COMMISSION STAFF WORKING DOCUMENT Country Report Croatia 2020 Accompanying the document COMMUNICATION FROM THE COMMISSION TO THE EUROPEAN PARLIAMENT, THE EUROPEAN COUNCIL, THE COUNCIL, THE EUROPEAN CENTRAL BANK AND THE EUROGROUP 2020 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: 2020-02-26
Institutions: European Commission, Secretariat-General
Subjects: Croatia, economic situation, green economy, investment, labour market, macroeconomics, public finance, social policy, structural adjustment, tax system

EN 

  EN 

   EUROPEAN COMMISSION  Brussels, 26.2.2020  SWD(2020) 510 final  COMMISSION STAFF WORKING DOCUMENT Country Report Croatia 2020 Accompanying the document COMMUNICATION FROM THE COMMISSION TO THE EUROPEAN PARLIAMENT, THE EUROPEAN COUNCIL, THE COUNCIL, THE EUROPEAN CENTRAL BANK AND THE EUROGROUP 2020 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(2020) 150 final}  
 
 
CONTENTS 

Executive summary 

1.  Economic situation and outlook 

2.  Progress with country-specific recommendations 

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

4.  Reform priorities 

4.1.  Public finances and taxation* 
4.2.  Financial sector* 
4.3.  Labour market, education and social policies* 
4.4.  Competitiveness reforms and investment* 
4.5.  Environmental sustainability 

Annex A: Overview table 

Annex B: Commission debt sustainability analysis and fiscal risks 

Annex C: Standard tables 

Annex D: Investment guidance on Just Transition Fund 2021-2027 for Croatia 

Annex E: Progress towards the Sustainable Development Goals (SDGs) 

References 

LIST OF TABLES 

Table 1.1: 

Key economic and financial indicators - Croatia 

Table 2.1: 

Assessment of the 2019 country-specific recommendations (CSRs) assessment 

Table 3.1: 

MIP matrix 

Table 4.2.1: 

Financial soundness indicators, all domestic and foreign banks in Croatia 

Table 4.4.1:  OECD  Product Market Regulation  (PMR) Indicators 

Table A.1: 

2019 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 

1 

4 

8 

14 

18 

23 

23 
28 
35 
44 
53 

57 

62 

63 

69 

71 

76 

13 

16 

21 

28 

45 

61 

63 

64 

65 

66 

 
 
 
Table C.5: 

Product market performance and policy indicators 

Table C.6: 

Green growth 

LIST OF GRAPHS 

Graph 1.1: 

Real GDP growth by segment of demand 

Graph 1.2: 

Real convergence of central and eastern European Member States 

Graph 1.3: 

Current account and net international investment position 

Graph 1.4: 

Labour market trends 

Graph 1.5: 

Nominal wage growth: actual and predicted based on economic fundamentals 

Graph 1.6:  GDP per capita in PPS as share of EU average (EU = 100) by country in 2016 

Graph 2.1:  Overall multiannual implementation of 2014-2019 CSRs to date 

Graph 4.1.1:  Maastricht debt and interest developments 

Graph 4.1.2:  Debt sustainability scenarios 

Graph 4.1.3:  Fiscal stance 2011-2019 

Graph 1: 

Healthcare sector: arrears and financial recovery programmes 

Graph 4.2.1:  NPL flows 

Graph 4.2.2:  Zagreb stock market activity, HRK billion 

Graph 4.2.3:  Decomposition of y-o-y changes in private debt-to-GDP ratios 

Graph 4.2.4:  Corporate debt and its fundamentals-based and prudential benchmarks 

Graph 4.2.5:  New lending (% year-on-year growth in annual volumes) 

Graph 4.2.6:  Household debt and its fundamental-based and prudential benchmarks 

Graph 4.2.7:  House price (2015=100) and mortgage growth 

Graph 4.3.1:  Employment rate by age group in Croatia and the EU 

Graph 4.3.2:  Labour shortages in Croatia as reported by employers, 2008-2019(Q3) 

Graph 4.3.3:  Population change (%) by county, 2001-2017 

Graph 4.3.4:  Relative dispersion of employment rates of different educational attainment groups in 

the EU 

Graph 4.3.5:  At-risk-of-poverty or social exclusion rate and its components (AROP, SMD, LWI) 

Graph 4.3.6:  Selected education indicators for Croatia and the EU (2018) 

Graph 4.4.1: 

Total factor productivity developments: Croatia and its peers 

Graph 4.4.2:  Percentage difference in labour productivity at the aggregate and sectoral levels 

relative to the EU28 (2016) and percentage change (2012-2016) 

Graph 4.5.1:  Municipal waste treatment: Croatia and peers 

67 

68 

8 

8 

9 

10 

11 

12 

14 

23 

23 

24 

26 

28 

30 

31 

31 

32 

32 

34 

35 

35 

36 

37 

38 

41 

44 

44 

53 

2 

 
 
 
 
LIST OF BOXES 

Box 2.1: EU Funds and programmes to address structural challenges and fostering growth and 

competitiveness in Croatia 

Box 4.1.2: Croatia’s healthcare system and its financial sustainability 

Box 4.2.3: Affordable and sustainable housing 

Box 4.3.4: Monitoring performance in light of the European Pillar of Social Rights 

Box 4.4.5: Investment challenges and reforms in Croatia 

17 

26 

33 

42 

49 

3 

 
 
 
 
EXECUTIVE SUMMARY 

Addressing  structural  weaknesses  with  lasting 
effect  would  enable  Croatia  to  converge  faster 
to the rest of the EU. The forecast is for  Croatia 
to  enjoy  sustained  economic  growth  this  year, 
before  growth  tapers  off  in  2021  in  line  with 
weakening  global  demand.  Stable  economic 
growth for five years, coupled with prudent macro-
fiscal stabilisation policy,  has enabled the  country 
to  progressively  reduce  its  high  levels  of  public, 
private  and  external  debt,  and  in  turn  contain  the 
vulnerabilities of the economy. The unemployment 
rate  has  continued  to  fall,  thereby  raising  the 
disposable  income  of  households.  However,  in 
2018, Croatia’s GDP per  capita relative to the EU 
average  was  still  at  the  same  level  as  ten  years 
earlier.  Participation  in  the  labour  market  and 
labour  productivity  remain  low,  and  the  business 
environment  and  the  public  administration  are 
insufficiently  supportive  of 
faster  economic 
convergence.  Implementation  of  policy  measures 
addressing  these  weaknesses  is  proceeding  at  an 
uneven  pace.  Stepping  up    and  sustaining  the 
momentum  for  reform  while  resisting  policy 
reversals  is  particularly  important  in  light  of 
Croatia’s  firm  ambition  to  join  the  exchange  rate 
mechanism and adopt the euro.(1) 

After five years of recovery, Croatia’s economic 
output in real terms in 2019 finally exceeded its 
pre-crisis  level.  Real  GDP  is  estimated  to  have 
risen  by  3%  in  2019  following  a  smaller  rise  by 
2.7%  in  2018.  Growth  in  2019  was  fuelled  by 
improvements  in  the  labour  market  and  rising 
wages,  as  well  as  a  noticeable  pick  up  in 
investment. The increase in exports of both goods 
and  services  rebounded  after  a  rather  weak 
performance  in  2018,  but  imports  increased  even 
faster, restraining output growth. 

Going forward, the pace of economic growth is 
expected  to  slow  down.  Real  GDP  is  forecast  to 
rise  to  by  2.6%  in  2020  and  by  2.3%  in  2021. 
Despite having increased in recent years, potential 
growth remains relatively low, slowing the pace of 

(1)  This  report  assesses  Croatia’s  economy  in  light  of  the 
European  Commission’s  Annual  Sustainable  Growth 
Strategy,  published  on  17  December  2019.  In 
this 
document, Commission sets out a new strategy  on how to 
address  not  only  the  short-term  economic  challenges  but 
also  the  economy's  longer-term  challenges.  This  new 
economic agenda of competitive sustainability rests on four 
dimensions:  environmental  sustainability,  productivity 
gains, fairness and macroeconomic stability.  

economic  convergence  with  the  rest  of  the  EU  in 
real terms.   

investment 

investment  remains 

the 
After  contracting  significantly  during 
recession, 
in  Croatia  has  been 
recovering over the last five years. The recovery 
was due to the uptake of EU funds, while residual 
low. 
private  and  public 
Nonetheless, the investment rate remained slightly 
below that of its peer countries and below the EU 
average.  Investment  is  expected  to  rise  over  the 
next  few  years.  Identifying  investment  needs  in 
green  technologies  and  sustainable  solutions,  and 
securing  adequate  funding  will  be  crucial  if 
Croatia is to meet its climate and energy objectives 
and  shape  a  new  growth  model.  Croatia  has  also 
investment  needs  in  transport.  Investing  more  in 
skills,  research  and 
innovation  would  boost 
Croatia’s comparatively low productivity. 

Croatia  has  made 
addressing 
the 
recommendations.  

limited  progress 

in 
country-specific 

2019 

There  has  been  some  progress  in  the  following 
areas: 

  A new legal framework regulating agency-type 
institutions  was  adopted.  However,  the  public 
administration  remains  highly  fragmented  at 
the local government level. 

  The 

incremental 

implementation  of 

the 
curricular reform has started in all primary and 
secondary  schools.  The  authorities  have  also 
refocused active labour market policy measures 
to make them more effective.  

  Electronic  communication  is  being  gradually 
extended  to  all  courts  and  backlogs  have  been 
reduced  in  commercial  court  cases.  A  number 
of  measures  have  been  taken  and  action  plans 
drawn  up  to  lighten  excessive  product  and 
services market regulations. 

  Key  railway  projects  have  been  set  in  motion, 
though there has been no significant progress in 
promoting sustainable urban transport. 

There  has  been  limited  progress  in  the  following 
areas: 

4 

 
 
                                                           
Executive summary 

  The  new  Budget  Act,  which  aims  to  improve 
the  fiscal  framework  and  better  regulate  the 
system  of  state  guarantees,  has  still  not  been 
adopted.  

 

Improvements  to  the  social  benefit  system  are 
still at the preparatory phase, and the long-due 
legislation on civil and public service wages is 
at a standstill. 

  A  new  legislation  on  whistle-blowers  was 
adopted,  but  gaps  remain  in  the  framework  to 
prevent and sanction corruption.  

  There has been limited progress in reducing or 
scrapping  non-tax  parafiscal  charges.  The 
governance  framework  of  majority  owned 
state-owned  enterprises  has 
improved,  but 
progress  on  selling  off  state-owned  assets  has 
been slow. 

 

its  efficiency 

Investment in R&D has increased substantially, 
but 
low.  Energy 
efficiency and investment in renewable energy 
are hampered by administrative and legislative 
hurdles. 

remains 

  The  administrative  capacity  to  design  and 
implement public projects and policies remains 
constrained,  despite  the  establishment  of  an 
institutional framework for strategic planning. 

Croatia still faces a number of employment and 
social  challenges  to  deliver  on  the  principles  of 
the  European  Pillar  of  Social  Rights.  Despite 
improvements  in  the  labour  market,  Croatia’s 
employment rate remains low, especially for some 
categories  of  workers.  The  risk  of  poverty  is  still 
high  and  social  transfers  have  limited  capacity  to 
reduce poverty. As regards education, the share of 
early leavers from education and training is one of 
the  lowest  in  the  EU.  Croatia,  however,  lags 
behind  on  participation 
in  early  childhood 
education and care and quality of education.  

Croatia  has  reached  its  national  targets  under  the 
Europe  2020  strategy  on  renewables  (except  in 
transport),  on  energy  efficiency,  greenhouse  gas 
emissions,  the  employment  rate,  early  school 
leaving, and poverty and social  exclusion. Croatia 
is  still  to  implement  the  policies  set  out  in  the 
National  Energy  and  Climate  Plan  to  reach  the 

2030  target  for  greenhouse  gas  emissions  not 
covered  by  the  EU  emissions  trading  system. 
Transport  emissions  have  increased  and  are  a  key 
for 
challenge 
greenhouse  emissions.  Croatia  is  within  reach  of 
achieving 
tertiary  education 
attainment. The country is still below its target for 
investment in research and development. 

target  on 

the  2030 

reaching 

target 

its 

in 

Croatia  performs  well  with  regards  to  the 
United Nations Sustainable  Development  Goals 
(SDGs).  Croatia has made significant progress in 
SDG 8 (decent work and economic growth) with a 
number  of  sub-indicators  moving  towards  the  EU 
average. However, in the area of peace, justice and 
strong  institutions  (SDG  16),  there  is  room  for 
progress, particularly regarding corruption. (2)  

findings  of 

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

in-depth 

the 

The government debt ratio continues to fall and 
debt  sustainability  is  improving.  Thanks  to 
budget surpluses and robust nominal GDP growth, 
the  government  debt  ratio  is  estimated  to  have 
dropped to 71.3% in 2019. It is set to continue  to 
fall despite further tax cuts and spending projected 
to  grow  faster  than  GDP.  Having  refinanced  a 
large  portion  of  its  debt  in  recent  years  at  record-
low,  fixed  interest  rates  with  longer  maturities, 
Croatia has cut its  spending  on interest as a  share 
of  GDP  to  pre-crisis  levels.  Today,  Croatia  faces 
low fiscal sustainability risks in the short, medium 
and  long  term.  The  recent  reversal  of  some  key 
features  of  the  2018  pension  reform  may  not 
significantly affect this assessment, but negatively 
affects inter-generational equity and future pension 
adequacy.  The 
remains 
incomplete as the Fiscal Policy Commission is not 
fully  functional  and  the  Budget  Act  is  not  yet  in 
is 
place.  The 
improving,  but  smaller  municipalities  lag  behind. 
In  spite  of  increasing  revenues,  payment  arrears 

transparency  of 

local  budgets 

framework 

fiscal 

(2)  Within the scope of its legal basis, the European Semester 
can help drive national economic and employment policies 
towards the achievement of the United Nations Sustainable 
Development  Goals  (SDGs)  by  monitoring  progress  and 
ensuring  closer  coordination  of  national  efforts.  The 
present report contains reinforced analysis and monitoring 
on  the  SDGs.  A  new  annex  (ANNEX  E)  presents  a 
statistical  assessment  of  trends  in  relation  to  SDGs  in 
Croatia during the past five years, based on Eurostat’s EU 
SDG indicator set. 

5 

 
 
                                                           
Executive summary 

continued  accumulating  in  the  healthcare  system 
indicating problems with its financial viability. 

Thanks  to  the  improved  economic  situation, 
Croatia has reduced private debt and associated 
vulnerabilities. The ratio of private sector debt to 
GDP continued to fall in 2019, primarily due to the 
rise  of  nominal  GDP  and  the  slow-down  in  new 
lending.  An  increased  uptake  of  loans  with  fixed 
interest  rates  reduces  exposure  of  households  and 
companies  to  interest  rate  risk.  The  exposure  of 
private  sector  debt  to  foreign  exchange  risk 
remains significant, but has fallen due to increased 
kuna lending in 2019.   

Croatia further reduced its external imbalances 
thanks to its positive current account balances. 
Croatia’s net international investment position has 
improved  significantly  since  2011,  but  remains 
below prudential levels and the levels indicated by 
relevant  economic  indicators.  However,  Croatia’s 
external 
foreign  creditors  and 
investors  are  mainly  in  the  form  of  equity,  which 
helps  mitigate  risks.  The  current  account  surplus 
narrowed  in  2019  due  to  the  worsening  trade 
balance,  and  it  is  expected  to  continue  decreasing 
in  2020  and  2021.  Despite  this,  Croatia  is  set  to 
make  further  progress  in  reducing  its  external 
imbalances, primarily thanks to GDP growth. 

liabilities 

to 

The  unemployment  rate  continued  falling  in 
2019  but  participation  in  the  labour  market 
remains very low. Croatia’s unemployment rate is 
at  its  lowest  recorded  level  and  projected  to  fall 
further. The improvement in the labour market has 
benefitted  several  categories  of 
job  seekers, 
including the long-term unemployed. However, the 
share  of  the  working  age  population  in  work  or 
looking for work remains among the lowest in the 
EU  across  all  age  categories,  particularly  older 
workers  (55-64).  This  is  largely  related  to  early 
care 
retirement 
the  case  of  women.  The 
responsibilities 
in 
capacity 
administrative 
labour  market 
institutions  and 
their  cooperation  with  social 
services  remain  limited.  Furthermore,  Croatia’s 
population is shrinking due to the negative natural 
increase 
flows,  which 
particularly  affect  the  less  developed  regions. 
These  factors,  together  with  skills  gaps,  combine 
to  produce  labour  shortages,  which  are  becoming 
more pronounced in a number of sectors.  

rate  and  emigration 

as  well 

skills 

low 

and 

of 

reforms, 

Reforms  to  improve  the  business  environment 
and  boost  competitiveness  and  productivity 
growth  proceed  but  at  a  slow  pace.  The  drivers 
of  competitiveness  are  gradually  improving,  but 
the regulatory environment remains burdensome to 
business.  Despite 
certain 
recent 
professions  remain  highly  regulated.  Stringent 
regulatory  requirements  limit  firms  access  to 
capital,  reduce  economies  of  scale,  and  restrict 
competition.  The  length  of  court  proceedings  is 
also a burden on businesses,  although  Croatia  has 
made 
electronic 
communication  and  reducing  court  case  backlogs. 
Several anti-corruption measures are pending, and 
perceptions  of  corruption  continue 
to  have 
negative effect on the investment climate. 

progress 

rolling 

out 

in 

Croatia  has  made  slow  progress  in  selling  off  
its  holdings  in  state-owned  enterprises.  State-
owned  enterprises  continue  to  play  an  important 
role in the economy. Croatia is on track to meet its 
targets  on  divesting  shares  and  stakes  in  non-
strategic  companies,  though  the  targets  are  not 
ambitious. The recent adoption of the draft Law on 
Unvalued  Construction  Land,  which  is  being 
discussed in the Parliament, opens up potential for 
future  investments  by  providing  clarity  on  land 
ownership.  Initiatives  are  ongoing  to  strengthen 
and  improve  the  governance  of  state  owned 
enterprises. 

sector 

efficiency  of 

The 
the  Croatian  public 
administration  remains  low,  also  due  to  the 
high  fragmentation  at  the  local  level.  Weak 
public 
inefficient 
performance 
and 
the  public  administration 
coordination  within 
hamper  policy  effectiveness.  The  new 
legal 
framework  for  the  harmonisation  of  the  state 
agencies has been adopted. Croatia has taken steps 
to  modernise  and  improve  the  uptake  of  e-
government  services.  However,  the  wage-setting 
framework still lacks consistency across the public 
administration  and  public  services,  and  the  long-
due  legislation  on  civil  service  wages  is  at  a 
the  financial  and 
standstill.  At 
level, 
small 
administrative 
municipalities  do  not  match  their  responsibilities 
and  competencies.  This  contributes  to  uneven 
public  service  provision  across  the  country  and 
raises administrative costs. 

local 
resources  of  numerous 

6 

 
 
Executive summary 

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

workplace training. Participation in adult education 
also remains very low.  

is 

are 

still 

rests 

regions, 

In  some 

caused  by 

externalities 

sustainability 

challenges 
the 

on 
Environmental 
improving  waste  and  water  management, 
enhancing rail transport and renewable energy 
use.  Increased  investments  in  waste  and  water 
infrastructure  is  essential  to  sustain  Croatia’s 
economic  development.  Moreover,  an  improved 
waste management would support the transition to 
the 
a  circular  economy. 
environmental 
especially 
tourist  season  when 
aggravated  during 
population  spikes.  A  modal  shift  from  road 
transport to rail would help address the substantial 
negative 
accidents, 
labour 
congestion  and  pollution,  benefitting 
productivity. While Croatia ranks well in terms of 
electricity  production  from  renewable  sources, 
there 
substantial  unused  potential, 
particularly  in  solar  and  wind  energy.  Removing 
regulatory  barriers  and  developing  a 
solid 
incentive  framework  would  help  Croatia  in  this 
regard.  The  Commission’s  proposal  for  a  Just 
Transition Mechanism under the next multi-annual 
financial  framework  for  the  period  2021-2027, 
includes  a  Just  Transition  Fund,  a  dedicated  just 
transition  scheme  under  InvestEU,  and  a  new 
public  sector  loan  facility  with  the  European 
Investment Bank. It is designed to ensure  that the 
transition towards EU climate neutrality is  fair by 
helping  the  most  affected  regions  in  Croatia  to 
address  the  social  and  economic  consequences. 
Key  priorities  for  support  by  the  Just  Transition 
Fund,  set  up  as  part  of  the  Just  Transition 
Mechanism, are identified in Annex D, building on 
the analysis of the transition challenges outlined in 
this report. 

Banking  sector  key  indicators  continued  to 
move  in  the  right  direction,  thanks  to  the 
positive  overall  macroeconomic  situation.  The 
profitability and capital position of Croatian banks 
remain  solid,  and  the  share  of  non-performing 
loans continues to fall. However, legal uncertainty 
persists  in  the  banking  sector  arising  from  court 
cases  related  to  loans  previously  indexed  to  the 
Swiss franc. 

Poverty in Croatia continues to fall but remains 
above  the  EU  average.  Improved  conditions  in 
the  labour  market  have  resulted  in  a  further 
reduction  in  the  share  of  the  population  at  risk  of 
poverty  or  social  exclusion.  However, 
lower 
income  households  are  not  benefitting  as  much 
from  the  improved  economic  conditions.  The 
coverage of minimum income schemes is low, and  
Croatia’s  fragmented  social  protection  system  is 
ineffective  in  easing  labour  market  and  social 
distress. 

