COMMISSION STAFF WORKING DOCUMENT Country Report Croatia 2019 Including an In-Depth Review on the prevention and correction of macroeconomic imbalances Accompanying the document COMMUNICATION FROM THE COMMISSION TO THE EUROPEAN PARLIAMENT, THE EUROPEAN COUNCIL, THE COUNCIL, THE EUROPEAN CENTRAL BANK AND THE EUROGROUP 2019 European Semester: Assessment of progress on structural reforms, prevention and correction of macroeconomic imbalances, and results of in-depth reviews under Regulation (EU) No 1176/2011
Date: 2019-02-27
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, 27.2.2019  SWD(2019) 1010 final  COMMISSION STAFF WORKING DOCUMENT Country Report Croatia 2019      Including an In-Depth Review on the prevention and correction of macroeconomic imbalances Accompanying the document COMMUNICATION FROM THE COMMISSION TO THE EUROPEAN PARLIAMENT, THE EUROPEAN COUNCIL, THE COUNCIL, THE EUROPEAN CENTRAL BANK AND THE EUROGROUP 2019 European Semester: Assessment of progress on structural reforms, prevention and correction of macroeconomic imbalances, and results of in-depth reviews under Regulation (EU) No 1176/2011 {COM(2019) 150 final}  
 
 
CONTENTS 

Executive summary 

1.  Economic situation and outlook 

2.  Progress with country-specific recommendations 

3.  Overall findings regarding imbalances, risks and adjustment issues 

4.  Reform priorities 

4.1.  Public finances and taxation* 

4.2.  Private sector debt and financial sector* 

4.3.  Labour market, education and social policies* 

4.4.   Competitiveness reforms and investment* 

Annex A: Overview Table 

Annex B: Commission Debt Sustainability Analysis and fiscal risks 

Annex C: Standard Tables 

4 

8 

14 

18 

23 

23 

30 

36 

47 

58 

62 

63 

Annex D: Investment Guidance on Cohesion Policy Funding 2021-2027 for Croatia 

69 

References 

LIST OF TABLES 

Table 1.1: 

Key economic and financial indicators - Croatia 

Table 2.1: 

2018 country-specific recommendations (CSRs) assessment 

Table 3.1: 

MIP matrix 

Table 4.2.1: 

Financial soundness indicators, all domestic and foreign banks 

Table A.1: 

2018 country-specific recommendations (and subparts) assessment 

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 

74 

13 

15 

21 

33 

58 

63 

64 

65 

66 

67 

68 

1 

 
 
 
 
LIST OF GRAPHS 

Graph 1.1: 

Real GDP growth by demand component 

Graph 1.2: 

Private and public investment 

Graph 1.3: 

Current account composition, gross external debt and net international investment 

position 

Graph 1.4: 

Labour market developments 

Graph 1.5: 

Nominal wage growth: actual and predicted based on economic fundamentals 

Graph 1.6: 

Potential output and components, 2017 

Graph 1.7: 

Regional convergence 

Graph 2.1:  Overall multiannual implementation of 2014-2018 CSRs to date 

Graph 4.1.1:  Drivers of change in the debt ratio 

Graph 4.1.2:  Structure of public debt 

Graph 4.1.3:  Drivers of change in government balance 

Graph 4.1.4:  Active government guarantees by companies, 2017 

Graph 4.1.5:  Public debt ratio baseline and scenarios 

Graph 4.1.6:  Distributional effects of changes to the PIT and contributions by income quintiles 

Graph 1: 

Tax rates on income by sources (lhs) and tourist beds per inhabitant by municipalities 

(rhs), 2017 

Graph 4.2.1: 

Trading volumes at Zagreb Stock Exchange 

Graph 4.2.2:  Growth of new business loans (in annual volumes) 

Graph 4.2.3:  Asset quality evolution 

Graph 4.2.4:  Evolution of NPL flows 

Graph 4.3.1:  Activity rate by age and educational attainment level, 2017 

Graph 4.3.2:  Reasons for inactivity by age and sex, 2016 

Graph 4.3.3:  Relative dispersion of employment rates of different skills groups in EU 

Graph 4.3.4:  Share of employers reporting labour shortages as the main factor limiting their activity 

by sector 

Graph 4.3.5:  Evolution (% change) of the population by municipalities, 2012-2017 

Graph 4.3.6:  Population migration 

Graph 4.3.7:  At-risk-of-poverty or social exclusion rate and its components (AROP, SMD, LWI) 

Graph 4.4.1:  Labour productivity (GVA per worker) by sector, 2017 

Graph 4.4.2:  Real labour productivity in manufacturing and construction by firm size 

Graph 4.4.3:  Business and public R&D intensity 

Graph 4.4.4:  Final energy consumption in 2015 

Graph 4.4.5:  Registered unemployment rate (%) by county, 2017 

Graph 4.4.6:  Employment, unemployment and tertiary education rates, by level of urbanisation, 

2015-2017 

8 

9 

9 

10 

11 

11 

12 

14 

23 

23 

24 

25 

25 

26 

27 

32 

33 

34 

34 

36 

36 

37 

37 

38 

39 

40 

47 

47 

49 

52 

54 

54 

2 

 
 
 
LIST OF BOXES 

Box 2.1: EU funds and programmes contribute to addressing structural challenges and fostering 

growth and competitiveness in Croatia 

Box 4.1.1: Taxation of labour, capital and property income of households 

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

Box 4.3.2: The 2018 Pension System Reform 

Box 4.4.1: Investment challenges and reforms in Croatia 

16 

27 

41 

43 

50 

3 

 
 
 
 
EXECUTIVE SUMMARY 

imbalances  continued 

Ensuring durable economic growth is becoming 
a key challenge for Croatia. While still above the 
EU  average,  the  pace  of  economic  growth  is 
moderating and gradually nearing its potential rate, 
which  is  only  slowly  increasing.  The  stock  of 
macroeconomic 
to  be 
reduced,  largely  driven  by  the  positive  economic 
of 
environment 
government  finances.  Using  the  still  favourable 
economic  outlook  to  step  up  structural  reform 
efforts would help boost potential growth. Reforms 
need  to  be  focused  on  sustaining  the  positive 
trends  on  the  labour  market,  and  on  creating  a 
business environment conducive to investment and 
higher productivity gains (1).  

prudent  management 

and 

remained 

consumption 

The  economic  recovery  has  continued,  largely 
driven  by  robust  domestic  demand.  In  2018 
GDP  growth  is  projected  to  have  moderated 
slightly  to  2.8 %,  from  2.9 %  the  year  before. 
as 
Private 
households  enjoyed  higher  disposable  incomes  on 
account  of  the  continued  growth  in  employment 
and  wages.  Public  capital  formation  remained 
investment 
subdued,  dragging  on 
activity.  Exports  of  both  goods  and  services 
continued to  grow  at  record levels, but  with signs 
of  slowing  and  outpaced  by  the  increase  in 
imports.  

the  overall 

strong 

A  full  decade  after  the  financial  crisis,  the 
economy  is  set  to  fully  regain  the  output  lost 
during the recession. Employment is expected to 
continue 
steadily.  Coupled  with 
continuing  low  inflation,  also  thanks  to  cuts  in 
consumption taxes in 2019 and 2020, GDP growth 
is expected to remain driven largely by household 
consumption.  However,  investment  will  play  a 

growing 

(1)  This  report  assesses  Croatia’s  economy  in  light  of  the 
European Commission’s Annual Growth Survey published 
on  21 November 2018  (European Commission,  2018d).  In 
the survey, the Commission calls on EU Member States to 
implement  reforms  to  make  the  European  economy  more 
productive,  resilient  and  inclusive.  In  so  doing,  Member 
States  should  focus  their  efforts  on  the  three  elements  of 
the  virtuous  triangle  of  economic  policy  —  delivering 
investment,  focusing  reforms  efforts  on 
high-quality 
productivity growth, inclusiveness and institutional quality 
and  ensuring  macroeconomic  stability  and  sound  public 
finance.  At  the  same  time,  the  Commission  published  the 
Alert  Mechanism  Report  (AMR;  European  Commission, 
2018b) 
the 
the 
macroeconomic imbalance procedure. The AMR found that 
Croatia warranted an in-depth review, which is presented in 
this report. 

round  of 

initiated 

eighth 

that 

gradually increasing role. In particular, the private 
sector  is  expected  to  continue  benefiting  from 
ample liquidity and declining interest rates.  In the 
public  sector,  greater  use  of  EU  funding  is 
expected  as  the  end  of  the  programming  period 
nears. As a result of the continued deterioration of 
the  balance  of  trade  in  goods,  the  contribution  of 
the  external  sector  to  growth  is  projected  to  grow 
increasingly  negative.  In  all,  real  GDP  growth  is 
forecast to moderate further to 2.7 % in 2019, and 
2.6 % in 2020. 

in 

skills 

railways, 

particular 

investment, 

infrastructure, 

the  economy’s  growth  potential 
Boosting 
requires  investments  in  transport,  energy  and 
environmental 
and 
research  and  innovation.  Croatia’s  low  level  of 
in  equipment  and 
i.e. 
capital 
infrastructure,  affects  the  growth  potential.  The 
quality of service and connectivity of the transport 
infrastructure, 
are 
underdeveloped.  Improving  energy  efficiency, 
water management and facilitating the transition to 
a  circular  economy  also  require  infrastructure 
investment. Investment in public and private R&D 
and  digitalisation  would  help  to  support  the 
economy’s  capacity  to  innovate,  if  acting  in 
synergy with investment in the education system to 
improve people’s skills. Finally, there is a need for 
resources  to  get  people  into  work  and  promote 
social  inclusion.  Annex  D  identifies  key  priorities 
for 
the  European  Regional 
Development Fund, the European Social Fund Plus 
and the Cohesion Fund for the 2021-2027 period in 
Croatia,  building  on  the  analysis  of  investment 
needs and challenges outlined in this report. 

support 

by 

Croatia  has  made  some  progress  in  addressing 
the 2018 country-specific recommendations.  

There  has  been  substantial  progress 
following areas:  

in 

the 

  Prudent  government  spending  and  borrowing 
continued to support a fast decrease in the debt 
ratio.  After  a  long  delay,  there  has  been 
progress in adopting measures to strengthen the 
institutional  framework  governing  the  public 
finances.  

  An 

important  pension 

reform,  aimed  at 
promoting longer working lives and addressing 

4 

 
 
                                                           
Executive summary 

structural inconsistencies in the system, entered 
into force in January 2019. 

country is still farthest from reaching the target for 
investment in research and development. 

There  has  been  some  progress  in  the  following 
areas:  

  Education  and  training  reforms,  long  in  the 
planning,  have  now  been  set  in  motion,  while 
participation  of  vulnerable  groups  in  policy 
measures  to  help  them  find  or  stay  in  work 
remains low.  

  Some  measures  to  make  public  administration 
more  efficient  have  been  initiated  but  await 
implementation. 
of 
The 
administrative burden is progressing, while the 
reduction  of  ‘parafiscal  charges’  (non-tax 
charges) has stalled.  

reduction 

  Court  backlogs  have  been 

reduced,  and 
measures  are  being  gradually  implemented  to 
improve the quality of the justice system. 

There  has  been  limited  progress  in  the  following 
areas: 

  The  introduction  of  a  recurrent  property  tax  is 
no longer planned, leaving in place the system 
of municipal fees.  

  The consolidation of social benefits remains in 
preparation,  while  new 
legislation  setting 
wages  for  civil  servants  has  been  postponed 
until 2019.  

  Measures  to  improve  corporate  governance  in 
state-owned 
been 
enterprises 
implemented, but less progress  has been  made 
to  dispose  of  minority  shares  and  other  assets. 
Some  unjustified  barriers  in  the  regulation  of 
professional  services  have  been  removed,  but 
many remain in place. 

have 

Regarding  progress  towards  the  targets  under  the 
Europe  2020  strategy,  Croatia  has  reached  its 
national targets in renewables (except in transport), 
energy  efficiency,  the  employment  rate,  early 
school  leaving,  and  poverty  and  social  exclusion. 
Croatia  is  on  track  to  reaching  its  target  for 
it 
lowering  greenhouse  gas  emissions,  while 
appears  unlikely  it  will  reach  the  target  for 
increasing  higher  education  attainment.  The 

Croatia faces several challenges with regards to 
a number of indicators of the Social Scoreboard 
supporting the European Pillar of Social Rights. 
The  proportion of people of working age  who are 
in employment remains low. In addition, there are 
still  challenges  with  ensuring  the  quality  of 
education,  both  for  young  people  and  adults.  The 
percentage  of  people  at  risk  of  poverty  or  social 
exclusion  is  declining  but  still  above  the  EU 
average,  and  the  capacity  of  social  benefits  to 
reduce poverty is limited. 

findings  of 

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

in-depth 

the 

  In 2018, the public debt ratio is projected to 

have declined further. 
During  the  protracted  recession,  the  general 
government debt more than doubled, driven by 
deficits  and  costs  related 
to  state-owned 
enterprises.  The  debt  ratio  started  falling  in 
2015,  and  has  declined  by  more  than  12 
percentage  points  since  then,  to  a  projected 
73.5 % of GDP in 2018. Its decrease has been 
driven  by  economic  growth  but  also  by 
restraint  in  spending.  Croatia  does  not  appear 
to  face  immediate  risks  of  ʻfiscal  stressʼ, 
despite  remaining  vulnerability 
to  foreign 
exchange  movements, and the lower sovereign 
risk has been reflected in the declining cost of 
servicing  the  debt.  However,  beyond  a  short 
term  perspective  sustainability  risks  increase, 
under the impact of population ageing. 

  The level of corporate debt  in proportion to 
GDP  is  decreasing  and  associated  risks  are 
moderating.    

Private  debt  continued  to  go  down  despite  the 
strong  recovery  in  lending.  Economic  growth 
was  the  main  driver  of  the  decrease  in  the 
private  debt-to-GDP  ratio,  but  a  significant 
contribution also came from the appreciation of 
the  domestic  currency.  The  high  share  of  debt 
denominated in  foreign currency points to still 
significant  exchange  rate  risks.  The  reduction 
of private  sector debt slowed in 2018 due to a 
pickup in net credit flows. Both household and 

5 

 
 
 
 
Executive summary 

been made eligible for sale and some measures 
to  put  non-productive  assets  to  use  have  been 
introduced, no clear privatisation strategy is in 
place.  The  suboptimal  performance  of  the 
research,  development  and  innovation  system 
represents  an  additional  barrier  to  increasing 
the  competitiveness  of  Croatian  businesses. 
Progress,  even  if  modest,  is  being  made  in 
liberalising  regulated  professions  and  reducing 
administrative  burden.  However,  ‘parafiscal 
charges’  remain  a  burden,  especially  for 
smaller  businesses.  Substantial  backlogs  in 
certainty,  while 
legal 
courts 
inefficiencies 
justice  hamper 
in  criminal 
effective  fight  against  economic  and  financial 
offences.  Corruption 
to  be 
widespread  and  effective  tools  to  prevent  and 
sanction  it  are  lacking,  particularly  at  local 
level. 

is  perceived 

reduce 

Other key structural issues analysed in this report, 
which  point  to  particular  challenges  for  Croatia’s 
economy, are as follows.  

  A  well-capitalised  and  profitable  financial 
sector,  despite  the  remaining  large  stock  of 
non-performing  loans,  is  facilitating  the 
recovery  in  lending  to  the  private  sector.

corporate  debt  are  within  prudential  levels, 
though  still  above  the  levels  suggested  by 
economic  fundamentals.  Corporate  sector  debt 
remains  heavily  concentrated  and  burdened 
with  a  high  share  of  non-performing  loans. 
Furthermore,  it  is  high  relative  to  corporate 
financial assets and equity, pointing to potential 
solvency risks for companies. 

  Economic  growth  and  sustained  current 
account  surpluses  are  facilitating  further 
reduction  of  liabilities  to  foreign  creditors 
and investors. 

Croatia's net liabilities  to  foreign creditors and 
investors declined significantly since their peak 
in 2011 but remain above prudential level and 
the level suggested by economic fundamentals. 
They  are  expected  to  move  closer  to  more 
sustainable  levels  by  2020,  on  account  of 
expected current account surpluses. In addition, 
their  composition,  in  particular  the  large  share 
of  direct  foreign  investments,  significantly 
mitigates the refinancing risk.  

  There  has  been  a  rapid 

the 
unemployment  rate,  but  still  too  few  people 
are working or looking for work. 

fall 

in 

improvement,  still 

On the back of dynamic economic activity, the 
unemployment rate fell further below pre-crisis 
levels,  but  remains  above  the  EU  average. 
Long-term  and  youth  unemployment  also  fell, 
but  remain  significant.  What  is  more,  the 
working  age  population  continues  to  contract 
due  to  emigration  and  population  ageing. 
Despite  some 
too  few 
people in this age group are active in the labour 
market, mainly because of early retirement and 
care responsibilities. Many perform undeclared 
work.  Despite 
high 
still 
unemployment, labour shortages have appeared 
in  some  sectors  of  the  economy,  also  because 
of  skills  gaps.    The  involvement  of  social 
partners in the preparation and implementation 
of policies remains limited. 

relatively 

  A  cumbersome  business  environment  and  a 
strong  presence  of  the  state  in  the  economy 
investment.  
hinder  competitiveness  and 

Although  more  state  owned  companies  have 

6 

levels 

capital 

in  2018,  as 

Profitability  of  the  banking  sector  in  Croatia 
loan  provisioning 
improved 
declined.  Banks’ 
remain 
significantly  above  regulatory  requirements. 
Ample  liquidity  provided  by  an  expansionary 
monetary  policy  has  allowed  for  a  further 
lowering  of  interest  rates.  Furthermore,  strong 
competition  in  the  banking  sector  has  eased 
lending  conditions  across  the  board.  This  has 
spurred  growth 
to  both 
in  new 
households  and  corporations.  The  share  of 
non-performing 
reduced 
significantly. While this share remains high and 
its reduction seems to be slowing, overall risks 
to the financial sector appear to be low. 

loans  has  been 

loans 

  Territorial  fragmentation  of  the  public 
its  efficiency  and 
disparities.  

administration  affects 
exacerbates 

regional 

The  powers  granted  to  local  government  units 
often  do  not  match  their  administrative  and 
financial  capacities.  This  results  in  an  uneven 

 
 
  
 
 
 
 
 
  
 
Executive summary 

strong 

across 

financially 

provision  of  public  services,  including  social 
services, 
and 
financially weak local units. Also, the capacity 
at  central  government  level  to  design  and 
implement policy and to  use  EU funding  need 
to 
strengthened.  The  wage-setting 
framework  still  lacks  consistency  across  the 
public administration and public services.   

be 

for 

and 

increase  the  use  of 
in  the  water  supply 
resources 
consumers. 
costs 
Competition is low in retail electricity and gas 
regulated. 
markets,  which 
Inadequate  urban  transport  systems  in  most 
cities and the underdeveloped railway network 
hinder  worker  mobility  and  have  negative 
effects  on  the  competitiveness  of  businesses 
and the environment. 

remain  highly 

  Poverty  and  social  exclusion  are  declining 
but  remain  above  the  EU  average,  while 
ensuring  adequate  pensions  is  a  challenge.

  The reliability of statistics remains a matter 

of concern.  

steps 

some 

taken 

Croatia  has 
towards 
improving  the  production  of  macroeconomic 
and  government  finance  statistics,  but  issues 
and 
their 
with 
timeliness persist. 

completeness, 

accuracy 

Having  someone  in  the  household  engaged  in 
paid  work  offers  strong  protection  against  the 
risk of poverty or social exclusion, whereas the 
capacity of social benefits to reduce poverty is 
limited.  Age,  gender  and  disability  are  also 
factors  that  influence  poverty  levels.  Ensuring 
that  the  pension  system  is  adequate  is  a 
significant  challenge,  in  part  because  people’s 
working lives are among the shortest in the EU. 
This  is  partly  being  addressed  by  the  recent 
reform of the pension system. 

  Structural weaknesses, in part addressed by 
ongoing  reforms,  impact  people’s  skills  and 
health. 

live  and 
influence 

their 
The  region  where  people 
socio-economic  background 
the 
extent  to  which  they  have  access  to  early 
childhood education and care and attain a given 
level  of  education.  Vocational  education  and 
training  and  higher  education  are  not 
sufficiently aligned with the needs of the labour 
market.  The  school  curriculum 
is  being 
reformed on a pilot basis to improve the overall 
quality of education and teaching. Measures to 
rationalise  hospitals  are  progressing  slowly. 
With  higher  employment,  more  people  are 
paying  into  the  health  system,  but  inadequate 
financing  of  hospitals  continues  to  generate 
arrears  in  the  system,  albeit  at  a  slower  pace 
than in previous years. 

  Challenges in network industries impact the 
environment and raise costs for consumers.  

Far too much  waste is put on landfills and too 
little  is  recycled.  There  is  further  potential  to 
increase the share of renewable energy. Losses 

7 

 
 
 
  
 
 
 
 
1.  ECONOMIC SITUATION AND OUTLOOK 

tax  cuts 

is  expected 

continue  benefitting  from  increasing  employment, 
rising wages and subdued inflation, also thanks to 
consumption 
in  2019  and  2020. 
to  continue 
Investment  activity 
intensifying, mainly driven by a pick-up of public 
investment as  the  uptake of  EU funding improves 
towards  the  end  of  the  programming  period.  On 
the external side, export growth is set to moderate 
further, in line with a slowing pace of market share 
gains,  while  strong  domestic  demand  is  projected 
to  continue  to  sustain  import  growth.  Overall,  the 
Commission’s  2019  Winter  Forecast  (European 
Commission,  2019c)  sees  real  GDP  growth 
slightly down at 2.7 % in 2019, and 2.6 % in 2020. 

Investment 

In 

(see  Graph 1.2). 

Gross  fixed  capital  formation  in  proportion  to 
GDP  remains  well  below  pre-crisis 
levels. 
Leading  up  to  the  crisis,  investment  was  the  key 
driver  of  growth,  peaking  at  28.1 %  of  GDP  in 
2008 
that  year,  public 
investment,  driven  by  large  infrastructure  projects 
(mainly  motorways),  made  up  more  than  20 %  of 
total investment.  Financed by relatively expensive 
borrowing,  public  investment  contributed  to  the 
build-up  of  sizeable  external  liabilities.  In  the  2 
years  of  the  sharp  adjustment  that  followed, 
investment  activity  contracted  by  almost  a  third, 
down  to  only  21 %  of  GDP  in  2010.  It  continued 
declining  even  as  the  economy  started  recovering 
at the end of 2014. A mild recovery in investment, 
driven  by  the  private  sector,  started  in  2015  and 
intensified the following year. In 2017 gross fixed 
capital  formation  stood  at  around  20 %  of  GDP, 
and public investment accounted for some 13.5 % 
of  it,  with  no  clear  sign  of  recovery.  Since  EU 
accession,  Croatia  has  increasingly  relied  on  EU 
funding  for  public  investment,  containing  the 
liabilities.  However,  the 
build-up  of  external 
(see 
take-up  of  EU 
Section 4.4). 

remains 

limited 

funds 

GDP growth  

investment,  as 
favourable 
the 

Growth moderates as output finally approaches 
pre-crisis  level.  Having  peaked  at  the  rate  of 
3.5 %  in  2016,  real  GDP  growth  slowed  to  2.9 % 
in  2017  and  is  projected  to  have  edged  down  to 
2.8 % in 2018. Domestic demand was bolstered by 
strong household consumption as well as dynamic 
financing  conditions 
private 
the  uncertainties 
remained 
surrounding 
of  Agrokor 
(European  Commission,  2018e)  wound  down 
substantially (2).  By  contrast, 
the  2018  data 
available so far suggest the start of a slowing trend 
in exports of goods and services. At the same time, 
imports of goods and services, while also slowing 
somewhat,  continue  to  perform  strongly,  reducing 
further  the  contribution  of  net  exports  to  growth 
(see Graph 1.1).  

and 
restructuring 

Graph 1.1: 

Real GDP growth by demand component 

Year-on-year contributions are obtained as the moving 
average of four quarters GDP component compared to the 
moving average of the respective components in the same 
quarters of previous year. 
Source: European Commission. 

Growth  is  expected  to  remain  solid,  while 
slowing gradually over the forecast period. The 
is 
strong  momentum 
expected  to  moderate  only  mildly,  supported  by 
steadily  rising  disposable  incomes  as  households 

in  consumer  spending 

(2)  On  26  October  the  High  Commercial  Court  in  Zagreb 
confirmed  the  settlement  agreed  by  Agrokor's  creditors  in 
July  2018,  clearing  way  for  the  process  of  the  Group's 
financial and operational restructuring to start. 

8 

-15-10-505101507Q108Q109Q110Q111Q112Q113Q114Q115Q116Q117Q118Q119Q120Q1ppsImports of goods and servicesInvestmentPublic consumptionPrivate consumptionExports of servicesExports of goodsGDPforecast 
 
 
                                                           
1. Economic situation and outlook 

Graph 1.2: 

Private and public investment 

Graph 1.3:  Current account composition, gross external 

debt and net international investment position 

Source: Eurostat, own calculations. 

External position  

A weakening trade balance is set to decrease the 
current  account  surplus.  In  the  absence  of 
temporary  effects  on  the  primary  income  balance 
in  2018,  such  as  loss  of  profits  in  the  largely 
foreign-owned  banking  sector  seen  in  previous 
years, the reduction of the current account surplus 
has been and is projected to continue being largely 
driven  by  the  deteriorating  trade  balance.  The 
current account balance is nevertheless forecast to 
remain  positive,  decreasing  from  a  projected 
surplus of 2.5 % of GDP in 2018 to just below 2 % 
in  2020.  In  cyclically  adjusted  terms,  the  current 
account surplus is much higher, at 4 % of GDP in 
2018. 

External imbalances narrow further, supported 
by the positive, albeit declining, current account 
balance.  Deleveraging  of  both  the  public  and 
private  sector  continued  in  2018.  By  June  2018, 
gross external debt declined by 1.8 pps to 80 % of 
GDP,  while 
investment 
position (NIIP) rose by 1.6 pps to -60.3 % of GDP 
(see  Graph 1.3).  The  net  external  debt  ratio  is 
projected to remain on a declining path, thanks to 
solid GDP growth and current account surpluses.  

international 

the  net 

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

Inflation and interest rates  

for 

strong  growth 

steadily  and  demand 

Rising  energy  prices  pushed  inflation  up  in 
in 
2018.  Despite  continued 
employment  and  rising  wages,  core  inflation  has 
remained  subdued.  However,  with  unemployment 
shrinking 
labour 
intensifying  in  some  sectors,  wage  pressures  are 
expected  to  grow  stronger  in  2019  and  2020.  At 
the  same  time,  the  Value  Added  Tax  (VAT)  rate 
reduction on several products (mostly unprocessed 
food)  in  2019  and  the  1  pp.  reduction  of  the 
standard  VAT  rate  in  2020  are  expected  to  exert 
downward  pressure  on  prices.  Energy  prices  are 
also expected to stabilise in mid-2019. As a result, 
after averaging 1.6 % in 2018, inflation is expected 
to  moderate  slightly  after  that.  Core  inflation  is 
expected to pick up towards the end of the forecast 
period. 

Interest rates continue declining amid abundant 
liquidity 
in  the  financial  system  and  the 
improving  country  risk  profile.  Interest  rates  on 
all  new  loans  to  households  and  non-financial 
corporations are decreasing, most notably on loans 
indexed in euros. The trend is expected to continue 
as Croatia's risk premium continues declining amid 
a positive economic and budgetary outlook. It has 
significantly improved in recent years, as reflected 
in  the  declining  spread  between  the  yield  on 
Croatia’s  sovereign  debt  and  the  German  bund, 
which,  while  still  higher  than  for  most  EU 

9 

05101520253002040608010008091011121314151617Share of private investment (% of tot. inv.)Share of public investment (% of tot. inv.)Total investment (% of GDP) (rhs)% of tot. inv.% of GDP-120-100-80-60-40-200-15-10-5051008Q109Q110Q111Q112Q113Q114Q115Q116Q117Q1% 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) 
 
 
1. Economic situation and outlook 

Labour market  

Croatia’s  labour  market  continues  to  improve 
on  the  back  of  the  economic  recovery.  Since 
2015,  robust  and  broad-based  economic  growth 
has  been  accompanied  by  sustained  employment 
growth.  As  a  result  of  job  creation,  as  well  as 
emigration and ageing, the unemployment rate has 
been declining rapidly over the same period. From 
11.0 %  in  2017,  it  fell  to  8.5 %  in  the  first  three 
quarters  of  2018,  and  is  expected  to  continue 
decreasing  to  7.6 %  in  2019.  Nevertheless,  the 
activity  rate  (20-64)  remains  very  low  (71.2 %  in 
2017  vs  78.0 %  for  the  EU)  (see  Graph 1.4).  The 
share of temporary employees in total employment 
remains well above the EU average (17.5 % vs EU 
11.3 %),  despite  the  increase  in  the  share  of 
permanent contracts in new hiring. 

Graph 1.4: 

Labour market developments 

Source: Eurostat. 

After  years  of  moderation,  wage  growth  is 
resuming. The different data sources offer a mixed 
picture  on  wage  dynamics  (3).  According  to 
national  accounts,  nominal  compensation  per 
employee continued to decrease by 1.1 %, in 2017. 
By  contrast,  administrative  figures  show 
the 
growth of average nominal gross wages resuming. 
The Commission’s 2018 Autumn Forecast projects 
compensation  per  employee  to  have  risen  by  2 % 
in  2018,  and  to  grow  by  a  further  1.7 %  in  2019, 

(3)  The  difference  between  administrative  data  (on  nominal 
gross wages) and national accounts (nominal compensation 
per  employee)  is  due  to  inconsistency  between  (survey 
based) employment data and administrative records. 

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

past, see in particular Section 4. 

countries, 
stayed  below  200  basis  points 
throughout 2018, as compared to 390 in mid-2016. 

Private indebtedness  

corporate 

Consolidated 

Private  sector  debt  further  decreased  despite 
the  recovery  of  bank  lending,  especially  to 
and 
households. 
household  debt  continued  decreasing  throughout 
the first three quarters of 2018. In September 2018 
corporate debt stood at 63.2 % and household debt 
at 34.1 % of GDP — some 20 and 8 pps below the 
peaks  registered  in  2010.  The  private  sector  debt 
ratio decreased on account of GDP growth and, to 
a lesser extent, valuation effects, as continued kuna 
appreciation  reduced  the  value  of  outstanding 
liabilities  indexed  to  or  denominated  in  foreign 
currency.  New  lending  to  the  non-bank  private 
sector  (adjusted  for  sales  and  securitisation)  from 
domestic  credit  institutions  remained  positive  in 
2018  but  declined  by  3.2 %  compared  to  2017 
loans 
despite  a  sharp  pick-up 
to 
in  new 
households.  However,  households 
continued 
decreasing  their  exposure  to  foreign  currency  and 
variable interest rate risk significantly. The private 
debt ratio is expected to keep decreasing. 

Public finances  

The  general  government  balance 
improved 
further thanks to dynamic revenue growth and 
expenditure containment. It recorded a surplus of 
0.9  %  of  GDP  in  2017,  a  notable  increase  from  a 
deficit  of  0.9 %  the  year  before.  Revenues  grew 
largely  on  account  of  dynamic  household 
consumption  and  an  improving  labour  market. 
Expenditure  growth  was  flat  in  nominal  terms, 
largely  through  cuts  in  investment  and  declining 
interest  expenditure,  benefiting  from  the  low 
interest rate environment. The headline balance in 
2018 is expected to decline under the impact of the 
materialisation of contingent liabilities, but remain 
in  surplus.  It  would  slightly  increase  in  2019, 
despite the impact of the planned cuts in taxes and 
social  contributions,  before  decreasing  again  in 
2020 on account of investment and the reduction in 
the  general  VAT  rate.  In  turn,  continued  mild 
surpluses  and  economic  growth  are  expected  to 
support 
reduction  of  general 
government  debt.  The  ratio  is  expected  to  have 
declined to below 73.5 % in 2018, and should fall 
to 68.2 % by 2020. 

further 

the 

10 

0102030405060708008091011121314151617Activity rate 20-64Unemployment rate 15-74Long-term unemployment rate 15-74Youth unemployment rate 15-24NEET rate 15-24% 
 
                                                           
1. Economic situation and outlook 

driven  by  the  negotiated  increases  in  the  public 
sector  wages  and  the  decline  in  unemployment. 
Nominal  wage  growth  is  projected  to  remain 
below  the  level  consistent  with  the  labour  market 
conditions  and  slightly  above 
that  for  cost 
competitiveness  (see  Graph 1.5).  In  real  terms 
(GDP  deflated),  compensation  per  employee  is 
projected  to  have  declined  by  a  further  0.3 %  in 
2018, and is expected to stabilise in 2019.  

