COMMISSION STAFF WORKING DOCUMENT Country Report Croatia 2018 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 COUNCIL, THE EUROPEAN CENTRAL BANK AND THE EUROGROUP 2018 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
Date: 2018-03-07
Institutions: European Commission, Secretariat-General
Subjects: Croatia, economic situation, education, investment, labour market, macroeconomics, public finance, social policy, structural adjustment, tax system

EN 

  EN 

   EUROPEAN COMMISSION  Brussels, 7.3.2018 SWD(2018) 209 final  COMMISSION STAFF WORKING DOCUMENT Country Report Croatia 2018 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 COUNCIL, THE EUROPEAN CENTRAL BANK AND THE EUROGROUP 2018 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(2018) 120 final}   
 
 
CONTENTS 

Executive summary 

1.  Economic situation and outlook 

2.  Progress with country-specific recommendations 

3.  Summary of the main findings from the Macroeconomic Imbalance Procedure 

in depth review 

4.  Reform priorities 

4.1.  Public finances* and taxation 
4.2.  Private sector debt and financial sector* 
4.3.  Labour market, social policies and education* 

4.4.   Competitiveness and investment* 

4.5.   Public governance* 

Annex A: Overview table 

Annex B: Macroeconomic Imbalance Procedure scoreboard 

Annex C: Standard tables 

References 

LIST OF TABLES 

Table 2.1: 

CSR progress 

Table 3.1: 

MIP Matrix 

Table 4.1.1: 

Tax wedge comparison with peers 

Table 4.2.1: 

Financial soundness indicators, all banks in Croatia 

Table 4.5.1: 

Hospital beds by type, per 100 000 inhabitants, 2015 

Table B.1: 

The MIP scoreboard for Croatia (AMR 2018) 

Table C.1: 

Financial market indicators 

Table C.2: 

Headline Social Scoreboard indicators 

Table C.3: 

Labour market and education indicators 

Table C.4: 

Social inclusion and health indicators 

Table C.5: 

Product market performance and policy indicators 

Table C.6: 

Green growth 

1 

4 

9 

13 

18 

18 
24 
31 
39 
47 

54 

60 

61 

67 

11 

16 

21 

29 

52 

60 

61 

62 

63 

64 

65 

66 

 
 
 
 
LIST OF GRAPHS 

Graph 1.1: 

Real GDP growth by demand component 

Graph 1.2: 

Current account composition, gross external debt and net international investment 

position 

Graph 1.3: 

Inflation and main components in Croatia and the EU 

Graph 1.4: 

Contributions to rate of change in yearly unit labour costs 

Graph 1.5: 

Actual and potential output growth 

Graph 2.1: 

Level of implementation of 2014-2017 CSRs 

Graph 4.1.1:  General government debt trends 

Graph 4.1.2:  Active government guarantees 

Graph 4.1.3:  Primary expenditure compared to peers in 2016 

Graph 4.1.4:  Expenditure by main functions in 2015 compared to peers 

Graph 4.2.1:  Debt composition of non-financial corporations 

Graph 4.2.2:  Contributions to change in total corporate debt-to-GDP ratio 

Graph 4.2.3: 

Interest rates on bank loans to corporations 

Graph 4.2.4:  Composition of household lending 

Graph 4.2.5:  Contributions to change in total households debt-to-GDP ratio 

Graph 4.2.6:  Dwellings price developments 

Graph 4.2.7:  Evolution of NPLs and coverage ratio 

Graph 4.2.8:  NPL sales and other NPL flows 

Graph 4.3.1:  Activity, unemployment, long-term unemployment, youth unemployment, NEET and 

employment rates 

Graph 4.3.2:  Employment rate by educational attainment 

Graph 4.3.3:  Employment change year-on-year 

Graph 4.3.4:  At-risk-of-poverty or social exclusion rate and two of its components (SMD, LWI) 

Graph 4.3.5:  Early childhood education and care 

Graph 4.4.1:  Exports of goods (volumes) in Croatia, EU15 and CEE10, index (2013=100) 

Graph 4.4.2:  Goods' export growth (values) between 2013 and 2016 by markets and product type 

Graph 4.4.3:  Global competitiveness index scores of Croatia and peers 

Graph 4.4.4:  Connectivity index in Croatia and peers 

Graph 4.5.1:  Cohesion Policy funding as an estimated share of public investment, 2015-2017 

Graph 4.5.2:  Healthcare expenditure 

Graph 4.5.3:  Staff in hospitals, 2015 

4 

5 

5 

6 

7 

9 

18 

19 

19 

20 

24 

24 

25 

26 

26 

27 

29 

29 

31 

33 

34 

35 

36 

39 

39 

40 

42 

48 

51 

52 

 
 
 
LIST OF BOXES 

Box 2.1: Tangible results delivered through EU support to structural change in in Croatia 

Box 4.1.2: Efficiency of spending in Croatia 

Box 4.2.3: Crisis and restructuring of Agrokor 

Box 4.3.4: European Pillar of Social Rights in Croatia 

Box 4.4.5: The role of Tourism in the Croatian economy 

Box 4.4.6: Investment challenges and reforms in Croatia 

Box 4.5.7: Policy Highlight: Developing a Comprehensive Curricular Reform 

12 

22 

30 

32 

41 

46 

53 

 
 
 
 
EXECUTIVE SUMMARY 

The  favourable  economic  environment  lends 
itself to stepping up reform efforts and ensuring 
sustainable  and 
inclusive  growth.  Croatia's 
potential  growth  remains  insufficient  to  enable 
faster  convergence  although  projected  to  increase 
somewhat  over  the  medium  term.  As  the  working 
age  population  continues  shrinking  and  labour 
low,  Croatia's 
utilisation  remains  chronically 
prospects of speeding up its economic growth will 
increasingly  depend  on  the  capacity  to  implement 
structural 
reforms.  Raising  potential  growth 
requires structural reforms that will allow for faster 
productivity  growth,  higher  participation  in  the 
labour  market,  and  a  business  environment  that is 
more attractive for investment (1).  

As  the  economy  enters  its  fourth  year  of 
recovery,  economic  growth  remains  broad-
based  and  robust.  Following  a 
sizeable 
acceleration  in  2016,  the  real  GDP  growth  rate  in 
2017  is  projected  to  have  remained  at  3.2  %. 
Household  consumption  continues  to  be  the  main 
driver  of  growth,  underpinned  by  resumed  wage 
growth,  steadily  increasing  employment  and  high 
consumer  confidence.  Investment  is  recovering, 
albeit  at  a  slower  pace  than  anticipated.  On  the 
external  side,  strong  global  demand  and  further 
market  share  gains  pushed  exports  up,  but  the 
associated surge in imports of goods is projected to 
have  resulted  in  net  exports  slightly  detracting 
from growth in 2017.  

The recovery is expected to continue in the next 
two  years,  with  somewhat  lower  growth  rates. 
Low  potential  output  is  preventing  the  economy 
from  reaching  higher  growth  rates  in  the  longer 
run.  Following  several  sharp  declines  in  previous 
years, unemployment is set to continue decreasing 
at  slower  rates,  on  the  back  of  an  expected 
slowdown 
in  outbound  migration.  Private 
consumption  is  expected  to  remain  the  driver  of 

(1)  This  report  assesses  Croatia’s  economy  in  the  light  of  the 
European Commission’s Annual Growth Survey published 
on 22 November 2017. In the survey, the Commission calls 
on  EU  Member  States  to  implement  reforms  to  make  the 
resilient  and 
European  economy  more  productive, 
inclusive.  In  so  doing,  Member  States  should  focus  their 
efforts  on  the  three  elements  of  the  virtuous  triangle  of 
economic policy - boosting investment, pursuing structural 
reforms  and  ensuring  responsible  fiscal  policies.  At  the 
same 
the  Alert 
the  Commission  published 
Mechanism Report (AMR) that initiated the seventh round 
of  the  macroeconomic  imbalance  procedure.  The  AMR 
found  that  Croatia  warranted  an  in-depth  review,  which  is 
presented in this report 

time, 

1 

improves.  Exports  are  projected 

growth, as rising wages are projected to offset the 
effects  of  the  rebound  in  inflation  on  disposable 
income. In 2018 and 2019, investment is expected 
to  intensify,  as  uncertainties  surrounding  the 
restructuring of Agrokor unwind and the use of EU 
funding 
to 
continue  performing  strongly,  but  imports  are 
expected to increasingly weigh on the contribution 
its  steady 
of  net  exports 
expansion, 
for 
employment and growth. However, challenges for 
policy  planning  to  anticipate  and  respond  to  the 
growing  and  diversifying  tourism  demand  lay 
ahead  if  this  sector  is  to  become  a  key  driver  of 
continued  economic  growth.  In  all,  real  GDP  is 
forecast to expand by 2.8 % in 2018 and a further 
2.7 % in 2019.  

to  growth.  With 
tourism  creates  opportunities 

Public  and  private  debt  ratios  continue 
decreasing,  aided  by  the  sustained  economic 
recovery  and  domestic  currency  appreciation. 
With revenues boosted by the recovering economic 
activity,  and  spending  contained,  the  general 
government is keeping a low deficit and the public 
debt ratio on a steadily declining path. Debt levels 
in  the  private  sector  are  also  falling,  while  credit 
activity  is  slowly  picking  up.  Corporate  debt 
remains  only  slightly  above  prudential  levels,  but 
vulnerable  to  foreign  currency  shocks.  Reflecting 
declining  private  and  public  debt,  and  as  the 
current  account  remains  in  a  comfortable  surplus, 
external debt is set to continue reducing.   

2017 

limited progress 

has  made 
the 

in 
Croatia 
addressing 
country-specific 
recommendations.  Fiscal  policy,  supported  by 
favourable macroeconomic conditions, has ensured 
a declining debt ratio, but structural measures have 
not  advanced.  Legislation  needed  to  reinforce  the 
fiscal  framework  has  not  been  adopted,  while  the 
previously  legislated  recurrent  property  tax  has 
been  abandoned.  Some  steps  are  being  taken  to 
rationalise  the  healthcare  system,  in  particular  for 
hospitals.  However,  payment  arrears  in  healthcare 
continue to grow. Measures planned for the social 
benefits  system  have  been  narrowed  in  scope, 
while  the  package  of  pension  system  reforms  has 
been  further  postponed.  Active  labour  market 
policy  measures  for  low-skilled  and  long-term 
unemployed  remain  largely  underutilised,  while 
the education reform is still pending, despite some 
encouraging  steps.  Major  public  administration 
reforms  are  largely  at  a  standstill.  Measures  to 

 
 
                                                           
Executive summary 

improve  the  business  environment  have  advanced 
somewhat  as  regards  relieving  the  administrative 
burden  and  reducing  parafiscal  charges.  Some 
progress  has  been  made  in  the  sale  of  minority 
shares  in  state-owned  enterprises  and  activating 
state  property,  while  backlogs  in  the  judicial 
system  have  marginally  reduced.  Some  measures 
to  address  the  high  level  of  non-performing  loans 
were  put 
in  place.  The  Croatian  Bank  for 
Reconstruction  and  Development  has  undergone 
an Asset Quality Review, the results of which are 
yet to be unveiled.  

Regarding  progress  towards  the  national  targets 
under the Europe 2020 strategy, Croatia is on track 
to  reaching  its  targets,  or  has  already  done  so,  in 
energy  efficiency,  greenhouse  gas  emissions,  
renewables  (except  in  transport),  early  school 
leaving  and  poverty  and  social  exclusion.  The 
target  for  tertiary  education  attainment  by  2020 
does  not  appear  within  reach,  while  the  largest 
distance to target remains in R&D investment. 

Croatia  faces  challenges  with  regard  to  a 
number  of  indicators  of  the  Social  Scoreboard 
supporting the European Pillar of Social Rights. 
These are related to equal opportunities, access to 
the  labour  market  and  fair  working  conditions. 
Economic  growth  has  translated  into  reducing 
unemployment,  but  the  employment  rate  remains 
comparatively  very  low.  Croatia  still  faces  a  high 
rate of young people not in employment, education 
or  training  and  low  participation  in  active  labour 
market  policy  measures.  Croatia  has  a  high  share 
of people at-risk-of poverty or social exclusion. 

findings  of 

The  main 
review 
contained  in  this  report  and  the  related  policy 
challenges are as follows:  

in-depth 

the 

  In  2017,  the  general  government  debt  ratio 
is  projected  to  have  declined  further  on  the 
back  of  continued  growth  and 
fiscal 
discipline.  During  the  protracted  crisis,  the 
general  government  debt  more  than  doubled, 
driven  largely  by  deficits  and  reclassifications 
of state-owned enterprises' debt. The decline in 
the  debt  ratio  from  a  high  of  almost  86 % 
started in 2015 and picked up pace in 2016. It 
is  expected  to  have  shrunk  to  around  80 %  of 
GDP  in  2017  and  continue  declining  in  the 
short  term.  The  decrease  has  been  driven  by 
economic growth but also expenditure restraint. 

2 

Nevertheless,  public  debt  is  still  high  in 
comparison with both pre-crisis levels and peer 
countries.  Sustainability  risks  in  the  medium 
term  have  declined  but  remain  relatively  high, 
especially  under 
scenarios. 
some 
Furthermore,  it  is  subject  to  foreign  currency 
risk, as the bulk of it is issued or denominated 
in foreign currency. Positive developments are 
the  sustained  reduction  in  the  cost  of  debt 
servicing, 
lengthening  of  maturities 
achieved  in  recent  years  as  well  as  some 
improvements in debt management.  

stress 

the 

reduced 

indexed 

liabilities 

the  euro 

  Private  sector  debt  reduction  progressed, 
while  still  heavily  exposed  to  currency  risk. 
The  decrease  in  private  debt  was  driven  by 
intensified economic activity. Furthermore, the 
continued appreciation of the national currency 
the  value  of 
against 
outstanding 
or 
to 
denominated  in  foreign  currency  –  a  positive 
development  that  however  highlights  foreign 
currency  risk.  The  pace  of  corporate  and 
household  debt  reduction  slowed  down  in 
2017,  following  a  pickup  in  net  credit  flows, 
which  is  supporting  investment.  However,  in 
the  corporate  sector,  debt  is  concentrated  in  a 
few  segments  and  remains  high  relative  to  the 
sectors'  financial  assets,  which  may  indicate 
potential solvency risks.   

interest 

  Indirect  credit  risk  weighs  on  the  well-
increasingly  profitable 
capitalised  and 
financial  sector.  Credit  demand  is  recovering 
thanks to better macroeconomic conditions and 
lower 
rates.  This,  coupled  with 
continued improvement in the quality of banks' 
assets  and  profitability,  helped  turn  net  credit 
flows  positive  in  2017.  The  relatively  fast 
reduction  of  the  non-performing  loans  ratio 
seen  in  2016  was  halted  in  2017,  as  the 
underlying  declining  trend  was  partially  offset 
by a net inflow of non-performing loans related 
to  Agrokor's  defaulted  loans.  Overall,  indirect 
credit risk remains a source of vulnerability for 
the  banking  sector,  in  particular  due  to  the 
extensive  exposure  to  foreign  currency  of  its 
corporate and household clients. 

  The  labour  market  continued  to  improve, 
but participation remains very low. In 2017, 
to  11.1 %. 
rate 
the  unemployment 

fell 

 
 
Migration  outflows  and  population  ageing 
contributed to the reduction of the working age 
population,  while  activity  and  employment 
rates  for  both  men  and  women  are  very  low, 
partly  due  to  care  responsibilities  and  the 
availability  of  multiple  pathways  to  early  exit 
from the labour market. Despite an increase in 
employment  on  permanent  contracts  in  2017, 
the  share  of  temporary  contracts  in  total 
employment  remains  sizable.  Youth  and  long-
term  unemployment  are  also  on  a  downward 
path,  but  remain  high.  The  social  dialogue 
between the government and the social partners 
is overall underdeveloped.  

  Competitiveness 

a 

by 

and 

restrictive 

investment 

are 
business 
hindered 
environment.  The  functioning  of  the  product 
and  capital  markets  is  constrained,  inhibiting 
the  smooth  allocation of  resources  to  the most 
sectors.  The 
productive  companies  and 
suboptimal  performance  of 
research, 
the 
development  and  innovation system  represents 
an  additional  barrier 
the 
of  Croatian 
businesses. 
competitiveness 
Liberalisation 
as 
slowly 
is  progressing 
numerous professions and major sectors remain 
highly  regulated.  There  remain  a  number  of 
legal 
distortions 
in 
consultancy  and 
tax  advisory.  Parafiscal 
charges and the administrative burden continue 
to  constrain  business  creation  and  expansion. 
the  anti-corruption 
The 
strategy suffers delays. 

implementation  of 

to  competition 

increasing 

the 

to 

Other key structural issues analysed in this report, 
– which point to particular challenges for Croatia’s 
economy – are the following:  

  The 

the 

fragmentation 

public 
of 
administration  continues 
to  weigh  on 
efficiency in the provision of public services. 
Croatia’s  marked  territorial  fragmentation  and 
complex  relations  across  levels  of  government 
are not conducive to the efficient utilisation of 
resources and delivery of public services. Weak 
administrative 
the 
capacity 
implementation  of  public  policies  and  a  more 
effective use of European Structural Investment 
Funds.  The  wage  setting  framework  lacks 
consistency  across  the  public  administration 
and  public  services.  While  backlogs  in  courts 

hinders 

Executive summary 

were reduced largely on the back of a reduced 
inflow  of  new  cases,  measures  to  improve  the 
efficiency  and  quality  of  the  justice  system 
remain on the agenda. Some progress has been 
made  in  the  disposal  of  minority  ownership, 
and  the  government's  list  of  companies  of 
strategic  and  special  interest  has  been  further 
reduced.  A  more  determined  progress  on  the 
planned 
state-owned 
of 
enterprises has yet to be seen.  

privatisation 

falling,  poverty  and 
levels  are  still  high.  This 

  Although 
social 
is 
exclusion 
particularly  the  case  for  the  low  skilled,  the 
elderly and the disabled. Territorial differences 
are  marked,  with  very  high  at-risk-of-poverty 
rates  in  some  counties.  The  uneven  provision 
of social services and a fragmented coverage of 
the  population  by  the  social  protection  system 
across 
existing 
disparities  in  labour  market  outcomes.  The 
length of working lives is one of the shortest in 
Europe,  impacting  negatively  on  the  adequacy 
of  both  current  and  future  pensions  and 
creating high risks of poverty in old age.  

exacerbate 

territory 

the 

  Education  and  health  outcomes  point  to 
structural  weaknesses.  Education  system 
indicators  have  stagnated  or 
performance 
worsened  in  most  relevant  areas,  highlighting 
the  need  for  reform.  The  recent  measures  to 
implement  the  national  strategy  for  education, 
science  and  technology  should,  if  maintained, 
help  address  the  quality  and  inclusiveness 
challenges.  Efforts 
improve  vocational 
to 
education and training and equip the workforce 
with  the  skills  needed  in  the  labour  market 
in  adult 
insufficient.  Participation 
remain 
education  remains  very  low.  Health  outcomes 
continue to improve, but remain below the EU 
average. Some measures aimed at rationalising 
the  hospital  system  were  initiated  in  2017. 
Hospitals,  however, 
inadequately 
financed and overburdened with arrears. 

remain 

3 

 
 
 
1.  ECONOMIC SITUATION AND OUTLOOK 

GDP growth  

Graph 1.1: 

Real GDP growth by demand component 

Croatia's  economy  continues  on  its  path  of 
recovery  from  one  of  the  longest  and  deepest 
recessions  in  the  EU.  In  the  last  three  years,  the 
economic  recovery  has  been  robust  and  broad-
based,  with  economic  growth  on  a  more  solid 
ground than the credit-driven growth leading up to 
the  2008  financial  crisis.  In  2017,  domestic 
demand,  and  especially  private  consumption, 
remained  the  main  engine  of  growth.  Public 
consumption also contributed to growth following 
years  of  negative  to  neutral  contribution.  After  a 
long-awaited  rebound  in  2015,  investment  picked 
up  further  in  2016,  but  showed  signs  of  slowing 
down  in  2017,  under  the  impact  of  lower  public 
sector investment and the operational and financial 
restructuring of the distressed food-processing and 
retail  giant  Agrokor  (see  Box  4.2.1).  Exports 
to  perform  strongly,  with  goods' 
continued 
exporters  gaining  further  market  shares  and 
tourism  adding  on  its  record  growth  achieved  the 
year  before.  However,  the  strong  internal  demand 
and  the  relatively  high  import  content  of  tourism 
boosted 
the  overall 
contribution  of  net  exports  to  GDP  growth  to  the 
negative side (see Graph 1.1). Overall, in 2017 the 
real GDP growth rate is projected to have matched 
the rate of 3.2 % from the previous year. 

further,  edging 

imports 

is  expected 

to  maintain 

Growth  is  expected  to  remain  robust  and  real 
GDP is projected to finally reach the pre-crisis 
level  in  2019.  The  economy  continues  to  benefit 
from favourable external conditions,  most notably 
from  the  positive  trends  in  global  trade  and  still 
increasing  demand  for  Croatian  exports.  As  the 
effects  of  the  recent  tax  reform  fade,  private 
consumption 
the 
momentum thanks to slow but steady employment 
growth  and  the  pick-up  in  wage  growth.  Higher 
growth  rates  are  projected  for  investment  in  2018 
and  2019,  driven  by  the  continued  favourable 
financing  conditions  and  increased  use  of  EU 
funds.  In  all,  the  macroeconomic  outlook  is 
favourable,  but  short-run  risks  remain  on  the 
downside,  as  structural  challenges  keep  weighing 
on the long-run growth potential, and uncertainties 
surrounding 
of  Agrokor’s 
restructuring  linger.  The  Commission’s  winter 
2018 forecast sees real GDP growth slowing down 
to 2.8 % in 2018 and  2.7 % in 2019. 

outcome 

the 

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: Eurostat. 

External position  

Despite  the  deteriorating  trade  balance,  the 
current account surplus increases. Declining net 
exports  combined  with  worsening  terms  of  trade 
are  set  to  drive  a  decrease  in  the  overall  trade 
balance  of  goods  and  services  in  2017.  However, 
the  current  account  balance  is  projected  to  have 
increased  to  3.1 %  in  2017,  in  part  thanks  to  the 
temporary  improvement  in  the  primary  income 
balance  owing  to  the  profits  in  the  largely 
foreign-owned banking sector having fallen due to 
Agrokor-related  provisioning.  The  cyclically 
adjusted current account surplus of 4.2 % in 2017 
was  considerably  above  level  of  -1.5 %  of  GDP 
suggested  by  fundamentals  (2).  The  surplus  is 
projected  to  remain  at  around  2 %  during  the 
forecast period. 

continued 

current  account 

The 
surplus 
translates  into  a  further  reduction  of  Croatia's 
external  liabilities.  By  September  2017,  gross 
external debt had fallen to just above 81 % of GDP 
2017,  and  the  NIIP  had  improved  to  -62 %  of 
GDP,  more  than  30  pps  above  its  lowest  level 

(2)  The  current  account  'norm'  benchmark  is  derived  from 
reduced-form  regressions  capturing  the  main  determinants 
of  the  saving-investment  balance,  including  fundamental 
determinants (European Commission, 2017c). 

4 

-15-10-505101506Q107Q108Q109Q110Q111Q112Q113Q114Q115Q116Q117Q118Q119Q1ppsImports of goods and servicesInvestmentPublic consumptionPrivate consumptionExports of servicesExports of goodsGDPforecast 
 
 
                                                           
1. Economic situation and outlook 

solid  economic  outlook  and  improved  public 
finances.  Notably,  Croatia's  risk  premium  has 
reduced  strongly,  as  reflected  by  the  spread 
between the yield on Croatia's sovereign debt and 
the German bund dropping to just about 200 basis 
points  at  the  end  of  2017  from  390  in  mid-2016. 
However,  it  remains  higher  than  for  most  EU 
countries.  

in 

the  aftermath  of 

attained 
the  crisis  (see 
Graph 1.2).  A  continued  kuna  appreciation 
contributed  to  the  reduction  of  the  external  debt 
ratio in 2017, but it also reminded of the extent of 
Croatia's  debt  exposure  to  currency  shocks.  The 
net  external  debt  ratio  is  expected  to  continue 
declining  in  line  with  the  continued  growth  and 
current account surpluses.  

Graph 1.2:  Current account composition, gross external 

Graph 1.3: 

debt and net international investment position 

Inflation and main components in Croatia and 
the EU 

10

pps 

8

6

4

2

0

-2

8
0

9
0

0
1

n
a
J

n
a
J

n
a
J
Other
Energy
HICP EA

1
1

n
a
J

2
1

n
a
J

3
1

n
a
J

4
1

n
a
J

5
1

6
1

7
1

n
a
J

n
a
J

n
a
J
Food
HICP HR
One year interest rates

Gross external debt is expressed in absolute terms. 
Source: Eurostat, Croatian National Bank. 

Source: Eurostat. 

Inflation and interest rates  

Wage  pressures  and  higher  energy  prices  set 
the  scene  for  a  modest  rebound  in  inflation.  
Tightening  labour  market  conditions  and  wage 
increases in the public sector are projected to raise 
the  cost  of  labour  in  both  2017  and  2018.  This, 
coupled with rising energy prices, pushed inflation 
up to 1.3 % in 2017, after more than three years of 
negative or stagnant price dynamics. The headline 
inflation  rate  is  projected  to  keep  increasing 
slightly,  with  core  inflation  outpacing  it  and 
picking up towards the end of 2019. 

Continued  abundant  liquidity  in  the  financial 
the  decreasing  country  risk 
system  and 
premium  are  contributing  to  a  further  decline 
in interest rates. Interest rates on all new loans to 
households  and  non-financial  corporations  are 
decreasing,  and  most  notably  on  loans  for  house 
purchases indexed in euro. These favourable trends 
in  interest  rates  are  expected  to  continue  as  the 
perception  of  country  risk  improves  thanks  to  a 

Public finances 

The  general  government  deficit  decreases 
further as revenues surge and expenditures are 
contained.  The  general  government  deficit 
decreased sharply to 0.9 % of GDP in 2016, from 
3.3 %  the  year  before,  leading  Croatia  out  of  the 
excessive  deficit  procedure  in  2017.  Revenues 
were boosted by the pick-up in economic activity, 
especially  household  consumption,  employment 
and corporate profits. Primary expenditure growth 
was  contained  well  below  nominal  GDP  growth, 
while  interest  expenditure  declined  as  debt  was 
reduced  and  refinanced  at  lower  interest  rates.  In 
spite of the negative budgetary impact of the recent 
tax  rate  reductions  in  2017,  the headline deficit  is 
expected  to  have  reduced  further  in  2017.  Solid 
growth  rates  and  low deficits  in  the  coming  years 
are  set  to  keep  the  general  government  debt  ratio 
on a declining path. The ratio is expected to have 
declined to below 80 % in 2017, and is set  to fall 
below 75 % by 2019. 

5 

-120-100-80-60-40-200-15-10-5051008Q109Q110Q111Q112Q113Q114Q115Q116Q117Q1% of GDP% of GDPBalance 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) 
 
 
 
 
 
 
 
 
 
 
 
 
Private indebtedness  

The  reduction  of  private  debt  progressed 
further,  but  bank  lending  to  households  and 
resumed.  By  mid-2017, 
corporates  has 
consolidated  corporate  and  household  debt 
decreased  to  roughly  67.8 %  and  34.6 %  of  GDP, 
respectively – some 15 and 7 pps below the peaks 
registered  in  2010.  In  2017,  the  private  debt  ratio 
continued to decrease, mainly on account of GDP 
growth and, to a lesser extent, valuation effects, as 
the  kuna  continued  appreciating  against  the  euro, 
liabilities 
the  value  of  outstanding 
reducing 
indexed to or denominated in foreign currency. In 
the  corporate  sector,  debt  reduction  during  2016 
was  also  driven  by  active  deleveraging,  with  net 
aggregate  credit  flows  remaining  mildly  negative. 
In  2017,  however,  loans  to  the  non-bank  private 
sector  (adjusted  for  sales  and  securitisation)  from 
domestic  credit  institutions  increased  by  3.4  %, 
with  a  sharp  increase  in  new  loans  contracted  in 
kuna with fixed rates, particularly in the household 
sector.  While  debt  levels  are  still  high,  the 
decreasing  debt 
for  both 
households and corporates is expected to continue 
supporting  new  credit.  The  private  debt  ratio  is 
therefore  set  to  keep  decreasing,  but  at  a  slower 
pace than in recent years.  

servicing  burden 

Labour market 

in 

improvements 

The  labour  market  continued  to  improve  in 
2017, but labour utilisation remains chronically 
the 
low.  Despite  moderate 
aftermath  of  the  crisis,  both  the  activity  and  the 
employment  rates,  respectively  at  71.7 %  and 
65.6 % in Q3 2017 (see Graph 4.3.1), were among 
the  lowest  in  the  EU (average  78.2 %  and 72.6 % 
respectively).  The  decline  in  the  labour  force  was 
driven by negative migration flows and population 
ageing.  Also  as  a  result  of  this  decline,  the 
unemployment  rate  has  been  on  a  rapid  declining 
path  and  is  projected  to  have  dropped  to  around 
11.1 %  in  2017,  from  17.6 %  in  early  2014.  The 
share of young people who are not in employment, 
education  or  training  has  decreased,  but  remains 
very  high,  as  does  the  youth  unemployment  rate 
and  the  rate  of  long-term  unemployed.  With 
outbound migration pressures expected to ease and 
stable employment growth, the unemployment rate 
is  projected  to  fall  below  8 %  in  2019.  In  2017, 
new  hiring  on  permanent  contracts  increased,  but 

1. Economic situation and outlook 

the  share  of 
employment remains sizable.  

temporary  contracts 

in 

total 

Despite  low  labour  utilisation,  the  tightening 
labour  market  has  resulted  in  renewed  wage 
growth. The nominal compensation per employee 
has  decreased  every  year  since  2013,  but  it  is 
projected  to  have  increased  by  2.5  %  in  2017. 
Coupled  with  modest  productivity  growth,  unit 
labour  cost  is  projected  to  have  increased  by  just 
over  1 %  (see  Graph  1.4).  Wages  are  expected  to 
continue  increasing,  following  upward  pressures 
from  the  legislated  increases  in  the  public  sector, 
as well as from workforce shortages in several key 
sectors, such as tourism and construction. 

Graph 1.4:  Contributions to rate of change in yearly unit 

labour costs 

y-o-y % 

forecast 

12

10

8

6

4

2

0

-2

-4

-6

-8

01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19

Inflation (GDP deflator growth)
Real compensation per employee
Productivity contribution (negative sign)
Nominal unit labour cost

Forecast: European Commission's Autumn forecast data. 
Source: Eurostat, European Commission. 

Social developments 

The share of people at risk of poverty and social 
exclusion  declined  in  2016,  but  remains  high. 
Risks  of  poverty  and  social  exclusion  (AROPE) 
are  still  high  in  Croatia,  particularly  for  some 
vulnerable  groups  such  as  the  disabled  and  the 
elderly  (see  Section  4.3).  Croatia  registers  high 
shares  of  population  living  in  severe  material 
deprivation and in households with very low work 
intensity, exceeding the EU average by 5.0 and 3.2 
pps,  respectively.  The  share  of  people  at  risk  of 
poverty  (AROP)  at  19.5 %  is  above  the  EU 
average  and  exceeds  most  of  the  peer  countries 
(income data from 2015). Regional differences are 

6 

 
 
1. Economic situation and outlook 

particularly  marked,  with 
exceeding 40 % in some counties. 

the  AROP 

rate 

Graph 1.5:  Actual and potential output growth 

Potential output: production function approach. 
Source: European Commission, DG ECFIN. 

Inequality of income is close to the EU average, 
but risks of poverty and social exclusion remain 
particularly  high  among  the  low  skilled.  In 
2016, the richest 20 % of Croatian households had 
five times as much income as the poorest 20 %, a 
ratio  just  below  the  EU  average  (2015  data).  The 
distribution  of  market  income  was  slightly  less 
unequal than the EU average, while the impact of 
social  transfers  on  poverty  reduction  was  below 
EU average in 2016. The concentration of the risk 
of  poverty  and  social  exclusion  among  the  low 
skilled,  often  living  in  rural  areas,  poses  crucial 
challenges  and  weighs  on  the  capacity  of  the 
country to reduce inequalities (see section 4.3.2). 

