70.1 68.2 66.7 66.0 65.9 65.4 65.1 64.9 64.7 64.5 64.3
Changes in the ratio  (-1+2+3) -2.7 -4.0 -3.4 -1.9 -1.5 -0.7 -0.1 -0.5 -0.3 -0.2 -0.2 -0.2 -0.3
of w hich
(1) Primary balance  (1.1+1.2+1.3) 3.5 2.7 2.6 2.2 1.7 1.3 0.9 0.9 0.8 0.8 0.9 1.0 1.1
(1.1) Structural primary balance  (1.1.1-1.1.2+1.1.3) 3.3 1.9 1.6 1.0 1.0 0.9 0.9 0.9 0.8 0.8 0.9 1.0 1.1
(1.1.1) Structural primary balance (bef. CoA) 3.3 1.9 1.6 1.0 1.0 1.0 1.0 1.0 1.0 1.0 1.0 1.0 1.0
(1.1.2) Cost of ageing 0.1 0.1 0.1 0.2 0.2 0.2 0.1 0.0 -0.2
(1.1.3) Others (taxes and property incomes) 0.0 0.0 0.0 0.0 0.0 0.0 -0.1 -0.1 -0.1
(1.2) Cyclical component 0.3 0.8 1.1 1.2 0.8 0.4 0.0 0.0 0.0 0.0 0.0 0.0 0.0
(1.3) One-off and other temporary measures -0.1 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0
(2) Snowball effect  (2.1+2.2+2.3) -0.5 -1.4 -0.9 -0.6 0.2 0.7 0.8 0.4 0.5 0.6 0.7 0.8 0.9
(2.1) Interest expenditure 2.7 2.4 2.3 2.2 2.2 2.2 2.2 2.3 2.4 2.5 2.6 2.7 2.7
(2.2) Growth effect -2.3 -2.1 -1.9 -1.7 -0.8 -0.3 -0.2 -0.7 -0.6 -0.6 -0.6 -0.6 -0.6
(2.3) Inflation effect -0.9 -1.7 -1.2 -1.1 -1.2 -1.2 -1.3 -1.3 -1.3 -1.3 -1.3 -1.3 -1.3
(3) Stock-flow adjustments 1.3 0.1 0.1 1.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0
Note: For further information, see the European Commission Fiscal Sustainability Report (FSR) 2018. 
b. For the medium-term, the risk category (low/medium/high) is based on the joint use of the S1 indicator and of the DSA results. The S1 indicator measures the fiscal adjustment 
required (cumulated over the 5 years following the forecast horizon and sustained thereafter) to bring the debt-to-GDP ratio to 60 % by 2033. The critical values used are 0 and 2.5 
pps. of GDP. The DSA classification is based on the results of 5 deterministic scenarios (baseline, historical SPB, higher interest rate, lower GDP growth and negative shock on the 
SPB scenarios) and the stochastic projections. Different criteria are used such as the projected debt level, the debt path, the realism of fiscal assumptions, the probability of debt 
stabilisation, and the size of uncertainties. 
c. For the long-term, the risk category (low/medium/high) is based on the joint use of the S2 indicator and the DSA results. The S2 indicator measures the upfront and permanent 
fiscal adjustment required to stabilise the debt-to-GDP ratio over the infinite horizon, including the costs of ageing. The critical values used are 2 and 6 pps. of GDP. The DSA results 
are used to further qualify the long-term risk classification, in particular in cases when debt vulnerabilities are identified (a medium / high DSA risk category). [2]Thecharts present aseries ofsensitivity tests around thebaseline scenario, aswellasalternative policy scenarios, inparticular: thehistorical structural primary balance (SPB)
scenario (where theSPB issetatitshistorical average), theStability andGrowth Pact (SGP) scenario (where fiscal policy isassumed toevolve inlinewiththemain provisions ofthe
SGP), ahigher interest ratescenario (+1pp.compared tothebaseline), alower GDP growth scenario (-0.5 pp.compared tothebaseline) andanegative shock ontheSPB (calibrated
onthebasis oftheforecasted change). Anadverse combined scenario andenhanced sensitivity tests (ontheinterest rateandgrowth) arealso included, aswell asstochastic
projections. Detailed information on the design of these projections can be found in the FSR 2018.HR - Debt projections baseline scenario
[1]Thefirsttable presents thebaseline no-fiscal policy change scenario projections. Itshows theprojected government debt dynamics anditsdecomposition between theprimary
balance, snowball effects andstock-flow adjustments. Snowball effects measure thenetimpact ofthecounteracting effects ofinterest rates, inflation, realGDP growth (and exchange
rates in some countries). Stock-flow adjustments include differences in cash and accrual accounting, net accumulation of assets, as well as valuation and other residual effects.
[3] The second table presents the overall fiscal risk classification over the short, medium and long-term. 
a. For the short-term, the risk category (low/high) is based on the S0 indicator. S0 is an early-detection indicator of fiscal stress in the upcoming year, based on 25 fiscal and financial-
competitiveness variables that have proven in the past to be leading indicators of fiscal stress. The critical threshold beyond which fiscal distress is signalled is 0.46. 50556065707580859095100
2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029Debt as % of GDP -HR
Baseline Enhanced lower GDP growth scenario
Adverse combined scenario Enhanced higher interest rate scenario5060708090100
2016 2017 2018 2019 2020 2021 2022 2023(% of GDP) Stochastic debt projections 2019 -2023 -HR
p10_p20 p20_p40 p40_p60
p60_p80 p80_p90 p50 Baseline50556065707580859095100
2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029Debt as % of GDP -HR
Baseline Historical SPB scenario SGP scenario50556065707580859095100
2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029Debt as % of GDP -HR
Baseline Higher interest rate scenario
Negative shock on the SPB Lower GDP growth scenario
BaselineHistorical 
SPBLower GDP 
growthHigher 
interest rateNegative 
shock on 
SPBStochastic 
projections
Risk category MEDIUM MEDIUM MEDIUM MEDIUM MEDIUM MEDIUM
Debt level (2029) 64.3 80.7 68.2 69.4 68.9
Debt peak year 2018 2029 2018 2018 2018
Percentile rank 38.0% 68.0%
Probability debt higher 35.8%
Dif. between percentiles 40.8MEDIUMLong 
termDSA
MEDIUMDebt sustainability analysis (detail)Medium 
term
MEDIUMMEDIUMShort 
term
LOW
(S0 = 0.2) (S1 = 0.2)S2
LOW
(S2 = -2.1)S1ANNEX B : COMMISSION DEBT SUST AINABILITY ANALYSIS AND 
FISCAL RISKS  
 
 
63  ANNEX C : STANDARD TABLES  
 
Table  C.1: Financial market indicators  
 
(1) Latest data Q3 2018. Includes not only banks but all monetary financial institutions excluding central banks.  
(2) Latest data Q2 2018.  
(3) Quarterly values are annualised.  
* Measured in basis points.  
Source:  European Commission (long -term interest rates); World Bank (gross external debt); Eurostat (private debt); ECB (all 
other indicators).  
 