Graph 1.5:  Nominal wage growth: actual and predicted 

based on economic fundamentals 

labour 

thanks 

the  negative  contribution  of 

some positive developments on the labour  market. 
Moreover,  the  working  age  population  (15 – 64 
years)  shrank  by  4.8  pps  between  2010  and  2017 
due to ageing and emigration. It is estimated that in 
2018 
to 
potential  growth  will  have  turned  marginally 
positive 
higher 
participation rates. Total factor productivity (TFP) 
remains  at  relatively  low  levels,  reflecting  a 
below-par performance on  measures of  goods and 
service  market  efficiency  and  public  sector 
governance.  Overall,  Croatia's  potential  growth, 
while  gradually  increasing,  remains  modest  for  a 
catching-up  economy,  and  lowest  among  peer 
Member States (see Graph 1.6). 

projected 

the 

to 

Graph 1.6: 

Potential output and components, 2017 

Source: Eurostat, own calculations. 

Social developments  

The share of people at risk of poverty or social 
exclusion  remains  high.  Although  it  has  been 
declining since 2013, it remained high at 26.4 % of 
the resident population in 2017 (EU 22.5 %). The 
elderly, low-skilled and people with disabilities are 
particularly  affected.  Poverty  in  Croatia  is  closely 
related  to  the  absence  of  work  income  in  the 
household,  as  in-work  poverty  is  well  below  the 
EU  average  (see  Section 4.3).  Inequality,  as 
measured  by  the  S80/S20  income  quintile  share 
ratio,  was  just  below  the  EU  average  in  2017  for 
those under 65, but higher for older persons. 

Potential growth  

Croatia's  real  GDP  growth  is  moving  closer  to 
its gradually increasing potential. Following five 
years  of  negative  rates,  potential  growth  turned 
positive in 2014, and has been gradually increasing 
since.  It  is  estimated  to  reach  2.4 %  by  2020. 
Labour utilisation remains chronically low despite 

Potential output: production function approach. 
Source: European Commission, own calculation. 

Statistical issues 

Concerns  remain  regarding  the  completeness, 
accuracy and  timeliness of macroeconomic and 
government  finance  statistics.  Reliable  statistics 
are  a  precondition  to  economic  and  budgetary 
surveillance  and 
informed  economic  policy 
making.  While  close  cooperation  between  the 
Croatian Bureau of  Statistics  and Eurostat  has led 
to  some  progress  in  producing  national  accounts 
and  ensuring  consistency  between  government 
finance  statistics  and  national  accounts,  sector 
accounts have yet to be published.   

11 

-6-4-202468101200020406081012141618Prediction based on inflation, productivity andunemploymentActual nominal compensation growthNominal compensation growth consistent with constantUCL-based REER% annual change-1012345ROPLBGCZHUSKSIHRTFP ContributionCapital Accumulation ContributionTotal Labour (Hours) ContributionPF Potential Growth% annual change 
 
 
1. Economic situation and outlook 

Regional disparities 

There  are  significant  regional  disparities  in 
Croatia.  GDP  per  capita  (in  Purchasing  Power 
Standard)  remains  well  below  the  EU  average  in 
all  the  counties,  with  the  exception  of  the  capital 
region  of  Zagreb  (see  Graph 1.7).  Over  the  2000-
2015  period  disparities  in  GDP  per  capita  have 
widened  across  the  country.  In  2015,  GDP  per 
capita ranged between 107 % of the EU average in 
Zagreb  to  32 %  in  Virovitica-Podravina  county  in 
eastern  Croatia.  Population  has  been  shrinking 
across  the  country  since  2010,  with  the  exception 
of the  city of  Zagreb. The phenomenon,  however, 
is much more pronounced in the eastern regions of 
Croatia.  Regional  demographic  developments  are 
in fact correlated with the labour market outcomes 
which also display strong territorial disparities (see 
Section 4.4). 

Graph 1.7: 

Regional convergence 

Year(s) of reference: GDP per head, 2015; GDP per head 
change, 2010-2015; Population growth, 2010-2016; 
Productivity, 2015. 
Source: Eurostat, own calculations. 

12 

20406080100120GDP per headGDP per headchangePopulation growthProductivityIndex, EU28=100City of ZagrebOther countiesEU28HR 
 
 
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. 
(3) The tax-to-GDP indicator includes imputed social contributions and hence differs from the tax-to-GDP indicator used in the 
section on taxation 
Source: Eurostat and ECB as of 31-1-2019, where available; European Commission for forecast figures (Winter forecast 2019 for 
real GDP and HICP, Autumn forecast 2018 otherwise). 

13 

2004-072008-122013-1520162017201820192020Real GDP (y-o-y)4.5-1.90.63.52.92.82.72.6Potential growth (y-o-y)3.00.00.21.61.71.82.12.4Private consumption (y-o-y)4.4-2.1-0.83.53.6...Public consumption (y-o-y)4.5-0.10.40.72.7...Gross fixed capital formation (y-o-y)6.6-5.70.86.53.8...Exports of goods and services (y-o-y)4.9-1.36.25.66.4...Imports of goods and services (y-o-y) 6.2-4.35.16.28.1...Contribution to GDP growth:Domestic demand (y-o-y)5.2-2.6-0.23.43.3...Inventories (y-o-y)0.3-0.70.30.30.2...Net exports (y-o-y)-0.91.30.5-0.1-0.6...Contribution to potential GDP growth:Total Labour (hours) (y-o-y)0.5-0.6-0.9-0.10.00.10.30.5Capital accumulation (y-o-y)2.01.20.60.70.70.80.91.0Total factor productivity (y-o-y)0.5-0.60.51.01.00.90.90.8Output gap3.1-0.8-3.5-0.70.61.62.32.5Unemployment rate12.111.816.913.411.09.07.56.5GDP deflator (y-o-y)3.82.50.3-0.11.12.31.71.6Harmonised index of consumer prices (HICP, y-o-y)2.82.90.8-0.61.31.61.41.4Nominal compensation per employee (y-o-y)4.82.1-2.01.3-1.12.01.71.5Labour productivity (real, person employed, y-o-y)2.50.10.23.20.7...Unit labour costs (ULC, whole economy, y-o-y)2.32.0-2.2-1.8-1.81.50.90.2Real unit labour costs (y-o-y)-1.5-0.4-2.4-1.8-2.8-0.8-0.8-1.3Real effective exchange rate (ULC, y-o-y)1.9-1.0-3.2-1.8-1.11.2-1.5-1.9Real effective exchange rate (HICP, y-o-y)0.8-0.70.11.20.42.6-1.3-1.0Savings rate of households (net saving as percentage of net disposable income).6.0......Private credit flow, consolidated (% of GDP)14.83.6-0.6-0.11.2...Private sector debt, consolidated (% of GDP)86.5119.5116.2105.398.4...of which household debt, consolidated (% of GDP)32.640.739.635.134.1...of which non-financial corporate debt, consolidated (% of GDP)53.978.976.770.164.3...Gross non-performing debt (% of total debt instruments and total loans and advances) (2)..12.410.18.4...Corporations, net lending (+) or net borrowing (-) (% of GDP).-1.0......Corporations, gross operating surplus (% of GDP).19.3......Households, net lending (+) or net borrowing (-) (% of GDP).3.5......Deflated house price index (y-o-y)9.8-5.1-3.12.12.8...Residential investment (% of GDP)0.0*0.0*0.0*.0*.0*...Current account balance (% of GDP), balance of payments-5.9-3.32.42.53.92.52.01.8Trade balance (% of GDP), balance of payments-6.6-2.41.52.82.1...Terms of trade of goods and services (y-o-y)1.30.50.31.40.21.10.30.5Capital account balance (% of GDP)0.00.10.41.40.6...Net international investment position (% of GDP)-66.5-87.3-83.3-69.9-62.4...NIIP excluding non-defaultable instruments (% of GDP) (1)-29.3-47.5-42.8-25.5-17.3...IIP liabilities excluding non-defaultable instruments (% of GDP) (1)68.788.892.277.569.2...Export performance vs. advanced countries (% change over 5 years)37.3-4.3-12.65.014.6...Export market share, goods and services (y-o-y)..2.77.92.5...Net FDI flows (% of GDP)-4.7-3.1-1.4-4.1-2.4...General government balance (% of GDP)-3.7-5.6-4.6-0.90.90.20.40.1Structural budget balance (% of GDP)..-3.1-0.80.7-0.5-0.7-1.1General government gross debt (% of GDP)39.355.682.780.277.573.570.168.2Tax-to-GDP ratio (%) (3)36.736.036.837.837.837.937.436.9Tax rate for a single person earning the average wage (%)..29.9.....Tax rate for a single person earning 50% of the average wage (%)..22.7.....forecast 
 
 
 
 
 
 
 
 
 
 
 
 
2.  PROGRESS WITH COUNTRY-SPECIFIC RECOMMENDATIONS 

of 

all 

51 % 

Since  the  start  of  the  European  Semester  in 
2014, 
country-specific 
recommendations  addressed  to  Croatia  have 
recorded  at  least  ‘some  progress’  (4).  The 
remaining  49 %  of  these  CSRs  recorded  ‘limited’ 
or ‘no progress’ (see Graph 2.1). Reform action in 
key  structural  policy  areas  stalled  over  the  past 
years, also in the context of a protracted period of 
political instability. Most progress has been seen in 
the  areas  of  fiscal  policy,  labour  market  and, 
recently, the pension system. 

Graph 2.1:  Overall multiannual implementation of 2014-

2018 CSRs to date 

(1) The overall assessment of the country-specific 
recommendations related to fiscal policy excludes 
compliance with the Stability and Growth Pact. 
(2) The multiannual CSR assessment looks at the 
implementation until 2019 Country Report since the CSRs 
were first adopted. 
Source: European Commission. 

Having  fully  corrected  its  excessive  general 
government  deficit,  Croatia  continued  with  a 
prudent  fiscal  policy.  It  exited  the  Excessive 
Deficit  Procedure  in  June  2017  after  having 
durably  corrected  its  excessive  deficit  in  2016, 
with respect to both the general government deficit 
and  the  debt  rule.  Prudent  fiscal  policy  needed  to 
decrease the public debt ratio continued in 2017.  

taken  measures 
the 

Croatia  has 
to  enhance 
labour  market,  while 
flexibility  of 
weaknesses  in  the  promotion  of  employability 
and  social  protection  remain.  Two  successive 
reforms, implemented in 2013 and 2014, facilitated 
the  use  of  fixed-term  contracts  and  flexible  types 

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

past, see in particular Section 4. 

of  work  (distance  work,  part-time  work,  seasonal 
work  and  agency  work),  and  simplified 
the 
procedures  for  terminating  employment  contracts. 
The  coverage  and  effectiveness  of  active  labour 
market policies however remains low. In 2015, the 
assessment  of  disability  claims  was  harmonised 
and  moved  to  a  new  Single  Expert  Evaluation 
in 
Body.  There  has  been 
consolidating  social  benefits  and  improving  their 
poverty reduction capacity.  

limited  progress 

Some  steps  have  been  taken  to  improve  the 
judiciary,  business  environment  and  resilience 
of  the  financial  sector.  Insolvency  procedures 
have  been  thoroughly  revised,  and  the  reformed 
judicial  map  is  improving  the  efficiency  of  the 
system.  Backlogs  in  the  courts  are  decreasing, 
especially those of oldest cases, but remain sizable. 
The reduction of parafiscal charges has been slow 
while  the  administrative  burden  on  businesses 
from  other 
reduced  more 
significantly. In 2014, the comprehensive portfolio 
screening  of  the  banking  sector  confirmed  its 
robustness,  and  some  identified  weaknesses  have 
been 
for 
addressed.  The  Croatian  Bank 
Reconstruction  and  Development  has  undergone 
an  asset  quality  review  indicating  several  areas  in 
need  of  improvement,  some  of  which  are  being 
addressed.  

impediments  was 

slowly.  The 

Reforms  of  healthcare,  state-owned  enterprises 
and  the  implementation  of  EU  funded  projects 
long-planned 
have  progressed 
functional 
integration  of  hospitals,  aimed  at 
rationalising  operations  and  improving  access  to 
healthcare,  has  started,  while  their  inadequate 
financing has yet to be addressed. Some measures 
to  improve  corporate  governance  in  state-owned 
enterprises  have been  implemented,  but activation 
and  sale  of  assets  have  advanced  only  slowly, 
without  a  clear  privatisation  strategy  in  place. 
Constrained 
and 
insufficient  strategic  planning  hinder  a  more 
efficient  implementation  of  projects  co-funded 
there  have  been 
from  EU 
improvements  over  the  past  years,  especially  in 
terms of increased staffing. 

funds,  although 

administrative 

capacity 

14 

No Progress19%Limited Progress30%Some Progress32%Substantial Progress12%Full Implementation7% 
 
 
                                                           
2. Progress with country-specific recommendations 

2018 

some (5)  progress 

in 
Croatia  has  made 
country-specific 
addressing 
the 
recommendations 
(see  Table 2.1).  After  a 
protracted period of reform standstill, policy action 
has  picked  up 
the 
Parliament adopted a package of important pension 

in  2018.  Most  notably 

(5)  Information  on  the  level  of  progress  and  actions  taken  to 
address  the  policy  advice  in  each  respective  subpart  of  a 
CSR is presented in the Overview Table in the Annex.  

system  reforms,  which  came  into  force  in  2019. 
Similarly,  the  fiscal  framework  was  strengthened 
at  the  end  of  2018.  Other  policy  measures  in  the 
area  of  public  sector  governance  and  the  business 
initiated  and  are  at 
environment  have  been 
full 
different 
parliamentary 
effective 
implementation.  

stages  of  progress,  awaiting 

adoption 

or 

Table 2.1: 

2018 country-specific recommendations (CSRs) assessment 

Source: European Commission. 

15 

Commitments  Summary assessment CSR 1: Strengthen the fiscal framework, including by strengthening the mandate and independence of the Fiscal Policy Commission. Introduce a recurrent property tax. (MIP relevant)   Croatia has made Some Progress in addressing CSR 1:  Substantial progress in strengthening the fiscal framework   No progress introducing a recurrent property tax   CSR 2: Discourage early retirement, accelerate the transition to a higher statutory retirement age and align pension provisions for specific categories with the rules of the general scheme. Deliver on the reform of the education and training system to improve its quality and labour market relevance for both young people and adults. Consolidate social benefits and improve their poverty reduction capacity. (MIP relevant)   Croatia has made Some Progress in addressing CSR 2:  Substantial in pensions system reform measures    Some progress in delivering on the reform of the education and training system   Limited progress in consolidating social benefits CSR 3: Reduce the territorial fragmentation of the public administration, streamline the functional distribution of competencies and enhance the capacity to design and implement public policies. In consultation with social partners, introduce harmonised wage-setting frameworks across the public administration and public services. (MIP relevant)   Croatia has made Limited Progress in addressing CSR 3:  Some progress in the public administration reform  Limited progress harmonising wage-setting frameworks in the public sector   CSR 4: Improve corporate governance in state-owned enterprises and intensify the sale of state-owned enterprises and non-productive assets. Significantly reduce the burden on businesses arising from parafiscal charges and from cumbersome administrative and legislative requirements. Enhance competition in business services and regulated professions. Reduce the duration of court proceedings and improve electronic communication in courts. (MIP relevant)   Croatia has made Some Progress in addressing CSR 4:  Limited progress in improving corporate governance and divestment in state-owned enterprises   Some progress in reducing the burden on businesses  Limited progress in enhancing competition in business services and regulated professions  Some progress in the judicial system reform    
                                                           
 
 
 
2. Progress with country-specific recommendations 

Box 2.1: EU funds and programmes contribute to addressing structural challenges and 
fostering growth and competitiveness in Croatia 

Croatia is one of the largest beneficiaries of EU solidarity. The financial allocation from the EU funds, 
aiming to support Croatia in facing development challenges, amounts to up to EUR 10.7 billion for 2014-
2020,  potentially  equivalent  to  above  3  %  of  GDP  annually.  The  additional  national  co-financing  will  be 
approximately EUR 2 billion, so the country budget amounts to almost EUR 12.6 billion. As of the end of 
2018, some EUR 6.8 billion (around 64 % of the total EU funds) was already allocated to specific projects. 
In  addition  to  ESIF,  EUR  424  million  was  allocated  to  specific  projects  on  strategic  transport  networks 
through  a  dedicated  EU  funding  instrument,  the  Connecting  Europe  Facility.  Furthermore,  numerous 
Croatian research institutions, innovative firms and individual researchers benefited from other EU funding 
instruments, notably Horizon 2020 which provided EUR 62 million.  

EU funding is helping to address policy challenges identified in the 2018 CSRs. Primarily by investing 
in  the  establishment  of  VET  centres  of  competence  and  providing  support  to  the  implementation  of  the 
integral  curricular  reform,  ESI  funds  (including  the  European  Social  Fund)  will  further  improve  a  link 
between  vocational  education  and  labour  market  needs.  Through  the  pilot  project  e-Schools,  elementary 
schools in Croatia have been equipped with LAN and two digital classrooms, with the intention of covering 
all  elementary  schools  with  the  second  phase  of  the  project  and  establishing  a  system  of  digitally  mature 
schools. In addition, ESIF also contributed to improving innovative performance of Croatia by  supporting 
projects  selected  under  the  smart  specialisation  strategy.  In  environmental  services,  around  half  million 
people  received  access  to  newly  built  waste-management  centres  and  around  half  million  people  already 
gained  access  to  modern  water  treatment  and  supply  services,  all  amounting  to  a  cleaner  and  healthier 
environment  for  citizens.  In  transport, new  sections  of  the  road  and  rail  network  on  the  TEN-T  are  being 
developed alongside the improved island connectivity. 

In addition, the Commission can provide tailor-made technical support upon Member State's request 
via  the  Structural  Reform  Support  Programme  to  help  implement  growth-sustaining  reforms  to 
address challenges identified in the European Semester process or other national reforms. Croatia for 
example is receiving support to implement a curriculum reform. The Commission is also assisting the 
authorities  in  their  efforts  to  remove  unnecessary  restrictions  to  regulated  professions,  to  harmonise 
terminology and improve transparency of social benefits, and to monitor the implementation of restructuring 
plans  for  state-owned  enterprises.  In  addition,  in  2018,  work  has  started  on  enhancing  the  administrative 
capacity  of  the  tax  authorities  to  detect  fraud  and  conduct  audits,  on  improving  human  resources 
management  in  the  public  administration  and  contributing  to  the  efficient  implementation  of  the  public 
administration reform, and on developing a strategy for Croatia's Bank for Reconstruction and Development 
(HBOR). 

EU  funding  contributes  to  mobilisation  of  private  investment  through  both  grants  and  financial 
instruments. Around EUR 522 million (8.3 % of the total) is earmarked to be delivered in the form of loans, 
microloans, portfolio guarantees and equity. The investments carried out via Financial instruments will be 
focused on SMEs and energy efficiency. Furthermore, the overall volume of approved operations by the EIB 
with  the  European  Fund  for  Strategic  Investment  backing  amounts  to  EUR  203  million,  which  is  set  to 
trigger a total of EUR 903 million in additional private and public investments. Croatia ranks 12th as to the 
overall volume of approved operations as a share of GDP. Under the Infrastructure and Innovation window, 
8 projects financed by the EIB with EFSI backing were approved, for a value of about EUR 109 million in 
total financing set to trigger EUR 571 million in total investment. Under the SMEs component, 8 agreements 
were  approved  with  intermediary  banks  financed  by  the  EIF  with  EFSI  backing,  for  a  total  of  EUR  94 
million  set  to  trigger  approximately  EUR  332  million  in  investments.  Some  1  178  SMEs  and  mid-cap 
companies are expected to benefit from improved access to finance. An example of EFSI-backed project in 
Croatia is "EL TO Zagreb", for which the EIB is lending Hrvatska Elektroprivreda DD EUR 150 million to 
build  a  new  combined  cycle  gas  turbine,  heat  and  electricity  cogeneration  plant  to  replace  less 
environmentally-friendly plants in Zagreb. 

EU actions strengthen national, regional and local authorities and the civil society. EUR 522.6 million 
(from  ESIF)  has  been  allocated  for  strengthening  capacity  of  public  administrations  at  different  levels  by 

16 

 
2. Progress with country-specific recommendations 

prompting  close  cooperation  with  stakeholders.  The  Catching  up  Regions  Initiative  delivers  targeted 
technical assistance and financing for developing five counties in the Eastern Croatia  – Slavonija, Baranja 
and Srijem Project. The importance of this project is twofold, on the one hand, it enables a more focused use 
of EU funds in the Slavonian counties, and on the other hand, it helps strengthening administrative capacity 
on  local  and  regional  level  in  order  to  prepare  and  implement  projects  needed  for  socio-economic 
development in the current programming period. 

More information at: https://cohesiondata.ec.europa.eu/countries/HR  

17 

 
3.  OVERALL FINDINGS REGARDING IMBALANCES, RISKS AND 

ADJUSTMENT ISSUES 

in-depth  review 

The  2019  Alert  Mechanism  Report  concluded 
should  be 
that  a  new 
undertaken for Croatia to assess the persistence 
or  unwinding  of  the  imbalances  (European 
Commission, 2018b). In spring 2018, Croatia was 
identified  as  having  excessive  macroeconomic 
imbalances  (European  Commission,  2018a).  The 
imbalances  identified  related  to  high  levels  of 
public,  private  and  external  debt,  all  largely 
denominated  in  foreign  currency,  in  a  context  of 
low potential growth. This chapter summarises the 
findings  of  the  analyses  in  the  context  of  the 
Macroeconomic  Imbalances  Procedure  in-depth 
review that is contained in various sections in this 
report (6). 

Imbalances and their gravity 

by 

induced 

Government  debt  continues  decreasing.  During 
the  protracted  recession,  large  budget  deficits  and 
costs 
enterprises 
state-owned 
contributed 
to  a  significant  accumulation  of 
government debt, which peaked in 2014 at 84 % of 
GDP. Following that, robust growth and a prudent 
fiscal stance gradually reduced government debt to 
77.5 %  of  GDP 
in  2017.  The  steady  kuna 
appreciation  since  2014  also  facilitated  debt 
reduction by depressing the value of the significant 
portion  of  debt  denominated  in  foreign  currency. 
The  decrease  of  public  debt  resulted  in  improved 
debt  sustainability  (see  Section  4.1)  and  was 
picked up by credit agencies, which rate Croatia’s 
long-term prospects with BB+, a rating just below 
investment 
outlook. 
Nevertheless,  public  debt  remains  high  and 
exposed to interest and exchange rate risks. 

grade,  with 

positive 

Private sector debt keeps decreasing despite the 
recovery  in  lending.  In  the  second  quarter  of 
2018,  consolidated  corporate  and  household  debt 
amounted 
to  63.2 %  and  34.1 %  of  GDP, 
respectively  –  some  20  and  8  percentage  points 
below  the  peak  registered  in  2010.  By  mid-2018, 

(6)  Analyses relevant for the in-depth review can be found in 
the  following  sections:  Government  debt  (Section  4.1; 
Private  sector  debt  and  the  financial  sector  (Section  4.2); 
Labour  market  (Section  4.3);  and  Business  environment, 
investment and public sector governance (Section 4.4). An 
that  section 
asterisk 
contributes 
the 
under 
Macroeconomic Imbalances Procedure. 

the  analysis 
in-depth 

indicates 
to 

in 
review 

that 

the 

scope 

indicating 

both  household  and  non-financial  corporations 
their  respective  prudential 
debt  were  below 
thresholds,  but  still  above  the  levels  suggested  by 
for 
fundamentals, 
further 
deleveraging. 
non-financial 
Furthermore, 
corporations’  debt  is  high  relative  to  their  gross 
financial assets or equity, signalling solvency risks 
for the corporate sector. Exposure to the exchange 
and interest rate risk are moderating. The share of 
private  sector  debt  exposed  to  foreign  exchange 
rate risk decreased from 78 % in 2012 to 64.5 % in 
Q2  2018,  as  both  corporates  and  households  took 
the  domestic 
liquidity 
advantage  of  high 
financial  sector 
their 
to  partially 
liabilities  denominated  in  foreign  currencies  in 
national  currency.  Similarly,  lower  interest  rates 
and non-interest charges due to strong competition 
in the domestic banking sector allowed corporates 
and households to refinance their  variable interest 
rate loans with cheaper loans of longer interest rate 
fixation periods.  

refinance 

in 

The  ongoing  deleveraging  of  both  the  public 
and  private  sector  is  reflected  in  Croatia's 
continued  current  account  surplus.  The  current 
account  surplus  increased  significantly  in  2017  to 
3.9 % of GDP. This resulted largely from a one-off 
increase in the primary income balance as banking 
sector  profitability  was  affected  by  higher 
provisioning  associated  with  the  Agrokor  crisis. 
With  strong  domestic  demand  supporting  import 
growth,  the  trade  surplus  declined  slightly  in  the 
first  half  of  2018.  In  turn,  the  current  account 
surplus  also  decreased  to  3.3 %  of  GDP (7).  The 
net  international  investment  position  improved 
to  -61.9 %  of  GDP  in  2017  and  declined  further 
to  -58.3 %  by  the  second  quarter  of  2018,  almost 
40  percentage  points  above  its  record  low  in  the 
third quarter of 2011. By mid-2018, gross external 
to  80 %  of  GDP,  over 
debt  decreased 
32 percentage points below its peak in 2015. While 
declining  rapidly,  in  2017  Croatia's  net  external 
liabilities were still significantly in excess of their 
prudential and fundamentals based benchmarks (8). 

(7)  4-quarter moving average  
(8)  The country-specific prudential threshold denotes the NIIP 
level beyond which an external crisis becomes likely. The 
NIIP  level  explained by  fundamentals  represents  the  NIIP 
that would result if a country had run its current account in 
line  with  fundamentals  since  1995.  For  Croatia,  the 
are 
prudential 

fundamental-based  benchmarks 

and 

18 

 
 
                                                           
                                                           
3. Overall findings regarding imbalances, risks and adjustment issues 

some 

2017 and throughout 2018 was driven by nominal 
GDP growth and the moderate appreciation of the 
kuna. Write-offs also contributed to debt reduction. 
At  the  same  time,  credit  flows  turned  positive  in 
2016  for  households  and  further  strengthened  in 
2017  and  2018.  New  lending  was  driven  by 
kuna-denominated non-housing loans. Credit flows 
to  non-financial  corporates  have  resumed  as  well, 
whereby 
firms  have  been  partially 
refinancing  their  external  debt  through  domestic 
borrowing. Non-financial sector credit growth will 
the  still  high 
likely  remain  moderate  given 
the 
assets 
financial 
debt-to-gross 
debt-to-equity 
ratios  of  Croatian  corporates. 
Furthermore,  many  corporates  remain  burdened 
with  high  non-performing  loans  (20.5 %  of  total 
loans  to  non-financial  corporations),  especially  in 
the  construction  sector  (47.6 %).  The  agreement 
between  Agrokor's  creditors,  confirmed  by  the 
High  Commercial  Court  in  Zagreb  in  October 
2018, should lead to an orderly restructuring of the 
conglomerate.  Large  risks  to  the  financial  and 
private  sector  from  Agrokor  thus  appear  to  be 
contained.  The  operational  and  financial  stability 
of  the  company  and  its  suppliers  now  depend  on 
the successful implementation of the agreement. 

and 

Croatia's current account surplus is expected to 
continue  supporting  the  reduction  in  external 
imbalances.  According  to  the  Commission  2018 
Autumn  Forecast,  the  current  account  surplus  is 
projected to gradually decline to 1.8 % of GDP by 
2020. The trade surplus is expected to narrow, with 
strong  domestic  demand  fuelling  imports  and 
export market share gains declining. Nevertheless, 
the expected current account  balances  will remain 
significantly  above 
level  suggested  by 
the 
fundamentals –estimated at around -0.6 % of GDP 
in  2017.  This  should  enable  the  continued  rapid 
reduction  of  external 
imbalances.  Even  with 
gradually  slowing  growth,  the  net  international 
rise 
is 
investment 
above -50 % of GDP by 2020, and move closer to 
more sustainable levels e.g. the levels suggested by 
the prudential and fundamentals-based benchmarks 
(-39 % of GDP and -22 % of GDP, respectively, in 
2018).   

expected 

position 

to 

Potential  growth  remains  relatively  low  to 
support  fast  convergence.  Since  peaking  in 
mid-2013,  the  unemployment  rate  is  estimated  to 
have fallen to its pre-crisis levels, 9.1 % in 2018. It 
is  expected  to  decline  further  to  6.6 %  by  2020, 

However,  the  net  external  position  excluding 
non-defaultable  instruments  was  only  -15 %  of 
GDP,  similar  to  some  of  the  peer  countries  and 
above its respective benchmarks.  

Croatia's  potential  growth  is  increasing,  but 
remains  relatively 
for  a  catching-up 
low 
economy.  After  plummeting  during  the  crisis 
years,  potential  output  growth  increased  to  an 
estimated  1.8 %  in  2018,  just  above  the  EU 
average  but  well  below  that  for  other  catching-up 
economies.  Labour  is  no  longer  detracting  from 
potential  growth,  mainly  thanks  to  the  decline  in 
the  structural  unemployment  rate,  but  adverse 
demographic trends and low activity rates continue 
to  restrain  it.  The  contribution  of  total  factor 
productivity  remains  relatively  low  compared  to 
that  recorded  by  the  economies  of  Central  and 
Eastern  Europe.  This  is  largely  explained  by  low 
allocative  efficiency,  which  is  also  related  to  the 
strong  presence  of  state-owned  enterprises  in  the 
economy (see Section 4.4.1). Furthermore, Croatia 
does  not  perform  well  on  indicators  of  efficiency 
of  goods  and  service  markets,  and  public  sector 
governance (see Section 4.4). 

Evolution, prospects, and policy responses 

Fiscal  surpluses  are  expected  to  support  the 
further  reduction  in  public  debt.  Public  debt  is 
projected  to  dip  to  68.2 %  of  GDP  by  2020.  The 
government  balance  is  expected  to  remain  in 
surplus in both 2019 and 2020 despite the expected 
shift  towards  a  pro-cyclical  fiscal  stance  and  the 
materialisation  of  some  contingent  liabilities.  A 
continued  low  interest  rate  environment  should 
continue  supporting  the  refinancing  of  maturing 
debt  at  lower  interest  rates  and  with  longer 
the  new  Fiscal 
maturities.  The  adoption  of 
Responsibility  Act 
improve 
Croatia's 
framework  by  giving  more 
the  Fiscal  Policy  Commission, 
autonomy 
prescribing 
and 
numerical 
strengthening  the  short  and  mid-term  budgetary 
framework at central and local level. 

is  expected 

fiscal 
to 

fiscal 

rules 

to 

Private  sector  debt  is  expected  to  continue 
decreasing  despite  the  expected  stronger  credit 
growth.  Debt  reduction  in  the  private  sector  in 

estimated to have been around -38 % and -23 % of GDP in 
2017, respectively. 

19 

 
                                                                                   
 
3. Overall findings regarding imbalances, risks and adjustment issues 

utilisation  while  several  policy  initiatives, 
in 
different  stages  or  preparation,  aim  at  improving 
public  sector  governance  and 
the  business 
reform  agenda 
environment.  The  ambitious 
presented  by  the  authorities  could  help  increase 
potential 
thorough 
implementation  of  the  planned  reforms  remains 
crucial  to  achieving  growth  rates  and  accelerating 
the process of real economic convergence. 

although 

growth, 

also  due 
to  persistent  employment  growth. 
However,  ageing  and  emigration  will  continue  to 
detract  from  the  labour  contribution  to  potential 
growth.  The  ageing  impact  should  be  partially 
offset  by  the  adopted  pension  reform,  which  will 
extend  working  lives.  The  contribution  of  total 
factor productivity to potential growth remains low 
compared  to  peers (9).  However,  the  proposed 
streamlining of government agencies, the reduction 
in the backlog of court cases and improvements in 
the  management  of  state-owned  assets  could 
contribute  to  higher  productivity  gains.  Overall, 
the  positive  output  gap  is  projected  to  further 
expand by 2020, supported by pro-cyclical tax cuts 
and  an  expected  recovery  of  public  investment 
towards  the  end  of  the  multiannual  programming 
period for EU funds. 

Overall assessment 

The private and public sectors are continuing to 
reduce  their  debt  and  its  exposure  to  currency 
and  interest  rate  risks.  High  debt  levels  still 
burden  the  economy,  although  the  situation  has 
been  improving  substantially  with  private  debt 
falling  below  prudential  levels  and  public  debt 
following a sustained declining path. However, the 
remains  over-leveraged  and 
corporate  sector 
loans.  External 
burdened  by  non-performing 
imbalances  narrowed  due  to  high  current  account 
surplus.  Overall  foreign  currency  denominated 
liabilities are decreasing, implying lower exposure 
to exchange rate risk. The unemployment rate  has 
reduced  sharply,  also  but  not  exclusively  due  to 
employment  growth.  However, 
labour  market 
participation  lags  significantly  behind  the  EU 
average. 