Potential growth  

Croatia  is  currently  growing  well  above  its 
estimated  potential.  The  negative  output  gap  is 
projected  to  have  closed  in  2017,  and  forecast  to 
turn  positive  in  2018.  The  solid  pick-up  in 
investment  is  adding  to  potential  growth,  but  the 
utilisation  of  labour  input  and  the  contribution  of 
total factor productivity remain low, especially for 
a catching-up economy. Negative  migration flows 
and population aging, in the context of one of the 
lowest activity rates in the EU weigh on the size of 
the  working  age  population,  with  negative  impact 
on 
long-term  prospects  for  employment 
growth. In the absence of policy measures capable 
of  boosting  the  participation  rate,  the  shrinking 
labour force is set  to continue detracting from the 
growth potential (see Graph 1.5).  

the 

7 

-8-6-4-20246020304050607080910111213141516171819ppsTotal factor productivityContribution from capital deepeningContribution from labourPotential output growthActual growthforecast 
 
 
1. Economic situation and outlook 

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. 
Source: Eurostat and ECB as of 30 Jan 2018, where available; European Commission for forecast figures (Winter forecast 2018 
for real GDP and HICP, Autumn forecast 2017 otherwise) 

8 

2004-072008-122013-1420152016201720182019Real GDP (y-o-y)4,5-1,9-0,42,33,23,22,82,7Potential growth (y-o-y)3,0-0,1-0,20,51,21,11,41,9Private consumption (y-o-y)4,4-2,1-1,71,13,5...Public consumption (y-o-y)4,5-0,10,7-0,91,9...Gross fixed capital formation (y-o-y)6,6-5,7-0,73,85,3...Exports of goods and services (y-o-y)4,9-1,34,69,45,6...Imports of goods and services (y-o-y) 6,2-4,33,19,26,2...Contribution to GDP growth:Domestic demand (y-o-y)5,1-2,6-1,01,23,4...Inventories (y-o-y)0,3-0,70,00,8-0,2...Net exports (y-o-y)-0,91,30,60,3-0,1...Contribution to potential GDP growth:Total Labour (hours) (y-o-y)0,7-0,3-0,5-0,8-0,3-0,6-0,40,0Capital accumulation (y-o-y)2,01,20,70,60,70,70,80,9Total factor productivity (y-o-y)0,4-1,0-0,40,80,90,90,90,9Output gap3,3-0,4-4,5-3,2-1,50,62,02,8Unemployment rate12,111,817,316,113,411,19,27,5GDP deflator (y-o-y)3,82,50,40,0-0,11,22,12,1Harmonised index of consumer prices (HICP, y-o-y)2,82,91,3-0,3-0,61,31,61,7Nominal compensation per employee (y-o-y)4,82,1-3,10,4-0,22,52,52,5Labour productivity (real, person employed, y-o-y)2,40,1-0,41,12,9...Unit labour costs (ULC, whole economy, y-o-y)2,32,0-2,8-0,7-3,01,11,31,3Real unit labour costs (y-o-y)-1,5-0,4-3,2-0,7-2,90,0-0,7-0,8Real effective exchange rate (ULC, y-o-y)1,9-1,0-3,3-3,2-3,11,81,4-0,5Real effective exchange rate (HICP, y-o-y)0,8-0,70,8-1,51,2-0,11,9.Savings rate of households (net saving as percentage of net disposable income)2,26,0......Private credit flow, consolidated (% of GDP)14,83,6-0,3-1,4-0,1...Private sector debt, consolidated (% of GDP)86,5119,6118,0113,2105,9...of which household debt, consolidated (% of GDP)32,540,740,238,535,3...of which non-financial corporate debt, consolidated (% of GDP)53,978,977,874,770,6...Gross non-performing debt (% of total debt instruments and total loans and advances) (2)..12,312,510,1...Corporations, net lending (+) or net borrowing (-) (% of GDP)-3,1-1,0......Corporations, gross operating surplus (% of GDP)20,419,3......Households, net lending (+) or net borrowing (-) (% of GDP)0,93,5......Deflated house price index (y-o-y)9,8-5,1-3,4-2,42,1...Residential investment (% of GDP)........Current account balance (% of GDP), balance of payments-5,9-3,31,54,42,43,11,91,9Trade balance (% of GDP), balance of payments-6,6-2,41,12,22,8...Terms of trade of goods and services (y-o-y)1,30,50,20,51,4-0,70,60,6Capital account balance (% of GDP)0,00,10,10,71,1...Net international investment position (% of GDP)-66,5-87,4-86,9-76,5-70,0...Net marketable external debt (% of GDP) (1)-29,3-47,6-46,2-36,2-25,3...Gross marketable external debt (% of GDP) (1)68,688,993,790,578,3...Export performance vs. advanced countries (% change over 5 years)37,3-4,3-16,0-4,45,1...Export market share, goods and services (y-o-y)-1,8-5,32,82,77,8...Net FDI flows (% of GDP)-4,7-3,1-1,7-0,6-4,2...General government balance (% of GDP)-3,7-5,6-5,2-3,3-0,9-0,9-0,9-0,7Structural budget balance (% of GDP).-5,4-3,1-1,8-0,3-0,9-1,9-2,0General government gross debt (% of GDP)39,656,583,885,482,780,177,374,4Tax-to-GDP ratio (%)36,636,036,437,037,737,637,237,0Tax rate for a single person earning the average wage (%)..30,329,1....Tax rate for a single person earning 50% of the average wage (%)..23,121,9....forecast 
 
 
 
 
2.  PROGRESS WITH COUNTRY-SPECIFIC RECOMMENDATIONS 

the 

the 

to  Croatia 

introduction  of 

implementation  of 

the 
Progress  with 
recommendations  addressed 
in 
2017 (3)  has  to  be  seen  in  a  longer  term 
the 
perspective  since 
European  Semester  in  2014.  Looking  at  the 
multi-annual  assessment  of  the  implementation  of 
the  CSRs  since  these  were  first  adopted,  almost 
half  of  all  the  CSRs  addressed  to  Croatia  have 
recorded at least 'some progress'. The rest recorded 
'limited'  or  'no  progress'  (see  Graph  2.1).  Most 
progress  has  been  seen  in  the  areas  of  labour 
market reform and fiscal policy.  

Graph 2.1: 

Level of implementation of 2014-2017 CSRs 

Full 
Implemen-
tation 
5% 

Substantial 
Progress 
12% 

No 
Progress 
19% 

Some 
Progress 
31% 

Limited 
Progress 
33% 

(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 2018 Country Report since the CSRs 
were first adopted. 
Source: European Commission. 

Croatia  has  secured  a  timely  and  durable 
correction  of  its  excessive  general  government 
deficit.  In  2016,  the  general  government  headline 
deficit  decreased  markedly  to  0.9%  of  GDP  from 
3.3% in 2015. This sharp reduction was driven by 
the  economic  recovery,  but  also  by  expenditure 
containment.  The  decrease  in  the  headline  deficit 
combined  with  GDP  growth  has  resulted  in  a 
decrease  in  the  debt  ratio,  which  is  expected  to 
continue.  Croatia  exited  the  Excessive  Deficit 
Procedure in June 2017. 

Over 
taken 
the  past  years,  Croatia  has 
measures to reform the labour market, but the 

(3)  For  the  assessment  of  other  reforms  implemented  in  the 

past, see in particular Section 4. 

9 

successive 

challenge  of  low  labour  participation  has  not 
been  addressed.  Two 
reforms, 
implemented  in  2013  and  2014,  enhanced  the 
flexibility of the labour market. In particular, they 
facilitated  the  use  of  fixed-term  contracts  and 
flexible  types  of  work  (distance  work,  part-time 
work,  seasonal  work  and  agency  work),  and 
simplified  in  various  ways  the  procedures  for 
terminating  employment  contracts.  The  challenge 
of  low  labour  utilisation  however  has  still  not 
received  an  adequate  response,  as  measures 
a 
encouraging 
streamlining  of  pension  provisions  have  not  yet 
been  carried  out.  In  2015,  the  assessment  of 
disability  claims  was  harmonised  and  moved  to  a 
new Single Expert Evaluation Body.  

longer  working 

lives 

and 

Steps have been taken to improve the judiciary 
system,  the  business  environment,  and  the 
resilience  of  the  financial  sector.  Insolvency 
procedures  have  been  thoroughly  revised,  and  the 
reformed judicial map has improved the efficiency 
of  the  system.  There  has  been  a  reduction  of 
backlogs  in  the  judiciary,  however  challenges 
remain.  Some  parafiscal  charges  and 
the 
administrative  burden  for  businesses  have  been 
reduced.  In  2014,  the  comprehensive  portfolio 
screening  of  the  banking  sector  confirmed  its 
robustness,  and  some  identified  weaknesses  have 
been addressed. The share of non-performing loans 
remains 
they  are  well 
provisioned,  and  their  sale  has  accelerated  lately. 
for  Reconstruction  and 
The  Croatian  Bank 
Development  (HBOR)  has  undergone  an  asset 
quality review. 

relatively  high,  but 

of 

hospitals. 

integration 

Reforms  of  healthcare,  state-owned  enterprises 
and  EU  funds  implementation  have progressed 
slowly.  The  healthcare  system  continues 
to 
generate payment arrears. However, the authorities 
have  taken  initial  steps  towards  the  long-planned 
functional 
The 
management  of  state  assets  was  transferred  to  a 
newly  established  ministry  and  their  sale  has 
advanced,  but  the  announced  improvement  of 
corporate  governance  in  state-owned  enterprises 
has  encountered  delays.  The  implementation  of 
projects  co-funded  from  EU  funds  has  improved 
over  the  past  years,  but  remains  hindered  by 
limited  administrative  capacity  and  strategic 
planning.  

 
 
 
                                                           
2. Progress with country-specific recommendations 

education,  and  the  financial  sector.  In  particular, 
the SRSS provides support for the implementation 
of  curriculum  reform;  for  measures  aimed  at 
for  measures 
improving 
strengthening 
the  governance  of  state-owned 
enterprises  and  monitoring  of  their  restructuring 
plans;  and 
increased 
for 
transparency of social policies. 

streamlined  and 

education; 

adult 

the 

limited (4)  progress 
2017 

in 
Croatia  has  made 
addressing 
country-specific 
recommendations  (see  Table  2.1).  The  unfolding 
of the Agrokor crisis in 2017 protracted a period of 
reform  standstill  during  which  Croatia  undertook 
limited  policy  action.  The  introduction  of  the 
recurrent  property  tax,  due  in  January  2018,  has 
been postponed indefinitely. The reform agenda in 
the area of social protection has been narrowed in 
scope. The planned reforms in areas such as fiscal 
framework,  pension  system,  public  administration 
and public sector wages have been largely delayed. 

administrative  procedures 

European  Structural  and  Investment  Funds 
(ESI  Funds)  are  pivotal  in  addressing  key 
challenges to inclusive growth and convergence 
in  Croatia.  This  is  achieved  by  supporting  the 
reduction  of 
for 
businesses,  reinforcing  capacities  in  the  research 
and  business  sectors  and  improving  cooperation 
between enterprises and public research institution. 
ESI  Funds  are  also  instrumental  in  addressing 
challenges  related 
to  employment  and  social 
policies  and  via  investments  in  infrastructure 
which  help  increase  productivity  and  improve  the 
access  to  healthcare  for  vulnerable  groups  and 
people living in deprived areas. 

can 

from 

request 

the 
Member  States 
Commission  technical  support  to  prepare, 
design,  and 
implement  growth-enhancing 
structural  reforms.  The  Structural  Reform 
Support  Service  (SRSS)  provides,  in  cooperation 
with  the  relevant  Commission  services,  tailor-
made technical support, which does not require co-
financing  and  is  provided  at  a  Member  State's 
request. The support addresses priorities identified 
in  the  context  of  the  EU  economic  governance 
process  (i.e.,  implementation  of  country-specific 
recommendations),  but  the  scope  of  the  SRSS 
support is wider as it can also cover reforms linked 
reforms 
to  other  Commission  priorities,  or 
undertaken at the initiative of Member States.  

Croatia  has  requested  technical  support  from 
the SRSS to help implement reforms in various 
areas,  such  as:  public  administration  and  justice, 
growth  and  the  business  environment,  healthcare, 

(4)  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. This 
overall  assessment  does  not  include  an  assessment  of 
compliance with the Stability and Growth Pact. 

10 

 
                                                           
 
 
2. Progress with country-specific recommendations 

Table 2.1: 

CSR progress 

(*)  This does not include an assessment of compliance with the Stability and Growth Pact 
Source:  European Commission. 

11 

Croatia Overall assessment of progress with 2017 CSRs:  limited progress CSR 1: Pursue its fiscal policy in line with the requirements of the preventive arm of the Stability and Growth Pact, which entails remaining at its medium-term budgetary objective in 2018. By September 2017, reinforce budgetary planning and the multiannual budgetary framework, including by strengthening the independence and mandate of the Fiscal Policy Commission. Take the necessary steps for the introduction of the value-based property tax. Reinforce the framework for public debt management, including by ensuring annual updates of the debt management strategy. Croatia has made limited progress (*) in addressing CSR 1:   No progress in reinforcing the fiscal frameworks  No progress in introducing a value-based property tax  Some progress in reinforcing public debt management  CSR 2: Discourage early retirement, accelerate the transition to the higher statutory retirement age and align pension provisions for specific categories with the rules of the general scheme. Improve coordination and transparency of social benefits. Croatia has made limited progress in addressing CSR 2:  No progress in reforming the pension system  Limited progress in improving the social benefits system  CSR 3: Improve adult education, in particular for older workers, the low-skilled and the long-term unemployed. Accelerate the reform of the education system. Croatia has made limited progress in addressing CSR 3:  Limited progress in improving adult education  Limited progress in reforming the education system CSR4: Reduce the fragmentation and improve the functional distribution of competencies in public administration, while enhancing the efficiency and reducing territorial disparities in the delivery of public services. In consultation with social partners, harmonise the wage-setting frameworks across the public administration and public services. Croatia has made no progress in addressing CSR 4:  No progress in the public administration reform   No progress in harmonising the wage-setting frameworks in the public sector CSR 5: Speed up the divestment of state-owned enterprises and other state assets, and improve corporate governance in the state-owned enterprise sector. Significantly reduce the burden on businesses stemming from costs of regulation and from administrative burdens. Remove regulatory restrictions hampering access to and the practice of regulated professions and professional and business services. Improve the quality and efficiency of the justice system, in particular by reducing the length of civil and commercial cases. Croatia has made limited progress in addressing CSR 5:  Limited progress in SOEs divestment and improving corporate governance  Limited progress in reducing administrative and regulatory burdens  Limited progress in removing restrictions to regulated professions and services  Limited progress in improving  quality and efficiency of justice    
 
 
 
 
 
 
 
2. Progress with country-specific recommendations 

Box 2.1: Tangible results delivered through EU support to structural change in Croatia 

Croatia  is  a  beneficiary  of  significant  European  Structural  and  Investment  Funds  (ESI  Funds)  and 
can  receive  up  to  EUR 10.73 billion  until  2020.  This  represents  around  3 %  of  GDP  annually  over  the 
period 2014-2018 and 80 % of public investment (1). By end-2017, an estimated EUR 4.2 billion (39 % of 
the total) was allocated to projects on the ground. This has paved the way for 734 new full-time equivalent 
employments having  been  created  in  the  supported  enterprises;  supporting  sustainable  tourism  and  adding 
more than 314 000 visits per year of the cultural and natural heritage and attractions; increasing capacity of 
childcare  and  education  for  an  additional  6 000  persons  in  the  future.  Out  of  the  ERDF  financing, 
approximately EUR 330 million will be delivered via financial instruments, which is a novelty compared to 
the 2007-2013 period, where financial instruments were not used. 

implement  country-specific 
structural  policy  challenges  and 
ESI  Funds  help  address 
recommendations.  Actions  cover,  among  others,  a  shift  to  a  digital  economy  and  e-systems,  aimed  at 
reducing  the  burden  on  businesses  by  making  administrative  procedures  more  efficient  and  effective. 
Support is provided to improve the effectiveness of the justice system. Investments in infrastructure (namely 
rail, road, broadband, energy and environment) are aimed at reducing regional disparities, promoting growth 
and  increasing  productivity. ESI  Funds  address  challenges  related  to  employment  and  social  policies. The 
Action Plan for the Implementation of the Public Administration Development Strategy 2017-2020 defines 
actions on the strategic, legal, organisational and procedural level to develop quality management systems, 
rationalise administrative procedures, and implement human resources policies that foster skill development 
at all levels of public administration. 

Various  steps  have  been  undertaken  already  as  a  precondition  for  ESI  Funds  support. A  Smart 
Specialisation Strategy for research and innovation was developed with a view of building R&I capacities in 
research  and  business  sectors  and  improving  cooperation  between  enterprises  and  public  research 
institutions. The comprehensive Transport Strategy adopted in August 2017 enables streamlining of projects 
in all modes of transport by defining the measures and setting the priorities on supranational and national 
level.  The  Sustainable  Urban  Mobility  Plans  at  the  level  of  functional  regions  focus  on  public  transport, 
low/zero  emission  modes  and  will  be  accompanied  by  complementary  mobility  management  policies.  To 
ensure  a  more  sustainable  use  of  water  resources,  the River  Basin  Management Plan  for  Croatia  has  been 
adopted.  In  the  health  sector,  specific  actions  are  directed  towards  improving  the  access  to  healthcare  in 
deprived areas and for vulnerable groups; supporting education of medical personnel in primary healthcare; 
and promoting specialisation programmes and the development of analytical tools in health management. 

Croatia  is  advancing  in  the  take  up  of  the  European  Fund  for  Strategic  Investments  (EFSI).  As  of 
December  2017,  the  overall  financing  volume  of  operations  approved  under  the  EFSI  amounted  to 
EUR 187 million,  which  is  expected  to  trigger  total  private  and  public  investments  of  EUR 745  million. 
More  specifically,  5  projects  have  been  approved  so  far  under  the  Infrastructure  and  Innovation  Window 
(including 2 multi-country projects), amounting to EUR 120 million in EIB financing under the EFSI. This 
is expected to trigger nearly EUR 494 million in investments. Under the SME Window, 5 agreements with 
financial intermediaries have been approved so far. The European Investment Fund financing enabled by the 
EFSI  amounts  to  EUR 67 million,  which  is  expected  to  mobilise  more  than  EUR 251 million  in  total 
investment.  Close  to  800  smaller  companies or start-ups  will  benefit  from  this support.  The  energy  sector 
ranks first in terms of operations and volume approved, closely followed by SMEs. 

Funding under Horizon 2020, the Connecting Europe Facility and other directly managed EU funds is 
additional to the ESI Funds. By end-2017, Croatia has signed agreements for EUR 424 million for projects 
under the Connecting Europe Facility. 
https://cohesiondata.ec.europa.eu/countries/HR 

(1)  Public investment is defined as the sum of gross fixed capital formation, investment grants, and national expenditure 

on agriculture and fisheries. 

12 

 
 
 
 
3.  SUMMARY OF THE MAIN FINDINGS FROM THE 

MACROECONOMIC IMBALANCE PROCEDURE IN DEPTH 
REVIEW 

The  in-depth  review  for  the  Croatian  economy 
is  presented  in  this  report.  In  spring  2017, 
Croatia  was 
identified  as  having  excessive 
macroeconomic  imbalances,  in  particular  relating 
to  the  high  levels  of  external  and  domestic  debt, 
both largely denominated in foreign currency, in a 
context  of  low  potential  output  growth.  The  2018 
Alert  Mechanism  Report  (European  Commission, 
2017b)  concluded  that  a  new  in-depth  review 
should  be  undertaken  for  Croatia 
to  assess 
developments  relating  to  identified  imbalances. 
Analyses  relevant  for  the  in-depth  review  can  be 
found  in  section  4.1  for  government  debt,  section 
4.2 for private sector debt and the financial sector, 
section  4.3  for  the  labour  market,  section  4.4  for 
business environment and investment, and section 
4.5 for public sector governance (5). 

Imbalances and their gravity 

Government  debt  remains  high.  The  debt  ratio 
peaked  at  85.8 %  in  2014,  driven  by  large 
government  deficits  and  the  materialisation  of 
contingent  liabilities  in  SOEs.  It  is  expected  to 
have  declined  to  below  80 %  of  GDP  in  2017, 
thanks  to  robust  nominal  growth  and  a  declining 
general government deficit. Furthermore, the kuna 
appreciation  decreased  the  value  of  the  large 
portion  of  debt  denominated  in  foreign  currency. 
Sustainability  risks  for  Croatia's  public  finances 
remain high in the medium term largely on account 
of the still high stock of debt. The fact that a large 
portion  of  the  debt  is  denominated  in  foreign 
currency is also a source of risk.  

The  private  debt-to-GDP  ratio  keeps  reducing, 
but  exposure  to  foreign  currency  and  over-
leverage  of  corporations  are  sources  of  risk.  In 
the second quarter of 2017, consolidated corporate 
and  household  debt  had  decreased  to  67.8 %  and 
34.6 % of GDP, respectively – some 15 and 7 pps 
below  the  peak  registered  in  2010.  By  mid-2017, 
private  sector  debt  was  close  to  or  below  the 
prudential  country-specific  threshold  and  only 
slightly 
by 
fundamentals,  indicating  that  Croatia  still  faces 

suggested 

above 

level 

the 

(5)  An  asterisk  indicates  that  the  analysis  in  the  section 

contributes to the in-depth review under the MIP. 

limited  deleveraging  needs  (see  Section  4.2). 
Although  their  level  of  debt  no  longer  appears 
exceedingly  high,  households  and  non-financial 
corporations  are  still  exposed  to  foreign  currency 
risk.  Furthermore,  in  non-financial  corporations, 
debt  is  high  relative  to  gross  financial  assets  or 
equity,  signalling  potential  solvency  risks  for  the 
corporate  sector.  Finally,  a  high  stock  of  non-
performing  loans  weighs  on  the  private  sector, 
with  a  particularly  high  share  of  such  loans  in 
construction  and  real-estate  activities,  but  also  in 
wholesale and retail trade and manufacturing.  

Continued  current  account  surpluses  are 
translating into a fast reduction of Croatia's net 
external  liabilities.  Thanks  to  a  continued  strong 
performance  of  exports,  the  current  account  stood 
at  2.5%  of  GDP  in  2016.  It  increased  further  to 
3.8 % of GDP in the third quarter of 2017, mainly 
due  to  the  improvement  in  the  income  balance. 
The NIIP improved to -70 % of GDP in 2016 and 
declined further to -62.1 % by the third quarter of 
2017,  36.5  pps  above  its  record  low  from  third 
quarter  of  2011.  In  the  third  quarter  of  2017,  it 
declined  further  to  61.8%  of  GDP.  Despite  these 
notable  improvements,  the  NIIP  remains  very 
negative. In particular, in 2016, the NIIP was still 
level  and  prudential 
below 
threshold 
the  composition  of 
Croatia's external liabilities in terms of asset type – 
in  particular,  the  high  share  of  FDI  and  portfolio 
investment  in  equity  –  mitigates  the  vulnerability 
risks associated to the high level of the NIIP.  

fundamental 
(6).  However, 

its 

Low  labour  utilisation  and  slow  productivity 
growth weigh on Croatia's potential output and 
adjustment 
Despite  moderate 
improvements,  in  Q3  2017  both  the  activity  rate 
(71.7 %)  and  the  employment  rate  (65.6 %)  were 

capacity. 

(6)  The  European  Commission  has  developed  new  country-
specific  NIIP  benchmarks  to  better  assess  the  need  of 
additional adjustment in the NIIPs of EU countries. From a 
prudential point of view, NIIP thresholds are determined as 
the  predictors  of  the  likelihood  of  a  balance  of  payment 
crisis  (see  QREA  "Assessing  prudent  NIIP  and  current 
account  positions",  forthcoming).  In  the  fundamentals-
based  approach,  NIIP  benchmarks  are  derived  from  the 
accumulation  of  current  account  norms  since  the  mid-
1990s.  For  Croatia,  the  prudential  and  fundamental-based 
benchmarks are estimated to be around -37 % and -38 % of 
GDP in 2016, respectively. 

13 

 
 
                                                           
                                                           
3. Summary of the main findings from the MIP in depth review 

while  in  the  households  sector  it  came  from  non-
housing loans. 

The  banking  sector  remains  well  capitalised 
overall  and  banks'  profitability  has  been 
increasing  since  2016.  Vulnerabilities  are  linked 
to 
the  high  exposure  of  corporations  and 
households  to  foreign  currency  risk  and,  to  some 
extent,  interest  rate  risk.  Maturity  mismatches 
between assets and liabilities in the banking sector 
are  also  emerging,  particularly  in  the  increasing 
segment of kuna-denominated credit. Risks related 
to this mismatch are limited by the fact that, in the 
current  low-interest  rate  environment,  transaction 
deposits  are 
long-run 
savings.  Bank  asset  quality  has  continued  to 
remains  high, 
the  NPL  ratio 
improve,  but 
especially  in  the  construction  and  real  estate 
segment.  By  June  2017,  the  total  stock  of  NPLs 
declined  to  11.7 % (from  a  record  high of 14.2 % 
in  2014)  despite  the  inflow  of  loans  classified  as 
non-performing  in  the  aftermath  of  the  Agrokor 
crisis earlier in the year.   

increasingly 

fed  with 

The  impact  of  the  Agrokor  crisis  on  the 
Croatian  economy  has  been  limited  so  far,  but 
related risks remain. Despite the fact that most of 
the Agrokor Group impairments have already been 
incurred  in  the  first  half  of  2017,  risks  remain  as 
the 
restructuring  of  Agrokor's  may  affect 
profitability during the rest of 2017 through greater 
provisioning in 2017 and possibly 2018. While the 
extraordinary 
activation 
administration 
important 
companies  (7)  contained  the  risk  of  a  disorderly 
restructuring, 
of  Agrokor's 
restructuring,  in  particular  if  the  settlement  is  not 
reached,  poses  a  significant  downside  risk  to 
economic  activity  and  the  banking  sector,  in 
particular  as 
losses  and  possible 
operational disruptions in the group and its supply 
chain may still materialize. 

of  measures 

systematically 

financial 

outcome 

the 

on 

in 

Croatia's  current  account  surplus  is  above  the 
norm  suggested  by  the  country's  fundamentals 

(7)  In April 2017, following the unveiling of financial distress 
in  Agrokor,  the  Croatian  parliament  adopted  a  law  on 
extraordinary  administration  in  "systemically  important 
companies"  aimed  at  maintaining  business  operations  and 
reducing  the  risk  of  a  chaotic  restructuring.  The  law 
authorises the court appointed  extraordinary administrator 
supervised  by  the  creditor's  council  to  administer  the 
processes of operational restructuring and negotiation of a 
settlement with the company's creditors and suppliers. 

to 

in 

the 

lowest 

remains 

low  compared 

the  EU,  pointing 

among 
to 
chronically  low  labour  utilisation.  Productivity 
growth 
the  EU 
economies  of  Central  and  Eastern  Europe.  Total 
factor productivity (TFP) contributed negatively to 
potential growth in the crisis period, and continues 
to  be  relatively  low.  A  strong  presence  of  state-
owned  enterprises  hinders  a  more  efficient 
allocation  of  resources  throughout  the  economy 
(see Section 4.5). Weak administrative capacity in 
the public sector as well as a burdensome business 
environment 
(see  Section  4.4)  weighs  on 
productivity  developments  and  on  the  economy's 
overall adjustment capacity.  

Evolution, prospects, and policy responses  

is  expected 

The  debt  ratio 
to  continue 
decreasing.  The  primary  balance  is  expected  to 
remain  in  surplus  as  the  nominal  GDP  growth-
interest  rate  differential,  having  turned  positive, 
increases further, also owing to the refinancing of 
maturing  debt  at  lower  interest  rates.  Recent 
improvements 
to  debt  management  could  be 
conducive to an improved fiscal risk management. 
In  addition,  a  significant  portion  of  the  debt 
previously  financed 
loans  was 
refinanced  by  a  bond,  reducing  and  fixing  the 
interest  rate,  extending  the  maturity  and  enabling 
better management. 

through  bank 

and 

since 

effects, 

valuation 

The private debt ratio is set to keep decreasing, 
though at a slower pace than in recent years as 
new credit started to grow. During 2016, private 
debt  reduction  was  mainly  driven  by  real  GDP 
growth 
the 
appreciation  of  the  kuna  against  the  euro  reduced 
the  value  of  outstanding  liabilities  indexed  to  or 
denominated in foreign currency. In the household 
sector,  debt  decreased  notably  due  to  a  large 
number  of  write-offs  following 
the  statutory 
conversion  of  CHF-denominated  loans  into  EUR-
denominated loans at the end of 2015. In 2017, the 
slight  rebound  in  inflation  also  supported  debt 
reduction,  whereas  credit  flows  turning  slightly 
positive worked in the opposite direction, slowing 
down the debt reduction pace. In 2017, the growth 
rate  of  loans  to  the  non-bank  private  sector 
(adjusted 
from 
domestic credit institutions increased to 3.4 %. The 
strongest  impetus  to  credit  growth  in  the  non-
financial  corporate  sector  came  from  the  increase 
in  investment  loans  and  working  capital  loans, 

for  sales  and  securitisation) 

14 

 
                                                           
3. Summary of the main findings from the MIP in depth review 

and  private  debt  remains  denominated  in  foreign 
currency,  which  implies  exchange  rate  risks.  The 
unemployment  rate  has  reduced  sharply,  but 
remains  high,  while  labour  market  participation 
lags significantly behind the EU average.  

In  the  long  run,  low  potential  growth  hinders 
imbalances. 
the  resolution  of  stock-related 
Economic growth is projected to be robust over the 
forecast  horizon.  However, 
lasting 
adjustment,  economic  growth  will  need  to  remain 
sustained  for  a  long  period.  This  underlines  the 
labour 
challenges 
utilisation  and  subdued  productivity  growth 
represent for the economy's potential growth.  

the  persistently 

low 

that 

for 

a 

Policy  action  has  not  yet  contributed  to  boost 
the 
the 
long-run  growth  potential  and 
economy's  overall  adjustment  capacity.  In  the 
absence  of  effective  policy  measures  to  boost  the 
participation  rate,  low  labour  utilisation  is  set  to 
keep weighing on potential growth in the long run. 
Policy action to improve the business environment 
and  modernise  public  sector  governance, 
in 
support of TFP growth, have been largely delayed. 
Structural  reforms  are  crucial  to  ensuring  that 
Croatia  can  fully  grasp  the  benefit  of  greater 
monetary  and  financial  stability,  while  furthering 
the process of real economic convergence. 

and  the  NIIP-reducing  benchmark.  Continued 
current  account  surpluses  are  underpinned  by  the 
strong  performance  in  exports,  with  exporters 
tourism 
further  market  shares  and 
gaining 
expanding.  In  2016,  the  current  account  balance 
exceeded  the  level  suggested  by  fundamentals  – 
that  is,  the  current  account  norm,  estimated  at  a 
deficit  of  around  1.5%  of  GDP.  According  to  the 
Commission  2017  autumn  forecast,  the  current 
account  surplus  is  projected  to  remain  at  around 
2 %  over  the  forecast  horizon.  This  is  above  the 
level  needed  over  the  medium  term  to  bring  the 
NIIP up to more sustainable levels – e.g. the levels 
suggested  by  the  prudential  and  fundamentals-
based  benchmarks, 
even  under  pessimistic 
scenarios  for nominal GDP  growth.  The  country's 
net  international  investment  position  is  set  to 
further improve.  

Croatia's economy is still growing well above its 
estimated potential growth rate. The output gap 
is  projected  to  have  closed  in  2017  and  turn 
positive  in  2018.  A  strong  pick-up  in  investment, 
somewhat  delayed  by  the  temporary  decline  in 
public  sector  investments  and  by  the  Agrokor 
crisis  during  2017,  is  expected  to  support  the 
growth  potential.  However,  negative  migration 
flows and population ageing restrain growth of the 
labour  force  (see  section  4.3).  After  having 
attained  a record  high of  17.6 %  in  mid-2013,  the 
unemployment rate is estimated to have contracted 
to  around  11 %  in  2017.  It  is  expected  to  fall  to 
pre-crisis  levels  by  the  end  of  2019,  aided  by 
modest  employment  creation  and  labour  force 
shrinking.  Croatia  continues  to  score  poorly  on 
several  measures  of  goods  and  service  market 
efficiency,  and  total  factor  productivity  growth 
remains subdued (see Sections 4.4 and 4.5). 