The short average working life in Croatia often 
results in inadequate pensions.  Early retirement 
continues to be  widespread, with  working lives in 
Croatia  being  among  the  shortest  in  the  EU.  This 
produces  a  considerably  negative 
impact  on 
pensions. People aged 65+ experience much higher 
risks  of  poverty  or  social  exclusion  compared  to 
the rest of the population, and compared to the EU 
average. Croatia’s reversal of some key features of 
the  reformed  pension  system  that  lengthened 
working  lives  has  not  helped  to  address  this 
challenge.  

The  reform  is  ongoing  to  raise  the  quality  of 
education  in  Croatia  but  challenges  remain. 
Participation in early childhood education and care 
has  increased  considerably,  though  it  remains  one 
of  the  lowest  in  the  EU.  The  latest  assessment  of 
school  pupils’  performance  on  reading,  science 
and  mathematics  confirms  that  there  are  quality 
gaps in the educational system. Croatia has started 
the  incremental  implementation  of  the  curricular 
reform  in  all  primary  and  secondary  schools.  The 
aim of the reform  is  to address the  weaknesses in 
the  quality  of  school  education.  Vocational 
education  and  training  does  not  offer  sufficient 

7 

 
 
1.  ECONOMIC SITUATION AND OUTLOOK 

GDP growth  

GDP  growth  is  estimated  to  have  picked  up  to 
3%  in  2019,  following  the  slowdown  in  2018.  
Following  the  peak  of  3.5%  in  2016,  real  GDP 
growth  gradually  slowed  to  2.7%  in  2018.  This 
slowdown was more pronounced than expected but 
appears  to  have  been  temporary.  Based  on  the 
strong  results  in  the  first  three  quarters  of  2019, 
growth picked up to an estimated 3% for the whole 
year.  Household  consumption  remains  the  main 
driver of growth, followed by a strong increase in 
investment.  Investment  benefited  from  strong 
uptake  of  EU 
funds  amid  sluggish  private 
investment  growth,  despite  favourable  financing 
conditions.  Exports  of  goods  picked  up  in  2019 
following  a  weaker  second  half  of  2018.  The  rise 
in  exports  of  services  slowed  partly  due  to  
capacity  constraints  in  the  peak  months  of  the 
slightly 
Import  growth 
tourist 
compared  to  2018  but  still  exceeded  the  rise  in  
exports,  leading  to  an  overall  deterioration  in  the 
trade balance.  

season. 

fell 

the  implementation  phase  in  2020  and  2021. 
Following  a  period  of  rapid  market  share  gains, 
Croatia’s  boom  in  exports  is  expected  to  slow 
down,  partly  due  to  uncertainties  surrounding 
global 
in 
Croatia’s main trading partners. Overall, real GDP 
growth  is  expected  to  slow  to  2.6%  and  2.3%  in 
2020 and 2021 respectively.  

trade  and  an  economic  slowdown 

Croatia  has  experienced  a  lost  decade  in  terms 
of  economic  catch  up  with  the  rest  of  the  EU. 
Following  a  six-year  recession  and  a  moderate 
recovery,  the  volume  of  economic  output  only 
surpassed  the  pre-crisis  level  in  2019.  Similarly, 
Croatia’s  GDP  per  capita  in  purchasing  power 
standard was 63% of the EU average in 2018, the 
same  value  as  in  the  last  pre-crisis  year  (2008). 
Furthermore,  Croatia  fell  further  behind  its  more 
advanced  peers  (3)  in  central  and  eastern  Europe 
and  was  surpassed  by  others.  Despite  stable 
growth,  Croatia’s  still  relatively 
low  growth 
potential will continue to be a break on it catching 
up with the rest of the EU in real terms.  

Graph 1.1: 

Real GDP growth by segment of demand 

Graph 1.2: 

Real convergence of central and eastern 
European Member States 

Source: European Commission 

Economic growth is expected to slow down due 
to  external  pressure.  Strong  domestic  demand  is 
expected  to  remain  the  main  driver  of  growth. 
Household  disposable  income  should  be  boosted 
by the  continued rise in employment,  increases in 
public and private-sector wages and low inflation. 
Underpinning  the  rise  in  both  public  and  private 
investment,  more  EU-funded  projects,  from  the 
current  programming  period,  should  be  reaching 

(1) Gross domestic product at current prices per head of 
population in PPS as a share of EU average 
Source: Eurostat 

Investment 

Investment in Croatia remains weak and lower 
than investment in peer countries. Its investment 

(3)  Peer  member  states  are  Czechia,  Hungary,  Poland, 

Slovakia and Slovenia  

8 

-6-4-202468101112131415161718192021% of GDPImports of G&SExports of G&SChanges in inventoriesInvestment (GFCF)Gov't consumptionHousehold consumptionGross domestic productforecast30405060708090100% of EU average20082018 
 
  
  
                                                           
1. Economic situation and outlook 

deleveraging. External imbalances are projected to 
continue to fall, driven primarily by GDP growth. 

Graph 1.3:  Current account and net international 

investment position 

share  of  potential  GDP  has  been  lower  than  its 
peers  every  year  bar  two  years  since  2001.  With 
the  collapse  of  Croatia’s  pre-crisis  growth  model 
based  on  debt-financed  consumption  and  public 
investment,  gross  fixed  capital  formation  fell 
sharply. Since the start of the recovery, growth has 
primarily been driven by consumption and exports, 
with  low  investment  due  to  the  high  private  and 
public-sector  debt  overhang.  In  2018,  real  gross 
fixed capital formation was still almost 20% below 
its  peak  in  2008.  However,  the  injection  of  EU 
funds since Croatia’s accession to the EU in 2013 
has  boosted  investment.  The  take-up  of  funds  is 
expected  to  peak  in  the  next  two  years  as  more 
projects 
phase. 
Investment 
to  provide  a  higher 
contribution to growth in both 2020 and 2021.  

implementation 

is  expected 

reach 

the 

External position  

to  narrow  due 

A weakening trade balance is forecast to reduce 
the  current  account  surplus.  After  peaking  in 
2017 at 3.3% of GDP, the current account surplus 
started 
to  a  progressively 
deteriorating  trade  balance.  In  2018,  the  trade 
balance 
turned  negative,  as  strong  domestic 
demand drove an increase in  imports.  As a result, 
the  current  account  surplus  fell  to  1.9%  of  GDP. 
However,  when  adjusted  for  cyclical  effects,  the 
current  account  surplus  was  3.1%  of  GDP.  The 
period  of  Croatia  increasing  strongly  its  export 
market  share  appears  to  have  ended  in  2018.  It  is 
expected  to  turn  negative  in  2019,  due  to  a 
slowdown  in  Croatia’s  largest  trading  partners.  
Exports  to  central  and  eastern  European  Member 
States  have  increased  steadily  since  2012  and  are 
projected to stimulate further increases in exports.  
Overall,  the  current  account  balance  is  forecast  to 
continue  declining  in  2020  and  2021  as  the  trade 
balance is expected to further deteriorate.  

Source: Eurostat 

Inflation and interest rates  

Headline  inflation  fell  in  2019,  despite  rising 
disposable  incomes  and  accelerating  economic 
activity. HICP inflation fell to 0.8% in 2019 due to 
the  full  year  effect  of  the  12-percentage  point 
reduction  in  the  VAT  rate  on  some  unprocessed 
foods.  Compared  to  2018,  energy  price  inflation 
slowed, leading to a lower producer price inflation 
in 2019. Inflation is expected to pick up but remain 
moderate  overall,  at  1.5%,  in  2020  and  1.7%  in 
2021.  Core  inflation,  having  remained  stable  in 
2019, is projected to pick up in 2020 and 2021 to 
1.8%. Low or negative energy price inflation and, 
to  a  lesser  degree,  a  new  12-percentage  points 
VAT  reduction  on  food  served  in  restaurants  are 
likely  to  curb  price  increases  throughout  the 
forecasting period.  

its  external 
Croatia  has  greatly  reduced 
imbalances  since  2010,  thanks  to  sustained 
current  account  surpluses.  The  net  international 
investment position  was at  -57.9% of GDP at the 
end  of  2018,  a  7.8  percentage  point  improvement 
since 2017 and around 42 percentage points above 
low.  By  September  2019,  it  had 
its  record 
increased 
to  a 
further 
particularly  strong  current  account  surplus  in  the 
third  quarter  of  2019.  Gross  external  debt  fell  in 
2018  by  6.2  percentage  points,  to  83%  of  GDP, 
to  government  and  corporate 
mainly  due 

-49.7%  owning 

to 

9 

and 

Interest  rates  fell  amid  high  competition  in  the 
banking  sector  and  improvements  in  Croatia’s 
risk  profile.  Lending  conditions  for  new  loans  to 
corporations 
households 
continue 
currency 
denominations,  purposes  and  maturities.  Banks’ 
net  interest  rate  margins  are  thus  being  further 
squeezed,  with  deposit  interest  rates  already  close 
to  zero.  Given  ample  liquidity  in  the  banking 
sector,  moderate  private-sector  demand  for  credit 

non-financial 
across 

ease, 

all 

to 

-120-100-80-60-40-200-30-20-10010203004050607080910111213141516171819-Q2% of GDP% of GDPCapital account (lhs)Secondary income balance (lhs)Primary income balance (lhs)Trade balance - services (lhs)Trade balance - goods (lhs)Current account balance (lhs)Net international investment position (rhs) 
  
1. Economic situation and outlook 

projected at 71.2% of GDP in 2019. By 2021 it is 
expected  to  reach  64.4%  of  GDP,  due  to  the 
increase in GDP and small surpluses. 

Labour Market  

employment 

Although labour  market conditions continue to 
improve,  employment  levels  remain  low.  After 
peaking in 2013, the unemployment rate has fallen 
continuously  due  to  increased  employment  and  to 
significant  emigration.  In  2018,  unemployment 
rate  fell  to  8.4%,  the  lowest  recorded  level. 
labour  market 
However, 
participation rates remain low, well below the EU 
average.  Some  groups  of  workers 
remain 
particularly  vulnerable,  namely  the  low  skilled, 
elderly  and  the  disabled.  The  activity  rate  is 
expected  to  increase  gradually  in  2020  and  2021, 
as improved labour market outcomes start drawing 
people  out  of  inactivity.  Despite  relatively  high 
unemployment,  labour  shortages  are  becoming 
more apparent in some sectors. . 

and 

Graph 1.4: 

Labour market trends 

Source: Eurostat 

in 

Wages continue to grow amidst low inflation. It 
is still difficult to interpret trends in wages due  to 
the  data  reported  by 
large  discrepancies 
different  sources.  National  accounts  show  that 
nominal  compensation  per  employee  increased  by 
1.9% in 2018, while administrative data show that 
average gross wages rose by a more sizeable 4.9% 
in  the  same  year  (and  3.5%  year-on-year  in  the 
first  nine  months  of  2019).  Looking  ahead, 
nominal  compensation  per  employee  is  projected 

and  active  debt  reduction  by  the  government, 
interest  rates  are  likely  to  continue  to  fall.  Stable 
growth  and  prudent  fiscal  policy  contribute  to  a 
further  improvement  in  Croatia's  risk  premium. 
The  spread between  yields on  Croatia’s sovereign 
debt  and  the  German  bund  dropped  to  94  basis 
points  in  October  2019,  well  below  most  of 
Croatia’s peers and close to the EU average of 82 
basis points. 

Private indebtedness  

fell  despite  a 
Overall  private-sector  debt 
moderate pick up in borrowing. In the first three 
quarters  of  2019,  consolidated  household  and 
corporate  debt  continued  decreasing,  reaching 
34.3%  and  58.4%  of  GDP  respectively,  some  8 
and  24  percentage  points  below  their  peaks 
registered in 2010. This was facilitated by nominal 
GDP growth and a slight appreciation in the value 
of the kuna. Household borrowing accelerated, due 
to rising consumer lending. The corporate sector is 
still  deleveraging,  although  new  borrowing  for 
investment  purposes  rose  noticeably.  Household 
borrowing is likely to increase further as consumer 
confidence remains high and improvements in the 
labour  market 
increase  people’s  disposable 
incomes.  Corporate  lending  is  set  to  remain  low 
given  the  high  levels  of  debt  and  the  share  of 
non-performing company loans.  

Public finances  

further  savings 

The  general  government  balance  remains  in 
surplus.  Following  its  first  ever-recorded  surplus 
in  2017, 
the  general  government  balance 
deteriorated  somewhat  in  2018,  but  remained 
positive  at  0.3%  of  GDP.  The  deterioration  was 
mainly due to the short-lived impact of the call of 
the  government  guarantees  in  the  Uljanik  and  3. 
Maj  shipyards.  As  in  the  previous  three  years, 
interest 
Croatia  achieved 
payments. A high portion of debt was refinanced at 
much lower rates, while revenue growth continued 
to  exceed  GDP  growth,  despite  tax  cuts.  The 
deterioration  of  the  structural  balance  was  more 
pronounced  (1%  of  GDP),  as 
the  economy 
continued  expanding  after  the  output  gap  was 
closed. In 2019, the general government surplus is 
expected  to  further  narrow  to  0.1%  of  GDP  as 
expenditure growth picks up (mostly due to public 
sector wages) and tax and social contribution cuts 
curb  from  revenue  growth.  Government  debt  is 

in 

10 

60%65%70%75%80%0%10%20%30%40%50%60%040506070809101112131415161718Activity rate 20-64 (rhs)Unemployment rate 15-74 (lhs)Long-term unemployment rate 15-74 (lhs)Youth unemployment rate 15-24 (lhs)NEET rate 15-24 (lhs) 
  
1. Economic situation and outlook 

social exclusion.  People excluded from the labour 
market,  the  low-skilled,  older  people  and  people 
with disabilities remain most exposed to the risk of 
poverty  or  social  exclusion.  In-work  poverty, 
already  below  the  EU  average,  has  fallen  further. 
Income  inequality,  as  measured  by  the  S80/S20 
income quintile share ratio, was just below the EU 
average  in  2018,  even  though  Croatia  has  one  of 
the least progressive labour income tax systems in 
the  EU,  measured  by  comparing  the  difference  in 
tax  levels  between  high-income  and  low-income 
earners (6). Gender inequality  in  Croatia is among 
the  highest  in  Europe  (European  Institute  for 
Gender Equality, 2019). 

Potential growth  

Croatia’s potential for growth is increasing but 
remains  insufficient  to  achieve  closer  economic 
convergence.  Potential  growth  is  estimated  to 
have increased gradually since 2010, but it remains 
low  compared  to  that  in  peer  countries.  After  10 
years  of  being  a  drag  on  growth,  the  labour 
contribution to potential growth turned positive in 
2019,  as  the  employment  rate  recovered  and  the 
activity  rate  improved  marginally.  Nevertheless, 
labour  participation  remains  chronically  low  in 
Croatia. This, together with negative demographic 
developments,  is  a  drag  on  potential  growth.  The 
contribution of capital accumulation is in line with 
Croatia’s peers but remains burdened by relatively 
high 
levels  of  corporate  debt.  Total  factor 
productivity significantly lags behind peers due to 
poor allocative efficiency, weak goods and service 
market  efficiency, 
in 
network  industries,  and  weaknesses  in  public 
sector  governance.  Although  Croatia’s  potential 
growth  is  forecast  to  continue  increasing  in  2020 
and 2021, it is set to remain modest for a catching-
up  economy,  at  2.5%  on  average  over  the  2019-
2021 period, one of the lowest among its peers.  

insufficient  competition 

Regional Disparities 

A  marked  regional  divide  persists  in  Croatia. 
There are large differences in GDP levels between 
counties, and in particular between the capital and 
the rest of the country. In 2016, Zagreb accounted 

(6)  Difference  between  the  tax  wedge  for  high  ( 167%  of  the 
average  wage)  and  low  (50%  of  the  average  wage)  for  a 
variety  of  family  compositions.  The  tax  wedge  includes 
personal 
family 
allowances and benefits (European Commission 2020c). 

social  contributions, 

income 

tax, 

to increase by 3% on average in the 2019-2021. In 
real  terms,  compensation  per  employee  rose  by 
0.3%  in  2018  and  is  expected  to  rise  by  1.7%  in 
2019 and 2.5% in 2020, before slowing to 1.1% in 
2021,  underpinned  by  strong  labour  demand, 
public sector salary increases(4) and an increase in 
the minimum wage for 2020. 

Despite  rising  wages,  Croatia  has  broadly 
maintained 
its  cost  competitiveness.  Wage 
growth  measured  on  the  basis  of  administrative 
data  is  consistent  with  economic  fundamentals(5). 
Nevertheless,  in  2018,  wage  growth  exceeded  the 
rate  consistent  with  preserving  Croatia’s  cost 
competitiveness, even though real wages rose less 
than labour productivity.  

Graph 1.5:  Nominal wage growth: actual and predicted 

based on economic fundamentals 

Source: Eurostat, Commission calculations 

Social developments  

The share of people at risk of poverty or social 
exclusion  is  approaching  the  EU  average.  The 
the  prolonged 
recovery  after 
labour  market 
recession  is  lifting  many  people  out  of  poverty  or 

(4)  Wages  for  all  civil  and  public  servants  will  increase  by 

6.12% in 2020, 3 increments of 2% 

in 

(5)  This  is  a  benchmark  for  wage  growth  consistent  with 
internal  and  external  labour  market  conditions.  It  is 
calculated  as  the  wage  growth  predicted  on  the  basis  of 
changes 
the 
unemployment  rate,  and  consistent  with  a  constant  real 
effective  exchange  rate  adjusted  by  unit  labour  costs  (see 
Labour  market  and  wage  developments  in  Europe,  2019; 
European  Commission  (2015):  “Benchmarks  for 
the 
assessment of wage developments: Spring 2015.”) 

labour  productivity,  prices 

and 

11 

-6%-4%-2%0%2%4%6%8%04050607080910111213141516171819Predicted wage growthActual nominal compensation growthNominal compensation growth (constant UCL-based REER) 
  
                                                           
                                                           
1. Economic situation and outlook 

for  34%  of  national  GDP,  though  it  is  home  to 
only  19%  of  country’s  population.  Most  of  the 
population  (65%)  lived  in  areas  with  a  GDP  per 
capita  below  55%  of  the  EU  average  (2016).  By 
contrast,  GDP  per  capita  in  Zagreb  was  107%  of 
the  EU  average,  and  in  four  counties  in  eastern 
Croatia,  it  was  but  34-36%  of  the  EU  average. 
These disparities reflect very diverse labour market 
outcomes. In 2018, the unemployment rate ranged 
from  4.7%  in  the  City  of  Zagreb  to  24.3%  in  the 
Sisak-Moslavina  county.  There  is  also  a  high 
correlation  between  labour  market  outcomes  and 
demographic change. Although the population has 
decreased  across  the  country  since  2010,  poorer 
regions,  especially 
in  eastern  Croatia,  have 
experienced much higher rates of decline driven by 
outmigration and ageing (see Section 4.3). 

Graph 1.6:  GDP per capita in PPS as share of EU average 

(EU = 100) by county in 2016 

Sustainable Development Goals 

Over  the  past  five  years,  Croatia  performed 
well  in  most  areas  covered  by  the  United 
Sustainable  Development  Goals 
Nations 
(SDGs). Significant progress was achieved in SDG 
8  (decent  work  and  economic  growth)  with  a 
number  of  sub-indicators  converging  towards  the 
EU average. Croatia has also fared well in poverty 
reduction  (SDG  1),  where  the  percentage  of  the 
population  at  risk  of  poverty  or  social  exclusion 
reduced  substantially.  However,  as  discussed  in 
Section 4.3, Croatia ranks below the EU average in 
a  number  of  labour  market  and  social  welfare 
indicators.  Moderate  progress  was  achieved  in 
areas such as good health and well-being (SDG 3), 
quality  education  (SDG  4),  affordable  and  clean 
energy  (SDG  7),  and  industry,  innovation  and 
infrastructure  (SDG  9).  Areas  where  Croatia  has 
made no progress include peace, justice and strong 
institutions  (SDG  16)  where  a  number  of  sub-
indicators remain flat.  Despite Croatia performing 
well  in  areas  such  as  the  gender  pay  gap  and  the 
gender employment gap vis-à-vis the EU average, 
gaps have widened from the objectives under SDG 
5 (gender equality). 

Source: Eurostat  

Statistical issues 

on 

improving 

is  working 

the 
Croatia 
consistency,  completeness  and  timeliness  of  its 
statistics,  but  major  gaps  remain.  In  particular, 
measures are being taken to strengthen institutional 
and  methodological  capacity  to  collect,  produce 
and disseminate statistics. On 21 October 2019, the 
Croatian  Bureau  of  Statistics  released  partly 
revised  annual  national  accounts  for  1995-2017, 
improved  cross-domain  consistency  of 
with 
aggregate  data.  Data  on  non-financial  sectoral 
accounts have yet to be published. 