Low  potential  growth  hampers  a  durable 
adjustment  of  imbalances.  Economic  growth  is 
projected  to  be  robust  over  the  forecast  horizon. 
Nevertheless, low potential growth limits Croatia’s 
shock  absorption  capacity.  To  increase  its  growth 
potential,  Croatia  needs 
labour 
increase 
utilisation  and  address 
its  weak  productivity 
growth.  

to 

Recent  policy  actions  should  help  to  address 
Croatia's  structural  weaknesses  but 
their 
implementation  remains  crucial.  The  adopted 
pension  reform  could  contribute  to  higher  labour 

(9)  Slovenia, Hungary, the Czech Republic, Slovakia, Poland  

20 

 
                                                           
3. Overall findings regarding imbalances, risks and adjustment issues 

Table 3.1: 

MIP matrix 

(Continued on the next page) 

21 

 Gravity of the challenge Evolution and prospects Policy response Imbalances (unsustainable trends, vulnerabilities and associated risks) Public debt In 2017 the government debt ratio decreased to 77.5 % of GDP, which is still above the Treaty reference value of 60 %. A large portion of the debt is exposed to foreign currency risk. The debt sustainability analysis indicates low risks in the short term but medium risks in the medium and long term. Between 2008 and 2014, public debt rose from 39 to 84 % of GDP on account of large government deficits and changes in the scope of general government. The debt ratio started declining in 2015, thanks to substantial improvements in the government balance and recovering GDP growth.  The general government balance recorded a surplus of 0.9 % of GDP in 2017. The budget balance is expected to remain mildly positive throughout 2020, allowing the debt ratio to continue decreasing.  The Commission 2018 autumn forecast expects the debt-to-GDP ratio to decline to 73.5 % of GDP in 2018 and to reach 68.2 % of GDP by 2020.  In 2018 debt continued to be refinanced at lower rates, lowering debt servicing costs. Maturities were extended and the share of debt issued in foreign currency declined. Household and corporate debt and the financial sector In 2017, consolidated corporate and household debt stood at 64.3 % and 34.1 % of GDP, respectively, down from 70.1% and 35.1% in 2016. Both decreased further in the first half of 2018 and stand below prudential thresholds but still above the levels suggested by fundamentals Around 48 % of household debt and approximately 76 % of (domestic and external) corporate debt was exposed to foreign currency risk (predominantly EUR) in mid-2018. In the second quarter of 2018, the NPL rate in the Croatian banking sector reached 8.7 %, down from 11.7% one year earlier and slightly below 8.9% in the previous quarter. The rate is still relatively high in both the corporate and household sector – 20.7 % and 7.6 % respectively.   The pace of deleveraging in both the household and corporate sector is set to continue but abate, as credit flows turned positive.  Despite improvements, the still high exposure to currency risks and interest rate hikes may put at risk the repayment capacity of some households and non-financial corporations and translate into credit risk for the banking sector.  Non-performing loans in the corporate sector decreased markedly in 2017, thanks to their sales and improving economic conditions. However, figures by the Croatian National Bank for September 2018 show a slowdown in NPL sales compared to 2017 and a lower reduction of overall NPLs.  The revised corporate insolvency legislation led to the closure of thousands of illiquid companies without assets. The authorities also plan to enhance the monitoring of the reformed personal insolvency framework.  In July 2018 a settlement between Agrokor's creditors was reached and on 26 October 2018, the Croatian High Commercial Court dismissed all of the appeals lodged by several of the remaining debtholders, effectively removing the final obstacle on the implementation of the deal. A smooth implementation of the agreement remains crucial for the operational and financial recovery of the firm and its suppliers.    
 
 
 
 
3. Overall findings regarding imbalances, risks and adjustment issues 

Table (continued) 

Source: European Commission. 

22 

External liabilities and trade performance The NIIP improved to -62.4 % of GDP in 2017, but remained well below its fundamental level and prudential thresholds. However, the stock of foreign liabilities net of less risky financial instruments (NENDI) is estimated at only - 15 % of GDP in 2018, above both benchmarks. The current account balance stood at 3.9 % of GDP in 2017. It decreased to 3.3 % of GDP in the first half of 2018.  Gross external debt declined below 80 % of GDP by June 2018.  The NIIP continued improving in the first half of 2018, rising to —58.3 % of GDP, more than 30 pps above its record low in 2010. The NIIP is projected to keep improving on account of continued current account surpluses and GDP growth.  The current account has moved from a record deficit of 9 % of GDP in 2008 to a surplus in 2013. After reaching 3.9 % of GDP in 2017 it is expected to start declining again to 2.5 % of GDP in 2018. Nevertheless, it should remain in a surplus throughout the forecast horizon, also thanks to continued strong performance of exports.  The economy has more than recovered the previously lost market shares, while tourism boasts record physical indicators year after year despite signs of capacity constraints. Croatian firms still have to bear a high administrative burden.  Persisting weaknesses in the business environment result in limited attractiveness of Croatia for FDIs and high costs of doing business for Croatian enterprises.  Many reform initiatives aimed at improving the business environment are in the pipeline. Potential output The unemployment rate has contracted to 9.1 % in 2018. However, at 70.9 % and 65.4 % in Q2 2018, activity and employment rates remain among the lowest in the EU.  The contribution of total factor productivity to potential growth remains low for a catching-up economy.  Low potential growth undermines the durability of the adjustment process. After having attained a record high of 17.6 % in early 2014, unemployment continues to reduce rapidly. Until 2018, part of the reduction was driven by the shrinking population of working age, due to negative migration flows and population aging. Following the rapid growth rates in pre-crisis years, wages stagnated or decreased in the post-crisis period. They have started growing again in 2017, under the impact of the stipulated increase of public wages. They are expected to continue growing as the labour market tightens. A comprehensive pension system reform entered into force in 2019, which among others, will extend working lives thus contributing to higher labour utilisation. Active labour market measures remain largely underutilised.  Some measures addressing the efficiency of the public administration have been initiated, while the harmonisation of the wage-setting system across the public administration is planned for early 2019.  Some steps have been taken to simplify the business environment, with regards to the administrative burden and regulated professions, while the reduction of parafiscal charges has stalled.  Conclusions from IDR analysis  Private sector debt declined substantially, however some corporates are still overleveraged and burdened with NPLs. Also Government debt is also on a downward path, thanks to sustained GDP growth and a prudent fiscal policy, but sustainability risks in the medium and long term remain at medium level. Vulnerabilities to potential currency and interest rate shocks are being contained due to an increasing share of fixed interest rate loans and domestic currency loans. A well-capitalised financial sector with improved profitability facilitates the recovery of lending to the private sector. The net international investment position is improving, but remains at levels that exceed the prudential threshold, although net of less risky financial instruments it reached prudential levels. Persistently low activity rates and the shrinking labour force hold back the growth potential.   The robust economic growth is expected to contribute to a further reduction in the private and public debt-to-GDP ratios. The pace of private sector deleveraging is set to abate as credit activity intensifies, supporting investment. The current account is expected to remain in surplus, supporting a further narrowing of external liabilities. In the medium term, low potential growth limits Croatia's shock absorption capacity.   Recently undertaken policy actions and planned measures in the areas of business environment, public administration and the pension system should help increase potential growth. A thorough implementation of reforms remains crucial for supporting the process of real economic convergence.   
 
 
 
4.  REFORM PRIORITIES 

4.1.  PUBLIC FINANCES AND TAXATION* 

at  a  record  low  of  3.4 %,  down  from  4.2 %  in 
2015.  In  addition,  an  extension  of  the  average 
maturity  of  outstanding  debt  and 
increased 
issuances  of  debt  in  national  currency  have 
somewhat  decreased  the  vulnerabilities  associated 
with  government  debt.  Similarly,  the  share  of 
fixed-rate  debt  increased,  reducing  exposure  to 
interest-rate shocks. 

Graph 4.1.2:  Structure of public debt 

Croatia's public debt ratio has been decreasing 
strongly  for  3  years  in  a  row  as  a  result  of  a 
prudent  fiscal  policy  and  robust  GDP  growth. 
The debt-to-GDP ratio reached 74.5 % in the third 
quarter  of  2018,  from  a  2015-Q1  high  of  86.2 %. 
The decrease was mainly driven by a combination 
of  GDP  growth  and  significant  improvements  in 
the general government balance (see Graph 4.1.1). 
With a structural surplus of 0.7 % of GDP in 2017, 
Croatia  remained  well  above  its  medium  term 
budgetary  objective  (-1.75 %  of  GDP).  However, 
the  activation  of  contingent  liabilities  is  expected 
to  have  a  strong  (in  excess  of  1 %  of  GDP)  yet 
temporary  negative  effect  on  the  government 
balance  over  2018  and  2019,  adding  also  to  the 
debt.  In  addition,  as  the  government  uses  fiscal 
space to cut taxes, fiscal policy is expected to shift 
towards a pro-cyclical stance. Still, the decrease in 
the debt ratio is expected to continue  – albeit at a 
slower pace – dipping to 68.2 % in 2020, driven by 
small surpluses and GDP growth. 

Graph 4.1.1:  Drivers of change in the debt ratio 

(1) Other CG (central government) includes mainly PPPs. 
(2) EB users = extra-budgetary users classified under central 
government. 
Source: Croatian National Bank, Ministry of Finance, own 
calculations. 

Expenditure  restraint  was  driven  by  cuts  in 
investment  and  savings  in  interest  spending. 
The  improvement  in  the  general  government 
balance in 2017 was achieved by a combination of 
growing  revenues  and  a  minor  decrease  in  total 
expenditure  in  nominal  terms,  in  spite  of  public 
sector wage hikes. Most notably, public investment 
was  cut  by  more  than  12 %  while  savings  in 
interest  paid  amounted  to  almost  10 %  compared 
to  2016.  Since  public  investment  as  a  share  of 
GDP is at a record low of 2.7 % and interest rates 
are projected to rise, creating fiscal  space through 
these categories in the coming years is unlikely to 
be possible.  

Stock-flow adjustments include differences between cash 
and accrual recording, the (net) accumulation of financial 
assets, valuation effects and some remaining statistical 
adjustments (e.g. sector reclassifications). 
Source: AMECO, European Commission 2018 autumn 
forecast, own calculations. 

The structure of Croatia’s debt has improved in 
many  respects.  In  recent  years,  Croatia  used  the 
refinance 
rate  environment 
low 
maturing bonds and loans at lower interest rates. In 
2017, the implicit interest rate on public debt was 

interest 

to 

23 

-8-6-4-20246810121112131415161718% of GDPStock-flowadjustmentDenominator -inflationDenominator -real GDP growthInterestPrimary surplusTotal changeforecastDomesticExternalState budget usersSOEsEB usersHBOROther CGLocal gov'tLT securitiesST securitiesLT loansST loansEURHRKUSD02040608010015  1715  1715  1715  17By debtholderresidenceBygovernmentlevelBy maturityandinstrumentBy currency% 
 
 
 
4.1. Public finances and taxation* 

units. However, it no longer ties revenue allocation 
for  decentralised  functions  to  the  number  of 
functions a unit commits to perform.  

Debt sustainability analysis and fiscal risks 

Croatia  faces  low  fiscal  sustainability  risks  in 
the  short  term  in  spite  of  the  expected  calls  on 
government  guarantees.  Based  on 
the  S0 
indicator (10), Croatia faces low fiscal risks mainly 
due to its solid primary balance, declining debt and 
financing  needs  (see  Annex  B).  The  sovereign 
yield spread, although higher than in most member 
states at 150-200 basis points, has been decreasing 
steadily.  The  improved  perception  of  Croatia’s 
sovereign  credit  risk  was  also  reflected  in  rating 
agencies’  reports.  Although  the  ratings  remain  a 
notch  below  investment  grade,  the  outlook  is 
deemed positive by most agencies. 

While  significant,  the  expected  materialisation 
of  contingent  liabilities  in  the  shipbuilding 
industry  should  not  substantially 
increase 
short-term  risk.  (11)  However,  the  fact  that  also 
the  guarantees  pertaining  to  projects  still  in  the 
early  stages  were  called,  points  to  flaws  in  the 
monitoring of the proper use of issued guarantees. 
As  a  result  of  these  guarantee  calls,  the  stock  of 
active  guarantees  is  expected  to  halve  in  2019 
compared  to  2017  (see  Graph  4.1.4),  thereby  also 
reducing 
remaining 
concentration 
the 
guarantees (12). 

of 

(10)  An  early-detection  indicator  of  short-term  fiscal  stress 
stemming  from  the  financial-competitiveness  or  the  fiscal 
side of the economy. 

(11)  The S0 indicator takes into account the Commission's 2018 
Autumn  Forecast  (European  Commission,  2018j),  which 
projects the materialisation of contingent liabilities to occur 
in both 2018 and 2019. The S0 indicator by design captures 
the  effect  in  2018,  but  not  2019.  Nevertheless,  Croatia's 
performance across indicators leaves substantial margin. 
(12)  The  Herfindahl–Hirschman  concentration  index  should 
improve  to  around  0.14  in  2019  from  0.28  in  2017.  The 
index is calculated as the sum of the squares of shares and 
ranges  from  0  to  1,  where  lower  values  mean  less 
concentration. 

Graph 4.1.3:  Drivers of change in government balance 

Source: AMECO, own calculations. 

fiscal 

framework  are  progressing. 

Long delayed  measures aimed at  strengthening 
In 
the 
December 2018, the Parliament adopted the Fiscal 
Responsibility  Act  while  the  State  Audit  Office 
Act  was  passed  for  the  second  reading  in  January 
2019. The new Fiscal Responsibility Act is aimed 
mainly at reinforcing the set-up and mandate of the 
Fiscal  Policy  Commission  and 
laying  down 
numerical  fiscal  rules, 
including  a  structural 
budget  balance  rule.  The  new  State  Audit  Office 
Act aims to address the low implementation of its 
instructions  and  recommendations  by  introducing 
sanctioning  mechanisms.  It  also  increases  the 
scope  of  the  State  Audit  Office  audits,  including 
the  Croatian  National  Bank.  The  Budget  Act  — 
aimed  at  specifying 
the  short  and  mid-term 
budgetary  framework at central and local level  — 
is  scheduled  for  adoption  by  the  government  in 
early 2019. 

Budgetary control is set to tighten at the central 
level  and  ease  at  the  local  level.  The  planned 
rationalisation  of  government  agencies  and 
harmonization  of  wage  setting  (see  section  4.4.4) 
have  the  potential  to  strengthen  budgetary  control 
at central government level. On the local level, the 
capacity  of  government  units  was 
fiscal 
strengthened  by  the  new  law  on  the  financing  of 
local  government  units,  which  streamlined  the 
system  of  central  government 
transfers  and 
introduced a new system of fiscal equalisation. The 
new  system  is  no  longer  based  on  geographical 
criteria,  but  on  the  fiscal  capacities  of  the  local 

24 

-1.5-1.0-0.50.00.51.01.52.02.53.03.51415161718% of GDPRevenue growthInterestPublicinvestmentSocial benefitsCapital transfersOtherexpenditureTotal changeforecast 
 
                                                           
4.1. Public finances and taxation* 

Graph 4.1.4:  Active government guarantees by companies, 

Graph 4.1.5:  Public debt ratio baseline and scenarios 

2017 

(1) ‘Uljanik (total)’ does not include guarantees issued to the 
‘3. Maj shipyard’ 
Source: Ministry of Finance, 2017 Budget execution report. 

In  the  medium  and  long  term,  Croatia  faces 
medium fiscal sustainability risks. The medium-
term sustainability gap indicator S1 (13) has a value 
just  above  the  medium  risk  threshold  (0.2 %  of 
GDP),  which  means  that  a  small  additional  effort 
would be needed on top of current policies to bring 
the debt ratio down to 60 % of GDP in 2033. The 
sustainability  gap  indicator  S2  (14)  indicates  low 
risks in the long term on account of the  projected 
decrease 
in 
particular pension benefits. The debt sustainability 
analysis also points to medium risk, mainly related 
to the high stock of debt and the unfavourable debt 
projections  under 
in 
particular  historical  (see  graph  4.1.5).  Therefore, 
the  DSA  confirms  the  medium  risk  assessment 
produced by the S1 indicator for the medium term 
and  drives  the  overall  assessment  of  medium  risk 
in the long term. 

ageing-related 

expenditure, 

alternative 

scenarios, 

in 

(1) SCP scenario is based on the projections presented in 
Croatia's 2018 Convergence programme. 
(2) SGP scenario is based on the provisions of the Stability 
and Growth Pact. 
Source: European Commission, Debt Sustainability Monitor 
2019. 

reform,  based  on 

The  pension  reform  is  set  to  improve  pension 
long-term 
adequacy  while  not  endangering 
sustainability.  While 
the  aforementioned  S2 
indicator  does  not  take  into  account  the  2018 
pension 
a  preliminary 
assessment,  the  reform  does  not  involve  severe 
risks  to  Croatia’s  long-term  fiscal  sustainability. 
Namely, 
the  2018  Ageing  report’s  baseline 
scenario  projected  a  steady  decrease  in  public 
pension expenditure by as much as 3.8 % of GDP 
in  2070  compared 
the 
supplement  granted  to  multi-pillar  perspective 
pensioners  will  increase  public  pension  spending 
compared 
long-term 
that  baseline, 
downward  trend  appears  confirmed.  At  the  same 
time,  the  supplement  is  projected  to  somewhat 
improve  the  low  pension  adequacy,  which  should 
also  improve  as  longer  working  lives  result  in 
higher benefits (see Section 4.3).  

to  2016.  Although 

the 

to 

(13)  The  medium-term  indicator  which  shows  the  cumulative 
improvement  in  the  structural  primary  balance  over  five 
years  (starting  from  2021)  required  to  reach  a  60 %  debt-
to-GDP ratio by 2033. 

(14)  The  long-term  fiscal  sustainability  indicator  which  shows 
the  upfront  adjustment  of  the  current  structural  primary 
balance  (kept  constant  thereafter)  required  to  stabilise  the 
debt-to-GDP ratio. 

Taxation 

After  the  tax  reform  that  entered  into  force  in 
2017,  the  authorities  will  enforce  further  tax 
cuts  effective  largely  as  of  2019.  The  cuts  are 
projected  to  cost  roughly  0.6 %  of  GDP  in 
foregone revenue. Most notably, they entail a shift 
of  several  foodstuffs  from  the  standard  (25 %)  to 
the  reduced  (13 %)  VAT  rate,  a  slight  decrease 
(-0.7  pp)  in  social  insurance  contributions  and  a 

25 

Uljanik (total)PlinacroPort authority Zadar0.00.20.40.60.81.01.21.41.6% of GDP556065707580851617181920212223242526272829BaselineSGP scenarioSCP scenarioLower interest rate scenarioHigher interest rate scenarioLower GDP growth scenarioHigher GDP growth scenario% of GDP 
 
                                                           
 
4.1. Public finances and taxation* 

input-based 

incentives  for  R&D  (which  were  not  in  line  with 
EU  State  aid 
tax 
rules),  new 
incentives (16)  were  legislated  in  July  2018.  They 
are  expected  to  have  a  positive  impact  on  R&D 
performance  and  innovation  as  they  focus  on  the 
most segments with the most pronounced deficit of 
R&D  investment  –  SMEs  and  basic  research  (see 
section 4.4). 

Graph 4.1.6:  Distributional effects of changes to the PIT and 
contributions by income quintiles 

Source: European Commission Joint Research Centre, 
calculations based on the EUROMOD model based on EU-
SILC 2016. 

taxes 

Dealing  with 
in  Croatia  remains 
burdensome.  The  time  it  takes  to  comply  with 
corporate, labour and consumption taxes in Croatia 
was  the  9th  highest  among  EU  countries  in 
2017 (World  Bank,  2018a)  and  has  remained 
unchanged  since  2014  while  the  average  for  the 
other  27  EU  MS  has  been  reduced  by  about  3 %. 
Nonetheless, the number of payments required per 
year decreased from 35 in 2016 to 24 in 2017. By 
further  digitalizing  its  tax  administration,  Croatia 
the  number  of  payments 
could  reduce  both 
required and average hours needed to comply. 

(16)  The maximum tax relief: 100 % of eligible R&D costs for 
basic  research, 50 %  for  industrial  research  and  feasibility 
studies and 25 % for experimental development. There are 
ceilings per  project  and  entity,  and deduction  rates can be 
increased by 20 percentage points for small enterprises and 
10 percentage points for medium sized enterprises. 

widening  of  the  first  personal  income  tax  bracket 
(24 %). In 2020, the standard VAT rate should be 
reduced  from  25 %  to  24 %.  In  addition,  the 
government  has  abandoned  plans  to  introduce  a 
recurrent  tax  on  immovable  property,  while  the 
real property transfer tax will be reduced from 4 % 
to 3 %. At the same time, the maximum amount at 
which local governments can set the tax on short-
term accommodation rentals has been increased. 

The  tax  cuts  should  spur  consumption  and 
slightly increase households' disposable income. 
The  decreases  in  VAT  rates  are  expected  to 
support  consumption  to  the  extent  that  they  are 
passed  through  to  consumers.  In  addition,  being 
largely  concentrated  on  essential  goods, 
the 
reductions have the potential to particularly benefit 
(in  relative  terms)  lower  income  households. 
Euromod simulations (15) show that the changes to 
the  personal  income  tax  and  social  insurance 
contributions  should  marginally  increase  mean 
disposable  income  for  households  in  all  income 
deciles. The increase in disposable income will be 
the  highest  in  upper  income  quintiles,  although 
still  very  small  (see  Graph  4.1.6).  This  is  a  result 
of  the  fact  that  lower  income  households  in  most 
cases  already  pay  no  personal  income  tax.  As  a 
result  of  these  changes,  the  progressivity  of  the 
insurance 
tax  and 
personal 
contributions (as measured by the Kakwani index) 
is  projected  to  decline  very  slightly,  but  remain 
relatively  high  in  comparative  terms.  Meanwhile, 
the  positive  effects  of  the  changes  to  social 
insurance  contributions  and  personal  income  tax 
on  employment  may  be  limited,  as  they  do  not 
appear  to  be  sufficiently  targeted  at  making  work 
pay  and 
is 
restrained  by  other  factors  unrelated  to  labour 
income  taxation  (e.g.  skills  mismatches  and  the 
availability  of  alternative  sources  of  income).  In 
this  context,  the  proposed  increase  in  the  ceiling 
for  the  tax  on  short-term  accommodation  rentals 
could  help  reduce  the  large  discrepancy  between 
the tax burdens on different sources of income (see 
Box  4.1.1).  After  the  2014  abolition  of  tax 

insofar  as  employment  growth 

income 

social 

(15)  Simulations were done by the European Commission Joint 
Research  Centre,  based  on  the  EUROMOD  model  using 
2016  EU-SILC  data.  EUROMOD  is  the  tax-benefit 
microsimulation  model  for  the  EU  which  can  simulate 
individuals'  and  households'  benefit  entitlements  and  tax 
contributions) 
social 
liabilities 
according  to  the  rules  in  place  in  each  Member  State. 
Incomes reported in the EU-SILC of 2016 refer to 2015. 

(including 

security 

26 

0.000.050.100.150246810121416182012345% growth% of taxpayers Share of winners in quintile (lhs)Average increase in disposable income (rhs) 
                                                           
 
 
                                                           
4.1. Public finances and taxation* 

Box 4.1.1: Taxation of labour, capital and property income of households 

There is a substantial variation in the tax burden on Croatian households depending on the source of their 
income.  With  one  of  the  highest  home  ownership  rates  in  the  EU (1),  Croatian households  appear  heavily 
skewed  towards  owning  and  investing  in  immovable  property  at  the  expense  of  more  liquid  and  tradable 
asset classes. This may be partly linked to historical causes and low financial literacy, but it may also owe to 
the  relatively  low  costs  of  property  ownership.  Tax  rates  on  income  earned  from  immovable  property  are 
substantially lower than on capital or labour (see Graph 1).  

In particular, revenue from short-term accommodation rental is only subject to a lump sum per-bed tax, and 
is  not  added  to  the  base  for  standard  personal  income  tax  or  contributions.  In  addition  to  being  highly 
regressive, it may provide a disincentive to work. Such a framework further narrows the already constrained 
long-term  property  rental  market,  particularly  in  the  coastal  areas.  This  disproportionately  affects 
lower-income households and young families, and harms worker mobility. Furthermore, it incentivises the 
already  booming  private  accommodation  sector,  crowding  out  investment  in  hotels  (2),  the  segment  with 
higher added value and lower seasonality. Similarly, the design of this tax provides a disincentive to scaling 
up (3).  

Graph 1:  Tax rates on income by sources (lhs) and tourist beds per inhabitant by municipalities (rhs), 2017 

Effective tax rate on short-term accommodation rental equals the sum of flat-rate tax per bed and the sojourn tax, 
divided by gross revenue. 
Source: EUROMOD simulation 2017, Croatian Tourist Board, Ministry of Finance, Croatian Bureau of Statistics, own 
calculations.  

In addition to addressing the aforementioned drawbacks, a more balanced approach in the taxation of income 
from immovable property (compared to labour and capital) could also help reduce regional disparities in the 
taxation of household income and housing prices. The tax reform passed in 2018 brought some changes, but 
retained the lump-sum approach: since 2019, local government units are allowed to establish the per-bed tax 
on their own, albeit within broadly pre-set limits, which makes the effects of this change difficult to forecast.  

(1)  In 2016, 89.9 % of Croatian nationals residing in the country lived in their own home, equal to Slovakia, and second 

only to Romania (95.6 %)  

(2)  In  2017,  households  accounted  for  almost  two  thirds  of  all  tourist  accommodation capacity  in  Croatia.  The  share  of 
tourist  overnight  stays  in  hotels  is  by  far  lower  than  in  any  of  Croatia’s  competitors  in  the  Mediterranean,  and  is 
decreasing. 

(3)  If a taxpayer registers more than 20 beds, the lump sum per-bed tax is replaced with the standard personal income tax, 

i.e. the income adds to the tax base. 

27 

 
 
 
4.1. Public finances and taxation* 

Healthcare  

The healthcare system remains a source of risk 
the  number  of 
for  public  finances.  While 
contributing individuals is increasing steadily, still 
only  around  one  third  of  those  entitled  to  use  the 
public  health  system  pay  full  premiums,  which 
reflects  the  low  employment  rate.  Insurance  for 
non-paying individuals (some 42 % of all insured) 
is  covered  through  state  budget  transfers,  which, 
however,  have  been  consistently  below  the  levels 
required for full coverage, adding to accumulation 
of  debt  in  the  healthcare  system.  In  September 
2018, the total debt was some 4 % higher than the 
year before, with roughly half classified as arrears.  

A higher health insurance premium is expected 
to  improve  the  financial  situation  of  the  health 
care  system.  Since  January  2019,  the  health 
contribution  rate  has  increased  by  1  percentage 
point,  increasing  the  reliance  of  the  system’s 
financing on the working population. According to 
the  authorities’  estimates, 
raise 
contribution revenue by 0.4 % of GDP (an increase 
of  roughly  6 %  of  the  Croatian  Health  Insurance 
Fund’s  total  revenue).  No  measures  are  currently 
planned  to  broaden  the  base  of  paying  users. 
Similarly, no specific plans have been disclosed to 
address the current stock of arrears.  

this  should 

Expenditure on  health care in Croatia remains 
well below the EU average. In 2016, total health 
expenditure  in  the  country  was  7.2 %  of  GDP, 
compared  to  9.9 %  on  average  in  the  EU.  When 
considering  only  public  expenses,  the  amounts 
were  5.6 %  vs 7.9 %  of  GDP.  In  recent  years,  the 
decreasing  trend  in  total  per-capita  spending  on 
health  was  reversed,  but,  at  EUR  1 307  in  2017, 
the level remains less than half the EU average.  

Health outcomes are generally below average in 
the  EU.  At  78.2,  life  expectancy  in  Croatia  is 
substantially  shorter  than  the  EU  average  (81). 
Healthy life expectancy at the age of 65 is 5 years, 
which is one of the lowest in the EU. Smoking and 
alcohol  consumption  are  above  the  EU  average, 
which  is  reflected  in  cardiovascular  and  cancer 
mortalities  being  responsible  for  around  75 %  of 
all deaths in the country. In access to  health care, 
Croatia  fares  better  than  many  other  Member 
States.  In  2017,  the  proportion  of  reported  unmet 
medical  needs  due  to  waiting  times,  cost  or 
distance was at the EU average. However, the high 

proportion  of  unmet  needs  only  due  to  distance 
(much  greater  than  the  EU  average)  remains  a 
concern.  

The system’s structure appears misaligned with 
the  needs  of  the  population.  Expenditure  on 
outpatient  pharmaceuticals  and  other  medical 
goods is well above the EU average (25 % vs 19 % 
of  total  health  expenditure),  which  contradicts  the 
relatively  high  number  of  patients  referred  to 
hospitals.  By  contrast,  inpatient  care  accounts  for 
25 %  of  total  expenditure,  5 percentage  points 
lower  than  the  EU  average,  but  the  number  of 
hospital  beds  per  inhabitant  is  higher  (European 
Commission,  2018e).  Some  hospitals 
the 
country provide services in excess of the limits set 
by  the  Croatian  Health  Insurance  Fund,  while 
some maintain capacities greater than the needs of 
the  population  they  serve.  While  the  authorities 
have  announced  plans  to  increase  the  spending 
limits  in  hospitals  across  the  board,  the  system  is 
likely  to  remain  prone  to  accumulation  of  arrears 
as  long  as  the  spending  limits  are  not  brought 
closer  in  line  with  types  and  amounts  of  services 
provided in each of the hospitals. 

in 

The  National  Hospital  Development  Plan  was 
finally  adopted  in  September  2018.  Building  on 
it  sets 
a  previous  document  for  2015-2016, 
functional integration as one of the main principles 
in  facilitating  modernisation  and  restructuring  of 
hospitals,  as  well  as  in  improving  the  quality  of 
care  they  provide.  Initiated  already  in  2017,  the 
functional integration has progressed slowly and is 
set 
timeline. 
Furthermore,  this  reform  of  the  hospital  system 
does  not  take  full  consideration  of  the  parallel 
initiatives  in  strengthening  outpatient  care  (see 
below). The two processes do not appear to be well 
coordinated,  posing 
risks  of  unsatisfactory 
outcomes.  

to  continue  without  a  specific 

The  primary  care  strengthening  is  on  the 
government’s agenda. Recent amendments to the 
Health  Care  Act  give  the  counties  possibility  to 
buy  certain  types  of  equipment  for  the  health 
centres on their territories. The intention is to give 
these  centres  a  crucial  role  in  the  health  care 
system 
include 
in  Croatia.  Other  measures 
increasing  the  number  of  general  practitioners, 
which is currently below the EU average (17 % of 
the  EU). 
all  medical  doctors  vs  23 % 

in 

28 

 
 
4.1. Public finances and taxation* 

Specialisation will be paid for general practitioners 
who  remain  in  specified  locations  in  the  country 
for  at  least  5  years.  This  should  contribute  to 
addressing  the  problem  of  uneven  distribution  of 
health  resources  in  Croatia  and  the  resulting 
difficult geographical access. 

E-health solutions have the potential to improve 
the  efficiency  of  the  health  care  system  in 
Croatia.  There  are  projects  like  e-prescriptions, 
which  have  been  already  operational  and 
successful — 80 % of prescriptions in community 
pharmacies  are  electronic.  On  the  other  hand, 
e-referrals  or  electronic  health  records  (the  latter 
used by only 3 % of general practitioners) are still 
under  development.  Investment 
in  equipment 
planned  in  the  health  centres  is  expected  to 
improve 
further 
system’s  capacity 
development of e-health services.  

the 

for 

Croatia  lacks  a  long-term  care  strategy  that 
would  cater  to  the  needs  of  older  people.  The 
currently  low  public  expenditure  (0.88 %  of  GDP 
in  2016)  on  long-term  care  is  projected  to  rise  to 
1.22 % in 2070 (European Commission, 2017h), as 
a  result  of  the  rapidly  aging  population.  The 
number  of  people  experiencing  problems 
in 
everyday  life  increases  with  age.  In  the  younger 
elderly  group  (65-74  years)  the  share  is  38.4 %, 
while in the older elderly group (85+) this share is 
as high as 67.9 %. Taking into account all state and 
county  homes  for  the  elderly,  other  homes  and 
foster  care,  there  are  places  for  only  3.68 %  of 
those  older  than  65.  In  addition  to  long  waiting 
lists,  differing  prices  in  state,  county  and  private 
homes, there is an  uneven regional distribution of 
available  places.  Since  2012, the  main  ’assistance 
at home’ service has been steadily decreasing (17). 
As  a  result,  the  burden  of  care  falls  mainly  on 
family  members,  both  as  a  financial  cost  and  a 
barrier to gainful employment.  