Overall assessment  

The  unwinding  of  debt-related  imbalances  is 
supported  by  a  solid  recovery,  however 
vulnerabilities  remain.  Both  public  and  private 
debt  ratios  to  GDP  keep  reducing,  but  still 
represent sources of vulnerability for the economy. 
Despite  significant  improvements,  public  debt 
weighs  on  the  country's  credit  rating  and  risk 
premium,  and  the  related  debt  servicing  costs 
weigh on the budget. Despite significant decreases, 
the  remaining  private  deleveraging  needs  hinder 
the recovery of credit flows and a more substantial 
pick-up in investment. A large share of both public 

15 

 
3. Summary of the main findings from the MIP in depth review 

Table 3.1: 

MIP Matrix 

(Continued on the next page) 

16 

  Gravity of the challenge Evolution and prospects Policy response Imbalances (unsustainable trends, vulnerabilities and associated risks) Public debt In 2016 the debt ratio decreased to 82.9 % of GDP, still significantly above the Treaty reference value of 60 %. A large portion of the debt is indexed to or denominated in foreign currency. The debt sustainability analysis indicates high risks in the medium term, in particular under some stress scenario.  Between 2008 and 2014, public debt rose from 39.6 to 85.8 % of GDP on account of large government deficits and the materialisation of contingent risks related to state-owned enterprises. The debt ratio started declining in 2015, thanks to a declining deficit and recovering GDP growth.  The general government deficit surprised in 2016, shrinking from 3.3 % to 0.9 % of GDP. The deficit is expected to decrease further, allowing the debt ratio to continue decreasing.  The Commission 2017 autumn forecast expects the debt-to-GDP ratio to have declined to 80.3 % of GDP in 2017, and recent data point to an even lower figure. It is set to decline further over the forecast horizon, as the deficit shrinks and nominal growth continues. In 2017 debt continued to be refinanced at considerably cheaper rates, extending maturities and lowering debt servicing costs. Part of the central government debt related to loans of SOEs was transferred to the Treasury as the government refinanced it by issuing bonds. This has de facto broadened the scope of central debt management. The Office for public debt management within the Ministry of Finance was upgraded to a Directorate and staffing has been improved. Household and corporate debt and the financial sector In the second quarter of 2017, consolidated corporate and household debt stood at 67.8 % and 34.6 % of GDP, respectively.  In mid-2017, the NPL rate declined to 11.7 %. However, the rate is still relatively high in both the corporate and household sector – 26.3 % and 8.8 % respectively. Around 52 % of household debt and approximately 75 % of (domestic and external) corporate debt was denominated in foreign currency (predominantly EUR) in mid-2017. Household and corporate debt increased rapidly in the previous decade reaching their respective peaks of 41.9 % and 83.4 % of GDP in 2010.  Following the steady reduction of their debt, both sectors faced limited deleveraging needs in 2016, based on the prudential and fundamental-based benchmarks calculated by the European Commission. As debt reduction progressed in the first half of 2017, the deleveraging needs declined further. The pace of deleveraging in both the household and corporate sector is set to abate, as credit flows turn positive, in the context of low interest rates and accelerated economic activity. Despite improvements on both dimensions, the still high exposure to currency risks and interest rate hikes may put at risk the repayment capacity of households and non-financial corporations and therefore 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. The pace of the NPL rate reduction slowed down somewhat on account of increased provisioning for Agrokor-related losses. The banking sector could be indirectly affected due its exposure to Agrokor’s suppliers, and by the potential wider impact on the Croatian economy of the Agrokor crisis.  The authorities facilitated the write off of non-performing loans through a one-off tax-treatment in 2016, but the impact of the measure has yet to be fully assessed. The revised corporate insolvency legislation led to the closure of thousands of illiquid companies without assets in its first few waves. The authorities also plan to enhance the monitoring of the reformed corporate and personal insolvency framework. In April 2017, the Croatian parliament adopted a law on extraordinary administration in systemically important companies, which allowed for Agrokor's operations to resume, thus reducing the risk of bankruptcy or a chaotic restructuring. The outcome of the restructuring is still uncertain, but the company's creditors, including a number of domestic banks, are expected to suffer considerable losses.    
 
 
 
 
3. Summary of the main findings from the MIP in depth review 

Table (continued) 

Source: European Commission. 

17 

External liabilities and trade performance The NIIP improved to -70 % of GDP in 2016, but remained well below its fundamental level and prudential threshold.  Gross external debt declined to 81.7 % of GDP in September 2017.  The current account balance stood at 2.5 % of GDP in 2016. It increased to 3.8 % of GDP in the third quarter of 2017.      The NIIP continued to improve in 2017, declining to -61.8 % of GDP at the end of the third quarter, which is 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. It is forecast to have reached 3.1 % of GDP in 2017 as a whole, and remain in a comfortable surplus at around 2 % throughout the forecast horizon, also thanks to continued strong performance of exports.  The economy has more than recovered the previously lost market shares, while tourism boasts record physical indicators year after year. Croatian firms are still burdened by costly administrative procedures.  Persisting weaknesses in the business environment result in limited attractiveness of Croatia for FDIs and higher costs of doing business for Croatian enterprises. Most reform initiatives aimed at improving the business environment have been delayed.   Potential output The unemployment rate is estimated to have contracted to around 11 % in 2017. However, at 71.7 % and 65.6 % in Q3, activity and employment rates are among the lowest in the EU. The contribution of total factor productivity remains low for a catching-up economy. Low labour utilisation and sluggish productivity dynamics weigh on potential growth, undermining the durability of the adjustment process.   After having attained a record high of 17.6 % in early 2014, unemployment continues to reduce rapidly, while employment increases at a moderate pace. A large share of the unemployment reduction was driven by the shrinking population of working age, due to negative migration flows and population aging. In 2017, permanent contracts outnumbered the temporary ones in new employment, but the share of temporary contracts in total employment remains very high.  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, but so far not outpacing productivity growth in real terms.     The government had undertaken a review of wage setting in the broader public sector (including state-owned enterprises), but has so far failed to propose reform measures. The adoption of the new Act on Public Sector Wages has been postponed by more than two years. Active labour market measures remain largely unutilised and insufficiently targeted.  Some steps have been taken in simplifying the business environment, including the reduction of parafiscal charges. Most other areas, however, register significant delays.    Expected Conclusions from IDR analysis  Corporate debt still burdens the economy, constraining investment. The still high general government debt implies high sustainability risks in the medium term. The large share of foreign currency denominated debt is a source of vulnerability to potential currency shocks. Despite the losses incurred from provisioning for Agrokor-related loans, the financial sector remains profitable and well-capitalised. The net international investment position is improving, but remains at levels that exceed the prudential threshold, contributing to the vulnerability of the economy. Persistently low activity rates and the shrinking labour force hold back the growth potential.  The continued economic growth is expected to contribute to a further reduction in the private and public debt-to-GDP ratio. The current account is expected to remain in surplus, supporting a further reduction in external debt. The pace of deleveraging is set to abate as household and corporate credit activity intensifies, supporting investment.  Improvements are needed in order to ensure a durable correction of the primary balance and solid management of public debt. With investment growing again, increase in potential growth could be ensured by improving the business environment and addressing the low activity rates.   
 
 
 
4.  REFORM PRIORITIES 

4.1.  PUBLIC FINANCES* AND TAXATION 

to  abrogate 

the  Council  decided 

Croatia's  deficit  decreased  markedly  and  the 
debt  ratio  was  put  on  a  declining  path.  In  June 
2017, 
the 
excessive deficit procedure for Croatia (8), after the 
general government deficit reached 0.9 % of GDP 
in 2016, well below the 3 % Treaty threshold. The 
improvement  was  largely  driven  by  economic 
growth  supporting  tax  revenue  and  restraint  of 
expenditure  growth.  The  lower  deficit  contributed 
to  the  decrease  in  the  debt  ratio  from  85.4 %  in 
2015 to 82.7 % in 2016. Nominal GDP growth and 
the  appreciation  of  the  kuna  (which  reduced  the 
value  of  the  large  portion  of  debt  in  foreign 
currency)  also  contributed  to  the  reduction  of  the 
debt-to-GDP  ratio.  In  spite  of  the  continued 
decrease  in  2017  (to  below  80 %),  the  debt  ratio 
remains high, especially compared to peers (9). It is 
expected  to  continue  decreasing  as  the  primary 
balance  remains  in  surplus  and  the  nominal  GDP 
growth-interest  rate  differential  grows  having 
turned  positive,  also  owing  to  the  refinancing  of 
debt at lower interest rates.  

Graph 4.1.1:  General government debt trends 

Source: Eurostat. 

is  expected 

previous  two  years  and  the  2017  convergence 
programme.  In  particular,  the  general  government 
balance  was  planned  at  -0.5 %  of  GDP  in  2018, 
before turning to a balanced budget in 2019 and a 
surplus  of  0.8%  of  GDP  in  2020.  These  targets 
seem  within  reach,  also  in  light  of  the  prudent 
projections  for  revenue  growth  in  the  budget  and 
the fact that the deficit reductions achieved in 2016 
and  2017  provide  a  good  basis  for  further 
improvements.  Based  on  the  latest  available  data, 
the  2017  deficit 
turn  out 
significantly  lower  than  forecasted.  Risks  for 
public  finances  arise  in  the  form  of  healthcare 
arrears  (see  Section  4.5),  pending  legal  disputes 
(10),  guarantees  and  the  impact  of  the  Agrokor 
crisis. In particular, after slightly decreasing in the 
aftermath  of  the  crisis,  the  level  of  guarantees 
issued  by  the  government,  mainly  on  the  debt  of 
SOEs,  has  been  rising  recently.  Agrokor-related 
fiscal  risks  include  HBOR's  stock  of  outstanding 
loans  issued  to  companies  within  Agrokor  (ca. 
0.15 %  of  GDP)  as  well  as  possible  negative 
effects on tax revenue from creditors and suppliers 
to the Agrokor group. 

to 

Refinancing risks appear low in the short term. 
The government financing needs were met without 
difficulty in 2017, also thanks to ample liquidity in 
the  banking  sector  and  low  and  declining  interest 
rates.  Yields  on  government  securities  have 
continued  to  fall  in  2017,  significantly  lowering 
the  cost  of  refinancing  maturing  debt.  Overall, 
short-term  fiscal  risks  stemming  from  the  fiscal 
and  broader  macro-financial  conditions  in  Croatia 
the 
to  decrease, 
have  continued 
improving  state  of  the  public  finances  as  well  as 
GDP  growth  and  deleveraging  in  the  private 
sector,  and  appear  low  (11).  The  key  risk  remains 
the depreciation of the kuna, since 70 % of public 
debt  is  denominated  in  foreign  currency,  mainly 
euros. 

thanks 

to 

Fiscal  policy  aims 
the  general 
to 
government deficit into a surplus in the medium 
term.  The  2018  budget,  adopted  in  November 
2017, is consistent with the policy direction in the 

turn 

(8)  Council Decision (EU) 2017/1191 
(9)  Slovenia, Hungary, Czech Republic, Slovakia and Poland. 

(10)  Including  arbitration  cases  against  the  government  of 
Croatia  on  account  of  some  commercial  banks'  claims  for 
compensation for the losses incurred in the aftermath of the 
2015 legislated conversion of CHF-denominated loans. 
(11)  Short  term  fiscal  risks  are  estimated  using  the  S0  "early 
detection"  composite  indicator  which  relies  on  28  fiscal 
and macro-financial variables with a proven track record of 
signalling upcoming fiscal stress (Berti et al., 2012). 

18 

-6-4-2024681012050607080910111213141516171819ppsPrimary deficitInterestReal growthInflationStock-flow adjust.Debt/GDP, changeforecast 
 
 
                                                           
                                                           
4.1. Public finances and taxation* 

As  Croatia's  deficit  decreases,  improving  the 
quality  of  expenditure  can  help  maintain  or 
improve  the  quality  of  services  provided.  The 
focus  of  fiscal  policy  in  recent  years  has  been  on 
decreasing the deficit in line with the requirements 
of  the  Stability  and  Growth  Pact.  This  has  been 
instrumental  in  restraining  the  build-up  of  public 
debt  and  subsequently  putting  the  debt  ratio  on  a 
declining 
government 
expenditure  in  proportion  to  GDP  remains  higher 
compared  to  peer  countries  (see  Graph  4.1.3),  in 
line with the observed strong influence of the state 
in the economy. 

path.  Nevertheless, 

Graph 4.1.3:  Primary expenditure compared to peers in 

2016 

% of GDP 

46

44

42

40

38

36

34

pps 

0

-2

-4

-6

-8

-10

Croatia Hungary Slovenia Slovakia Poland Czech R.

Primary expenditure (lhs)
Decrease from 2010-2015 average (rhs)

Source: Eurostat. 

High spending in public administration and low 
spending  in  transport,  education  and  R&D 
stands  out  for  Croatia.  In  most  categories, 
Croatia's expenditure ratio is in line with that of its 
peers. Social protection spending is slightly below 
the  average  in  spite  of  the  comparatively  more 
severe  economic  situation  in  recent  years.  Even 
when  the  cost  of  debt  servicing  is  excluded, 
Croatia  spends  considerably  above  average  on 
general public services, which is mostly related to 
the  cost  of  public  administration  at  all  levels  of 
government. This confirms the conclusions on the 
analysis  of  territorial  fragmentation  in  the  2017 
Country report, which noted that in local units the 
administrative  functions  absorb  more  than  one 
third of current expenditure, and in some cases the 
financing  of  the  administration  itself  takes  up  to 
half  of  the  units’  budgets.  At  the  same  time, 
spending is relatively low in Transport, as well as 

Graph 4.1.2:  Active government guarantees 

Source: Croatian National Bank. 

trajectory  points 

Fiscal  sustainability  risks  remain  low  in  the 
in  the 
long  term  and  declined  somewhat 
medium  term.  Assessed  on  the  basis  of  the 
autumn  2017  forecast,  fiscal  risks  in  the  medium 
term  declined  since  spring  2017,  but  remain  high 
overall.  In  particular,  the  improved  budgetary 
position  implies  that  the  size  of  fiscal  adjustment 
in  primary  structural  terms  required  to  reduce  the 
debt  ratio  to  the  60 %  Treaty  reference  value  by 
2032  has  declined.  Still,  a  sensitivity  analysis  of 
the  public  debt 
to  high 
sustainability  risks  in  the  medium  term  under  a 
scenario  which  maintains  the  historic  structural 
should 
primary  balance 
nevertheless  be  noted  that  a  2017  outturn  for  the 
deficit  and  debt  ratio  better  than  expected  and 
forecasted  in  autumn  2017 would  further  improve 
the  fiscal  sustainability  risks  in  the  medium  term. 
In  the  long  term,  Croatia  continues  to  face  low 
fiscal  risks  (12),  largely  related  to  the  projected 
decrease in the spending requirements on pensions 
increased 
which 
spending  requirements  on  health.  The  improving 
country  risk  was  reflected  in  the  first  upgrade  of 
Croatia's  rating  since  2004  (13),  bringing  it  to  a 
notch below investment grade. 

is  offset  only  partially  by 

through  2028. 

It 

(12)  The  long-term  sustainability  is  assessed  using  the  S2 
indicator.  It  estimates  the  fiscal  adjustment  in  structural 
terms  required  to  stabilise  the  debt  ratio  over  an  infinite 
period, taking into account the costs of ageing. However, it 
does not entail a specific reference value at which the debt 
is stabilized. 

(13)  In January 2018, Fitch upgraded Croatia's rating to BB+. 

19 

0123024681011Q112Q113Q114Q115Q116Q117Q1% of GDPbillion HRKInternational (lhs)Other domestic (lhs)Guarantees - HBOR loans (lhs)Total (rhs) 
 
                                                           
 
4.1. Public finances and taxation* 

indicators for each expenditure area, it assesses the 
efficiency  with  which  such  expenditure 
is 
translated  into  the  set  outputs,  using  the  best 
the 
in 
performing  country 
benchmark. Overall,  the  analysis  suggests  there  is 
scope for considerably improving the efficiency of 
spending  in  most  areas,  Social  protection  and 
in  which 
among 
Education  being 
socioeconomic benefits could be highest.  

the  sample  as 

those 

Fiscal-structural issues 

The  long  overdue  adoption  of  new  Fiscal 
Responsibility  and  Budget  acts  has  again  been 
  The  national  budgetary  framework 
delayed. 
remains  underdeveloped.  The 
transparency  of 
fiscal policy suffers from the non-systematic use of 
sensitivity  analyses  in  budgetary  planning  and  a 
lack  of  methodological  publications  and  ex-post 
evaluations of the official forecasts. The design of 
the  national  numerical  fiscal  rule  remains  flawed, 
as  no  consequences  are  defined 
for  non-
compliance. The domestic medium-term budgetary 
framework  is  only  indicative  for  annual  fiscal 
the  Fiscal  Policy 
planning  and 
Commission remains weak. 

the  role  of 

In 

the 

on  Stability,  Coordination 

Croatia  has  initiated  the  ratification  of  the 
and 
Treaty 
Governance. 
context  of  Croatia's 
announced  intention  to  introduce  the  Euro,  in 
January  2018  the  Parliament  adopted  legislation 
whereby Croatia became a signatory to the Treaty 
on  Stability,  Coordination  and  Governance. 
Croatia  is  exercising  its  right  of  exemption  from 
the  Fiscal  Compact  provisions  (such  as 
the 
stipulation  of  the  structural  budget  balance  rule 
monitored  by  an  independent  institution)  of  the 
Treaty until Eurozone accession. 

fixing 

In  November  2017, 

the 
interest 
this  enabled 

Improvements  were  made  to  the  management 
the 
of  public  debt. 
government issued a EUR 1.25 billion bond as part 
of the refinancing of SOEs' debt. Besides reducing 
rate  and  extending 
and 
to 
the  authorities 
maturities, 
concentrate  a  higher  share  of  general  government 
debt  under  the  Treasury.  In  addition,  the  body 
assigned  with  debt  management  was  upgraded  to 
the  level  of  a  Directorate  in  the  ministry  of 
these 
Finance,  with 
developments  are  expected 
the 
to 
effectiveness of debt management. 

increased  staffing.  Both 

improve 

in  Education  and  R&D  spending  –  two  areas  that 
are crucial for sustainable growth. Trends indicate 
that, as a share of total, spending on Transport and 
Education has decreased in the period 2008-2015, 
while 
stagnated. 
Meanwhile,  spending  on  economic  affairs  and 
recreation, culture and religion have been rising. 

spending  on  Health  has 

Graph 4.1.4:  Expenditure by main functions in 2015 

compared to peers 

(1) Expenditure based on COFOG classification. 
(2) Peer group consists of countries in footnote 10. 
(3) General public services exclude public debt 
transactions. 
(4) Economic affairs exclude transport expenditure, shown 
separately. 
Source: Eurostat. 

The  estimated  efficiency  of  spending  is  low  in 
many  areas.  In  order  to  assess  the  quality  of 
public expenditure, a review of its composition has 
to  be  complemented  by  an  analysis  of 
its 
focus  on  efficiency  allows 
efficiency.  The 
reconciling the goal of sustainable public finances 
with the continued provision of adequate levels of 
public services to citizens. Measuring efficiency of 
public expenditures is a complex task. It crucially 
requires identifying the goals or outcomes that the 
public sector aims to achieve in each spending area 
examined.  Public  expenditures  may  fulfil  various 
objectives,  such  as  fairness  and  redistribution, 
macroeconomic  stabilisation,  the  promotion  of 
employment  and  growth.  Box  4.1.1  presents  the 
results of the analysis of expenditure efficiency in 
eight  areas:  police  services,  law  courts,  transport, 
health,  education,  research  &  innovation,  social 
protection  and  social  protection  of  the  elderly. 
After  defining  the  objectives  in  terms  of  output 

20 

05101520% of GDPHRPeer average (simple)MinMax 
 
4.1. Public finances and taxation* 

Taxation 

The  Croatian  tax  system  strongly  relies  on 
indirect taxes. In proportion to GDP, indirect tax 
revenues (19.7 %) in Croatia are three times higher 
than  direct  taxes  (6 %).  They  are  significantly 
above  EU  average  (13.6 %),  but  also  the  average 
for  the  peer  countries.  (14)  The  already  legislated 
introduction  of  the  property  tax  was  postponed 
with no indication of whether and when will it be 
implemented.  This 
is  generally 
type  of 
regarded as one of the least detrimental to growth. 

tax 

tax 

The 2017 tax reform is expected to benefit only 
certain  types  of  households.  The  reform,  which 
most  notably  cut  personal  income  tax  rates  and 
raised  the  personal  tax  allowance(15),  is  projected 
to  have  decreased 
liability  for  all 
the 
households  that  were  subject  to  income  tax  and 
increased  the  number  of  households  that  pay  no 
tax. Simulations (16) project that the gains from the 
reform  are  largest  at  the  lower  end  of  the  wage 
distribution in the cases of single earners and two-
earner  households  with  no  children  or  one  child. 
The tax wedge for a single worker (average wage) 
is  projected  to  have  decreased  by  0.5  pp,  with 
larger  decreases  for  those  earning  67 %  and  50 % 
of  the  average  wage  (-2.3  pp  and  -1.2  pp, 
respectively).  Decreases  in  the  tax  wedge  for  a 
two  children  are 
two-earner  household  with 
slightly  larger  at  average  wage  level  (-1.5  pp). 

(14)  2015 peer (see footnote 10) average is 14.1 % for indirect 
taxes  and  7.2 %  for  direct  taxes.  As  a  %  of  GDP,  Croatia 
collects  the  highest  amount  of  VAT  among  EU  member 
states (European Commission 2017k). 

(15)  The  specifics  of  the  tax  reform  were  outlined  in  the  2017 
Country  report,  which  also  included  an  analysis  of  the 
impact  of  the  reform  on  disposable  income  and  marginal 
tax rates across the income distribution.  

(16)  Calculated by the  European Commission using the OECD 

Tax-Benefits model 

However,  the  tax  wedge  for  this  household  type 
does not decrease at lower wage levels (67 % and 
50 % of average wage), as these incomes were not 
the  reform.  Significant 
taxed  already  before 
increases  in  the  (non  means-tested  and  non-
capped)  child  tax  allowances  mean  that  the  gains 
will  have  been  highest  for  larger  families  at  the 
upper end of the earnings distribution. 

The  reform  is  projected  to  increase  inequality 
and  provide  limited  support  to  employment. 
Although  the  tax  burden  and  tax  wedge  were 
already low before the reform, the reduction of the 
tax  wedge  should  benefit  employment.  However, 
the  increase  in  the  dependent  spouse  allowance 
could  decrease  incentives  to  work  for  second 
earners. Since households  in the  lowest deciles  of 
the  overall  income  distribution  are  unlikely  to 
benefit  from  the  reform  (17),  the  Gini  coefficient 
which measures income inequality (18) is projected 
to have increased. 

Table 4.1.1: 

Tax wedge comparison with peers 

(1) Peer group consists of countries in footnote 10. 
(2) Simple averages were used for EU and peers. 
(3) 2017 projection based on EUROMOD simulation. 
Source: European Commission, OECD. 

(17)  Results  of 

the  EUROMOD 

simulation 

(European 

Commission 2017f). 

(18)  For  incomes  the  coefficient  is  bound  by  0  (no  inequality) 
and  1  (maximum  inequality).  Income  data  from  EU-SILC 
refer to the previous year. 

21 

Tax wedgeSingle person, 50% AWSingle person, 67% AWSingle person, AWCroatia 201632.9%34.9%38.8%Croatia 2017 31.7%32.6%38.3%EU average 201632.5%36.8%40.6%Peer average 201637.3%40.2%42.2%Peer range 201632.6%-48.3%35.1%-48.3%35.8%-48.3% 
                                                           
 
 
 
 
                                                           
4.1. Public finances and taxation* 

Box 4.1.1: Efficiency of spending in Croatia 

The analysis in this box assesses efficiency of public spending by comparing inputs (spending in a certain 
category) with outputs or outcomes (indicators mirroring the performance in the respective category) across 
countries,  using  a  BCC  model1  of  data  envelopment  analysis  (DEA).  This  approach  measures  relative 
efficiency of inputs (spending) and ranks countries accordingly. The best-ranked country is considered to be 
at  the  efficiency  frontier.  The  distance  to  the  efficiency  frontier  provides  a  perspective  of  how  much  a 
certain country could improve its outcomes with its current level of spending – or – how much spending a 
country could allocate elsewhere or save, keeping the same outcomes. As the robustness of results obtained 
using this method depends on how well the choice of the outcome indicator isolates the effect of spending 
from extraneous variables, its applicability is limited to several areas. 

The  efficiency  of  Croatia's  spending  is  assessed  against  those  of  its  five  CEE  peers  (Slovenia,  Hungary, 
Slovakia,  Czech  Republic  and  Poland)  in  eight  areas:  police  services,  law  courts,  transport,  health, 
education, research & innovation, social protection of people below 65 years of age and social protection of 
the  elderly.  Inputs  in  all  cases  relate  to  spending  in  the  concerned  category,  but  the  time  interval  varies 
depending on both the nature of the category and the output indicators used. While healthcare and education 
are areas where spending takes a long time to produce results, this is to a smaller extent the case with police 
services, law courts or social protection. In the case of transport, infrastructure projects typically take a very 
long time to be completed. For this reason, in some instances average spending throughout a longer period is 
taken as input, but also the output indicator looks at progress made over the same longer period as opposed 
to the current state of play. The indicators and periods used are listed in the table below. 

The results of the analysis of efficiency of public spending in Croatia paint a rather consistent picture across 
spending categories. Croatia is at the efficiency frontier in only one area (Social protection of the elderly) 
whereas in other areas tends to be below average and in some cases the lowest among peers. This is the case 
especially when spending is expressed as a percentage of GDP rather than nominal spending per capita, in 
view of Croatia's low GDP compared to peers. 

In general, Croatia seems to fare worse in areas where its spending levels are high in comparison with peers, 
such as education or police services. Social protection of the elderly appears relatively ineffective but at the 
same time efficient. Namely, in the reference period Croatia had the highest share of elderly people at risk of 
poverty among peers (average of 24.3 % vis-à-vis the peer average of 9.5 % and EU average of 13.9 %), but 
at the same time Croatia's spending in this category was very low compared to peers. This result is in line 
with  the  pension  adequacy  risk  highlighted  by  the  Commission  (see  Section  4.3).When  it  comes  to  social 
protection of people below 65 years of age, Croatia's ranking is just below average (although still far from 
the efficiency frontier) while its spending levels are high with respect to peers (also due to the relatively high 
number  of  early  retirees  in  Croatia).  This  confirms  the  view  that  their  effectiveness  of  social  benefits  is 
hindered  by  poor  targeting  at  those  most  in  need  and  the  existence  of  privileged  categories  such  as  war 
veterans  (see  section  4.3).  In  the  area  of  transport,  the  relatively  high  spending  seems  to  be  moderately 
efficient, but here composition effects play a big role since spending in this category was very high in the 

22 

AreaIndicators - inputsOutput indicators with sourcesPolice servicesSpending on Police services in 2013-2015Share of people that tend to trust the police, 2015 (Eurobarometer)Rule of Law Score: Order and Security, 2016 (World Justice Project)Law courts (1)Spending on Law courts in 2013-2015Days needed to resolve cases in 1st instance, 2015 (EU Justice scoreboard)Rule of Law Score: Civil justice, 2016 (World Justice Project)Rule of Law Score: Criminal justice, 2016 (World Justice Project)TransportSpending on Transport in 2006-2015Million passenger kilometers per fatality (road); improvement 2005-2015 (Eurostat)Length of motorways, improvement 2005-2015 (Eurostat)HealthcareSpending on Health in 2008-2015Infant mortality rate (inverted), 2015 (Eurostat)Probability of dying at age 5-14 years (inverted), 2015 (World Bank)Mortality from CVD, cancer, diabetes or CRD (ages 30 and 70) (inverted), 2015 (World Bank)Research and InnovationSpending on R&I in 2012-2014Scientific publications within 10% most cited worldwide, 2014 (EU Innovation scoreboard)Quality of scientific research institutions, 2015 (World Economic Forum)Social protection (above 65)Spending on Social protection (Old age) in 2013-2015Reduction of poverty risk at peopled aged 65 and above, 2015 (Eurostat) (2)Social protection (below 65)Spending on Social protection (excl. Old age) in 2013-2015Reduction of poverty risk at peopled aged below 65, 2015 (Eurostat) (2)EducationSpending on Education in 2009 -2015PISA scores in Mathematics, 2015 (OECD)PISA scores in Reading, 2015 (OECD)PISA scores in Science, 2015 (OECD)(1) Slovakia excluded from the sample due to lack of data(2) Calculated as the difference in the at risk of poverty rate before and after transfers (including pensions). Threshold for risk of poverty set at 60% of median equivalised income. 
 
4.1. Public finances and taxation* 

first part of the period under consideration but sharply declined in the second part. 

In  order  to  assess  the  robustness  of  the  results,  alternative  indicators  were  tested,  largely  confirming  the 
initial  results.  In  three  areas,  alternative  input  indicators  were  tested,  namely:  the  number  of  judges  (law 
courts) and medical doctors (health) per 100 000 inhabitants and teachers per 100 pupils (education). In the 
case of health and particularly law courts, the use of the alternative indicator decreases Croatia's efficiency 
score,  suggesting  that  inefficiencies  could  in  part  be  traced  back  to  the  sub-optimal  allocation  of  human 
resources, which is in line with the observed uneven workload of judges. In that sense, the reorganization of 
the judicial network (see section 4.5) could help reduce inefficiencies. On the other hand, in education the 
use of an alternative input indicator substantially improves Croatia's efficiency score. 

It should be noted that this analysis is based on data up to 2015. Given the extent of expenditure restraint 
recorded in 2016 and 2017 it is possible that the efficiency of spending has since improved. For a broader 
analysis of efficiency of spending in the EU, see European Commission (2016d).  

1 Banker, Charnes, Cooper model, which assumes variable returns to scale. 

23 

 
 
 
4.2.  PRIVATE SECTOR DEBT AND FINANCIAL SECTOR* 

Corporate debt 

Corporate  debt  decreased  as  a  percentage  of 
GDP  and  corporations  lowered  their  exposure 
to foreign currency. In the first half of 2017, the 
corporate  debt-to-GDP  ratio  decreased  by  an 
additional 2.8 pps, to 67.8 % of GDP. Overall, the 
debt ratio dropped by approximately 15.6 pps from 
its  2010  peak  value  of  83.4 %  of  GDP.  The 
reduction  has  been  driven  mainly  by  a  substantial 
contraction  in  domestic  loans  denominated  in 
foreign  currency  (by  7.5  pps)  and  in  external 
corporate debt (by 7.9 pps). However, the exposure 
of  Croatian  companies  to  currency  risk  remains 
high,  as  75 %  of  corporate  debt,  equivalent  to 
approximately  51 %  of  GDP,  was  debt  contracted 
abroad  or  denominated  in  foreign  currency  (see 
Graph 4.2.1). 

whereas the latter reduced the value of outstanding 
liabilities  indexed  to  or  denominated  in  foreign 
currency (see Graph 4.2.2). Debt reduction mainly 
took place in businesses in the hotel and restaurant 
sector  as  well  as  in  the  trade  and  construction 
sectors,  which  reduced  their  external  loans  by 
principal  repayment,  in  addition  to  considerable 
write-offs.  Taking  into  account  the  domestic 
banking  sector  only,  negative  credit  flows  to  the 
corporate  sector  were  still  contributing  to  the 
reduction of corporate debt in 2015 and, to a small 
extent, 2016. However, in 2017, credit flows to the 
corporate  sector  had  turned  positive  rising  by  3.4 
%  -  due  to  positive  growth  rates  in  the  foreign 
currency segment more than compensating for the 
slightly decrease in flows in the domestic segment 
(see Graph 4.2.2). 

Graph 4.2.1:  Debt composition of non-financial 

corporations 

Graph 4.2.2:  Contributions to change in total corporate 

debt-to-GDP ratio 

* Mid-2017. 
(1) 'Other debt' is the debt to domestic leasing companies, 
insurance companies and other financial institutions. NFC: 
non-financial corporations; CI: credit institutions; F/C: foreign 
currency. 
(2) Intercompany lending is assumed to belong to external 
debt of private NFCs. 
Source: Croatian National Bank and Eurostat. 

The  economic  recovery 
is  supporting  the 
reduction  of  corporate  debt.  Since  2015,  the 
decrease in corporate debt has been mainly driven 
by  dynamic  economic  activity,  supported  by  the 
moderate  pick-up  in  inflation  in  2017.  Write-offs 
and  valuation  effects,  i.e.  the  appreciation  of  the 
Kuna  against  the  Euro,  also  contributed  to  the 
reduction  of  corporate  indebtedness  since  the  first 
reduced  the  amount  of  non-performing  loans, 

* Mid-2017. 
(1) 'Other changes' include write-offs and valuation effects. 
Source: Croatian National Bank and Eurostat. 