12 

 
 
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. 
(4) Defined as the income tax on gross wage earnings plus the employee's social security contributions less universal cash benefits, 
expressed as a percentage of gross wage earnings. 
Source: Eurostat and ECB as of 9-1-2020, where available; European Commission for forecast figures (Autumn forecast 2019)         

13 

2004-072008-122013-1620172018201920202021Real GDP (y-o-y)4.7-2.01.33.12.73.02.62.3Potential growth (y-o-y)3.00.10.71.31.72.12.52.8Private consumption (y-o-y)3.9-1.8-0.13.13.2...Public consumption (y-o-y)4.50.00.32.21.3...Gross fixed capital formation (y-o-y)6.6-5.72.25.14.1...Exports of goods and services (y-o-y)6.2-1.76.86.83.7...Imports of goods and services (y-o-y) 6.2-4.35.68.47.5...Contribution to GDP growth:Domestic demand (y-o-y)5.0-2.50.43.33.0...Inventories (y-o-y)0.3-0.70.40.51.6...Net exports (y-o-y)-0.61.10.5-0.6-1.8...Contribution to potential GDP growth:Total Labour (hours) (y-o-y)0.5-0.5-0.6-0.5-0.20.10.40.7Capital accumulation (y-o-y)1.91.10.60.70.81.01.11.3Total factor productivity (y-o-y)0.6-0.60.71.11.11.00.90.9Output gap3.4-0.4-3.50.31.22.02.21.9Unemployment rate12.111.816.011.08.46.95.84.9GDP deflator (y-o-y)3.72.50.21.21.81.92.42.5Harmonised index of consumer prices (HICP, y-o-y)2.82.90.41.31.60.81.51.7Nominal compensation per employee (y-o-y)4.72.0-1.30.22.22.62.52.2Labour productivity (real, person employed, y-o-y)2.60.00.90.90.8...Unit labour costs (ULC, whole economy, y-o-y)2.02.0-2.2-0.71.41.01.00.8Real unit labour costs (y-o-y)-1.6-0.5-2.5-1.9-0.4-0.9-1.4-1.6Real effective exchange rate (ULC, y-o-y)1.6-1.0-3.1-0.10.9-2.1-1.6-1.0Real effective exchange rate (HICP, y-o-y)0.8-0.70.30.62.5-1.5-1.1-0.6Net savings rate of households (net saving as percentage of net disposable income).6.0......Private credit flow, consolidated (% of GDP)14.83.6-0.61.52.3...Private sector debt, consolidated (% of GDP)86.7118.6112.697.893.9...of which household debt, consolidated (% of GDP)32.540.738.534.134.1...of which non-financial corporate debt, consolidated (% of GDP)54.277.874.163.759.9...Gross non-performing debt (% of total debt instruments and total loans and advances) (2)..11.88.47.0...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)9.8-4.9-2.62.94.6...Residential investment (% of GDP)........Current account balance (% of GDP), balance of payments-7.3-4.71.13.31.91.60.70.3Trade balance (% of GDP), balance of payments-8.6-4.2-0.30.6-0.8...Terms of trade of goods and services (y-o-y)1.40.60.50.30.70.71.11.2Capital account balance (% of GDP)0.00.10.71.11.4...Net international investment position (% of GDP)-69.5-89.3-81.8-65.6-57.9...NENDI - NIIP excluding non-defaultable instruments (% of GDP) (1)-32.4-49.3-40.2-19.4-13.7...IIP liabilities excluding non-defaultable instruments (% of GDP) (1)74.894.094.175.870.7...Export performance vs. advanced countries (% change over 5 years)30.7-3.4-7.319.820.5...Export market share, goods and services (y-o-y)-0.1-5.84.72.51.61.9-0.4-0.9Net FDI flows (% of GDP)-4.7-2.9-2.0-2.3-1.4...General government balance (% of GDP)-3.5-5.7-3.80.80.30.10.00.0Structural budget balance (% of GDP)..-2.30.7-0.3-0.8-1.0-0.8General government gross debt (% of GDP)39.556.082.878.074.871.267.764.4Tax-to-GDP ratio (%) (3)36.736.037.037.838.638.637.937.5Tax rate for a single person earning the average wage (%) (4)..29.228.829.5...Tax rate for a single person earning 50% of the average wage (%) (4)..21.920.020.0... 
 
 
  
 
 
2.  PROGRESS WITH COUNTRY-SPECIFIC RECOMMENDATIONS 

of 

all 

57% 

Since  the  start  of  the  European  Semester  in 
2014, 
country-specific 
recommendations  addressed  to  Croatia  have 
recorded  at  least  ‘some  progress’ (7).  ‘Limited’ 
or  ‘no  progress’  has  been  made  in  the  remaining 
(Graph  2.1). 
43%  of 
recommendations 
Implementation  of 
reform  agenda  has 
the 
proceeded  at  an  uneven  pace  in  different  policy 
areas.  Most  progress  has  been  made  on  fiscal 
policy  and  labour  market.  There  has  been  some 
backtracking on pensions. 

the 

Graph 2.1:  Overall multiannual implementation of 2014-

2019 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 2020 Country Report since the CSRs 
were first adopted.  
Source: European Commission 

Croatia  has  pursued  a  responsible  fiscal  policy 
but  gaps  remain  in  its  fiscal  framework.  After 
timely  correcting  its  excessive  deficit  in  2016 
(which  allowed  it  to  exit  the  Excessive  Deficit 
Procedure  in  June  2017),  Croatia  continued  to 
pursue  a  prudent  fiscal  policy.  Since  2016, 
Croatia’s  structural  balance  remained  consistently 
above its medium-term objective, in spite of some 
deterioration  in  2018  and  2019.  Regarding  fiscal-
structural reforms, the Fiscal Policy Commission is 
still  not  operational  in  line  with  the  new  Fiscal 
Responsibility  Act.  The  new  Budget  Act,  that 
aimed  to  improve  the  budgetary  framework  at 

(7)  For the assessment of other reforms implemented in the 
past, see in particular Section 4. 

central  and  local  level  and  better  regulated  the 
system  of  government  guarantees,  has  not  been 
adopted. 

Croatia  has  taken  measures  to  improve  the 
functioning of the labour market and to reform 
its  education  system.  Two  successive  reforms, 
implemented in 2013 and 2014, facilitated the use 
of fixed-term contracts and flexible types of work 
(distance work, part-time work, seasonal work and 
agency  work),  and  simplified  the  procedures  for 
terminating  permanent  employment  contracts.  In 
2015,  the  assessment  of  disability  claims  was 
harmonised  and  moved  to  a  new  single  expert 
evaluation  body.  The  long-due  legislation  on 
wage-setting  for civil and public servants  has still 
not been adopted by the government. In 2019, the  
incremental 
the  curricular 
reform has started in all schools, and active labour 
market policies have been refocused to make them 
more effective. 

implementation  of 

to 

the 

continue 

justice  system,  and 

Steps  have  been  taken  to  improve  the  business 
the 
environment, 
resilience  of  the  financial  sector.  Efforts  to 
reduce  the  administrative  burden  and  improve  the 
competitiveness  of 
the  services’  sectors  are 
advancing, while a review of parafiscal charges is 
improve 
on-going.  Measures 
governance of state-owned enterprises, and Croatia 
is  taking  steps  to  reduce  state  ownership  in 
companies.  The  reduction  of  court  backlogs  and 
the  resolution  of  older  cases  is  hindered  by  the 
inflow of new cases, although measures to improve 
efficiency  in  the  justice  system  are  progressing. 
Insolvency  procedures  have  been 
thoroughly 
revised  and  the  weaknesses  identified  in  the 
banking sector  have been addressed following the 
comprehensive  portfolio  screening  in  2014.  The 
Croatian 
and 
Development  has  undergone  an  asset  quality 
review that identified areas for improvement, some 
of which are being addressed. 

Reconstruction 

Bank 

for 

and 

systems, 

Reforms  of  the  public  administration,  social 
benefits 
have 
healthcare 
progressed  slowly.  Measures  to  harmonise  the 
regulation  of  state  agencies  are  making  progress, 
but the overall modernisation process of the public 
administration  requires  further  policy  action. 
Constrained  administrative  capacity  and  process 
complexity impair a more efficient implementation 

14 

No Progress6%Limited Progress37%Some Progress43%Substantial Progress7%Full Implementation7% 
   
                                                           
2. Progress with country-specific recommendations 

of  EU  co-funded  projects.  Measures  aimed  at 
improving  social  benefits  and  tackling  payment 
arrears in the healthcare system remain limited. 

Key  elements  of  the  reformed  pension  system 
have  been  reversed.  In  December  2018,  the 
parliament  adopted  an  important  pension  reform 
package, which came into force in 2019. However, 
elements  of  the  reform  aimed  at  lengthening 
working 
lives  were  subsequently  reversed  in 
response to trade union demands. 

requirements.  It  also  provided  support  to  help 
simplify  the  registration  of  private  businesses 
through  the  on-line  platform  START,  which  was 
launched in November 2019. In 2019, work started 
on improving the quality of the budgetary process, 
creating 
the 
performance  of  public  polices  and  contributing  to 
better  strategic  planning.  Support  will  also  be 
provided for improving financial supervision. 

framework 

assessing 

for 

a 

the 

to  some  progress 

limited (8)  progress 
2019 

in 
Croatia  has  made 
addressing 
country-specific 
recommendations (see Table 2.1). There has been 
some progress in the areas  of education curricular 
reform  and  governance  of  state  agencies.  Some 
progress has also been made new package of active 
labour  market  policy  measures.  Croatia  signed 
several contracts for key railway projects in 2019, 
in 
the  area  of 
thus  making  some  progress 
sustainable 
the  use  of 
transport.  Extending 
electronic communication in court proceedings and 
reducing  backlogs  in  commercial  court  cases  has 
the  area  of  court 
led 
proceedings.  A  number  of  measures  aimed  at  the 
alleviation  of  excessive  administrative  obligations 
and 
services  were 
implemented, which led to some improvements in 
the  business  environment.  Progress  has  been 
limited  in  other  areas,  such  as  reinforcing  the 
budgetary  framework, 
setting 
protection 
frameworks, 
investment-related 
economic policy, improving corporate governance 
and  intensifying  the  divestment  of  shares  and 
stakes  in  state-owned  enterprises,  and  in  the 
prevention and sanctioning of corruption. 

reforming  wage 

liberalisation 

refocussing 

improving 

system, 

the 

of 

in 

the  social   

At the request of a Member State, the European 
Commission  can  provide  tailor-made  expertise 
via the Structural Reform Support Programme 
to  help  design  and 
implement  growth-
enhancing  reforms.  Since  2016,  the  Commission 
has  provided  this  support  to  Croatia  for  over  50 
projects.  In  2019,  several  projects  were  finalised. 
For  example, 
the 
collection,  classification  and  analysis  of  local 
reporting 
social 

the  Commission  supported 

benefits  with 

improved 

(8)  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 Annex A. 

15 

 
                                                           
2. Progress with country-specific recommendations 

Table 2.1: 

Assessment of the 2019 country-specific recommendations (CSRs) assessment (*) 

(*)The assessment of CSR 3 does not take into account the contribution of the EU 2021-2027 cohesion policy funds. 
The regulatory framework underpinning the programming of the 2021-2027 EU cohesion policy funds has not yet been 
adopted by the co-legislators, pending inter alia an agreement on the multiannual financial framework (MFF). 
Source: European Commission 

16 

Commitments  Summary assessment CSR 1: Reinforce the budgetary framework and monitoring of contingent liabilities at central and local level. Reduce the territorial fragmentation of the public administration and streamline the functional distribution of competencies. (MIP relevant)   Croatia has made Limited Progress in addressing CSR 1:  Limited progress in reinforcing the budgetary framework   Some progress in streamlining the public administration    CSR 2: Deliver on the education reform and improve both access to education and training at all levels and their quality and labour market relevance. Consolidate social benefits and improve their capacity to reduce poverty. Strengthen labour market measures and institutions and their coordination with social services. In consultation with the social partners, introduce harmonised wage-setting frameworks across the public administration and public services. (MIP relevant)   Croatia has made Some Progress in addressing CSR 2:  Some progress in delivering on the education reform    Limited progress in consolidating social benefits  Some progress in strengthening labour market measures   Limited progress in harmonising wage-setting frameworks in the public sector CSR 3: Focus investment-related economic policy on research and innovation, sustainable urban and railway transport, energy efficiency, renewables and environmental infrastructure, taking into account regional disparities. Increase the administration's capacity to design and implement public projects and policies. (MIP relevant)   Croatia has made Limited Progress in addressing CSR 3:  Limited progress in focussing investment in research and innovation  Some progress in urban and railway transport  Limited progress in energy and environmental infrastructure  Limited progress in increasing the administrative capacity to design and implement public policies  CSR 4: Improve corporate governance in State-owned enterprises and intensify the sale of such enterprises and non-productive assets. Enhance the prevention and sanctioning of corruption, in particular at the local level. Reduce the duration of court proceedings and improve electronic communication in courts. Reduce the most burdensome parafiscal charges and excessive product and services market regulation. (MIP relevant)   Croatia has made Limted Progress in addressing CSR 4:  Limited progress in state-owned enterprises governance and divestment   Limited progress in enhancing the prevention and sanctioning of corruption  Some progress in reducing court proceedings and improving electronic communication   Limited progress in reducing parafiscal charges  Some progress in reducing excessive product and services market regulation    
 
     
 
2. Progress with country-specific recommendations 

Box 2.1: EU Funds and programmes to address structural challenges and fostering growth 
and competitiveness in Croatia 

Croatia is one of the countries benefiting most from EU support.  The financial allocation from the EU 
Cohesion  Policy  Funds (1)  for  Croatia  amounts  to  EUR  9.9  billion  in  the  current  Multiannual  Financial 
Framework, equivalent to around 2.9% of  GDP annually. By the  end of 2019, the entirety of this amount  
was  allocated  to  specific  projects,    while  EUR  2.8  billion    was  reported  as  spent  by  the  selected  projects 
(2)(3) showing a level of implementation well below the EU average. 

While  bringing  about  a  more  harmonious  development  through  reducing  economic,  social  and 
territorial  disparities,  EU  Cohesion  policy  funding  also  contributes  significantly  to  addressing 
structural challenges in Croatia. The Cohesion Policy programmes for Croatia have allocated EU funding 
of EUR 1.9 billion for smart growth, EUR 4.0 billion for sustainable growth and sustainable transport and 
EUR 2.2 billion for inclusive growth. In 2019, following a performance review (4) EUR 301.3 million have 
been made available within performing priorities. 

EU  Cohesion  policy  funding  is  contributing  to  major  transformations  of  the  Croatian  economy.  It 
promotes  growth  and  employment  via  investments,  among  others,  in  research,  technological  development 
and  innovation,  competitiveness  of  enterprises,  sustainable  development  (energy,  environment  and 
transport),  employment  and  labour  mobility.  By  2019,  investments  driven  by  EU  Funds  have  already 
supported 933 new enterprises as well as co-financed equipping 151 schools with IT equipment in order to 
increase skills of the students. With the objective of reducing greenhouse gas emissions, 4,287 households 
have improved their energy efficiency classification and 20 km of rail has been reconstructed or upgraded to 
promote the modal shift from the roads. Support allocated for improved wastewater treatment  will benefit 
almost 1.6 million people. Support to 1,436 primary health care providers will improve access to healthcare, 
especially in remote and deprived areas. The European Social Fund has focused on supporting women by 
offering  training  and  employment  opportunities  and  skilling  around  7,000  women,  who  will  provide  care 
services for nearly 30,000 elderly and disadvantaged people in their households. Within these interventions, 
women receive additional education for professions that are in high demand in their local community. 

Agricultural and fisheries funds and other EU programmes also contribute to addressing investment 
needs. The European Agricultural Fund for Rural Development (EARDF) makes available in total of EUR 
2.38 billion, and the European Maritime and Fisheries Fund (EMFF) in total of EUR 344 million (including 
the national co-financing for both). Croatia also benefits from other EU programmes, such as the Connecting 
Europe  Facility,  which  allocated  EUR  430.5  million  to  specific  projects  on  strategic  transport  networks, 
Horizon 2020 allocated EU funding of EUR 84 million (including 40 SMEs with about EUR 15.2 million). 

EU  funding  contributes  to  the  mobilisation  of  important  private  investment.  By  the  end  of  2018, 
European Structural and Investment Funds (ESIF) supported programmes alone mobilised additional capital 
by committing about 553 million EUR in the form of loans, guarantees and equity (5), which is 5.6% of all 
decided allocations of the ESIF. 

EU  funds  already  invest  substantial  amounts  on  actions  in  line  with  the  Sustainable  Development 
Goals (SDGs). In Croatia, European Structural and Investment Funds support 13 out the 17 SDGs and up to 
95% of the expenditure is contributing to those.  

(1)  European  Regional  Development  Fund,  Cohesion  Fund,  European  Social  Fund,  Youth  Employment  Initiative, 

including national co-financing. 

(2)  Annual Implementation Report for Operational Programme Competitiveness and Cohesion 2014-2020 for 2018 
(3)  Annual Implementation Report for Operational Programme Efficient Human Resources 2014-2020 for 2018 
(4)  The performance review is regulated by Article 22 of the Regulation (EU) 1303/2013. 5-7% of resources allocated are 

released to performing priority axes of the operational programmes (amount includes national co-financing). 

(5)  Member States’ reporting on financial instruments based on Article 46 Regulation 1303/2013, 31/12/2018. 

17 

 
3.  SUMMARY OF THE MAIN FINDINGS FROM THE MIP IN-

DEPTH REVIEW 

in-depth  review 

The  2020  Alert  Mechanism  Report  concluded 
should  be 
that  a  new 
undertaken for Croatia to assess the persistence 
or  unwinding  of  the  imbalances  (European 
Commission, 2019a). In spring 2019, Croatia was 
identified  as  having  macroeconomic  imbalances 
(European  Commission,  2019b).  The  imbalances 
identified  related  to  high  levels  of  public,  private 
and  external  debt,  in  a  context  of  low  potential 
growth.  This  chapter  summarises  the  findings  of 
the  analyses  in  the  context  of  the  MIP  in-depth 
review that is contained in various sections in this 
report (9). 

Imbalances and their gravity 

to 

recession, 

contributed 

Public debt remains high, but is falling rapidly. 
High  general  government 
spending  and  a 
significant  fall  in  revenue,  due  to  a  severe  and 
protracted 
the 
accumulation of public debt that peaked at 84.7% 
of  GDP  in  2014.  Public  finances  have  since 
improved, due to reined-in spending and a tax-rich 
economic recovery. Croatia recorded its first fiscal 
surplus in 2017, and its second in 2018, despite a 
non-negligible  materialisation  of 
contingent 
liabilities.  Overall,  public  debt  remains  high  at 
74.8%  of  GDP  in  2018.  Nevertheless,  thanks 
partially 
in  public  debt 
management,  debt  is  being  refinanced  at  record 
low  and  predominantly  fixed  rates,  with  extended 
maturities.  The  improvements  in  public  finances 
were  recognised  by  Fitch  and  S&P  agencies  as 
they upgraded Croatia’s long-term sovereign credit 
rating  to  investment  grade  with  a  positive  and 
respectively,  while  Moody’s 
stable  outlook 
upgraded its outlook to positive. 

improvements 

to 

The  private-sector  debt  profile  continues  to 
and 
consolidated 
improve.  The 
household debt levels for the third quarter of 2019 
are  estimated  at  58.4%  and  34.3%  of  GDP 
respectively,  some  24  and  8  percentage  points 
below  the  peak  registered  in  2010.  Since  2017, 

corporate 

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

the  analysis 

indicates 

that 

in 

to 

levels  remain  high  compared 

both  household  and  corporate  debt  levels  have 
been  below  their  respective  prudential  thresholds 
(10). However, despite a significant reduction, both 
debt 
their 
thresholds  based  on  fundamentals.  Corporate  debt 
also remains high relative to gross financial assets 
or  equity,  signalling  a  persistently  high  debt 
overhang  and  solvency  risks  for  the  corporate 
sector.  The  private-sector  debt  profile  has  also 
continued 
improve.  The  share  of  foreign 
exchange  risk  exposed  debt  fell  from  65.7%  in 
2018 to 63.1% in Q3 2019. The reduction reflects 
the  increasing  propensity  of  both  businesses  and 
households  to  borrow  in  domestic  currency  and 
repay  their  foreign-currency-denominated  debt. 
Businesses  and  households  are  also  benefiting 
from  high  competition  in  the  domestic  banking 
sector  to  refinance  their  loans  with  lower  interest 
rates and longer periods of fixed interest rates. 

to 

the  current  account  surplus 

Although 
is 
shrinking,  it  is  still  helping  to  curb  external 
imbalances.  After  peaking  at  3.3%  of  GDP  in 
2017,  the  current  account  surplus  narrowed  to 
1.9% of GDP in 2018, as the increase in imports of 
goods  turned  the  trade  balance  negative.  The 
current account surplus rebounded in the first three 
quarters  of 2019 to 2.2% of GDP (11) largely due 
to  growing  tourist  receipts.  Revised  data  on 
external  liabilities,  using  improved  methodology 
and standards, published by the Croatian National 
Bank  in  September  2019,  show  higher  levels  of 
gross  external  debt  and  a  lower  net  international 
investment position (NIIP). However, the external 
imbalances  continued  to  abate  in  2018  and  in  the 
first  three  quarters  of  2019.  By  September  2019, 
the  NIIP  stood  at  -49.7%  of  GDP,  almost  50 
percentage  points  above  its  record  low,  while  the 
gross  external  debt  was  81%  of  GDP,  almost 
40 percentage  points  below  its  peak  in  Q1-2015. 
Nevertheless,  compared  to  the  prudential  and 

(10)  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 
Commission  (2017)  and updates  to  the  methodology  have 
been  subsequently  proposed  in  European  Commission 
(2018a). 

are  described 

(11)  Four quarter moving average  

18 

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

However,  lacking  an  appointed  chair  it  is  not  yet 
fully functional. The new Budget Act has yet to be 
adopted. 