(17)  In  2015  it  was  provided  to  3 300  persons  older  than  65, 

compared to 15 500 beneficiaries in 2012. 

29 

 
 
                                                           
4.2.  PRIVATE SECTOR DEBT AND FINANCIAL SECTOR* 

Corporate debt 

The  consolidated  debt-to-GDP  ratio  of  the 
corporate  sector  has  declined  by  more  than  20 
percentage  points  since  2010.  Following  a  sharp 
contraction  by  5.9  percentage  points  in  2017,  the 
corporate  debt-to-GDP  ratio  further  decreased  by 
1.1  percentage  points  in  the  first  half  of  2018,  to 
63.2 % of GDP, still highest among peer countries. 
Since  2016, 
the  reduction  has  been  driven 
primarily  by  a  significant  contraction  of  the 
external  debt  of  both  private  and  public 
non-financial  corporations  (by  4.2  percentage 
points of GDP and 1.4 percentage points, of GDP 
respectively).  With  an  improved  sovereign  risk 
premium 
rate 
management  and  stabilisation  policies  pursued  by 
the  Croatian  National  Bank,  reduced  overall 
exposure  to  external  financing  has  mitigated  the 
foreign  exchange  rate  risk  of  the  non-financial 
corporations. 

exchange 

credible 

and 

the 

in 

loans 

reduced 

domestic 

facilitating 

in  corporate  debt 

Several  other  factors  have  contributed  to  the 
since  2016. 
reduction 
Economic  growth  continued 
the 
reduction  in  corporate  debt,  supported  by  the 
pick-up 
inflation,  along  with  stock-flow 
adjustments, in the form of debt write-offs and the 
continued  appreciation  of  the  domestic  currency. 
the 
Sales  of  non-performing 
indebtedness of non-financial corporations towards 
the 
sector.  However, 
non-performing loans sales seem to have slowed in 
2018  due  to  both  supply  and  demand  factors. 
Lending  transactions  by  the  domestic  banking 
sector to non-financial corporations turned positive 
in  2016  and  throughout  2017  and  2018.  A  large 
the 
roll-up 
settlement preparation process and the  widespread 
refinancing  of  the  external  debt  of  non-financial 
corporations  in  the  domestic  market  supported 
recovery of debt transactions.  

to  Agrokor  agreed  during 

banking 

loan 

Financing  conditions  for  enterprises  continued 
improving  in  2018  and  are  expected  to  remain 
liquidity  provided  by  an 
favourable.  Ample 
expansionary  monetary  policy  allowed  for  further 
reduction  of  interest  rates  on  new  loans  to 
enterprises.  In  September  2018,  interest  rates  on 
new  loans  to  non-financial  corporations  across 
almost  all  maturities,  loan  sizes  and  currency 
denominations  were  on  average  50  basis  points 
lower than at the end of 2017. However, owing to 

the  still  relatively  high-risk  premium  for  Croatia, 
interest rates for non-financial corporations remain 
above  those  in  some  peer  countries,  despite  the 
gradual  reduction  in  country  spreads  for  both 
long-term  and  short-term 
loans.  Furthermore, 
reduction in bank margins and non-interest charges 
due to strong competition in the banking sector led 
to a strong increase in new business loans. Overall, 
the volume of new business loans to non-financial 
corporations  grew  by  12 %  year-on-year  in  the 
12-months up to September 2018, driven primarily 
by 
loans 
denominated  in  a  foreign  currency.  A  significant 
share  of  these  loans  was  used  to  refinance  older 
loans,  now  under  more  favourable  terms.  This 
partially  explains  the  negative  nominal  growth  of 
the  total  non-financial  corporation  loan-stock  of 
2.0 % in the same period.   

foreign  currency 

loans  and 

the 

Corporate debt level is decreasing, but remains 
high  with  a  number  of  vulnerabilities.  Overall, 
by  mid-2018  the  corporate  debt  ratio  was  6.8 
percentage  points  below  its  prudential  threshold 
the 
but  18.2  percentage  points  above 
level 
(18), 
indicating 
fundamentals 
suggested  by 
remaining  risks.  Foreign  currency  exposure  of 
non-financial  corporations  remains  significant; 
around  76 %  of  overall  corporate  debt  (48.2 %  of 
GDP)  is  either  contracted  abroad,  or  denominated 
in  foreign  currency.  However,  given  ample  loan 
refinancing  options  due  to  currently  favourable 
financing 
should  be 
manageable  even  for  non-exporting  firms  with 
larger open foreign currency positions. Interest rate 
risk  further  subsided  as  average  fixation  periods 
for  new  loans  increased  in  2017  and  throughout 
2018.  The  share  of  new  loans  issued  with  a 
variable interest rate or with a fixation period up to 
3  months  fell  from  93 %  in  2012  to  67 %  during 
the  first  three  quarters  of  2018.  However,  the 
‘debt-to-gross 
the 
and 
the  non-financial 
‘debt-to-equity’ 
corporate 
high, 
relatively 
highlighting potential solvency risks. 

financial 
ratios  of 
remain 

conditions 

assets’ 

sector 

risk 

this 

(18)  Fundamentals-based  benchmarks 

are  derived 

from 
regressions  capturing  the  main  determinants  of  credit 
growth and taking into account a given initial stock of debt. 
Prudential  thresholds  represent  the  debt  threshold  beyond 
which the probability of a banking crisis is relatively high, 
minimising the probability of missed crisis and that of false 
alerts.  Methodologies 
in  European 
are 
Commission (2017b) and updates to the methodology have 
been  subsequently  proposed  in  European  Commission 
(2018l). 

describe 

30 

 
 
                                                           
4.2. Private sector debt and financial sector* 

the 

points 

below 

The  household  debt  ratio  is  not  particularly 
high  and  its  risk  profile  is  improving.  In 
mid-2018, the household debt ratio was almost 20 
prudential 
percentage 
country-specific threshold (54 % of GDP), but was 
still  around  8  percentage  points  above 
the 
fundamentals-based  benchmark  (26 %  of  GDP), 
suggesting  that  risks  are  limited,  although  there 
remains  scope  for  some  deleveraging.  Despite 
improvements,  a  significant  share  of  the  stock  of 
loans  is  still  exposed  to  exchange  rate  shocks  or 
interest rate  hikes. Following recommendations to 
credit  institutions  issued  by  the  Croatian  National 
Bank 
in  September  2017,  banks  have  been 
extending  their  offer  of  loans  at  fixed  rates  and 
minimising  the  cost  for  consumers  of  refinancing 
existing  loans  at  variable  rates  into  loans  with 
fixed  rates.  Interest  rates  have  been  decreasing 
since  the  end  of  2015  and  are  expected  to  stay  at 
low levels. Credit risk remains moderate given the 
relatively low level of households’ non-performing 
loans  and  still  moderate  aggregate  credit  growth. 
However,  consumer  lending,  especially  kuna  cash 
loans, have been growing at a much higher rate.  

Housing market 

Despite a strong recovery in 2017, real housing 
prices  remain  significantly  below  the  peak  in 
2007.  Because  of  strong  growth  since  2016,  real 
housing  prices  recovered  to  2012  levels,  but  in 
June  2018,  they  were  still  more  than  25 %  below 
the  peak  in  2007.  Average  real  house  prices  in 
Croatia  grew  by  6.6 %  in  2017.  However,  in  the 
first  half  of  2018  prices  stagnated,  despite  a 
continued drop in interest rates  for housing loans. 
Prices  of 
existing  dwellings  have  grown 
significantly faster since 2016 than prices of newly 
built ones, 7.4 % and 2 % respectively. According 
to  the  price-to-rental  indicator,  housing  prices  are 
still significantly below their long-term average in 
Croatia.  This  can  partly  be  explained  by  a 
combination  of  negative  demographic  trends  and 
an already high rate of home ownership.  

There  are  significant  regional  disparities  in 
housing price developments. In the 18 months up 
to  June  2018,  housing  prices  in  Zagreb  grew  by 
11.8 %,  followed  by  prices  along  the  Adriatic 
coast,  which  grew  5.9 %.  The  rest  of  the  country 
recorded  an  average  1.1 %  decline  in  housing 
prices.  The  number  of  recorded  housing  purchase 
regional 
transactions 

confirms 

large 

also 

Household debt 

Household  debt  as  a  percentage  of  GDP 
stagnated  in  2018  as  new  borrowing  picks  up. 
By  June  2018,  the  debt-to-GDP  ratio  of  the 
household  sector  stood  at  34.2 %,  7.7  percentage 
points below its 2010 peak value. Since 2017, the 
debt  level  has  largely  stagnated  despite  strong 
economic  activity,  due  to  a  moderate  upswing  in 
credit  flows.  In  the  first  9  months  of  2018,  new 
credit  to  households  increased  by  3 %.  Unlike  in 
2017,  credit  standards  for  granting  housing  and 
consumer  loans  tightened  in  2018,  because  of 
legislative changes to the enforcement framework. 
However, strong competition in the banking sector, 
decreasing  costs  of  bank  financing,  and  growth 
expectations  still  facilitate  credit  supply.  Demand 
for  household  loans  remained  strong  in  2017  and 
throughout  2018  as  the  improving  labour  market 
and  rising  wages  helped  to  strengthen  consumer 
confidence. 

The foreign exchange and variable interest rate 
exposure  of  households  has 
substantially 
changed  in  the  last  5  years.  In  September  2018, 
the  share  of  outstanding  kuna  denominated  loans 
stood  at  51 %  of  total  loans,  double  their  share  at 
the end of 2013. During the same period, the share 
of kuna loans in new loans rose from around 40 % 
in  2013  to  73 %  in  2018.  The  shift  started 
following  the  Swiss  franc  loan  conversion,  when 
many clients refinanced their newly converted euro 
denominated  loans  with  kuna  denominated  ones. 
With  the  overall  fall  in  interest  rates,  households 
seem  to  be  less  willing  to  take  on  exchange  rate 
risk.  This  is  especially  noticeable  for  non-house 
purchase loans. Interest rate spreads for such loans 
between  loans  in  kuna  and  those  denominated  in 
foreign  currency  were  around  30  basis  points 
higher  in  2018  than  in  2013.  On  the  other  hand, 
availability  of  kuna  financing  for  banks,  due  to 
expansionary  monetary  policy,  and  a  noticeable 
shift  in  the  composition  of  deposits  towards 
short-term  kuna  deposits,  allowed  banks 
to 
increase  the  supply  of  kuna  loans  significantly. 
Households also reduced their exposure to interest 
rate risk. Average interest rate fixation periods for 
new  house  purchases  loans  are  estimated  to  have 
increased by around 32 months between 2013 and 
2018.  Similarly,  the  share  of  new  long-term 
consumer  and  other  purpose  loans  with  interest 
rate fixation periods of up to 1 year fell from 46 % 
to 29 %.  

31 

 
4.2. Private sector debt and financial sector* 

disparities,  as  more  than  76 %  of  transactions 
occurred  within  only  five  counties  and  the  city  of 
Zagreb  (Tkalec  and  al.,  2018).  Furthermore,  the 
analysis  of  housing  affordability  suggests  higher 
housing  prices  relative  to  income  in  the  coastal 
areas  and  the  city  of  Zagreb.  This  is  in  line  with 
expectations given the large share of housing used 
for  renting  to  tourists  along  the  coast  (see  Box 
4.1).  

market capitalization of around 25 % of GDP. The 
average  market  capitalization  of  the  local  stock 
exchange  represents  a  healthy  share  of  35 %  of 
GDP  in  2018,  despite  Agrokor  related  losses. 
However,  average 
low,  around 
0.75 %  and  investors  held  only  one  third  of  the 
listed shares as portfolio investments. 

turnover  was 

Graph 4.2.1:  Trading volumes at Zagreb Stock Exchange 

Access to finance  

Access  to  bank  loans  is  improving,  also  for 
small  and  medium-sized  enterprises.  Bank 
lending traditionally represents the most important 
source  of  external  financing  for  enterprises  in 
Croatia.  However,  it  remains  subdued,  especially 
for  small  and  medium-sized  enterprises,  despite 
improvements in lending conditions. According to 
the bank lending survey, credit standards on loans 
to  enterprises  have  continued  to  ease  throughout 
2018,  especially  for  short-term  loans  and  loans  to 
small and medium-sized enterprises. According to 
the  latest  findings  from  the  Survey  on  the  Access 
to  Finance  of  Enterprises,  access  to  finance 
remained  a  challenge  for  enterprises  in  Croatia  in 
2018.  Around  11 %  of  small  and  medium-sized 
enterprises in Croatia reported access to finance as 
their most important problem, compared to the EU 
average  of  7 %.  Around  67 %  of  the  companies 
that applied for a bank loan were granted a loan of 
a  full  requested  amount,  compared  with  the  EU 
average of 73 %. Furthermore, 7 % of all surveyed 
small  and  medium-sized  enterprises  did  not  apply 
for a bank loan due to fear of rejection, compared 
to the EU average of 5 %. The  Croatian Bank for 
Reconstruction and Development and the Croatian 
Agency  for  small  and  medium-sized  enterprises, 
Innovations  and  Investments  help  improve  access 
to finance by providing credit lines with subsidised 
interest  and  specific  loans  for  innovation  and 
innovation commercialisation.  

Croatian bond markets remain underdeveloped 
and the stock market has been characterised by 
relatively  low  turnover.  The  corporate  bond 
market  remains  very  small,  limited  to  a  few  large 
issuers.  At  the  end  of  2018,  there  were  seven 
active  corporate 
financial 
institutions,  which  had  bond  listing  on  the  on  the 
Zagreb  Stock  Exchange,  with  an  average  market 
capitalization  of  about  1 %  of  GDP.  The 
outstanding  government  bonds,  in  turn,  had  a 

including 

issuers, 

Source: Zagreb Stock Exchange, own calculations. 

Other  sources  of  financing  for  companies  are 
being  developed.  In  2018,  the  Zagreb  Stock 
Exchange  launched  a  new  market,  with  less 
restrictive  listing  and  reporting  requirements,  for 
small  and  medium  sized  enterprises.  This  market 
enables  small  and  medium-sized  enterprises  to 
make  initial  public  offerings  in  order  to  finance 
inclusive,  long-term  growth  and  development. 
With the establishment of the equity crowdfunding 
platform  for  small  firms and  start-ups, the  Zagreb 
Stock Exchange has become a  company-financing 
hub  providing  its  services  to  companies  at  all 
stages of development.  

Several new initiatives should help increase the 
availability  of  venture  capital  financing.  Over 
the past few years, there has been little progress in 
developing  new  venture  capital  funds  in  Croatia. 
This could be explained in part by the small size of 
the Croatian market, as well as the financial crisis. 
However,  raising  funds  on  the  capital  markets  is 
particularly  relevant  for  innovative  start-ups  with 
high  growth  potential.  The  recently  established 
Venture  Capital  Fund  supported  by  EUR  35 
million from the European Regional Development 

32 

051015202530350809101112131415161718Total value of transactionsbillion HRK0123456780809101112131415161718Total volumebillion 0204060801001201401600809101112131415161718Market capitalisation(shares)billion HRK01230809101112131415161718Average daily number oftransactions (shares)thousand transactions 
 
4.2. Private sector debt and financial sector* 

Table 4.2.1: 

Financial soundness indicators, all domestic and foreign banks 

(1) Defined as accumulated impairments / NPLs. 
(2) For comparability reasons, annualized values are presented. 
Source: ECB - CBD2 - Consolidated Banking data; own calculations. 

Fund,  should  help  improve  access  to  the  equity 
funding  for  start-ups  (19).  However,  the  selection 
of  the  fund  manager  was  delayed.  The  recently 
adopted pension reform allows mandatory pension 
funds  (Pillar  II)  to  invest  part  of  their  managed 
assets  into  funds  supporting  small  and  medium 
enterprises  and  start-ups.  Exposure 
to  such 
investments  is  limited  to  0.2 %  and  0.1 %  of  the 
total  assets  of  A  and  B-risk  category  funds 
respectively.  This  should  free  up  around  100 
million  kuna  for  investment  in  venture  capital. 
Moreover, EU funding from COSME has recently 
supported  two  private  equity  fund  initiatives  that 
are  currently  raising  funds  focusing  on  small  and 
medium enterprises in Croatia and the region. 

Financial sector 

Croatian banks' profitability and solvency have 
continued  to  improve  since  2015.  With  a  return 
on equity of 5.9 % at end-2017, banks' profitability 
was  lower  than  in  end-2016,  largely  because  of 
losses  on  exposures  to  the  Agrokor  Group  (see 
Table 4.2.1).  Profitability  increased  again  in  the 
first  half  of  2018,  as  provisioning  levels  are 
returning  to  levels  comparable  to  those  of  2016. 
While  healthy  profits  and  local  rules  continue  to 
help  banks  maintain  relatively  high  solvency 
ratios,  the  ending  of  the  preferential  0 %  risk 
weighting  for  the  non-kuna  exposures  to  the 
Republic  of  Croatia  at  end-2017  led  to  a  one-off 
reduction in capital ratios in early 2018. The share 
of  direct  bank  financing  from  mother  banks, 
predominantly  in  Italy  and  Austria,  is  low  and 

(19)  Croatia  is  in  20th  position  in  the  EU  (Cyprus,  Malta  not 
included)  for  Venture  Capital  as a %  of  GDP  (Invest 
Europe, 2018). 

decreasing  while  domestic  sources  of  financing, 
mostly  deposits,  increase.  Lending  to  the  private 
sector,  excluding  financial  corporations,  grew  in 
the  12  months  up  to  September  2018  on  a 
year-on-year  basis,  reversing  its  downward  trend 
since 2017. In particular, the overall annual credit 
growth rate was driven by renewed growth in new 
loans  to  non-financial  corporations;  especially 
non-kuna loans (see Graph 4.2.2). 

Graph 4.2.2:  Growth of new business loans (in annual 

volumes) 

New business loans only cover all contracts that specify for 
the first time the interest rate of the loan, including 
renegotiations of the terms and conditions of existing loan 
contracts. The data includes all loans other revolving loans, 
overdrafts, and credit card claims. 
Source: Croatian National Bank. 

Progress in reducing non-performing loans has 
been significant. In September 2018, the stock of 

33 

-15-10-505101514Q115Q116Q117Q118Q1HHNFCHH+NFC% y-o-y2014201520162017q12017q22017q32017q42018q1NPL ratio (all sectors)13.613.010.712.111.710.88.88.9NPL ratio (NFC and households sectors)20.019.116.017.316.515.813.613.6NPL ratio (NFC sector)31.229.924.226.726.325.021.221.1NPL ratio (household sector)12.011.89.79.98.88.47.78.0Coverage ratio(1)54.359.165.862.760.561.362.661.2Return on equity(2)3.9-6.88.93.54.36.15.911.0Return on assets(2)0.5-0.91.20.50.60.80.81.5Total capital ratio20.419.220.821.020.920.221.420.7CET 1 ratio19.417.719.419.719.619.120.219.6Tier 1 ratio19.417.719.419.719.619.120.219.6Loan to deposit ratio92.089.285.385.285.084.882.182.4 
                                                           
 
 
 
 
4.2. Private sector debt and financial sector* 

locally  defined  non-performing  loans  (20)  stood  at 
HRK  26.1  billion,  representing  10.3 %  of  gross 
loans, down  from HRK 32.5 billion, or 12.5 % of 
gross loans, a year ago  (see Graph 4.2.3). Most of 
this  reduction  has  been  thanks  to  loan  sales  in 
2017,  and  despite  the  inflow  of  non-performing 
loans  from  Agrokor  and  related  exposures  (see 
Graph 4.2.4). Two-thirds of this stock continues to 
be  concentrated  in  the  non-financial  corporate 
sector, resulting  in a  non-performing loan  ratio of 
20.5 %, down from 25.9 % a year ago. Among the 
various  corporate  sectors,  the  construction  sector 
continues to account for a significant proportion of 
the 
a 
non-performing  loan  ratio  of  47.6 %,  down  from 
63 % a year ago. The non-performing loan ratio for 
the household sector is 7.3 %, down from 8.1 % in 
2017. 

non-performing 

stock,  with 

loans 

volume of non-performing loan sales, (see Graph). 
This  is  partly  due  to  the  reduced  willingness  of 
banks  to  sell  and  the  investors  to  buy  the 
remaining  assets  on  the  banks’  balance  sheets, 
which  include  assets  that  are  easier  to  work  out 
and thus with a lower internal rate of return. More 
importantly,  a  number  of  measures  that  entered 
into  force  on  1  January  2018  have  lowered  the 
provisioning  coverage  ratio  and  resulted  in  the 
recognition  of  new  non-performing  loans.  While 
the  later  factor  is  clearly  a  one-off,  slowing  sales, 
if 
the 
non-performing loan ratio may remain moderately 
high for an extended period. 

sustained, 

concerns 

raises 

that 

Graph 4.2.4:  Evolution of NPL flows 

Graph 4.2.3:  Asset quality evolution 

NFC: non-financial corporations. Local NPL definition is used. 
Source: Croatian National Bank. 

Despite  these  improvements,  there  are  signs 
that  non-performing  loans  reduction  may  be 
slowing  down.  Non-performing  loan  reduction 
slowed down in early 2018, due to two key factors. 
First, there are early indications of reduction in the 

(20)  Up to 2017 the non-performing loans definition was based 
on the local loan classification rules. Non-performing loans 
cover  partly  recoverable  loans  (i.e.  loans  for  which  there 
exists  objective  evidence  of  partial  impairment)  and  fully 
irrecoverable  loans  (i.e.  loans  for  which  there  exists 
objective evidence of full impairment) in line with IAS39. 
In  2018  IFRS9  was  introduced  and  local  rules  were  fully 
aligned  with  EBA  reporting  requirements  for  non-
performing loans (ITS 680/2014)..  

Local NPL definition is used. 
* June 2018. 
Source: Croatian National Bank. 

The  impact  of  the  Agrokor  crisis  on  the 
banking system appears to be contained for the 
moment. In particular, most of the non-performing 
loans arising from Agrokor’s difficulties in paying 
its  creditors  and  suppliers  have  been  incorporated 
in  2017  results.  A  settlement  was  agreed  in  July 
2018  by  the  firm’s  largest  creditors,  representing 
nearly  80 %  of  the  outstanding  debt.  On  26 
October  2018,  the  Croatian  High  Commercial 
Court  dismissed  all  of  the  appeals  lodged  by 
several  of  the  remaining  debtholders,  effectively 
removing  the  final  obstacle  to  implementation  of 
the  deal.  The  settlement  involves  a  debt-to-equity 
swap  applicable  to  most  of  the  firm’s  outstanding 
debt,  and  corresponding  write-offs  to  ensure  that 
the firm remains solvent. This has not resulted in a 
significant  rise  in  non-performing  loans,  since 

34 

02040608009101112131415161718% of loansCoverage ratioNPLs: HouseholdsNPLs: NFCsNPLs: All-12,000-8,000-4,00004,0008,00012,000101112131415161718*HRK mln.NPL salesOther NPL flowsChange in NPLs from prior period 
 
                                                           
 
4.2. Private sector debt and financial sector* 

its 

for 

core 

Bank 

system, 

Reconstruction 

implementing  some  of  the  issues  identified  as 
operational  inefficiencies  during  last  year’s  ‘asset 
quality  review’  exercise.  Along  these  lines,  the 
and 
Croatian 
Development  has  taken  a  number  of  measures  to 
improve 
implement 
IT 
International  Financial  Reporting  Standard  9  and 
the  European  Banking  Authority  guidelines  on 
non-performing  loans,  and  introduce  a  new  credit 
risk  management  procedures,  including  collateral 
valuation. The ongoing project,  which  was  kicked 
off  in  early  October  2018,  also  aims  to  help 
produce  a  mid-term  strategy  and  ensure  that  the 
institution  has  tools  to  identify  market  gaps  and 
commercial 
prevent 
competition  with 
any 
institutions.  Despite 
developments, 
authorities  have  not  yet  engaged  in  any  concrete 
plan 
for 
Reconstruction  and  Development  to  prudential 
supervision. 

the  Croatian  Bank 

subject 

these 

to 

ruling 

in  October  2017, 

the  Swiss  franc-indexed 

The  conversion  of  CHF-loans  remains  subject 
to  legal  challenges.  Following  Croatia's  Supreme 
Court 
the  High 
Commercial  Court  upheld  in  July  2018  the  ruling 
on  the  legal  nullity  of:  (i)  unilateral  interest  rate 
increases,  and  (ii)  the  foreign  currency  clause  in 
the  case  of 
loans. 
Questions  arise  as  to  how  lower-instance  courts 
will interpret the ruling. For example, it is not clear 
whether  it  applies  only  to  non-converted  Swiss 
franc-indexed loans or more broadly. Moreover, it 
is  not  clear  whether  the  decision  covers  only  the 
outstanding  or  also  the  paid  out  loans.  These 
sources  of  uncertainty  may  affect  the  operating 
environment for banks. 

most  banks  had  already  provisioned  for  such 
losses.  However,  the  refinancing  of  Agrokor’s 
remaining debt, which was issued after the Law on 
in  Companies  of 
Emergency  Administration 
Systemic Importance for the Republic of Croatia in 
April 2017, nevertheless remains a concern.    

interest  rate  exposure  of  households 
The 
remains  high,  but  continues  to  subside  as 
fixed-rate  loans  become  increasingly  common. 
The  share  of  loans  with  fixed  rates  is  increasing. 
At end-2017, 39 % of outstanding loans granted to 
households were loans with fixed interest rates, up 
from  25 %  3  years  ago.  This  is  in  line  with 
recommendations  published  by 
the  Croatian 
National  Bank  in  October  2017  to  mitigate  the 
exposures  of  consumers  to  interest  rate  risk  by 
offering them the possibility to switch to fixed-rate 
loans. The wider use of fixed-rate loans, however, 
has  shifted  the  interest  rate  risk  to  banks.  Some 
banks  are  hedging  against  potential  losses  from 
higher 
interest  rate 
hedging  derivatives  in  kuna  remain  scarce  and 
costly. 

interest  rates.  However, 

the 

from 

significant 

(49 %)  of 

Banks  are  exposed  to  indirect  credit  risk, 
stemming 
currency 
mismatches in the private sector balance sheets. 
While the earnings of most households are in kuna, 
in  June  2018  nearly  half 
their 
outstanding loans was either in a foreign currency 
or  indexed  to  a  foreign  currency,  mostly  euro. 
Households  do  have  significant  foreign  currency 
deposits,  representing  two-thirds  of  the  total, 
which,  if  matched,  could  lower  risks.  However, 
foreign  currency  deposits  have  been  declining; 
down from 75 % at end-2014, sight kuna deposits 
have  become  increasingly  popular  as  a  result  of 
lower interest rates on term  and savings accounts. 
In 
financial  positions  of 
non-financial  corporations  are  quite  large,  with 
non-kuna  loans  and  deposits  amounting  to  67 % 
and 36 %, respectively. 

the  open 

turn, 

The  Croatian  Bank  for  Reconstruction  and 
Development is taking a number of measures to 
implement  recommendations  from  the  2017 
Asset 
Review 
Quality 
(PricewaterhouseCoopers,  2017)  exercise,  but 
immediate  plans  to  address 
there  are  no 
deficiencies  in  its  supervisory  framework.  The 
management 
for 
of 
is  currently 
Reconstruction  and  Development 

the  Croatian  Bank 

35 

 
4.3.  LABOUR MARKET, EDUCATION AND SOCIAL POLICIES* 

4.3.1.  LABOUR MARKET DEVELOPMENTS 

The labour market has further improved with a 
rapid  fall  of  the  unemployment  rate.  On  the 
back of solid GDP growth, the unemployment rate 
in Croatia fell further over the past year – to 7.8 % 
in Q4 2018 – almost reaching its pre-crisis level. In 
2018, long-term unemployment dropped compared 
to  the  previous  year,  reaching  3.3 %  in  Q3  2018. 
The  youth  unemployment  rate  and  the  share  of 
young  people 
in 
employment,  education  or  training  also  decreased 
considerably,  but  remain  high  (at  22.7 %  in  Q4 
2018  and  15.4 %  in  2017,  respectively).  Overall, 
despite  the  recent  positive  developments,  Croatia 
still  displays  high  unemployment  rates  relative  to 
the EU average, especially for young people.  

(aged  15-24  years)  not 

Graph 4.3.1:  Activity rate by age and educational 
attainment level, 2017 

activity  rate  of  low-skilled  workers  is  one  of  the 
lowest  in  the  EU  and  has  even  declined  over  the 
period  2014-2017.  Low-skilled  workers  have 
significantly lower participation rates than medium 
and  high-skilled  workers  across  all  age  groups. 
Among  medium  skilled  workers,  those  aged  over 
40  years  display  much 
lower  activity  rates 
compared  to  the  EU  average.  Since  the  medium 
skilled  represent  a  much  larger  share  of  the 
working-age population than on average in the EU, 
this largely drives the overall lower activity rate in 
Croatia, as well as the much lower activity rate of 
older  workers  (55-64),  which  remains  at  43.6 % 
(compared  to  an  EU  average  of  60.6 %),  despite 
some improvement in recent years. There are also 
marked  differences  in  employment  rates  of  the 
low-skilled  as  compared  to  medium-  and  high-
skilled,  and  this  gap  keeps  increasing  (21)  (see 
Graph 4.3.3).  

Graph 4.3.2:  Reasons for inactivity by age and sex, 2016 

Low reliability of data for low-skilled between the ages 20-29 
in Croatia. 
Source: Eurostat. 

Source: LFS, own calculations. 

Activity  and  employment  rates 
in  Croatia 
remain  low,  especially  for  certain  groups.  In 
2017,  the  overall  activity  and  employment  rates 
(for people aged 20-64 years)  were at 71.2 % and 
63.6 %  (64.9 %  in  Q3  2018),  respectively,  well 
below  the  corresponding  EU  averages  of  78.0 % 
and  72.1 %  (73.2 %  in  Q3  2018).  Labour  market 
participation is low among both  men and  women, 
with  a  gender  activity  gap  of  10.6  percentage 
points in 2017, which is still below the EU average 
(12.1 percentage  points).  High-skilled  workers  are 
more  active  in  the  labour  market  than  on  average 
in  the  EU.  By  contrast,  at  43.4 %  in  2017,  the 

and 

exits 

labour  market 

Early 
care 
responsibilities  play  an  important  role  for 
inactivity. According to Labour Force Survey data 
on self-declared reasons for not seeking work, the 
main  reason  for  low  activity  of  older  inactive 
people (55-64 years) in 2016 was early retirement 
(see  Graph  4.3.2).  For  older  women,  personal, 
family  or  care  responsibilities  also  played  a  role 
(22 %).  Disability  or  illness  is  a  frequent  reason 
across  all  age  groups  for  both  sexes,  while 

(21)  The employment rate of low-skilled was at 34.7 % in 2017 
significantly lower than the employment rates of medium- 
(64.1 %) and in particular high-skilled persons (81.5 %). 

36 

010203040506070809010020-2425-2930-3435-3940-4445-4950-5450-5460-64EU28 LowEU28 MediumEU28 HighHR Low*HR MediumHR High%020406080100M.W.M.W.M.W.M.W.25-3435-4445-5455-64OtherDisability or illnessPerso., fam. or care resp.EducationRetirementDiscouraged% 
 
 
 
 
 
                                                           
4.3. Labour market, education and social policies* 

personal,  family  or  care  responsibilities  are  the 
main  reason  for  inactivity  of  women  in  the  age 
group  25-54.  At  35 %,  the  employment  rate  of 
people  with  disabilities  is  well  below  EU  average 
(48.1 %).  

Graph 4.3.3:  Relative dispersion of employment rates of 

different skills groups in EU 

(Williams  and  Horodnić,  2017).  It  ranges  from 
work  with partly  undeclared  pay (envelope  wages 
(24))  to  fully  undeclared  employment.  Despite 
efforts  by  the  authorities  to  address  the  issue (25), 
in  the  private  sector  undeclared  work  accounted 
for 14.2 % of total labour input in 2013, of which 
66 % referred to employees and 34 % to the  self–
employed (Williams and Horodnić, 2017).  

Graph 4.3.4:  Share of employers reporting labour shortages 

as the main factor limiting their activity by 
sector 

(1) Annual indicator based on the average of four quarters. 
(2) The relative dispersion of employment rates is equal to 
the ratio of the absolute dispersion and the overall 
employment rate. The absolute dispersion of employment 
rates is measured as the sum of the differences of 
employment rates for each skill group from the overall 
employment rate, weighted by the size of each group. 
Source: Eurostat, own calculations. 