Interest  rates  have  been  on  a  declining  trend 
over the last few years and are expected to stay 
at  low  levels.  This  trend  is  more  pronounced  in 
loans  indexed  to  and  denominated  in  foreign 
currency.  The  decrease  started  in  the  second  half 
of 2014 with big-size loans, followed by medium-
sized loans in 2016, stabilizing between 2 and 3 % 
thereafter.  Interest  rates  on  loans  denominated  in 
domestic  currency  also  decreased,  but  remain 
above  those  of  peers  (see  Graph  4.2.3).  The 
decrease is least visible in the short-term segment. 
The  decrease  in  interest  rates  in  the  long-term 
segment reflects the mild fall in yields to maturity 

24 

020406080100060708091011121314151617*% of GPDOther debtDomestic loans in F/CDomestic loans in KunaExternal debt of private NFCsExternal debt of public NFCsTotal corporate debtTotal external debt of NFCsExternal debt + debt from domestic CI-6-4-20246810121402030405060708091011121314151617*y-o-y change -% of GDPCredit flowReal growthInflationOther changesD/GDP, change 
 
 
 
4.2. Private sector debt and financial sector* 

on  Croatian  long-term  government  bonds,  ample 
liquidity  and  greater  competition  among  domestic 
banks,  particularly  in  offering  more  competitive 
(re)financing  conditions.  However,  the  continued 
parallel  decline  in  interest  rates  in  the  euro  area 
together  with  the  still  relatively  high  country  risk 
premium for Croatia resulted in a widening spread 
between interest rates on corporate loans in Croatia 
for  short-term  loans,  but  a  narrowing  one  with 
regard to long-term loans (see CNB, 2017). 

Graph 4.2.3:  Interest rates on bank loans to corporations 

arise in the form of high share of loans in foreign 
currency,  especially  for  non-exporting  companies. 
Notwithstanding  the  greater  availability  of  less 
costly  funding,  corporate  sector  debt  is  also  still 
exposed  to  interest  rate  hikes.  However,  this  risk 
has been slightly reduced, due to an increase in the 
duration  of  average  fixation  period.  In  addition, 
both  the  ‘debt-to-gross  financial  assets’  and  the 
‘debt-to-equity’ 
the  non-financial 
corporate  sector  are  relatively  high,  highlighting 
potential solvency risks. 

ratios  of 

Household debt 

Household  debt  as  a  percentage  of  GDP 
decreased  further,  despite  the  recovery  of 
borrowing  in  2017.  By  June  2017,  the  debt-to-
GDP  ratio  in  the  household  sector  was  down  to 
34.6 %,  7.3  pps  below  its  2010  peak  value.  In 
2016,  the  reduction  in  the  debt  ratio  was  notably 
impacted  by  the  statutory  conversion  of  CHF-
denominated  loans  into  EUR-denominated  loans 
(with interest rates capped at historical averages of 
equivalent  EUR-denominated  loans)  at  the  end  of 
2015.  In  2017,  the  pace  of  debt  reduction  slowed 
down  despite  intensifying  economic  activity,  due 
to an upswing in credit flows (see Graph 4.2.5). On 
the one hand, credit standards for granting housing 
and  consumer  loans  continued  to  ease  throughout 
2016  and  early  2017,  due  to  stronger  competition 
among  banks 
in  offering  more  competitive 
(re)financing  conditions,  reduced  costs  of  sources 
of financing and positive growth expectations. On 
the other, demand by households for loans picked 
up, due to growing consumer confidence, positive 
trends  in  the  labour  market  and  a  favourable  real 
estate market outlook (see Graph 4.2.4). 

(1) Mid-size loans (EUR 0.25-1 million) from domestic credit 
institutions to non-financial corporations with an initial rate 
fixation period 5-10 years issued in domestic currency, new 
business 
(2) Peer countries relate to the peer group defined in 
footnote [10], excluding Poland (no data)  
Source: European Central Bank. 

to 

threshold 

the  prudential 

The  corporate  debt  ratio  is  not  particularly 
high but subject to a number of vulnerabilities. 
Overall, by June 2017 the corporate debt ratio was 
close 
indicating 
potential  risks  and  less  than  10%  of  GDP  above 
level  suggested  by  fundamentals19.  The 
the 
decrease in the corporate debt ratio since 2010 has 
thus  reduced  risks  significantly.  One  of 
the 
vulnerabilities 
the  high  concentration  of 
corporate  debt  in  a  few  big  companies,  including 
also the Agrokor Group (see Box 4.2.1). Risks also 

is 

(19)  Fundamentals-based  benchmarks 

are  derived 

from 
regressions  capturing  the  main  determinants  of  credit 
growth.  Prudential  thresholds  represent  the  debt  threshold 
beyond  which  the  probability  of  a  banking  crisis  is  high, 
obtained  from  the  minimisation  of  the  probability  of 
missed  crisis  and 
(European 
Commission, 2017c). 

false  alerts 

that  of 

25 

012345678Jun 17Dec 16Jun 16Dec 15Jun 15Dec 14Jun 14Dec 13ppsPeer rangeCroatia 
 
                                                           
4.2. Private sector debt and financial sector* 

Graph 4.2.4:  Composition of household lending 

Graph 4.2.5:  Contributions to change in total households 

debt-to-GDP ratio 

* Mid-2017. 
(1) 'Other' includes debt towards the external sector and 
debt towards other domestic non-financial sectors.  
(2) F/C: foreign currency. 
Source: Croatian National Bank and Eurostat. 

* Mid-2017. 
'Other changes' include write-offs and valuation effects. 
Source: Croatian National Bank and Eurostat. 

changing 

The  composition  of  household  debt  has  been 
progressively 
towards  HRK 
denominated loans. HRK-denominated loans rose 
by  5  %  of  GDP  between  2010  and  mid-2017.  In 
addition to a steady trend towards borrowing in the 
national  currency  that  started  in  2013,  the  Swiss-
franc loan conversion led many clients to refinance 
their  newly  converted  EUR-denominated  loans 
with  HRK-denominated  ones,  thus  substantially 
reducing  the  amount  of  loans  exposed  to  foreign 
currencies  (see  Graph  4.2.4).  In  addition  to  a 
reduced  propensity  by  households  to  borrow  in  a 
foreign  currency 
franc 
following 
experience,  also  banks  were  inclined  to  provide 
more kuna denominated loans due to, among other 
things,  an  increase  in  kuna  sources  of  funding  in 
their liabilities. This, amid a general fall in interest 
rates,  contributed  to  reduce  both  the  interest  rates 
on  HRK-denominated 
the  spread 
between  interest  rates  on  HRK  and  EUR  loans. 
Notwithstanding 
the 
this,  more 
outstanding  stock  of  loans  is  still  exposed  to 
exchange rate shocks.  

the  Swiss 

loans  and 

than  half 

interest  rates  on 

The  household  debt  ratio  is  not  particularly 
high and the interest rate risk is decreasing. In 
mid-2017, the household debt ratio was well below 
the prudential country-specific threshold but above 
the  fundamentals-based  benchmark,  suggesting 
that risks are limited, although there remains scope 
for  some  deleveraging.  Due  to  its  composition, 
risks to household debt mainly stem from possible 
interest  rate  hikes. 
exchange  rate  shocks  or 
loans  for  house 
However, 
purchases  and  consumer 
loans  have  been 
decreasing since the end of 2015 and are expected 
to stay at low levels. In addition, there has been a 
recent  decline  in  loans  with  variable  interest  rates 
and  a  simultaneous  slow  increase  in  loans  with 
fixed interest rates. Namely, since the end of 2015, 
there has been a 9.2 % increase in loans for house 
purchases  with  fixed  interest  rates.  However,  a 
possible  rise  in  reference  interest  rates  remains  a 
source of risk for clients, which in turn exposes the 
banking sector to indirect credit risk. In September 
2017,  the  CNB  issued  recommendations  to  credit 
institutions  aimed  at  mitigating  such  risk.  The 
the 
recommendations 
transparency of information provided to consumers 
on  debt  servicing  conditions  while  encouraging 
banks  to  extend  their  offer  of  loans  at  fixed  rates 
and  minimise 
for  consumers  of 
refinancing  existing  loans  at  variable  rates  into 
loans with fixed rates.  

increasing 

the  cost 

aim 

at 

26 

051015202530354045060708091011121314151617*% of GDPOtherLoans to households in F/CLoans to households in KunaTotal households debt-4-20246802030405060708091011121314151617*y-o-y change -% of GDPCredit flowReal growthInflationOther changesD/GDP, change 
 
 
4.2. Private sector debt and financial sector* 

budget,  covers  half  of  the  annuity  during  the  first 
four years of the repayment period. 

Access to finance 

Companies'  access  to  bank  loans  is  gradually 
improving,  also  for  small  firms.  Banks’  lending 
activity  remains  subdued,  especially  in  the  small 
business segment. According to the latest findings 
from  the  Survey  on  the  Access  to  Finance  of 
Enterprises,  access 
to  finance  has  generally 
improved,  but  on  average  remains  more  difficult 
for  Croatian  firms.  In  2017,  among  the  surveyed 
companies  that  applied  for  a  bank  loan,  71 %  of 
them were granted a loan, compared with 61 % the 
year  before.  However,  many  surveyed  companies 
(21 %)  were  still  awaiting  the  outcome  of  their 
application,  compared  with  13 %  the  year  before. 
Moreover, 11 % of all surveyed small firms did not 
apply for a bank loan due to fear of rejection, more 
than  twice  the  EU  average  of  5 %.  According  to 
banks' responses to the bank lending survey, credit 
standards  on  loans  to  enterprises  tightened  mildly 
in  the  second  and  third  quarters  of  2017,  with 
to  medium  and  small 
standards  on 
enterprises  tightening  the  most.  On  the  contrary, 
the latter experienced easing credit standards in the 
fourth quarter of 2017, while standards on loans to 
large enterprises kept tightening. Apart from direct 
bank  lending,  other  sources  of  financing  include 
loans and credit lines with subsidised interest rates 
from  the  Croatian  Bank  for  Reconstruction  and 
through 
Development 
commercial banks (20) and loans from the Croatian 
Agency  for  SMEs,  Innovations  and  Investments 
(HAMAG-BICRO), mainly to fund innovation and 
its commercialisation in entrepreneurship. 

implemented 

(HBOR), 

loans 

financial 

The  European  Structural  and  Investment 
Funds  aim  to  facilitate  financing  for  small 
firms.  A  set  of  new 
instruments 
supported by the European Regional Development 
Fund (ERDF) are  meant  to  ease  access  to  finance 
for  small  businesses  and  consequently  boost 
entrepreneurship  in  Croatia.  The  debt  instruments 
amount  to  a  total  of  EUR  280  million  and  are 
expected  to  leverage  approximately  EUR  800 
million  of  private  investment.  They  are  being 
developed under two financing agreements. One is 
implemented by the government agency HAMAG-
BICRO  and  mobilises  EUR  170  million  in  micro 

(20)  However, more than half of HBOR assets are direct loans. 

Housing market 

As  the  economic  recovery  gained  ground,  real 
prices  of dwellings  picked up  by 2.1 %  in  2016 
in  spite  of  low  demand  from  the  household 
sector.  The  rebound  in  house  prices  witnessed 
since  2016  has  been  driven  by  increases  in  the 
prices  of  existing 
real  estate,  which  are 
nevertheless  still  below  their  2010  levels.  By 
contrast,  the  prices  of  new  residential  properties 
have  continued  to  decline.  House  prices  on  the 
Adriatic  coast  and  in  Zagreb  have  contributed  to 
the  growth,  while  prices  in  other  parts  of  the 
country remain subdued. In recent years, helped by 
increasing  incomes  on  the  one  hand  and  subdued 
price  dynamics  on  the  other,  the  price-to-income 
improved 
ratio 
affordability  of  housing.  Nevertheless,  private 
demand  remains  subdued.  This  can  partly  be 
explained  by 
combination  of  negative 
demographic  trends  and  an  already  high  rate  of 
home ownership. 

decreased, 

signalling 

has 

a 

Graph 4.2.6:  Dwellings price developments 

Source: Croatian Bureau of Statistics. 

the  exemption 

The  abolition  of  tax  exemptions  was  partly 
offset  by  the  introduction  of  a  subsidy  scheme 
for  first-time  buyers.  As  part  of  the  2016  tax 
the  property 
reform, 
transaction tax for first time buyers was abolished. 
However, 
the  new  Act  on  State-subsidised 
Housing  Loans  aims  to  compensate,  subject  to 
certain  criteria,  first  time  buyers  of  residential 
property  by  providing  more  favourable  borrowing 
conditions.  The  subsidy,  funded  from  the  state 

from 

27 

-8-6-4-2024615Q115Q215Q315Q416Q116Q216Q316Q417Q117Q2% change y-o-yNew dwellingsExisting dwellingsZagrebAdriaticOther 
 
                                                           
4.2. Private sector debt and financial sector* 

4.2.1). The solvency ratio is back to the level it had 
reached  before  the  CHF  conversion.  Liquidity 
indicators  remain  relatively  high.  In  2016,  the 
loan-to-deposit  ratio  dropped  to  its  lowest  level 
since  2004,  before  increasing  mildly  in  the  first 
half of 2017 as lending to the private sector started 
to recover. 

their  downward 

The  stock  of  non-performing  loans  (NPLs) 
continues to decline in the private sector, albeit 
at  a  slower  pace.  Both  the  NPL  stock  and  NPL 
ratio  have  continued 
trend, 
although  more  slowly  than  in  2016  (see  Graph 
4.2.7).  By  June  2017,  the  NPL  ratio  stood  at 
11.7 %, up from 11.6 % in June 2016. As of June 
2017,  NPLs  were  still  significant  in  the  private 
sector.  Among  non-financial  corporations,  the 
NPL  ratio  is  about  26.3 %.  Based  on  CNB  data 
(21),  NPLs  particularly  affect  the  construction 
sector,  which  alone  constitutes  17 %  of  the  total 
NPL  stock  and  where  the  NPL  ratio  has  been 
above 60 % since June 2014. A high level of NPLs 
may  hamper  the  ability  of  banks  to  extend  new 
credit to firms, thus (partly) explaining why credit 
flows for the corporate sector are still weak. In the 
household  sector  the  NPL  ratio  reached  8.8 %  in 
June  2017,  about  3  pps  lower  than  its  2015  peak. 
NPLs  in  the  household  sector  are  predominantly 
found among mortgage loans. The reduction in the 
coverage 
ratio  between 
accumulated  impairments  and  NPLs,  has  been 
mainly  due  to  (i)  the  use  of  provisions,  as  certain 
banks  wrote-off  their  Agrokor  exposures  and  (ii) 
the  automatic  provisioning 
amendments 
to 
rules(22),  which 
some  amount  of 
led 
provisioning reversals (see Table 4.2.1). 

ratio,  namely 

the 

to 

(21)  The Croatian National Bank data on NPLs, which provides 
a  more  granular  analysis  than  ECB  data,  are  based  on  the 
local  loan  classification  rules.  Accordingly,  they  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).  As  a  general  rule, 
the  local  figures  are  broader  than  those  cited  by  the 
European Central Bank. 

(22)  In March 2017, the CNB introduced an amendment to the 
automatic  provisioning  rules  that  were  first  introduced  in 
2013.  The  guidelines  continue  to  encourage  banks  to 
increase the coverage ratio of past-due loans by 10 % each 
additional  year  they  spend  as  being  past-due,  now  with  a 
cap of 80 %. 

loans, 

and  small 
individual  guarantees  and 
guarantees  combined  with  interest  subsidy.  This 
instrument  has  proved  successful,  with  a  total 
disbursement rate of 41 % with the cut-off date 31 
December  2017.  The  other,  signed  in  October 
2017,  will  be  implemented  by  the  Croatian  Bank 
for  Reconstruction  and  Development  (HBOR).  It 
will make a total of EUR 110 million available in 
growth and development loans. Implementation of 
this  agreement  is  expected  to  start  soon,  and  is 
planned  to  raise  total  private  capital  of  EUR  105 
million. The first tranche was paid from HBOR to 
financial  intermediaries  (3  selected  commercial 
banks)  in  December  2017,  but  nothing  has  been 
disbursed yet. 

Other  sources  of  financing  for  companies 
remain  largely  underdeveloped.  Over  the  past 
few  years  there  has  been  very  little  progress  in 
developing  new  venture  capital  funds  in  Croatia. 
The 2015 World Bank initiative on Innovation and 
Entrepreneurship  Venture  Capital  Project  –  which 
aimed  to  strengthen  risk  capital  financing  for 
innovative  small  and  medium-sized  firms  and 
start-ups  in  Croatia  –  did  not  produce  results. 
However  recently,  thanks  to  incentive  of  ESI 
Funds  funding,  the  Croatian  government  started 
negotiations  with  the  EIF  aiming  at  addressing 
early  stage  equity  market  needs.  ESI  Funds  are 
expected  to  contribute  EUR  35  million  and  the 
total expected leverage amounts to more than EUR 
70 million. The agreement is planned to be signed 
by mid-March 2018 and the funds to start reaching 
beneficiaries by end 2018. In parallel, HBOR and 
EIF are discussing to jointly commit around EUR 
70  million  for  later  stage  equity  market  needs. 
Both initiatives should provide significant support 
for  Croatian  venture  capital  and  private  equity 
market.  EU  funding  recently  supported  a  private 
equity fund with a target size of EUR 100 million, 
focusing  on  small  firms  in  Croatia,  Slovenia  and 
Serbia  (European  Investment  Bank,  2017),  a  sign 
that  a  venture  capital  ecosystem  might  be 
gradually taking shape. 

Financial sector 

Despite  the  Agrokor  crisis,  Croatian  banks’ 
profitability  and  solvency  have  continued  to 
improve  since  2015.  With  a  return  on  equity  of 
8.9 %  in  2016,  banks'  profitability  has  largely 
recovered  from 
the 
the  negative 
conversion  of  CHF-denominated  loans  (see  Table 

impact  of 

28 

 
 
                                                           
4.2. Private sector debt and financial sector* 

Table 4.2.1: 

Financial soundness indicators, all banks in Croatia 

(1) Defined as accumulated impairments / NPLs. 
(2) ECB aggregated balance sheet: loans excl. to gov. and MFI / deposits excl. from gov. and MFI. 
(3) For comparability only annual values are presented. 
(4) The variability in 2017 Q2 NPL figures have been partly driven by a broadening of the coverage of the database. 
Source: European Central Bank, Consolidated Banking Data. 

Graph 4.2.7:  Evolution of NPLs and coverage ratio 

frameworks may facilitate the further reduction in 
NPLs. 

Graph 4.2.8:  NPL sales and other NPL flows 

NFCs: non-financial corporations. Domestic (CNB) definition 
of NPLs is used. 
Source: Croatian National Bank. 

NPL  sales  continue  to  be  the  main  contributor 
to the reduction in NPLs. NPL sales in 2017 are 
likely  to  compare  closely  to  the  previous  year 
when  total  sales  were  already  at  historically  high 
levels  (see  Graph  4.2.8).  In  addition,  the  overall 
economic  improvement  has  led  to  an  increasing 
share  of  restructured  loans  being  reclassified  as 
performing. In the upcoming period, this beneficial 
development  may  also  be  supported  by 
the 
recently  introduced  amendment  of  reclassification 
rules by the CNB that enables banks to cure loans 
more easily and in line with the European Banking 
Authority guidelines. These positive developments 
have  been  offset  by  a  net  inflow  of  NPLs,  which 
are  partly  due  to  defaulted  exposures  of  banks  to 
insolvency 
Agrokor  entities.  Well-functioning 

* Mid-2017. 
Domestic (CNB) definition of NPLs is used. 
Source: Croatian National Bank. 

The  impact  of  the  Agrokor  crisis  on  Croatian 
banks has been limited so far, but risks remain. 
Roughly  one  fifth  of  Agrokor’s  total  loans  are 
estimated  to be from Croatian banks, and most of 
their  impairments  have  already  been  incurred  in 
the  first  half  of  2017.  The  resulting  flow  of  new 
NPLs  and  the  relevant  losses  have  been  less  than 
those  predicted  under  an  orderly  restructuring 
scenario  in  CNB’s  top-down  stress  test  exercise, 
conducted in early 2017 (Croatian National Bank, 
2017).  Nevertheless,  the  banking  sector  could  be 
indirectly  affected  by  its  exposure  to  Agrokor’s 
suppliers and by the wider impact on the Croatian 
economy of the Agrokor crisis. 

29 

010203040506070091011121314151617% of loansCoverage ratioHouseholdsNFCsAll sectors-12-7-2381011121314151617*billion HRKOther NPL flowsNPL salesChange in NPLs from previous period(%)20102011201220132014201520162017Q2Non-performing debt ratio---11.812.912.510.110.7NPL ratio (total)----13.613.010.711.7NPL ratio (NFC)----31.229.924.226.3NPL ratio (HH)----12.011.89.78.8Coverage ratio(¹)---48.154.359.165.860.5Loan to deposit ratio(²)111.2100.595.691.083.777.378.5Tier 1 ratio---18.619.417.719.419.6Capital adequacy ratio---19.620.419.220.820.9Return on equity(³)---0.63.9-6.88.9-Return on assets(³)---0.10.5-0.91.2- 
 
 
 
 
 
 
4.2. Private sector debt and financial sector* 

Box 4.2.1: Crisis and restructuring of Agrokor 

With around 30 000 employees and 2.2 % of the total gross value added in the economy, the Agrokor group 
is the largest private employer in Croatia. Having faced serious financial distress in early 2017, Agrokor was 
put under extraordinary administration in April. The potentially large impact on the Croatian economy and 
financial stability prompted the government to introduce a special law intended at minimizing the risk of a 
disorderly  restructuring  in  systemically  important  companies.  The  law  authorised  a  court-appointed 
extraordinary administrator, supervised by a council of creditors, to administer the processes of operational 
restructuring  and  negotiation  of  a  settlement  with  the  company's  creditors.  Agrokor's  core  business 
operations  thus  suffered  only  minor  disruptions,  which  allowed  the  group  to  benefit  from  another  record 
tourist season in Croatia. 

In  September  an  audit  revealed  that  total  liabilities  in  2015  were  over  20 %  higher  than  previous  official 
figures. Agrokor's equity thus turned out to be negative as borrowings stood at just over HRK 40 billion in 
2016, representing more than 16 % of the country's total corporate debt or 11.5 % of GDP. Other liabilities, 
including most notably trade payables, amounted to more than HRK 16 billion (4.6 % of GDP).  

In  January  2018,  the  Commercial  Court  in  Zagreb  issued  a  final  list  of  creditors'  valid  claims  towards 
Agrokor,  which  formed  the  basis  for  determining  voting  rights  in  the  council  of  creditors  (1).  After  the 
establishment of voting rights, a negotiation period ensues which is required by the special law to result in a 
settlement by mid-2018, or else the procedure will turn into regular insolvency. 

The  still  uncertain  outcome  of  Agrokor's  restructuring,  particularly  if  no  settlement  is  reached,  poses  a 
significant downside risk to the economic activity, as financial losses and possible operational disruptions in 
the  group  and  its  supply  chain  could  be  sizeable.  However,  the direct  risk  to  the  stability  of  the  domestic 
financial  sector  should  be  contained,  since  the  majority  of  Agrokor's  borrowing  relates  to  external  debt 
contracted abroad, whereas Agrokor's debt held by the well-capitalised domestic banking sector is not highly 
concentrated. 

(1) In the meantime, a provisional formation of the council is operational. 

The  high  exposure  of  the  private  sector  to 
currency  risks  leads  to  indirect  credit  risk  for 
the banking sector. At the end of December 2016, 
86 % of total loans denominated in or indexed to a 
foreign  currency  were  not  hedged  against 
currency-induced  credit  risk.  Alongside  the  CNB 
recommendations  to  credit  institutions  discussed 
above  and  aimed  at  mitigating  credit  risk  on 
consumer loans, the CNB enabled easier access to 
HRK funding of banks by amending the regulatory 
framework  for  monetary  policy  operations,  as  the 
is 
high  demand  for  HRK-denominated 
putting  pressure  on  the  banking  sector,  due  to  an 
increasing  problem  of  maturity  mismatch.  Indeed, 
banks  may  find  it  challenging  to  provide  fixed-
rate, long-term lending in HRK, given the lack of 
long-term HRK funding. 

loans 

In  2017  the  Parliament  passed  a  number  of 
financial  laws.  In  summer  2017,  the  parliament 
the 
introduced  new 
validity of certain existing loans taken with foreign 
creditors.  The  CNB  and  the  ECB  were  not 

legislation  which  annuls 

consulted  on  the  draft  law,  the  implementation  of 
which  may  prove  problematic  given  the  lack  of 
precise data on the loans concerned and the lack of 
clarity  on  some  of  its  key  provisions.  The  most 
affected  bank  has  lodged  a  complaint  with  the 
the 
Constitutional  Court. 
parliament  adopted  a 
the 
Mortgage Credit Directive, and the related by-laws 
were enacted by the CNB subsequently. 

In  October  2017, 
transpose 
law 

to 

that 

The authorities have not yet communicated the 
results  and  possible  follow-up  to  the  Asset 
Quality Review of HBOR in 2017. The Croatian 
National  Bank  oversaw  the  quality  assurance  and 
ensured 
the  AQR  methodology  closely 
followed  the  ECB  methodology  developed  in 
2014. One of the purposes of the AQR is to inform 
the  government  decisions  on  possible  changes  in 
the regulatory and governance structure of HBOR. 
The 
indeed  a  development  and 
promotional  state-owned  bank  that  presents  a 
number of specificities, like a high share of direct 
lending (European Commission, 2017f). 

latter 

is 

30 

 
 
4.3.  LABOUR MARKET, SOCIAL POLICIES AND EDUCATION* 

Labour market developments  

low. 

remains 

utilisation 

The  unemployment  rate  in  Croatia  has  been 
falling  considerably  over  the  past  year,  but 
The 
labour 
unemployment rate decreased from 13.4 % in 2016 
to  11.1  %in    2017.  The  drop  resulted  from  the 
combined  effect  of  increases  in  the  employment 
rate and in the activity rate. However, at 65.6 % in 
Q3 2017, the employment rate was still one of the 
lowest  in  the  EU;  the  activity  rate  was  71.7 % 
(Graph 4.3.1),  compared  to  the  EU  average  of 
78.2 %. Between Q3 2016 and Q3 2017, the rate of 
long-term unemployment (LTU) declined to 3.9 % 
of the labour force (-1.5 pps), moving closer to the 
EU average of 3.3 % (23). Overall, the chronically 
low  labour  utilisation  in  the  Croatian  economy 
continues to weigh on potential growth and on the 
country's adjustment capacity. There are also large 
territorial  disparities  in  labour  market  outcomes. 
Based  on  2016  registered  unemployment  data  by 
county (Croatian Bureau of Statistics), the highest 
unemployment  rate  was  almost  four  times  the 
lowest  rate.  Most  counties  with 
the  highest 
unemployment  rates  were  located  in  the  Eastern 
and Central part of the country.     

Low  participation  and  low  employment  are 
widespread across age groups and genders, and 
vulnerable groups are particularly affected. The 
activity  and  employment  rate  of  both  men  and 
women are well below EU average. Men recorded 
the  second  lowest  employment  rate  in  the  EU, 
while  the  employment  rate  of  women  is  10  pp 
lower 
(56.6 %  and  66.2 % 
respectively).  Discouragement,  skills  gaps,  care 
responsibilities  as  well  as  multiple  pathways  to 
to 
early  exits 

important  barriers 

for  men 

represent 

than 

(23)  Croatia  has  undertaken  steps  to  implement  the  Council 
Recommendation  on 
long-term 
the 
unemployed  into  the  labour  market.  However,  challenges 
still remain, including the establishment of the Single Point 
of Contact (SPOC) for the beneficiaries. 

integration  of 

employment  (European  Commission,  2017f).  The 
rate of young people not in employment, education 
or training (NEET) (16.9 % in 2016) and the youth 
unemployment  rate (26.4  %  in  2017) both  remain 
high.  The  employment  rate  of  older  workers  in 
2016  was  the  second  lowest  in  the  EU  (38.1 %). 
Besides the numerous pathways to early exit from 
reflect 
the 
insufficient focus on training for this age group. In 
2016 at 37.9 %, the employment rate of low skilled 
workers was well below the EU average (53.6 %) 
and much lower than for medium and high skilled 
workers (see Graph 4.3.2). Finally, the activity gap 
between  people  with  and  without  disabilities  in 
2015 was 28.9 pp above the EU average. 

this  could  also 

labour  market, 

Graph 4.3.1:  Activity, unemployment, long-term 

unemployment, youth unemployment, NEET 
and employment rates 

* Based on Q1-Q3, except for unemployment. 
(1) NEET: Not in employment, education or training. 
(2) Activity, employment and NEET rates: % of population. 
(3) Unemployment, youth unemployment and long-term 
unemployment rates: % of labour force. 
Source: Eurostat, Labour Force Survey (LFS). 

31 

 
 
                                                           
 
4.3. Labour market, social policies and education* 

Box 4.3.1: Monitoring performance in light of the European Pillar of Social Rights 

The  European  Pillar  of  Social  Rights,  proclaimed  on  17  November  2017  by the European  Parliament,  the 
Council and the European Commission, sets out 20 key principles and rights to benefit citizens in the EU. In 
light  of  the  legacy  of  the  crisis  and  changes  in  our  societies  driven  by  population  ageing,  technological 
change  and  new  ways  of  working,  the  Pillar  serves  as  a  compass  for  a  renewed  process  of  convergence 
towards better working and living conditions. 

Croatia faces challenges with regard to a number of indicators of the Social Scoreboard24 supporting the 
European Pillar of Social Rights. This is notably the case for equal opportunities and access to the labour 
market and fair working conditions. Unemployment rate is decreasing. However, Croatia still faces a high 
rate of young people not in employment, education or training (NEETs), and low employment rates while 
only  few  of  the  jobseekers  participate  in  active 
labour market policy measures. Croatia has high 
shares  of  people  at-risk-of  poverty  or  social 
exclusion. Nonetheless, the share of early school 
leavers is relatively low.  

Low participation in the labour market applies 
in  particular  to  older  workers.  Among  55-64 
years olds the employment rate stands at 38.1 %. 
Croatia has in recent years not been successful in 
addressing this issue, and this is raising concerns 
for  the  adequacy  of  the  pension  system  in  a 
context of demographic change. 

the 

integration  of 

The  establishment  of  a  network  of 
Lifelong  Career  Guidance 
(LLCG) 
Centres across Croatia is a step forward 
in 
employment 
provide 
programmes.  The  Centres 
individual  and  tailored  career  guidance 
support to all Croatian citizens. One of their 
main aims is to create targeted measures for 
the  identification  and  activation  of  youth 
NEETs.  The  Centres  use  a  partnership-
based  model  and  work  with  relevant 
stakeholders  at  local  and  county  levels.  So 
far  there  are  13  Centres  and  the  plan  is  to 
reach at least 22 by 2020. In addition, the Croatian Public Employment Service and the Ministry 
of  Science,  Education  and  Sports  as  well  as  the  Ministry  of  Labour  and  Pension  System  have 
signed agreements on the establishment of data exchange systems between them. This will allow 
tracking the youth NEETs and exchanging changing data on the career intentions of students in 
their final year of study. 

24 The Social Scoreboard includes 14 headline indicators, of which 12 are currently used to compare Member States performance. 
The indicators "participants in active labour market policies per 100 persons wanting to work" and "compensation of employees 
per hour worked (in EUR)" are not used due to technical concerns by Member States. Possible alternatives will be discussed in 
the relevant Committees. GDHI: gross disposable household income. 