Although  moderate,  credit  recovery  is  slowing 
the reduction in the overall debt ratio. Nominal 
GDP  growth  and  a  moderate  appreciation  of  the 
kuna contributed to a further reduction, although at 
a  slower  pace,  of 
the  overall  private-sector 
indebtedness, in 2018 and the first three quarters of 
2019.  Deleveraging 
the  corporate  sector 
in 
continued  while  net  borrowing  remained  low 
(although  2019  saw  a  noticeable  pickup  in  new 
borrowing  for  investment  purposes).  Lending  to 
corporations is likely to remain at moderate levels, 
given  persistently  high  levels  of  debt  and  high, 
levels  of  non-performing 
though  decreasing, 
corporate  loans  (16.3%  in  the  second  quarter  of 
2019),  especially 
the  construction  sector. 
Borrowing  by  the  household  sector  picked  up, 
driven  by  strong  consumer  confidence  and  rising 
income,  with  the  bulk  of  new  lending  being 
general-purpose  cash 
lending.  To  prevent  an 
unsustainable  accumulation  of  new  household 
debt,  the  Croatian  National  Bank  recommended 
tightening banks-lending conditions. 

in 

Despite  the  current  account  surplus  closing, 
external imbalances should continue to fall. Due 
to  the  expected  further  deterioration  of  the  trade 
balance, the current account surplus is projected to 
gradually  decrease  in  2020  and  2021(13).  Strong 
domestic  demand  is  set  to  drive  an  increase  in 
imports while it is becoming increasingly difficult 
to  increase  share  of  exports.  Although  declining, 
the  current  account  balance  will  aid  the  reduction 
of  external  imbalances  above  the  level  suggested 
by  fundamentals,  estimated  at  around  0.9%  of 
GDP  in  2019.  The  net  international  investment 
position is expected to increase to above  50% of 
GDP already in 2020 and to continue improving in 
2021.  Nevertheless,  it  will  still  remain  below  the 
levels  suggested  by  prudential  and  fundamentals-
based  benchmarks  (40%  and  24%  of  GDP  in 
2019 respectively). 

Significant structural reforms will be necessary 
to  increase  Croatia’s  relatively  low  potential 
growth.  Potential  growth  is  projected  to  remain 
the  lowest  among  Croatia’s  peers  throughout  the 
2019-2021 period. Although growth is expected to 

fundamentals-based  benchmarks (see  section  4.2), 
Croatia  continues  to  have  very  high  external 
liabilities.  Its  net  external  position  excluding 
(NENDI)  was 
instruments 
non-defaultable 
estimated  at  only  -5.6%  of  GDP,  significantly 
above 
less 
problematic composition of external liabilities. 

the  benchmarks, 

indicating 

a 

though 

recovery  of  employment, 
the 

Low  potential  growth  remains  an  obstacle  to 
Croatia  catching  up  with  the  rest  of  the  EU 
more rapidly. After reaching a low point in 2010, 
potential  output  growth  has  since 
increased 
significantly, estimated at 2.1% in 2019. Although 
this is higher than the EU average, it is the lowest 
among  peer  countries(12),  indicating  to  Croatia’s 
limited  convergence  capacity,  and  explaining  its 
relative  falling  behind.  The  labour  contribution  to 
potential  growth turned positive in 2019, due  to a 
gradual 
it 
remains  one  of 
lowest  among  peers. 
Demographic trends and a chronically low activity 
rate are a drag on labour contribution to growth for 
future  years.  Capital  accumulation  makes  a 
positive  contribution  to  growth,  though  it,  is  held 
back  somewhat  by  high  levels  of  debt  of  the 
corporate  sector  and  a  cumbersome  business 
environment. Total factor productivity contribution 
to potential growth remains low  for a catching  up 
economy  and  when  compared  to  peers.  Low 
efficiency  of  goods  and 
services  markets, 
insufficient  competition  in  network  industries, 
poor  public  sector  governance,  and  a  widespread 
the 
influence  of  state-owned  enterprises 
economy continue to depress productivity growth. 

in 

Evolution, prospects, and policy responses 

Public-debt  reduction  is  set  to  continue.  The 
headline  general  government  balance  is  expected 
to  remain  stable  and  close  to  balance  throughout 
the  period  2019-2021.  Buoyant  revenue  and 
savings  from  refinancing  the  public  debt  at  lower 
interest  rates  are  offset  by  the  agreed  wage 
increases and the government’s commitment to cut 
taxes  in  2019  and  2020. This  is  driving  down  the 
government  balance  in  those  years.  Public  debt  is 
expected  to  continue  to  fall  to  64.4%  of  GDP  in 
2021.  The  new  Fiscal  Responsibility  Act  brought 
in new and improved numerical fiscal rules. It also 
strengthened  the  role  of  and  allocated  more 
the  Fiscal  Policy  Commission. 
resources 

to 

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

(13)  According to the Commission 2018 Autumn forecast 

19 

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

Policy implementation has been uneven and has 
even  backtracked  on  pensions.  Reforms  in  the 
education system and the business environment are 
progressing,  with  more  action  needed  on  public 
administration  and  the  governance  of  state-owned 
enterprises.  The  authorities’  firm  commitment  to 
join the ERM II provides an impetus to reforms in 
important  policy  areas.  Key  aspects  of  the  recent 
pension reform that aimed at lengthening working 
lives  have  been  reversed  (even  before  they  were 
implemented),  with  no 
credible  offsetting 
measures announced. The new pension law sets the 
general retirement age at 65 as of 2030, even lower 
than  what  was  planned  before  the  abandoned 
reform. 

reach 2.8% in 2021, contributions from labour and 
total  factor  productivity  growth  remain  relatively 
low.  The  unemployment  rate  is  already  at  an  all-
time  low  (6.9%  estimated  in  2019),  projected  to 
fall further to 4.9% by 2021. Increasing the labour 
contribution  to  potential  growth  will  thus  require 
increasing Croatia’s persistently  low activity rate. 
This  may  become  increasingly  difficult  given 
Croatia’s  demographic  challenges,  the  complete 
reversal  of  the  recent  pension  reform,  which  
reduces the  retirement age to 65, and low take-up 
of  active  labour  market  policy  measures.  Low 
allocative  efficiency,  the  cumbersome  business 
environment  and  an 
inefficient  public  sector 
continue  to  depress  the  total  factor  productivity 
contribution  to  potential  growth.  Overall,  due  to 
pro-cyclical wage increases, tax cuts and a pickup 
in public investment, the output gap is expected to 
widen  further  in  2019  and  2020  before  narrowing 
in 2021. 

Overall assessment 

burdened 

Moderate growth in Croatia continues to bring 
imbalances.  Household  and 
down  the  debt 
corporate  debt  remain  high,  despite  significant 
improvements  over  the  last  few  years.  Household 
debt reduction slowed due to a strong recovery in 
lending,  while  businesses  continue  to  reduce  its 
debt, 
high 
by 
non-performing 
loans.  Both  households  and 
businesses  are  improving  their  risk  profiles  by 
and 
taking 
competition in the banking sector to refinance their 
old  debt  obligations.  Public  debt  remains  high, 
although  prudent  fiscal  policy  over  the  last  two 
years has brought it down considerably. Similarly, 
Croatia’s  external  liabilities  have  fallen,  thanks  to 
sustained current account surpluses. 

persistently 

available 

liquidity 

ample 

up 

Croatia’s  low  growth  potential  remains  an 
obstacle to it catching up with the rest of the EU 
and  to  correcting  macroeconomic  imbalances 
with  a  lasting  effect.  Despite  improvements  in 
labour  market  outcomes,  increasing  the  labour 
to  potential  growth  will  require 
contribution 
raising  the  low  activity  rate,  which  is  set  to  be 
difficult  especially  given  Croatia’s  demographic 
challenges.  Productivity  growth  remains  curtailed 
by  weak  allocative  efficiency,  a  cumbersome 
business  environment,  and  an  inefficient  public 
sector. 

20 

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

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 2018 the government debt ratio decreased to 74.8% of GDP, which is still above the Treaty reference value of 60%. Debt sustainability analysis, not yet taking into account the impact of the latest measures on pensions, indicates low risks in the short, medium and long term, not taking into account the reversal of the pension reform. Public debt that peaked at 84.7% of GDP in 2014. Public finances have since improved, due to reigned-in spending and a strong cyclical recovery in revenues, both supported by the recovering GDP growth. Credit rating agencies Fitch and S&P upgraded Croatia’s long-term sovereign credit rating to investment grade with positive and stable outlook respectively, while Moody’s upgraded its outlook to positive. The headline general government balance is expected to remain  close to balance throughout 2019-2021. The Commission 2019 autumn forecast expects the debt-to-GDP ratio to decline to 64.4% of GDP in 2021. Also due to improvements in public debt management, maturing debt is being refinanced at record low and dominantly fixed rates. This has yielded significant savings on interest payments already in 2019, but its full effect is expected in 2020. Household and corporate debt and the financial sector In 2018, consolidated corporate and household debt stood at 59.9% and 34.1% of GDP. Corporate debt decreased further in the first half of 2019 to 58.7% of GDP, while household debt slightly increased to 34.6% of GDP. Both stand below prudential thresholds, but remain above the levels suggested by fundamentals. Still high shares of household and corporate debt are exposed to foreign currency risk, as 45% and 74% of their respective debt is denominated in foreign currency (mainly EUR). In the second quarter of 2019, the NPL rate in the Croatian banking sector reached 6.9%, down from 8.7% one year earlier and slightly below 7.3% in the previous quarter. The rate is still relatively high, especially for corporations, 16.3%. The reduction in private sector debt appears to have slowed in 2018 and the first half of 2019. While the corporate sector continued deleveraging, borrowing of the household sector picked up driven by strong consumer confidence and rising incomes. Private debt should nonetheless continue decreasing driven by moderate nominal GDP growth.  Both corporations and households are starting to increase their borrowing in domestic currency and repay their foreign currency denominated debt. Furthermore, they are taking advantage of high competition in the domestic banking sector to refinance their loans under more favourable terms. The CNB issued recommendations to all credit institutions urging caution in granting general-purpose cash loans to households, in view of the strong increase in this category of loans over the past four years. In particular, CNB recommended taking account of the minimum cost of living when assessing consumers’ creditworthiness for non-housing loans with an initial maturity equal to or exceeding five years. External liabilities and trade performance Revised data, based on improved methodology and standards, published by the Croatian National Bank in September 2019, show higher levels of gross external debt and a lower net international investment position (NIIP). However, the trend of narrowing external imbalances was preserved both in 2018 and in the first half of 2019. The NIIP stood at -58% of GDP in 2018, well below its fundamental level and prudential thresholds. However, the stock of foreign liabilities net of less risky financial instruments (NENDI) stood at only - 14% of GDP in 2018. The current The NIIP improved slightly in the first half of 2019, rising to -57.5% of GDP, more than 40 pps above its record low in 2010. Driven by GDP growth, the NIIP is projected to keep improving despite a steady deterioration of the current account balance. After peaking at 3.3% of GDP in 2017, the current account surplus is expected to deteriorate in 2020 and 2021. Croatia’s goods exports grew significantly less in 2018, thus ending a period of rapid market share gains. Exports of services, dominated by the tourism sector, are also expected to grow more Boosting exports will require significant reforms to address weaknesses in the business environment, namely the high costs of doing business, slow judiciary, and weak public governance.   
 
  
 
3. Summary of the main findings from the MIP in-depth review 

Table (continued) 

Source: European Commission 

22 

account balance narrowed to 1.9% of GDP in 2018. Gross external debt declined to 81% of GDP by September  2018. moderately going forward as capacity constraints limit further expansion in the peak months of the tourist season. Potential output The unemployment rate has contracted to 6.8% in 2019. However, at 71.4% and 67.6% in Q3 2019, activity and employment rates remain among the lowest in the EU. Although it turned positive in 2013, the contribution of total factor productivity to potential growth remains low for a catching-up economy. Potential growth remains low relative to that of peer countries, and weighs on the long-term durability of Croatia’s adjustment process. The unemployment rate is already at an all-time low (6.9% estimated in 2019) and projected to further decrease to 4.9% by 2021. However, demographic trends and chronically low participation in the labour market weigh on labour input. Low allocative efficiency, a cumbersome business environment and an inefficient public sector continue to depress the total factor productivity contribution to potential growth. Policy implementation has been uneven across policy areas, with also some backtracking in the area of pensions. Progress is being made in reforming the education system, while public administration and SOE governance require more effort. Lengthening working lives remains a challenge, further aggravated by the  reversal of the key elements of the pension reform. Take-up of ALMPs and the use of re- and up-skilling programs for working age people remains low.  Conclusions from IDR analysis  The public debt ratio remains on a downward trend due to continued GDP growth and sustained general government surpluses. Furthermore, sovereign risk perception improved as sustainability risks declined. While household borrowing picked up, non-financial corporations continued deleveraging, contributing to further reduction in private sector debt. Despite a narrowing of the current account surplus, the net international investment position continued improving. Potential growth is still low due to low total factor productivity; this weighs on Croatia’s capacity of adjustment.  Debt stocks are expected to continue to narrow, underpinned by moderate GDP growth. Public debt should come down due to balanced budgets. Private sector borrowing is expected to pick up further, and household borrowing in particular. Corporate net lending, although still negative, is showing some signs of picking up. The current account balance, is expected to continue deteriorating. However, external imbalances should continue narrowing due to GDP growth.   Raising the labour contribution to growth remains challenging. The backtracking of the recent pension measures designed to promote longer working lives aggravated thi challenge. In other areas, policy implementation has been uneven. Policies in the field of fiscal framework, civil service wage setting and the judiciary are stalling. Some progress was made in education and in improving the business environment. Measures need to be stepped up to address issues in the areas of public administration and SOE governance.   
 
 
 
  
 
4.  REFORM PRIORITIES 

4.1.  PUBLIC FINANCES AND TAXATION* 

Debt developments and sustainability 

continues 

Croatia’s  government  debt 
to 
decrease  rapidly.  The  gross  general  government 
debt ratio is projected to have dropped from a peak 
of  84.7%  in  2014  to  71.3%  in  2019,  and  set  to 
continue decreasing sharply in the following years. 
The decrease has been driven by a combination of 
the strong improvement in the government balance 
and  robust  GDP  growth.  Following  the  sizeable 
amount of guarantee calls in 2018-2019, the stock 
of 
also 
government 
decreased  from  2.7%  of  GDP  in  2017  to  1.2%  of 
GDP in September 2019, leaving Croatia’s level of 
contingent liabilities comparatively low. 

guarantees 

remaining 

projected  to  have  already  dropped  below  its  2009 
level,  when  the  debt  ratio  was  below  50%.  The 
spread between the interest rates on Croatia’s long-
term  bonds  and  the  German  bund  dropped  to  89 
basis  points  by  the  end  of  2019,  well  below  most 
of Croatia’s peers and close to the  EU average  of 
84  basis  points  –  underlining  the  structural  nature 
of  the  improvement.  Further  savings  on  debt 
servicing  costs  are  expected  in  2020-2021,  as 
another  HRK  30  billion  of  the  most  expensive 
outstanding  debt  (with  interest  rates  averaging  at 
6.5%) matures. 

Graph 4.1.2:  Debt sustainability scenarios 

Graph 4.1.1:  Maastricht debt and interest developments 

Source: Eurostat, ECFIN calculations 

Over  the  last  four  years,  the  sustainability  of 
Croatia’s  public  debt  improved  substantially. 
Croatia has made extensive use of the low interest 
to  refinance 
improved  ratings 
rates  and 
maturing  debt  at  record-low,  fixed  interest  rates 
with  longer  maturities.(14)  As  a  result,  Croatia’s 
interest  spending  in  proportion  debt-to-GDP  is 

its 

(14)  In  2019  alone,  Croatia  issued  bonds  worth  HRK  25.8 
billion  (almost  10%  of  the  current  debt)  at  an  average 
interest  rate  of  0.9%.  Overall  in  the  period  2016-2019, 
Croatia  issued  bonds  worth  HRK  89.1  billion  (almost  a 
third  of  the  current  stock  of  debt)  at  an  average  rate  of 
2.1%. The average bond maturity at end-2019 was 7 years 
and  9  months,  compared  to  5  years  and  8  months  at  end-
2015. 

(1) Lower growth scenario: -0.5 pp above baseline 
(2) Higher interest rate: +1 pp above baseline 
(3) Adverse combined scenario: (1) and (2) combined 
Source: European Commission, Debt Sustainability Monitor 
2020 

Croatia  faces  low  fiscal  sustainability  risks  in 
the  short,  medium  and  long  term.  Based  on  the 
2019  Autumn  Forecast,  the  Commission  early-
detection  indicator  of  short-term  fiscal  stress  (S0) 
and  the  long-term  sustainability  indicator  (S2) 
indicate  low  risk,  unchanged  from  the  assessment 
in  the  2019  country  report.  The  S1  indicator  of 
medium-term fiscal risks has dropped substantially 
and now also indicates low risk. This assessment is 
confirmed  by  a  debt  sustainability  analysis  that 
points  to  low  risk  on  account  of  decreasing  debt 
across  projection  scenarios  (see  graph  4.1.2).  It  is 
important  to  note  that  this  assessment  does  not 
account for the recent reversal of the 2018 pension 
preliminary  Commission 
reform.  However, 

23 

0.0%0.5%1.0%1.5%2.0%2.5%3.0%3.5%4.0%4.5%5.0%0102030405060708090070809101112131415161718192021% of GDPShort-term loansShort-term securitiesLong-term loansLong-term securitiesImplicit interest rate (rhs)Interest as % of GDP (rhs)40455055606570758085901718192021222324252627282930% of GDPBaselineLower GDP growth scenarioHigher interest rate scenarioAdverse combined scenario 
   
                                                           
   
estimates assess the long-term budgetary impact of 
the reform reversal as relatively limited, at 0.4% of 
GDP.  While  this  means 
that  public  pension 
remain  on  a  downward 
expenditure  would 
trajectory  over  the  long  term,  it  also  limits  the 
potential  to  address  the  low  level  of  pension 
adequacy  (see  Section  4.3.).  For  a  detailed 
overview of the debt sustainability analysis, see the 
DSA standard statistical annex. 

Fiscal policy 

Following several years of prudent fiscal policy, 
Croatia’s fiscal policy stance  is turning  slightly 
pro-cyclical.  Over  the  period  2015-2017,  the 
structural  primary  balance  improved  in  parallel 
with  improving  economic  conditions,  which  was 
particularly  important  given  the  still  high  public 
debt  at  the  time.  In  2018-2019,  expenditure 
restraint  weakened  and  some 
tax  cuts  were 
introduced,  turning  the  fiscal  stance  into  pro-
cyclical,  although  this  was  partly  due  to  the 
materialisation 
in 
shipyards.  Going  forward,  the  fiscal  stance  is 
expected  to  remain  pro-cyclical  as  tax  cuts  curb 
revenue  growth  and  expenditure  growth  remains 
robust, driven by public sector wage increases. 

contingent 

liabilities 

of 

Graph 4.1.3:  Fiscal stance 2011-2019 

4.1. Public finances and taxation* 

Fiscal framework 

The  Fiscal  Policy  Commission  is  still  not  fully 
functional  and  the  planned  reform  of  the 
budgetary  framework  is  not  yet  in  place.  The 
Fiscal  Responsibility  Act,  introducing  new  and 
improved numerical  fiscal rules and strengthening 
the independent status of the national Fiscal Policy 
in  2018. 
Commission,  was 
However, the Commission is still not operating in 
line  with  its  new  provisions.  Namely,  attempts  to 
appoint  the  chair  of  this  body  were  unsuccessful. 
In  addition,  the  new  Budget  Act,  which  should 
improve  both 
term 
budgetary framework at central and local level and 
address 
of 
government guarantees, has still not been adopted. 

the  short  and  medium 

finally  adopted 

vulnerabilities 

system 

the 

in 

transparent 

the  most 

transparency 

The transparency of local budgets is improving, 
though  smaller  municipalities  lag  behind.  The 
score  of  municipality 
average 
budgets  (developed  by  the  Croatian  Institute  of 
Public  Finance  (15))  rose  substantially  between 
2015  and  2018.  However, 
there  are  visible 
differences  in  the  scores  of  small  and  large 
municipalities.  The  42  municipalities  with  a 
population below 1,000 earned an average score of 
2.5  in  2018,  compared  with  3.8  for  the  42  most 
populous  municipalities  (with  5,000  inhabitants 
and  more).  The  median  size  of  the  municipalities 
with 
(18 
municipalities  with a  score of 4 or 5) is 2.5 times 
that of the municipalities with the least transparent 
budgets  (24  municipalities  with  a  score  of  zero). 
Smaller  local  government  units  also  tend  to  have 
more  irregularities  detected  by  audits:  in  2016-
2017, only 35% of the local government units with 
less  than  5,000  residents  received  an  unqualified 
positive  opinion  from  the  State  Audit  Office, 
compared to 47% of government units  with 5,000 
residents  or  more.  These  findings  are  in  line  with 
the  identified  inefficiencies  of  Croatia’s  highly 
fragmented 
government, 
of 
characterised  by 
the  difficulties  of  smaller 
municipalities  to  deliver  quality  services  to  their 
citizens (see Section 4.4.). 

budgets 

system 

local 

(1) The red dashed line and the years in brackets indicate 
the alternative scenario without the materialisation of 
contingent liabilities in 2018-2019. 
Source: Eurostat, ECFIN forecast 

(15)  Developed by the Institute of Public Finance in Zagreb, the 
Transparency  score  can  range  from  0  to  5,  depending  on 
how  many  of  the  key  budgetary  documents  are  published 
on  the  web.  Available  at:  http://www.ijf.hr/transparency-
2019/map/.   