2013 2014 2015 2016 2017 2018
Total assets of the banking sector (% of GDP)(1)132,4 133,1 129,8 124,6 119,2 115,2
Share of assets of the five largest banks (% of total assets) 72,9 72,3 72,7 73,0 72,8 -
Foreign ownership of banking system (% of total assets)(2)89,9 90,2 90,5 90,1 90,8 90,7
Financial soundness indicators:(2)
              - non-performing loans (% of total loans) - 13,6 13,0 10,7 8,8 8,7
              - capital adequacy ratio (%) 19,6 20,4 19,2 20,8 21,4 20,3
              - return on equity (%)(3)0,6 3,9 -6,8 8,9 5,9 11,1
Bank loans to the private sector (year-on-year % change)(1)-0,1 -1,7 -2,4 0,5 4,5 5,0
Lending for house purchase (year-on-year % change)(1)-2,0 -2,8 -1,9 -2,1 2,7 3,3
Loan to deposit ratio(2)- 92,0 89,2 85,3 82,1 83,1
Central Bank liquidity as % of liabilities(1)0,0 0,0 0,1 0,3 0,4 0,3
Private debt (% of GDP) 117,7 118,0 113,0 105,3 98,4 -
Gross external debt (% of GDP)(2) - public 32,5 35,5 35,7 31,7 29,1 27,7
    - private 50,3 51,8 48,7 44,7 40,7 39,0
Long-term interest rate spread versus Bund (basis points)* 311,1 288,8 305,5 339,6 245,0 176,9
Credit default swap spreads for sovereign securities (5-year)* 303,7 276,1 273,1 240,1 148,4 94,5
C. Standard Tables  
 
64   
Table  C.2: Headline Social Scoreboard indicators  
 
(1) People at risk of poverty or social exclusion (AROPE): individuals who are at risk of poverty (AROP) and/or suffering fro m 
severe material deprivation (SMD) and/or living in households with zero or very low work intensi ty (LWI).  
AROPE: At -risk-of-poverty or social exclusion rate (% of total population). People who are at -risk-of poverty (AROP) and/or 
suffering from severe material deprivation (SMD) and/or living in household with zero or very low work intensity (LWI).  
AROP: At -risk-of poverty rate (% of total population). People who have an equivalised disposable income below 60  % of the 
national equivalised median income.  
SMD: Severe material deprivation rate (% of total population). People who experience at least 4 out  of 9 deprivations: people 
cannot afford to i) pay their rent or utility bills, ii) keep their home adequately warm, iii) face unexpected expenses, iv) eat 
meat, fish, or a protein equivalent every second day, v) enjoy a week of holiday away from home once  a year, vi) have a 
car, vii) have a washing machine, viii) have a colour tv, or ix) have a telephone.  
LWI: People living in low work intensity households (% of population 0 -59). People living in households where the adults work 
less than 20  % of their tot al work -time potential during the previous 12 months.  
AROPE, AROP: previous year income, SMD: current year, JLH: previous year.  
(2) Unemployed persons are all those who were not employed but had actively sought work and were ready to begin 
working immedia tely or within two weeks.       
(3) Long -term unemployed are people who have been unemployed for at least 12 months.       
(4) Gross disposable household income is defined in unadjusted terms, according to the draft Joint Employment Report 2019.       
(5) Reduction in percentage of the risk of poverty rate, due to social transfers (calculated comparing at -risk-of poverty rates 
before social transfers with those after transfers; pensions are not considered as social transfers in the calculation).       
(6) A verage of first three quarters of 2018 for the employment rate, long -term unemployment rate and gender employment 
gap. Data for unemployment rate is annual (except for DK, EE, EL, HU, IT and UK data based on first three quarters of 2018).       
Source:  Eurostat.  
 
2013 2014 2015 2016 2017 2018(6)
Equal opportunities and access to the labour market
Early leavers from education and training 
(% of population aged 18-24)4,5 2,8 2,8 2,8 3,1 :
Gender employment gap (pps) 8,8 10,0 9,5 9,6 10,6 9,9
Income inequality, measured as quintile share ratio (S80/S20) 5,3 5,1 5,2 5,0 5,0 :
At-risk-of-poverty or social exclusion rate(1) (AROPE) 29,9 29,3 29,1 27,9 26,4 :
Young people neither in employment nor in education and 
training (% of population aged 15-24)19,6 19,3 18,1 16,9 15,4 :
Dynamic labour markets and fair working conditions†
Employment rate (20-64 years) 57,2 59,2 60,6 61,4 63,6 65,2
Unemployment rate(2) (15-74 years) 17,4 17,2 16,1 13,4 11,0 8,5
Long-term unemployment rate(3) (as % of active population) 11,0 10,1 10,2 6,6 4,6 3,5
Gross disposable income of households in real terms per 
capita(4) (Index 2008=100) : : : : : :
Annual net earnings of a full-time single worker without 
children earning an average wage (levels in PPS, three-year 
average): : 12789 13113 : :
Annual net earnings of a full-time single worker without 
children earning an average wage (percentage change, real 
terms, three-year average): : : 2,3 : :
Public support / Social protection and inclusion
Impact of social transfers (excluding pensions) on poverty 
reduction(5) 34,3 35,1 35,5 28,6 24,8 :
Children aged less than 3 years in formal childcare 11,0 17,1 11,8 15,7 15,9 :
Self-reported unmet need for medical care 3,3 3,3 1,9 1,7 1,6 :
Individuals who have basic or above basic overall digital skills 
(% of population aged 16-74): : 51,0 55,0 41,0 :
C. Standard Tables  
 
65   
Table  C.3: Labour market and education indicators  
 
* Non -scoreboard indicator.  
(1) Difference between the average gross hourly earnings of male paid employees and of female paid employees as a 
percentage of average gross hourly earnings of male paid employees. It is defined as "unadjusted", as it does not correct for  
the distribution  of individual characteristics (and thus gives an overall picture of gender inequalities in terms of pay). All 
employees working in firms with ten or more employees, without restrictions for age and hours worked, are included.       
(2) PISA (OECD) results  for low achievement in mathematics for 15 year -olds.  
(3) Impact of socio -economic and cultural status on PISA (OECD) scores. Values for 2012 and 2015 refer respectively to 
mathematics and science.  
(4) Average of first three quarters of 2018 for the activi ty rate, employment growth, employment rate, part -time employment, 
fixed -term employment. Data for youth unemployment rate is annual (except for DK, EE, EL, HU, IT and UK data based on first 
three quarters of 2018).  
Source:  Eurostat, OECD.  
 