Source: European Business and Consumer Survey, European 
Commission. 

Undeclared  work  absorbs  part  of  the  labour 
input.  Estimates  of  the  size  of  the  shadow 
economy  in  Croatia  vary  across  studies  (22).  A 
substantial share of the shadow economy is related 
to  a  rather  large  incidence  of  undeclared  work, 
which refers to wages that workers and businesses 
taxes  and  social 
to  avoid 
do  not  declare 
contributions  or 
regulation. 
Undeclared  work  not  only  negatively  affects 
government  revenues  (in  terms  of  uncollected 
taxes  and  social  contributions)  and  businesses  by 
affecting 
field,  but  also 
individuals through breaches of workers’ rights (23) 

labour  market 

level  playing 

the 

(22)  According to Stefanov et al.  (2017), the shadow  economy 
accounted  to  27.7 %  of  GDP  in  2015,  the  third  highest 
share in the EU. Medina and Schneider (2018) estimate the 
shadow  economy  to  account  for  between  17.2 %  and 
26.5 %  of  GDP  in  2017,  the  second  highest  share  among 
EU members. 

(23)  61 % of employees receiving envelope wages in 2015 were 
asked to  accept additional  work  conditions  to  those  stated 
in  the  written  contract  or  terms  of  employment,  such  as 
longer  working hours (34 %), additional tasks (27 %) and 

report 

increasingly 

Employers 
labour 
shortages,  despite  the  still  relatively  high 
unemployment  rate.  The  share  of  employers 
reporting  labour  shortages  as  a  major  factor 
constraining 
increased 
substantially  (European  Business  and  Consumer 
Survey). In 2017, this share was 16.9 %, compared 
to only 1.9 % in 2013, but it is broadly in line with 
the EU average of 16.8 % (in 2017) (26). Over the 
same period, the number of vacancies recorded by 

their  production  has 

underutilisation  of  statutory  entitlement  to  annual  leave 
(19 %). 

(24)  In  Croatia,  in  2015  at  least  6.6  %  of  declared  employees 
received  an  additional  undeclared  ('envelope')  wage  from 
their  formal  employer.  The  officially  declared  wage  of 
nearly  half  of  these  workers  was  the  minimum  wage 
(Stefanov et al. 2017). 

(25)  Targeted  incentives  to  register  employees,  seasonal  work 
vouchers,  awareness-raising  campaigns  on  the  harmful 
the  economy  and 
effects  of  undeclared  work  on 
(European 
simplification  of 
Commission, 2016e; Williams et al. 2017b). 

registration  procedures 

(26)  Average  of  three  sectors  (industry,  construction  and 
services sector), weighted by their share in employment. 

37 

0.000.050.100.150.200.250.30PTNLDKEEATDELVCZSIFISECYLUELMTESROPLHULTFRSKIEITBGHRBE20172010201401020304050131415161718IndustryConstructionServices% of employers 
 
 
                                                           
 
                                                                                   
4.3. Labour market, education and social policies* 

the  Croatian  Employment  Service  also  increased 
substantially, from 143 000 to more than 250 000. 
As illustrated by Graph 4.3.4, labour shortages are 
most pronounced in the construction sector and in 
industry.  Within  services,  evidence  points  at 
shortages in tourism and IT.  

Graph 4.3.5:  Evolution (% change) of the population by 

municipalities, 2012-2017 

The population estimates are based on administrative data. 
Source: Croatian Bureau of Statistics, own calculations 

Various  factors  contribute  to  the  increase  of 
labour  shortages.  The  increased  labour  demand 
induced  by  the  pickup  in  economic  activity  is  not 
matched  by  labour  force  growth,  also  due  to 
combined  effects  of  ageing  and  emigration.  Skills 
gaps  also  appear  to  be  an  important  driver  of  the 
shortages. Finally, low job quality may also play a 
role in discouraging labour supply. Indeed, Croatia 
has the highest share of employees in the EU with 
a contract not exceeding a duration of three months 
(7.1 %  vs  EU28:  2.3 %  in  2017),  likely  reflecting 
also  the  relevance  of  the  (very  seasonal)  tourism 
sector  in  the  economy.  The  emerging  labour 
shortages  are  expected  to  contribute  to  upward 
pressure  on  wages  (see  Chapter  1).  Addressing 
these  challenges  calls  for  prioritising  investment 
aimed  at  improving  access  to  employment  for  all 
jobseekers and to anticipate skills needs.  

Increasing  emigration  flows  contribute  to  the 
challenges  in  the  labour  market.  The  negative 
net  migration  flows  over  the  last  decade  (see 
Graph  4.3.6) have become  more pronounced after 
Croatia's  accession  to  the  EU  in  2013,  as  it 
happened  for  other  Central  and  Eastern  European 
Countries  in  the  early  2000s.  This  phenomenon 

appears to affect the country  unevenly  (see Graph 
4.3.5).  Between  2012  and  2017,  most  counties 
recorded  negative  population  change,  presumably 
also as a result of emigration. Some parts of inland 
Croatia and the eastern counties lost 25 % or more 
of  their  resident  population.  By  contrast,  some 
municipalities  from  the  coastal  counties  and  the 
city  of  Zagreb  recorded  an  increase  in  their 
population. Labour Force Survey data show that in 
2017  Croatians 
living  abroad  had  a  higher 
employment  rate  than  Croatian  residents  (79.8 % 
and  63.6 %,  respectively);  they  also  had  a  lower 
share  of  tertiary  educational  attainment  (17.4  % 
and 22.4  % respectively),  which is  not a common 
feature among migrants from other Member States. 
A  combination  of  factors  influences  mobility 
flows,  including  differences  in  per  capita  income 
levels,  quality  of  institutions,  and  employment 
prospects  (Atoyan  and  al.  2016).  In  addition, 
Croatia has one of the highest shares of its working 
age  population  (20-64)  living  in  another  EU 
Member  State  (14  %  vs  3.8 %  average  of  EU 
Member States, in 2017), which may also play as a 
pull 
factor.  The  migration  outflows  clearly 
contribute  to,  and  are  set  to  aggravate  if  they 
continue, the emerging labour shortages discussed 
in the paragraphs above. While there is awareness 
at  political  level  of  the  challenges  posed  by  the 
and  demographic 
trends 
current  migration 
developments,  a  coordinated  policy  response  is 
still missing, with current measures mostly focused 
towards improving the situation of young families 
and their children. 

Concerns  remain  on  the  efficiency  of  active 
labour  market  policy  measures  in  reaching 
vulnerable  groups.  In  2016,  the  coverage  of 
active labour market policies remained low, at just 
7 %  of  persons  wanting  to  work.  Similarly,  the 
coverage  of  unemployed  youth  remains  very  low 
and  worsened  in  2017,  when  the  share  of  people 
not  in  employment,  education  or  training  (aged 
under  25  years)  supported  by  the  Croatian  Youth 
Guarantee scheme declined to 45 %, 9 percentage 
points  less  than  the  previous  year.  The  2018 
labour  market  policies 
package  of  active 
introduced  a  number  of  improvements,  including 
increased  subsidies  for  employment  and  self-
employment  and  simplifications  in  procurement 
procedures  for  the  provision  of  education  and 
training. Access to "occupational training for work 
without  commencing  employment",  originally 
designed  for  young  people  aged  18-29  years,  has 

38 

 
 
4.3. Labour market, education and social policies* 

Graph 4.3.6:  Population migration 

The migrations are registered at local level. Emigrants 
include persons who left permanently the country or who 
were absent for more than one year from their permanent 
residence and who reported their absence. However, 
based on data collected in the main recipient countries, it 
appears that the figures provided by the CBS probably 
underrepresent the actual migration numbers, even taking 
into account the differences between nationality and 
country of previous residence. 
Source: Croatian Bureau of Statistics, own calculations. 

4.3.2.  SOCIAL PROTECTION SYSTEM 

The  proportion  of  the  population  at-risk-of 
poverty  or  social  exclusion  is  declining,  but 
remains above the EU average. In 2017, it stood 
at  26.4 %,  compared  to  22.5 %  in  the  EU, 
following  improvements  in  the  two  sub-indicators 
on severe material deprivation and people working 
in  low  work  intensity  households  (see  Graph 
4.3.7).  The  poverty  gap  (29)  and  the  persistent  at-
risk-of  poverty  rate  (30)  remain  steadily  high  (in 
2016,  at  30.7 %  and  14.5 %,  respectively).  The 
capacity of social transfers (other than pensions) to 
reduce  poverty  decreased  from  35.5 %  in  2015  to 
24.8  %  in  2017.  As  labour  market  conditions 
improved,  household  incomes  and  their  relative 
poverty 
social 
benefits  remained  largely  unchanged  over  the 
period. Government spending on social protection 
amounted to 15.3 % of GDP in 2015 (EU average: 

increased,  whereas 

threshold 

the 

as  well 

been  extended  to  people  aged  30+  without  work 
experience  targeting  occupations  in  social  care, 
education,  health  and  culture.  Overall,  however, 
some  of  the  most  used  measures  (such  as  public 
works), 
underutilised 
as 
reskilling/upskilling measures, have not yet proven 
to significantly increase the employability of their 
participants,  which  may  indicate  lack  of  efficient 
targeting  (27)  (Munta,  2018).  The  capacity  of  the 
Croatian Employment Service to provide adequate 
assistance  to  vulnerable  groups  remains  limited 
(28).  There  is  no  structured  cooperation  between 
employment and social services in the provision of 
integrated support. Further support to active labour 
market  policy  measures  and 
in 
modernising  labour  market  institutions  have  a 
potential  to  improve  access  to  employment  for 
vulnerable groups. 

investments 

While  showing  signs  of 
improvement,  the 
impact of social dialogue on policy preparation 
and implementation exhibits weaknesses. Social 
dialogue  within  the  framework  of  the  National 
Economic and Social Council is an established and 
gradually developing practice. However, it appears 
of  mostly  formalistic  nature,  with  low  impact  of 
social  partners  on  design  and  implementation  of 
legislative  proposals  (Eurofound,  2018).  Not  all 
relevant  regulations  and  policies  are  included  in 
the  work  plan  of  this  Council  and  social  partners 
are  sometimes  excluded  from  working  groups  on 
topics  of  interest  (e.g.  legislation  on  student 
employment).  The  fragmentation  of  trade  unions 
also poses a challenge and limits their capacity to 
engage efficiently in social dialogue.  

(27)  For  example,  in  2017  public  works,  which  are  primarily 
intended for the low-skilled and the long term unemployed, 
saw increased participation by medium skilled unemployed 
persons and by people with shorter unemployment spells.  
(28)  Croatia  has  one  of  the  highest  rates  of  registration  and 
utilization  of  job  searching  services  offered  by  the  Public 
Employment  Service  (PES).  Still,  the  percentage  of  total 
PES staff directly servicing clients is low (at 64 %). Next 
to that, there are large regional disparities in the capacity of 
local PES offices and quality of services offered by them.  

(29)  The poverty gap measures 'how poor' the poor actually are. 
It  is  calculated  as  the  difference  between  the  median 
equalized  disposable  income  of  people  below  the  at-risk-
of-poverty threshold and the at-risk-of-poverty threshold. 
(30)  Share of people who are currently poor and were poor also 

two out of the three previous years. 

39 

-50000-40000-30000-20000-100000100002000008091011121314151617ImmigrantsEmigrantsNet migration 
 
                                                           
 
                                                           
4.3. Labour market, education and social policies* 

employment  rate  compared  with  the  EU  average 
(35 % in Croatia vs. 48.1 % in the EU). Measures 
aimed at including persons  with disabilities  in the 
labour market or education should be stepped up. 

Graph 4.3.7:  At-risk-of-poverty or social exclusion rate and 
its components (AROP, SMD, LWI) 

Detailed definitions of the indicator and its components are 
available in annex C. 
Source: Eurostat. 

reduction 

capacity  of 

The  poverty 
the 
Guaranteed  Minimum  Benefit  remains  weak. 
The  income  of  a  Guaranteed  Minimum  Benefit 
beneficiary,  expressed  as  a  share  of  the  poverty 
threshold,  was  at  55 %  in  2016  (32).  The  benefit 
does  not  appear  to  pose  financial  disincentives  to 
work, as the income of a beneficiary  was 41 % of 
an  average  low  wage  earner  (vs  46.1 %  EU 
average).  The  beneficiaries,  on  average,  have  low 
levels  of  educational  attainment  and  modest 
employment experience. Based on 2015 data, only 
one  quarter  of  Guaranteed  Minimum  Benefit 
recipients  found  a  job  within  one  year,  reflecting 
the  need  for  more  targeted  support  to  facilitate 
labour  market  inclusion  and  better  coordination 
between social services providers and the Croatian 
Employment 
of 
transitioning into employment is almost double for 
recipients  who  have  3-year  vocational  education 
(Matković and Caha, 2017). 

Service.  The 

likelihood 

largest 

fraction 

19.1 %).  The 
is  spent  on 
contributory  social  insurance  benefits  (disability 
pensions, sickness benefits and old age  pensions), 
whereas  less  than  10 %  of  total  social  protection 
expenditure 
for  non-contributory 
programs  (families  and  children,  housing  and 
social  exclusion).  Investments  to  foster  active 
in 
inclusion  could  play  an 
promoting  equal  opportunities  and  addressing 
material deprivation. 

is  available 

important 

role 

Labour  market  outcomes  are 
important 
determinants  of  poverty  in  Croatia.  In-work 
poverty  stood  at  5.5 %  in  2016  and  is  below  the 
EU  average  (9.6 %)  indicating  a  strong  negative 
correlation between the presence of some  work in 
the  household  and  its  exposure  to  the  risk  of 
poverty.  In  2016  the  at-risk-of-poverty  rate  for 
households  with  low  work  intensity  was  30 %  in 
Croatia (EU average  of 40.1 %), and much higher 
for  households  with  very  low  work  intensity 
(63.4 % in  Croatia vs 57 % EU average) (31). The 
labour  market 
to  be  an 
important channel for escaping poverty: more than 
70 %  of  poor  people  who  get  a  job  also  escape 
from poverty, and this is the highest transition rate 
in the EU (based on 2011-2013 data, ESDE, 2016). 
The  Croatian  unemployment  benefit  (calculated 
for people previously earning 67 % of the average 
wage)  does  not  appear 
to  provide  adequate 
protection  from  poverty,  given  its  short  duration 
and its reduction by more than 50 % after 6 months 
of unemployment. 

therefore  continues 

Age, gender and disability are factors that have 
an  impact  on  poverty  levels.  The  poverty  rate  is 
higher  in  households  where  a  woman  is  the  only 
earner  of  labour  market  income.  The  at-risk-of 
poverty or social exclusion rate for persons above 
65 in Croatia is  much higher compared to the  EU 
average 
respectively), 
especially  for  women,  pointing  to  the  adequacy 
challenge  of  current  and  future  pensions.  Persons 
with  disabilities  face  one  of  the  highest  at-risk-of 
poverty  or  social  exclusion  rates  in  the  EU 
low 
(38.8 %),  probably  reflecting 

(32.8 %  vs  18.2 %, 

their  very 

(31)  Very  low  work  intensity  is  defined  as  working  less  than 
20 % of the total work potential of a household during the 
past year. Low work intensity 20-45 %; medium 45-55 %; 
high 55-85 % and very high 85-100 %. 

(32)  According  to  the  Benchmarking  Framework  on  Minimum 
Incomes conducted within the SPC Committee. For details, 
see European Commission, 2018g. 

40 

051015202530351011121314151617At-risk-of-poverty-or-social-exclusion rateAt-risk-of-poverty rateSevere material deprivationPeople living in low work intensity households% 
                                                           
 
                                                           
4.3. Labour market, education and social policies* 

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

The European Pillar of Social Rights is designed as a compass for a renewed process of upward convergence 
towards better working and living conditions in the European Union (1) . It sets out twenty essential principles 
and rights in the areas of equal opportunities and access to the labour market; fair  working conditions; and 
social protection and inclusion. 

is  still  critically 

Croatia  faces  several  challenges  with  regards 
to  a  number  of  indicators  of  the  Social 
Scoreboard  supporting  the  European  Pillar  of 
Social  Rights.  Despite  improvements  in  the 
labour market as reflected by a decreasing (long-
term)  unemployment  rate,  challenges  related  to 
equal  opportunities,  access  to  the  labour  market 
and  social  protection  and  inclusion  remain.  The 
employment  rate 
in 
particular  for  youth,  older  workers,  low  skilled 
and  people  with  disabilities.  This  reflects  the 
widespread use of early retirement and challenges 
regarding  the  efficiency  of  active  labour  market 
policies.  Although  the  share  of  early  school 
leavers  in  Croatia  is  well  below  the  EU  average, 
challenges  remain  with  regard  to  the  quality  of 
education,  both  for  young  people  and  adults. 
While  improving,  the  share  of  people  at-risk-of 
poverty  or  social  exclusion  is  still  above  the  EU 
average,  partly  related  to  the  limited  poverty 
reduction capacity of social benefits.  

low, 

Although  improving,  the  rate  of  young  people 
(15-24)  not 
in  employment,  education  or 
training  (NEET)  remains  very  high.  The  share 
of  NEETs  increased  between  2014  and  2017, 
further distancing this population from the labour 
market.  The  majority  of  NEETs  in  Croatia  have 
secondary education, in particular from vocational 
schools.  There  is no national  tracking  system  for 
VET  graduates  which  could  help  analyse  the 
performance  of  new  graduates  in  the  labour 
market, identify skills needed and ultimately help 
improving 
labour  market 
relevance  of  VET  programmes.  The  introduction 
of such system, together with the already established Career Guidance Centres (CISOK centres) and the local 
level youth organizations would allow designing prevention activities and targeting specific interventions. 

the  quality  and 

The implementation of the curricular reform takes first steps with the pilot initiative School for Life in 
the year 2018/2019. The experimental implementation of the curricular reform was launched in March 2018 
with the selection of 74 pilot schools (around 6 % of all schools in Croatia). During the pilot period, Croatia 
will invest around EUR 25 million in school equipment upgrades, part of which comes from EU funds, and 
the  reform  rollout  will  include  new  textbooks  to  be  delivered  in  both  paper  and  digital  format.  The  new 
curricula, developed through a comprehensive drafting and assessment process, adopt the 'learning outcomes 
approach', which shifts the classroom focus to the pupils’ experience.  

(1)  The European Pillar of Social Rights was proclaimed on 17 November 2017 by the European Parliament, the Council 
and  the  European  Commission:  https://ec.europa.eu/commission/priorities/deeper-and-fairer-economic-and-monetary-
union/european-pillar-social-rights/european-pillar-social-rights-20-principles_en  

41 

 
 
 
 
 
 
 
4.3. Labour market, education and social policies* 

relate  to  establishing  a  systematic  approach  to 
deinstitutionalisation,  rather  than  implementing 
individual  projects,  and  to  the  need  for  increased 
investments. 

The Croatian pension system faces a significant 
adequacy  challenge,  partly  addressed  by  the 
recent  pension  system  reform.  According  to  the 
Croatian  Pension  Insurance  Institute,  the  ratio  of 
contributing  workers  to  pension  beneficiaries  was 
very  low,  at  1.2  in  August  2018. This  reflects  the 
unfavourable  demographic 
trends  (ageing  and 
emigration)  as  well  as  the  existence  of  many 
pathways to early retirement (34). Around 41 % of 
pensioners  have  less  than  30  years  of  service, 
whereas less than 15 % of them in 2016 received a 
pension based on 40 or more qualifying years. The 
benefit  ratio  (average  pension  as  a  share  of  the 
average wage) is set to decline from 32 % in 2016 
to  22 %  in  2070  (European  Commission,  2017h). 
Moreover, in 2017, the aggregate replacement ratio 
(35)  stood  at  41 %,  one  of  the  lowest  in  the  EU. 
This  results  in  a  significant  drop  in  pensioners' 
living  standards  upon  retirement,  as  reflected  in  a 
high  risk  of  poverty  or  social  exclusion.  The  net 
theoretical 
is 
expected  to  further  decrease  by  2056  (36).  For  an 
average  earner  with  as  many  as  40  years  of 
contributions, their rate will have fallen by 16.4 pp 
(from  56.6 %).  Two  additional  working  years 
would increase the theoretical replacement rate by 
1.6  percentage  points.  Therefore,  an  increase  in 
retirement  age  and  career  length  results  in  higher 
pension  entitlements.  The  pension  system  reform 
in  December  2018,  among  other 
adopted 
objectives,  aims  at 
length  of 
working lives – see Box 4.3.2. 

rate  of  pensions 

replacement 

increasing 

the 

(34)  Employment  rate  of  older  workers  (55-64)  at  40.3 %  in 

2017 is far below the EU average of 57.1 %. 

(35)  The  ratio  of  income  from  pensions  of  persons  aged 
between 65 and 74 years and income from work of persons 
aged between 50 and 59 years. 

(36)  Theoretical replacement rates are calculated as the level of 
pension  income  in  the  first  year  after  retirement  as  a 
percentage of individual earnings at the moment of take-up 
of pensions. For further details, see European Commission, 
2018m. 

different 

counties, 

The  authorities  have  taken  steps  to  categorise 
social benefits provided at the local level. Social 
protection  expenditure  of  sub-central  government 
units, at local and county level, accounted for less 
than  0.9  %  of  GDP  in  2017.  However,  there  are 
large  differences  in  per  capita  social  spending 
across 
fiscal 
reflecting 
capacities  of  the  local  government  units.  Around 
60 % of total expenditure was allocated to finance 
pre-school education,  whereas less than 20 %  was 
spent  on  cash  or  means-tested  benefits.  The 
authorities are aligning the classification of data on 
the 
the 
social  benefits  at 
nomenclature  of 
the  European  System  of 
integrated  Social  Protection  Statistics.  This  would 
result  in  an  improved  information  flow  and  more 
efficient monitoring of the benefits administered at 
the  local  and  the  central  level,  in  turn  allowing  a 
more  efficient  distribution  of  funds  and  better 
targeted social policies. 

level  with 

local 

as 

the  number  of 

The  move  from  a  model  based  on  institutional 
care  to  one  relying  on  support  for  family-  and 
community-based care for children who cannot 
stay  with  their  families  and  the  disabled  faces 
challenges.  In  2017,  there  was  an  increase  in  the 
number  of  children  deprived  of  a 
family 
environment  or  with  families  in  socio-economic 
hardship  who  were  living  in  residential  care 
institutions, 
adoptions 
decreased (33).  The  newly  adopted  Act  on  Foster 
Care  is  expected  to  improve  the  situation.  Some 
the 
progress 
deinstitutionalisation  of  adults,  including  of  those 
with  disabilities.  However,  relevant  legislative 
initiatives  such  as  the  Family  Act  and  the  Act  on 
Social  Welfare  have  not  yet  been  adopted.  The 
the 
with 
main 
deinstitutionalisation  process  relate  to  the  co-
operation  between  health,  education  and  social 
services  (in  particular  at  the  local  government 
sustainability  of 
long-term 
level)  and 
community-based  care  services,  which  require  a 
more  efficient  funding  model.  Further  challenges 

concerns 

respect 

made 

been 

has 

the 

to 

in 

(33)  This  refers  also  to  the  age  category  below  3,  despite  the 
law  stating  that  children  below  the  age  of  3  should  be 
placed  in  institutions  only  exceptionally  and  for  the 
shortest period of time. The average duration of placement 
for children lasts four years. 

42 

 
                                                           
 
                                                           
4.3. Labour market, education and social policies* 

Box 4.3.2: The 2018 Pension System Reform 

In December 2018, the parliament adopted an important package of pension system reforms 
that  entered  into  force  in  2019.  The  purpose  of  the  reforms  is  multifaceted  and  can  be 
summarised  in  three  main  objectives:  first,  addressing  structural  design  inconsistencies,  which 
resulted in an unfair treatment of certain cohorts of pensioners; second, improving pension system 
adequacy  through  longer  working  lives;  and  third,  strengthening  the  institutional  setup  and 
performance of the 2nd pillar. On the first objective, the government proposes to extend the 27 % 
supplement of the pension entitlement (that is currently paid out to individuals receiving a pension 
from the 1st pillar only) to all pensioners in a proportional way (1), while retaining the possibility 
for all  to opt-out of the 2nd pillar and shift  savings to the  1st pillar at retirement.  The aim of the 
authorities was to find an equitable solution that would avoid severely undermining the 2 nd pillar. 
According to government's estimates, mainly low-wage earners would find it convenient to move 
back to the 1st pillar, as well as workers that have a short contributory period under the 2nd pillar. 
The authorities also plan to increase the minimum pension by 3.13 % from mid-2019, and enable 
the  accumulation  of  a  supplementary  contribution  period  of  six  months  per  child  for  the 
calculation of the pension entitlement of the parent. On the second objective, the reform proposal 
includes:  (i)  accelerating  the  planned  increase  in  the  statutory  retirement  age  to  67,  bringing  it 
forward  from  2038  to  2033;  (ii)  accelerating  the  equalisation  of  retirement  age  for  men  and 
women, brought forward to year 2027; (iii) increasing penalties for early-retirement and bonuses 
for  deferred  retirement,  while  retaining  the  relatively  large  gap  of  five  years  between  early  and 
statutory retirement age; (v) widening the possibility to work part-time while receiving a pension; 
and  (vi)  streamlining  the  list  of  arduous  and  hazardous  professions  benefitting  from  more 
favourable pension entitlements,  while preserving a number of special pension  schemes (e.g. for 
military personnel and police). 

A  dedicated  set  of  measures  addresses  the  design  of  the  compulsory  funded  2nd  pillar.  The 
measures aim at increasing the efficiency and performance of the compulsory funded 2nd pillar, as 
well  as  the  voluntary  3rd  pillar.  The  legislative  acts  introduce  more  stringent  rules  to  tackle 
potential  conflict  of  interest  arising  in  the  private  funds  and  lower  caps  on  membership 
management  fees  paid  by  2nd  pillar  members.  The  amended  Acts  also  modify  some  of  the 
investment rules, introducing a new investment category, which allows pension funds to invest in 
infrastructural projects in Croatia within prescribed limits. Furthermore, all 2nd pillar members can 
choose the risk profile of their pension fund (2), though a new default option is foreseen for those 
who  do  not  express  their  choice  upon  first  employment.  The  amended  Acts  enable  the  Croatian 
Pension  Insurance  Institute  to  establish  a  public  pension  insurance  company  that  would  be  in 
charge of the payout of annuities from the 2nd and 3rd pillar. On pension insurance companies, the 
proposed  legislation  also  introduces  new  governance  rules  for  cross-border  transactions  and  for 
managers  (in  terms  of  fitness  and  probity),  new  requirements  in  terms  of  capital  shares  and 
technical  reserves,  a  cap  on  certain  administrative  costs  and  the  obligation  for  the  insurance 
companies  to  adjust  the  annuity  payments  to  the  consumer  inflation  rate  twice  a  year.  The  new 
legislation allows life insurance companies to pay-out 3rd pillar annuities (under certain conditions 
of compliance  with the relevant legislative rules). Furthermore, among other  measures,  2nd pillar 
pensioners  can  request  a  lump-sum  payment  of  15 %  of  their  2nd  pillar  savings  upon  retirement, 
provided their pension is at least 15 % higher than the 1st pillar minimum pension.  

(1)  Pensioners  covered  by  both  the  1st  and  2nd  pillar  would  receive  a  supplement  27 %  for  the  contribution  period  until 
December 2001 and a supplement of 20.25 % for the years after 2002 when they started paying also into the 2nd pillar. 
For  an  explanation  of  how  the  27 %  supplement  in the  current  system  works,  see  European Commission 2018e  and 
2018f.  

(2)  Under  the  2nd  pillar,  pension  funds  in  Croatia  are  required  to  offer  three  different  funds  knowns  as  A,  B  and  C 
categories. They differ by their investment and risk profile with A-funds having the highest risk level and C-funds the 
lowest.  

43 

 
 
 
 
4.3. Labour market, education and social policies* 

rate 

exclusion 
for  children  by  educational 
attainment  of  their  parents,  at  70.9 pp.  in  2016,  is 
one of the highest in the EU, indicating substantial 
inequality  of  opportunity  (38).  The  early  school 
leavers'  gap  between  people  with  and  without 
disabilities  remains  higher  than  the  EU  average 
(15.7 %.  vs  the  EU  average  of  12.6 %).  In  higher 
education,  students  from  better-educated  family 
backgrounds  tend  to  be  overrepresented  in  the 
student population (Doolan et al. 2018). However, 
the number of students with lower socio-economic 
status  has  increased  and  measures  to  increase  it 
in 
further  have  been  outlined  for  2019-21 
‘National  Plan 
the  Social 
Dimension  in  Higher  Education  adopted  by  the 
Government on 3 January 2019. Further funding of 
e.g.  scholarships,  transportation  or  infrastructure 
for tertiary education would support  access that is 
more  equal.  Additional  investments  would  be 
required, in particular for vulnerable groups and in 
less developed areas to ensure equal access to and 
provision of quality education at all levels. 

for  Promoting 

The  implementation  of  the  curricular  reform 
has been launched in the form of a pilot project. 
In order to increase the overall quality of education 
and  teaching,  a  set  of  reformed  general  education 
curricula  have  been  introduced  in  74  schools  in 
Croatia  as  part  of  the  pilot  project  ‘School  for 
Life’,  and  36,000  teachers  have  already  received 
online and face-to-face training. The results of the 
pilot  phase  are  monitored  and  evaluated  on  the 
‘School  for  Life’  website  and  the  national  rollout 
of  the  reform  is  planned  for  autumn  2019. 
Investing  in  teachers’  training  and  increasing  the 
attractiveness of the profession is needed to ensure 
their  engagement  in  planned  school  reforms,  and 
especially  to  enable  the  necessary  increase  of 
teaching  staff  where  needed.  In  terms  of  digital 
skills, Croatia ranks as one of the lowest in the EU. 
Despite  recent  improvements  and  government 
initiatives (39), further efforts will be needed in this 
area.  

4.3.3.  EDUCATION, TRAINING AND SKILLS 

systemic  regional 
There  are  pronounced 
differences  in  the  coverage  of  early  childhood 
education  and  care  in  Croatia.  In  the  period 
between 2014 and 2016, 7.2 % of all kindergarten-
aged  children  in  Croatia  lived  in  municipalities 
that  did  not  have  a  kindergarten  programme,  and 
this  was  the  case  for  17.4 %  of  all  nursery-aged 
children  (Dobrotić  et  al.  2018).  In  2016,  formal 
childcare  enrolment  in  Croatia  for  the  0-3  age 
group stood at 15.6 %, one of the lowest in the EU 
(29.9 %  EU  average),  and  for  children  4-6  years 
old it was 75.1 % (EU average of 95.5 %). Croatia 
has  earmarked  investments  in  the  area  of  early 
childhood  education  and  care  from  both  national 
and EU funds. Yet, the challenge will be to ensure 
a lasting effect of these investments, particularly in 
areas  that  do  not  have  sufficient  resources  to 
provide  early  childhood  education  and  care  to  all 
children  in  need.  Given  the  current  trends,  in  the 
absence  of  a  review  of  the  early  childhood 
education and care funding model, Croatia is likely 
to remain below the 95 % Education and Training 
2020 benchmark (37). 

to 

by 

the 

15-year-olds, 

the  OECD’s  Programme 

Educational attainment in Croatia is influenced 
by  socio-economic  differences  as  well  as  by 
disabilities.  The  variation  in  scores  in  science  of 
Croatian 
educational 
background  of  parents,  was  relatively  limited, 
for 
according 
International  Student  Assessment.  However,  a 
number of other indicators show a significant link 
between the socio-economic status and educational 
attainment (European Commission, 2018h). In the 
the  share  of  pupils  who  had 
assessment, 
participated in early childhood education and care 
is  20  pp.  lower  for  families  with  low  education 
levels  compared  to  that  of  families  with  at  least 
one  highly-educated  parent  (the  gap  at  the  EU 
(European 
average 
Commission/EACEA/Eurydice/Eurostat, 
2014). 
The  gap  between  the  at-risk-of-poverty  or  social 

pp) 

is 

7 

(37)  Kindergarten  costs  account  for,  on  average,  more  than 
80 %  of  the  expenditures  under  the  relevant  function  in 
cities  and  municipalities.  However,  there  are  significant 
differences 
in  kindergarten  expenditures,  particularly 
among  municipalities  from  developed  and  less  developed 
counties.  In  the  most  developed  counties,  municipalities 
spend  more 
their  Family/Children 
expenditures  on  kindergartens,  while  this  share  drops  to 
less than 30 % in municipalities from the poorest counties.  

than  90  %  of 

(38)  The  gap  is  calculated  as  the  percentage  point  difference 
between  the  AROPE  for  children  of  low-skilled  parents 
(less than primary, primary and lower secondary education) 
and  of  children  whose  parents  are  high-skilled  (have 
tertiary education). This calculation is affected also by the 
employment levels of parents, which are lower for the low-
skilled. 