24 

201120122013201420152016201720182019[2018][2019]-2-101234-3-2-10123Change in structural primary balanceChange in output gapRestrictive pro-cyclicalRestrictive counter-cyclicalExpansionary counter-cyclicalExpansionary pro-cyclical   
                                                           
4.1. Public finances and taxation* 

Taxation 

Croatia’s  taxation  system  is  strongly  skewed 
towards  indirect  taxation.  Croatia  is  among  the 
Member  States  which  collect  the  least  revenue 
from  direct  taxes.  This  is  partly  a  consequence  of 
very  low  property  taxes,  which  are  considered  to 
be among the most growth-friendly taxes. The low 
share  of  direct  taxation  is  also  a  reflection  of  low 
taxes  on  capital  as  well  as  successive  cuts  in  the 
personal  income  tax  implemented  over  the  past  4 
years. Aimed at reducing the tax burden on labour, 
the cuts have resulted in more than half of persons 
in  employment  not  being  liable  for  any  personal 
income  tax.  Still,  Croatia  ranks  around  the  EU 
average  when  it  comes  to  revenue  from  social 
contributions in proportion to GDP, despite having 
the third lowest employment rate in the EU. At the 
same  time,  Croatia  collects  the  highest  share  of 
VAT  revenue  in  proportion  to  GDP  of  all  EU 
Member  States.  At  3.6%  of  GDP  in  2018, 
Croatia’s revenues from environmental taxes were 
above the  EU average of 2.4%.  However, there  is 
scope to improve the use of environmental taxation 
to  better  support  environment  and  climate  policy 
objectives.  Croatia  is  one  of  the  few  Member 
States  that  does  not  have  a  landfill  tax  nor  an 
incineration  tax  for  waste  management  (EEA, 
2016). 

In  2020,  the  personal  income  tax  is  being  cut 
again,  this  time  for  young  people.  A  new  tax 
break for young people fully exempts people under 
the  age  of  25  from  personal  income  tax  liability, 

whereas  those  aged  26-30  will  pay  50%  of  their 
standard liability. The measure will likely result in 
taxation  spikes  when  turning  26  and  31,  while  its 
overall budgetary effects are  expected to be  small 
due  to  the  already  low  share  of  persons  in 
employment  who  pay  personal  income  tax,  in 
particular among young people. 

The  reduction  of  the  standard  VAT  rate  is 
being  reversed  and  the  scope  of  the  reduced 
rate broadened. A reduction of the standard VAT 
rate (which at 25% is the second highest in the EU) 
was  legislated  in  2018,  but  was  later  reverted 
before taking effect, while the 13% reduced rate is 
being  applied  to  more  commodities.  After  several 
key  foods  were  shifted to the reduced rate  regime 
as  of  2019,  from  2020  food  served  in  restaurants 
will also be taxed at the reduced rate. This measure 
is primarily intended to address labour shortages in 
the tourism sector. Restaurant services had already 
been taxed at a reduced VAT rate of 10% in 2013 
and 13% in the period 2014-2016, with the aim of 
increasing  the  international  competitiveness  of 
Croatia's tourism. However, the VAT rate was then 
brought  back  to  the  standard  one  in  view  of  the 
observed limited impact of the cuts on prices. The 
above  mentioned  changes  of  policy  course  and 
reversals  of  already  legislated  tax  cuts  negatively 
affect  the  stability  of  tax  policy.  In  2018,  it  took 
medium-sized companies an average of 206 hours 
to  comply  with  their  main  tax  requirements, 
significantly  above  the  EU  average  of  172  hours 
per year (World Bank, 2019b). 

25 

4.1. Public finances and taxation* 

Box 4.1.2: Croatia’s healthcare system and its financial sustainability 

Despite  the  strong  increase  in  revenue  from  health  contributions,  the  healthcare  sector  continues  to 
accumulate arrears. As of 1 January 2019, the health contribution rate was raised by 1.5 percentage points. 
Coupled  with  growing  employment  and  wages,  this  is  estimated  to  have  increased  the  revenue  of  the 
Croatian Health Insurance Fund (CHIF) by 11% (year-on-year) in 2019. In spite of this, payment arrears to 
suppliers  of  goods  and  services  are  estimated  to  have  grown  by  over  15%.  Furthermore,  expenditure  is 
expected to grow strongly in 2020 on the back of wage increases in the sector agreed in September 2019 and 
the Supreme Court ruling from December 2019 which upheld doctors’ claims on unpaid overtime. 

Arrears  are  mostly  generated  in  hospitals,  particularly  those  owned  by  counties.  The  hospitals’ 
revenues are largely comprised of transfers from the CHIF, which are based on diagnosis-related groups and 
upper limits set by the CHIF. This combination of payment methods aims at reducing hospitals’ costs and 
increasing  their  efficiency.  With  some  of  the  county  hospitals’  budgets  barely  covering  personnel  costs, 
arrears quickly pile up. Faced with the prospect of suppliers suspending deliveries, the central government 
settles such arrears through ad hoc financial recovery programmes. There have been 12 such interventions 
since 2000, ranging from 0.1 to 0.6 per cent of GDP in a given year. There are several factors that contribute 
to the piling up of arrears in hospitals. Service is maintained in some hospitals in close proximity to each 
other where this is not justified by population size, and moral hazard often arises from the combination of 
local  governments  as  owners  of  most  hospitals  and  the  central  government  as  their  source  of  financing. 
Furthermore, there is a lack of mechanisms and incentives for ensuring financial accountability of hospital 
managers.  Functional  integration  of  hospitals  (six  pairs  for  the  time  being)  is  aimed  to  rationalise  the 
hospital network by modifying their functioning to respond to the needs of populations they serve. 

programmes 

Graph 1:  Healthcare sector: arrears and financial recovery 

Several  initiatives  were  taken  to  improve  the 
functioning  of  the  health  system,  which 
remains focused on acute care. Around 45% of 
all hospital purchases are procured centrally, up 
from  8%  in  2016,  enabling  substantial  savings. 
However,  while  centralised  procurement 
is 
mandatory  for  all  state  owned  hospitals,  many 
health  institutions  owned  by  counties  opt  to 
purchase  individually.  In  September  2018,  the 
the  National  Hospital 
government  adopted 
Development 
the 
implementation of which should address some of 
the  problems  of  hospital 
sector,  namely 
rationalisation  of 
the  hospital  network  and 
reducing  the  reliance  on  acute  care.  Croatia  is 
preparing  its  e-Health  Strategic  Development 
Plan  2020-2025  and  aims  to  launch  a  national 
mobile application allowing patients to schedule 
appointments.  Additionally,  preparatory  work 
has  been  done  to  link  up  hospitals  to  a  central 
lists  more 
calendar 
effectively, but implementation may take longer 
than  planned  due  to  interoperability  issues. 
Referrals from general practitioners to specialists 
were  substantially  reduced  in  the  last  decade. 
Still,  the  system  remains  focused  on  acute  care  provided  in  hospitals,  while  integration  of  preventive, 
chronic and long-term care remains low (OECD & European Observatory on Health Systems and Policies, 
2019). 

(1) The data on arrears for 2019 is preliminary, not based on 
finalized financial statements. The data based on quarterly 
financial statements for 2019-3Q shows arrear growth in 
excess of 28% (year-on-year). 
Source: Ministry of finance, Ministry of health 

to  manage  waiting 

2018-2020, 

Plan 

Access to health care in Croatia is relatively good, with a low level of unmet needs for healthcare.  At 
1.4%,  the  share  of  people  who  declare  unmet  medical  needs  in  Croatia  is  below  the  EU  average  of  2%. 
However,  unmet  needs  due  to  geographical  distance  are  higher  in  Croatia  than  in  any  other  EU  Member 

26 

-1.5-1-0.500.520152016201720182019% of GDPStock of arrearsFinancial recovery programmeIncreasein healthcare contribution  
4.1. Public finances and taxation* 

State.  The  geographical  distribution of  health  care  infrastructure and  human  resources  varies  considerably 
and there are a number of hospitals close to each other offering the same types of services (OECD, 2019). 
Also, unmet medical needs affect 4.1% of people aged 65 and above, well above the EU average of 2.5%. At 
4.5  percentage  points,  the  difference  in  unmet  needs  between  the  poorest  and  the  wealthiest  20%  of  the 
population is also considerably above the EU average. Sickness and health care benefits are designed to help 
bridge this gap for the poorest. However, while they are well targeted, they are low. Only 4% of households 
are  affected  by  out-of-pocket  health  expenditure  exceeding  40%  of  their  total  spending  net  of  subsistence 
needs (so-called ‘catastrophic health expenditure’), which can be considered low. 

The  health  status  of  the  Croatian  population  is  improving,  but  vaccination  rates  are  dropping.  Life 
expectancy has increased from 74.6 years in 2000 to 78 in 2017, in line with the overall EU trend (from 77.3 
to  80.9  in  the  same  period)  and  the  life  expectancy  gender  gap  (6.1  years)  exceeds  the  EU  average. 
However,  both  preventable  and  treatable  mortalities,  which  are  proxies  for  effectiveness  of  health  care 
system,  are  well  above  the  EU  average.  The  prevalent  preventable  causes  are  lung  cancer,  heart  disease, 
alcohol  use  and  accidents.  High  mortality  from  treatable  diseases  is  primarily  a  result  of  cardiovascular 
diseases  and  colorectal  and  breast  cancers.  This  owes  in  part  to  underdeveloped  preventive  medicine 
initiatives  like  awareness-raising,  disincentives  to  smoking  and  alcohol  consumption  and  promotion  of 
healthy diet and lifestyle. Vaccination rates are dropping below levels which ensure a population’s immunity 
(95%):  for  the  first  time  in  20  years,  coverage  with  the  first  dose  of  the  measles-mumps-rubella  (MMR) 
vaccine dropped below 90% in 2016, whereas for diseases like measles, diphtheria, tetanus and pertussis the 
coverage was 93%. At 21%, the rate of influenza vaccinations of people older than 65 years is less than half 
of  EU  average.  This  situation  owes  largely  to  the  anti-vaccination  movement  gaining  popularity  in  the 
country.  During  2019,  the  Croatian  authorities  have  taken  educational  initiatives  aimed  at  fostering 
vaccination rates, especially in paediatric and school medicine.  

27 

4.2.  FINANCIAL SECTOR* 

4.2.1.  FINANCIAL SECTOR 

largely  been  due 

Croatian  banks  have  a  healthy 
level  of 
profitability and capital. With a return on equity 
of  11.3%  (EU  average:  6.4%)  in  the  first  half  of 
2019,  profitability  remains  relatively  high  (see 
Table  4.2.1).  This  has 
to 
significantly  lower  provisioning  levels  than  in  the 
past  few  years.  The  total  capital  ratio  fell  slightly 
to  20.7%  in  mid-2019,  due  to  the  increase  in 
general-purpose cash loans, which carry relatively 
high  risk  weights.  The  impact  of  the  higher  risk 
weights  for  non-kuna  government  bonds,  which 
reduced  the  regulatory  capital  ratios  in  2018,  was 
offset  by  the  sovereign  rating  upgrades  in  early 
2019. Croatian banks remain well capitalised, with 
a  CET1  ratio  of  19.9%  (EU  average:  15.0%). 
Croatian  banks  are  not  expected  to  encounter 
problems in meeting the minimum requirement for 
own  funds  and  eligible  liabilities  (MREL)  given 
their current capital levels. 

The  volume  of  non-performing  loans  (NPLs) 
continues  to  fall,  albeit  at  a  slow  pace.  The 
headline NPL ratio for the Croatian banking sector 
dropped  to  6.9%  (ECB  figures)  in  June  2019, 
down  from  8.7%  a  year  ago.  In  absolute  terms, 
annual  NPL  reduction  has  slowed  down  over  the 
past year. This is largely due to an increase in the 
inflow of NPLs and to the lower  volume of  loans 
sold  (Graph  4.2.1).  The  increased  inflow  of 
defaults  are  due  to  the  write-downs  arising  from 
the Agrokor settlement in the second half of 2018. 
The  slowdown  in  sales  can  be  explained  by  a 
combination of demand factors (i.e. lower investor 
interest  in  remaining  assets)  and  supply  factors 
(i.e. banks’ willingness to hold NPLs). Nearly two-
thirds  of  this  stock  remains  concentrated  in  the 

non-financial  corporate  sector  (NFC),  resulting  in 
an  NPL  ratio  of  16.3%  of  all  NFC  loans,  down 
from  20.7%  a  year  ago.  The  construction  sector 
continues to account for a significant proportion of 
the NPL stock, with an NPL ratio of 39.1% (local 
data) (16), down from 53.5% a year ago. It is much 
smaller  in  the  household  sector  at  5.9%  in  June 
2019, down from 7.6% a year ago.   

Graph 4.2.1:  NPL flows 

Local NPL definition is used. 
Source: Croatian National Bank (CNB) 

(16)  Two  NPL  definitions  are  used  in  the  text:  for  data  up  to 
2017  provided  by  the  Croatian  National  Bank,  the  NPL 
definition  was  based  on  local  loan  classification  rules.  As 
from  2018,  local  dual  reporting  was  discontinued  and  all 
local  data  was 
reporting 
requirements  for  non-performing 
loans,  (Commission 
Implementing Regulation (EU) 2015/227). 

fully  aligned  with  EBA 

Table 4.2.1: 

Financial soundness indicators, all domestic and foreign banks in Croatia 

(1) Defined as accumulated impairments / NPLs. 
(2) For comparability reasons, annualised values are presented. 
Source: ECB Consolidated Banking Data 

28 

-15,000-10,000-5,00005,00010,00015,000HRK mlillionNPL salesOther NPL flowsChange in NPLs from prior period20142015201620172018-Q12018-Q22018-Q32018-Q42019-Q12019-Q2Non-performing loans13.613.010.78.88.98.77.97.37.36.9o/w foreign entities13.112.410.58.38.48.17.26.76.66.2o/w NFC & HH sectors20.019.116.013.613.613.312.311.511.210.3o/w NFC sector31.229.924.221.221.120.719.018.518.116.3o/w HH sector12.011.89.77.78.07.67.26.56.25.9Coverage ratio(1)54.359.165.862.661.261.962.360.962.259.6Return on equity(2)3.9-6.88.95.911.011.110.98.810.011.3Return on assets(2)0.5-0.91.20.81.51.51.51.21.41.5Total capital ratio20.419.220.821.420.720.320.021.120.620.7CET 1 ratio19.417.719.420.219.619.419.120.219.719.9Tier 1 ratio19.417.719.420.219.619.419.120.219.820.0Loan to deposit ratio92.089.285.382.182.483.183.782.182.782.2 
   
 
                                                           
 
    
 
4.2. Financial sector* 

face 

returns 

to  meet 

sufficient 

to 
severe  difficulties 

investment  in  debt  securities,  primarily  sovereign 
bonds,  puts  pressure  on  profits  of  all  financial 
life 
institutions.  This  applies  particularly 
in 
insurers,  which 
generating 
their 
obligations.  More  generally,  low  rates  expose 
insurers, pension funds and investment funds to the 
risk  of  asset  revaluations  due  to  changes  in  the 
base  interest  rate  and  risk  premium.  With  no 
alternative high yielding investment opportunities, 
real  estate  investments  are  becoming  increasingly 
attractive  to  financial  institutions.  Although  the 
real  estate  market  is  not  experiencing  excessive 
growth, the concentration of exposures is a source 
of  systemic  risk.  Low  interest  rates  also  reduce 
compliance  costs  as  insurers  step  into  the  new 
international  financial  reporting  standard  under 
IFRS 17. 

Joining the Euro area could alleviate some risks 
in the banking sector. A greater use of fixed-rate 
loans  has  shifted  the  interest  rate  risk  to  banks. 
However,  hedging  instruments  remain  costly  due 
to the low availability of interest rate derivatives in 
local currency. In addition,  the indirect credit risk 
stemming  from  currency  mismatches,  which  is 
significant  for  non-financial  corporations  (see 
section  4.2.2),  will  largely  disappear  if  Croatia 
joins the Euro area. 

loans 

loans, 

Legal uncertainty persists in the banking sector, 
arising  from  Swiss  franc  foreign-currency-
that  have 
including 
indexed 
matured.  A  September  2019  judgment  by  the 
Supreme Court effectively confirms the June 2018 
High  Commercial  Court  decision  that  upheld  the 
legal  nullity  of  Swiss  franc  (CHF)  foreign-
currency  clauses.  The  Supreme  Court  found  that 
banks  had  breached  the  collective  interests  and 
consumer  rights  of  borrowers  by  extending  CHF-
denominated  or  -indexed  loans,  without  properly 
informing  the  customers  of  all  the  conditions  for 
making an informed decision. This decision paved 
the  way  for 
including 
borrowers  whose  loans  have  matured,  to  seek 
compensation  from  banks  for  overpayment  and 
other damages. 

individual  borrowers, 

Access to finance 

There is a significant amount of excess liquidity 
in  the  banking  system.  All  banks  meet  the 
liquidity requirements with relative ease, (liquidity 
coverage ratio (LCR): 165% and net stable funding 
ratio  (NSFR):  148%).  This  is  thanks  to  the 
substantial amount of liquid assets on their balance 
sheets. In mid-2019, nearly 45% of the total assets 
of  the  Croatian  banking  system  were  held  in  low 
interest-yielding  liquid  assets  such  as  government 
bonds, currency and central bank deposits. 

The  closure  of  the  credit  registry  (HROK)  has 
had a negative impact on credit risk assessment. 
Credit information reported to the registry stopped 
for  individual  reports  in  May  2018  due  to  legal 
risks  emanating  from  the  entry  into  force  of  the 
General Data Protection Regulation (GDPR). Over 
the  past  year, 
experienced 
difficulties in determining the overall level of debt 
of  a  borrower,  information  that  is  necessary  for 
making appropriate credit decisions, including new 
creditworthiness 
register 
partially  resumed  operations  for  delinquent  loans 
in  August  2019  and  reporting  on  the  remaining 
items  (i.e.  positive,  non-default  information)  is 
expected to recommence by May 2020. 

assessments.  The 

several  banks 

is 

(HBOR) 

The  Croatian  Bank  for  Reconstruction  and 
implementing 
Development 
recommendations  from  the  2017  Asset  Quality 
Review.  A  number  of  projects  are  being  carried 
out  with  support  from  the  Structural  Reform 
Support  Programme  (SRSP)  including  support  for 
development  of  HBOR’s  medium-term  strategy 
improving  credit  rating  and  scoring  models,  as 
well  as    upgrading  HBOR’s  IT  infrastructure. 
While  the  authorities  may  setup  a  working  group 
to evaluate the different approaches to supervising 
HBOR,  they  have  not  committed  to  strengthening 
its  supervisory  framework.  Since  January  2018, 
HBOR  has  implemented  IFRS9  along  with  all 
banks  in  Croatia.  The  new  reporting  framework 
resulted  in  shifting  a  portion  of  HBOR's  portfolio 
into  higher  risk  categories,  including  guaranteed 
loans  provided 
to  Croatian  shipyards.  The 
implementation  of  IFRS9  rules  resulted  in  a  non-
performing 
ratio  of  18.5%,  broadly 
unchanged from 2017 (if the same  standards were 
applied). . 

loan 

The main challenges for the non-bank financial 
sector  are  low  interest  rates  and  the  limited 
depth  of  capital  markets.  The  concentration  of 

Several EU funding programmes have been put 
in  place  to  boost  funding  to  companies  with  a 
high  growth  potential.  Support  from  European 

29 

4.2. Financial sector* 

Graph 4.2.2:  Zagreb stock market activity, HRK billion 

Turnover figures are annualised for 2019, using the 10-month 
data available. 
Source: Zagreb Stock Exchange (ZSE) 

the  progress  market,  with 

Other sources of equity financing for companies 
are being developed. In January 2019, the Zagreb 
Stock  Exchange  launched  the  progress  market,  a 
new ‘SME Growth Market’ (19) with support from 
the  European  Bank 
for  Reconstruction  and 
Development.  This  aims  to  encourage  start-ups 
and  SMEs  to  issue  securities  with  less  restrictive 
listing  and  reporting  requirements.  As  at  end-
October  2019,  five  companies  have  issued  equity 
on 
a  market 
capitalisation of HRK 1.0 billion. As in the prime 
market, 
is 
extremely  low  for  the  moment  (0.7%  of  market 
capitalisation).  However,  recent  amendments  to 
the  Mandatory  Pension  Funds  Act  could  increase 
interest  and  liquidity  in  this  market  (20).  Another 
recent  initiative  is  the  Adria  Prime  Index,  which 
consists  of  five  Croatian  and  nine  Slovenian 
companies  listed  on  the  ZSE.  Although  still  at  an 
early stage, this initiative could help attract interest 
from international investors to the region. 

the  progress  market 

turnover  on 

Structural  and  Investment  Funds  (ESIF),  and  in 
particular  the  European  Regional  Development 
Fund  (ERDF),  helped  fund  over  €1  billion  of 
investment  since  2014.  Nearly  half  that  amount 
was  made  up  of  favourable  loans  and  guarantees, 
promoted  by  The  Croatian  Agency  for  SMEs, 
Innovation  and  Investment  (HAMAG-BICRO). 
ESIF  loans  for  growth  and  development  targeting 
SMEs  operating  for  at  least  two  years  took  the 
lion’s  share  of  funding.  The  Croatian  Venture 
Capital  Initiative  was  established  in  June  2018  to 
kick-start  risk  capital  investments  in  start-ups.  It 
has raised €12.2 million of private-sector funding, 
on  top  of  the  original  €35  million  injection  from 
the  European  Investment  Fund  (EIF)  (17).  In 
January  2019,  the  EIF  and  the  Croatian  Bank  for 
Reconstruction  and  Development  launched  the 
Croatian  growth  investment  programme,  a  €70 
million  co-investment  programme  to  support  fast-
growing  SMEs.  In  July  2019,  a  grant  scheme 
targeting  innovative  SMEs  (‘Innovations  in  S3 
areas’) was launched with funding of €85 million. 