Labour market indicators 2013 2014 2015 2016 2017 2018(4)
Activity rate (15-64) 63,7 66,1 66,9 65,6 66,4 66,3
Employment in current job by duration
From 0 to 11 months 8,9 11,6 11,5 14,1 14,2 :
From 12 to 23 months 7,1 6,0 7,5 8,8 9,0 :
From 24 to 59 months 14,0 14,1 12,9 13,6 14,8 :
60 months or over 70,0 68,3 68,0 62,4 60,7 :
Employment growth* 
(% change from previous year) -2,6 2,7 1,2 0,3 2,2 2,4
Employment rate of women
(% of female population aged 20-64) 52,8 54,2 55,9 56,6 58,3 60,3
Employment rate of men 
(% of male population aged 20-64)61,6 64,2 65,4 66,2 68,9 70,2
Employment rate of older workers* 
(% of population aged 55-64)37,8 36,2 39,2 38,1 40,3 42,9
Part-time employment* 
(% of total employment, aged 15-64)5,4 5,3 6,0 5,6 4,8 5,0
Fixed-term employment* 
(% of employees with a fixed term contract, aged 15-64)14,5 16,9 20,2 22,2 20,7 20,2
Participation in activation labour market policies
(per 100 persons wanting to work)4,8 4,5 6,6 7,0 : :
Transition rate from temporary to permanent employment
(3-year average)35,5 : 30,8 32,2 34,1 :
Youth unemployment rate 
(% active population aged 15-24)49,9 44,9 42,3 31,8 27,2 24,5
Gender gap in part-time employment (aged 20-64) 1,7 2,7 2,6 2,7 2,2 2,6
Gender pay gap(1) (in undadjusted form) 7,7 8,7 : : : :
Education and training indicators 2013 2014 2015 2016 2017 2018
Adult participation in learning
(% of people aged 25-64 participating in education and  training)3,1 2,8 3,1 3,0 2,3 :
Underachievement in education(2): : 32,0 : : :
Tertiary educational attainment (% of population aged 30-34 having 
successfully completed tertiary education)25,6 32,1 30,8 29,3 28,7 :
Variation in performance explained by students' socio-economic 
status(3) : : 12,1 : : :
C. Standard Tables  
 
66   
Table  C.4: Social inclusion and health indicators  
 
* Non -scoreboard indicator.   
(1) At -risk-of-poverty rate (AROP): proportion of people with an equivalised disposable income below 60  % of the national 
equivalised median income.        
(2) Proportion of people who experience at least four of the following forms of deprivation: not being able to afford to i) p ay 
their rent or utility bills, ii) keep their home adequately warm, iii) face unexpected expenses, iv) eat meat, fish or a prot ein 
equivalent every second day, v) enjoy a week of holiday away from home once a year, vi) have a car, vii) have a washing 
machine, viii) have a colour TV, or ix) have a telephone.       
(3) Percentage of total population living in overcrowded dwellings and exhibiting housing deprivation.       
(4) People living in households with very low work intensity: proportion of people aged 0 -59 living in households where the 
adults (excluding dependent children) worked less than 20  % of their total work -time potential  in the previous 12 months.       
(5) Ratio of the median individual gross pensions of people aged 65 -74 relative to the median individual gross earnings of 
people aged 50 -59. 
(6) Fixed broadband take up (33  %), mobile broadband take up (22  %), speed (33  %) and affordability (11  %), from the Digital 
Scoreboard.  
Source:  Eurostat, OECD.  
 
2012 2013 2014 2015 2016 2017
Expenditure on social protection benefits* (% of GDP)
Sickness/healthcare 7,4 6,9 6,8 7,1 7,0 :
Disability 2,7 2,7 2,6 2,5 2,3 :
Old age and survivors 8,7 9,0 9,3 9,1 9,0 :
Family/children 1,6 1,6 1,9 1,9 1,8 :
Unemployment 0,5 0,5 0,5 0,6 0,5 :
Housing 0,0 0,0 0,0 0,0 0,0 :
Social exclusion n.e.c. 0,2 0,2 0,3 0,3 0,3 :
Total 21,1 20,9 21,4 21,4 20,9 :
of which: means-tested benefits 1,1 1,1 1,1 1,1 1,0 :
General government expenditure by function (% of GDP, COFOG)
Social protection 15,5 15,4 15,9 15,3 14,7 :
Health 7,2 6,5 6,6 6,4 6,5 :
Education 4,9 5,1 4,8 4,8 4,8 :
Out-of-pocket expenditure on healthcare (% of total health expenditure) : 12,8 15,8 15,5 15,4 :
Children at risk of poverty or social exclusion (% of people 
aged 0-17)*34,8 29,3 29,0 28,2 26,6 25,8
At-risk-of-poverty  rate(1) (% of total population) 20,4 19,5 19,4 20,0 19,5 20,0
In-work at-risk-of-poverty rate (% of persons employed) 6,0 6,2 5,7 5,9 5,6 5,8
Severe material deprivation rate(2)  (% of total population) 15,9 14,7 13,9 13,7 12,5 10,3
Severe housing deprivation rate(3), by tenure status
Owner, with mortgage or loan 11,6 5,8 2,3 6,1 5,4 6,2
Tenant, rent at market price 17,6 7,1 16,0 15,0 7,6 5,5
Proportion of people living in low work intensity households(4)
(% of people aged 0-59)16,8 14,8 14,7 14,4 13,0 12,2
Poverty thresholds, expressed in national currency at constant prices* 20922 19330 19585 20544 21568 23293
Healthy life years (at the age of 65)
Females 7,9 5,9 5,8 4,5 4,9 :
Males 7,7 5,5 6,0 4,7 5,2 :
Aggregate replacement ratio for pensions(5) (at the age of 65) 0,4 0,4 0,4 0,4 0,4 0,4
Connectivity dimension of the Digital Economy and Society Index 
(DESI)(6) : : 29,9 35,4 42,0 45,0
GINI coefficient before taxes and transfers* 50,6 50,8 50,1 51,0 49,9 49,4
GINI coefficient after taxes and transfers* 30,9 30,9 30,2 30,6 29,8 29,9
C. Standard Tables  
 
67   
Table  C.5: Product market performance and policy indicators  
 
(1) Value added in constant prices divided by the number of persons employed.  
(2) Compensation of employees in current prices divided by value added in constant prices.  
(3) The methodologies, including the assumptions, for this indicator are shown in detail here: 
http://www.doingbusiness.org/methodology  
(4) Average of the answer to question Q7B_a. "[B ank loan]: If you applied and tried to negotiate for this type of financing 
over the past six months, what was the outcome?". Answers were codified as follows: zero if received everything, one if 
received 75  % and above, two if received below 75  %, three i f refused or rejected and treated as missing values if the 
application is still pending or don't know.  
(5) Percentage population aged 15 -64 having completed tertiary education.  
(6) Percentage population aged 20 -24 having attained at least upper secondary e ducation.  
(7) Index: 0 = not regulated; 6 = most regulated. The methodologies of the OECD product market regulation indicators are 
shown in detail here: http://www.oecd.org/competition/reform/indicatorsofproductmarketregulationhomepage.htm  
(8) Aggregate O ECD indicators of regulation in energy, transport and communications (ETCR).  
Source:  European Commission; World Bank — Doing Business (for enforcing contracts and time to start a business); OECD (for 
the product market regulation indicators); SAFE (for out come of SMEs' applications for bank loans).  
 