32 

Early leavers from education and training (% of population aged 18-24)Best performersGender employment gapOn averageIncome quintile ratio (S80/S20)On averageAt risk of poverty or social exclusion (in %)To watchYouth NEET (% of total population aged 15-24)Critical situationEmployment rate (% population aged 20-64)Critical situationUnemployment rate (% population aged 15-74)Weak but improvingGDHI per capita growth N/AImpact of social transfers (other than pensions) on poverty reductionTo watchChildren aged less than 3 years in formal childcareTo watchSelf-reported unmet need for medical care On averageIndividuals' level of digital skillsCritical situationMembersStates'areclassifiedaccordingtoastatisticalmethodologyagreedwiththeEMCOandSPCCommittees.ThemethodologylooksjointlyatlevelsandchangesoftheindicatorsincomparisonwiththerespectiveEUaverages,andclassifiesMemberStatesinsevencategories(from"bestperformers"to"criticalsituations").Forinstance,acountrycanbeflaggedas"betterthanaverage"iftheleveloftheindicatorisclosetoEUaverage,butitisimprovingfast.Formethodologicaldetails,pleaseconsultthedraftJoint Employment Report 2018, COM (2017) 674 final. NEET:neitherinemploymentnorineducationortraining;GDHI:grossdisposablehousehold income.Equal opportunities and access to the labour marketDynamic labour markets and fair working conditionsSocial protection and inclusionCROATIA 
                                                           
labour  market  measures 

Active 
are 
insufficiently  targeted  at  vulnerable  groups.  In 
2016  the  participation  of  unemployed  persons  in 
active labour market measures (ALMPs) was very 
low,  at  7 %.  In  early  2017,  new  ALMPs  were 
announced, but from a preliminary evaluation, they 
do not seem  to  address  the difficulties  in  entering 
the  labour  market  for  the  long  term  unemployed 
and  the  low-skilled  (25).  At  the  same  time,  the 
Croatian  Youth  Guarantee  scheme  is  showing 
some  promising  results:  it  reached  more  than  half 
(54 %) of NEETs aged 15-24 in 2016 (EU average 
42.5 %),  and  18  months  after  leaving  the  scheme, 
in  employment. 
68.3 %  of  participants  were 
Regarding  passive  measures, 
the  duration  of 
unemployment  benefits  (relative  to  the  qualifying 
contribution  period)  is  short  in  Croatia,  and  the 
coverage 
the  eligible 
population)  remains  low  (European  Commission, 
2017a). 

than  15 %  of 

(less 

increase 

increase 

As  of  2017,  there  has  been  a  decrease  in  the 
number  of  new  hires  on  temporary  contracts 
and  a  sharp 
in  new  permanent 
contracts.  The  pick-up  in  economic  activity  and 
the  improving  conditions  on  the  labour  market 
favoured  an 
in  permanent  contracts 
(Graph  4.3.3).  In  Q3  2017  however,  temporary 
employees  as  a  percentage  of  total  employment 
still  stood  at  22.5  %,  against  an  EU  average  of 
14.8 %.  As  far  as  self-employed  workers  are 
concerned, in 2016 their share in total employment 
decreased to 12 %, of which the largest group were 
farmers (30%). 

(25)  From  January 

tends 

to  September  2017, 

the  majority  of 
participants  of  ALMP  measures  were  in  "Traineeship  for 
work  without  employment"  (32.5 %)  or  public  works 
(30.4 %).  The  first  measure 
to  favour  young 
beneficiaries  with  a  higher  education  level  who  are  more 
likely to find a job without any intervention (the so called 
"creaming" effect), whereas the impact of public works on 
employability of, primarily, older workers was evaluated as 
small  or  even  negative  (Bejaković,  and  al.,  2016).  Only 
1.3 %  of  all  ALMP  participants  took  part  in  educational 
programmes  offering  the  possibility  to  acquire  additional 
skills needed to enter the labour market. 

4.3. Labour market, social policies and education* 

Graph 4.3.2:  Employment rate by educational attainment 

Source: Eurostat. 

After  years  of  wage  moderation,  wages  have 
started  growing  again.  Both  nominal  and  real 
(GDP deflated) wage growth was negative in 2013 
and 2014, followed by a slight increase in 2015. In 
2016,  nominal  wages  decreased  marginally,  while 
real  wages  stabilised  as  inflation  was  negative. 
Between 2014 and 2016, Croatia was amongst the 
the  highest  gap  between 
EU  countries  with 
productivity  and 
real  wage  growth,  which 
supported  cost-competitiveness  gains  (European 
Commission,  2017j).   In  2017,  the  negotiated 
increase  in  public  wages,  combined  with  the 
improving  economic  conditions  and  the  further 
tightening  of  the  labour  market  are  putting  some 
upward pressure on wages. Nominal wages started 
growing again, at a projected rate of 2.5 % for the 
year  as  a  whole,  and  are  expected  to  continue 
growing  at  the  same  rate  in  2018  and  2019.  As 
inflation  has  turned  positive,  real  wages  are 
projected  to have  increased by  1.3 %  in  2017  and 
to  continue  growing  at  a  moderate  rate  of  0.4 % 
the  forecast  horizon,  remaining  below 
over 
productivity growth.  

The  authorities  have  adopted  changes  to  the 
minimum  wage.  At  the  end  of  2017,  the  gross 
minimum  wage  was  raised  by  5 %  to  EUR  456, 
which  corresponds  to  the  42.9 %  of  the  gross 
average wage in Croatia. In order to minimise the 
impact  on  labour  costs,  the  base  on  which  the 
employer  contribution  is  calculated  was  cut  by 
50 %  for  those  workers  that  have  been  employed 
for  a  period  of  more  than  12  months  on  the 

33 

30405060708090080910111213141516% of population, 20-64High skilledMedium skilledLow skilled 
                                                           
 
4.3. Labour market, social policies and education* 

minimum-wage, which risks creating an important 
low  wage  trap.  In  2016,  the  coverage  of  the 
minimum  wage  was  relatively  low  (6.6 %  of  the 
employed)  and  its  incidence  most  pronounced  in 
the  poorest  counties  of  Croatia  and  in  a  few 
sectors.  

Graph 4.3.3:  Employment change year-on-year 

to 

are 

invited 

Social  Dialogue  is  not  yet  a  well-developed 
practice  in  Croatia.  Formally,  Croatia  has  an 
established social dialogue structure in the form of 
a  National  Economic  and  Social  Council.  Social 
partners 
provide  written 
contributions  before  the  adoption  of  National 
Reform Programmes and other relevant legislative 
initiatives.  However,  the  interaction  between  the 
authorities and the stakeholders is over all limited, 
and  mostly  confined  to  the  provision  of  written 
feedback  on  some  of  the  government  proposed 
measures.  Another 
that 
fragmentation  seems  to  be  central  to  limiting  the 
overall capacity of trade unions to engage in social 
dialogue. 

inhibiting 

factor 

is 

Social protection system  

rate 

The  rate  of  at-risk-of  poverty  and  social 
exclusion declined in 2016, but remains high. In 
2016,  a  large  share  of  the  population  –  27.9%  – 
was  at  risk  of  poverty  or  social  exclusion 
(AROPE),  compared  to  23.5  %  in  EU  (Graph 
4.3.4).  The  share  of  people  persistently  facing  a 
(AROP) (26)  was 
high  at-risk-of-poverty 
14.5 %,  whereas  the  percentage  of  the  population 
living  in  overcrowded  households (27)  was  more 
than  double  that  of  the  EU  average.  Regional 
disparities  are  high  and  persistent,  with  at  risk  of 
poverty  rates  reaching  over  40 %  in  many  eastern 
and  central  municipalities  and  in  rural  areas 
(Croatian  Bureau  of  Statistics).  Particularly 
affected  are  the  elderly  and  the  disabled (28). 
Moreover,  73.2 %  of  children  of  low  skilled 
parents were at risk of poverty in 2016, against just 
the 2.9 % of children of high-skilled parents. This 
is the reflection of the very low employment rates 
among  the  low  skilled.  Parental  education  levels 
and  poverty  have  strong  impacts  on  children's 
chances  to  do  well  in  school,  to  have  access  to 

(26)  The  indicator  is  defined  as  the  share  of  persons  with  an 
equalised  disposable  income  below  the  risk-of-poverty 
threshold  in  the  current  year  and  in  at  least  two  of  the 
preceding three years. 

(27)  A  person  is  considered  as  living  in  an  overcrowded 
household if the household does not have at its disposal  a 
minimum  of  rooms  equal  to  one  room  for  each  of  the 
following  categories:  the  household;  by  couple  in  the 
household;  for  each  single  person  aged  18  and  more;  by 
pair  of  single  people  of  the  same  sex  between  12  and  17 
years  of  age;  for  each  single  person  between  12  and  17 
years of age and not included in the previous category; by 
pair of children under 12 years of age. 

(28)  The risk of poverty or social exclusion for disabled persons 
is high (40.0 %), especially for the elderly disabled (65+). 

Employment (thousand), total, ages 20-64, year-on-year 
change based on non-seasonally adjusted data. 
Source: Eurostat, Labour Force Survey (LFS). 

The  adoption  of  the  announced  legislation  to 
harmonise wage setting for civil servants across 
the  public  administration  has  been  further 
postponed. Initially planned to cover wage setting 
in the public sector as a whole, the new legislation 
will  be  enacted  in  two  steps,  first  covering  civil 
servants only, and at a second stage, public sector 
workers.  Greater  harmonisation  of  wage  setting 
across the public administration would be achieved 
through  the  introduction  of  common  wage  grids 
and  job  complexity  coefficients,  based  on  more 
consistent  job  descriptions  and  skills  frameworks. 
According  to  the  authorities,  the  new  legislation 
the  employment 
would  also  cover  areas  of 
relationship  of  civil  and  public  servants  that  are 
currently negotiated through collective bargaining. 
In  the  meantime  however,  the  basic  collective 
agreement regulating the rights of civil and public 
servants was renegotiated in December 2017, with 
validity  until  2021.  The  collective  agreements  for 
six sectors expired in 2017 and are still due to be 
renegotiated.  As  far  as  state-owned  enterprises 
(SOEs)  are  concerned,  no  further  steps  have  been 
taken  in  setting  up  a  coordinated  system  for 
collective bargaining. 

34 

-150-100-5005010015020025007Q108Q109Q110Q111Q112Q113Q114Q115Q116Q117Q1y-o-y change in thousandsPermanent employeesTemporary employeesSelf employmentOverall 
 
                                                           
4.3. Labour market, social policies and education* 

children. Since February 2017, GMB recipients are 
allowed  to  take  part  in  paid  public  works  without 
losing  entitlement  to  the  benefit,  thus  combining 
the income support with incentives to (re)integrate 
in  the  labour  market.  In  July  2017,  parental  and 
child  benefits  (30)  were  increased  as  a  measure  in 
support of demographic renewal (see Section 4.1). 
With  a  similar  policy  objective,  in  July  2017  the 
authorities  also 
introduced  a  non-refundable 
subsidy  that,  under  certain  conditions,  covers  half 
of the monthly instalments of the first four years of 
new loans to purchase the first home (see Section 
4.2).However,  the  success  of  this  measure  in 
hampering  migration  outflows  of  working  age 
individuals would come with the downside of also 
hindering 
the  highly 
labour  mobility  within 
fragmented national labour market.    

Territorial  disparities  in  the  provision of  social 
benefits  result  in  increased  inequality.  The 
provision  of  social  benefits  in  Croatia  is  shared 
between  the  central  and  sub-national  government 
units.  Following  the  decentralization  of  public 
functions initiated in 2001, regional and local sub-
to 
national  units  assumed 
provide and administer some social benefits (such 
as  housing  benefits,  the  lump-sum  grant  for  new-
born  children  and  childcare  services).  However, 
due  to  the  lower  fiscal  capacity  of  poorer  local 
units to finance such benefits, this system results in 
an  unequal  treatment  of  citizens  and  exacerbates 
existing 
territory  and 
weakens  the  social  inclusion  impact  of  the  social 
safety net (31) (see Section 4.5).  

inequalities  across 

the  responsibility 

the 

The  large  variation  in  fiscal  capacities  of 
counties  also  affects  the  provision  and  use  of 
child  care  services.  High  quality  formal  Early 
Childhood  Education  and  Care  (ECEC)  plays  an 
important  role  in  children's  development  and 
supports  participation 
labour  market, 
in 
especially  of  women.  In  2015,  only  11.8 %  of 
children up to 3 years of age and 73.8 % of pupils 

the 

(30)  Under the law, the maximum allowance for the second half 
of the year-long maternity leave for employed parents will 
rise from HRK 2 660 to HRK 3 991 (appx. EUR 532). For 
unemployed parents who do not meet the criterion of 12 or 
18  months of service, the parental allowance will increase 
from HRK 1 663 to 2 328 (appx. EUR 310). 

(31)  More than half of local-government social programmes are 
cash  benefits.  The  city  of  Zagreb  and  the  counties  of 
Dubrovnik and Istria record the largest spending per capita, 
whereas in Virovitica-Podravina County spending is almost 
6 times lower. 

quality health care and to reach their full potentials 
later in life. 

Graph 4.3.4:  At-risk-of-poverty or social exclusion rate and 
two of its components (SMD, LWI) 

(1) 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). 
(2) 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. 
(3) LWI: People living in very low work intensity households 
(% of population 0-59). People living in households where the 
adults work less than 20% of their total work-time potential 
during the previous 12 months. 
(4) AROP: based on previous year income data, SMD: 
current year, LWI: status over previous 12 months. 
Source: Eurostat, European Union Statistics on Income and 
Living Conditions (EU-SILC). 

is 

for 

inadequate, 

jobless  households 

The  income  support  schemes  on  average  seem 
inadequate  to  reduce  poverty.  The  level  of  the 
minimum  income  offered  by  the  Guaranteed 
in 
(GMB) 
Minimum  Benefit 
particular 
(European 
Commission,  2017a).  Family  benefits,  and  in 
particular 
cover 
adequately  the  poorest  counties  and  their  poverty 
reduction  capacity  is  limited  (29).  A  number  of 
steps  have  been  taken  recently  to  strengthen 
income  support  and  support  for  households  with 

allowances  do  not 

child 

(29)  The  project  "Evaluation  of  the  efficiency  of  social  help", 
was  implemented  in  2017  by  the Croatian  authorities  and 
the World Bank. 

35 

0510152025303510111213141516ppsAROPE EU28AROPE HRSMD EU 28SMD HRLWI EU28LWI HR 
 
                                                           
                                                           
4.3. Labour market, social policies and education* 

throughout  the  territory.  To  this  purpose,  the 
authorities plan to harmonize the definitions of the 
benefits  granted  at  local  government  level  on  the 
basis  of  the  ESSPROS  (European  System  of 
integrated 
Statistics) 
nomenclature,  and  establish  regular  reporting 
channels from the local to the central government 
level. 

Protection 

Social 

contributing  workers 

retirement  age,  especially 

The  Croatian  pension  system  continues  to  face 
medium  and  long  term  challenges.  In  2017,  the 
ratio  of 
to  pension 
beneficiaries  was  at  1.2,  reflecting  unfavourable 
demographic  trends,  but  also  the  existence  of 
numerous  pathways  to  early  retirement  and  a  still 
low  statutory 
for 
women.  In  2016,  only  38.1 %  of  people  aged  55-
64  were  employed  and  only  14.8 %  of  all 
pensioners  had  40  or  more  qualifying  years.  The 
average  duration  of  working  life  is  one  of  the 
lowest  in  EU  (32.1  years  in  2016).  In  2016,  the 
aggregate replacement ratio of pensions (0.39) was 
significantly  lower  than  the  EU  average,  resulting 
in a higher at risk of poverty rate for people aged 
65+  (26.5 %  vs  14.6 %  EU  in  2016).  The  2018 
Aging Report (forthcoming) projects that by 2070 
the  public  pension  expenditure  as  percentage  of 
GDP  will  further  fall  by  3.8pp.  Ensuring  pension 
adequacy  in  the  future  will  require  increased 
pension contributions and/or longer working lives.  

in  2002  and 

supplementary  pillar 

Existing  discrepancies  in  the  pension  system 
pose  also  short  term  challenges.  Successive 
interventions in the pension system – starting from 
the 1999 reform and including the establishment of 
a 
the 
introduction, in 2007, of a pension supplement for 
those insured under the first pillar only – have left 
the cohort of people born between 1962 and 1984 
with prospective pensions that could be up to 30 % 
lower  than  those  for  the  older  cohort.  This  is 
because of their short contribution history into the 
second  pillar.  Inflows  into  retirement  from  this 
cohort  have  just  started  and  are  expected  to 
intensify  in  2019.  People  with  shorter  working 
lives,  and  in  particular  women,  will  be  most 
penalised.  The  authorities  are  exploring  different 
options to tackle the situation. 

aged  between  4  and  6  were  enrolled  in  ECEC. 
Local government units cover the large majority of 
ECEC  expenses  (Dobrotić  and  Matković,  2017) 
according  to  the  current  financing  model,  thus 
creating  a  strong  link  between  ECEC  access  and 
counties'  income  (32).  As  a  result,  and  with  the 
exception  of  counties  with  major  city  centres,  the 
coverage of ECEC increases in line with GDP per 
(Graph 4.3.5).  The 
capita 
authorities  announced  plans 
the 
increase 
participation in ECEC to 95 % by 2020. This will 
be difficult in the absence of a major reform of the 
ECEC  financing  system  and  possibly  of  the 
distribution  of  competences  between  central  and 
sub-national government levels.  

in  each  county 

to 

Graph 4.3.5:  Early childhood education and care 

ECEC: Early Childhood Education and Care. 
Source: Centre for Peace Studies (2016) and Croatian 
Bureau of Statistics. 

The  consolidation  of  the  benefits  system  with 
the  aim  to  improve  targeting  and  reduce 
poverty  has  not  advanced.  The  authorities 
abandoned the establishment of the one-stop-shops 
as  a  central  point  for  the  administration  and 
provision  of  social  benefits  and  services,  which 
used  to  be  a  flagship  measure  in  successive  past 
NRPs. The previously announced harmonisation of 
eligibility  criteria  and  plans  to  consolidate  more 
benefits under the GMB have also been suspended. 
The  focus  has  instead  shifted  to  improving  the 
allocated 
on 
information 

benefits 

system 

(32)  In  the  city  of  Zagreb  91 %  of  children  aged  3-5  attended 
some  form  of  ECEC  in  2014,  whereas  only  22 %  of 
children  did  so  in  the  Brod-Posavina  county  (Centar  za 
Mirovne Studije, 2016). 

The  announced  changes  to  the  pension  system, 
aimed  at  encouraging  longer  working  lives, 
have  not  been  implemented.  Reform  measures 
planned  for  December  2017  have  been  further 

36 

010203040506070809010002,0004,0006,0008,00010,00012,00014,00016,00018,00020,000Brod-PosavinaVukovar-SrijemVirovitica-PodravinaPožega-SlavoniaBjelovar-BilogoraKrapina-ZagorjeLika-SenjOsijek-BaranjaKoprivnica-KriževciSisak-MoslavinaVaraždinKarlovacMeđimurjeZadarZagreb CountyŠibenik-KninSplit-DalmatiaPrimorje-Gorski KotarDubrovnik-NeretvaIstriaCity of ZagrebppsGDP per headECEC access 3-5 year-olds (rhs)GDP/capita (lhs) 
 
                                                           
4.3. Labour market, social policies and education* 

relevance  of  education.  After  a  delay  of  almost  a 
year,  in  autumn  2017  work  began  on  the  revision 
of the reform's draft documentation on the basis of 
is 
a  public  consultation.  The  documentation 
expected  to  undergo  external  reviews  by  spring 
2018,  with  pilot  implementation  due  to  start  in 
September  2018 
in  3-5 %  of  schools.  The 
introduction  of  obligatory  subject  Computer 
Science in the 5th and 6th grades of primary school 
is  also  planned  for  2018.  Currently,  10 %  of 
Croatian schools are taking part in the ESI Funds-
supported  e-Schools  project  designed  to  prepare 
to 
strategic  documents,  plans  and  policies 
systematically integrate ICT into activities of all of 
primary and secondary schools by 2022.  

Growth in tertiary graduates has slowed, while 
their employment rates have not yet returned to 
pre-crisis  levels.  Tertiary  educational  attainment 
in Croatia had been on an upward trend for the last 
in  2014.  The 
decade  but  started  declining 
proportion  of  30-  to  34-year-olds  with  tertiary 
education  in  2016  was  29.5 %  (35),  significantly 
below  the  EU  average  of  39.1 %  and  Croatia’s 
national  2020  target  of  35 %.  In  2008,  86.3 %  of 
people  who  had  completed  tertiary  education 
within the previous 1-3 years was in employment, 
while in 2016 this share was down to 74.7 % (EU 
average  of  82.8 %),  despite  the  recent  pick-up  in 
economic  activity.  The  unemployment  rate  of 
tertiary graduates was at 7.8 % in 2016, the fourth 
highest in the EU.  

Croatia  lacks  mechanisms  to  address  the  skills 
mismatch  of  tertiary  education  graduates.  A 
2017  employers'  survey  on  how  the  tertiary 
education  meets  the  needs  of  a  competitive 
economy  ranked  Croatia  112th  out  of  137  global 
economies and among the lowest in the EU (World 
Economic  Forum,  2017).  Despite  the  annual 
recommendations  from  the  Croatian  Employment 
in 
Service  (CES) 
business  administration  and  law,  there  was  no 
change  between  2012  and  2016.  Almost  one  in 
three  Croatian  students  graduated  in  business  and 
law,  among  the  highest  in  the  EU  (31.4 %  vs 
24.3 %).  The  recent  introduction  of  an  ESF-
supported  'science,  technology,  engineering  and 
math'  scholarship  scheme  aims  to  increase  the 
pupils'  interest  in  these  subjects.  Despite  the 

to  reduce  enrolment  rates 

(35)  The  same  rate  for  people  with  disabilities  is  the  lowest  in 

the EU (15.6% vs. 29.4% in 2015). 

include 

the  meantime, 

to  mid-2018.  These 

postponed 
the 
streamlining  of  the  100+  arduous  or  hazardous 
professions  benefitting 
from  more  generous 
pension  provisions,  measures  aimed  at  reducing 
access  to  early  retirement,  the  increase  of  the 
statutory retirement age and the acceleration in the 
equalisation of retirement age for women and men. 
improvements  have  been 
In 
introduced  in  the  methodology  applied  for  the 
medical  assessment  of  disability  pensions.  The 
authorities  have  proposed  to  further  extend  the 
benefits  granted  to  war  veterans  and  their  family 
members (33),resulting in further increases of their 
pension ceilings (34). Little progress has been made 
to  support  war  veterans'  re-integration  into  the 
labour market.  

Education and skills  

The  low  performance  of  Croatia's  education 
system  underlines  the  urgency  of  reform.  The 
performance  of  the  education  system  –  measured 
in  the  context  of  the  EU  Education  and  Training 
2020 process stagnates or has worsened in most of 
the  relevant  areas.  These  include  performance  in 
the  2015  OECD  Programme  for  International 
Student  Assessment  (PISA)  survey  of  15  year-
olds, tertiary education attainment, adult education, 
learning  mobility 
education 
(European Commission, 2017h). At the same time 
Croatia  exhibits  the  lowest  rate  of  early  leaving 
from  education  and  training  in  the  EU  (2.8 %  vs 
10.7 %  EU  average  in  2016).  The  gap  for  early 
school  leavers  between  pupils  with  and  without 
disabilities however is one of the largest in the EU 
(14.5pps vs the EU average of 10.3pps in 2015). 

investment  and 

The  implementation  of  the  education  reforms 
announced 
in  the  Strategy  for  Education, 
Research  and  Technology  faced  delays.  This 
affected  in  particular  one  of  the  strategy's  most 
prominent priorities: the comprehensive curricular 
the  quality  and 
improving 
reform  aimed  at 

(33)  The  law  adopted  by  government  in  November    2017 
reopens  the  possibility  to  register  as  war  veteran,  reduces 
their  retirement  age  and  extends  the  rights  of  family 
members  to  inherit  veterans'  pensions.  The  law  also 
introduces  a  number  of  additional  social  benefits  for 
veterans and mandatory financing of veterans' associations 
(in the range of 0.3-1.0 % of local government budgets). 
(34)  General  pensions  for  war  veterans  tend  to  be  more  than 
twice  as  high  compared  to  the  general  scheme  (Statistical 
Information  of  the  Croatian  Pension  Insurance  Institute, 
September 2017). 

37 

 
                                                           
                                                           
4.3. Labour market, social policies and education* 

secondary  schools.  However,  so  far  the  impact  of 
skills  anticipation  activities  on  educational  policy 
has  been  negligible  (European  Centre  for  the 
and 
Development 
European Commission, 2017).   

of  Vocational  Training 

Croatia lags behind in upskilling and reskilling 
the  working  age  population.  Based  on  the 
European Working Conditions Survey, three out of 
four workers in 2015 had not attended any training 
over  the  previous  year.  EUROSTAT  indicators 
show  that  in  2016  only  3 %  (vs  the  EU  average 
10.8%) of Croatian adults (25-64) reported having 
participated  in  adult  learning,  with  no  difference 
between  unemployed  and  employed  persons  and 
with slightly higher rates for more educated people 
(ISCED  5-8).  Most  of  the  participants  are  young 
adults, while older people (55-64) de facto do not 
participate. To improve the employability of adults 
with  low  skills,  Croatia  is  working  on  improving 
the  assessment  of  current  and  missing  skills,  the 
supply  of  adequate 
the 
validation of acquired new skills (36). 

learning  offers  and 

Systemic  inefficiencies  in  the  adult  education 
system  affect  its  labour  market  relevance. 
Croatia lacks systematic professional development 
programmes  for  adult  educators,  and  non-formal 
and informal learning programmes are not properly 
assessed nor recognized. There are around 10 600 
programmes,  offered  by  600  adult  education 
institutions,  many  of  which  established  without 
adhering  to  high  quality  criteria  (Brčić  Kuljiš  and 
Koludrović,  2016).  Furthermore, 
lack  of 
financial  support  to  participants (37)  is  among  the 
reasons behind the low participation rates in adult 
education. The regional distribution of institutions 
offering  formal  adult  education  is  highly  uneven 
(35 %  are  in  Zagreb  and  in  Splitsko-Dalmatinska 
County)  leading  to  an  increased  inequality  of 
access to learning. The adoption of the new Adult 
Education  Act,  the  harmonization  of  procedures 
for  adult  education  programmes  with  the  CROQF 
and  regular  reporting  on  participation  rates,  may 
current  weaknesses. 
help 

addressing 

the 

the 

(36)  In  line  with  the  Council  Recommendation  on  Upskilling 

Pathways from 19 December 2016. 

(37)  According  to  the  Agency  for  Vocational  Education  and 
Training and Adult Education, the majority of participants 
(61%)  need  to  pay  the  participation  fee  themselves, 
employers  finance  fees  for  18 %  of  participants,  the 
Croatian  Employment  Service  supports  9 %  and  a  small 
portion is financed from other sources. 

analysis  of  CES  on  skills  needed  in  the  labour 
market,  Croatia  does  not  have  a  mechanism  to 
match  tertiary  education  admissions  quotas  with 
skills needs. 

councils, 

the  Croatian 
The 
of 
implementation 
Qualifications  Framework 
(CROQF)  has 
begun.  In  order  to  improve  the  labour  market 
relevance of education, the CROQF established 25 
sectoral 
educators, 
employers,  stakeholders  and  representatives  from 
the  public  administration.  They  were  tasked  to 
review  and  update  the  country's  qualifications 
system. After delays in 2015 and 2016, the sectoral 
councils  have  now  started  updating  over  300 
qualification and occupation standards.  

consisting  of 

Secondary  vocational  education  would  benefit 
from  further  alignment  with  labour  market 
needs. While Croatia has the highest percentage of 
secondary  school  students  enrolled  in  vocational 
education  and  training  (VET)  programmes  in  the 
EU (71 %), their prospects of successful transition 
to  the  labour  market  remain  limited.  More  than 
half  of  registered  unemployed  (average  over  the 
period  2010-2015)  hold  a  secondary  vocational 
education  diploma.  To  increase  the  labour  market 
relevance  of  VET,  the  authorities  announced  the 
for 
adoption  of 
Vocational  Education,  which  is  currently  under 
review.  This  will  be  complemented  by  plans  to 
develop  sectorial  curricula,  establish  an  effective 
network  of  vocational  schools  and  programmes 
and  a  quality  assurance  system,  establish  regional 
centres  of  competence  and  promote  international 
mobility of teachers and students.  

the  National  Curriculum 

Employers play a marginal role in the provision 
of  vocational  education.  VET  is  more  and  more 
carried  out  in  school  classrooms  and  outside  of 
firms – which minimised the role of employers in 
vocational  education.  Even  though  both  schools 
and  employers  see  the  benefits  of  implementing 
work-based  learning  strategies,  a  recent  study 
showed that they would require additional support 
from  public  authorities  (South  East  European 
Centre  for  Entrepreneurial  Learning,  2017).  A 
central  role  is  due  to  be  played  by  the  Croatian 
Employment Service, which was tasked to analyse 
in 
and  forecast 
cooperation  with  the  employers.  Such  analysis 
should 
the 
enrolment  policy  of  various  VET  courses  in 

labour  market  skills  needs 

the  recommendations  for 

inform 

38 

 
                                                           
4.4. COMPETITIVENESS AND INVESTMENT* 

Trade performance 

The competitiveness of the Croatian economy as 
gauged by its export performance is improving, 
but  remains  below  peers.  The  25 %  share  of 
exports  of  goods  in  GDP  is  only  half  the  average 
share  in  Central  and  Eastern  European  economies 
(CEE10).  Still,  it  is  a  substantial  improvement 
compared to the 15 % of GDP in 2000.  

Graph 4.4.1:  Exports of goods (volumes) in Croatia, EU15 
and CEE10, index (2013=100) 

global  demand,  as  well  as  policies  geared  to 
restore  external  competitiveness  through  wage 
restraint – including labour market reforms (2013-
2014).  Most  notably,  however,  EU  accession  has 
opened up opportunities for Croatian firms, which 
continue making inroads into EU value chains and 
gaining  market  shares.  Exports  of  services  – 
mainly tourism – have also been growing strongly, 
as  Croatia  attracts  more  and  more  tourists  from 
abroad  and  global  demand  for  tourism  grows  in 
line with the recovery in disposable incomes.  

Graph 4.4.2:  Goods' export growth (values) between 2013 

and 2016 by markets and product type 

Source: Eurostat. 

Weak export performance during the crisis can 
largely  be  linked  to  competitiveness  losses  and 
demand  factors.  Exports  of  goods  grew  strongly 
in  the  early  2000s  (Graph  4.4.1),  but  as  domestic 
demand  boomed,  the  tightening  labour  market 
combined  with  a  mild  currency  appreciation 
eroded  international  competitiveness.  The  real 
effective  exchange  rate  (deflated  by  unit  labour 
costs)  continued  to  appreciate  up  until  the  end  of 
2009, leading to significant losses in export market 
shares.  In  addition,  the  slow  growth  in  two  of 
Croatia's  major  trading  partners,  Slovenia  and 
Italy, weighed on the demand for Croatian goods, 
while the restructuring of the shipbuilding industry 
(started 
further  depressed  exports. 
Consequently, total exports of goods decreased by 
3 % in 2010-2012. 

in  2013) 

Following  EU  accession,  exports  rebounded 
strongly.  Between  the  third  quarter  of  2013  and 
the  third  quarter  of  2017,  exports  of  goods 
expanded  at  an  average  rate  of  9 %  year-on-year. 
Such  strong  growth  is  linked  to  a  turnaround  in 

(1) New products are products not exported in in 2013 
(2) Marginally exported products were exported in the value 
<50 000 EUR in 2013. 
Source: Eurostat. 

The  structure  of  Croatia's  goods  exports  is 
changing 
in  terms  of  both  markets  and 
products.  Following  EU  accession,  merchandise 
exports  grew  particularly  strongly  towards  the 
CEE10,  while  exports  to  countries  in  the  Central 
European Free Trade Agreement (CEFTA) grew at 
a much slower pace. This suggests a weakening of 
historical 
the  ex-Yugoslavian 
economies and convergence to the export patterns 
of  CEE10  economies,  which  are  more  geared 
towards  the  EU.  Greater  product  differentiation 
underpinned the export growth in 2013-2016, as a 
number  of  Croatian  products  found  their  export 
markets  for  the  first  time.  While  the  share  of 
higher  complexity  exports  (38)  has  increased  in 

ties  with 

trade 

(38)  As measured by the Observatory of economic Complexity, 
an  analytical  tool  developed  by  Simoes  and  Hidalgo 
(2011). 