(39)  According to LFS data, the proportion of ICT specialists in 
total  employment  remained  stable  at  3.3 %  in  2017  after 
having  increased  from  2.7 %  in  2015.  The  share  of 

44 

 
                                                           
                                                           
4.3. Labour market, education and social policies* 

of  occupation  and  qualification  standards  should 
lead  to  the  creation  of  new  programmes  better 
aligned with labour market needs.  

and 

education 

vocational 

Reform  efforts  in  vocational  education  and 
training  include  the  establishment  of  regional 
competences centres and a pilot project of dual 
vocational education and training. In May 2018, 
the  authorities  established  a  national  Network  of 
Regional  Centres  of  Competences  in  vocational 
education  and  training.  Their  objective  is  to 
designate  places  of  excellence  that  will  offer 
training 
regular 
programmes,  but  also  lifelong  learning  and  other 
forms  of 
formal  and  non-formal  education. 
Following adoption of the Network,  in July 2018, 
25 vocational education and training schools were 
appointed to the Regional Centres of Competences 
(40).  A  strong  cooperation  with  vocational 
education  and  training  schools  from  the  regular 
network  and  employers  at  the  local  level  will  be 
important to ensure the long-term sustainability of 
the  centres.  In  addition,  the  authorities  have  also 
presented  a  new  model  for  the  Croatian  dual 
education  and  an  experimental  programme  called 
"Dual Education in VET". The programme is to be 
delivered  in  11  vocational  education  and  training 
schools  across  Croatia  and  aims  at  addressing 
challenges  related  to  inadequate  practical  training 
and 
to  entrepreneurial 
competences.  

insufficient  attention 

Challenges  related  to  the  quality  and  access  to 
adult  education  have  not  been  addressed. 
Croatia performs below the EU average within the 
benchmarking  framework  on  adult  skills  and 
learning.  The  participation  rate  in  adult  education 
is steadily decreasing, at 2.3 % in 2017, compared 
to  the  EU  average  of  10.9 %.  In  particular,  there 
are  extremely  low  participation  rates  for  those 
most in need of additional education, such as low-
qualified (0.6 %) and unemployed persons (1.5 %). 
In  line  with  the  objectives  of  the  EU  Council 
Recommendation on Upskilling Pathways, there is 
a need in Croatia to establish a framework for the 
assessment,  provision  and  validation  of  skills 
aligned with labour market needs, including a clear 
re-definition  of  responsibilities  across  public 

(40)  They will cover the following sectors / sub-sectors Tourism 
and  Hospitality,  Mechanical  Engineering,  Electrical 
Engineering  and  Computing,  Agriculture  and  Health,  the 
aim being to achieve a balance between regional presence 
and high levels of quality.  

in 

institutions  per  capita 

Fragmentation and lack of transparency hinder 
the  efficiency  of  the  tertiary  education  system. 
Croatia has among the highest numbers of tertiary 
the  EU 
education 
(European  Commission/EACEA/Eurydice,  2018). 
Despite  the  efforts  made  through  the  Croatian 
Qualifications Framework, the link between labour 
market  needs  and  tertiary  education  enrolment 
remains weak. The legal framework that regulates 
admissions grants autonomy to universities, which 
have  an  incentive  to  keep  enrolment  quotas  high 
because  of  tuition  fees  revenues.  In  addition, 
faculties  and  universities  have  no  obligation  to 
report  the  use  of  their  budgets  beyond  what  is 
needed  for  national  accounts  reporting,  which 
reduces  the  capacity  of  the  government  to  target 
investments  in  tertiary  education  and  reduces  the 
systems’  efficiency,  despite  the  efforts  made 
through 
and 
scholarship schemes. 

performance 

agreements 

the 

Vocational education and training is not aligned 
with  labour  market  needs.  In  2016,  the  share  of 
vocational education and training students at upper 
secondary  level  remained  stable  at  70 %,  20  pp. 
above the EU  average.  However, the employment 
rate of vocational education and training graduates 
decreased from 70.3 % in 2016 to 59.4 % in 2017 
(despite  an  overall  improvement  of  the  labour 
market  in  this  period),  pointing  to  the  need  of 
modernising the  vocational education and training 
sector  in  Croatia.  In  2016,  the  percentage  of 
students  undertaking  programs,  which  included 
work based learning was at 27.3 %, in comparison 
to  the  43.8 %  EU  average.  Amendments  to  the 
Vocational  Education  and  Training  Act  were 
adopted  in  March  2018.  They  introduced  a  new 
national  framework  for  Vocational  Education  and 
Training  curricula, 
the  National 
curriculum  for  vocational  education  and  training, 
adopted in July 2018, the development of modular 
and  outcome-based  sectorial  curricula  and  greater 
autonomy  for  vocational  education  and  training 
schools in the design of school-level curricula. The 
establishment of 25 sectoral councils is supporting 
the  implementation  of  the  Croatian  Qualifications 
Framework. In particular, stepping up the adoption 

foreseeing 

graduates 
in  Science,  Technology,  Engineering  and 
Mathematics  (STEM)  in  the  20-29  years  old  cohort  went 
up,  (17.1  graduates  per  1000  individuals  (CBS,  2016), 
compared  to  EU  average  of  19.1  (2015)).  To  improve 
further,  Croatia  plans  to  offer  17  000  STEM  scholarships 
by the end of 2021. 

45 

 
                                                                                   
                                                           
4.3. Labour market, education and social policies* 

institutions.  However,  the  adoption  of  the  Adult 
Education Act, aimed at addressing some of these 
challenges,  has  been  further  postponed.  It  is 
foreseen for the Act to regulate the self-assessment 
and  external  evaluation  of  adult  education 
institutions,  the  professional  licensing  system  for 
teaching staff, the development of adult education 
the  Croatian 
programmes 
Qualifications  Framework),  and  non-formal  and 
informal learning programmes. 

line  with 

(in 

4.3.4.  INVESTMENT NEEDS  

inclusion  are 

Increased  investment  in  skills,  education  and 
training, aimed at promoting employability and 
important  for  raising 
social 
Croatia’s  productivity  and  long-term  inclusive 
growth. Employment rates remain low, especially 
for  vulnerable  groups,  pointing  to  the  need  to 
improve  access  to  employment  for  all  jobseekers 
and  to  anticipate  skills  needs.  This  also  includes 
aligning  education  and  training  with  the  labour 
market  needs.  The  share  of  the  population  at  risk 
of  poverty  or  social  exclusion  remains  high 
emphasising  the  need  to  foster  policies  of  active 
inclusion  with  a  view  to  reducing  poverty  and 
promoting equal opportunities with regard to child 
and long-term care services. 

46 

 
 
4.4. COMPETITIVENESS REFORMS AND INVESTMENT* 

4.4.1.  PRODUCTIVITY 

Croatia's labour productivity is still low in most 
in  professional, 
sectors.  Labour  productivity 
scientific and technical activities, ICT and finance 
is broadly in line with that of peers, though below 
the  EU  average  (see  graph  4.4.1).  By  contrast, 
labour  productivity  in  manufacturing  lags  behind. 
However,  it  has  improved  in  recent  years,  and  in 
parallel  with  employment  growth,  underscoring 
genuine 
the  efficiency  of 
production.  Measured  productivity  in  agriculture 
has  also  been  rising,  but  mostly  on  account  of  a 
strong decline in employment. 

improvements 

in 

Graph 4.4.1:  Labour productivity (GVA per worker) by 

sector, 2017 

(1) NACE sectors: C = Manufacturing; F = Construction; G-I = 
Trade, transport; J = ICT; K = Finance and M-N = Professional, 
scientific and technical activities 
(2) Peers: SI, HU, SK, CZ, PL  
Source: Eurostat, own calculations 

At  firm  level,  productivity  slumped  during  the 
crisis  in  the  largest  and  most  productive  firms 
and has not yet recovered. In manufacturing and 
construction, labour productivity peaked in 2007 in 
real  terms  across  the  entire  distribution  of  firm 
sizes,  particularly  in  the  largest  firms,  which  tend 
to  be  the  most  productive  ones  (see  graph  4.4.2). 
Following  the  financial  and  economic  crisis,  it 
declined  year-on-year  for  almost  a  decade.  The 
largest  productivity  losses  took  place  among  the 
most  productive  firms, 
to  a  gradual 
downward convergence of firm-level productivity. 

leading 

Obstacles  to  productivity  growth  in  the  least 
productive sectors and to re-allocation of labour 

and capital away from such sectors result in low 
productivity  growth.  Productive  resources  are 
concentrated  in  sectors  with  relatively  low  labour 
productivity,  as  reflected  in  one  of  the  lowest 
scores in the efficiency of labour allocation in the 
EU  (European  Commission,  2018c).  This  means 
that  overall 
labour  productivity  could  be 
substantially  improved  by  fostering  productivity 
growth  in  such  sectors  and  by  facilitating  labour 
reallocation to  more productive sectors.  Structural 
impediments  to  the  reallocation  of  the  factors  of 
production,  ranging  from  skill  gaps  to  the  high 
presence of the state in the economy and excessive 
product  and  service  market  regulation,  help 
explain Croatia's low allocative efficiency score. 

Graph 4.4.2:  Real labour productivity in manufacturing and 

construction by firm size 

(1) Average real GVA by employee in selected quantiles of 
the firm size distribution, from smallest firms (P5) to largest 
ones (P95), through median-sized firms (P50). 
(2) Construction (right graph), manufacturing (left graph) 
Source: CompNet. 

Business environment and digitalisation 

rate 

its 
continues 

largely  maintained 
but 

level  of 
Croatia 
competitiveness 
lag 
to 
significantly  behind  peers.  The  real  effective 
exchange  rate (41)  appreciated  by  4.2  %  since 
largely  driven  by  continuous  nominal 
2016, 
exchange 
appreciation.  Nevertheless, 
substantial cost competitiveness gains made during 
the  recession  are  largely  preserved  as  the  real 
effective  exchange  rate  remains  significantly 
below  its  pre-crisis  level.  Nominal  unit  labour 
costs  increased  in  2018  for  the  first  time  since 
2009  reflecting  modest  productivity  growth  and 
rising  wages  due  to  labour  market  pressures. 
Furthermore,  the  sharp  growth  in  export  market 
shares  (by  19.9  %  cumulatively  in  the  five  years 

(41)  The real effective exchange rate is a measure of a country's 
price  competitiveness  relative  to  its  principal  competitors. 
It  is  deflated  by  the  HICP  index  against  a  panel  of  42 
countries.  A  rise 
loss  of 
competitiveness. 

index  means  a 

the 

in 

47 

020,00040,00060,00080,000100,000120,000CFG-IJKM-NPeer min.Peer av.Peer max.HREU 28in 2010EUR-200204060801001201401600204060810121416p5p25p50p75p95k EUR-200204060801001201401600204060810121416p5p25p50p75p95k EUR 
 
 
 
                                                           
4.4. Competitiveness reforms and investment* 

the  growing  need  for  information  technology 
specialists  expressed  by  small  and  medium-sized 
enterprises  (European  Commission,  2019a)  (see 
Section 4.3). 

State-owned enterprises 

in  many  sectors  of 

Slow  progress  in  management  and  disposal  of 
state-owned  enterprises  entails  their  continued 
strong  impact  on  the  economy.  Their  large 
presence 
the  economy 
continues  hampering  allocative  efficiency  and 
(European  Commission, 
productivity  growth 
2017c).  The  new  act  on  the  management  of 
state-owned  assets  was  adopted  in  June  2018. 
However,  the  substantial  delay  in  its  adoption 
postponed  the  planned  introduction  of  measures 
aimed  at  speeding  up  the  activation  of  assets  and 
disposal  of  minority  shares 
in  state-owned 
enterprises.  In  2018,  the  sale  of  assets  has  thus 
standard  public 
through 
continued  mostly 
tendering  procedures,  with  fewer  successfully 
completed  calls  and  lower  revenue  than  the  year 
before. 

The list of companies ineligible for privatisation 
has  been  reduced  and  streamlined.  These 
companies  are  now  included  in  a  single  list  of  39 
entities of special interest. Most of them  maintain 
strong  presence,  and  even  dominant  positions,  in 
their sectors. In particular, state-owned companies 
fully dominate the rail sector; where there is large 
scope  to  improve  efficiency,  productivity  and 
quality  of  services  (see  Section  4.4).  The  number 
of  companies  eligible  for  privatisation  continues 
expanding, but no clear privatisation strategy is in 
place.  This  has  resulted  in  companies  being 
privatised only as a measure of last resort at times 
of 
for 
severe 
recapitalisation. 

financial  distress  or  need 

Measures  to  improve  corporate  governance  in 
state-owned  enterprises  are  progressing  slowly. 
The new Code of Corporate Governance has been 
adopted  in  all  majority  state-owned  enterprises, 
and  mid-term planning and performance reporting 
have  been  made  obligatory.  Yet,  a  clearer 
commitment 
in 
improving 
state-owned  enterprises 
their 
performance remains weak.  

is  needed,  as 

governance 

to 

looks  at 

since  2012),  slowed  to  0.4  %  in  2018,  reflecting 
the  fading  impact  of  Croatia’s  EU  accession.  The 
World Economic Forum's Global Competitiveness 
the  broader  non-cost 
Index,  which 
competitiveness  of  countries,  shows  Croatia  is 
significantly  less  competitive  compared  to  peers. 
This  implies  that  Croatia’s  institutions,  labour 
market  and  business  dynamism  are  particularly  in 
need of improvement.   

business 

environment 

Croatia's 
remains 
burdensome,  but  the  identified  best  practices 
within the country offer scope for improvement. 
When  looking  at  the  subnational  indicator  of 
Doing  Business  in  Croatia,  there  are  substantial 
differences  in  regulatory  performance  among  the 
five studied cities (Zagreb, Rijeka, Split, Varaždin 
and Osijek). Therefore there is potential to lift the 
national  average  by  replicating  good  identified 
practices  within  the  country,  such  as  starting  a 
business  in  Split  or  dealing  with  construction 
permits  in  Varaždin  (42).  As  part  of  the  efforts  to 
facilitate doing business in Croatia, the authorities 
have  committed  to  reducing  the  administrative 
burden on companies. Based on the Standard Cost 
Model, the burden in the economy is estimated to 
correspond to 3 % of GDP. The completion of the 
burden reduction in 2019 is expected to lift around 
20 % of the cost-equivalent burden. 

Croatian  enterprises  are  slowly 
integrating 
digital technologies. With 15.5 % of enterprises at 
a  high  and  very  high  level  of  digital  intensity, 
Croatia  is  behind  the  EU  average  of  18 %. 
However,  Croatian  companies  are  above-average 
users of cloud technologies and take advantage of 
the  opportunities  offered  by  online  commerce: 
17.1 % of small and medium-sized enterprises sell 
online,  similar  to  the  EU  average  of  17.2 % 
(European  Commission,  2019a).  Croatia  is  taking 
several initiatives that will help small and medium-
sized enterprises digitise further (such as eBusiness 
and  eFees),  for  example  by  enabling  electronic 
payment  of  administrative  fees  and  charges  and 
access to tax administration files, health insurance, 
the pension system. More investment efforts could 
be  made  to  foster  digitisation  among  small  and 
medium-sized  enterprises,  including  by  ensuring 
that the education and training system responds to 

(42)  Doing Business in the European Union 2018 (Subnational 
series): Croatia, the Czech Republic, Portugal and Slovakia 
(World Bank, 2018a). See also Section 4.4.3. 

48 

 
                                                           
4.4. Competitiveness reforms and investment* 

Research and development 

in  R&D 

to  filling 
is 

Croatia’s  R&D  intensity  is  low  and  its  small 
and  medium-sized 
enterprises  are  weak 
innovators.  The  overall  R&D  intensity  in  2017 
amounted to 0.86 % of GDP, equally split between 
the  public  and  private  sectors.  Based  on  recent 
trends, Croatia  will not reach its national target of 
1.4 % of GDP by 2020, though the  reintroduction 
of  tax  breaks  for  R&D  in  2018  (see  section  4.1) 
the  gap.  Business 
may  contribute 
investment 
largely 
low 
concentrated in large companies in pharmaceutical, 
telecommunications, 
food 
industries.  Meanwhile, 
the  2018  European 
Innovation  Scoreboard  shows  a  decline  between 
2010  and  2017  in  all  three  aspects  of  small  and 
medium-sized  enterprises  innovation:  product  and 
process  innovations;  marketing  and  organisational 
innovations; 
and  medium-sized 
small 
enterprises  innovating  in-house.  As  a  result,  the 
overall  score  of  Croatia  in  this  area  was  72 %  of 
the  EU  level  in  2017  (European  Commission, 
2018k).  

agriculture 

and 

and 

and 

Graph 4.4.3:  Business and public R&D intensity 

to 

and 

poor 

Excessive fragmentation of the science base and 
policy shortcomings affect the quality of public 
research.  The  share  of  Croatia's  total  scientific 
publications  that  are  among  the  top  10 %  most 
cited publications worldwide is rising slightly, but 
compared  to  the  EU  average  (11.1 %)  it  remains 
very low at 4.2 %. Lack coordination and effective 
management  in  research  and  innovation  policies 
leads 
inadequate 
targeting 
prioritisation  of  support  instruments.  In  addition, 
some of the undertaken reforms of public research 
institutes and universities remain unfinished. With 
every faculty having a separate legal entity status, 
it is difficult to develop a university-wide vision or 
set  a  strategic  direction  (Kralj  and  al.,  2011). 
Performance  criteria  for 
institutional  funding, 
formally  introduced  in  2013,  are  still  not  being 
used,  and  as  a  result,  project-based  funding 
allocation  is  not  competitive.  Internationalisation 
and international co-publications are rare (43). Still, 
some  excellence  niches  in  ICT,  biomedical  and 
natural sciences exist at the Universities of Zagreb 
(Faculty  of  electrical  engineering),  Rijeka  and  the 
Ruđer  Bošković  Institute,  and  the 
increasing 
numbers  of  graduates  in  the  field  of  computing 
places Croatia among the best performing Member 
States  (44).  The  Ericsson-Nikola  Tesla  partnership 
with the University of Zagreb on ICT is a good yet 
isolated example of science-business cooperation.  

(43)  Croatia  ranks  24th 

international  co-
publications  as  a  share  of  total  (European  Commission, 
2018k). 

the  EU  by 

in 

(44)  Croatia  ranks  9th  in  the  EU  by  computing  graduates  per 

thousand population aged 25-34 (Eurostat) 

R&D intensity measures spending on research and 
development as a share of GDP. 
Source: Eurostat, own calculations. 

49 

0.00.20.40.602030405060708091011121314151617Public R&D intensity (GOVERD + HERD)Business R&D intensity (BERD)% of GDP 
 
                                                           
4.4. Competitiveness reforms and investment* 

Box 4.4.1: Investment challenges and reforms in Croatia 

Macroeconomic perspective  

The  protracted  recession  made  a  lasting  effect  on  investment  activity  in  Croatia,  in  both  the  private  and 
public  sector.  While  still  well  below  the  pre-crisis  level,  private  investment  has  been  recovering  steadily 
since  2015,  in  line  with  the  positive  macroeconomic  outlook  and  supported  by  increasingly  favourable 
financing conditions. With the halting of the large infrastructure campaign in the aftermath of the financial 
crisis, public investment has been more than halved to date, and is expected to continue relying on the so-far 
limited  absorption  of  EU  funding.  Overall,  investment  in  Croatia  is  expected  to  continue  recovering  at 
moderate pace over the forecast horizon.  

Assessment of barriers to investment and ongoing reforms 

As  broadly  positive  macroeconomic  trends  continue,  the  business  environment  remains  insufficiently 
conducive to investment. Fragmented public administration, as well as insufficient administrative capacity at 
regional and local level, weighs on the overall capacity to attract and implement investment, particularly as 
regards  the  absorption  of  EU  funding  (see  Section  4.4).  The  high  corporate  sector  debt  still  constrains 
financing,  while  capital  markets  remain  underdeveloped  and  alternative  sources  of  equity  financing  are 
largely underutilised (see Section 4.2).  

Selected barriers to investment and priority actions underway  

(1) Some measures have been implemented to reduce parafiscal charges and administrative burden, but the 
persisting weaknesses in the public administration and the judiciary hamper service delivery to businesses, 
including  the  still  cumbersome  business  registration  and  lengthy  proceedings  in  civil  and  commercial 
litigation. (2) Investment in the digital economy is constrained due to low take-up of high-speed broadband, 
despite wide availability, and extremely low take-up of ultrafast broadband.  

In  Croatia,  the  national  development  bank  is  Hrvatska  banka  za  obnovu  i  razvitak  (HBOR).  Its  main 
activities  include  promoting  exports  and  supporting  the  development  of  SMEs.  Roughly,  76 %  of  newly 
approved loans in 2017 were used to finance investment. HBOR’s loan portfolio amounted to around 6.8 % 
of GDP in Q12018.  

Measures to reduce fragmentation and improve 
innovation 
the  efficiency  of  research  and 
policies  are  lagging.  As  a  precondition  to  access 
ESIF-funding,  in  2016  Croatia  introduced  the 
'smart  specialisation'  strategy  2016-2020  (RIS3), 

fostering 

aimed  at 
innovation,  overcoming 
fragmentation  in  the  system  and  ensuring  that 
R&D activities are organised around key economic 
priorities. However, its implementation is lagging. 
Centres of Competence and Centres of Excellence 

50 

 
 
4.4. Competitiveness reforms and investment* 

rights for architects and a significant liberalisation 
of  taxi  services  have  been  implemented  recently. 
tax 
Also,  residence  restrictions  for  certified 
the  2017 
advisors  have  been  removed  and 
accounting  law,  which  introduced  compulsory, 
licensing  for  accountants  was  repealed.  Finally, 
Croatia  is  now  working  with  the  World  Bank  on 
the  preparation  of  two  national  action  plans 
covering 
regulated  professions. 
Meanwhile,  the  key  big  restrictions  remain  in 
place.  

around  20 

Environment and energy  

from 

towards 
The  shift  away 
landfilling 
separate  collection  and  recycling 
is  slow. 
Landfilling  of  municipal  waste  accounts  for  77 % 
of total waste, considerably above the EU average 
(24 %).  Croatia  also  scores  low  in  terms  of 
recycling,  with  only  21 %  of  waste  materials 
recycled,  compared  to  an  EU  average  of  46 % 
(Eurostat).  Therefore,  Croatia  is  at  risk  of  not 
reaching the 50 % preparation for re-use/recycling 
target  on  municipal  waste  by  2020  (European 
Commission,  2016x).  Reaching  the  even  more 
ambitious and binding target of 65 % by 2035 will 
require  shifting  investments  further  up  the  waste 
hierarchy.  In  2017,  the  long-awaited  national 
Waste Management Plan 2017-2022 was adopted, 
but  its  implementation  faces  delays.  Improving 
in  waste  management 
Croatia's  performance 
requires 
in  waste 
investment 
infrastructure.  

substantial 

While  water  supply  networks  are  relatively 
developed, sanitation in general is lagging. Data 
available only up to 2011 shows that around 86 % 
of  the  population  was  connected  to  the  public 
water  supply  system  (Eurostat).  The  key  issue 
remains  a  high  leakage  rate,  at  44 %  compared  to 
the  EU  average  of  23 %  (European  Commission, 
2017w).  Moreover,  some  areas  do  not  meet  the 
quality  requirements  for  drinking  water,  for 
instance  Eastern  Slavonia.  The  development  of 
public sewage systems lags considerably behind as 
in  2015  only  54.6 %  of  the  population  was 
connected  to  the  sewage  systems  (Eurostat).  The 
estimated investment needed to ensure appropriate 
collection  and 
is 
considerable  (around  2.9  billion  euro)  (European 
Commission,  2017y).  The  size  of  the  challenge 
calls for an effective prioritization strategy (within 
a National Investment Plan). 

treatment  of  wastewater 

to 

are 

clear 

Both 

intended 

are in the process of being established or are still to 
deliver 
schemes 
outcomes. 
implemented  along  other  measures,  which  are 
improve 
lagging  behind 
connections between academia and businesses. As 
a  result,  the  funding  for  policies  to  support 
businesses  and  innovation  (EUR  1.665  billion 
from the ERDF) has not yet been used in full (45). 
In  an  effort  to  overhaul  the  RIS  3  governance,  in 
July 2018, an inter-ministerial National Innovation 
Council  was  set up to oversee its implementation. 
Thematic Innovation Councils formally established 
in  September  2018  are  yet  to  bring  any  concrete 
results.  In  addition,  there  is  the  intention  to 
strengthen  the  monitoring  of  smart  specialisation 
strategy  and  other  policy  instruments  with  a  view 
evidence-based 
basis 
to 
policymaking.  Recent  analysis  done  by 
the 
Croatian  government  together  with  the  World 
Bank  could  be  used  to  prioritise  interventions 
under the smart specialisation strategy and reform 
innovation environment. 

creating 

for 

a 

4.4.2.  MARKET FUNCTIONING AND INVESTMENT 

Investment  gaps  are  pronounced  in  research 
and  development,  environment  and  transport. 
Better-targeted government investment in research 
and development can spur progress towards a more 
innovative  economy.  Similarly,  investments  are 
required to improve the quality and connectivity of 
the underdeveloped railway infrastructure, but also 
urban  transport.  Croatia  also  requires  substantial 
investment in waste and water management, which 
are underdeveloped.  

Regulated professions and business services 

in 

the 

restrictions 

services  are  being 

Some 
regulation  of 
professional 
relaxed. 
(European  Commission, 
Commission  analysis 
2016z)  shows  that  restrictiveness  of  regulation  in 
Croatia remains higher than the EU average for six 
of 
is 
the  seven  analysed  professions.  This 
especially the case for lawyers (most restrictive in 
the  EU),  architects  and  engineers.  Some  reform 
measures,  such  as  the  loosening  of  marketing 
restrictions  for  lawyers,  abolition  of  exclusive 

(45)  Only  5.5  %  of  ERDF  allocations  earmarked  for  the 
implementation  of  RIS3  have  been  spent  by  beneficiaries 
by the end of 2018 (SFC 2014 reporting system). 

51 

 
                                                           
4.4. Competitiveness reforms and investment* 

EU (Eurostat). All of the above indicates potential 
to  scale  up  energy  efficiency  (World  Bank, 
2018b),  in  particular  by  increasing  efficiency  of 
district  heating  and  supporting  smart  grids  and 
metering. 

target 

its  2020 

Croatia  has  reached 
for 
renewable  energy,  but  there  is  potential  to 
further  exploit  wind  and  solar  power.  In  2016, 
the share of renewable energy was 28.3 % (against 
17 %  on  average  in  the  EU),  notably  thanks  to 
Croatia's  strong  hydropower  industry.  The  2020 
target for the share of renewable energy in energy 
consumption  (20 %)  has  therefore  been  reached. 
Still,  Croatia  has  potential  to  further  develop 
renewable  energy  sources  in  a  cost-effective  way, 
as  in  2016  intermittent  wind  and  solar  capacity 
accounted for just 11 % of installed grid-connected 
power  generation  capacity  (against  a  EU  average 
of  26 %).  Developing 
in 
particular benefit Croatia’s island regions. 

renewables  could 

Graph 4.4.4:  Final energy consumption in 2015 

on 

the 

is  an 

depend 

important 

in  general  and  tourism 

in 
The  economy 
particular 
sustainable 
management  of  natural  resources.  With  its 
location  and  natural  attractions, 
advantageous 
Croatia 
tourist  destination. 
Excessive reliance on tourism, however, can  have 
negative  impact  on  the  environment,  in  turn 
affecting  the  sector  and  the  economy  as  a  whole 
(Orsini and Ostojić, 2018). Croatia has the second 
largest  Natura  2000-protected  network  in  the 
European  Union,  covering  more  than  one  third  of 
its  terrestrial  surface,  as  well  as  a  significant 
marine  area  of  4986  km².  The  management  of 
Natura 2000 sites will require efficient cooperation 
across  economic  sectors  to  optimise  and  channel 
the  necessary  investments  into  concrete  site-level 
conservation measures,  

to 

forest 

fires.  The 

Croatia  is  increasingly  vulnerable  to  climate 
risks.  With  average  annual  damage  costs  from 
extreme  weather  (Jelavić  and  EKOBERG,  2017) 
estimated  at  80  million  EUR  in  the  period  from 
1980  to  2016,  climate  change  is  likely  to  pose 
increasing  challenges.  It  exacerbates  the  threat  of 
flooding  in  the  Danube  river  basin  and  of  storm 
surges  on  the  coast,  while  heightening  Croatia's 
vulnerability 
recently 
developed  climate  change  adaptation  strategy 
(Trumbić  and  al.,  2017)  has  identified  priority 
sectors 
action.  The 
decarbonisation of Croatia`s economy  will require 
significant  investment  as  well  as  a  structural  shift 
of activities especially in the energy and transport 
sectors. In its National Energy and Climate Plan to 
be adopted by end of 2019, Croatia will provide an 
overview  of  its  investment  and  policy  needs  until 
2030  for  renewable  energy,  energy  efficiency, 
security  of  supply,  and  climate  mitigation  and 
adaptation. 

in  need  of 

further 

Increasing energy efficiency is crucial to reduce 
energy  intensity.  Croatia  uses  a  third  less  energy 
per  capita  than  the  EU  average,  but  its  energy 
intensity  (energy  use  as  a  share  of  GDP)  is  61 % 
higher.  In  2015,  the  residential  sector  accounted 
for  36.7 %  of  total  energy  consumption,  well 
above  the  EU  average  (25.4 %).  While  this  is 
largely  due  to  the  smaller  share  of  the  energy-
intensive  industry  sector  in  the  economy,  it  must 
be  noted  that  the  majority  of  the  1.42  million 
dwellings  in  Croatia  are  older  than  20  years  and 
thus tend to be less energy efficient. Croatia is the 
third biggest consumer of energy for cooling in the 

Source: Eurostat, own calculations. 

There  is  further  scope  to  increase  competition 
and customer choice in retail electricity and gas 
from  2016,  energy  price 
markets.  Starting 
regulation  for  households  for  electricity  has  been 
phased out.  Further liberalisation notwithstanding, 
price  regulation  for  gas  still  exists  for  retail 
consumers,  while 
it  will  be  phased  out  at 
wholesale level in 2021. The retail market remains 
highly concentrated, in particular in the electricity 
sector,  where  most  of  the  new  entrants  have 

52 

010203040OtherAgriculture /Forestry /FishingServicesResidentialTransportIndustryEUHR 
 
4.4. Competitiveness reforms and investment* 

Urban  transport  is  developed  only  in  a  few 
major  cities,  while  others  lack  even  basic 
infrastructure.  In  2014–2020,  investments  are 
taking  place  in  Zagreb  and  Osijek,  but  public 
transport  in  two  other  major  cities,  Split  and 
Rijeka, as well as smaller cities, remains outdated 
and  unable  to  satisfy  existing  needs,  let  alone 
increased  future  demand,  or  cope  with  seasonal 
fluctuations. 

The  share  of  renewable  energy  sources  in  the 
transport  sector  (1.3  %  in  2016)  is  one  of  the 
lowest among EU Member States and below the 
2020  target  of  10  %.  In  2018,  the  Croatian 
Government introduced incentives to the purchase 
of electric cars. Additional efforts and investments 
are  nonetheless  needed  to  effectively  reduce  the 
high  share  of  fossil  fuel  passenger  cars,  promote 
inter-modality  and  more  generally  curb  the  rising 
GHG emissions in the transport sector. 

average 

towards 

Take-up  of  broadband  is  low  in  Croatia.  In 
2018,  broadband  connections  were  available  to 
80 % of households  – an improvement from 2017 
(86 %). 
the  EU 
(77 %) 
Meanwhile, 
take-up  also 
the  fast  broadband 
improved a lot (from 14 % to 19 % of households), 
but  remains  well  below  the  EU  average  (41 %) 
Factors 
(European 
contributing  to  the  low  take-up  include  low 
internet  use  and  high  prices  for  (fast)  broadband. 
Achieving the European Gigabit Society targets for 
2025  (European  Commission,  2016q)  is  uncertain 
without  public  support.  Effective  deployment  of 
the  5G  networks  could  improve  fast  connectivity 
in rural and remote areas. 

Commission, 

2019x). 