The  Croatian  securities  markets  remain  highly 
underdeveloped  with  a  relatively  low turnover. 
The  corporate  bond  market  remains  very  small, 
limited  to  a  few  large  issuers.  As  of  June  2019, 
only  nine  active  corporate  issuers,  including  two 
foreign-owned  banks,  had  active  bond  listings  on 
the  Zagreb  Stock  Exchange,  with  an  average 
market  capitalisation  of  less  than  1.5%  of  GDP. 
Outstanding  government  bonds  had  a  domestic 
market capitalisation of around 30% of GDP. The 
average  market  capitalisation  of  the  local  stock 
exchange  was  HRK  261.9  billion  as  of  October 
2019  (Graph  4.2.2),  or  61.2%  of  GDP.  This 
represents an improvement since end-2018 figures, 
losses  were 
when  several  Agrokor 
recorded.  Ever  since  the  global  financial  crisis  of 
2008-9,  turnover  on  the  stock  market  has  been 
very 
total  market 
capitalisation (18) per year.  

low  at  around  1%  of 

related 

(17)  As  of  September  2019,  24  start-ups  have  already  secured 
an  investment  of  €50,000,  on  top  of  the  9  venture  capital 
investments of over €3.75 million over late summer  2019. 
Of these, 17 aim to bring start-ups to Croatia. 

(18)  Croatia  had  one  of  the  lowest  turnover  ratio  of  domestic 
shares in the EU, after Luxembourg and alongside Cyprus.  

(19)  An  ‘SME  Growth  Market’  is  a  category  of  multilateral 
trading  facility  (MTF)  created  under  the  Markets  in 
Financial  Instruments  II  2014/65/EU  (MiFID  II).  Among 
other simplification measures taken, firms aiming to list on 
such facilities can use a simplified admission document.  
(20)  The  Mandatory  Pension  Funds  Act  of  2018  recognised 
investment in start-ups and SME stocks that are listed on a 
regulated  market,  which  can  be  defined  by  the  local 
financial  market  regulator,  HANFA.  In  October  2019, 
HANFA  adopted  guidelines  that  effectively  explicitly 
recognised all multilateral trading facility (MTF), including 
the ZSE progress market, as regulated markets.  

30 

0510152025050100150200250300Market capitalisation (lhs)Turnover (rhs)                                                           
   
                                                           
4.2. Financial sector* 

ratio was 6 percentage points below the prudential 
threshold  estimated  for  Croatia,  but  almost  21 
percentage  points  above  the  fundamental-based 
benchmark  (Graph  4.2.4),  indicating  scope  for 
further  debt  reduction  (21).  New  lending  to  non-
financial  corporations  slowed  in  late  2018  and  in 
early  2019  (Graph  4.2.5).  New 
to 
corporations continued to be skewed towards large 
corporations. 

lending 

Graph 4.2.4:  Corporate debt and its fundamentals-based 

and prudential benchmarks 

4.2.2.  PRIVATE-SECTOR DEBT 

The private-sector debt-to-GDP ratio continued 
to  fall  in  2019.  Since  joining  the  EU  in  2013, 
private-sector  debt  has  fallen  by  23  percentage 
points  to  93%  of  GDP.  The  main  reasons  for  the 
lower  debt  since  the  beginning  of  2018  were 
nominal  GDP  growth  (Graph  4.2.3)  and  the 
exchange  rate  appreciation  against  the  euro.  The 
increase  in  new  lending  has  slowed,  driven  by  a 
slow-down  in  lending  to  the  corporate  sector. 
Credit  growth  to  the  private  sector  rose  at  an 
annual rate of 3.1% in the first half of 2019. High 
levels  of  kuna  liquidity  in  the  banking  sector 
continued  to  grow,  supporting  the  favourable 
financing  environment.  The  exposure  of  private-
sector  debt  to  foreign  exchange  risk  remains 
significant,  despite  falling  due  to  increased  kuna 
lending in 2019. 

Graph 4.2.3:  Decomposition of y-o-y changes in private 

debt-to-GDP ratios 

Source: European Commission 

The  favourable  macroeconomic  environment 
helped  reduce  vulnerabilities  in  the  corporate 
sector. Given the favourable environment for debt 
refinancing, corporates optimised their funding by 
reducing interest rate risk. The share of loans with 
a  fixed  interest  rate  increased  by  3  percentage 
points in 2018. Interest rates on new bank loans to 
the  corporate  sector  decreased  in  2019,  especially 
the interest rates on working capital loans indexed 
to a foreign currency. 

The  exposure  of  the  corporate  sector  to 
currency  risk  is  increasing  for  new  business 
loans.  The  share  of  foreign  currency  loans  and 

(21)  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.  The  methodologies  are  described  in  European 
Commission  (2017)  and updates  to  the  methodology  have 
been proposed in European Commission (2018). 

Source: Eurostat 

Corporate debt 

Consolidated  non-financial  corporate  sector 
debt  fell  by  1.9  percentage  points  in  the  first 
three  quarters  of  2019  to  58.4%  of  GDP.  This 
came  on  the  back  of  GDP  growth  and  the 
appreciation  of  the  kuna.  Total  loans  to  the 
corporate  sector  fell  by  3.0%  on  an  annualised 
basis  in  September  2019,  due  to  several  one-off 
effects  such  as  the  renegotiated  or  restructured 
loans  in  the  Agrokor  settlement  and  loans  to 
troubled  shipyards.  In  2018,  the  corporate  debt 

31 

-10-8-6-4-2024681013-Q114-Q115-Q116-Q117-Q118-Q119-Q1% of GDPCredit flowReal growthInflationOther changesD/GDP, change0102030405060708090989900010203040506070809101112131415161718% of GDPNFC debt, consolidatedFundamentals-based benchmark for consolidated NFC debtPrudential benchmark for consolidated NFC debt   
   
                                                           
4.2. Financial sector* 

loans  indexed  to  a  foreign  currency  in  total  new 
loans  decreased  to  42%  in  2019,  from  48%  the 
year  before.  This  contrasts  with  foreign-currency 
(denominated  and  indexed)  corporate  deposits, 
represented only 12% of foreign-currency loans in 
September 2019. 

Graph 4.2.5:  New lending (% year-on-year growth in 

annual volumes) 

take-up  of  these  loans,  which  are  innately  riskier, 
seems  to  be  largely  due  to  the  tighter  lending 
requirements for housing loans, partly due to local 
implementation  of  European  Banking  Authority 
(EBA) guidelines on creditworthiness assessments 
(22). In February 2019, the CNB recommended that 
banks  level  out  the  conditions  for  assessing  the 
creditworthiness of housing and non-housing loans 
with longer maturities. 

Graph 4.2.6:  Household debt and its fundamental-based 
and prudential benchmarks 

HH: Households; NFC: non-financial corporations.  
New business loans 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 covers all loans other than revolving 
loans, overdrafts, and credit card claims. 
Source: Croatian National Bank (CNB) 

Household debt 

The  stock  of  household  debt  increased  slightly 
to  34.3%  of  GDP  in  the  third  quarter  of  2019 
from  34.2%  at  the  end  of  2018.  The  growth  in 
mortgages  reached  an  annualised  rate  of  4.8%  in 
August  2019.  In  2018,  the  household  debt  ratio 
remained  almost  18  percentage  points  below  the 
prudential  threshold  for  Croatia  (52%),  but  10 
percentage  points  above  the  fundamentals-based 
benchmark (24%) (Graph 4.2.6). 

Loans to households increased by 7% annually 
in  September  2019,  driven  mainly  by  the 
increase in general-purpose cash loans. A higher 

Source: European Commission 

The 
interest  rate  exposure  of  households 
remains high, but continues to fall as fixed-rate 
loans become increasingly common. The share of 
loans granted with fixed rates is increasing. At the 
end of 2018, 38.3% of total outstanding loans were 
with  fixed  interest  rates,  up  from  33.7%  a  year 
earlier.  This  is  in  line  with  recommendations 
published by the CNB in October 2017 to mitigate 
consumer exposure to interest rate risk by offering 
the option to switch to fixed-rate loans. 

(22)  EBA/GL/2015/11. 

32 

-10%-5%0%5%10%15%20%HHNFCHH+NFC01020304050607080989900010203040506070809101112131415161718% of GDPHousehold debtFundamentals-based benchmark, household debtPrudential benchmark, household debt   
   
                                                           
4.2. Financial sector* 

Box 4.2.3: Affordable and sustainable housing 

Affordable and quality housing in a safe environment is a fundamental human need and forms part of 
the  UN  Sustainable  Development  Goals.  Providing  for  this  need  that  helps  alleviate  poverty  and  social 
exclusion  is  still  a  significant  challenge  in  a  number  of  European  countries.  Despite  suffering  from  net 
outmigration,  Croatia  is  experiencing  a  surge  in  real  house  prices  in  some  areas  (see  Section  4.2.2),  with 
rental prices rising steeply above inflation and GDP growth. These trends make housing less affordable and 
merit monitoring. 

Only  5.8%  of  Croatians  live  in  households  that  spend  40%  or  more  of  their  disposable  income  on 
housing (European Commission 2019c). This compares favourably to the EU average (10.4%). This could 
be  related  to  the  relatively  high  proportion  of  the  population  living  in  households  with  no  outstanding 
mortgage (83.6% compared to 42.8% in the EU). 

Housing  affordability  differs  considerably  in  Croatia  according  to  type  of  household.  Despite  only 
1.5%  of  Croatians  being  tenants  with  market-price  rents,  almost  half  of  this  population’s  housing  costs 
exceed  40%  of  their  disposable  income.  This  is  considerably  higher  than  the  EU  average  (26.3%)  and 
significantly higher than in Croatia’s neighbouring countries. A very high cost of housing relative to income 
may  lead  to  housing  deprivation,  such  as  living  in  dwellings  that  are  not  adapted  to  the  size  of  their 
household or that have serious structural flaws. 

Croatia  has  a  number  of  government  housing  schemes  and  incentives.  8.0%  of  Croatians  are  tenants 
renting at reduced or no rent. In addition, a government scheme introduced in 2017 subsidises people aged 
up  to  45  years  buying  a  house.  However,  this  subsidy  is  neither  means-tested  nor  targeted  at  those  areas 
where  affordability  is  lowest.  Ensuring  the  availability  of  affordable  housing  will  remain  a  challenge 
particularly in some areas.  

14.5%,  well  above  the  rise  on  the  Adriatic  coast 
(9.1%) and in the rest of the country, where prices 
rose by 3.3%. Housing rents are also increasing. In 
the  year  to  October  2019,  rents  increased  5.3%. 
This  is  considerable,  coming  on  top  of  the  2.6% 
increase in 2018. Rising house prices coupled with 
steep  increases  in  rents  could  create  affordability 
issues that merit close monitoring (Box 4.2.1). 

Despite the surge in property prices, prices are 
still  below  peak  levels  recorded  before  the 
financial crisis. Nevertheless, there is currently no 
sign  of  overvaluation,  given  the  well-established 
benchmarks  such  as  price-to-rent  ratios,  which 
show  that  house  prices  are  still  below  their  long-
term average in Croatia. 

The  currency  structure  of  debt  has  changed  as 
the  share  of  kuna-denominated  debt  in  total 
household loans continued to rise. In September 
2019,  45%  of  households’  outstanding  loans  (23) 
were  denominated  in  or  indexed  to  a  foreign 
currency,  down  from  a  peak  of  80%  in  March 
foreign-
2012.  Households  hold 
currency deposits, representing nearly 80% of total 
outstanding  deposits,  which,  if  matched,  could 
significantly mitigate risk. 

significant 

Housing market 

In  2019  house  prices  in  Croatia  experienced 
double  digit  growth  for  the  first  time  since  the 
financial  crisis.  A  favourable  macroeconomic 
environment, with increasing employment and low 
interest  rates  fuelled  the  surge  in  property  prices. 
House prices started to pick up in step with the rise 
in  mortgages  after  having  fallen  for  much  of  the 
past decade (Graph 4.2.7). House prices rose at an 
annual average rate of 10.4% in the second quarter 
of 2019. However, this  masks significant regional 
disparities.  House  prices  in  Zagreb  surged  by 

(23)  These  figures  exclude  revolving  loans,  overdrafts,  credit 

card credit, and general-purpose cash loans.  

33 

                                                           
4.2. Financial sector* 

Graph 4.2.7:  House price (2015=100) and mortgage growth 

Source: European Commission, ECB 

the  data 

Systemic  Risk  Board 
requirements 

Measures  to  improve  the  collection  of  real 
the 
estate  data  continue.  In  August  2019, 
(ESRB) 
European 
strengthened 
the 
for 
assessment  and  monitoring  of  risks  to  financial 
stability  associated  with  real  estate  markets.  In 
response,  the  Croatian  National  Bank  (CNB)  is 
setting up a new system to collect granular data on 
consumer  lending  conditions,  which  will  enable 
the 
the  monitoring  of  risks  associated  with 
residential real estate market. 

34 

020406080100120140160-15%-10%-5%0%5%10%04-Q405-Q406-Q407-Q408-Q409-Q410-Q411-Q412-Q413-Q414-Q415-Q416-Q417-Q418-Q4MFI loans for house purchase, y-o-y growth (lhs)Real House Price Index, 2015=100 (rhs)Nominal House Price Index, 2015=100, rhs  
4.3.  LABOUR MARKET, EDUCATION AND SOCIAL POLICIES* 

4.3.1.  LABOUR MARKET DEVELOPMENTS 

Unemployment  continued  to  fall,  but  labour 
participation remains very low. At 8.4% in 2018, 
Croatia’s  unemployment  rate  is  at  its  lowest 
recorded  level  and  projected  to  continue  falling. 
The  employment  rate  (20-64)  reached  65.2%  in 
2018,  1.6  percentage  points  up  from  the  previous 
year.  However,  this  Social  Scoreboard  indicator 
remains among the lowest in the EU. The activity 
rate  (15-64)  dropped  to  66.3%  in  2018,  pushing 
Croatia  further  down  the  EU  country  ranking  for 
this  metric.  The  improvements  in  the  labour 
market  benefited  different  categories  of  workers 
and 
long-term 
including 
unemployed.  However,  across  all  age  categories, 
employment rates are below the EU average, with 
the biggest gap recorded for older workers (55-64) 
(Graph 4.3.1). 

jobseekers, 

the 

Graph 4.3.1:  Employment rate by age group in Croatia and 

the EU 

Source: Eurostat 

have 

shortages 

Labour 
become  more 
pronounced  across  sectors.  The  share  of 
employers reporting labour shortages as  measured 
by  the  European  Business  Survey  (EBS)  has 
increased  substantially. 
In  2018,  23.5%  of 
industry,  construction  and 
in 
employers 
services  sectors  (24)  reported  labour  shortages,  up 
from  16.9%  in  2017  (Graph  4.3.2). The  shortages 
are  most  pronounced  in  the  construction  sector, 
where  half  of  the  employers  (51.3%)  reported 

the 

(24)  Average of the three sectors, weighted by their share in the 

overall rate of employment. 

In 

sector. 

services 

response, 

labour  shortages  as  a  factor  limiting  building 
activity,  while  the  highest  increase  between  2018 
and  2019  (7.1  percentage  points)  was  recorded  in 
targeted 
the 
scholarships  have  been  made  available 
in 
vocational secondary schools to support training in 
62  occupations  in  high  demand.  In  addition,  the 
authorities decided to facilitate access to the labour 
market  for  foreign  workers  by  significantly 
increasing 
in 
construction, tourism and hospitality for 2018 and 
2019,  and  simplifying  the  procedure  to  recognise 
foreign professionals’ qualifications. 

the  number  of  work  permits 

Graph 4.3.2:  Labour shortages in Croatia as reported by 

employers, 2008-2019(Q3) 

(1) Seasonally adjusted figures. 
Source: Business and Consumer Survey, European 
Commission.  

Croatia’s  population  is  shrinking  due  to  the 
natural  decrease  and  to  emigration  flows.  In 
2018,  the  country’s  population  was  4.1  million, 
projected  to  fall  to  3.4  million  by  2050.  The 
natural  increase  rate  (25)  has  been  negative  since 
2009,  as  births  have  fallen  by  17%  in  ten  years. 
The  projected  increase  of  the  median  age  of  the 
resident  population  (from  43.7  in  2018  to  51.3  in 
2050)  is  set  to  amplify  the  existing  challenges  in 
the labour market and the social protection system. 
Population decline was also driven by negative net 
migration  flows  in  2018,  even  though  the  flows 
seem  to  have  ebbed  since  2017.  To  address  the 

(25)  The  difference  between  the  number  of  live  births  and  the 
number  of  deaths  per 1000 inhabitants during the  year.  In 
2018, it stood at -3.9, down by 101% since 2009.  

35 

01020304050607080901000809101112131415161718%ofpopulationHR 15-24HR 25-54HR 55-64EU 15-24EU 25-54EU 55-640102030405060080910111213141516171819% of employersIndustryConstructionServices 
    
                                                           
    
                                                           
4.3. Labour market, education and social policies* 

aggregate  skills  mismatch  rate (26),  measured  on 
the basis of the three educational attainment levels 
(low, medium and high), was high in Croatia, and 
higher  than  in  2015  (Graph  4.3.4).  In  particular, 
the  employment  rates  of  low-skilled  workers 
(37.2% in 2018 vs EU 56.1%) and medium-skilled 
workers  (65.1%  vs  EU  73.4%)  considerably  lag 
behind the rate  of  high-skilled  workers (81.5% vs 
EU  84.5%).  This  is  compounded  by  the  fact  that 
the  composition  of  the  Croatian  labour  force  is 
skewed  towards  the  medium  skilled  (62%  vs  EU 
48%), with a lower share of low-skilled (8% vs EU 
16%).  The  low  activity  rate  of  the  latter  group  is 
due  to  the  fact  that  the  older  cohort  are  over-
represented  in  it  (the  activity  rate  of  low-skilled 
workers aged 55-64 is 24.7% vs EU 48.2%). As a 
result,  Croatia’s  employment  rate  gap  to  the  EU 
average  is  driven  by  the  medium-educated.  This 
indicates  the  need  to  tackle  all  the  drivers  behind 
low  employment,  including  the  lack  of  the  skills 
(across  all 
needed  on 
educational  attainment  levels),  and  other  factors 
such  as 
to 
geographic mobility. 

job  attractiveness  and  obstacles 

labour  market 

the 

and 

qualifications.  According 

Future jobs will increase the demand for higher 
skills  and  qualifications.  Due  to  technological 
change, the  demand for skills is  shifting to higher 
to 
skills 
CEDEFOP’s  (2018)  forecast  of  skills  needs  up  to 
2030,  36%  of  all  job  openings  in  Croatia  will 
require high-level qualifications (EU average 43%) 
over the forecast period. In particular, increases are 
expected for professionals in teaching, legal, social 
and  cultural  areas,  business,  administration  and 
health. By contrast, the study projects that only 4% 
of  all 
low-level 
qualifications  (EU  average  11%),  as  agricultural 
and fishery jobs will fall substantially with only a 
small  number  of  new  jobs  likely  to  be  created  to 
replace  current  workers.  As  regards  medium-

job  openings  will 

require 

(26)  The  macroeconomic  skills  mismatch  shows  the  relative 
dispersion  of  employment  rates  across  population  groups 
with  different  educational  attainment:  low  (ISCED  0-2), 
medium  (ISCED  3-5)  and  high  (ISCED  6  and  above).  It 
compares  the  composition  of  employment  (as  a  proxy  for 
labour demand) with that of the population of working age 
(as  a  proxy  for  supply) 
terms  of  educational 
qualifications.  Macroeconomic  skills  mismatches  are  high 
if  the  employment  rates  of  low-  and/or  medium-skilled 
workers are low compared to those of high-skilled workers, 
while  the  former  also  make  out  a  substantial  share  of  the 
working age population. 

in 

demographic  challenge, 
the  authorities  have 
implemented  measures  aimed  at  improving  the 
material  conditions  of  young  families  and  their 
children,  including  increased  maternity  benefits 
and birth grants, as well as subsidies for housing.  