Performance indicators 2012 2013 2014 2015 2016 2017
Labour productivity per person(1) growth (t/t-1) in %
Labour productivity growth in industry -2,72 2,53 0,79 4,23 5,07 -0,39
Labour productivity growth in construction -5,62 -2,51 0,92 -2,90 -0,86 6,18
Labour productivity growth in market services -1,03 2,64 -4,35 -0,56 -0,35 -2,48
Unit Labour Cost (ULC) index(2) growth (t/t-1) in %
ULC growth in industry 6,01 1,61 -2,66 -1,36 -3,77 1,33
ULC growth in construction 8,64 -2,42 -3,39 4,02 -1,00 2,02
ULC growth in market services 1,48 -1,33 1,73 -1,29 2,23 0,15
Business environment 2012 2013 2014 2015 2016 2017
Time needed to enforce contracts(3) (days) 572 650 650 650 650 650
Time needed to start a business(3) (days) 22,5 22,5 22,5 22,5 22,5 22,5
Outcome of applications by SMEs for bank loans(4): 0,19 0,88 0,31 0,60 0,10
Research and innovation 2012 2013 2014 2015 2016 2017
R&D intensity 0,75 0,81 0,78 0,84 0,84 0,86
General government expenditure on education as % of GDP 4,90 5,10 4,80 4,80 4,80 :
Employed people with tertiary education and/or people employed in 
science and technology as % of total employment32 36 37 38 38 38
Population having completed tertiary education(5)16 17 19 20 20 21
Young people with upper secondary education(6)94 94 96 96 96 96
Trade balance of high technology products as % of GDP -1,27 -1,48 -1,52 -1,75 -1,85 -1,15
Product and service markets and competition 2003 2008 2013
OECD product market regulation (PMR)(7), overall : : 2,08
OECD PMR(7), retail : : 1,42
OECD PMR(7), professional services : : 3,70
OECD PMR(7), network industries(8): : 2,75
C. Standard Tables  
 
68  
Table  C.6: Green growth  
 
(1) All macro intensity indicators are expressed as a ratio of a physical quantity to GDP (in 2010 prices).  
(2) Gross inland energy consumption (in kgoe) divided by GDP (in EUR).  
(3) Greenhouse gas emissions (in kg CO2 equivalents) divided by GDP (in EUR).  
(4) Domestic material consumption (in kg) divided by GDP (in EUR).  
(5) Waste (in kg) divided by GDP (in EUR).  
(6) Balance of energy exports and imports, expressed as % of GDP.  
(7) Proportion of 'energy' items in the consumption basket used for the construction of the HICP.  
(8) Energy component of HICP, and total HICP inflation (annual % change).  
(9) Real energy costs as % of total value added for the economy.  
(10) Final energy co nsumption of industry (in kgoe) divided by gross value added of industry (in 2010 EUR).  
(11) Real costs as % of value added for manufacturing sectors.  
(12) Share of gross value added of the energy -intensive industries in GDP.  
(13) Consumption band 500 –20 00MWh and 10 000 –100 000 GJ; figures excl. VAT.  
(14) Ratio of recycled and composted municipal waste to total municipal waste.  
(15) Government spending on R&D for these categories as % of GDP.  
(16) Based on GHG emissions (excluding aviation, land use, land use change and forestry) as reported by Member States to 
the European Environment Agency.  
(17) Final energy consumption of transport activity (kgoe) divided by transport industry gross value added (in 2010 EUR).  
(18) GHG emissions in transport activity div ided by gross value added of the transport industry.  
(19) Net energy imports divided by gross inland energy consumption incl. consumption of international bunker fuels.  
(20) Covers oil, gas and coal. Smaller values indicate larger diversification and hence  lower risk.  
(21) Herfindahl index covering natural gas, total petrol products, nuclear heat, renewable energies and solid fuels.  
* European Commission and European Environment Agency.  
Source:  European Commission and European Environment Agency (Share of G HG emissions covered by ETS); European 
Commission (Environmental taxes over labour taxes and GDP); Eurostat (all other indicators).  
Green growth performance 2012 2013 2014 2015 2016 2017
Macroeconomic(1)
Energy intensity(2)kgoe / € 0,20 0,20 0,19 0,19 0,18 0,19
Carbon intensity(3)kg / € 0,59 0,56 0,54 0,54 0,52 -
Resource intensity (reciprocal of resource productivity)(4)kg / € 0,92 0,97 0,88 0,92 0,91 0,84
Waste intensity(5)kg / € 0,08 - 0,09 - 0,11 -
Energy balance of trade(6)% GDP -5,6 -5,1 -4,0 -3,4 -2,7 -2,9
Weighting of energy in HICP(7)% 14,5 15,7 16,5 14,9 10,8 11,6
Difference between energy price change and inflation(8)% 11,4 2,6 -0,2 -2,7 -4,4 -5,3
Real unit of energy cost(9) % of value 
added9,4 9,0 8,7 9,0 9,3 -
Ratio of environmental taxes to labour taxes ratio 0,18 0,20 0,22 0,23 0,24 -
Environmental taxes % GDP 2,6 2,9 3,2 3,4 3,5 3,4
Sectoral 
Industry energy intensity(10)kgoe / € 0,12 0,12 0,12 0,11 0,11 -
Real unit energy cost for manufacturing industry excl. 
refining(11)% of value 
added5,6 5,5 5,4 5,5 5,6 -
Share of energy-intensive industries in the economy(12)% GDP 9,2 9,2 9,4 9,5 9,8 -
Electricity prices for medium-sized industrial users(13)€ / kWh 0,09 0,09 0,09 0,09 0,09 0,09
Gas prices for medium-sized industrial users € / kWh 0,04 0,04 0,04 0,04 0,03 0,02
Public R&D for energy(15)% GDP 0,00 0,00 0,00 0,00 0,00 0,00
Public R&D for environmental protection(15)% GDP 0,00 0,00 0,00 0,00 0,01 0,00
Municipal waste recycling rate(14)% 14,7 14,9 16,5 18,0 21,0 23,6
Share of GHG emissions covered by ETS(16)*% 37,5 37,0 36,7 37,2 34,1 -
Transport energy intensity(17)kgoe / € 1,23 1,34 1,36 1,42 1,37 -
Transport carbon intensity(18)kg / € 3,45 3,75 3,81 4,00 3,91 -
Security of energy supply
Energy import dependency(19)% 49,9 47,5 44,3 48,9 48,5 53,3
Aggregated supplier concentration index(20)HHI 19,8 28,2 19,5 14,7 12,6 -
Diversification of energy mix(21)HHI 0,26 0,27 0,28 0,26 0,27 0,28
 