4.4.3.  REGIONAL DISPARITIES 

Croatia  is  characterised  by  marked  territorial 
disparities. Similarly to the great variation of GDP 
per  capita  across  the  territory  (see  Chapter  1), 
labour  market  outcomes  also  display 
large 
territorial differences, with the unemployment rate 
in 2017 ranging from a 4.6 % low in Istria county 
to a  high of 26 % in  Sisak-Moslavina county (see 
Graph  4.4.5).  Almost  40 %  of  the  country’s 
unemployed population live in Eastern and Central 
Croatia,  even  though  these  regions  only  host  a 
quarter  of  Croatia's  total  population,  also  as  a 

already exited the market, citing as reasons lack of 
access  for  them  to  generation  capacity,  anti-
competitive practices by the incumbent and lack of 
a  stable  investment  environment  in  particular  due 
to  frequent  changes  in  the  support  framework  for 
renewable  energy  sources.  The  independence  and 
capacity  of 
the  National  Energy  Regulatory 
Authority is key to improving competition.  

The  Projects  of  Common  Interest  currently 
being  developed,  in  particular  the  Krk  LNG 
terminal  and  the  SINCRO  large-scale  smart 
grid  project,  are  essential  to  Croatia’s  security 
of  supply  of  electricity  and  gas.  In  this  context, 
the  implementation  of  bidirectional  capacity  gas 
projects with the neighbouring counties – Hungary 
in  particular  –  is  of  great  importance  for  the 
viability  of  the  Krk  LNG  project  and  for  security 
of supply of the region in general. This requires a 
consistent  regional  approach  with  neighbouring 
countries. 

Transport and connectivity 

infrastructure 

The  transport  network  is  unbalanced,  with 
railway 
lagging  significantly 
behind  the  EU  average.  Completion  of  the  core 
TEN-T rail network in Croatia stands at just 5-6 %, 
compared  to  the  EU  average  of  60 %  (European 
Commission, 2018p). The outdated and limited rail 
infrastructure  results  in  low  competitiveness,  low 
quality  of  service  and  a  general  preference  for 
other transport modes, in particular road transport. 
Based on an analysis of the comprehensive traffic 
model  and  the  investments  taking  place  in  the 
2014–2020  period, 
the  most  critical  missing 
components  of  the  rail  TEN-T  corridors  are 
Zagreb–Rijeka,  development  of  the  Zagreb  node 
and  the  Dugo  Selo–Novska  section.  By  contrast, 
the quality of road infrastructure is overall good as 
intensive  investments  have  resulted  in  a  dense 
motorway  network  of  high  quality  (46).  At  the 
same time, there remain bottlenecks on state roads, 
which are often exacerbated by peaks in the tourist 
season. Finally, while road deaths were reduced by 
28 %  between  2010  and  2016,  Croatia  remains 
among  the  worst  performing  Member  States  in 
terms  of  road  safety  (European  Commission, 
2017a). 

(46)  At  23.1  km  of  motorway  per  thousand  km2,  Croatia  is 

above EU average (17 km) (Eurostat). 

53 

 
                                                           
result  of  strong  emigration  flows  (47).  In  addition, 
similarly  to  other  Member  States,  the  urban-rural 
divide  is  marked,  as  cities  offer  better  labour 
opportunities and attract higher skilled individuals. 
Namely,  69.5 %  of  the  workforce  in  cities  is  in 
employment,  contrary  to  a  59.2 %  in  rural  areas. 
Only  18.8 %  of  the  rural  areas  population  has 
tertiary education, compared to a 43.5 % in cities, 
which 
the  EU  average  (see 
graph 4.4.6). 

is  higher 

than 

Graph 4.4.5:  Registered unemployment rate (%) by county, 

2017 

4.4. Competitiveness reforms and investment* 

energy, water and wastewater services and natural 
protection in islands, which are exacerbated during 
seasonal population influx peaks. 

experience 

regions).  However, 

Investment  decisions  supported  by  EU  funds 
need  to  take  due  consideration  of  regional 
specificities. Targeted investments with a focus on 
human  capital  and  competitiveness  would  help  to 
strengthen  the  endogenous  growth  potential  of 
lagging regions. They could address weaknesses in 
terms  of  transport  connectivity  (islands)  and/or 
access  to  healthcare  and  quality  social  services 
in 
(border 
implementing 
sustainable  urban  development 
strategies  (48)  with  EU  funded  assistance  is  so  far 
inconclusive.  Cities have  made  valuable efforts  to 
define  strategies  integrating  the  wider  needs  of 
their  neighbouring  municipalities,  but  there  have 
been  considerable  delays  in  their  implementation. 
Furthermore,  the  absence  of  a  comprehensive 
national  urban  policy  framework  over  the  past 
years  resulted  in  multiple  standalone  projects  in 
cities,  with  limited  impact.  Cities  could  in  the 
future strengthen their role of engines of growth at 
regional level. 

Graph 4.4.6:  Employment, unemployment and tertiary 

education rates, by level of urbanisation, 2015-
2017 

Source: Croatian Bureau of Statistics. 

suggest 

endowments 

Significant  regional  differences  in  terms  of 
resource 
different 
investment needs across the territory. Industrial 
production  is  highly  concentrated  in  the  Zagreb 
and Primorje-Gorski Kotar counties (World Bank, 
2018b),  while  large  cities  (Zagreb,  Split,  Rijeka, 
Osijek)  display 
for 
the  highest  potential 
innovation, 
including  poles  of  world  class 
excellence  in  information  and  communication 
technology,  biomedical  and  natural  sciences  in 
both the capital and  Rijeka.  Eastern  Croatia relies 
on  agriculture  and  wood 
its 
geographical proximity to Central Europe could be 
used as a competitive advantage. Regions from the 
Adriatic  coast  and  islands  draw  most  of  their 
relative  prosperity 
tourism.  They  face 
from 
problems  with  connectivity  and  access  to  clean 

industry  and 

Source: Eurostat, own calculations. 

(47)  The  population  in  Central  and  Eastern  Croatia's  seven 
counties  has  shrunk  by  more  than  5 %  in  the  period 
2014-2017, compared to a national decline of 2 %. 

(48)  In Zagreb, Osijek, Rijeka, Split, Zadar, Slavonski Brod and 

Pula 

54 

20406080100120Employment rateUnemploymentrateTertiaryeducatedIndex, EU28=100EU28HRCitiesTowns and suburbsRural areas 
 
                                                           
 
                                                           
4.4. Competitiveness reforms and investment* 

establish  clear  connections  between  priorities  and 
goals on the one hand, and budget planning on the 
other. It will include a shared IT platform securing 
transparency  and  facilitating  aggregation  of  data 
and information and reporting. 

A  number  of  other  measures  addressing  the 
efficiency  of  the  public  administration  are 
making  progress.  In  August,  the  government 
adopted a Decision on a substantial rationalisation 
of the cumbersome state agencies system, which is 
a  step  towards  simplification  and  efficiency.  A 
total  of  54  state  agencies,  state  institutions  and 
state-owned  enterprises  will  be  either  suppressed 
or merged  with agencies or within line  ministries. 
For the remaining agencies, the authorities plan to 
establish  a  new  framework  introducing  a  higher 
degree  of  homogeneity  across  the  system.  The 
authorities  have  also  prepared  the  legislation  for 
the transfer of competences from branch-offices of 
(e.g.  ministries) 
central 
the 
operating  at 
the  county-level 
level 
administration.  The  legislation  is  planned  for 
adoption in April 2019 (and implemented in 2020), 
and  it  would  in  part  address  the  fragmentation  of 
the  state  administration  system.  The  impact  of 
these measures however remains highly dependent 
on  their  effective  implementation.  Finally,  the 
provision  of  e-public  services  has  improved  with 
the  further  development  of  the  eCitizens  systems 
(currently,  54  electronic  services  available), 
eIDAS  (electronic  Identification,  Authentication 
and trust Services) and various other eGovernment 
systems (50). 

administration 
local 

to 

New  legislation  on  civil  service  wage-setting  is 
planned  for  the  first  quarter  of  2019.  The  new 
legislation,  which  has  been  postponed  several 
times by the government, will cover civil servants, 
while wages of other public sector employees will 
be addressed in a second phase. The aim of the law 
is  to  achieve  a  greater  harmonisation  of  wage 
setting across the public administration through the 
introduction  of  common  wage  grids  and  job 
complexity  coefficients,  based  on  more  consistent 
job descriptions and competences frameworks. The 

(50)  eGovernment  includes  eNewborn  (online  registration  of 
children), eTax (various tax-related activities). mSignature 
and mStamp (electronic signing, stamping or validation of 
documents)  are  planned  to  be  developed.  With  the 
establishment  of  the  Shared  Services  Centre,  all  public 
sector bodies will be able to use joint, reliable and scalable 
infrastructure on the ‘cloud’ paradigm. 

4.4.4.  PUBLIC ADMINISTRATION 

have 

devolved 

competencies 

Regional  disparities  are  exacerbated  by  a  high 
degree of fragmentation in the efficiency of the 
public  administration.  Previous  country  reports 
highlighted  that  many  small  local  governments 
units 
and 
responsibilities  in  providing  public  services,  but 
often  lack  the  adequate  financial,  administrative 
and  personnel  resources  to  carry  out  their  duties. 
This  creates  large  disparities  in  public  service 
provision between financially and administratively 
strong  and  weak  local  units  across  Croatia.  The 
situation is aggravated by the fact that the division 
of  competencies  and  responsibilities  in  terms  of 
service  provision  by  local  units  (municipalities, 
cities, counties) are not clearly spelt out (European 
Commission,  2016b)  (49).  The  current  territorial 
organisation  raises  costs  and  reduces  the  quality 
and effectiveness of the services delivered (World 
Bank, 2018b).  

Efforts are being made to improve coordination 
within  the  central  level  state  administration. 
The  2015  Strategy  for  Public  Administration, 
setting  out  a  number  of  objectives  for 
the 
modernisation of the state administration, has been 
implemented  only  in  few  areas.  In  particular, 
measures  related  to  upgrading  human  resources 
management  and  introducing  modern  systems  for 
the  improvement  of  service  quality  are  lagging. 
Similarly,  inter-ministerial  coordination  of  policy 
proposals has until recently been limited, as is the 
involvement  of 
the 
academic 
policymaking  process  (Petak  et  al.  2018).  The 
2018  country  report  recognised  also  the  need  to 
strengthen  the  administrative  capacities  related  to 
design  and  implementation  of  public  policies,  as 
well  as  more  efficient  and  effective  use  of  EU 
funds.  In  order 
to  strengthen  policy-making, 
coordination  and  implementation,  the  authorities 
are  preparing  a  National  Development  Strategy 
2021–2030.  The  Strategy  should  result  in  the 
streamlining  of  many  small  and  non-aligned 
sectorial  and  territorial  strategies,  and  help  to 

experts 

in 

(49)  The  absence  of  clear  national  standards,  applicable  by  all 
local units, is felt particularly in the field of social policy. 
Here, the implementation of central government regulation 
has differed strongly among municipalities. In some cases, 
legal  requirements  such  as  the  provision  in  the  Act  on 
Social Welfare that municipalities should use 5 % of their 
budgets  for  housing  allowances  for  socially  marginalized 
groups have not been complied with. 

55 

 
                                                           
                                                           
4.4. Competitiveness reforms and investment* 

FINA  is  no  longer  a  procedural  step  before 
reaching the court. While this is expected to lead to 
an  increased  use  of  the  personal  insolvency 
procedures  and  help  reduce  the  over-indebtedness 
of  some  households,  the  average  duration  of 
insolvency  and  restructuring  proceedings  further 
increased in all categories. 

Electronic  communication 
in  courts  and 
implementation  of  the  judicial  map  reform  are 
advancing.  All  commercial  courts  are  now 
equipped  for  e-communication  with 
lawyers, 
notaries and prosecutors. The same is expected to 
follow for insolvency administrators, court experts 
and  municipal  courts.  Online  payment  of  Court 
fees  are  being  incentivised  by  offering  a  50 % 
discount in case of immediate payment and online 
submission  of  a  claim.  As  of  2019,  personal  and 
corporate 
should  be 
insolvency  documents 
delivered from the Financial Agency to the courts 
electronically. A pilot project is testing the central 
postal  delivery  of  court  documents.  The  Supreme 
Court  has  fully  adopted  the  e-case  system  and 
plans to increase the number of published first and 
second instance court rulings, also to  improve the 
consistency of case law. The reform of the judicial 
map  (in  force  from  January  2019)  will  merge 
nearly  all  misdemeanour  courts  into  municipal 
courts. This is expected to increase efficiency and 
quality by better distributing workload. 

Challenges in efficiency and quality in criminal 
justice  may  hamper  effective  fight  against 
economic  and 
crime.  Backlogs 
financial 
increased  at  all  criminal  court  instances  and 
proceedings  remained  lengthy  (650  and  400  days 
at Municipal and for first instance cases at County 
courts,  respectively).  The  State  Attorney's  Office 
received some additional human resources, but  its 
capacity  to  fight  economic  and  financial  crime 
remains limited.  

Concerns  about  judicial  independence  remain. 
According  to  a  ruling  by  the  Constitutional  Court 
(Constitutional  Court  of  the  Republic  of  Croatia, 
2018),  the  State  Judicial  Council  did  not  provide 
sufficient  reasoning  in  certain  decisions  on  the 
career  of 
legislative 
amendments that decreased the Council's power in 
selecting  judges  and  could  interfere  with  its 
institutional  role.  A  Eurobarometer  survey  shows 
that the perceived judicial independence in Croatia 
decreased  further  from  an  already  very  low  level 

judges,  which 

led 

to 

new  legislation  would  also  cover  areas  of  the 
employment  relationship  of  civil  servants  that  are 
currently negotiated through collective bargaining, 
conditional  upon  the  implementation  of  a  new 
performance  evaluation  system  for  civil  servants. 
As  for state-owned enterprises, for  the time being 
no  further  steps  have  been  taken  in  setting  up  a 
coordinated system for collective bargaining. 

involved 

The  overall 
institutional  setup  for  public 
procurement needs strengthening. A State Audit 
report  in  2018  (State  Audit  Office,  2018)  noted 
overall  delays  and  shortages  of  staff  in  most 
institutions 
in  public  procurement, 
including  the  Central  State  Office  for  Public 
Procurement and the bodies working in the area of 
ESIF.  The  report  emphasised  the  key  role  of  the 
Central Finance and Contracting Agency and other 
second  level  intermediate  bodies  (51)  as  dedicated 
services  to  provide  non-obligatory  checks  and 
input to draft tender documents. These services are 
understaffed  yet  they  are  crucial  in  assisting  the 
final beneficiaries of EU funds and must maintain 
a high level of technical knowledge and resistance 
to corruption and undue influence. Further work in 
public 
include  wider 
development and implementation of policies (some 
existing 
public 
specific 
instrument 
procurement  as  a  strategic  policy 
(social, green and innovative procurement). 

procurement 

cases) 

could 

using 

in 

Justice system 

Despite  progress  in  the  reduction  of  backlogs, 
the  quality  and  efficiency  of  the  justice  system 
and the personal insolvency framework remain 
to  be  improved.  With  the  exception  of  the  High 
Commercial  Court,  the  continued  reduction  of 
backlogs (52) was mainly due to a lower caseload. 
The  focus  on  resolving  the  oldest  cases  (10  years 
and  older)  was  effective,  but  the  2019  EU  Justice 
Scoreboard  (European  Commission,  forthcoming) 
shows  that  the  duration  of  court  proceedings  and 
backlogs  in  Croatia  remain  among  the  highest  in 
the  EU.  As  of  1  January  2019,  the  Financial 
Agency  will  be  authorised  to  initiate  ex  officio 
certain  personal  insolvency  cases  (e.g.  for  people 
with  blocked  accounts)  and  the  mediation  before 

(51)  Bodies in direct charge of grant contracts of ESIF projects 
(52)  18 %  in  first  instance  litigious  civil  and  commercial  and 
enforcement cases and 23 % in the High Commercial Court 
(2018 compared to 2017) (Ministry of Justice) 

56 

 
                                                           
4.4. Competitiveness reforms and investment* 

code  of  ethics  for  Members  of  Parliament  and 
plans to regulate lobbying have stalled.   

to 

improvements 

Control  and  sanction  mechanisms  at  the  local 
level are weak. Changes to the framework for the 
functioning  of  local  government  units  are  not 
accompanied  by 
control 
corruption at the local level. The Law on Local and 
local 
Regional  Self-Governance  gives  elected 
officials  considerable  discretion 
in  decision-
making.  Their  discretionary  powers  to  decide  on 
disposing  of  assets  and  finances  of  up  to  HRK  1 
million  and  to  appoint  board  members  of  public 
local  companies  are  considerable  risk  factors  as 
these  board  members  are  not  subject  to  the  same 
form 
Special 
Eurobarometer  on  corruption  shows  that  90 %  of 
Croatians  think  that  corruption  is  present  in  local 
or  regional  public 
institutions,  and  72 %  of 
companies think corruption is widespread in public 
procurement  managed  at  the  local  or  regional 
level,  an  increase  by  six  percentage  points  from 
2015.  Studies  also 
that  competitive 
advantage on the market at local level is achieved 
mainly because of political connections rather than 
competence (Vuković, 2017). 

oversight.  The 

indicate 

2017 

of 

and 

ex-ante 

scrutiny 

Strengthening 
e-
procurement  can  support  the  fight  against 
corruption. E-procurement in Croatia is advanced 
and provides a good basis for further developments 
in  transparency  through  further  use  of  data, 
integration with other e-government solutions, and 
deployment  of  emerging  technologies.  Positive 
steps  were  taken  with  the  development  of  the 
contract  register  and  the  possibility  to  lodge 
the  State 
complaints 
electronically  before 
Public 
of 
Commission 
Procurement Procedures (56). 

Supervision 

for 

(56)  This  will  soon  become  mandatory  and  it  is  crucial  that 
technical 

resources  be  dedicated 

to  any 

adequate 
challenges. 

(European Commission 2019b).  

Fight against corruption 

Corruption  is  perceived  to  be  widespread. 
Croatia  is  amongst  the  worst  performing  Member 
States  in  terms  of  perception  and  control  of 
corruption, with no improving trend (53). Over half 
of respondents to the 2017 Special Eurobarometer 
on  Corruption  feel  affected  by  corruption  in  their 
daily  lives  (59 %)  and  Croatia  has  the  largest 
proportion  of  respondents  (16 %)  exposed  to 
(European 
corruption  of  all  Member  States 
Commission, 
2017 
the 
2017g).  Similarly, 
Eurobarometer  survey  on  businesses'  attitudes 
towards 
(European 
in 
Commission, 2017d) reports that Croatia registered 
the  lowest  proportion  of  businesses  (5  %)  of  the 
view  that  people  who  take  bribes  are  adequately 
punished, a drop of 14 percentage points compared 
to previous results. Also, only 15 % of businesses 
agree that measures against corruption are applied 
impartially  and  without  ulterior  motive,  a 
considerable  drop  by  24  percentage  points  from 
2015 (54). 

corruption 

the  EU 

the 

through 

legislative 

to  prevent  and 

Some 
initiatives  do  not  offer 
adequate  enforcement  tools  against  corruption. 
the  partial 
Despite  some  progress 
implementation  of  the  anti-corruption  action  plan, 
Croatia's  capacity 
sanction 
instances  of  corruption  remains  limited.  Two 
legislative proposals, on the protection of  whistle-
blowers  and  on  the  prevention  of  conflicts  of 
interests,  are  pending  adoption  by  Parliament  (55), 
but 
latter  does  not  fully  address  post-
employment  issues  ("revolving  doors").  The  draft 
law also makes it difficult for the Commission for 
Determining  Conflicts  of  Interest 
initiate 
proceedings and impose sanctions on officials who 
submit  inaccurate  asset  declarations.  It  also  does 
not  apply  to  chairmen  and  board  members  of 
companies  majority-owned  by  local  government 
units, which manage significant financial resources 
and  thus  could  be  exposed  to  corruption.  Finally, 
no  progress  has  been  made  on  the  adoption  of  a 

to 

(53)  Transparency  International,  Corruption  Perceptions  Index; 

World Bank, Control of Corruption Indicator. 

(54)  Question:  "To  what  extent  are  public  officeholders 
for  private 

their  position 

prevented 
interests?" (Petak and al. 2018). 

from  abusing 

(55)  The laws are planned for adoption by end of 2018. 

57 

 
                                                           
                                                           
ANNEX A: OVERVIEW TABLE 

Table A.1: 

2018 country-specific recommendations (and subparts) assessment 

CSR  1:  Strengthen  the  fiscal  framework, 
including  by  strengthening  the  mandate  and 
independence 
Policy 
Commission.  Introduce  a  recurrent  property 
tax.  

Fiscal 

the 

of 

Croatia  has  made  Some  Progress  in  addressing 
CSR 1 

Strengthen the fiscal framework, including 
the  mandate 
by 
and 
strengthening 
independence  of 
the  Fiscal  Policy 
Commission.  

Substantial  Progress  in  strengthening  the  fiscal 
framework. After a long delay, in December 2018 the 
Parliament  adopted  a  new  Fiscal  Responsibility  Act 
and  a  new  State  Audit  Office  Act.  The  adoption  of 
the new Budget Act remains delayed.  

Introduce a recurrent property tax.  

No  Progress  The  introduction  of  a  recurrent  value-
based property tax is no longer planned.  

early 

CSR  2:  Discourage 
retirement, 
accelerate  the  transition  to  a  higher  statutory 
retirement  age  and  align  pension  provisions 
for  specific  categories  with  the  rules  of  the 
general  scheme.  Deliver  on  the  reform  of  the 
education  and  training  system  to  improve  its 
quality  and  labour  market  relevance  for  both 
young  people  and  adults.  Consolidate  social 
benefits  and  improve  their  poverty  reduction 
capacity.  

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

Deliver  on  the  reform  of  the  education  and 
training  system  to  improve  its  quality  and 
labour  market  relevance  for  both  young 
people and adults.  

Consolidate  social  benefits  and  improve 
their poverty reduction capacity.  

Croatia  has  made  Some  Progress  in  addressing 
CSR 2 

the 
Substantial  Progress.  In  December  2018 
parliament adopted an important package of pension 
system 
reforms  aimed  at  addressing  design 
inconsistencies  in  the  system,  improving  pension 
lives,  and 
adequacy 
strengthening the institutional setup and performance 
of the 2nd mandatory pillar. 

longer  working 

through 

Some  Progress  in  delivering  on  the  reform  of  the 
education  and 
training  system.  A  number  of 
measures have been set in motion, such as the launch 
of  newly developed general education curricula  as a 
pilot  project.  Other  objectives  set  in  the  Education 
and  Training  2020  Strategic  Framework  await 
adoption and implementation. 

Limited Progress in consolidating social benefits. A 
categorisation of the types of benefits granted at the 
local  government  level  following  the  European 
System  of  integrated  Social  Protection  Statistics 
nomenclature  was completed. However,  most  policy 
measures remain in a preparatory phase.  

58 

 
 
 
 
 
 
A. Overview Table 

Croatia  has  made  Limited  Progress  in  addressing 
CSR 3  

CSR  3:  Reduce  the  territorial  fragmentation 
of  the  public  administration,  streamline  the 
functional  distribution  of  competencies  and 
enhance the capacity to design and implement 
public  policies.  In  consultation  with  social 
partners,  introduce  harmonised  wage-setting 
frameworks  across  the  public  administration 
and public services.  

Reduce the territorial fragmentation of the 
public  administration, 
the 
functional  distribution  of  competencies 
and  enhance  the  capacity  to  design  and 
implement public policies.  

streamline 

Some  Progress  in  the  public  administration  reform. 
A substantial rationalisation of the cumbersome state 
agencies  system  –  as  a  step  towards  simplification 
and  efficiency  – 
territorial 
fragmentation at the  local government level remains 
a challenge.  

is  ongoing.  The 

in  harmonising  wage-setting 
Limited  Progress 
frameworks  across  the  public  administration  and 
public services, as the relevant legislation remains in 
a preparatory phase  

Croatia  has  made  Some  Progress  in  addressing 
CSR 4  

In  consultation  with  social  partners, 
wage-setting 
introduce 
frameworks 
public 
administration and public services.  

harmonised 
across 

the 

CSR  4:  Improve  corporate  governance  in 
state-owned  enterprises  and  intensify  the  sale 
of state-owned enterprises and non-productive 
assets.  Significantly  reduce  the  burden  on 
businesses arising from parafiscal charges and 
from 
and 
legislative requirements. Enhance competition 
in business services and regulated professions. 
Reduce the duration of court proceedings and 
improve electronic communication in courts.  

administrative 

cumbersome 

Improve  corporate  governance  in  state-
owned enterprises and intensify the sale of 
state-owned 
non-
enterprises 
productive assets.  

and 

Limited  Progress.  A  new  Corporate  Governance 
Code  has  been 
implemented,  and  obligatory 
reporting  on  business  plans  and  performance  has 
been introduced in all major state-owned enterprises. 
Disposal of state assets has progressed slowly due to 
delays in adoption of required legislation. 

reduce 

Significantly 
the  burden  on 
businesses arising from parafiscal charges 
and  from  cumbersome  administrative  and 
legislative requirements.  

Some  Progress  in  reducing  the  burden  on  business. 
There  has been some progress  with the continuation 
of  removal  of  identified  administrative  burden  and 
limited  progress  with  the  removal  of  parafiscal 
charges. 

Enhance  competition  in  business  services 
and regulated professions.  

Limited  Progress  in  enhancing  competition  in 
business  services  and  regulated  professions.  The 
implementation  of  some  measures 
remove 
excessive  restrictions  has  finally  started,  most 
notably in passenger transport, audit and education.  

to 

59 

 
A. Overview Table 

Reduce  the  duration  of  court  proceedings 
and  improve  electronic  communication  in 
courts.  

Some  Progress  in  the  judicial  system  reform. 
Backlogs  in  courts  have  been  reduced  and  progress 
was  made  with 
implementation  of  electronic 
communication.  Mergers  of  courts  effective  as  of 
January 2019 are expected to increase efficiency. 

The following categories are used to assess progress in implementing the country-specific recommendations (CSRs): 

No  progress:  The  Member  State  has  not  credibly  announced  nor  adopted  any  measures  to  address  the  CSR.  This  category 
covers a number of typical situations to be interpreted on a case by case basis taking into account country-specific conditions. 
They include the following: 

 

 

 

 

 

 

no legal, administrative, or budgetary measures have been announced  

in the national reform programme, 

in  any  other  official  communication to  the  national  Parliament/relevant  parliamentary  committees  or  the  European 
Commission, 

publicly (e.g. in a press statement or on the government's website); 

no non-legislative acts have been presented by the governing or legislative body; 

the Member State has taken initial steps in addressing the CSR, such as commissioning a study or setting up a study 
group  to  analyse  possible  measures  to  be  taken  (unless  the  CSR  explicitly  asks  for  orientations  or  exploratory 
actions). However, it has not proposed any clearly-specified measure(s) to address the CSR. 

Limited progress: The Member State has:  

 

 

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

presented  legislative  acts  in  the  governing  or  legislative  body  but  these  have  not  been  adopted  yet  and  substantial 
further, non-legislative work is needed before the CSR is implemented; 

 

presented non-legislative acts, but has not followed these up with the implementation needed to address the CSR. 

Some progress: The Member State has adopted measures: 

 

 

that partly address the CSR; and/or  

that address the CSR, but a fair amount of work is still needed to fully address the CSR fully as only a few of the 
measures have been implemented. For instance, a measure or measures have been adopted by the national Parliament 
or by ministerial decision but no implementing decisions are in place. 

Substantial progress: The Member State has adopted measures that go a long  way towards addressing the CSR and most of 
them have been implemented.  

Full implementation: The Member State has implemented all measures needed to address the CSR appropriately. 

60 

 
A. Overview Table 

Europe 2020 (national targets and progress)  

Employment  rate  (age  group  20  –  64)  target 
set in the NRP: 65.2 % 

R&D target set in the NRP: 1.4 % of GDP  

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

The employment rate in Croatia has been slowly and 
steadily increasing (from 58.3% in 2013 to 66.3 % in 
Q3  2018).  Croatia  has  achieved  its  national  target, 
but the employment rate is still among the lowest in 
the EU, and well below the EU average. 

In  2017,  R&D  intensity  in  Croatia  was  0.86%  of 
GDP composed of 50% private investment (0.43% of 
GDP)  and  50%  public  investment  (0.43%  of  GDP). 
Croatia is not on track to meet the target.  

Total  GHG  emissions  in  Croatia  were  reduced  by 
23.3%  from  1990  to  2017.  Based  on  the  latest 
national  projections  submitted  to  the  Commission, 
and taking into account existing measures, Croatia is 
expected to 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  28.3  %  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  in  2016, 
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 consumption); 

  7 Mtoe (final energy consumption). 

Early school leaving (ESL) target: 4 % 

Tertiary education target: 35 % 

  8.07 Mtoe (primary energy consumption, 2016) 

  6.64 Mtoe (final energy consumption, 2016) 

At  3.1 %  Croatia  remained  among  the  leading  EU 
Member  States  in  ensuring  that  its  young  people 
complete  secondary  education.  Both  the  national 
target  of  4 %  and  the  EU-level  target  of  10 %  were 
comfortably met. 

Croatia's  tertiary  education  attainment  rate  has  been 
slowly  declining  since  2014  and  stood  at  28.7 %  in 
2017.  The  enrolment  rates  of  the  corresponding 
student  cohort,  together  with  the  overall  drop-out 
rates,  make  it  unlikely  that  Croatia  will  meet  its 
national target by 2020. 

Target  for  reducing  the  number  of  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  1.085 
million  in  2017.  Therefore,  the  national  target  has 
already been met.   

61 

 
 
ANNEX B: COMMISSION DEBT SUSTAINABILITY ANALYSIS AND 

FISCAL RISKS 

62 

General Government debt projections under baseline, alternative scenarios and sensitivity tests2017201820192020202120222023202420252026202720282029Gross debt ratio77.573.570.168.266.766.065.965.465.164.964.764.564.3Changes in the ratio (-1+2+3)-2.7-4.0-3.4-1.9-1.5-0.7-0.1-0.5-0.3-0.2-0.2-0.2-0.3of which(1) Primary balance (1.1+1.2+1.3)3.52.72.62.21.71.30.90.90.80.80.91.01.1(1.1) Structural primary balance (1.1.1-1.1.2+1.1.3)3.31.91.61.01.00.90.90.90.80.80.91.01.1(1.1.1) Structural primary balance (bef. CoA)3.31.91.61.01.01.01.01.01.01.01.01.01.0(1.1.2) Cost of ageing0.10.10.10.20.20.20.10.0-0.2(1.1.3) Others (taxes and property incomes)0.00.00.00.00.00.0-0.1-0.1-0.1(1.2) Cyclical component0.30.81.11.20.80.40.00.00.00.00.00.00.0(1.3) One-off and other temporary measures-0.10.00.00.00.00.00.00.00.00.00.00.00.0(2) Snowball effect (2.1+2.2+2.3)-0.5-1.4-0.9-0.60.20.70.80.40.50.60.70.80.9(2.1) Interest expenditure2.72.42.32.22.22.22.22.32.42.52.62.72.7(2.2) Growth effect-2.3-2.1-1.9-1.7-0.8-0.3-0.2-0.7-0.6-0.6-0.6-0.6-0.6(2.3) Inflation effect-0.9-1.7-1.2-1.1-1.2-1.2-1.3-1.3-1.3-1.3-1.3-1.3-1.3(3) Stock-flow adjustments1.30.10.11.00.00.00.00.00.00.00.00.00.0Note: For further information, see the European Commission Fiscal Sustainability Report (FSR) 2018. b. For the medium-term, the risk category (low/medium/high) is based on the joint use of the S1 indicator and of the DSA results. The S1 indicator measures the fiscal adjustment required (cumulated over the 5 years following the forecast horizon and sustained thereafter) to bring the debt-to-GDP ratio to 60 % by 2033. The critical values used are 0 and 2.5 pps. of GDP. The DSA classification is based on the results of 5 deterministic scenarios (baseline, historical SPB, higher interest rate, lower GDP growth and negative shock on the SPB scenarios) and the stochastic projections. Different criteria are used such as the projected debt level, the debt path, the realism of fiscal assumptions, the probability of debt stabilisation, and the size of uncertainties. c. For the long-term, the risk category (low/medium/high) is based on the joint use of the S2 indicator and the DSA results. The S2 indicator measures the upfront and permanent fiscal adjustment required to stabilise the debt-to-GDP ratio over the infinite horizon, including the costs of ageing. The critical values used are 2 and 6 pps. of GDP. The DSA results are used to further qualify the long-term risk classification, in particular in cases when debt vulnerabilities are identified (a medium / high DSA risk category). [2]Thechartspresentaseriesofsensitivitytestsaroundthebaselinescenario,aswellasalternativepolicyscenarios,inparticular:thehistoricalstructuralprimarybalance(SPB)scenario(wheretheSPBissetatitshistoricalaverage),theStabilityandGrowthPact(SGP)scenario(wherefiscalpolicyisassumedtoevolveinlinewiththemainprovisionsoftheSGP),ahigherinterestratescenario(+1pp.comparedtothebaseline),alowerGDPgrowthscenario(-0.5pp.comparedtothebaseline)andanegativeshockontheSPB(calibratedonthebasisoftheforecastedchange).Anadversecombinedscenarioandenhancedsensitivitytests(ontheinterestrateandgrowth)arealsoincluded,aswellasstochasticprojections. Detailed information on the design of these projections can be found in the FSR 2018.HR - Debt projections baseline scenario[1]Thefirsttablepresentsthebaselineno-fiscalpolicychangescenarioprojections.Itshowstheprojectedgovernmentdebtdynamicsanditsdecompositionbetweentheprimarybalance,snowballeffectsandstock-flowadjustments.Snowballeffectsmeasurethenetimpactofthecounteractingeffectsofinterestrates,inflation,realGDPgrowth(andexchangerates in some countries). Stock-flow adjustments include differences in cash and accrual accounting, net accumulation of assets, as well as valuation and other residual effects.[3] The second table presents the overall fiscal risk classification over the short, medium and long-term. a. For the short-term, the risk category (low/high) is based on the S0 indicator. S0 is an early-detection indicator of fiscal stress in the upcoming year, based on 25 fiscal and financial-competitiveness variables that have proven in the past to be leading indicators of fiscal stress. The critical threshold beyond which fiscal distress is signalled is 0.46. 5055606570758085909510020162017201820192020202120222023202420252026202720282029Debt as % of GDP -HRBaselineEnhanced lower GDP growth scenarioAdverse combined scenarioEnhanced higher interest rate scenario506070809010020162017201820192020202120222023(% of GDP)Stochastic debt projections 2019-2023 -HRp10_p20p20_p40p40_p60p60_p80p80_p90p50Baseline5055606570758085909510020162017201820192020202120222023202420252026202720282029Debt as % of GDP -HRBaselineHistorical SPB scenarioSGP scenario5055606570758085909510020162017201820192020202120222023202420252026202720282029Debt as % of GDP -HRBaselineHigher interest rate scenarioNegative shock on the SPBLower GDP growth scenarioBaselineHistorical SPBLower GDP growthHigher interest rateNegative shock on SPBStochastic projectionsRisk categoryMEDIUMMEDIUMMEDIUMMEDIUMMEDIUMMEDIUMDebt level (2029)64.380.768.269.468.9Debt peak year20182029201820182018Percentile rank38.0%68.0%Probability debt higher35.8%Dif. between percentiles40.8MEDIUMLong termDSAMEDIUMDebt sustainability analysis (detail)Medium termMEDIUMMEDIUMShort termLOW(S0 = 0.2)(S1 = 0.2)S2LOW(S2 = -2.1)S1 
 
ANNEX C: STANDARD TABLES 

Table C.1: 

Financial market indicators 

(1) Latest data Q3 2018. Includes not only banks but all monetary financial institutions excluding central banks. 
(2) Latest data Q2 2018. 
(3) Quarterly values are annualised. 
* Measured in basis points. 
Source: European Commission (long-term interest rates); World Bank (gross external debt); Eurostat (private debt); ECB (all 
other indicators). 