Graph 4.3.3:  Population change (%) by county, 2001-2017 

Source: Croatian Bureau of Statistics  

less-developed  regions 

The 
in  Croatia  are 
experiencing  depopulation.  Between  2000  and 
2017,  Croatia  lost  5.4%  of  its  overall  population, 
but  the  picture  is  very  mixed  across  counties 
(Graph 4.3.3). Only five counties with large urban 
centres  recorded  population  growth,  whereas  nine 
out of the  fourteen counties in continental Croatia 
saw their population fall by between 10 and 20%. 
The  population  of  Lika-Senj  county  dropped  by 
almost one-fifth (18%) to reach 8.5 inhabitants per 
square km (almost as low as the sparsely populated 
northern  areas  of  Finland).  In  eastern  Croatia,  the 
in  Slavonia  and  Baranja  are 
five  counties 
experiencing 
to 
chronic  depopulation  due 
migration,  especially  of  young  people,  as  well  as 
low birth rates. This, combined  with high rates of 
unemployment  and  inactivity,  contributes  to  the 
economic  stagnation  and  low  growth  potential  of 
this part of the country. In 2017, only 51% of the 
working-age  population  in  Slavonia  and  Baranja 
was  employed,  compared  to  61%  in  the  rest  of 
Croatia (World Bank, 2019a). 

across 
Employment 
educational  attainment  groups.  In  2018,  the 

rates  differ  widely 

36 

 
                                                           
4.3. Labour market, education and social policies* 

skilled  workers,  there  is  projected  to  remain  a 
surplus on the supply side. 

relatively  low  level  of  the  benefit  (European 
Commission, 2019d). 

Graph 4.3.4:  Relative dispersion of employment rates of 

different educational attainment groups in the 
EU 

The  outreach  to  the  unemployed  and  inactive 
youth is still underdeveloped. The rate  of young 
people  not  in  employment,  education  or  training 
(NEET) and the youth unemployment rate are fast 
-decreasing  (down  to  13.6%  and  23.7%  in  2018, 
respectively),  but  remain  well  above  the  EU 
average.  Even  though  the  rate  of  registration  of 
jobseekers  at  the  Public  Employment  Service  is 
one  of  the  highest  in  the  EU,  measures  provided 
under  the  Youth  Guarantee  scheme  in  2018 
reached  only  39%  of  young  people  (15-24)  with 
the NEET status. The low and progressive decline 
in  coverage  is  in  part  linked  to  the  increasing 
population of non-registered NEETs (from 4.8% in 
2017  to  6%  in  2018).  Around  two  thirds  of  those 
who 
in 
employment, education or training six months after 
the end of the measure (28), above the EU average 
of 50.4%.  

in  2018  were 

received 

support 

(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. 

Temporary involuntary work is still prominent 
in  Croatia.  The  share  of  temporary  workers 
amongst employees (15-64) is one of the highest in 
the EU (19.9% vs EU average 14.2% in 2018), of 
which  86.6%  are  involuntary  temporary  workers 
(EU  average  52.8%).  Part-time  work  is  not  a 
common practice in Croatia, totalling only 4.9%. 

and 

In  2018, 

employment 

unemployed.  The 

Implementation  of  active  labour  market  policy 
measures  has  improved,  but  some  concerns 
self-
remain. 
employment subsidies covered the largest share of 
beneficiaries  of  active 
labour  market  policy 
measures.  Results  have  been  good  in  terms  of 
increasing  employability,  including  for  the  long-
term 
programme 
“occupational 
for  work  without 
commencing employment”, is exceeding the initial 
coverage targets set by the  authorities (27), though 
too  few  jobseekers  are  starting  education  or 
reskilling programmes (Ministry of Labour, 2019). 
As regards passive support, in 2019 unemployment 
benefits covered only 23% of unemployed people. 
This  could  be  due 
to  demanding  eligibility 
conditions,  including  strict  availability-to-work 
conditions  and  job-search  requirements,  and  the 

training 

youth 

(27)  In  2018,  16%  of  all  ALMP  young  beneficiaries  were 
received 

this  measure,  whereas  5.5% 

included 
traineeship offers. 

is 

The  incidence  of  undeclared  work  is  estimated 
to  remain  high.  Undeclared  work  may  take  the 
form  of  partly  undeclared  pay  (envelope  wages) 
and  fully  undeclared  employment.  There  are 
various  factors  contributing  to  this  phenomenon, 
including  the  low  quality  of  job  offers,  also 
reflected  in  the  high  number  of  discouraged  job 
seekers,  and  the  overall  perception  of  inefficient 
public  institutions  and  regulatory  systems  (29). 
Measures implemented so far have not yet resulted 
in  effective  preventive  and  penalty  mechanisms. 
The  establishment  in  April  2019  of  a  centralised 
State Inspectorate,  which  took over the  inspection 
role 
sectoral 
carried 
inspectorates,  and  the  announced  preparation  of  a 

previously 

out 

by 

(28)  With  the  caveat  of  the  high  proportion  of  unknown 
destinations  in  the  data  in  follow-up  six  months  after  the 
exit (22.8%).  

(29)  Based  on  the  analysis  of  following  indicators:  regulatory 
environment  for  businesses,  the  Rule  of  Law  indicator, 
Corruption 
and  Government 
Effectiveness Indicator. 

Perception 

Index 

37 

00.050.10.150.20.250.3UKNLPTATEEDKDECYLVCZFISIEUMTSEESHUPLROLTLUELFRIESKITBGHRBECoefficient of variation201820152010  
 
                                                           
                                                           
4.3. Labour market, education and social policies* 

labour  market  include  caring  responsibilities  and 
domestic  work.  This  is  reflected  in  the  low 
participation  rate  of  children  in  early  childhood 
education and care (see Section 4.3.3) and the low 
take-up  of  paternity  and  parental  leave  by  fathers 
(33)  (Ombudsperson  for  gender  equality,  2019). 
Data  from  2015  show  that  one  third  of  Croatian 
women provided care for older people or disabled 
relatives  several  days  a  week,  one  of  the  highest 
proportions in the EU. Bringing more women into 
the labour market will require developing efficient 
services  providing  care  to  children  and  older 
people.  Furthermore,    due  to  short  working  lives, 
the  risk  of  poverty  for  women  aged  65+  is  much 
higher  than  the  EU  average,  which  negatively 
affects  Croatia’s 
the  UN 
achievement  of 
(Gender 
Sustainable  Development  Goal  5 
Equality).  In  view  of  the  large  gap  in  life 
expectancy  between  women  and  men,  the  lower 
standard retirement age for women relative to men 
does  not  help  address  the  challenge  of  pension 
adequacy for women. 

Graph 4.3.5:  At-risk-of-poverty or social exclusion rate and 
its components (AROP, SMD, LWI) 

national  programme  to  combat  undeclared  work 
may lead to improvements on this front. 

4.3.2.  SOCIAL PROTECTION SYSTEM 

Poverty levels in Croatia are falling but remain 
above  the  EU  average.  In  2018,  the  at-risk-of 
poverty  or  social  exclusion 
rate  decreased, 
following  improvements  in  all  its  sub-indicators, 
but  remained  above  the  EU  average  (at  24.8%  vs 
EU  21.9%)  (Graph  4.3.5).  The  improvements 
contribute  towards  the  achievement  of  the  UN 
Sustainable Goal 1 (No Poverty). A decrease of 1.6 
percentage  points  from  the  previous  year  was 
mainly  related  to  improved  conditions  on  the 
labour market, rather than to changes in the social 
protection system. In 2013, social benefits reduced 
the at-risk-of-poverty rate by around one third and 
the poverty gap by more than one half; the impact 
of the benefits on reducing poverty fell during the 
recovery.  Despite  these  improvements,  in  2018, 
the poverty gap remained high and increased (from 
26%  in  2017  to  28.4%  in  2018)  (30),  as  did  the 
persistent  at-risk-of-poverty  rate  (31)  (from  14.7% 
in  2016  to  17%  in  2017),  indicating  that  lower-
income  households  are  not  benefiting  from  the 
improved  economic  conditions.  The  coverage  of 
minimum  income  benefits  is  very  low  and  their 
level 
(European 
Commission,  2019).  The  targeting  accuracy  of 
family  benefits  (32)  (representing  8.6%  of  social 
protection  expenditure  in  2017)  is  also  relatively 
low,  mainly due to the lack of  means testing (e.g. 
for maternity benefits and lump sum birth grants). 
Overall, 
the  purchasing  power  of  Croatian 
households is among the lowest in the EU (63% in 
2018), up by only 3 percentage points since 2008, 
indicating high costs of living. 

the  EU  average 

is  below 

Due  to  low  participation  in  the  labour  market, 
women  face  a  high  risk  of  poverty.  The 
employment  rate  of  both  men  and  women  in 
Croatia  are  among  the  lowest  in  the  EU  (70.3% 
and  60.1%,  respectively,  vs  EU  average  79%  and 
67.4%).  The  factors  keeping  women  out  of  the 

(30)  The  poverty  gap  measures  ‘how  poor’  the  poor  actually 
are.  It  is  calculated  as  the  difference  between  the  median 
equalised disposable income of people below the at-risk-of-
poverty threshold and the at-risk-of-poverty threshold. 
(31)  Share of people who are currently poor and were in poverty 

for two out of the three previous years. 

(32)  Encompasses maternity, parental and child benefits. 

(1) Detailed definitions of the indicator and its components 
are available in Annex C. 
Source: Eurostat 

Croatia  reversed  key  elements  of  the  reformed 
pension  system  aimed  at  lengthening  working 
lives.  In  December  2018,  parliament  adopted  a 

(33)  In  2018,  0.28%  of  men  took  paternity  leave  and  7.55% 
took parental leave. Statutory paternity leave still does not 
exist. 

38 

0%5%10%15%20%25%30%35%201020112012201320142015201620172018At-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* 

experience  much  higher  risks  of  poverty  or  social 
exclusion (32% vs EU average 18.6%). 

face  particular 
People  with  disabilities 
challenges  on  the  labour  market.  In  2017,  the 
employment  rate  of  people  with  disabilities  was 
33.8%.  Although  the  employment  gap  compared 
with  the  overall  population  narrowed,  it  remained 
one of the largest in the EU (32.2% vs EU average 
24.2%). Employability is hampered by the lack of 
skills,  highlighted  by  the  completion  rate  of 
tertiary  education  for  people  with  disabilities 
remaining  one  of  the  lowest  in  the  EU  (21.9%  in 
2017).  As  a  consequence,  many  are  at  risk  of 
poverty or social exclusion (37.1% vs 28.7% in the 
EU 
the  social 
protection  system.  Government  spending  on 
disability benefits is higher in Croatia than in other 
EU  countries,  but  skewed 
towards  disability 
pensions. 

in  2018)  and  dependent  on 

the  quota 

Croatia  has  brought  in  policies  that  aim  to 
improve  the  employment  prospects  of  people 
with  disabilities.  A  quota  system  requires  all 
private  and  public-sector  entities  with  more  than 
20 employees to hire a specified number of people 
with  a  disability.  However,  54%  of  entities, 
including government departments, have opted out 
instead  pay  a 
system  and 
of 
compensatory  fee  (Ministry  of  Demographics, 
Family,  Youth  and  Social  Policy,  2016).  As 
regards  active 
the  percentage  of 
beneficiaries  with  disabilities  reached  by  active 
labour  market  programmes  has  fallen  since  2014. 
This  also  reflects  a  reduction  in  the  number  of 
registered  unemployed  people  with  disabilities 
(down  by  nine  percentage  points  between  2015 
and  2017),  though  their  share  increased  by  0.5% 
due  to  an  overall  decrease  in  the  total  number  of 
unemployed  people.  There  is  a  large  pool  of 
inactive  people  with  disabilities,  pointing 
to 
obstacles in the labour market and ineffective legal 
provisions. 

support, 

disabilities 

people  with 

Family- and community-based care for children 
remains 
and 
underdeveloped.  In  2017,  72%  of  children  and 
young adults  without parents  or adequate  parental 
care  lived  outside  institutional  care,  which  is  an 
improvement  since  2010.  Expected  improvements 
following the adoption of the Law on Foster Care 

to  call 

major  pension  reform  package (34),  which  came 
into force in 2019. The pension reform was met by 
strong  resistance  from  the  trade  unions,  who 
for  a 
collected  enough  signatures 
referendum  on  the  stipulated  elements  aimed  at 
lengthening  working  lives.  In  October  2019,  the 
government  accepted  to  withdraw  those  contested 
elements.  Parliament  adopted  amendments  to  the 
pension 
including 
law  via  urgent  procedure, 
bringing the retirement age back to 65, decreasing 
penalisation  for  early  retirement  and  stopping  the 
acceleration  of  the  equalisation  of  retirement  age 
for men and women that was brought in under the 
2018  reform.  These  changes,  which  entered  into 
force  as  of  January  2020,  reversed  features  of  the 
most  recent  reform  and  the  2014  reform,  which 
had  first  increased  the  retirement  age  to  67.  The 
changes  refer  to  the  retirement  age,  penalisation 
the  equalisation.  Other 
and  acceleration  of 
measures 
the  recent  pension 
reform are still in force (for the budgetary impact, 
see section 4.1). 

implemented 

in 

Early retirement remains a key cause of the low 
participation  of  older  workers  in  the  labour 
market.  Although  the  employment  rate  of  older 
workers (55-64) increased by 2.5 percentage points 
to 42.8% in 2018 from the year before, it remains 
the  second  lowest  in  the  EU  (which  averages 
58.7%)  (Graph  4.3.1).  Early  old-age  pensioners 
represent more than a quarter (28% in 2016) of all 
in  Croatia  (35).  Including 
old-age  pensioners 
disability  pensioners,  39%  of  all  pensioners  in 
Croatia in 2016 were early retirees (36). Their share 
has increased during the economic crisis. The self-
reported  reasons  for  early  retirement  include 
inadequate  skills,  poor  health,  available  financial 
incentives  for  retirement  and  low  quality  of 
working  life  (Bađun  and  Smolić,  2018).  Due  to 
lives,  people  aged  65+ 
their  short  working 

(34)  The  main  objectives  of  the  reform  were  threefold:  i)  to 
address design inconsistencies, which had resulted in unfair 
treatment  of  certain  groups  of  pensioners;  ii) to  accelerate 
the  planned  increase  in  the  statutory  retirement  age  to  67 
and  increase  penalties  for  early-retirement;  and  iii)  to 
strengthen  the  institutional  setup  and  performance  of  the 
second pension pillar. 

(35)  Duration  of  working  life  indicator  (32.5)  iswell  below  the 
EU  average.  AWG  assumption  on  the  effective  labour 
market  exit  age  (61.5  in  2017)  is  also  well  below  the  EU 
average. 

(36)  The  proportion  of  retired  people  receiving  a  disability 
pension is much higher in Croatia than the EU average (HR 
25% vs EU 14%). 

39 

                                                           
4.3. Labour market, education and social policies* 

need  of  care,  one  of  the  lowest  ratios  in  the  EU) 
and their below-average working conditions. 

hire 

employers 

Public  Employment 
to 

Employment  and  social  services  are  still  not 
sufficiently  integrated.  Cooperation  between  the 
various  institutional  bodies  (e.g.  employment, 
social,  physical  and  mental  health  and  housing 
support  services)  remains  limited,  despite  some 
steps  taken  (41),  in  part  due  to  data  protection 
Service 
issues.  The 
encourages 
long-term 
unemployed  by  providing  employment  and 
training  subsidies.  While  employment  subsidies 
are used, participation rate in training measures are 
low.    Negative  perceptions  towards  long-term 
unemployed persists among employers, as  well as  
lack of post-placement support services (European 
Commission,  2019e).  The 
integrated 
support is particularly evident in some regions and 
local 
limited 
units, 
administrative and financial capacity, especially in 
the rural areas. 

government 

reflecting 

lack  of 

the 

fiscal  capacity  of 

Overall,  progress  with  policy  measures 
addressing  the  social  benefits  system  remains 
limited.  A  fragmented  social  protection  system  –
dependent  on 
local 
government  units  –  remains  unable  to  address  the 
marked  regional  disparities  in  terms  of  risk  of 
poverty.  The  authorities  are  establishing  regular 
reporting  mechanisms  from 
to  central 
government 
level  on  all  benefits  paid  out, 
following  the  European  System  of  Integrated 
Social 
(ESSPROS) 
classification. However, the data collected has not 
yet  been  analysed.  The  new  Social  Welfare  Act 
aimed at improving the provision of social benefits 
and services has not yet been adopted. 

Protection 

Statistics 

local 

in  January  2019  are  yet  to  materialise  (37).  The 
shift away from a model based on institutional care 
requires  the  development  of  new  and  different 
services  offered  to  the  community  (38).  However, 
out of thirteen homes for children aged 6-18, so far 
only four have completed the transition to the new 
model  of  community-based  care.  Over  60%  of 
including 
people 
children  and  young  adults  with  behavioural 
problems  and  adults  with  mental  disabilities,  still 
lived in institutions in 2017. 

in  other  vulnerable  groups, 

lacks  a  strategy  for 

Formal  long-term  care  is  underdeveloped  and 
ineffective.  Croatia 
the 
provision  of  long-term  care  and  the  system  is 
fragmented  across  different  health  and  social 
institutions.  Long-term  care  spending 
welfare 
made  up  only  3.1%  of  health  care  expenditure, 
much  lower  than  the  EU  average  of  16.3%.  Only 
13%  of  dependent  people  (39)  receive  institutional 
care  and  14%  receive  formal  home  care  (EU 
average  23%  and  31%  respectively).  By  contrast, 
72%  of  people  dependent  on  care  receive  cash 
benefits.  Public  social  protection  covers  a  mere 
10%  of  homecare  costs  for  moderate  needs  and 
20% for severe needs, regardless of the income of 
the  recipient,  less  than  in  countries  with  similar 
public expenditure on long-term care . As a result, 
out-of-pocket  costs  are  particularly  high  –  almost 
100% of the disposable income of median income 
earners  to  cover  moderate  needs  and  as  much  as 
150%  to  cover  severe  needs  (OECD,  2019a). 
Simulation  from  the  same  study  shows  that  the 
social  protection  system  is  much  less  effective  in 
reducing the poverty risk caused by long-term care 
costs(40)  than  many  other  EU  Member  States. 
Additional  challenges  relate  to  the  lack  of  long-
term care workers (one per 50 people aged 65+ in 

(37)  On  the  contrary,  the  number  of  foster  parents  in  August 
2019  (1400)  has  fallen  since  January  2018  (1496).  The 
number  of  children  returned  from  foster  families  back  to 
the institutions increased. 

(38)  According  to  the  Social  Welfare  Act,  for  children  and 
young  people,  these  would  be  day  care,  counselling  and 
support  to  individuals  and  families,  counselling  and 
support to adoptive families, early intervention for children 
with disabilities, supported living, adoption etc.  

to  as  ’ADL-dependency’ 

(39)  People  unable  to  perform  daily  personal  care  tasks.  Often 
in 

referred 
i.e.  difficulties 
performing at least one Activity of Daily Living (ADL). 
(40)  The  proportion  of  older  people  at  risk  of  poverty  after 
paying  the  out-of-pocket  costs  of  home  care  would  be  at 
50% for low needs, 80% for moderate needs and 90% for 
severe needs. 

4.3.3.  EDUCATION, TRAINING AND SKILLS 

Participation  in  early  childhood  education  and 
care  (ECEC)  has  increased  considerably  but 
remains  one  of  the  lowest  in  the  EU.  In  2017, 
82.8%  of  children  aged  4  years  until  compulsory 
school  age  participated  in  ECEC,  well  below  the 
EU  average  of  95.4%.  However,  this  share  has 

(41)  For example, development of a case management approach 
or  stronger  information  sharing  mechanisms  between  the 
PES  and  social  services  to  provide  support  to  long-term 
unemployed people. 

40 

                                                           
                                                           
risen sharply, by 7.7 percentage points since 2016 
(European  Commission,  2019f).  For  children 
under  the  age  of  three,  the  participation  rate  was 
particularly  low  at  17.8%  in  2018  (EU  average 
35.1%,  Barcelona 
target  33%).  The  ECEC 
participation rate for children at risk of poverty or 
social  exclusion  (from  3  years  onwards)  is  four 
times  lower  than  for  children  not  at  risk (42). 
Factors  influencing  the  low  ECEC  participation 
rates include insufficient number of places, teacher 
shortages  (Dobrotić  et  al.,  2018)  and  the  low 
activity  rate  of  women  (see  Section  4.3.2). 
Financing of ECEC infrastructure is decentralised, 
which  leads  to  significant  regional  disparities  in 
terms  of  availability,  quality  and  affordability  of 
care,  with  the  lowest  coverage  in  the  poorest 
take 
counties.  Children  of  employed  parents 
priority  over  those  of  unemployed  and  inactive 
ones  in  access  to  ECEC.  The  authorities  are 
drawing on EU structural funds (43) to substantially 
expand  and  modernise  the  network,  and  taking 
measures  to  address  the  shortage  of  pre-school 
teachers.  Lastly, 
of 
kindergartens  have been extended and  many local 
governments are reducing attendance fees. 

the  working 

hours 

(OECD,  2019b).  The 

The  quality  of  education  remains  a  challenge. 
The  rate  of  early  leavers  from  education  and 
training is one of the lowest in the EU, at 3.3% in 
year.  At  the  same  time,  the  OECD’s  Programme 
for  International  Skills  Assessment  (PISA)  2018 
results  show  that  pupils  perform  below  the  EU 
average  in  reading,  science  and  in  particular 
mathematics 
rates  of 
underperformance  in  science  (25.4%  compared  to 
the EU average of 21.6%)  and  maths (31.2%, EU 
average 22.4%), are among the highest in the EU, 
and  the  proportion  of  top  performers  in  all  three 
subjects is among the lowest (around 5%). The low 
annual 
lower 
secondary education (275 and 240 hours less than 
the EU average, respectively) affects the quality of 
education  (European  Commission,  2019f).  Many 
schools operate in two shifts, with pupils attending 
school  one  week  in  the  morning  and  one  week  in 

in  primary  and 

teaching 

time 

(42)  Based on JRC calculations on 2016 EU-SILC  
(43)  110  million  EUR  out  of  120  million  total  investment  in 

ECEC. 