 
69 Building on the Commission proposal for the next Multi -Annual Financial Framework for the period 
2021 -2027 of 2 May 2018 (COM (2018) 321), this Annex presents the  preliminary Commission s ervices 
views on priority investment areas and framework conditions for effective delivery for the 2021 -2027 
Cohesion Policy. These priority investment areas are derived from the broader context of investment 
bottlenecks, investment needs and regional disp arities assessed in the report. This Annex  (57) provides  the 
basis for a dialogue between Croatia and the Commission services in view of the programming of the 
cohesion policy funds (European Regional Development Fund, Cohesion Fund and European Social Fund  
Plus).  
Policy Objective 1: A Smarter Europe – Innovative and smart industrial transformation  
The innovativeness of the Croatian economy is low and progress in improving innovation performance is 
very limited. High priority investment needs  (58) have been identified to enhance research and 
innovation capacities and the uptake of advanced technologies, by taking into account territorial 
differences, and in particular to:  
 strengthen innovation performance and foster productivity growth by identify ing smart specialisation 
areas on the basis of national and regional needs and potential;  
 increase the number of innovative firms in the smart specialisation areas with the highest growth 
potential;  
 develop universities’ and research institutions’ capacity  to enhance market relevance of their research 
projects, build critical research mass and attract talent in the strategic smart specialisation areas;  
 support collaboration between universities and businesses, enabling transfer of technology and 
commerciali sation of research outcomes; support cross -regional, transnational and interregional 
projects;  
 strengthen governance of the smart specialisation strategy.  
Croatia has made progress in digitalisation but further action is needed to exploit its potential. P riority 
investment needs have been identified to reap the benefits of digitalisation for citizens, companies and 
governments , and in particular to:  
 support integration of digital technology in small and medium -sized enterprises including 
infrastructures an d services, by taking into account territorial differences;  
 promote the range of interoperable e -services and their uptake by citizens;  
 upscale and accelerate Digital Public Services in a systemic way.  
Croatia ranks last among peers in business environment; Croatian firms are weakly integrated in global 
value chains. Business investment in research and development is low and concentrated in large 
companies, with low participation of small and medium -sized enterprises.  High priority investment needs 
have been identified to enhance growth and competitiveness of small and medium -sized enterprises , 
and in particular to:  
 move up the global value chains;  
 identify new markets, cooperation networks; stimulate pot ential for innovation clusters by looking 
into emerging trends, markets and concentration in high -performing sectors;  
 enhance quality of business support institutions and business environment.  
Skills shortages and mismatches are among the main barriers fo r further economic development of 
Croatia. High priority investment needs have been identified to develop skills for smart specialisation, 
industrial transition and entrepreneurship , and in particular to:  
 reskill and upskill in smart specialisation areas, with a particular attention to supporting acquisition of 
key competences including digital skills;  
 strengthen education and training institutions including higher education and centres of vocational 
excellence to foster skills for innovation and stimulate entrepreneurship culture.  
                                                           
(57) This Annex is to be considered in conjunction with the EC Proposal for a Regulation of the European Parliament and of the 
Council on the European Regional Development Fund and on  the Cohesion Fund COM(2018) 372 and the EC Proposal for a 
Regulation of the European Parliament and of the Council on the European Social Fund Plus COM(2018) 382, in particular as 
regards the requirements for thematic concentration and urban earmarking ou tlined in these proposals.  
(58) The intensity of needs is classified in three categories in a descending order – high priority needs, priority needs, needs.  ANNEX D : INVESTMENT GUIDANCE ON COHESION POLICY 
FUNDING 2021 -2027 FOR CROATIA  
D. Investment Guidance on Cohesion Policy Funding 2021 -2027 for Croatia  
 
70 Policy Objective 2: A low carbon and greener Europe – Clean and fair energy transition, Green 
and blue investment, circular economy, climate adaptation and risk prevention  
The shift away from landfilling towards separate collection and recycling is stalling. High priority 
investment needs have been identified to promote the transition to a circular economy,  and in 
particular to:  
 support systems of separate collection, compos ting and sorting plants and other measures preparing 
for reuse and recycling, develop alternatives to raw materials and increase demand for recycled 
content;  
 modernise and upgrade existing recycling and waste treatment infrastructure to adapt to new long -
term-recycling targets;  
 raise citizen awareness to sustainable consumption practices and behaviour and improve capacity for 
all stakeholders including though cooperation and share of experiences between Member States;  
 improve the knowledge base and monitor ing of waste and material streams.  
While water supply networks are quite well developed, sanitation lags behind. High priority investment 
needs have been identified to promote sustainable water management,  and in particular to:  
 invest in the collection and treatment of wastewater in agglomerations above 2000 population 
equivalent;  
 invest in drinking water to reduce leakage of water networks and ensure quality requirements for 
drinking water where they are not met (e.g. Eastern Slavonia);  
 increase capacit y of beneficiaries especially at local and regional level to ensure long -term 
sustainability of the sector.  
The economy in general and tourism in particular, depend on the sustainable management of natural 
resources. Priority investment needs have been id entified to enhance biodiversity, green infrastructure 
in the urban environment, and reducing pollution,  and in particular to:  
 support biodiversity as well as ecosystem conservation and restoration projects, species protection 
measures and green infrastruc ture. 
Croatia faces considerable risks caused by extreme weather conditions, especially floods and forest fires. 
Priority investment needs have been identified to promote climate change adaptation, risk prevention 
and disaster resilience,  and in particula r to: 
 address risks as identified in the national risk assessment and climate strategy; primarily floods and 
forest fires.  
High energy intensity could be decreased by increasing energy efficiency  High priority investment needs 
have been identified to promote energy efficiency measures  and developing smart energy systems,  in 
particular to:  
 reduce energy consumption in the building sector i.e. renovation of public and residential buildings; 
tackle the problem of energy poor and improve energy efficiency of district heating networks;  
 deploy solutions for smart electricity, distribution grids and storage linked to demand and supply.  
While in 2016, renewable energy was above EU average, notably thanks to its strong hydropower 
industry, the next phase of ren ewable energy projects, especially wind and solar have considerable 
development potential.  Priority investment needs have been identified to promote renewable energy  and 
in particular to:  
 support transition to renewables in heating and cooling;  
 ensure furt her penetration of sustainable and clean energy primarily wind and solar energy addressing 
in particular energy self -reliance of islands in line with the “Clean Energy for EU islands” initiative.  
D. Investment Guidance on Cohesion Policy Funding 2021 -2027 for Croatia  
 