39 

020406080100120140160000102030405060708091011121314151617HREU15CEE10HR EUaccession2013=1000102030405060EU15EU10CEFTAOTHERppsOld productsNew productsMarginally exported products 
 
 
 
                                                           
4.4. Competitiveness and investment* 

recent years, the aggregate complexity of Croatian 
exports (0.75) remains below the (simple) average 
of  the  CEE10  countries  (0.93).  Nevertheless, 
Croatia  features  areas  of  excellence  in  exports, 
especially  in  the  pharmaceutical  industry.  Finally, 
the  decoupling  of  exports 
industrial 
production points to a strengthening of the import 
content  of  exports,  in  line  with  the  increasing 
integration  of  Croatian  companies  into  EU  value 
chains. 

from 

Exports  of  goods  have  the  potential  to  sustain 
long-run  growth  prospects  The 
Croatia's 
positive trends in recent years suggest that Croatia 
could pursue a model of export-led growth to spur 
its  economic  convergence,  much  like  its  CEE10 
peers  (39).  Furthermore,  a  move  towards  higher 
complexity  exports,  as  suggested  by  the  existing 
areas  of  excellence, 
is  more  a  question  of 
competitiveness  and  allocation  of  resources  than 
developing  essential  capabilities.  In  this  sense, 
well-functioning  product  and  capital  markets 
which  boost  productivity  and  promote 
the 
reallocation  of  resources  towards  faster  growing 
sectors  are  crucial.  In  the  longer  run,  a  stronger 
R&D&I 
system  can  boost  competitiveness, 
particularly  in  emerging  industries  and  industries 
where  Croatia  already  enjoys  a  comparative 
advantage.  Similarly,  unlocking  Croatia's  labour 
supply potential and providing the workforce with 
the  skills  needed  in  innovative  sectors  could  also 
help relax capacity constraints.  

Business environment 

Croatia is lagging behind in the pace of reform 
of  the  business  environment.  Croatia  ranks  last 
among  peers  in  both  performance  and  progress 
regarding  the  quality  of  its  business  environment. 

(39)  Extensive literature has stressed the link between trade and 
the  export-led  growth 
growth.  The  proponents  of 
hypothesis  argue  that  exports  are  a  key  engine  of  growth, 
through the positive externalities that participation in world 
markets  generates,  namely:  an  improved  allocation  of 
resources;  greater  capacity  utilisation  through  the  use  of 
economies of scale; the diffusion of technological progress 
and promotion of TFP; and labour training effects. Exports 
can also boost investment by relaxing the foreign exchange 
constraint on the import of foreign capital and intermediate 
goods, by increasing the country’s external earnings. 

the 

is 
in 

Economic 

comparatively 
areas  of 

The  World 
Forum's  Global 
Competitiveness  Index  shows  Croatia  stagnating 
while its peers advance (see Graph 4.4.3). Croatia's 
and 
performance 
low 
deteriorating 
institutions, 
innovation,  goods  and  labour  market  efficiency. 
This  mirrors  the  European  Commission's  findings 
on  the  fragmentation  of  the  public  administration 
the  excessive 
(see  Section  4.5),  as  well  as 
regulation 
some 
in  product  markets 
professions  and  barriers  to  investment  (see  Box 
4.4.2). 

and 

Graph 4.4.3:  Global competitiveness index scores of 

Croatia and peers 

Scale is from 1 to 7. 
Source: World Economic Forum. 

Progress is gradually being made in addressing 
burdensome  regulation.  The  authorities  continue 
to  screen  existing  legislation  for  administrative 
burdens  and  subsequently  amending  legislation  in 
order  to  reduce  it.  Meanwhile,  the  new  SME  test 
was  finally  adopted  in  April  2017.  By  setting  out 
the  criteria  for  regulatory  impact  assessments 
to 
focused  on  SMEs, 
significantly improve the business environment for 
this class of firms. However, SMEs would need to 
be  consulted  in  a  more  targeted  way  during  the 
public consultation stage in order to really improve 
impact  assessment.  Two  parafiscal  charges  were 
reduced and further reductions are in the pipeline, 
potentially resulting in substantial reductions. 

the  potential 

it  has 

40 

3.54.04.55.013-1414-1515-1616-1717-18CroatiaCzech R.HungaryPolandSlovakiaSlovenia 
                                                           
 
4.4. Competitiveness and investment* 

Box 4.4.1: The role of Tourism in the Croatian economy 

With its advantageous location and natural beauty, Croatia has been an important tourist destination 
ever  since  the  surge  in  international  tourism.  International  tourists'  expenditure  in  Croatia  amounts  to 
almost 20% of  GDP  – by far the largest share compared to other European  Union countries. Tourism has 
consequently generally been considered as a key driver of Croatia's economy. Despite several improvements 
in the diversification of the offer, Croatia mainly features a typical "sun and sea" tourism model, with stays 
concentrated  in  coastal  areas  and  over  the  summer  months.  The  accommodation  offer  is  skewed  towards 
relatively  cheap  structures  (such  as  private  holiday  houses  and  camping  grounds)  and  average  tourist 
expenditure  is  below  that  recorded  in  EU  peers.  Recent  econometric  analysis  sheds  more  light  on  the 
structural characteristics of the Croatian tourism sector and its contribution to GDP growth.  

The  international  demand  for  Croatian  tourism  is  more  responsive  to  changes  in  income  of  source 
countries compared to other destinations in the Mediterranean. Structural differences in tourism models 
across countries are reflected in a different sensitivity of demand for tourism services to income and prices. 
The  international  tourism  demand  for  Croatia  and  three  other  Mediterranean  destinations  was  estimated 
using a comparable specification (Orsini and Ostojić, 2018) . Tourism demand was modelled as a function 
of purchasing power in the EU, the relative price of tourism services and travel costs in each country. The 
findings  provide  evidence  that  each  percentage  point  increase  in  GDP  in  the  EU  drives  the  number  of 
arrivals up by 4.3 % in Croatia, 4.0 % in Greece, 3.8 % in Spain and 2.8 % in Italy. This makes Croatia the 
most 'income elastic' destination in the Northern Mediterranean. The analysis confirms that tourism demand 
can be extremely sensitive to prices. In this respect, Croatia features the lowest price elasticity among the 
countries considered, but it is affected more than others by fluctuations in fuel prices. A 10 pps increase in 
the relative price of fuel decreases arrivals, overnight stays and spending by roughly 3 %. Tourism revenue 
in  Croatia  –  more  than  other  destinations  –  is  found  to  be  driven  by  the  increasing  number  of  tourists' 
arrivals and overnights, while the average spending per night per tourist tends to stagnate or even decrease. 
The analysis highlights that an excessive reliance on the current model of tourism may not be sustainable in 
the  long-term.  The  supply  of  new  and  well  differentiated  tourism  services  could  mitigate  the  risks  of 
stagnation, maximise the impact on other sectors of the economy and reduce congestion and environmental 
costs. 

Tourism  is  not  likely  to  be  a  key  driver  of  long-term  economic  growth  in  Croatia,  but  it  is  also  not 
likely to have negative effects on other sectors. International economic literature has extensively delved 
into  testing  whether  there is  a long-run  positive  causal  relation between  tourism  and  economic growth,  or 
whether tourism has negative effects by crowding out the development of other sectors (often referred to as 
the Dutch disease). The empirical findings in (Orsini and Pletikosa, 2018) demonstrate that neither seems to 
be particularly relevant for Croatia. The study was conducted using a model of a small open economy with 
two exporting sectors – manufactured goods and tourism services, through four key variables  – exports of 
goods, tourism revenues, the real effective exchange rate and income of trading partners/potential tourists. 
Results suggest that the demand for Croatian tourism is less income elastic than the demand for goods, but 
more sensitive to changes in prices. The findings are consistent with the peculiarities of the Croatian tourism 
sector, including a high leakage rate (high share of imported goods in tourist consumption) and a contained 
impact on employment, as these factors insulate the rest of the economy from potential positive or negative 
spill-over  effects.  From  a  policy  perspective,  there  are  evident  limitations  in  over-reliance  on  tourism  for 
sustaining  Croatia's  process  of  economic  convergence  towards  a  more  mature  economy.  Scaling  up  and 
diversifying the tourism model is likely to improve the positive contribution of the sector to GDP growth, 
but could also come at the cost of crowding out the more productive manufacturing sector.  

Limited  progress  has  been  made  in  reforming 
professional  services  in  Croatia.  Some  limited 
reform  measures,  such  as  the  removal  of  fixed 
prices  in  several  sectors,  have  been  implemented 
over  the  last  years.  However,  according  to  an 
indicator developed by the European Commission, 
the  level  of  restrictiveness  in  Croatia  remains 

higher than the weighted EU average for six of the 
seven  analysed  professions  (architects,  certified 
lawyers,  patent 
civil  engineers, 
tax  advisers, 
agents, 
tourist  guides). 
real  estate  agents, 
Moreover,  the  2017  accounting  law  announced 
that  compulsory  licensing  will  be  introduced  for 
accounting  services  by  2019.  In  addition,  with 

41 

 
4.4. Competitiveness and investment* 

to 

legal  services, 

regard 
fixed  prices  and 
advertising  restrictions  are  still  in  place,  although 
discussions  are  ongoing  for  their  abolishment. 
Restrictions on having more than one office in the 
territory  of  Croatia  and  on  retaining  the  title  of 
lawyer  if  the  profession  is  not  exercised  for  more 
than six months also continue to apply. Moreover, 
the  new  Act  on  the  provision  of  tourism  services 
which  was  adopted  on  15  December  2017 
maintained  the  territorial  restrictions  on  tourist 
guides,  with  separate  exams  for  each  of  the  21 
counties,  and  affecting  also  temporary  service 
providers from other Member States. 

to 

conducive 

framework 

Restrictive  regulation  across  sectors  continues 
to  weigh  on  competitiveness.  A  strategy  and 
the 
regulatory 
development  of  the  collaborative  economy  is 
missing.  In  the  accommodation  sector,  different 
requirements apply to different categories of short-
term  rentals.  In  the  energy  sector,  the  still  highly 
regulated  gas  and  electricity  prices,  both  at  retail 
and wholesale level, continue to limit competition 
by  favouring  incumbent  firms  and  creating  a 
barrier to market entry. 

is  no  single 

interface  with 

to  a  study  of 

Registering  a  business  remains  burdensome. 
According 
the  administrative 
formalities  and  burdens  imposed  on  businesses, 
there 
integrated 
procedures  for  registering  a  business  for  all 
purposes (registration of an economic activity, for 
VAT  purposes,  for  business  income  tax  purposes, 
or  as  an  employer).  The  procedures  cannot  be 
completed  fully  online  and  it  is  difficult  to  find 
information  online.  However,  there  is  ongoing 
work to reform the Point of Single Contact (Ecorys 
Netherlands  and  Mazars,  2017).  Companies  face 
continued  difficulties 
their 
registered  offices  in  and  out  of  Croatia  due  to 
inadequate rules and procedures. 

transferring 

in 

Network industries, climate and environment 

Broadband  connectivity  and  coverage  are 
improving, but remain low. In comparison to the 
EU  average,  Croatia  underperforms  in  broadband 
coverage,  divide  between  urban  and  rural  areas, 
prices  and 
take-up  rates.  Coverage  of  next 
generation  access  (NGA)  fast  fixed  broadband 
technologies  in  rural  areas  (67 %)  are  among  the 
lowest in the EU (average: 80 %). Also – at 73 % – 
4G  coverage  (for  fast  mobile  communications)  is 

the 

lowest 

in  Europe 

among 
(European 
Commission,  2018a).    In  June  2017  the  European 
Commission  found  that Croatia's  Next Generation 
Network  Broadband  plan  worth  over  EUR  100 
million  meets  EU 
rules.  The 
implementation of the scheme – aimed to increase 
coverage with a focus on least covered areas – has 
not started yet, pending government approval.  

state 

aid 

Graph 4.4.4:  Connectivity index in Croatia and peers 

Source: The Digital Economy and Society Index (DESI), 
European Commission. 

the 

and 

final 

primary 

targets.  Despite 

Croatia’s 
energy 
consumption  remains  comfortably  within  the 
2020 
targets  allowing 
increases,  both  primary  and  final 
substantial 
energy consumption have been decreasing steadily 
since  2005.  However,  additional  efforts  regarding 
energy  efficiency,  especially  in  transport  and 
industry, are needed to minimise the effects of the 
ongoing  economic 
recovery.  Primary  energy 
consumption  remains  substantially  above  EU 
average  (overall  and  for  manufacturing,  services 
and  households),  which  points  to  unexploited 
efficiency  potential,  and  it  decreased  slower  than 
the  EU  average  (with  almost  no  decrease  in  the 
services sector). Until 2020, Croatia is expected to 
step up its energy efficiency actions and programs 
saving 
necessary 
requirements 
the  Energy 
Efficiency Directive.  

the  cumulative 

stemming 

to  meet 

from 

Croatia  is  expected  to  meet  its  greenhouse  gas 
emission  target  by  a  wide  margin.  With  a  28 % 
share of renewables in 2016, Croatia is well above 

42 

0.20.30.40.50.60.70.814151617CroatiaPolandSlovakiaSloveniaCzech R.HungaryEU 
 
its  2015/2016  indicative  overall  interim  target,  as 
well  as  its  2020  target  of  20 %.  However,  with 
1.3 % in 2016, Croatia is well below its  target for 
the share of  renewable energy in transport. At the 
same time, renewable energy accounted for 37.4 % 
in  heating  and  cooling  and  46.7 %  in  electricity 
generation. Electricity from renewable sources has 
mainly  been  promoted  through  a  premium  tariff 
for  small 
and  a  guaranteed 
feed-in 
installations  allocated 
tenders.  The 
surcharge for financing renewable energy projects 
has been increased to maintain the sustainability of 
the  support  scheme,  while  the  VAT  rate  on 
electricity  was  lowered  to  compensate  for  this 
increase.  This  could,  however,  lead  to  higher  and 
less-efficient 
electricity, 
potentially extending the distance to targets.  

consumption 

through 

tariff 

of 

the 

that 

country 

The competitiveness of Croatia is increasing for 
the  solar  PV  sector  and  decreasing  in  wind. 
Between 2005 and 2015, the revealed comparative 
advantage indicator for solar increased to above 1, 
meaning 
its 
specialisation, while the trend was opposite in the 
wind sector, with the indicator having fallen below 
1 In 2015, the relative trade balance (40) confirmed 
the  competitiveness  of  the  country  as  a  net 
exporter  of  solar  components,  while  it  became  a 
net importer of wind technology components, due 
to a strong trade deficit in wind turbine generating 
sets and gearboxes. 

increased 

The long-overdue Waste Management Plan and 
Waste  Prevention  Programme  were adopted  in 
January  2017.  Both  documents  are  in  line  with 
the  Commission  circular  economy  package, 
putting  Croatia  on  a  path  to  a  more  circular 
on 
economy.  Subsequently, 
Implementation  of 
the 
Ordinance  on  Municipal  Waste  were  adopted  in 
May  2017.  The  adoption  of  these  documents 
constitutes fulfilment of the ex-ante conditionality 
on  waste,  which  opens  up  a  total  of  EUR  475 
million  from  the  ESI  Funds  to  be  used  for,  inter 
alia,  separate  waste  collection  and  recycling 
infrastructure projects. 

the  Decision 
the  Action  Plan  and 

(40)  The  RTB  indicator  for  product  "i"  is  defined  as  follows: 
 where Xi is the value of product's "i" exports 

Xi−Mi
Xi+Mi

RTBi =
and Mi imports. 

4.4. Competitiveness and investment* 

Research and development 

in  2015-2016.  Business 

Croatia's  investment  in  R&D  over  the  past 
decade  remained  stable,  with  limited  public 
funding and slow progress in implementing ESI 
Funds.  Croatia's  R&D  intensity  was  0.84 %  of 
GDP 
expenditure 
contributed with  0.37 % of GDP  in 2016, ranking 
Croatia  24th  in  the  EU.  Meanwhile,  public  R&D 
intensity increased to 0.46 % of GDP in 2016 after 
years of stagnation. However, a growth at this rate 
is  not  sufficient  for  Croatia  to  reach  its  national 
Europe  2020  R&D  intensity  target  of  1.4 %  of 
GDP. Such a large distance to the target reveals a 
low focus on science and innovation in the policy 
strategy of the country. 

The efficiency of the Croatian R&I system lags 
behind  that  of  other  EU  Member  States.  As 
illustrated  in  Box  4.1.1,  Croatia's  efficiency  of 
spending  in  R&I  is  in  line  with  that  of  peers. 
However,  compared  to  the  EU  average,  the 
country's performance in quality scientific outputs 
is very low (41). This is largely due to scarce public 
investment  in  R&D  but  also  to  a  fragmented 
landscape  of  higher  education  institutions,  a  lack 
incentives  for  researchers'  careers  and  a 
of 
significant 
of 
of 
internationalising Croatia's science and innovation 
arena.  ESI  Funds  funding  is  not  matched  by 
adequate  efforts  from  the  national  budget.  Public 
funding  for  research 
is  generally 
distributed  evenly,  without  much  regard  for  the 
assessment  of  performance.  This  puts  a  de  facto 
cap on increases in research quality.  

institutions 

relevance 

neglect 

the 

levels  hinders 

Fragmentation  on  all 
the 
cooperation  between  research  institutions  and 
the  business  sector.  Major  universities  have 
highly  fragmented  governance  structures,  which 
reduces  efficiency  and  cooperation.  Researchers 
lack incentives to produce high quality science, as 
publications 
their 
quality, yield the same value for career promotion. 
Integration  of  international  researchers  is  difficult 
due to rigid administrative rules. Cooperation with 
businesses  is  not  incentivised  by  the  academic 
system,  which  discourages  commercialisation  of 
scientific  research.  Researcher  mobility  between 

irrespective  of 

journals, 

in 

(41)  Scientific  publications  within  the  top  10  %  most  cited 
scientific  publications  worldwide  as  %  of  total  scientific 
publications  of  the  country  stood  at  4.1  in  2014  (EU 
average is 11.1).  

43 

 
                                                           
                                                           
4.4. Competitiveness and investment* 

the 

2013, EU  average 12 %). At the  same  time,  95 % 
of 
respondents  having  experienced  or 
witnessed cases of corruption say that they did not 
report  it,  either  because  it  would  be  pointless, 
difficult to prove, or for fear of retaliation. 

The  implementation  record  of  anti-corruption 
measures  is  mixed.  While  Croatia  has  improved 
certain  aspects  of  its  anti-corruption  policies  and 
structures  since  joining  the  EU,  several  key 
elements  still  leave  room  for  improvement.  These 
include  effective  verification  mechanisms  for 
conflicts  of  interest  and  asset  disclosure  of  public 
officials;  protection  of  whistle-blowers;  specific 
safeguards  for  the  healthcare  sector  and  effective 
risk  control  in  public  procurement,  especially  by 
contracting  authorities  with  weaker  control 
mechanisms;  code  of  conduct  for  members  of 
Parliament;  inadequate  technical  and  personnel 
resources of the Commission for the Prevention of 
Conflicts of Interest and not sufficiently proactive 
approach  in  its  preventive  role.  Delays  in  the 
implementation  of  the  Anti-Corruption  Action 
Plan  (2015–2016)  were  acknowledged  by  the 
national  authorities  in  the  Anti-Corruption  Action 
Plan  2017–2018  which  carries  over  a  number  of 
the  first  (46).  The  Worldwide 
actions  from 
Governance Indicators (World Bank, 2017b) show 
a  declining  trend  in  Croatia’s  ranking  on  the 
control of corruption indicator while in the Global 
Competitiveness Index corruption moves from the 
5th to the 4th biggest obstacle for business (World 
Economic  Forum,  2017).  Survey  data  (European 
Commission  2017d)  show  a  similar  trend,  with 
58%  of  business 
representatives  considering 
corruption  as  a  very  serious  or  quite  serious 
problem,  up  by  7  percentage  points  compared  to 
2015, with the EU average at 37 %. 

Public  awareness  of  whistle-blowing  reporting 
channels  and  access  to  public  information  is 
low.  In  a  2017  business  survey,  respondents  from 
Croatia  were  in  penultimate  place  in  terms  of 
awareness  of  existing  reporting  channels  for 
whistle-blowers (EY, 2017). Furthermore, 60 % of 
2017e) 
respondents 
declare  not  to  know  how  to  report  corruption. 
Amendments  to  the  Law  on  the  right  to  access  to 
information  entered  into  force  in  August  2015, 
transparency  and  helping  decrease 
increasing 

(European  Commission 

(46)  Only  57 %  of  the  first  action  plan  was  implemented  on 

time. 

the  private  and  public  sectors  is  difficult  and  the 
cross-sector  cooperation  is  under-developed  (42), 
although  the  introduction  of  ESIF-based  schemes 
is  improving  the  situation.  Although  innovative 
sectors still represent a relatively small share of the 
employed  population  (43),  there  are  pockets  of 
excellence  in  niche  sectors  such  as  biotech  and 
ICT  where  companies  cooperate  much  more 
closely  with  research  institutions.  The  policy 
responsibility in support of science and innovation 
appears  fragmented  (44)  and  the  policy  strategy  is 
scattered  across  a  number  of  policy  actions  with 
low critical mass, with no systematic evaluation of 
impact of R&I policies in place. 

the  country's 

innovation  system  are 

Some  targeted  efforts  to  reform  the  national 
in  the 
science  and 
making.  The  smart  specialisation  strategy  (S3) 
was  adopted  in  2016  and  is  being  revised  with  a 
focus  on 
innovation  strengths. 
Implementation  is  picking  up  pace  with  the 
announcement  of  a  limited  set  of  calls  to  support 
innovation,  including  one  to  establish  Centres  of 
Competence 
implementation. 
Around  EUR  665  million  of  ERDF  funds  have 
been allocated (45).  

to  support 

the 

Corruption 

shows 

Corruption  remains  a  prominent  problem.  The 
2017  Special  Eurobarometer  on  corruption 
(European  Commission,  2017e) 
that 
tolerance  to  corruption  in  Croatia  is  increasing, 
with  only  45 %  of 
the  respondents  finding 
corruption unacceptable (EU average 70 %). At the 
same  time,  corruption  is  seen  as  much  as  a 
problem as in the previous 2013 survey. The share 
of  people  who  think  that  corruption  has  increased 
or  is  at  the  same  level  as  before  is  at  91 %  (EU 
average  79 %)  and  those  who  report  having  been 
involved  or  having  knowledge  of  bribery  cases 
have increased to 28 % (in comparison to 24 % in 

(42)  The share of public-private co-publications in total number 
of  publications  dropped  by  11%  since  2007  and  public 
expenditure on R&D financed by businesses as % of GDP 
is 0.034 vs. an EU average of 0.052.  

(43)  Croatia scores 22nd among EU Member States.  
(44)  Three  ministries  share  the  R&I  policy  portfolio:  Ministry 
of  Education  and  Science,  Ministry  of  Economy, 
Entrepreneurship  and  Crafts  and  Ministry  of  Regional 
development and European Funds. 

(45)  ESF  contributes  additional  EUR  24  million  for  social 
innovation,  aimed  mainly  at 
into  human 
resources in order to ensure sustainability and productivity 
of the RDI system. 

investing 

44 

 
                                                           
                                                           
4.4. Competitiveness and investment* 

corruption  opportunities  at  the  central  level.  At 
regional  level,  research  shows  an  increase  in 
budget  transparency  of  local  entities  (Ott  et  al., 
2017).  Despite  this  positive  trend,  the  study 
underscores  that  there  are  still  many  local  units 
that  remain  non-transparent.  A  new  ordinance 
concerning  the  obligation  to  publish  procurement 
plans  and  contract  registers  in  a  standardised 
format on the e-procurement platform entered into 
force on 1 January 2018. 

Public procurement in the construction sector is 
to  corruption.  Survey  data  on 
vulnerable 
corruption 
2017d) 
(European  Commission 
indicates  an  increasing  share  of  respondents  who 
think that corruption in public procurement is very 

or fairly widespread (from 62 % in 2015 to 73 %). 
Unclear  selection  criteria  are  among  the  practices 
most  widely  reported  (from  48 %  in  2015  to 
68 %). A recent study on public procurement in the 
construction  sector  shows  that  despite  the  sound 
legal framework and existing control mechanisms, 
the integrity of procurement in the sector is at risk 
due  to  a  large  share  of  in-house  contracting  by 
state-owned  entities  which  are  subject  to  weaker 
control.  While  there  is  limited  use  of  restrictive 
procedures,  competition  for  public  contracts  is 
surprisingly  weak  for  a  sector  under  considerable 
economic  pressure.  Around  half  of  the  total 
contract  value  is  won  by  companies  partially  or 
fully  owned  by  the  state  (Podumljak  and  Dávid-
Barrett, 2015).  

45 

 
4.4. Competitiveness and investment* 

Box 4.4.2: Investment challenges and reforms in Croatia 

Macroeconomic perspective 

After taking a hard hit during the economic crisis, investment started slowly rebounding in 2015, recording a 
solid annual growth of 5.3 % in 2016. The sharp decline in investment spending during the recession was 
seen in both public and private sector, mainly driven by weak domestic demand, particularly in households, 
debt  overhang,  particularly  in  corporations,  and  tightened  financing  conditions.  A  stronger  pick-up  was 
anticipated in 2017, however, the ongoing operational and financial restructuring of the food-processing and 
retail  giant  Agrokor  seems  to  have  impacted  investment  decisions,  especially  in  the  manufacturing  sector. 
Investment  is  expected  to  intensify  in  2018  and  2019,  driven  by  strong  and  increasing  domestic  demand, 
abating deleveraging needs, improving financing conditions and expected pick-up in the implementation of 
European Structural and Investment Funds.  

Assessment of barriers to investment and ongoing reforms 

As the macroeconomic and financing conditions continue to improve, a number of barriers stand in the way 
of  creating  a  business  environment  more  conducive  to  investment,  as  confirmed  by  the  European 
Commission  assessment  (1).  Some  measures  have  been  adopted,  particularly  in  the  area  of  business 
environment, but most of the continually identified barriers to investment have yet to be fully addressed.   

Main barriers to investment and priority actions underway  

(1) The business environment remains burdened with parafiscal charges, frequent changes in regulation and 
its  interference  in  market  mechanisms in  some  sectors.  The  inefficiencies  of  the judicial  system weigh  on 
investors'  perceived  legal  certainty.  Weaknesses  in  the  public  administration  hamper  service  delivery  to 
businesses,  not  least  of  which  is  the  still  cumbersome  and  lengthy  business  registration  process.  (2) 
Companies are heavily reliant on traditional bank financing as capital markets remain underdeveloped and 
alternative avenues of financing, such as risk and venture capital, remain largely underutilised (see Section 
4.2). (3) The limited high speed broadband coverage, especially in rural areas, and the very low take-up of 
ultrafast broadband limit the potential for investment in digital economy.  

(1) See ‘Challenges to Member States’ Investment Environments’, SWD (2015) 400 final    

46 

Regulatory/ administrative burdenCSRTaxationPublic administrationCSRAccess to financePublic procurement /PPPsCooperation btw academia, research and businessJudicial systemCSRFinancing of R&D&IInsolvency frameworkCSRBusiness services / Regulated professionsCSRCompetition and regulatory frameworkRetailEPL & framework for labour contracts ConstructionWages & wage settingCSRDigital Economy / TelecomEducation CSREnergyLegend:TransportNo barrier to investment identifiedCSRInvestment barriers that are also subject to a CSRSome progressNo progressSubstantial progressLimited progressFully addressedPublic administration/ Business environmentFinancial Sector / TaxationR&D&ISector specific regulationLabour market/ Education 
 
 
 
 
 
4.5. PUBLIC GOVERNANCE* 

Public administration 

The  territorial  fragmentation  of  the  public 
administration  weighs  on  efficiency  of  public 
service provision. Croatia is generally regarded as 
a  relatively  centralised  country.  However,  the 
constitutional and legislative amendments of 1992 
and 2001 led to a very high increase in the number 
of towns and municipalities. Despite being granted 
competencies  and  responsibilities  in  providing 
public  services,  many  small  local  units  lack  the 
adequate  financial,  administrative  and  personnel 
resources  to  carry  out  decentralised  functions 
(European Commission, country report, 2016b and 
2017f).  The  current  territorial  organisation  also 
creates  numerous  overlaps  between  central  and 
local  government.  This  is  particularly  evident  in 
numerous  branch  offices  of  ministries  and  other 
central  government  bodies  present  at  the  county 
and  local  level.  The  high  fragmentation  of  the 
public  administration  hinders  the  implementation 
of public policies, increases costs and inefficiency 
in the use of resources. 

public 

performance 

largely  hinder 

Key  indicators  for  the  public  administration 
show a performance below the EU average. The 
Croatian 
and 
sector 
government  effectiveness  ranked  well  below  the 
EU  average  in  2015 (European  Commission  2015 
and  2016e,  World  Economic  Forum).  Weak 
administrative  capacities 
the 
implementation  of  strategic  documents  and  the 
implementation  of  relevant  reform  measures. 
Evidence-based policy making is ranked at the EU 
average  level,  with  large  differences  between  the 
central  and 
levels.  Public 
local  government 
consultations  and  regulatory  impact  assessments 
are  improving  at  the  central  level,  while  at  the 
local 
they  are  practically  non-existent, 
placing Croatia overall well below the EU average. 
The  adopted  regulatory  impact  assessment  law 
to  analyse  economic, 
(mandating  ministries 
environmental,  societal,  legal  and  administrative 
aspects  of  new  regulations)  is  a  step  forward. 
Croatia however ranks unfavourably in the level of 
professionalism, impartiality and corruption of the 
civil 
(EUPACK-Project,  European 
Commission,  2018c).  The  indicator  on  public 
administration  transparency  is  improving,  mainly 
thanks  to  the  implementation  of  the  Right  to 
Access  Information  Act  and  participation  in  the 
Open  Government  Partnership  initiative  since 
2011.  

service 

level 

Amendments  to  the  law  on  financing  local 
government  units  were  adopted  in  December 
2017. The draft legislation aims at simplifying the 
complex system of transfers and financing, as well 
as increasing transparency. It also introduces a new 
system  of  fiscal  equalisation  establishing  a  more 
efficient  model  of  revenue  sharing  and  reducing 
disparities  in  fiscal  capacity  across  local  units. 
According  to  the  Ministry  of  Finance  and  the 
Institute for Public Finance, the changes are likely 
to  have  a  broadly  neutral  impact,  both  on  the 
central  state  budget  and  on  the  budgets  of  most 
the 
local 
shortcomings  in  the  functional  distribution  of 
competences  across  all  government  levels,  and  in 
administrative  capacity  in  the  smallest  local  units 
have yet to be addressed. 

units.  However, 

government 

of 

the 

reforms 

territorial 

fragmentation, 

Other  major 
public 
administration have not considerably advanced. 
the  Strategy  of  Public  Administration 
With 
Development  2015-2020,  the  authorities  plan  to 
address  the  main  weaknesses  of  the  system, 
including 
political 
influence  in  the  recruitment  process,  poor  design 
of  working  positions,  lack  of  in-service  training, 
subjective  appraisals  and  inconsistencies  in  the 
salary  system.  The  strategy,  however  remains 
largely  unimplemented.  The  authorities  have 
completed  the  analysis  needed  for  the  planned 
reduction  of  the  1200  branch  and  regional  offices 
of  the  central  administration  operating  at  local 
level.  The  rationalisation  plan  is  expected  to  start 
only in June 2018. Previous plans to rationalise the 
cumbersome  system  of  state  agencies  have  been 
suspended  due  to  weak  political  support.  The 
authorities  are  now  planning  to  establish  a  new 
legal  framework  for  state  agencies,  with  a  higher 
degree  of  homogeneity  across  the  system  and  a 
defined  set  of  criteria  with  which  the  existing 
agencies should comply. 