63 

201320142015201620172018Total assets of the banking sector (% of GDP)(1)132,4133,1129,8124,6119,2115,2Share of assets of the five largest banks (% of total assets)72,972,372,773,072,8-Foreign ownership of banking system (% of total assets)(2)89,990,290,590,190,890,7Financial soundness indicators:(2)              - non-performing loans (% of total loans)-13,613,010,78,88,7              - capital adequacy ratio (%)19,620,419,220,821,420,3              - return on equity (%)(3)0,63,9-6,88,95,911,1Bank loans to the private sector (year-on-year % change)(1)-0,1-1,7-2,40,54,55,0Lending for house purchase (year-on-year % change)(1)-2,0-2,8-1,9-2,12,73,3Loan to deposit ratio(2)-92,089,285,382,183,1Central Bank liquidity as % of liabilities(1)0,00,00,10,30,40,3Private debt (% of GDP)117,7118,0113,0105,398,4-Gross external debt (% of GDP)(2) - public32,535,535,731,729,127,7    - private50,351,848,744,740,739,0Long-term interest rate spread versus Bund (basis points)*311,1288,8305,5339,6245,0176,9Credit default swap spreads for sovereign securities (5-year)*303,7276,1273,1240,1148,494,5 
 
 
 
 
 
C. Standard Tables 

Table C.2: 

Headline Social Scoreboard indicators 

(1) People at risk of poverty or social exclusion (AROPE): individuals who are at risk of poverty (AROP) and/or suffering from 
severe material deprivation (SMD) and/or living in households with zero or very low work intensity (LWI).  
AROPE: At-risk-of-poverty or social exclusion rate (% of total population). People who are at-risk-of poverty (AROP) and/or 
suffering from severe material deprivation (SMD) and/or living in household with zero or very low work intensity (LWI). 
AROP: At-risk-of poverty rate (% of total population). People who have an equivalised disposable income below 60 % of the 
national equivalised median income. 
SMD: Severe material deprivation rate (% of total population). People who experience at least 4 out of 9 deprivations: people 
cannot afford to i) pay their rent or utility bills, ii) keep their home adequately warm, iii) face unexpected expenses, iv) eat 
meat, fish, or a protein equivalent every second day, v) enjoy a week of holiday away from home once a year, vi) have a 
car, vii) have a washing machine, viii) have a colour tv, or ix) have a telephone. 
LWI: People living in low work intensity households (% of population 0-59). People living in households where the adults work 
less than 20 % of their total work-time potential during the previous 12 months. 
AROPE, AROP: previous year income, SMD: current year, JLH: previous year.  
(2) Unemployed persons are all those who were not employed but had actively sought work and were ready to begin 
working immediately or within two weeks.       
(3) Long-term unemployed are people who have been unemployed for at least 12 months.       
(4) Gross disposable household income is defined in unadjusted terms, according to the draft Joint Employment Report 2019.       
(5) Reduction in percentage of the risk of poverty rate, due to social transfers (calculated comparing at-risk-of poverty rates 
before social transfers with those after transfers; pensions are not considered as social transfers in the calculation).       
(6) Average of first three quarters of 2018 for the employment rate, long-term unemployment rate and gender employment 
gap. Data for unemployment rate is annual (except for DK, EE, EL, HU, IT and UK data based on first three quarters of 2018).       
Source: Eurostat. 

64 

201320142015201620172018(6)Equal opportunities and access to the labour marketEarly leavers from education and training (% of population aged 18-24)4,52,82,82,83,1:Gender employment gap (pps)8,810,09,59,610,69,9Income inequality, measured as quintile share ratio (S80/S20)5,35,15,25,05,0:At-risk-of-poverty or social exclusion rate(1) (AROPE)29,929,329,127,926,4:Young people neither in employment nor in education and training (% of population aged 15-24)19,619,318,116,915,4:Dynamic labour markets and fair working conditions†Employment rate (20-64 years)57,259,260,661,463,665,2Unemployment rate(2) (15-74 years)17,417,216,113,411,08,5Long-term unemployment rate(3) (as % of active population)11,010,110,26,64,63,5Gross disposable income of households in real terms per capita(4) (Index 2008=100) ::::::Annual net earnings of a full-time single worker without children earning an average wage (levels in PPS, three-year average)::1278913113::Annual net earnings of a full-time single worker without children earning an average wage (percentage change, real terms, three-year average):::2,3::Public support / Social protection and inclusionImpact of social transfers (excluding pensions) on poverty reduction(5)34,335,135,528,624,8:Children aged less than 3 years in formal childcare11,017,111,815,715,9:Self-reported unmet need for medical care3,33,31,91,71,6: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) Difference between the average gross hourly earnings of male paid employees and of female paid employees as a 
percentage of average gross hourly earnings of male paid employees. It is defined as "unadjusted", as it does not correct for 
the distribution of individual characteristics (and thus gives an overall picture of gender inequalities in terms of pay). All 
employees working in firms with ten or more employees, without restrictions for age and hours worked, are included.       
(2) PISA (OECD) results for low achievement in mathematics for 15 year-olds. 
(3) Impact of socio-economic and cultural status on PISA (OECD) scores. Values for 2012 and 2015 refer respectively to 
mathematics and science. 
(4) Average of first three quarters of 2018 for the activity rate, employment growth, employment rate, part-time employment, 
fixed-term employment. Data for youth unemployment rate is annual (except for DK, EE, EL, HU, IT and UK data based on first 
three quarters of 2018). 
Source: Eurostat, OECD. 

65 

Labour market indicators201320142015201620172018(4)Activity rate (15-64)63,766,166,965,666,466,3Employment in current job by durationFrom 0 to 11 months8,911,611,514,114,2:From 12 to 23 months7,16,07,58,89,0:From 24 to 59 months14,014,112,913,614,8:60 months or over70,068,368,062,460,7:Employment growth* (% change from previous year)-2,62,71,20,32,22,4Employment rate of women(% of female population aged 20-64)52,854,255,956,658,360,3Employment rate of men (% of male population aged 20-64)61,664,265,466,268,970,2Employment rate of older workers* (% of population aged 55-64)37,836,239,238,140,342,9Part-time employment* (% of total employment, aged 15-64)5,45,36,05,64,85,0Fixed-term employment* (% of employees with a fixed term contract, aged 15-64)14,516,920,222,220,720,2Participation in activation labour market policies(per 100 persons wanting to work)4,84,56,67,0::Transition rate from temporary to permanent employment(3-year average)35,5:30,832,234,1:Youth unemployment rate (% active population aged 15-24)49,944,942,331,827,224,5Gender gap in part-time employment (aged 20-64)1,72,72,62,72,22,6Gender pay gap(1) (in undadjusted form)7,78,7::::Education and training indicators201320142015201620172018Adult participation in learning(% of people aged 25-64 participating in education and  training)3,12,83,13,02,3:Underachievement in education(2)::32,0:::Tertiary educational attainment (% of population aged 30-34 having successfully completed tertiary education)25,632,130,829,328,7:Variation in performance explained by students' socio-economic status(3)::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. 

66 

201220132014201520162017Expenditure on social protection benefits* (% of GDP)Sickness/healthcare7,46,96,87,17,0:Disability2,72,72,62,52,3:Old age and survivors8,79,09,39,19,0:Family/children1,61,61,91,91,8:Unemployment0,50,50,50,60,5:Housing0,00,00,00,00,0:Social exclusion n.e.c.0,20,20,30,30,3:Total21,120,921,421,420,9:of which: means-tested benefits1,11,11,11,11,0: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):12,815,815,515,4:Children at risk of poverty or social exclusion (% of people aged 0-17)*34,829,329,028,226,625,8At-risk-of-poverty  rate(1) (% of total population)20,419,519,420,019,520,0In-work at-risk-of-poverty rate (% of persons employed)6,06,25,75,95,65,8Severe material deprivation rate(2)  (% of total population)15,914,713,913,712,510,3Severe housing deprivation rate(3), by tenure statusOwner, with mortgage or loan11,65,82,36,15,46,2Tenant, rent at market price17,67,116,015,07,65,5Proportion of people living in low work intensity households(4)(% of people aged 0-59)16,814,814,714,413,012,2Poverty thresholds, expressed in national currency at constant prices*209221933019585205442156823293Healthy life years (at the age of 65)Females7,95,95,84,54,9:Males7,75,56,04,75,2:Aggregate replacement ratio for pensions(5) (at the age of 65)0,40,40,40,40,40,4Connectivity dimension of the Digital Economy and Society Index (DESI)(6)::29,935,442,045,0GINI coefficient before taxes and transfers*50,650,850,151,049,949,4GINI coefficient after taxes and transfers*30,930,930,230,629,829,9 
 
 
 
 
C. Standard Tables 

Table C.5: 

Product market performance and policy indicators 

(1) Value added in constant prices divided by the number of persons employed. 
(2) Compensation of employees in current prices divided by value added in constant prices. 
(3) The methodologies, including the assumptions, for this indicator are shown in detail here: 
http://www.doingbusiness.org/methodology  
(4) Average of the answer to question Q7B_a. "[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 75 % and above, two if received below 75 %, three if refused or rejected and treated as missing values if the 
application is still pending or don't know. 
(5) Percentage population aged 15-64 having completed tertiary education. 
(6) Percentage population aged 20-24 having attained at least upper secondary education. 
(7) Index: 0 = not regulated; 6 = most regulated. The methodologies of the OECD product market regulation indicators are 
shown in detail here: http://www.oecd.org/competition/reform/indicatorsofproductmarketregulationhomepage.htm  
(8) Aggregate 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). 

67 

Performance indicators201220132014201520162017Labour productivity per person(1) growth (t/t-1) in %Labour productivity growth in industry-2,722,530,794,235,07-0,39Labour productivity growth in construction-5,62-2,510,92-2,90-0,866,18Labour productivity growth in market services-1,032,64-4,35-0,56-0,35-2,48Unit Labour Cost (ULC) index(2) growth (t/t-1) in %ULC growth in industry6,011,61-2,66-1,36-3,771,33ULC growth in construction8,64-2,42-3,394,02-1,002,02ULC growth in market services1,48-1,331,73-1,292,230,15Business environment201220132014201520162017Time needed to enforce contracts(3) (days)572650650650650650Time needed to start a business(3) (days)22,522,522,522,522,522,5Outcome of applications by SMEs for bank loans(4):0,190,880,310,600,10Research and innovation201220132014201520162017R&D intensity0,750,810,780,840,840,86General government expenditure on education as % of GDP4,905,104,804,804,80:Employed people with tertiary education and/or people employed in science and technology as % of total employment323637383838Population having completed tertiary education(5)161719202021Young people with upper secondary education(6)949496969696Trade balance of high technology products as % of GDP-1,27-1,48-1,52-1,75-1,85-1,15Product and service markets and competition200320082013OECD product market regulation (PMR)(7), overall::2,08OECD PMR(7), retail::1,42OECD PMR(7), professional services::3,70OECD PMR(7), network industries(8)::2,75 
 
 
 
 
C. Standard Tables 

Table C.6:  Green growth 

(1) All macro intensity indicators are expressed as a ratio of a physical quantity to GDP (in 2010 prices). 
(2) Gross inland energy consumption (in kgoe) divided by GDP (in EUR). 
(3) Greenhouse gas emissions (in kg CO2 equivalents) divided by GDP (in EUR). 
(4) Domestic material consumption (in kg) divided by GDP (in EUR). 
(5) Waste (in kg) divided by GDP (in EUR). 
(6) Balance of energy exports and imports, expressed as % of GDP. 
(7) Proportion of 'energy' items in the consumption basket used for the construction of the HICP. 
(8) Energy component of HICP, and total HICP inflation (annual % change). 
(9) Real energy costs as % of total value added for the economy. 
(10) Final energy consumption of industry (in kgoe) divided by gross value added of industry (in 2010 EUR). 
(11) Real costs as % of value added for manufacturing sectors. 
(12) Share of gross value added of the energy-intensive industries in GDP. 
(13) Consumption band 500–20 00MWh and 10 000–100 000 GJ; figures excl. VAT. 
(14) Ratio of recycled and composted municipal waste to total municipal waste. 
(15) Government spending on R&D for these categories as % of GDP. 
(16) Based on GHG emissions (excluding aviation, land use, land use change and forestry) as reported by Member States to 
the European Environment Agency. 
(17) Final energy consumption of transport activity (kgoe) divided by transport industry gross value added (in 2010 EUR). 
(18) GHG emissions in transport activity divided by gross value added of the transport industry. 
(19) Net energy imports divided by gross inland energy consumption incl. consumption of international bunker fuels. 
(20) Covers oil, gas and coal. Smaller values indicate larger diversification and hence lower risk. 
(21) Herfindahl index covering natural gas, total petrol products, nuclear heat, renewable energies and solid fuels. 
* European Commission and European Environment Agency. 
Source: European Commission and European Environment Agency (Share of GHG emissions covered by ETS); European 
Commission (Environmental taxes over labour taxes and GDP); Eurostat (all other indicators). 

68 

Green growth performance201220132014201520162017Macroeconomic(1)Energy intensity(2)kgoe / €0,200,200,190,190,180,19Carbon intensity(3)kg / €0,590,560,540,540,52-Resource intensity (reciprocal of resource productivity)(4)kg / €0,920,970,880,920,910,84Waste intensity(5)kg / €0,08-0,09-0,11-Energy balance of trade(6)% GDP-5,6-5,1-4,0-3,4-2,7-2,9Weighting of energy in HICP(7)%14,515,716,514,910,811,6Difference between energy price change and inflation(8)%11,42,6-0,2-2,7-4,4-5,3Real unit of energy cost(9)% of value added9,49,08,79,09,3-Ratio of environmental taxes to labour taxesratio0,180,200,220,230,24-Environmental taxes% GDP2,62,93,23,43,53,4Sectoral Industry energy intensity(10)kgoe / € 0,120,120,120,110,11-Real unit energy cost for manufacturing industry excl. refining(11)% of value added5,65,55,45,55,6-Share of energy-intensive industries in the economy(12)% GDP9,29,29,49,59,8-Electricity prices for medium-sized industrial users(13)€ / kWh0,090,090,090,090,090,09Gas prices for medium-sized industrial users€ / kWh0,040,040,040,040,030,02Public R&D for energy(15)% GDP0,000,000,000,000,000,00Public R&D for environmental protection(15)% GDP0,000,000,000,000,010,00Municipal waste recycling rate(14)%14,714,916,518,021,023,6Share of GHG emissions covered by ETS(16)*%37,537,036,737,234,1-Transport energy intensity(17)kgoe / €1,231,341,361,421,37-Transport carbon intensity(18)kg / €3,453,753,814,003,91-Security of energy supplyEnergy import dependency(19)%49,947,544,348,948,553,3Aggregated supplier concentration index(20)HHI19,828,219,514,712,6-Diversification of energy mix(21)HHI0,260,270,280,260,270,28 
 
 
ANNEX D: INVESTMENT GUIDANCE ON COHESION POLICY 
FUNDING 2021-2027 FOR CROATIA 

Building  on  the  Commission  proposal  for  the  next  Multi-Annual  Financial  Framework  for  the  period 
2021-2027 of 2 May 2018 (COM (2018) 321), this Annex presents the preliminary Commission services 
views  on  priority  investment  areas  and  framework  conditions  for  effective  delivery  for  the  2021-2027 
Cohesion  Policy.  These  priority  investment  areas  are  derived  from  the  broader  context  of  investment 
bottlenecks, investment needs and regional disparities assessed in the report. This Annex (57) provides the 
basis  for  a  dialogue  between  Croatia  and  the  Commission  services  in  view  of  the  programming  of  the 
cohesion policy funds (European Regional Development Fund, Cohesion Fund and European Social Fund 
Plus). 

Policy Objective 1: A Smarter Europe – Innovative and smart industrial transformation 
The innovativeness of the Croatian economy is low and progress in improving innovation performance is 
very  limited.  High  priority  investment  needs (58)  have  been  identified  to  enhance  research  and 
innovation  capacities  and  the  uptake  of  advanced  technologies,  by  taking  into  account  territorial 
differences, and in particular to: 
  strengthen innovation performance and foster productivity growth by identifying smart specialisation 

 

areas on the basis of national and regional needs and potential; 
increase  the  number  of  innovative  firms  in  the  smart  specialisation  areas  with  the  highest  growth 
potential; 

  develop universities’ and research institutions’ capacity to enhance market relevance of their research 

projects, build critical research mass and attract talent in the strategic smart specialisation areas; 

  support  collaboration  between  universities  and  businesses,  enabling  transfer  of  technology  and 
commercialisation  of  research  outcomes;  support  cross-regional,  transnational  and  interregional 
projects; 

  strengthen governance of the smart specialisation strategy. 
Croatia  has  made  progress  in  digitalisation  but  further  action  is  needed  to  exploit  its  potential.  Priority 
investment needs have been identified to reap the benefits of digitalisation for citizens, companies and 
governments, and in particular to: 
  support  integration  of  digital  technology  in  small  and  medium-sized  enterprises  including 

infrastructures and services, by taking into account territorial differences;  
  promote the range of interoperable e-services and their uptake by citizens; 
  upscale and accelerate Digital Public Services in a systemic way. 
Croatia ranks last among peers in business environment; Croatian firms are weakly integrated in global 
value  chains.  Business  investment  in  research  and  development  is  low  and  concentrated  in  large 
companies, with low participation of small and medium-sized enterprises. High priority investment needs 
have been identified to enhance growth and competitiveness of small and medium-sized enterprises, 
and in particular to: 
  move up the global value chains; 
 

identify  new  markets,  cooperation  networks;  stimulate  potential  for  innovation  clusters  by  looking 
into emerging trends, markets and concentration in high-performing sectors; 

  enhance quality of business support institutions and business environment. 
Skills  shortages  and  mismatches  are  among  the  main  barriers  for  further  economic  development  of 
Croatia. High priority investment needs have been identified to develop skills for smart specialisation, 
industrial transition and entrepreneurship, and in particular to: 
 

reskill and upskill in smart specialisation areas, with a particular attention to supporting acquisition of 
key competences including digital skills; 

  strengthen  education  and  training  institutions  including  higher  education  and  centres  of  vocational 

excellence to foster skills for innovation and stimulate entrepreneurship culture. 

(57)  This Annex is to be considered in conjunction with the EC Proposal for a Regulation of the European Parliament and of the 
Council on the European Regional Development Fund and on the Cohesion Fund COM(2018) 372 and the EC Proposal for a 
Regulation of the European Parliament and of the Council on the European Social Fund Plus COM(2018) 382, in particular as 
regards the requirements for thematic concentration and urban earmarking outlined in these proposals. 

(58)  The intensity of needs is classified in three categories in a descending order – high priority needs, priority needs, needs. 

69 

 
 
                                                           
D. Investment Guidance on Cohesion Policy Funding 2021-2027 for Croatia 

Policy  Objective  2:  A  low  carbon  and  greener  Europe  –  Clean  and  fair  energy  transition,  Green 
and blue investment, circular economy, climate adaptation and risk prevention 

The  shift  away  from  landfilling  towards  separate  collection  and  recycling  is  stalling.  High  priority 
investment  needs  have  been  identified  to  promote  the  transition  to  a  circular  economy,  and  in 
particular to: 
  support  systems  of  separate  collection,  composting  and  sorting  plants  and  other  measures  preparing 
for  reuse  and  recycling,  develop  alternatives  to  raw  materials  and  increase  demand  for  recycled 
content; 

  modernise  and  upgrade  existing  recycling  and  waste  treatment  infrastructure  to  adapt  to  new  long-

 

term-recycling targets; 
raise citizen awareness to sustainable consumption practices and behaviour and improve capacity for 
all stakeholders including though cooperation and share of experiences between Member States;  
improve the knowledge base and monitoring of waste and material streams. 

 
While water supply networks are quite well developed, sanitation lags behind. High priority investment 
needs have been identified to promote sustainable water management, and in particular to: 
 

invest  in  the  collection  and  treatment  of  wastewater  in  agglomerations  above  2000  population 
equivalent; 
invest  in  drinking  water  to  reduce  leakage  of  water  networks  and  ensure  quality  requirements  for 
drinking water where they are not met (e.g. Eastern Slavonia); 
increase  capacity  of  beneficiaries  especially  at  local  and  regional  level  to  ensure  long-term 
sustainability of the sector. 

 

 

The  economy  in  general  and  tourism  in  particular,  depend  on  the  sustainable  management  of  natural 
resources. Priority investment needs have been identified to enhance biodiversity, green infrastructure 
in the urban environment, and reducing pollution, and in particular to: 
  support  biodiversity  as  well  as  ecosystem  conservation  and  restoration  projects,  species  protection 

measures and green infrastructure. 

Croatia faces considerable risks caused by extreme weather conditions, especially floods and forest fires. 
Priority investment needs have been identified to promote climate change adaptation, risk prevention 
and disaster resilience, and in particular to: 
  address risks as identified in  the  national risk assessment and climate  strategy; primarily floods and 

forest fires. 

High energy intensity could be decreased by increasing energy efficiency High priority investment needs 
have been identified to promote energy efficiency measures and developing smart energy systems, in 
particular to: 
 

reduce energy consumption in the building sector i.e. renovation of public and residential buildings; 
tackle the problem of energy poor and improve energy efficiency of district heating networks; 
  deploy solutions for smart electricity, distribution grids and storage linked to demand and supply. 
While  in  2016,  renewable  energy  was  above  EU  average,  notably  thanks  to  its  strong  hydropower 
industry,  the  next  phase  of  renewable  energy  projects,  especially  wind  and  solar  have  considerable 
development potential. Priority investment needs have been identified to promote renewable energy and 
in particular to: 
  support transition to renewables in heating and cooling; 
  ensure further penetration of sustainable and clean energy primarily wind and solar energy addressing 
in particular energy self-reliance of islands in line with the “Clean Energy for EU islands” initiative. 

70 

 
D. Investment Guidance on Cohesion Policy Funding 2021-2027 for Croatia 

Policy  Objective  3:  A  more  connected  Europe  –  Mobility  and  regional  Information  and 
Communications Technology connectivity 
The railway and multi-modal infrastructure is still visibly lagging behind motorways in terms of quality 
and connectivity. High priority investment needs have been identified to develop a sustainable, climate 
resilient,  intelligent,  secure  and  intermodal  Trans-European  Transport  Network,  and  in  particular 
to: 
  complete  the  Trans-European  Transport  Network  core  and  comprehensive  railway  network  with 
requirements on interoperability, including cross-border sections. The focus of investments will be on 
completing investments along the Med Corridor and the sub-urban rail network in the greater Zagreb 
functional area; 

  support investments in multi-modal transport with priority on improving the connectivity of different 

sustainable transport modes. 

The  transport  sector  in  Croatia  is  faced  with  an  increasing  energy  consumption,  decreasing  share  of 
renewable  energy  and  a  high  road  fatalities  rate.  Investment  needs  have  been  identified  to  develop 
sustainable,  climate  resilient,  intelligent  and  intermodal  national,  regional  and  local  mobility, 
including improved access to Trans-European Transport Network and cross-border  mobility, and 
in particular to: 
  address  negative  externalities  from  transport  by  investments  into  sustainable  modes  of  transport 

improve access of national networks to the Trans-European Transport Network. 

(public transport, multi-modal transport, railways) as well as road safety measures; 
  develop a smart, connected and clean transport system and deploy related infrastructure; 
 
Croatia is highly dependent on passenger cars, with other modes of transport visibly lagging behind, and 
the  implementation  of  sustainable  urban  mobility  plans  remains  a  challenge.  Priority  investment  needs 
have been identified to promote sustainable multimodal urban mobility, and in particular to: 
 

improve  urban  transport  systems  and  related  rolling  stock  (taking  into  account  the  relevant 
masterplans  of  functional  regions)  to  reduce  dependency  on  private  cars  and  enable  a  shift  towards 
sustainable  and  accessible  modes  of  transport  (e.g.  low-carbon  collective  public  transport,  active 
modes of transport); 
invest  in  intelligent  transportation  system  solutions  for  improved  infrastructure  use  and  service 
quality; 
invest  in  the  commuter  port  infrastructure  on  the  islands  and  floating  stock  in  cases  with  a  public 
service contract. 

 

 

Policy Objective 4: A more social Europe – Implementing the European Pillar of Social Rights 

improve cooperation between employment and social services, employers and education providers; 

Labour market participation remains low, especially for vulnerable groups, while high net emigration and 
skills shortages pose a growing challenge. High priority investment needs have therefore been identified 
to improve access to employment for all jobseekers and to anticipate skills needs, and in particular to: 
  modernise labour market institutions, including advanced equipment and infrastructure; 
 
  assess and anticipate skills needs and develop outreach strategies and tracking systems; 
 
 
 
  develop  mechanisms  for  quick  adaptation  to  the  new  forms  of  work  and  stimulate  mobility  of 

improve coverage and targeting of Active Labour Market Policy measures; 
tackle the drivers of inactivity, including undeclared work;  
reduce territorial disparities in labour market outcomes; 

workers; 

  create  business  incubators  and  invest  in  self-employment,  small  and  medium-sized  enterprises  and 

business/jobs creation and develop social entrepreneurship. 

Croatia  performs  below  the  EU  average  in  education  outcomes.  High  priority  investment  needs  have 
therefore  been  identified  to  improve  the  quality,  effectiveness  and  labour  market  relevance  of 
education and training, and in particular to: 
  ensure equal access to and provision of inclusive quality education at all levels, including investments 

71 

 
 
D. Investment Guidance on Cohesion Policy Funding 2021-2027 for Croatia 

in infrastructure and equipment, but especially in early childhood education and care, in particular for 
vulnerable groups and in less developed areas; 

improve social services and infrastructure of centres to support vulnerable groups and families; 
improve the transition from residential/institutional care to family and community-based care; 
reduce territorial disparities in social outcomes; 

  upskill and reskill the labour force through adult learning; modernise equipment and infrastructure; 
  provide support to education and training of teachers and trainers. 
The share of the population at risk of poverty or social exclusion remains high. High priority investment 
needs  have  therefore  been  identified  to  foster  active  inclusion  with  a  view  to  promoting  equal 
opportunities and addressing material deprivation, and in particular to:  
 
 
 
  address material deprivation through food and basic material assistance to the most deprived; 
  promote social innovation. 
Health outcomes remain weak and inefficiencies in the health care sector persist. High priority investment 
needs have therefore been identified to improve accessibility, effectiveness and resilience of healthcare 
and long-term care services, and in particular to: 
 

restructure inpatient care and strengthen outpatient services, particularly primary and long term care 
services, including infrastructure and equipment; 
tackle geographical obstacles in access to healthcare and address gaps in healthcare infrastructure and 
shortages in workforce, based on mapping of needs; 

 

  support implementation of quality standards in healthcare; 
  develop health promotion and disease prevention programmes; 
  continue the rollout of e-health services and improve digital solutions as telemedicine. 
Policy  Objective  5  –  A  Europe  closer  to  citizens  by  fostering  the  sustainable  and  integrated 
development of urban, rural and coastal areas and local initiatives 

Croatia  faces  noticeable  territorial  imbalances  that  weigh  on  its  competiveness  and  sustainable  growth 
potential.  High  priority  investment  needs  have  been  identified  to  foster  integrated  socio-economic 
development, including for rural, coastal areas or islands, in particular to:  
 

reduce inequalities between regions and urban-rural divide by unleashing the endogenous potential of 
lagging  regions  (e.g.  Eastern  Croatia),  addressing  geographical  specificities  (islands),  boosting  the 
economic activity and creating the necessary linkages with leading poles; 

  support  community  building  by  integrated  territorial  development  strategies  in  rural/sparsely 
populated  areas,  empowering  local  stakeholders  possibly  through  the  use  of  Community-led  local 
development. 

Croatia's urban centres offer better job opportunities for better qualified people but do not fully play their 
catalytic role as engines of regional growth. Priority investment needs have been identified and should be 
further  specified  in  integrated  urban  development  strategies  to  foster  the  integrated  socio-economic 
development in urban areas, in particular to:  
 

reinforce  the  role  of  leading  economic  centres  as  drivers  of  regional  growth  and  of  sustainable  and 
integrated development of their functional areas (university centres, places of innovation, urban-rural 
linkages, etc.); 

  support the regeneration of deprived urban neighbourhoods to increase attractiveness for business and 

social inclusion using Community-led local development when possible; 

  strengthen capacities of local authorities to develop sound integrated territorial strategies. 
Factors for effective delivery of Cohesion policy 

Additional  efforts  are  needed  to  increase  the  administrative  capacity  necessary  for  the  effective 
administration and implementation of the Funds, in particular through: 
  enhanced  dialogue  with  stakeholders,  including  with  social  partners,  and  strengthened  capacities  of 
the final beneficiaries, and stakeholders at all levels to effectively implement projects and ensure long 
term sustainability of investments including through institutional consolidation; 
reduced  administrative  burden, 
documentation and over bureaucratic requirements to project proposals; 

improved  and  simplified  procedures,  eliminating  excessive 

 

72 

 
D. Investment Guidance on Cohesion Policy Funding 2021-2027 for Croatia 

  consolidated  and  properly  functioning  management  and  control  systems,  as  well  as  well  working 
evaluation  culture  in  order  to  enable  proper  monitoring  and  evidence-based  decisions  on 
implementation of EU funds; 
improved public procurement performance ensuring sufficient staff and its support; 
improved  and  more  efficient  measures  to  prevent  and  address  conflict  of  interest,  fraud  and 
corruption; 

 
 

  development and implementation of a roadmap on administrative capacity building on the pilot action 

on frontloading administrative capacity – to effectively manage and use EU funds; 

  broader use of financial instruments and/or contributions to a Croatian’s compartment under InvestEU 

for revenue-generating and cost-saving activities. 

73 

 
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