71  
Policy Objective 3: A more connected Europe – Mobility an d regional Information and 
Communications Technology connectivity  
The railway and multi -modal infrastructure is still visibly lagging behind motorways in terms of quality 
and connectivity. High priority investment needs have been identified to develop a sustainable, climate 
resilient, intelligent, secure and intermodal Trans -European Transport Network , and in particular 
to: 
 complete the Trans -European Transport Network  core and comprehensive railway network with 
requirements on interoperability, including  cross -border sections.  The focus of investments will be on 
completing investments along the Med Corridor and the sub -urban rail network in the greater Zagreb 
functional area;  
 support investments in multi -modal transport with priority on improving the connectivity of different 
sustainable transport modes.  
The transport sector in Croatia is faced with an increasing energy consumption, decreasing share of 
renewable energy and a high road fatalities rate. Investment needs have been identified to develop 
sustainable, climate resilient, intelligent and intermodal national, regional and local mobility, 
including improved access to Trans -European Transport Network  and cross -border mobility , and 
in particular to:  
 address negative externalities from transport by  investments into sustainable modes of transport 
(public transport, multi -modal transport, railways) as well as road safety measures;  
 develop a smart, connected and clean transport system and deploy related infrastructure;  
 improve access of national networ ks to the Trans -European Transport Network.  
Croatia is highly dependent on passenger cars, with other modes of transport visibly lagging behind, and 
the implementation of sustainable urban mobility plans remains a challenge. Priority investment needs 
have been identified to promote sustainable multi modal urban mobility , and in particular to:  
 improve urban transport systems and related rolling stock (taking into account the relevant 
masterplans of functional regions) to reduce dependency on private cars and enable a shift towards 
sustainable and acces sible modes of transport (e.g. low -carbon collective public transport, active 
modes of transport);  
 invest in intelligent transportation system solutions for improved infrastructure use and service 
quality;  
 invest in the commuter port infrastructure on the islands and floating stock in cases with a public 
service contract.  
Policy Objective 4: A more social Europe – Implementing the European Pillar of Social Rights  
Labour market participation remains low, especially for vulnerable groups, while high net emigration and 
skills shortages pose a growing challenge. High priority investment needs have therefore been identified 
to improve access to employment for all jobseekers and to anticipate skills needs , and in particular to:  
 modernise labour market institu tions, including advanced equipment and infrastructure;  
 improve cooperation between employment and social services, employers and education providers;  
 assess and anticipate skills needs and develop outreach strategies and tracking systems;  
 improve coverage  and targeting of Active Labour Market Policy measures;  
 tackle the drivers of inactivity, including undeclared work;  
 reduce territorial disparities in labour market outcomes;  
 develop mechanisms for quick adaptation to the new forms of work and stimulate m obility of 
workers;  
 create business incubators and invest in self -employment, small and medium -sized enterprises and 
business/jobs creation and develop social entrepreneurship.  
Croatia performs below the EU average in education outcomes. High priority inv estment needs have 
therefore been identified to improve the quality, effectiveness and labour market relevance of 
education and training , and in particular to:  
 ensure equal access to and provision of inclusive quality education at all levels, including inv estments 
D. Investment Guidance on Cohesion Policy Funding 2021 -2027 for Croatia  
 
72 in infrastructure and equipment, but especially in early childhood education and care, in particular for 
vulnerable groups and in less developed areas;  
 upskill and reskill the labour force through adult learning; modernise equipment and infrastruc ture; 
 provide support to education and training of teachers and trainers.  
The share of the population at risk of poverty or social exclusion remains high. High priority investment 
needs have therefore been identified to foster active inclusion with a view  to promoting equal 
opportunities and addressing material deprivation , and in particular to:  
 improve social services and infrastructure of centres to support vulnerable groups and families;  
 improve the transition from residential/institutional care to fam ily and community -based care;  
 reduce territorial disparities in social outcomes;  
 address material deprivation through food and basic material assistance to the most deprived;  
 promote social innovation.  
Health outcomes remain weak and inefficiencies in the health care sector persist. High priority investment 
needs have therefore been identified to improve accessibility, effectiveness and resilience of healthcare 
and long -term care services , and in particu lar to:  
 restructure inpatient care and strengthen outpatient services, particularly primary and long term care 
services, including infrastructure and equipment;  
 tackle geographical obstacles in access to healthcare and address gaps in healthcare infrastruc ture and 
shortages in workforce, based on mapping of needs;  
 support implementation of quality standards in healthcare;  
 develop health promotion and disease prevention programmes;  
 continue the rollout of e -health services and improve digital solutions as te lemedicine.  
Policy Objective 5 – A Europe  closer  to citizens  by fostering  the sustainable  and integrated  
development  of urban, rural and coastal areas and local initiatives  
Croatia faces noticeable territorial imbalances that weigh on its competiveness and sustainable growth 
potential. High priority investment needs have been identified to foster integrated socio -economic 
development, including for rural, coastal areas or isl ands , in particular to:  
 reduce inequalities between regions and urban -rural divide by unleashing the endogenous potential of 
lagging regions (e.g. Eastern Croatia), addressing geographical specificities (islands), boosting the 
economic activity and creati ng the necessary linkages with leading poles;  
 support community building by integrated territorial development strategies in rural/sparsely 
populated areas, empowering local stakeholders possibly through the use of Community -led local 
development.  
Croatia 's urban centres offer better job opportunities for better qualified people but do not fully play their 
catalytic role as engines of regional growth. Priority investment needs have been identified and should be 
further specified in integrated urban develop ment strategies to foster the integrated socio -economic 
development in urban areas , in particular to:  
 reinforce the role of leading economic centres as drivers of regional growth and of sustainable and 
integrated development of their functional areas (uni versity centres, places of innovation, urban -rural 
linkages, etc.);  
 support the regeneration of deprived urban neighbourhoods to increase attractiveness for business and 
social inclusion using Community -led local development when possible;  
 strengthen capac ities of local authorities to develop sound integrated territorial strategies.  
Factors for effective delivery of Cohesion policy  
Additional efforts are needed to increase the administrative capacity necessary for the effective 
administration and implementation of the Funds, in particular through:  
 enhanced dialogue with stakeholders, including with social partners, and strengthened capacities of 
the final beneficiaries, and stakeholders at all levels to effectively implement projects and ensure lon g 
term sustainability of investments including through institutional consolidation;  
 reduced administrative burden, improved and simplified procedures, eliminating excessive 
documentation and over bureaucratic requirements to project proposals;  
D. Investment Guidance on Cohesion Policy Funding 2021 -2027 for Croatia  
 
73  consolidated  and properly functioning management and control systems, as well as well working 
evaluation culture in order to enable proper monitoring and evidence -based decisions on 
implementation of EU funds;  
 improved public procurement performance ensuring sufficien t staff and its support;  
 improved and more efficient measures to prevent and address conflict of interest, fraud and 
corruption;  
 development and implementation of a roadmap on administrative capacity building on the pilot action 
on frontloading administrat ive capacity – to effectively manage and use EU funds;  
 broader use of financial instruments and/or contributions to a Croatian’s compartment under InvestEU 
for revenue -generating and cost -saving activities.  
 