The  development  of  eGovernment  services  is 
progressing,  mainly  thanks  to  an  improved 
access  to  Open  Data.  The  platform  eCitizen, 
launched in 2014, offered 43 different eServices in 
2017  and  continues  to  develop  and  integrate  new 
features.  The  recently  adopted  Strategy  for  e-
Croatia  2020  and  its  Action  Plan,  as  well  as  the 
eGovernment  and  government  digitisation  plan 
(May  2017)  are  aimed  at  supporting  positive 
developments 
including 
interoperable  government  systems  and  services  to 

this  policy  area, 

in 

47 

 
 
4.5. Public governance* 

reduce  bureaucracy.  The  plan  updates  proposals 
for  policy  and  actions  on  government  cloud 
services, 
information 
management,  eInclusion,  open  data  and  human 
resources.  

service, 

shared 

ICT 

EU funds  

of 

strengthening 

A more efficient and effective use of ESI Funds 
requires 
administrative 
capacities  in  the  public  administration.  Weak 
strategic  planning,  low  implementation  capacities 
and organizational inconsistencies all contribute to 
poor  administrative  capacities.  The  authorities 
have identified the lack of administrative capacity 
as  one  of  the  most  significant  hindrances  to  the 
implementation  of  ESI  funds  and  policies  in 
Croatia 
(European  Commission,  2016a  and 
2016c).  For  the  period  2015  -  2017,  the  share  of 
ESI Funds in public investment stood at 80 % and 
it is the second highest in EU (see Graph 4.5.1. and 
Box  2.1).  In  order 
the  current 
weaknesses  in  the  management  system  of  ESI 
funds, the authorities have speeded-up recruitment 
of  additional  676  staff  in  line  ministries  and 
identified  the  digitalisation  of  procedures  as  a 
priority.  Despite  these  plans,  there  has  been  little 
evidence of progress. 

to  address 

Public  administration  reform  measures  are 
supported  by 
the  2014-2020  ESI  Funds' 
operational programmes. The priority axis ‘Good 
governance’  within  the  ESF  aims  at  building  and 
enhancing the administrative capacity in the public 

of 

axis 

'Use 

Information 

sector,  more  specifically,  by  supporting 
the 
modernisation  of  business  processes,  including 
upgrades  of  existing  and  the  design  of  new  e-
government  services.  The  funds  also  support  the 
civil  society,  social  dialogue  and  partnerships  in 
the  public  sphere.  By  mid-2017,  however,  no 
project was contracted under this priority axis. The 
and 
priority 
Communication  Technologies'  within  the  ERDF 
also  addresses  the  digitalisation  of  administrative 
ICT 
services 
at 
applications 
e-learning, 
e-inclusion,  e-culture  and  e-health.  These  systems 
are 
coordination, 
transparency, accountability, and consequently, the 
efficiency  of 
the  public  administration.  The 
to 
e-systems 
allocation 
EUR 98.6 million,  only  6.1 %  of  which  was 
selected for support by end-2017.  

e-government, 

strengthening 

expected 

amounts 

improve 

aims 

and 

for 

to 

to 

and 

implementing 

Efficient  use  of  ESI  funds  is  key  to  supporting 
investment 
structural 
reforms.  Having  joined  the  EU  in  mid-2013, 
Croatia  was  exceptionally  granted  an  additional 
year  to  close  its  2007-2013  programming  period. 
By the end date (December 2017) the rate of use of 
ESI  Funds  climbed  to  81 %  (from  78 %  in  2016 
and  slightly  below  50 %  in  2015).  Following  the 
fulfilment of all required ex-ante conditionalities in 
the  authorities  are  now  focusing  on 
2017, 
operational 
2014-2020 
implementing 
the 
allocation  of 
programmes,  with 
total 
2.1).  When 
(see  Box 
EUR 10.73 billion 
implemented, the measures aimed at strengthening 

the 

Graph 4.5.1:  Cohesion Policy funding as an estimated share of public investment, 2015-2017 

Source:  DG REGIO, Eurostat, DG ECFIN and Ameco 

48 

0102030405060708090% of public investment 
 
4.5. Public governance* 

in  the  sale  of  state-owned  dwellings  and  minority 
shares  in  non-strategic  and  not-of-special-interest 
enterprises.  By  September,  total  revenues  from 
management  and  disposal  of  state  assets  reached 
90 %  of  the  planned  revenue  set  out  in  the  2017 
NRP.  Privatisation  was  initiated  for  two  major 
SOEs,  both  of  which  bear  critical  economic  and 
social  importance  for  the  local  community,  and 
fresh  private  capital  is  widely  seen  as  crucial  for 
their  survival.  However,  a  more  decisive  effort  in 
following  through  on  the  privatisation  activities 
planned in the NRP is yet to be seen. 

Justice system 

commercial, 

enforcement 

Despite  a  further  reduction  in  backlogs,  court 
proceedings  remain  long  and  there  is  room  for 
improvement  of  the  quality  and  independence 
of  justice.  The  decrease  in  backlogs  has  been 
largely achieved due to reduced caseload as courts 
resolved  fewer  cases.  According  to  the  2018  EU 
Justice  Scoreboard 
(European  Commission, 
2018a),  length  of  court  proceedings  and  backlogs 
in  Croatia  are  among  the  most  significant  in  the 
EU.  In  2017,  backlogs  in  first  instance  courts  in 
civil, 
cases 
and 
decreased  by  6 %  (compared  to  2016)  and  courts 
prioritized  oldest  cases.  Proceedings 
in  first 
instance  courts  remained  slow  with  civil  and 
commercial  cases  taking  on  average  884  and  730 
days,  respectively.  However,  at  second  instance, 
backlogs  decreased  both  in  civil  cases  before 
County  courts  (by  13 %)  and  significantly  in 
commercial  cases  before  the  High  Commercial 
Court  (by  23 %),  with  length  of  proceedings 
increasing in civil cases (to 298 days), but further 
decreasing  in  commercial  cases  (to  789  days).  A 
partial reform of the business processes has shown 
some  results  at  the  High  Commercial  Court,  but 
has not been extended to other courts. 

is  experiencing 

lengthy  (638  days 

issues  of 
Criminal  justice 
efficiency  and  quality,  particularly  regarding 
resources  which  are 
lacking.  The  backlogs 
increased  at  all  criminal  court  instances  and 
in 
proceedings  remained 
Municipal  courts,  and  962  days  for  first  instance 
cases  in  County  courts).  The  criminal  justice 
system  appears  to  be  reacting  regarding  cases  of 
corruption  among  judges.  The  State  Attorney's 
Office appears to be experiencing a resource issue, 
as  according  to  the  current  framework  criteria 
more than 20% State Attorney positions or equal to 

administrative  capacity  are  expected  to  alleviate 
the current issues in implementation and the use of 
ESI funds. 

State-owned enterprises 

SOEs  continue  to  play  an  important  role  in 
Croatia's  economy  due  to  their  size  and 
presence  in  numerous  sectors.  According  to  the 
analysis  in  last  year's  Country  Report  (European 
Commission,  2017f),  SOEs  in  Croatia  are  marred 
by  weak  productivity.  The  gap  in  productivity 
between  SOE's  and  their  privately-owned  peers  is 
the widest among all CEE countries. In addition to 
reducing 
their 
the  average  productivity 
in 
respective  sectors  nominally, 
their  prominent 
presence  hampers  the  allocative  efficiency  of  the 
market,  as  productive  resources  are  diverted  from 
the  more  efficient  companies.  The  importance  of 
reducing  state  ownership  in  companies  of  no 
strategic  or  special  interest  for  the  state  through 
privatisation, and improving corporate governance 
in  those  that  remain  in  state  ownership,  has  been 
well  recognised  in  National  Reform  Programmes 
over  the  recent  years.  However,  the  commitments 
taken  to  that  effect  have  been  followed  through 
only partially.   

in 

State-owned assets are now directly managed at 
ministerial  level.  The  new  Ministry  of  State 
Assets  has  assumed  direct  authority  over  the 
enterprises  of  strategic  and  special  interest,  while 
the  remaining  SOEs  and  state-owned  assets  are 
managed through the Centre for Restructuring and 
Sale  of  State  Assets  (CERP).  In  2017,  some 
progress  has  been  made  on  some  of 
the 
commitments  outlined 
latest  National 
Reform  Programme.  In  particular,  efforts  have 
intensified  in  the  area  of  disposal  of  state-owned 
assets  and  enterprises.  The  Ministry  has  further 
reduced  the  list  of  companies  of  strategic  and 
special interest by nine entities, paving the way for 
privatisation efforts to intensify in 2018. The new 
corporate  governance  code  was  adopted 
in 
December  2017.  However,  other  key  documents 
planned  for  adoption  in  2017,  including  the  new 
Act  on  Management  and  Disposal  of  State  Assets 
are significantly delayed.    

the 

The  government  has  made  steps  towards  a 
more  effective  and  transparent  privatisation 
process.  The  implementation  of  the  annual  State 
Assets Management Plan for 2017 led to progress 

49 

 
4.5. Public governance* 

the  effects  of 

insolvency  cases 

insolvency  cases  remains 

The  inflow  of  corporate  pre-insolvency  and 
insolvency cases is decreasing while the number 
of  personal 
low. 
Driven  by  economic  growth,  the  influx  of  pre-
insolvency  and 
regarding 
companies  significantly  decreased,  which  helped 
the  courts  reduce  backlogs.  A  draft  report 
the  new  personal 
analysing 
insolvency  framework  shows  an  increasing  (but 
still insignificant) number of personal insolvencies, 
mostly  concerning  persons  with  no  assets,  and  a 
decreasing  number  of  insolvency  administrators 
ready to work on such cases, which appears to be a 
financial incentives issue. The average duration of 
proceedings  increased  both  in  pre-insolvency  (to 
416  days)  and  insolvency  cases  (to  334  days). 
Preliminary  data  submitted  by  the  Ministry  of 
Justice  suggests  that  initiated  insolvencies  mainly 
involved  micro  companies  without  employees  or 
assets, mostly in construction and trade.  

Healthcare system  

Health  outcomes  in  Croatia  have  improved  in 
recent  years.  With  life  expectancy  of  74.4  and 
80.5  years  at  birth  in  2015  for  men  and  women 
respectively,  Croatia  still  scores  below  the  EU 
average  (77.9  and  83.3),  but  exceeds  most  of  the 
peer  countries.  The  relatively  low  life  expectancy 
owes  greatly 
to  high  mortality  caused  by 
cardiovascular  diseases  (almost  twice  the  EU 
average)  and  certain  cancers,  but  also  to  external 
causes  of  death,  with  73  deaths  per  100 000 
inhabitants compared to EU average of 46 (OECD 
and European Observatory on Health Systems and 
Policies,  2017).  Perinatal  mortality,  generally 
taken  as  a  proxy  of  the  effectiveness  of  a 
healthcare  system,  is  below  the  EU  average. 
However,  infant  mortality,  which  is  influenced 
also by external factors, is still one of the highest. 
This  suggests  a  relatively  effective  healthcare 
system  and  a  need  for  better  preventive  measures 
outside  it.  For  the  positive  trends  in  health 
outcomes to hold, the system will need to address 
the  increasing  pressures  from  rising  costs  and  the 
trends, 
particularly 
particularly  if  the  principles  of  solidarity  in 
funding and universality in service provision are to 
be preserved. 

demographic 

adverse 

Healthcare-related  inequalities  give  a  mixed 
picture.  Differences  in  life  expectancy  between 
groups with different educational levels in Croatia 

nearly  500  staff  positions  remain  vacant,  which 
could  be  a  source  of  concern  considering  that  the 
prosecution  is  currently  occupied  with  large  and 
complex  economic  and  financial  crime  cases. 
Financial  resources  for  experts,  including  on 
economic  and  financial  crimes  are  not  adequately 
budgeted for as 70 % of the State Attorney's Office 
budget is spent on disputes representing the state in 
in  arbitration 
international  disputes  mainly 
procedures.  The  upgraded  ICT 
the  State 
in 
Attorney's Office allows for electronic exchange of 
court  documents  at 
the 
implementation  of  qualified  electronic  signatures 
is on-going. 

some  courts  and 

Quality  of  justice  could  be  further  improved, 
through  electronic  communication  with  courts 
and  a  reform  of  the  judicial  map.  Most  court 
documents  are  delivered  in  physical  form  and 
electronic  communication  is  being  tested  and 
gradually  implemented  between  courts  and  police 
(in misdemeanour cases) and lawyers (particularly 
in  commercial  cases).  However,  more  complete 
communication  with  other  parties  (e.g.  public 
tax  administration, 
notaries,  State  Attorneys, 
insolvency  administrators,  FINA)  requires  further 
preparation.  Commercial  judges  gained  access  to 
the  land  registry  and  the  registry  of  blocked 
accounts,  but  access  to  other  registers  (e.g.  for 
vehicles,  boats)  is  still  lacking.  A  new  reform  of 
the  judicial  map  is  envisaged  to  merge  most 
Misdemeanour  courts  (where  the  caseload  has 
been  decreasing)  with  Municipal  courts,  which 
could  even-out 
judges  and 
improve  efficiency.  Court  directors,  under  the 
authority  of  the  Court  Presidents,  who  would  be 
responsible  for  management  of  courts,  are  being 
considered. 

the  workload  of 

judicial 

Perceived 
independence  decreased 
further  and  the  involvement  of  the  National 
Security  Agency  in  the  appointment  of  first 
time judges raises further judicial independence 
concerns.  The  law  envisaging  the  involvement  of 
the  National  Security  Agency  in  background 
checks  of  first-time  appointed  judges  remains 
under  constitutional  review  and  the  necessary 
amendments  to  remove  this  power  have  been 
announced  and  will  have  to  be  closely  followed. 
The  Council  for  the  judiciary,  which  plays  a  key 
role 
independence, 
remains weak in its administrative capacity. 

in  guaranteeing 

judicial 

50 

 
the 

are 
lowest  among  all  analysed  Member 
States (47).  The  percentage  of  Croats  reporting 
unmet  medical  needs  due  to  long  waiting  lists, 
costs of services and distance to providers is lower 
than  in  the  EU  on  average.  However,  Croatia  is 
one  of  the  worst  performers  in  unmet  needs  for 
people  over  65,  and  scores  well  below  the  EU 
average  in  unmet  needs  due  to  distance  alone, 
which  may  be  attributed  to  the  challenges  in 
providing health care on islands and to the uneven 
geographical  distribution  of  healthcare  resources 
across the country.  

Expenditure on healthcare in Croatia stagnates 
whereas costs increase across the EU. Healthcare 
expenditure in Croatia is at one of the lowest levels 
in  EU.  At  only  EUR  760  in  2015,  healthcare 
expenditure  per  inhabitant  was  lower  only  in 
Romania,  Latvia  and  Bulgaria.  It  is  also  well 
below  the  EU  average  when  expressed  as  a 
percentage  of  GDP  and  in  purchasing  power 
standard  per  inhabitant.  In  the  latter,  it  is  lower 
even  than  the  average  of  the  12  Member  States 
joining  the  EU  since  2004  (EU12,  see  Graph 
4.5.2).  Furthermore,  while  a  vast  majority  of  EU 
countries  have  been  spending  more  and  more  on 
healthcare  in  recent  years,  which  is  commonly 
credited 
technological 
advancement  in  medicine  and  population  aging, 
Croatia has kept its total healthcare expenditure at 
a similar level since 2011. 

to  rising  expenses  for 

(47)  Data available for Bulgaria, the Czech Republic, Denmark, 
Italy,  Poland,  Portugal, 

Finland,  Greece,  Hungary, 
Romania, Slovakia, Slovenia and Sweden. 

4.5. Public governance* 

Graph 4.5.2:  Healthcare expenditure 

(1) In purchasing power standard (PPS) per inhabitant. 
(2) Data not available for all countries in all years. 
Source: Eurostat. 

Hospitals  account  for  the  largest  share  of  total 
healthcare  expenditure  in  Croatia.  In  2015, 
42 %  of  total  healthcare  expenditure  was  spent  in 
hospitals, followed by 28 % spent through retailers 
and  suppliers  of  medical  goods.  As  such,  the 
hospital  system  has  been  the  subject  of  numerous 
analyses  and  reform  efforts  over  the  recent  years. 
Reorganization  through  functional  integration  of 
hospitals is at the centre of the most recent efforts 
to rationalize spending and improve cost efficiency 
in the healthcare system. However, the distribution 
of  hospitals  is  generally  considered  to  be  uneven, 
with a high concentration in and around the city of 
Zagreb.  A  further  reduction  in  the  number  of 
hospitals,  or  in  the  range  and  scope  of  services 
they  provide,  raises  concerns  regarding  a  possible 
deterioration of access to healthcare in Croatia. 

Costs  of  personnel  account  for  more  than  half 
of all expenditure in hospitals in Croatia. These 
shares vary across the different types of hospitals, 
ranging  from  slightly  above  50%  in  clinical-
hospital centres to above 60% in special hospitals 
(Vehovec,  2014).  Average  numbers  of  medical 
doctors in hospitals across the observed groups of 
EU Member States do not vary substantially, albeit 
there  are 
individual 
large  differences  across 
countries. However, significant differences may be 
observed in the number of nurses as well as in total 
hospital  employment  (see  Graph  4.5.3).  In  both, 
Croatia  has  markedly  lower  numbers,  particularly 
as regards the number of nursing staff. In all, these 

51 

05001,0001,5002,0002,5003,0003,500CroatiaAVG EU 12AVG EU 15AVG EUPPS201320142015 
                                                           
 
4.5. Public governance* 

per  discharged  patient,  for  all  diseases,  Croatia 
ranks second only to Hungary (9.5). This, coupled 
with  above-average  bed  occupancy  rate  (48), 
generates  high  costs  for  hospitals.  For  discharges 
related  to  pregnancy,  child  birth  and  puerperium, 
the  average  number  of  days  spent  in  hospitals 
exceeds  that  in  any  other  EU  Member  State. 
Furthermore, in the period from 2011 to 2015, the 
number of in-patient discharges remained constant, 
while day cases increased by a third. The hospitals 
managing  to  handle  such  a  sizeable  increase  in 
turnover  without  substantially 
the 
number  of  patients  admitted  overnight  is  by  all 
means a positive development. However, the fast-
rising  number  of  day  cases  in  hospitals  possibly 
points  to  a  healthcare  system  that  does  not  fully 
utilise its primary care.  

increasing 

The  healthcare  system  remains  underfinanced 
and indebted. The regular sources of financing are 
insufficient to cover all the expenses, which causes 
outstanding  debt  (arrears)  to  accumulate  in  the 
system.  These  are  eventually  settled  by  one-off 
transfers from the state budget, the latest of which 
amounted  to  3 %  and  9 %  of  the  state  insurance 
fund's  revenues  in  2013  and  2014,  respectively. 
The  overall  debt  in  mid-2017  stood  at  more  than 
EUR 1.1 billion,  half  of  which  was  outstanding 
is 
debt.  One  of 
underpayment  of  health  insurance  premiums  for 
the  economically 
inactive  population  and  of 
contributions collected from the special excises on 
in  particular,  are 
tobacco.  Hospital  budgets, 
strained  by  underfinancing,  with  the  inadequately 
set  spending  limits  still  in  force.  The  amount  of 
arrears and overall debt levels currently generated 
in  hospitals  threaten  the  sustainability  of  the 
healthcare system. 

reasons  behind 

this 

the 

The  government  has  taken  some  measures 
aimed  at  rationalizing  spending  and  increasing 
in 
revenues.  The  number  of  paying  clients 
supplementary insurance was increased by 15 000 
during  2017.  The 
functional 
integration  of  hospitals  was  initiated  in  July  2017 
as  six  pairs  of  hospitals  signed  their  integration 
agreements. The National Plan for Development of 
Hospitals  2017-2020,  along  with  the  measures 
regulating  non-medical  activities  in  hospitals,  is 
still pending. 

long-planned 

(48)  Eurostat,  curative  bed  occupancy  data  in  2015,  Croatia  at 

76.3 %, EU average at 72 % 

physical  indicators  seem  to  provide  insufficient 
grounds  for  rationalising  hospital  expenses  by 
reducing medical personnel 

Graph 4.5.3:  Staff in hospitals, 2015 

per 
100,000 
inhabitants 

1.600

1.400

1.200

1.000

800

600

400

200

0

Croatia

EU12

EU15

EU

Doctors

Nurses

Total employees

Data not available for all countries. 
Source: Eurostat. 

the  EU 

Croatia is among the countries with a relatively 
high number of hospital  beds.  The  total number 
of beds in hospitals was reduced by 7 % from 2011 
to  2015,  when  it  amounted  to  556  per  100 000 
average. 
than 
inhabitants,  higher 
Particularly high numbers of beds are available in 
rehabilitative and long-term care hospital facilities, 
well above the averages observed (see table 4.5.1). 
Conversely, the number of beds available for care 
for chronic impairments and reduced independence 
outside  of  hospitals  is  far  lower.  These  numbers 
suggest  a  substantial  scope  for  reorganizing  the 
system  by  relieving  hospitals  from  part  of  the 
costly long-term care.  

Table 4.5.1:  Hospital beds by type, per 100 000 inhabitants, 

2015 

Far right column represents beds outside of hospitals. 
Source: Eurostat. 

Hospital  expenses  are  under  the  increasing 
pressures  from  rising  number  of  patients  and 
lengthy  treatments.  With  an  average  of  9.4  days 

52 

Beds TotalCurative careRehabilitative careLong-term careNursing and residential Croatia556.3358.1101.297.0225.3EU12584.7444.864.072.4536.5EU15436.9366.953.142.0874.4EU514.5402.560.457.9698.7 
 
 
 
 
                                                           
4.5. Public governance* 

Box 4.5.1: Policy Highlight: Developing a Comprehensive Curricular Reform 

In order to modernise and improve its education system, in 2014 Croatia adopted the National Strategy for 
Education,  Science  and  Technology  (Strategy).  The  Strategy's  headline  activity  in  primary  and  secondary 
education  is  a  comprehensive  curricular  reform.  Due  to  successive  elections  and  changes  in  political 
leadership,  the  reform  was  delayed  between  2016  and  2017.  Work  has  since  restarted  and  a  pilot 
implementation  across  70  schools  is  planned  from  autumn  2018.  The  curricular  reform  has  pioneered  a 
number of best practices in policy development.  

The  curricular  reform  benefitted  from  a  strong  policy  foundation.  Embedding  the  reform  into  the 
Strategy for Education, Science and Technology ensured clear goals and coherence with other wider policy 
objectives. Furthermore, the planning of the curricula reform was comprehensive from the start. It included 
different aspects ranging from the development of a dedicated methodology ahead of the drafting of specific 
curricula, to the adaptation of textbooks and the training of teachers. Finally, the funding for the reform was 
appropriately devised and secured from both the national budget and the European Structural and Investment 
Funds.  

The reform used state of the art approaches in policy development. The new curricula are founded on 
the  approach  set  out  in  the  European  Qualifications  Framework  (EQF),  which  defines  the  European 
guidelines for educational programmes. EQF-based curricula use the so-called 'learning outcomes' approach 
to  describe  what  pupils  are  expected  to  attain  when  they  leave  a  class.  The  reform  incorporates  also  the 
development  of  skills for  the  citizens  of  the  future,  such  as  learning  to  learn,  entrepreneurship,  the  use  of 
ICT, personal and social development and citizenship education. Finally, the draft curricula benefitted from 
an  international  peer  review,  partly  supported  by  the  European  Commission's  Structural  Reform  Support 
Service.  Once  finalised,  the  curricula  will  be  first  implemented  through  a  pilot  scheme,  allowing  the 
authorities to adjust the content where needed before the full rollout.  

The  reform  was  developed  following  principles  of  inclusion  and  transparency.  The  draft  reform 
documents were developed by over 430 teachers seconded from the education system. They prepared more 
than  50  curricula  proposals  which  were  discussed  by  over  60 000  school  heads,  teachers,  experts, 
institutional representatives and relevant NGOs over more than 700 events. Subsequently, a general public 
consultation  was  launched.  Altogether,  the expert  and  the public  consultations  jointly attracted over  3 700 
observations by more than 900 institutions and individual experts. The expert groups are expected to redraft 
the curricula on the basis of these inputs by early 2018, when the final drafts will be submitted to the last 
public consultation. The transparency and inclusiveness of the process have ensured a wide base of support 
for the reform, including from the teacher unions, parents and the non-governmental sector. 

Based on the experience of other EU Member States, the implementation of the curricular reform is likely to 
have a positive impact on the quality of the Croatian education system. The reform is, however, at an early 
stage  and  a  number  of  important  steps  still  need  to  be  taken,  among  which  the  need  to  ensure  full 
implementation of the reform and its coherence with the other actions in the Strategy. Equally important will 
be  adjusting  the  full  rollout  on  the  basis  of  the  feedback  received  from  the  pilot  phase,  and  providing  the 
appropriate  support  to  teachers  and  schools.  While  the  reform  is  yet  to  be  implemented,  the  design, 
development and the consultation process that Croatia conducted so far could inform the reform efforts of 
other EU Member States in this policy area.  

53 

 
ANNEX A  

Overview table 

Commitments  

Summary assessment (49) 

2017 Country-specific recommendations (CSRs)  

Croatia has made limited progress in addressing CSR 1  

This  overall  assessment  of  CSR1  does  not  include  an 
assessment of compliance with the Stability and Growth Pact. 

the 

requirements  of 

its  medium-term 

CSR 1: Pursue its fiscal policy in line 
with 
the 
preventive  arm  of  the  Stability  and 
Growth Pact, which entails remaining 
at 
budgetary 
objective  in  2018.  By  September 
2017,  reinforce  budgetary  planning 
the  multiannual  budgetary 
and 
framework, 
by 
including 
strengthening  the  independence  and 
the  Fiscal  Policy 
mandate  of 
the  necessary 
Commission.  Take 
steps  for  the  introduction  of  the 
value-based  property  tax.  Reinforce 
the 
for  public  debt 
management,  including  by  ensuring 
debt 
of 
annual 
management strategy.  

framework 

updates 

the 

• 

(49)  The following categories are used to assess progress in implementing the country-specific recommendations:  
No progress: 
The Member State has not credibly announced nor adopted any measures to address the CSR. Below a number of non-exhaustive 
typical situations that could be covered under this, to be interpreted on a case by case basis taking into account country-specific 
conditions: 
no legal, administrative, or budgetary  measures have been announced in the National Reform  Programme or in other official 
communication  to  the  national  Parliament  /  relevant  parliamentary  committees,  the  European  Commission,  or  announced  in 
public (e.g. in a press statement, information on government's website);  
no non-legislative acts have been presented by the governing or legislator 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 that would need to be taken (unless the CSR explicitly asks for orientations or exploratory actions), 
while clearly-specified measure(s) to address the CSR has not been proposed. 

• 
• 

Limited progress: 
The Member State has: 
• 
and/or 
• 

announced certain measures but these only address the CSR to a limited extent; 

presented legislative acts in the governing or legislator body but these have not been adopted yet and substantial non-legislative 
further work is needed before the CSR will be implemented; 
presented non-legislative acts, yet with no further follow-up in terms of implementation which is needed to address the CSR. 

• 
Some progress: 
The Member State has adopted measures that partly address the CSR  
and/or  
the Member State has adopted measures that address the CSR, but a fair amount of work is still needed to fully address the CSR as 
only  a  few  of  the  adopted  measures  have  been  implemented.  For  instance:  adopted  by  national  parliament;  by  ministerial 
decision; but no implementing decisions are in place.  

Substantial progress: 
The Member State has adopted measures that go a long way in addressing the CSR and most of which have been implemented.  
Full implementation:  
The Member State has implemented all measures needed to address the CSR appropriately. 

54 

 
 
 
                                                           
A. Overview Table 

  Pursue  its  fiscal  policy  in  line 
with 
the 
the  requirements  of 
preventive  arm  of  the  Stability 
and  Growth  Pact,  which  entails 
remaining  at 
its  medium-term 
budgetary objective in 2018.  

  By  September  2017,  reinforce 
and 
the 
budgetary  planning 
budgetary 
multiannual 
by 
framework, 
independence 
the 
strengthening 
and  mandate  of  the  Fiscal  Policy 
Commission.  

including 

  The  compliance  assessment  with  the  Stability  and  Growth 
Pact will be included in spring when final data for 2017 will 
be available. 

  No  Progress  in  reinforcing  the  budgetary  framework.  The 
new  Fiscal  Responsibility  and  Budget  Acts,  aimed  at 
addressing  many  of  the  outstanding  issues,  have  still  not 
been adopted. 

  Take  the  necessary  steps  for  the 
introduction  of  the  value-based 
property tax.  

  No  Progress  in  introducing  the  property  tax.  The  already 
legislated  introduction  of  the  property  tax,  scheduled  for 
January  2018  (as  part  of  the  tax  reform  adopted  in  2016), 
was postponed without a timeframe for adoption. 

the 
debt 

framework 

  Reinforce 
for 
public 
management, 
including  by  ensuring  annual 
updates  of  the  debt  management 
strategy.  

  Some  Progress  in  reinforcing  the  framework  for  public 
debt  management.  A  sizable  share  of  central  government 
debt relating to SOEs (previously in the form of loans) was 
refinanced  by  a  bond  issuance  and  the  public  debt 
management  body  was  promoted  to  the  status  of  a 
the  Ministry  of  Finance.  Both 
Directorate  within 
developments 
control  over  debt 
management. 

improve 

should 

Croatia has made Limited Progress in addressing CSR 2  

CSR  2:  Discourage  early  retirement, 
accelerate the transition to the higher 
statutory  retirement  age  and  align 
specific 
pension  provisions 
the 
categories  with 
general 
Improve 
coordination  and 
transparency  of 
social benefits.  

for 
the  rules  of 

scheme. 

  Discourage 

retirement, 
early 
accelerate  the  transition  to  the 
higher  statutory  retirement  age 
and  align  pension  provisions  for 
specific  categories  with  the  rules 
of the general scheme.  

  No  Progress  in  reforming  the  pension  system.  Reform 
measures  planned  for  December  2017  are  being  further 
postponed  to  mid-2018.  These  include  the  streamlining  of 
the 100+ arduous or hazardous professions benefitting from 
more  generous  pension  provisions,  measures  aimed  at 
reducing  access  to  early  retirement,  the  increase  of  the 
statutory  retirement  age  and  the  acceleration  in  the 
equalisation of retirement age for women and men. 

55 

 
 

Improve 
transparency of social benefits.  

coordination 

and 

CSR  3:  Improve  adult  education,  in 
particular for older workers, the low-
skilled 
long-term 
unemployed.  Accelerate  the  reform 
of the education system.  

and 

the 

 

adult 

education, 

Improve 
in 
particular  for  older  workers,  the 
low-skilled  and 
long-term 
unemployed.  

the 

  Accelerate 

the  reform  of 

the 

education system.  

the 

improve 

CSR  4:  Reduce  the  fragmentation 
and 
functional 
distribution of competencies in public 
administration,  while  enhancing  the 
efficiency  and  reducing 
territorial 
disparities  in  the  delivery  of  public 
services.  In  consultation  with  social 
partners,  harmonise  the  wage-setting 
public 
across 
frameworks 
administration and public services.  

the 

A. Overview Table 

  Limited Progress in improving the social benefits system. 
The  ambitious  and  long-planned  establishment  of  the  one-
stop-shop  as  a  central  point  for  the  administration  and 
provision  of  social  benefits  and  services  has  been 
abandoned. 
announced 
the 
harmonisation  of  eligibility  criteria  for  social  benefits  has 
been  suspended.  The  focus  has  shifted  to  harmonizing 
definitions  and  classifications  of  social  protection  benefits 
and  improving  beneficiaries'  records  as  well  as  data 
exchange between the central and local government level. 

previously 

Similarly, 

Croatia has made Limited Progress in addressing CSR 3  

of 

the  CES 

  Limited Progress in improving adult education. Coverage 
of  Active  Labour  Market  Policies  (ALMPs)  remains  very 
low.  In  February  2017  the  Croatian  Employment  Service 
(CES)  adopted  a  new  package  of  ALMP  with  focus  on 
education.  Concerns  however  remain  with  regard  to  the 
of 
capacity 
employment/education  measures 
its 
increase 
authorities' 
beneficiaries.  The 
participation  in  adult  learning  do  not  seem  to  be  well 
coordinated  with  the  provision  of  ALMPs  by  the  CES 
(including 
reskilling  and  upskilling  measures).  The 
adoption  of  the  new  Adult  Education  Act  and  the  Law  on 
Vocational  Education  and  Training  has  been  further 
postponed. 

offer 
the  needs  of 
to 

adapt 
to 
efforts 

its 

to 

  Limited  Progress  in  reforming  the  education  system.  The 
implementation  of  the  reform  previously  suffered  from 
numerous delays. Some activities were relaunched in 2017, 
and a pilot project to implement the curricular reform is due 
to  start  in  September  2018.  The  necessary  legislation 
amendments, including on the General Education Act, have 
not yet been discussed in Parliament. The adoption of a new 
bylaw on non-formal and informal learning is still pending. 

Croatia has made No Progress in addressing CSR 4  

56 

 
A. Overview Table 

to 

  No  Progress  in  the  public  administration  reform.  The 
planned  reduction  of  the  branch-offices  of  the  central 
administration  (e.g.  ministries)  operating  at  local  level  has 
the 
not  yet  started.  Previous  plans 
cumbersome  state  agencies  system  have  been  suspended. 
The authorities plan to establish first a new legal framework 
for states agencies. The government proposed amendments 
to the law on the financing of local government units, aims 
at  simplifying  the  complex  system  of  transfers  and 
financing. The fragmentation and functional distribution of 
competencies  of  sub-national  units  have  not  been 
addressed. 

rationalise 

  No  Progress  in  harmonising  the  wage-setting  frameworks 
across  the  public  administration  and  public  services.  The 
new legislation on public sector wages has been postponed 
several  times.  The  aim  of  the  law  is  to  achieve  greater 
harmonisation  of  wages  across  the  public  administration 
through  the  introduction  of  common  wage  grids  and  job 
complexity  coefficients,  based  on  more  consistent  job 
descriptions and competences frameworks. 