 
74 Atoyan, R. and al. (2016), Emigration and its economic impact on Eastern Europe , IMF Staff Discussion 
Note , International Monetary Fund, Washington ( www.imf.org/external/pubs/ft/sdn/2016/sdn1607.pdf ). 
Constitutional Court of the Republic of Croatia (USRH) (2018), Decision U -III-5074/2017 of 22 May 
2018 , Zagreb.  
Dobrotić, I. and al. (2018), Analiza pristupačnosti, kvalitete, kapaciteta i financiranja sustava ranoga i 
predškolskog odgoja i obrazovanja u republici hrvatskoj , Ministry of demography, family and social 
policies, Zagreb 
(https://mdomsp.gov.hr/UserDocsImages/Publ ikacije/Analiza%20pristupačnosti%20%2C%20kvalitete%
2C%20kapaciteta%20i%20financiranja%20sustava%20ranog%20i%20predškolskog%20odgoja%20i%20
obrazovanja%20u%20Republici%20Hrvatskoj.pdf ). 
Doolan, K., and al. (2018), 'Social inequalities in access to higher edu cation in Croatia: five decades of 
resilient findings', Journal of further and higher education , 42:4.  
Eurofound (2013), Tackling undeclared work in Croatia and four EU candidate countries , Eurofound, 
Dublin ( www.eurofound.europa.eu/publications/report/2013/labour -market/tackling -undeclared -work -in-
croatia -and-four-eu-candidate -countries ). 
Eurofound (2018) , Involvement of the national social partners in the European Semester 2017: Social 
dialogue practices , Eurofound, Luxembourg 
(www.eurofound.europa.eu/publications/report/2018/involvement -of-the-national -social -partners -in-the-
european -semester -2017 -social -dialogue -practices ). 
European Commission (2016a), Connectivity for a competitive di gital single market - Towards a 
European gigabit society , European Commission, Brussels ( https: //ec.europa.eu/digital -single -
market/en/news/communication -connectivity -competitive -digital -single -market -towards -european -
gigabit -society ). 
European Commission (2016b), Country report Croatia 2016. Including an in -depth review on the 
prevention and correc tion of macroeconomic imbalances , European Commission, Brussels 
(https://ec.europa.eu/info/publications/2016 -european -semester -country -reports_en ). 
European Commission (2016c), Detailed information on the assessment of regulation in professional 
services , European Commission, Brussels ( https://eur -lex.eur opa.eu/legal -
content/EN/TXT/PDF/?uri=CELEX:52016SC0436&from=DE ). 
European Commission (2016d), Employment and social developments in Europe , European Commission, 
Luxembourg ( https://ec.europa.eu/social/main.jsp?catId=738&langId=en&pubId=7952&visible=0& ). 
European Commission (2016e), European platform tackling undeclared work: Member state factsheets 
and synthesis report , European Commission, Brussels 
(www.ec.europa.eu/social/BlobServlet?docId=18860&langId=en ). 
European Commission (2016f), The early warning report for Croatia, European Commission, Brussels 
(http://ec.europa.eu/environment/waste/pdf/early_warning_report_HR.pdf ). 
European Commission (2017a), Annual accident report 2017 , European Commission, Brussels 
(https://ec.europa.eu/transport/road_safety/sites/roadsafety/files/pdf/statistics/dacota/asr2017.pdf ). 
European Commission (2017b), Benchmarks for the assessment of private debt. N ote for the Economic 
Policy Committee , European Commission, Brussels.  REFERENCES  
References  
 
 
75 European Commission (2017c), Country report Croatia 2017. Including an in -depth review on the 
prevention and correction of macroeconomic   imbalances , European Commission, Brussels 
(https://ec.europa.eu/info/publications/2017 -european -semester -country -reports_en ). 
European Commission (2017d), Flash Eurobarometer 457. Report.  Businesses’ attitud es towards 
corruption in the EU , European Union, Brussels 
(http://ec.europa.eu/commfrontoffice/publicopinio n/index.cfm/Survey/getSurveyDetail/instruments/FLAS
H/search/corruption/surveyKy/2177 ). 
European Commission (2017e), Impact assessment , European Commission, Brussels 
(https://publications.europa.eu/en/publication -detail/ -/publication/b2d53cb5 -074f-11e8 -b8f5-
01aa75ed71a1/language -en). 
European  Commission (2017f), Ninth report on the implementation status and the programmes for 
implementation (as required by Article 17) of Council Directive 91/271/EEC concerning urban waste 
water treatment , European Commission, Brussels ( http://ec.europa.eu/environment/water/water -
urbanwaste/implementation/implementationreports_en.htm ). 
European Commission (2017g), Special Eurobarometer 470. Report. Corruption , European Union, 
Brussels 
(http://ec.europa.eu/commfrontoffice/publicopinion/index.cfm/Survey/getSurveyDetail/in struments/SPEC
IAL/surveyKy/2176 ). 
European Commission (2017h), The 2018 ageing report: Underlying assumptions and projection 
methodologies , European Commission, Brussels ( https://ec.europa.eu/info/publications/economy -
finance/2018 -ageing -report -underlying -assumptions -and-projection -methodologies_en ). 
European Commission (2018a), 2018 European Semester: Assessment o f progress on structural reforms, 
prevention and correction of macroeconomic imbalances, and results of in -depth reviews under 
Regulation (EU) No 1176/2011 , European Commission, Brussels 
(https://ec.europa.eu/info/sites/info/files/2018 -european -semester -country -report -communication_en.pdf ). 
European Commission (2018b), 2019 Alert mechanism report , European Commission, Brussels 
(https://ec.europa.eu/info/sites/info/files/file_import/2019 -european -semester -alert-mechanism -
report_en_0.pdf ). 
European Commission (2018c), Allocative efficiency in the euro area. Thematic discussion on growth and 
jobs. Note for the Eurogroup , European Union, Brussels 
(https://www.consilium.europa.eu/media/36345/eg_ae _20180827.pdf ). 
European Commission (2018d), Annual growth survey 2018 , European Commission, Brussels 
(https://ec.europa.eu/info/publications/2018 -europea n-semester -annual -growth -survey_en ). 
European Commission (2018e), Country report Croatia 2018. Including an in -depth review on the 
prevention and correction of macroeconomic imbalances , European Commission, Brussels 
(https://ec.europa.eu/info/publications/2018 -european -semester -country -reports_en ). 
European Commission (2018f), Croatia — Review of progress on policy measures relevant for the 
correction of macroec onomic imbalances , European Commisssion, Brussels 
(https://ec.europa.eu/info/business -economy -euro/economic -and-fiscal -policy -coordination/eu -economic -
governance -monitoring -prevention -correction/macroeconomic -imbalance -procedure/specific -
monitoring_en ). 
References  
 