Croatia has made Limited Progress in addressing CSR 5  

  Reduce 
the  fragmentation  and 
improve 
functional 
the 
distribution  of  competencies  in 
administration,  while 
public 
enhancing 
the  efficiency  and 
reducing  territorial  disparities  in 
the delivery of public services.  

 

consultation  with 

social 
In 
the  wage-
partners,  harmonise 
the 
setting  frameworks  across 
public  administration  and  public 
services.  

in 

the 

CSR  5:  Speed  up  the  divestment  of 
state-owned  enterprises  and  other 
state  assets,  and  improve  corporate 
governance 
state-owned 
enterprise sector. Significantly reduce 
the  burden  on  businesses  stemming 
from  costs  of  regulation  and  from 
administrative 
burdens.  Remove 
restrictions  hampering 
regulatory 
the  practice  of 
access 
and 
regulated 
professional  and  business  services. 
Improve the quality and efficiency of 
the  justice  system,  in  particular  by 
reducing  the  length  of  civil  and 
commercial cases.  

professions 

to  and 

  Speed up the divestment of state-
owned  enterprises  and  other  state 
assets,  and 
improve  corporate 
governance  in  the  state-owned 
enterprise sector.  

  Limited  Progress  in  SOEs  divestment  and  improving 
corporate  governance.  The  new  Ministry  has  advanced 
efforts in sales of minority shares in state-owned companies 
and  further  reduced  the  list  of  companies  of  strategic  and 
special  interest.  However,  there  are  considerable  delays  in 
the legislation aimed at improving the management of state 
assets and corporate governance in SOEs. 

  Significantly  reduce  the  burden 
on  businesses  stemming  from 
costs  of  regulation  and  from 
administrative burdens.  

  Limited Progress in reducing the burden on business. The 
measuring  and  subsequent  reduction  of  administrative 
burden has continued and two parafiscal charges have been 
reduced. 

57 

 
A. Overview Table 

  Limited  Progress  in  liberalising  regulated  professions. 
Measures  in  this  area  were  limited  in  scope  and  the 
restrictions  most  detrimental  to  the  functioning  of  the 
economy remain in place. 

  Limited  Progress  in  improving  the  quality  and  efficiency 
of  the  justice  system.  Over  the  past  year,  the  decrease  in 
backlogs  was  driven  mainly  by  reduced  inflows,  whereas 
proceedings  remained  long.  Efficiency  enhancing  and 
modernisation  measures  in  the  system  are  progressing 
slowly. 

  Remove 

regulatory 

restrictions 
hampering  access 
the 
practice  of  regulated  professions 
and  professional  and  business 
services.  

to  and 

 

the 

quality 

Improve 
and 
efficiency of the justice system, in 
particular  by  reducing  the  length 
of civil and commercial cases.  

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  65.6 %  in  Q3  2017).  Even 
though Croatia has achieved the national target, its 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  

R&D  intensity  has  maintained  the  same  value  as  in  previous 
year and equals 0.84 % of GDP. Croatia is not on track to meet 
the Europe 2020 target.  

Greenhouse  gas  emissions,  national 
target:  
+11% between 2005 and 2020 

Total GHG emissions in Croatia have been reduced by 27.5 % 
from  1990  to  2016.  Based  on  the  latest  national  projections 
submitted to the Commission, and taking into account existing 
measures,  it  is  expected  that  Croatia  will  meet  its  GHG 
emission  target by  a  wide  margin  (-12.5  %  between  2005  and 
2020).  

2020 renewable energy target: 20 % 

With  a  renewable  energy  share  of  28.2  %  in  2016,  Croatia  is 
well above its target for 2020. 

2020 renewable energy source (RES) 
in transport target: 10 % 

With a 1.3 % share of RES in transport, Croatia is well below 
its 2020 target.    

Energy  efficiency,  2020  energy 
consumption targets:  

Croatia's primary and final energy consumption remains below 
the country's 2020 energy efficiency targets. 

  11.2  Mtoe 

(primary 

energy 

8.0 Mtoe (primary energy consumption, 2015) 

consumption); 

  7 

Mtoe 

(final 

energy 

consumption). 

Early  school  leaving  (ESL)  target: 
4 % 

6.59 Mtoe (final energy consumption, 2015) 

At  2.8 %  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. 

58 

 
A. Overview Table 

Tertiary education target: 35 % 

Croatia's  tertiary  education  attainment  rate  has  been  slowly 
declining  since  2014  and  stood  at  29.5 %  in  2016.  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 
people  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 1.159 million in 2016. Therefore, 
the national target has already been met.   

59 

 
ANNEX B  

Macroeconomic Imbalance Procedure scoreboard 

Table B.1: 

The MIP scoreboard for Croatia (AMR 2018) 

Flags: e: Estimated. 
1) This table provides data as published under the Alert Mechanism Report 2018, which reports data as of 24 Oct 2017. Please 
note that figures reported in this table may therefore differ from more recent data elsewhere in this document.2) NULC d: 
employment data use national concept instead of domestic concept. 3) Figures highlighted are those falling outside the 
threshold established in the European Commission's Alert Mechanism Report. 
Source: European Commission 2017, Statistical Annex to the Alert Mechanism Report 2018, SWD(2017) 661. 

60 

Thresholds201120122013201420152016Current account balance, % of GDP 3 year average-4%/6%-2.4 -0.7 0.0 0.9 2.5 2.9 Net international investment position% of GDP-35%-91.5 -90.6 -88.5 -85.4 -76.5 -70.1 Real effective exchange rate - 42 trading partners, HICP deflator3 year % change±5% (EA) ±11% (Non-EA)-4.7 -8.4 -3.9 -0.9 0.2 0.1 Export market share - % of world exports5 year % change-6%-16.0 -23.8 -23.0 -19.9 -5.8 8.1 Nominal unit labour cost index (2010=100)3 year % change9% (EA) 12% (Non-EA)6.3d-1.6d-3.9d-6.4d-6.1d-5.9dHouse price index (2015=100), deflated 1 year % change6%-2.1 -4.6 -5.8 -1.1 -2.4 2.1 Private sector credit flow, consolidated% of GDP14%-2.3 -3.0 -0.6 0.1 -1.4 -0.1ePrivate sector debt, consolidated% of GDP133%122.8 120.0 117.9 118.1 113.2 106.1eGeneral government gross debt% of GDP60%65.0 70.6 81.7 85.8 85.4 82.9 Unemployment rate3 year average10%11.6 13.8 15.6 16.8 16.9 15.6 Total financial sector liabilities, non-consolidated1 year % change16.5%2.6 1.0 3.2 0.2 2.1 2.5 Activity rate - % of total population aged 15-643 year change in pp-0.2 pp-1.7 -1.7 -1.4 2.0 3.0 1.9 Long-term unemployment rate - % of active population aged 15-743 year change in pp0.5 pp3.1 5.1 4.4 1.7 0.0 -4.4 Youth unemployment rate - % of active population aged 15-243 year change in pp2 pp13.0 16.8 17.6 8.3 0.1 -18.1 External imbalances and competitivenessInternal imbalancesEmployment indicators 
 
 
 
 
 
 
ANNEX C  

Standard tables 

Table C.1: 

Financial market indicators 

(1) Latest data Q3 2017. Includes not only banks but all monetary financial institutions excluding central banks 
(2) Latest data Q2 2017. 
(3) As per ECB definition of gross non-performing debt instruments 
(4) Quarterly values are not annualised 
(5) Latest data April 2017. 
* Measured in basis points. 
Source: European Commission (long-term interest rates); World Bank (gross external debt); Eurostat (private debt); ECB (all 
other indicators). 

61 

201220132014201520162017Total assets of the banking sector (% of GDP)(1)132.0132.5133.2130.0125.3119.4Share of assets of the five largest banks (% of total assets)73.972.972.372.773.0-Foreign ownership of banking system (% of total assets)(2)-89.990.290.590.190.1Financial soundness indicators:2)              - non-performing loans (% of total loans)(3)-11.812.912.510.110.7              - capital adequacy ratio (%)-19.620.419.220.820.9              - return on equity (%)(4)-0.63.9-6.88.92.2Bank loans to the private sector (year-on-year % change)(1)-6.2-0.1-1.7-2.40.52.7Lending for house purchase (year-on-year % change)(1)-0.9-2.0-2.8-1.9-2.10.1Loan to deposit ratio(1)100.595.691.083.777.375.2Central Bank liquidity as % of liabilities(5)0.00.00.00.10.30.3Private debt (% of GDP)120.0117.9118.1113.2105.9-Gross external debt (% of GDP)(2) - public28.132.635.535.831.928.3    - private51.650.451.848.845.042.3Long-term interest rate spread versus Bund (basis points)*463.4311.1288.8305.5339.6247.5Credit default swap spreads for sovereign securities (5-year)*382.9303.7276.1273.1240.1148.4 
 
 
 
 
  
C. Standard Tables 

Table C.2: 

Headline Social Scoreboard indicators 

† The Social Scoreboard includes 14 headline indicators, of which 12 are currently used to compare Member States 
performance. The indicators "participants in active labour market policies per 100 persons wanting to work" and 
"compensation of employees per hour worked (in EUR)" are not used due to technical concerns by Member States. Possible 
alternatives will be discussed in the relevant Committees. 
(1) People at risk of poverty or social exclusion (AROPE): individuals who are at risk of poverty (AROP) and/or suffering from 
severe material deprivation (SMD) and/or living in households with zero or very low work intensity (LWI).       
(2) Unemployed persons are all those who were not employed but had actively sought work and were ready to begin 
working immediately or within two weeks.       
(3) Gross disposable household income is defined in unadjusted terms, according to the draft Joint Employment Report 2018.       
(4) 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).       
(5) Average of first three quarters of 2017 for the employment rate and gender employment gap. 
Source: Eurostat 

62 

201220132014201520162017 5Equal opportunities and access to the labour marketEarly leavers from education and training (% of population aged 18-24)5.14.52.82.82.8:Gender employment gap (pps)11.18.810.09.59.611.0Income inequality, measured as quintile share ratio (S80/S20)5.45.35.15.25.0:At-risk-of-poverty or social exclusion rate1 (AROPE)32.629.929.329.127.9:Young people neither in employment nor in education and training (% of population aged 15-24)16.619.619.318.116.9:Dynamic labour markets and fair working conditions†Employment rate (20-64 years)58.157.259.260.661.463.3Unemployment rate2 (15-74 years)15.817.417.216.113.411.1Gross disposable income of households in real terms per capita3 (Index 2008=100) ::::::Public support / Social protection and inclusionImpact of social transfers (excluding pensions) on poverty reduction433.334.335.135.528.6:Children aged less than 3 years in formal childcare11.011.017.111.815.7:Self-reported unmet need for medical care3.53.33.31.91.7:Individuals who have basic or above basic overall digital skills (% of population aged 16-74):::51.055.041.0 
 
  
 
  
C. Standard Tables 

Table C.3: 

Labour market and education indicators 

* Non-scoreboard indicator       
(1) Long-term unemployed are people who have been unemployed for at least 12 months.       
(2) 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.       
(3) PISA (OECD) results for low achievement in mathematics for 15 year-olds.       
(4) Impact of socio-economic and cultural status on PISA (OECD) scores. Values for 2012 and 2015 refer respectively to 
mathematics and science.     
(5) Average of first three quarters of 2017, unless for the youth unemployment rate (annual figure). 
Sources: Eurostat, OECD 

63 

Labour market indicators201220132014201520162017 5Activity rate (15-64)63.963.766.166.965.6:Employment in current job by durationFrom 0 to 11 months8.58.911.611.514.1:From 12 to 23 months7.47.16.07.58.8:From 24 to 59 months14.614.014.112.913.6:60 months or over69.570.068.368.062.4:Employment growth* (% change from previous year)-3.6-2.62.71.20.31.7Employment rate of women(% of female population aged 20-64)52.652.854.255.956.657.8Employment rate of men (% of male population aged 20-64)63.761.664.265.466.268.8Employment rate of older workers* (% of population aged 55-64)37.537.836.239.238.139.8Part-time employment* (% of total employment, aged 15-64)5.65.45.36.05.64.8Fixed-term employment* (% of employees with a fixed term contract, aged 15-64)13.314.516.920.222.220.9Transition rate from temporary to permanent employment(3-year average)41.535.5:30.8::Long-term unemployment rate1 (% of labour force)10.211.010.110.26.65.0Youth unemployment rate (% active population aged 15-24)42.249.944.942.331.826.4Gender gap in part-time employment2.31.82.52.52.72.0Gender pay gap2 (in undadjusted form)2.99.010.4:::Education and training indicators201220132014201520162017Adult participation in learning(% of people aged 25-64 participating in education and  training)3.33.12.83.13.0:Underachievement in education329.9::32.0::Tertiary educational attainment (% of population aged 30-34 having successfully completed tertiary education)23.125.632.130.829.3:Variation in performance explained by students' socio-economic status412.0::12.1:: 
 
 
 
  
 
C. Standard Tables 

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) 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. 
(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 

64 

201220132014201520162017Expenditure on social protection benefits* (% of GDP)Sickness/healthcare7.07.57.06.9::Disability2.72.72.62.5::Old age and survivors8.79.09.29.0::Family/children1.61.61.51.5::Unemployment0.50.50.50.5::Housing0.00.00.00.0::Social exclusion n.e.c.0.20.20.20.2::Total20.721.421.020.7::of which: means-tested benefits1.01.11.01.0::General government expenditure by function (% of GDP, COFOG)Social protection15.515.415.915.314.7:Health7.26.56.66.46.5:Education4.95.14.84.84.8:Out-of-pocket expenditure on healthcare (% of total health expenditure):12.115.015.2::Children at risk of poverty or social exclusion (% of people aged 0-17)*34.829.329.028.226.6:At-risk-of-poverty  rate1 (% of total population)20.419.519.420.019.5:In-work at-risk-of-poverty rate (% of persons employed)6.06.25.75.95.6:Severe material deprivation rate2  (% of total population)15.914.713.913.712.5:Severe housing deprivation rate3, by tenure statusOwner, with mortgage or loan11.65.82.36.15.4:Tenant, rent at market price17.67.116.015.07.6:Proportion of people living in low work intensity households4 (% of people aged 0-59)16.814.814.714.413.0:Poverty thresholds, expressed in national currency at constant prices*2092219330195852054421568:Healthy life years (at the age of 65)Females7.95.95.84.5::Males7.75.56.04.7::Aggregate replacement ratio for pensions5 (at the age of 65)0.40.40.40.40.4:Connectivity dimension of the Digital Economy and Society Inedex (DESI)6::29.935.442.045.0GINI coefficient before taxes and transfers*50.650.850.151.049.6:GINI coefficient after taxes and transfers*30.930.930.230.629.7: 
 
 
 
 
 
C. Standard Tables 

Table C.5: 

Product market performance and policy indicators 

(1) The methodologies, including the assumptions, for this indicator are shown in detail here: 
http://www.doingbusiness.org/methodology.        
(2) Average of the answer to question Q7B_a. "[Bank 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 most of it, two if only received a limited part of it, three if refused or rejected and treated as missing values if the 
application is still pending or don't know.       
(3) Percentage population aged 15-64 having completed tertiary education.       
(4) Percentage population aged 20-24 having attained at least upper secondary education.       
(5) 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       
(6) Aggregate OECD 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 outcome of SMEs' applications for bank loans).   

65 

Performance Indicators2010201120122013201420152016Labour productivity (real, per person employed, year-on-year % change)Labour productivity in Industry1.27-1.40-1.403.471.038.162.59Labour productivity in Construction3.082.10-3.22-3.96-0.21-0.66-2.53Labour productivity in Market Services0.676.37-0.513.85-2.503.481.91Unit labour costs (ULC) (whole economy, year-on-year % change)ULC in Industry0.39-0.385.931.49-2.40-1.38-2.43ULC in Construction3.971.127.78-2.46-3.073.960.34ULC in Market Services-1.87-0.532.05-1.941.24-2.50-0.56Business Environment2010201120122013201420152016Time needed to enforce contracts(1) (days)561.0561.0572.0572.0572.0572.0572.0Time needed to start a business(1) (days)15.515.015.015.015.012.07.0Outcome of applications by SMEs for bank loans(2)na0.17na0.190.880.310.60Research and innovation2010201120122013201420152016R&D intensity0.740.750.750.810.780.840.84General government expenditure on education as % of GDP5.104.904.905.104.704.70naPersons with tertiary education and/or employed in science and technology as % of total employment31303236373838Population having completed tertiary education(3)16151617192020Young people with upper secondary level education(4)94959494969696Trade balance of high technology products as % of GDP-1.48-1.50-1.27-1.48-1.52-1.72naProduct and service markets and competition200320082013OECD product market regulation (PMR)(5), overallnana2.08OECD PMR5, retailnana1.42OECD PMR5, professional servicesnana3.70OECD PMR5, network industries(6)nana2.75 
 
 
 
  
C. Standard Tables 

Table C.6:  Green growth 

All macro intensity indicators are expressed as a ratio of a physical quantity to GDP (in 2010 prices) 
          Energy intensity: gross inland energy consumption (in kgoe) divided by GDP (in EUR) 
          Carbon intensity: greenhouse gas emissions (in kg CO2 equivalents) divided by GDP (in EUR) 
          Resource intensity: domestic material consumption (in kg) divided by GDP (in EUR) 
          Waste intensity: waste (in kg) divided by GDP (in EUR) 
Energy balance of trade: the balance of energy exports and imports, expressed as % of GDP   
Weighting of energy in HICP: the proportion of 'energy' items in the consumption basket used for the construction of the HICP 
Difference between energy price change and inflation: energy component of HICP, and total HICP inflation (annual % 
change) 
Real unit energy cost: real energy costs as % of total value added for the economy 
Industry energy intensity: final energy consumption of industry (in kgoe) divided by gross value added of industry (in 2010 EUR)  
Real unit energy costs for manufacturing industry excluding refining : real costs as % of value added for  manufacturing 
sectors 
Share of energy-intensive industries in the economy: share of gross value added of the energy-intensive industries in GDP 
Electricity and gas prices for medium-sized industrial users: consumption band 500–20 00MWh and 10 000–100 000 GJ; figures 
excl. VAT. 
Recycling rate of municipal waste: ratio of recycled and composted municipal waste to total municipal waste 
Public R&D for energy or for the environment: government spending on R&D for these categories as % of GDP 
Proportion of GHG emissions covered by EU emissions trading system (ETS) (excluding aviation): based on GHG emissions 
(excl land use, land use change and forestry) as reported by Member States to the European Environment Agency. 
Transport energy intensity: final energy consumption of transport activity (kgoe) divided by transport industry gross value 
added (in 2010 EUR) 
Transport carbon intensity: GHG emissions in transport activity divided by gross value added of the transport sector 
Energy import dependency: net energy imports divided by gross inland energy consumption incl. consumption of 
international bunker fuels 
Aggregated supplier concentration index:  covers oil, gas and coal. Smaller values indicate larger diversification and hence 
lower risk. 
Diversification of the energy mix: 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 GHG emissions covered by ETS); European 
Commission (Environmental taxes over labour taxes and GDP); Eurostat (all other indicators) 

66 

Green growth performance201120122013201420152016MacroeconomicEnergy intensity kgoe / €0.210.200.200.190.190.19Carbon intensity kg / €0.600.570.550.530.53-Resource intensity (reciprocal of resource productivity)kg / €0.980.920.970.880.920.92Waste intensity kg / €-0.08-0.09--Energy balance of trade % GDP-5.4-5.6-5.1-4.0-3.4-2.7Weighting of energy in HICP%13.1914.4715.7416.4914.8710.78Difference between energy price change and inflation %0.311.42.6-0.2-2.7-4.4Real unit of energy cost% of value added18.920.319.820.0--Ratio of environmental taxes to labour taxesratio0.230.220.240.260.28-Environmental taxes% GDP2.72.62.93.23.43.5Sectoral Industry energy intensity kgoe / € 0.170.150.160.150.14-Real unit energy cost for manufacturing industry excl. refining% of value added13.313.013.013.3--Share of energy-intensive industries in the economy% GDP------Electricity prices for medium-sized industrial users€ / kWh0.090.090.090.090.090.09Gas prices for medium-sized industrial users€ / kWh0.040.040.040.040.040.03Public R&D for energy % GDP0.000.000.000.000.000.00Public R&D for environmental protection% GDP0.000.000.000.000.000.00Municipal waste recycling rate%8.314.714.916.518.021.0Share of GHG emissions covered by ETS*%38.637.537.036.737.236.6Transport energy intensitykgoe / €1.161.201.251.231.23-Transport carbon intensitykg / €3.303.363.513.433.48-Security of energy supplyEnergy import dependency%49.449.047.143.848.347.8Aggregated supplier concentration indexHHI26.219.828.219.514.7-Diversification of energy mixHHI0.270.270.280.280.270.27 
 
 
 
  
REFERENCES 

Summary 

Bejaković, P. and al. (IPSOS) (2016), External evaluation of active labour market policy measures 2010-
2013. 
Zagreb 
(www.hzz.hr/UserDocsImages/Sumarno%20evaluacijsko%20izvje%C5%A1%C4%87e_ENG_Vanjska%
20evaluacija%20mjera%20aktivne%20politike%20tr%C5%BEi%C5%A1ta%20rada%202010%20-
2013.pdf). 

Employment 

evaluation 

Croatian 

Service, 

report, 

Berti,  K.  et  al.  (2012),  'An  early-detection  index  of  fiscal  stress  for  EU  countries',  European  Economy 
Economic Paper, No 475, European Commission (DG  Economic and Financial Affairs (DG ECFIN)), 
Brussels (http://ec.europa.eu/economy_finance/publications/economic_paper/2012/pdf/ecp475_en.pdf). 

Brčić  Kuljiš,  M.  and  M.  Koludrović  (2016),  Stanje  i  perspektive  obrazovanja  odraslih  u  Republici 
Hrvatskoj.  Zbornik  radova  znanstveno-stručnog  kolokvija,  Filozofski  Fakultet  u  Splitu,  Split 
(https://ec.europa.eu/epale/sites/epale/files/zbornik_radova_znanstveno-strucnog_kolokvija_-
_stanje_i_perspektive_obrazovanja_odraslih_u_republici_hrvatskoj_2016.pdf). 

Center 
Peace 
(http://nejednakost.cms.hr/obrazovanje/). 

Studies 

for 

(2016),  Geometar 

nejednakosti, 

IPA 

2011 

Project 

Croatian  National  Bank  (2017),  Financial  Stability  Report,  No  18,  Croatian  National  Bank,  Zagreb 
(www.hnb.hr/documents/20182/1972383/e-fs-18-2017.pdf/c738405d-b8b7-4e6f-9819-2e0f72e39715). 

Dobrotić, I. and Matković, T. (2017), Pokazatelji obuhvaćenosti i ulaganja u redovne programe ranog i 
predškolskog odgoja i obrazovanja u Hrvatskoj u kontekstu postizanja ciljeva iz Barcelone i pedagoškog 
standarda, unpublished. 

Ecorys Netherlands and Mazars (2017), Study about administrative formalities of important procedures 
and administrative burdens for businesses, study for the European Commission (DG for Internal Market, 
Industry,  Entrepreneurship  and  SMEs  (DG  GROWTH)),  European  Commission,  Luxembourg 
(https://ec.europa.eu/growth/content/study-about-administrative-formalities-important-procedures-and-
administrative-burdens-0_en). 

European  Centre  for  the  Development  of  Vocational  Training  (CEDEFOP)  and  European  Commission 
(DG for Employment, Social Affairs and Inclusion (DG EMPL)) (2017),  Skills anticipation in Croatia, 
Skills  Panorama 
(http://skillspanorama.cedefop.europa.eu/en/analytical_highligths/skills-anticipation-
croatia). 

European Commission (2015),  Attitudes of Europeans towards Tourism, Flash Eurobarometer, No 370, 
European Union, Brussels (https://data.europa.eu/euodp/data/dataset/S1072_370).   

European  Commission  (2016a),  Annual  Implementation  Report  on  the  Operational  Programme 
Competitiveness and Cohesion 2014-2020, European Commission, Brussels. 

European Commission (DG for Economic and Financial Affairs (DG ECFIN)) (2016b),  Country report 
Croatia  2016.  Including  an  in-depth  review  on  the  prevention  and  correction  of  macroeconomic 
imbalances,  European  Economy 
Papers,  European  Commission,  Brussels 
Institutional 
(https://ec.europa.eu/info/sites/info/files/2017-european-semester-country-report-croatia-en.pdf). 

European  Commission  (2016c),  Progress  Report  on  the  implementation  of  Partnership  Agreement, 
European Commission, Brussels. 

European  Commission  (2016d),  Report  on  Public  Finances  in  EMU,  European  Economy  Institutional 
Papers, 
Luxembourg 
(https://ec.europa.eu/info/sites/info/files/ip045_en_0.pdf). 

Publications 

European 

Union, 

Office 

45, 

the 

No 

of 

67 

 
 
References 

European Commission (2016e), Public opinion in the European Union, Standard Eurobarometer, No 85, 
European Union, Brussels (http://data.europa.eu/euodp/en/data/dataset/S2130_85_2_STD85_ENG).   

European  Commission  (DG  for  Employment,  Social  Affairs  and  Inclusion  (DG  EMPL))  (2017a),  2018 
European  Semester:  Draft 
Joint  Employment  Report,  European  Commission,  Brussels 
(https://ec.europa.eu/info/publications/2018-european-semester-draft-joint-employment-report_en). 

European  Commission  (2017b),  Alert  Mechanism  Report  2018,  European  Commission,  Brussels 
(https://ec.europa.eu/info/sites/info/files/economy-finance/com-2017-771-en.pdf). 

European  Commission  (2017c),  Benchmarks  for  the  assessment  of  private  debt,  Note for  the  Economic 
Policy Committee. 

European  Commission  (2017d),  Businesses’  attitudes  towards  corruption  in  the  EU,  Flash  Business 
Eurobarometer, 
Brussels 
(https://data.europa.eu/euodp/data/dataset/S2177_457_ENG).   

European 

Union, 

457, 

No 

European  Commission  (2017e),  Corruption.  Report,  Special  Eurobarometer,  No  470,  European  Union, 
Brussels (https://data.europa.eu/euodp/data/dataset/S2176_88_2_470_ENG). 

European  Commission  (DG  for  Economic  and  Financial  Affairs  (DG  ECFIN))  (2017f),  Country  report 
Croatia  2017.  Including  an  in-depth  review  on  the  prevention  and  correction  of  macroeconomic 
imbalances,  European  Economy 
Papers,  European  Commission,  Brussels 
Institutional 
(https://ec.europa.eu/info/sites/info/files/2017-european-semester-country-report-croatia-en.pdf). 

European  Commission  (2017g),  Digital  economy  and  society  index  2017  –  Croatia,  European 
Commission,  Brussels  (https://ec.europa.eu/digital-single-market/en/news/digital-economy-and-society-
index-desi-2017). 

European  Commission  (2017h),  Education  and  Training  Monitor  2017  —  Country  Analysis,  Croatia, 
Publications 
Luxembourg 
of 
(http://ec.europa.eu/education/sites/education/files/monitor2017_en.pdf). 

European 

Union, 

Office 

the 

European  Commission  (2017i),  Empirical  current  account  benchmarks:  modelling  the  impact  of 
demographic variables, LIME Working Group, 24 April 2017. 

European Commission (DG for Employement, Social Affairs and Inclusion (DG EMPL)) (2017j), Labour 
Market  and  Wage  Developments  in  Europe.  Annual  Review  2017,  Publications  Office  of  the  European 
Union,  Luxembourg 
(https://publications.europa.eu/en/publication-detail/-/publication/2df2eaca-b3b0-
11e7-837e-01aa75ed71a1/language-en).  

European  Commission  (DG  Taxation  and  Customs  Union  (DG  TAXUD))  (2017k),  Taxation  Trends  in 
the  European  Union.  Data  for  the  EU  Member  States,  Iceland  and  Norway.  2018  edition,  European 
Union, 
Luxembourg 
(https://ec.europa.eu/taxation_customs/sites/taxation/files/taxation_trends_report_2017.pdf). 

European Commission (2018a), Digital Scoreboard. 

European Commission (DG Taxation and Customs Union (DG TAXUD)) (2018b), Taxation trends in the 
european union. Data for the EU member states, Iceland and Norway. 2018 edition, Publications Office 
of the European Union, Luxembourg, forthcoming. 

68 

 
 
References 

European  Commission  (2018c),  European  Public  Administration  Country  Knowledge  (EUPACK) 
(https://www.hertie-school.org/en/eupack/).  

European Investment Bank (EIB) (2017), 'EIB Group reaffirms commitment to financing in the Western 
Balkans', 
Luxembourg 
(www.eif.org/what_we_do/equity/news/2017/wbedif_cosme_western_balkans.htm). 

release, 

press 

EIF 

EY (2017), EMEIA fraud survey 2017 (https://fraudsurveys.ey.com/). 

GAN  Integrity  (2017),  Croatia  corruption  report,  GAN  (www.business-anti-corruption.com/country-
profiles/croatia). 

National Statistics Office (2017), Gross domestic product for republic of Croatia. Nuts 2013 – 2nd level 
and counties, 2014, (https://www.dzs.hr/Hrv_Eng/publication/2017/12-01-03_01_2017.htm). 

OECD and European Observatory on Health Systems and Policies (2017), Croatia: country health profile 
2017,  State  of  Health  in  the  EU,  OECD  Publishing  /  European  Observatory  on  Health  Systems  and 
Policies, Paris / Brussels (http://dx.doi.org/10.1787/9789264283312-en). 

Ott, K. and al. (Institute of Public Finance) (2017), Budget transparency in Croatian counties, cities and 
municipalities, Institute of Public Finance, Zagreb (www.ijf.hr/upload/files/file/ENG/newsletter/112.pdf). 

Podumljak, M. and E. Dávid-Barrett (2015), The public procurement of construction works: the case of 
Croatia, 
Zagreb 
(https://www.vkontrole.lt/tf/files/files/The%20Public%20Procurement%20of%20Construction%20Work-
The%20Case%20of%20Croatia.pdf). 

Development, 

Partnership 

Anticorrp 

Project, 

Social 

for 

Simoes, A. J. G. and C. A. Hidalgo (2011), 'The Economic Complexity Observatory: An Analytical Tool 
for  Understanding  the  Dynamics  of  Economic  Development',  Scalable  Integration  of  Analytics  and 
Visualization,  Papers  from  the  2011  AAAI  Workshop,  Association  for  the  Advancement  of  Artificial 
Intelligence 
Alto 
(https://pdfs.semanticscholar.org/7733/68ce1faa36d9ac833b3c3412d136033b91c1.pdf).  

(AAI), 

Palo 

South East European Centre for Entrepreneurial Learning (SEECEL) (2017), Strengthening the capacities 
of the chambers and partners to help SMEs to engage in apprenticeship. Analysis of the current status of 
the  apprenticeship  scheme  in  Croatia,  Project  Cap4App,  Croatian  Chamber  of  Economy,  Zagreb 
(www.hgk.hr/documents/seecel-reportfinalreviewed58e5fad85b0fe.pdf). 

Vehovec,  M.  (ed.)  (2014),  O  zdravstvu  iz  ekonomske  perspective,  Ekonomski  institut,  Zagreb 
(www.eizg.hr/hr-HR/O-zdravstvu-iz-ekonomske-perspektive-1417.aspx). 

World Bank (2017a), Doing business 2018. Reforming to create jobs, World Bank Group flagship report, 
International  Bank  for  Reconstruction  and  Development  /  The  World  Bank,  Washington  DC 
(www.doingbusiness.org/~/media/WBG/DoingBusiness/Documents/Annual-Reports/English/DB2018-
Full-Report.pdf). 

World 
Worldwide 
(http://info.worldbank.org/governance/wgi/index.aspx#home).  

(2017b), 

Bank 

Governance 

Indicators 

World  Economic  Forum  (2017),  Global  competitiveness  index  2017–2018,  Croatia:  Executive  opinion 
survey. 

69