 
76 European Commission (2018g), Draft joint employment report , European Commission, Brussels 
(https://eur -lex.europa.eu/legal -
content/EN/TXT/?qid=1547650919951&uri=CELEX%3A52018DC0761 ). 
European  Commission (2018h), Employment and social developments in Europe. Annual review 2018 , 
Publications Office of the European Union, Luxembourg 
(https://ec.europa.eu/social/main.jsp?catId=738&langId=en&pubId=8110&furtherPubs=yes ). 
European Commission (2018i), ESIF 2014 -2020 EU payments , European Commission, Brussels 
(https://cohesiondata.ec.europa.eu/2014 -2020/ESIF -2014 -2020 -EU-payments -daily -update -/gayr -92qh ). 
European Commission (2018j), European Economic Forecast. Autumn 2018 , European Commission, 
Brussels ( https://ec.europa.eu/info/publications/economy -finance/european -economic -forecast -autumn -
2018_en ). 
European Commission (2018k), European innovation scoreboard 2018 , Europea n Commission, Brussels 
(https://ec.europa.eu/growth/industry/innovation/facts -figures/scoreboards_en ). 
European Commission (2018l), Fundamentals -based private debt  benchmarks: enhanced sample and 
robustness checks. Note to LIME , not published.  
European Commission (2018m), Pension adequacy report. Current and future income adequacy in old 
age in the EU , Publications Office of the European Union, Luxembourg 
(https://publications.europa.eu/en/publication -detail/ -/publication/f0e89c3f -7821 -11e8 -ac6a-
01aa75ed71a1/language -en). 
European Commis sion (2018n), Transport in the European Union. Current trends and issues , European 
Commission, Brussels ( https://ec.europa.eu/transp ort/sites/transport/files/2018 -transport -in-the-eu-
current -trends -and-issues.pdf ). 
European Commission (2019a), Digital Scoreboard 2019 , European Commission, Brussels 
(https:/ /ec.europa.eu/digital -single -market/en/digital -scoreboard ). 
European Commission (2019b), EU Justice scoreboard 2019 , European Commission, Brussels 
(https://ec.europa.eu/info/policies/justice -and-fundamental -rights/effective -justice/eu -justice -
scoreboard_en ). 
European Commission (2 019c), European Economic Forecast. Winter 2019 , European Commission, 
Brussels.  
European Commission/EACEA/Eurydice (2018), Structural Indicators for Monitoring Education and 
Training Systems in Europe – 2018. Eurydice Report , Publications Office of the Euro pean Union, 
Luxembourg ( https://eacea.ec.europa.eu/national -policies/eurydice/content/str uctural -indicators -
monitoring -education -and-training -systems -europe -%E2%80%93 -2018_en ). 
European Commission/EACEA/Eurydice/Eurostat (2014), Key data on early childhood education and 
care in Europe.  Eurydice and Eurostat report , Publications Office of the E uropean Union, Luxembourg 
(https://ec.europa.eu/eurostat/documents/3217494/5785249/EC -01-14-484-EN.PDF/cbdf1804 -a139 -43a9 -
b8f1-ca5223eea2a1 ). 
Invest Europe (2018), 2017 European private equity activity, Invest Europe, Brussels 
(www.investeurope.eu/research/activity -data/annual -activity -statistics/ ). 
References  
 
 
77 Jelavić, V. and EKOBERG (2017), Strategija niskougljičnog razvoja Republike Hrvatske do 2030. 
godine, s pogledom na 2050. godinu , Ministry of Environmental Protection and Energy, Zagreb 
(www.hgk.hr/documents/prezentacija -14759783310589eb.pdf ). 
Kralj, A. and al. (2011), Institutional Evaluation Programme – Evaluation report , University of Zagreb, 
Zagreb ( www.iep -qaa.org/downloads/publications/iep%20zagreb%20report%20final.pdf ). 
Matković, T. and D. Caha (2017), ‘Patterns of welfare -to-employment transitions of Croatian Guaranteed 
Minimum Benefit recipients: a preliminary study’ , Public Sector Economics , 41:3.  
Medina, L. and F. Schneider (2018), Shadow economies around the world: What did we learn over the 
last 20 years? , IMF Working paper , International Monetary Fund, Washington 
(www.imf.org/en/Publications/WP/Issues/2018/01/25/Shadow -Economies -Around -the-World -What -Did-
We-Learn -Over -the-Last-20-Years -45583 ). 
Munta, M. (2018), Iako broj nezaposlenih pada broj uključenih u javne radove raste, čak I onih sa 
srednjom I višom školom. O čemu se tu radi , ideje, Zagreb ( http://ideje.hr/iako -broj-nezaposlenih -pada -
broj-ukljucenih -u-javne -radove -raste -cak-i-onih-sa-srednjom -i-visom -skolom -o-cemu -se-tu-radi/). 
Orsini, K. and V. Ostojić (2018), Croatia's Tourism Industry: Beyond the Sun and Sea , Economic Brief , 
European Commission, Brussels ( https://ec.europa.eu/info/publications/economy -finance/croatias -
tourism -industry -beyond -sun-and-sea_en ). 
Petak, Z. and al. (2018), Sustainable governance indicators 2018 - Croatia report , Bertelsmann Stiftung, 
Gütersloh ( www.sgi -network.org/docs/2018/count ry/SGI2018_Croatia.pdf ). 
PricewaterhouseCoopers (PwC) (2017), 2017 Asset quality report , not published.  
State Audit Office (SAO) (2018), Izvješće o obavljenoj reviziji učinkovitosti provedbe operativnog 
programa konkurentnost i kohezija 2014. - 2020. , Repu blic of Croatia - State Audit  
Office, Zagreb ( www.revizija.hr/datastore/filestore/160/PROVEDBA -OPERATIVNOG -PROGRAMA -
KONKUREN TNOST -I-KOHEZIJA -2014 -2020.pdf ). 
Stefanov and al. (2017), Tackling undeclared work in Croatia: Knowledge -informed policy responses , 
GREY Policy Brief 
(https://www.researchgate.net/publication/319289121_TACKLING_UNDECLARED_WORK_IN_CRO
ATIA_KNOWLEDGE -INFORMED_POLICY_RESPONSES ).  
Tkalec, M. and al. (2018), An overview of the real estate market in the Republic of Croatia , Institute of 
Economics (EIZ), Zagreb ( www.eizg.hr/publications/serial -publications/an -overview -of-the-real-estate -
mark et-in-the-republic -of-croatia/4274 ). 
Trumbić, I. (ed.) and al. (2017), Draft Climate Change Adaptation Strategy in the Republic of Croatia for 
the period to 2040 with a view to 2070 , EPTISA ADRIA d.o.o. o. /  Ministry of environment and energy, 
Zagreb ( http://prilagodba -klimi.hr/wp -
content/uploads/docs/Draft%20CC%20Adaptation%20Strategy.pdf . 
Vuković, V. 'The political economy of local government in Croat ia: Winning coalitions, corruption and 
taxes', Public Sector Economics , 41:4.  
Williams, C.C. and al. (2017a), An evaluation of the scale of undeclared work in the European Union and 
its structural determinants: Estimates using the Labour Input Method , Publ ications Office of the 
European Union, Luxembourg ( https://ec.europa.eu/social/BlobServlet?docId=19002&langId=en ). 
References  
 
 
78 Williams, C.C. and al. (2017b), Preventative policy measures to  tackle undeclared work in Croatia , 
Ministry of labour and pension system, Zagreb 
(www.researchgate.net/publication/31845333 5_Preventative_Policy_Measures_to_Tackle_Undeclared_
Work_in_Croatia ). 
Williams, C.C. and I.A. Horodnić (2017), Under -declaring work, falsely declaring work: Undeclared 
employment in the European Union , European Commission, Brussels 
(https://ec.europa.eu/social/BlobServlet?docId=18376&langId=en ). 
World Bank (2018a), Doing business 2019. Training for reform , World Bank Group, Washington 
(www.doingbusiness.org/en/reports/global -reports/doing -business -2019 ). 
World Bank (2018b), The Republic of Croatia systematic country diagnostic , World Bank Group, 
Washington ( http://documents.worldbank.org/curated/en/452231526559636808/Croatia -Systematic -
Country -Diagnostic ).