4.3. Labour market, education and social policies* 

the  afternoon,  due  to  school  infrastructure  gaps 
(44).  Moreover,  Croatia  has  among  the  shortest 
compulsory schooling cycles in the EU (8 years). 

Graph 4.3.6:  Selected education indicators for Croatia and 

the EU (2018) 

Source: Eurostat 

The  general  education  curricular  reform  has 
been rolled out in all schools. Reformed curricula 
aimed at introducing a learning outcomes approach 
and  improving 
the  quality  of  education  and 
teaching  are  being  gradually  rolled  out  to  all 
primary  and  secondary  schools,  with  a  view  to 
completing implementation of the reform by 2022. 
Progress  with  the  reform  would  further  support 
achieving  SDG  4  (Quality  of  Education).  To  this 
purpose, teacher training and mentoring is ongoing 
and  new  methods  have  been  introduced  to  assess 
teaching 
outcomes. 
Nevertheless,  there  are  concerns  about  the  quality 
of teaching of the new curricula (45) and the scope 
of the reform (46). 

learning 

pupils’ 

and 

(44)  The  World  Bank  is  working  with  authorities  on  this 

challenge. 

(45)  An  assessment  by  the  National  Centre  for  External 
Evaluation  of  Education  of  pupils  that  participated  in  the 
pilot 
the  curricular  reform  gave 
disappointing results 

implementation  of 

(46)  Report  of  the  Ombudsman’s  office  (Ombudsperson  for 

gender equality, 2019) 

41 

0%5%10%15%20%25%30%35%40%45%Participationin ECEC 0-3Early schoolleavingTertiaryeducationattainmentAdulteducationparticipationHREU                                                           
    
                                                           
4.3. Labour market, education and social policies* 

Box 4.3.4: Monitoring performance in light of the European Pillar of Social Rights 

The European Pillar of Social Rights is a compass  for a renewed  process of upward convergence towards 
better working and living conditions in the European Union. 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. 

Social 

related 

remain 

the  rate  of 

Scoreboard,  which 
The 
supports the European Pillar of Social 
Rights, 
identifies  a  number  of 
employment  and  social  challenges  in 
Croatia.  Despite  overall  improvements 
in  the  labour  market,  including  the 
reduction  of 
long-term 
unemployment and of young people not 
in  employment,  education  or  training, 
to 
some  challenges 
labour  markets,  as  well  as  social 
protection 
The 
employment rate is still critically low, in 
particular  among  young  people,  older 
workers, the low skilled and people with 
disabilities. 
concerns 
regarding  the  effectiveness  of  active 
labour  market 
the 
remaining  pathways  to  early  retirement. 
The  share  of  early  school  leavers  in 
Croatia  is  well  below  the  EU  average. 
Nonetheless, access to and the quality of 
education,  both  for  young  people  and 
adults, remain a challenge. 

inclusion. 

policies 

There 

and 

and 

are 

exclusion 

in  Croatia 

The  impact  of  social  transfers  on 
poverty  reduction  remains  limited. 
The share of people at risk of poverty or 
has 
social 
approached  the  EU  average,  while  the 
share  of  people  persistently  exposed  to 
poverty  is  increasing.  Following  the 
labour 
overall 
market,  the  poverty  reduction  capacity 
of social benefits has deteriorated. 

improvements 

the 

in 

Croatia  has  started  the  incremental 
the  curricular 
implementation  of 
reform in all schools. The aim of the reformed curricula is to increase the overall quality of education. The 
new teaching approaches are being gradually adopted in all primary and secondary schools, with a view to 
implementing the reform for all grades by 2022. The reform also aims to improve digital education, through 
training of both teachers and pupils in digital skills. The reform also envisages the provision of training and 
mentoring for teachers.  

42 

 
 
 
 
4.3. Labour market, education and social policies* 

training 

the  workplace 

‘Dual  Education 

not offer sufficient workplace training. Only about 
23%  of  Croatian  VET  participants  reported 
spending half or more of their secondary education 
purposes, 
for 
in 
significantly  behind  the  EU  average  of  32%.  The 
experimental  programme 
in 
VET’, 
to  provide  more 
in  2018 
launched 
opportunities  for  work-based  learning,  has  been 
expanded  to  20  VET  schools  for  the  2019/2020 
school  year.  The  quality  of  VET  education  in 
Croatia  is  also  affected  by  the  slow  pace  of 
adoption of occupation and qualification standards 
as  part  of  Croatian  Qualification  Framework 
(CROQF),  the  reduced  availability  and  quality  of 
equipment  for  VET  programmes  and  inadequate 
teacher 
(particularly  of  vocational 
subjects). 

training 

The  tertiary  attainment  rate  has  risen  sharply 
over  the  past  year,  but  participation  in  adult 
education  remains  very  low.  In  2018,  34.1%  of 
the population aged 30-34 had a tertiary education, 
up 5.4 percentage points since 2017. Croatia could 
therefore  still  reach  its  national  EU2020  target  of 
35%,  though  it  remains  below  the  EU  average  of 
40.7%. The  proportion  of  STEM  graduates  is  one 
of  the  highest  in  the  EU,  at  27%  of  tertiary 
graduates in 2017. At the same time, Croatia has a 
very  low  participation  rate  in  adult  education: 
2.9%  vs  EU  the  average  of  11.1%.  The  adult 
education policy  framework remains outdated and 
a new version of the Adult Education Act is still to 
be adopted. 

Targeted scholarships aim at increasing equity. 
According  to  the  latest  PISA  survey,  disparities 
related 
to  socioeconomic  status  and  migrant 
background  are  relatively  small,  and  academic 
resilience (47)  is  the  second  best  in  the  EU.  In 
higher  education,  dedicated  scholarships  support 
students  coming 
lower  socioeconomic 
background.  The  2018-2021  National  Plan  for 
Enhancing 
the  Social  Dimension  of  Higher 
Education,  adopted  in  January  2019,  aims  to 
further  increase  equity.  Croatia  is  also  using  EU 
funds  to  double  the  number  of  scholarships  for 
students from a lower socio-economic background 
and  students  with  disabilities,  including  transport 
subsidies (European Commission, 2019f). 

from 

(47)  Academic  resilience  is  measured  as  the  percentage  of 
disadvantaged students who scored in the top quarter of the 
reading performance in PISA tests in 2018. 

that 

teaching 

There  are  shortages  of  certain  categories  of 
teachers.  In  2017,  education  spending,  both  as  a 
share  of  GDP  (4.7%)  and  as  a  proportion  of 
general  government  expenditure  (10.5%),  was 
slightly  above  the  EU  average.  According  to  the 
OECD’s  TALIS  Survey,  only  9.2%  of  Croatian 
teachers  believe 
is  a  valued 
profession in society (compared to an EU average 
of  17.7%),  one  of  the  lowest  percentages  in  all 
OECD countries (OECD, 2019c). In remote areas, 
there  are  shortages  of 
teachers  of  science, 
technology, engineering and mathematics (STEM), 
communications 
and 
technology 
the  authorities 
increased  the  salary  levels  of  teachers  and  a  new 
scholarship  scheme  was  introduced  for  people 
studying  to  become  teachers  in  subjects  where 
shortages  were  identified  (mathematics,  physics, 
informatics and English language). 

information 
(ICT). 

In  2019, 

and 

of 

Meeting  the  demand  for  digital  skills  on  the 
labour market remains difficult. In 2019, 53% of 
people  aged  between  16  and  74  years  had  basic 
digital  skills, and 35% had advanced digital skills 
(against  an  EU  average  of  58%  and  33% 
respectively).  The  reformed  general  curriculum 
includes  compulsory  education  and  training  for 
both teachers and pupils in digital skills. It focuses 
on  equipping  schools  with  specialised  computer 
labs,  providing  personal  tablets  to  pupils  and 
rolling  out  digital 
interactive 
applications  in  learning  and  teaching.  The  aim  of 
these  measures  is  to  address  the  difficulties  with 
meeting the demand for digital skills on the labour 
market.  The  shortage  is  especially  visible  in  the 
ICT  sector,  where  62%  of  Croatian  enterprises  in 
the  IT  sector  reported  difficulties  in  filling  the 
vacancies  in  2019,  well  above  the  EU  average  of 
51% (European Commission, 2020a). 

textbooks  and 

Croatia  is  reforming  vocational  education  and 
training. The share of students enrolled in formal 
VET programmes in 2019 was at 68.5%. However, 
vocational education is considered a less attractive 
option (Buković and Matković, 2018). To address 
this,  the  Croatian  Agency  for  VET  and  Adult 
Education 
through  skills 
competitions  and  job  fairs  for  students.  In  2018, 
the  employability  of  VET  graduates  improved 
significantly  (to  68.8%  from  59.4%  in  2017),  but 
remains below the EU average (79.5%). Over half 
of  registered  unemployed  people  in  2018  were 
VET  graduates.  VET  programmes  in  Croatia  do 

is  promoting  VET 

43 

                                                           
4.4.  COMPETITIVENESS REFORMS AND INVESTMENT* 

4.4.1.  PRODUCTIVITY 

Graph 4.4.2:  Percentage difference in labour productivity at 

the aggregate and sectoral levels relative to 
the EU28 (2016) and percentage change 
(2012-2016) 

environment 

Total factor productivity growth in Croatia lags 
behind that of its peers and remains below pre-
levels.  Low  allocative  efficiency,  a 
crisis 
cumbersome  business 
an 
inefficient public sector continue to weigh on total 
factor productivity and its convergence towards the 
EU average. Over the past decade, subdued growth 
in 
left  Croatia 
underperforming  its  peers  in  Central  and  Eastern 
Europe,  thus  stalling  Croatia’s  catch-up  with  the 
EU average (Graph 4.4.1). 

total  factor  productivity  has 

and 

Graph 4.4.1:  Total factor productivity developments: 

Croatia and its peers 

AGG - Aggregate productivity 
C - Manufacturing 
F - Construction 
G - Wholesale and retail trade; repair of motor vehicles and 
motorcycles 
H - Transportation and storage 
I - Accommodation and food service activities 
J - Information and communication 
M - Professional, scientific and technical activities 
N - Administrative and support service activities 
Source: European Commission 

In  2016, 

Labour  productivity  differs  widely  across  the 
regions  within  Croatia. 
labour 
productivity (48)  in  all  counties  in  continental 
Croatia  (except  for  Zagreb)  was  at  or  below  60% 
of the EU average. Counties in the Adriatic part of 
Croatia  performed  better,  and  the  city  of  Zagreb 
recorded the smallest gap to the EU average, with 
a level of productivity at 80% of the  EU average, 
almost double that of Virovitica-Podravina county, 
at  43%  of  the  EU  average.  In  regions  facing 
depopulation 
(see  Section  4.3),  productivity 
growth  of  local  firms  is  more  challenging  due  to 
skills  gaps  and  the  distance  from  both  suppliers 
and customers. Sluggish productivity coupled with 
a falling population in those regions, particularly in 
continental  Croatia  will  amplify  the  productivity 
gap,  thus  hampering  convergence  between  them 
and the City of Zagreb. 

Exporting  firms  are  about  twice  as  productive 
as  non-exporting  firms.  Analysis  based  on 
Compnet  data  shows  that  the  most  productive 

(48)  Measures  as  gross  value  added  per  person  employed,  in 

purchasing power standard. 

Source: European Commission 

Labour  productivity  in  Croatia  remains  below 
the  EU  average.  The  lower  aggregate  labour 
productivity  is  mainly  due  to  the  fact  that  firms' 
labour productivity in Croatia is on average (for a 
given firm size in a given sector) 26% lower than 
the  EU  average  (Bauer  et  al.,  2020).  When 
considering  the  sectoral  components  of  labour 
productivity in Croatia, ‘accommodation and food 
service’ activities are more productive that the EU 
average  (Graph  4.4.2).  However,  productivity  in 
all  other  sectors  lag  substantially  below  the  EU 
average.  Labour  productivity  growth  in  sectors 
‘transportation  and  storage’,  ‘information  and 
communication’  and  ‘professional,  scientific  and 
technical  activities’  remained  flat  over  the  period 
2012-2016,  which  slowed  the  convergence  of 
aggregate productivity towards the EU average. 

44 

9510010511011512012513013501020304050607080910111213141516171819Index (2000=100)HRHUPLSIEU28-50-40-30-20-1001020304050AGGCFGHIJMNDifference relative to the EU28Growth (2012-2016) 
  
  
                                                           
4.4. Competitiveness reforms and investment* 

services. 

Further 

identify 

consultations 

The  reduction  of 
the  administrative  and 
financial  burden  on  the  business  sector  is 
progressing. 
with 
stakeholders have been carried out, also via a new 
dedicated  website  (boljipropisi.hr/),  which  has 
the  administrative  processes, 
helped 
obligations and red tape that put the highest burden 
on  business  and  that  need  to  be  simplified.  In 
2019, 314 administrative processes and obligations 
were singled out to be cut or simplified, leading to 
estimated savings to business of 0.16% of GDP per 
year.  Up  to  October  2019,  94  of  these  measures 
have  been 
the 
administrative  burden  by  approximately  0.1%  of 
financial  burden  on 
GDP.  The  estimated 
companies  and  citizens  stemming  from  parafiscal 
charges  stands  at  approximately  2.3%  of  GDP.  A 
review of such charges is on-going and a decision 
on  the  reduction/abolition  of  these  charges  is 
expected in the first quarter of 2020. 

implemented, 

reducing 

thus 

improvement 

recorded 
the  region,  but 

Competitiveness  is  gradually  improving,  but 
Croatia still ranks poorly compared to its peers. 
In  the  latest  World  Economic  Forum  Global 
the 
Index,  Croatia 
Competitiveness 
biggest 
its 
in 
performance  remains  below  both  the  EU  average 
and  of 
improved 
its  peer  countries.  The 
performance  due  to  increased  macro-economic 
stability. 
lost 
competitiveness in the “product market” category. 
According  to  the  2020  Doing  Business  report 
(World  Bank,  2019b)  Croatia 
its 
performance  and  now  ranks  somewhat  more 
favourably  in  EU  comparison  but  still  below  the 
EU average. 

Nevertheless, 

improved 

Croatia 

Over  the  past  five  years,  Croatia  reduced  the 
restrictiveness  of 
its  product  and  services 
market  regulation.  Croatia’s  score  in  the  2018 

firms (top 10%) were 12 times more productive in 
2016  than  the  least  productive  (bottom  10%)  in 
terms of total factor productivity. This ratio is still 
somewhat  higher  than  the  ratio  recorded  by  other 
countries  for  which  data  are  available.  A  high 
and/or  increasing  gap  between  front-running  and 
lagging  firms  may  signal  issues  of  inefficient 
resource allocation and/or technology take-up. 

skill 

learning 

Skills shortages, low R&D investment, rigidities 
in the  business environment and weaknesses in 
public  administration  are  key  drivers  of 
Croatia's  productivity  gap.  Employers  find  it 
increasingly  difficult  to  find  employees  with  the 
right  skills  (see  section  4.3.1),  while  low  activity 
rates  and  low  participation  of  the  workforce  in 
activation 
hamper 
lifelong 
(CEDEFOP,  2018).  At  0.5%  of  GDP,  business 
R&D  expenditure  is  among  the  lowest  in  the  EU. 
Croatia  is  among  the  worst  performers  in  the  EU 
on  several  aspects  of  the  business  environment, 
including  starting  a  business,  paying  taxes  and 
dealing  with  construction  permits.  As  a  result, 
business dynamism is also below the EU average. 
Significant  weaknesses  remain  in  several  aspects 
of 
the  public  administration  and  governance 
framework,  including  the  burden  of  government 
regulation  and  the  perceived  quality  of  public 
services. 

Business environment 

to 

has 

reducing 

committed 

A  cumbersome  business  environment  hinders 
competitiveness  and  productivity  growth. 
Croatia 
the 
administrative  and  financial  burden  of  companies 
by  reducing  the  number  and  overall  burden  of 
para-fiscal  charges.  These  actions  form  part  of 
Croatia’s  prior  commitments  to  joining  ERM  II. 
Initiatives  are  ongoing  to  lighten  the  burden  of 
administrative obligations for entrepreneurs, as are 
selected  professional 
measures 

liberalise 

to 

Table 4.4.1:  OECD  Product Market Regulation  (PMR) Indicators 

(1) PMR index range from 0 - 6 from the most to the least competition-friendly regulation  
(2) EU score for 2018 includes the UK and excludes Estonia. 
(3) Due to methodological changes in the PMR methodology between 2013 and 2018, comparisons can be drawn across 
countries within the same edition and not necessarily between the same country across editions. 
Source: OECD 

45 

2018 PMRHREUDifference2013 PMRHREUDifferenceTotal1.431.40-2%Total2.081.44-31%Public Ownership2.802.10-25%Public Ownership3.012.72-10%Involvement in Business Operations0.851.2041%Involvement in Business Operations2.061.63-21%Simplification and Evaluation of Regulations1.801.52-16%Admin. Burden on Start-ups 2.982.08-30%Admin. Burden on Start-ups 1.000.95-5%Complexity of regulatory procedures2.001.85-8%Barriers in Service & Network sectors1.641.746%Regulatory protection of incumbents0.971.1316%Barriers to Trade and Investment0.510.48-6%Barriers to Trade and Investment1.710.47-73% 
    
 
that 

shows 

(OECD,  2020) 

the  Product  Market  Regulation  
version  of 
indicators 
the 
restrictiveness of Croatia’s regulations was close to 
the  EU  average,  which  is  a  big  improvement 
compared  to  2013,  when  Croatia  was  found  to 
have  substantially  more  restrictive  regulation  (see 
Table  4.4.1).  A  breakdown  by  components  shows 
that Croatia’s ‘barriers to trade and investment’ are 
least  restrictive,  followed  by  ‘involvement  in 
business operations’ and ‘administrative burden on 
start-ups’.  On  the  other  hand,  Croatia  still  has  the 
least  competition-friendly  regulation  for  ‘public 
ownership’  (see  Section  4.4.2  on  state-owned 
enterprises),  ‘simplification  and  evaluation  of 
regulations’ and ‘barriers in services sector’. 

mandatory 

professional 

Despite recent reforms, several professions face 
high  regulatory  restrictions.  This  is  particularly 
acute  for  lawyers,  architects,  engineers  and  tax 
advisers (49). While some positive steps have been 
taken  to  reduce  restrictions  for  architects  and 
engineers,  such  as  the  opening  up  of  interior 
design  and 
landscaping  activities,  restrictions 
remain  high.  This  is  due,  among  other  factors,  to 
chamber 
costly 
membership  (including  an  obligation  to  register 
separately for each specialisation), the sitting of an 
additional  professional  exam  after  graduation,  the 
recommended  prices  as  well  as 
setting  of 
significant fragmentation of exclusive rights across 
engineering professions. For tax advisory services, 
Croatia  removed  the  residency  restrictions  for 
certified  tax  advisers  but  shareholding  restrictions 
and  limits  on  multidisciplinary  practices  continue 
to  apply.  Excessive  restrictions  also  continue  to 
apply  to  lawyers,  one  of  these  being  a  100% 
total 
shareholding  requirement  as  well  as  a 
practice. 
prohibition 
Following  support  by 
the  Structural  Reform 
Support Programme, Croatia adopted a first action 
plan  containing  20  deregulation  measures  for 
seven  professions,  which  should  be  implemented 
by  the  second  quarter  of  2020.  A  second  action 
plan  with  measures 
another  13 
professions  is  expected  to  follow.  In  addition,  a 
law  abolishing  mandatory  chamber  membership 
for construction site managers and works managers 
was  adopted  in  October  2019.  Several  significant 

on  multidisciplinary 

covering 

(49)  See  the  European  Commission’s  restrictiveness  indicator 
regulatory 
(COM(2016)  820 
restrictiveness in Croatia is higher than the EU average for 
six out of seven analysed professions. 

showing 

final) 

that 

4.4. Competitiveness reforms and investment* 

restrictions  still  remain  though,  undermining  the 
productivity 
the 
professional services’ sector. 

competitiveness 

and 

of 

to  notify 

is  obliged 

Croatia  issues  a  low  volume  of  notifications  of 
national  draft  technical  regulations  under  the 
Single  Market  Transparency  Directive (50). 
the  European 
Croatia 
Commission  of  any  draft  legislation  it  intends  to 
table  that  concerns  products  or  services.  The  aim 
of  the  notification  procedure  is  to  detect  and 
prevent  obstacles  to  the  EU  internal  market  being 
created  before  they  materialise.  Croatia  notified 
just seven draft laws in 2018, which is 1% of total 
notifications  to  the  European  Commission.  To 
improve  Croatia’s  integration  in  the  EU  internal 
market,  it  is  necessary  to  address  any  potential 
issues 
the  number  of 
notifications  of  draft  technical  regulations  under 
the Single Market Transparency Directive. 

in  order 

increase 

to 

recovery 

Lack  of  data  does  not  allow 
for  a 
comprehensive  assessment  of  the  insolvency 
framework and the impact  of the 2015 reform. 
in  pre-insolvency 
rates 
Data  on 
settlements  and  insolvency  procedures  are  not 
publicly  available.  According  to  the  2020  Doing 
Business  report,  which  uses  set  cases,  recovery 
rates  have  not  significantly  improved  since  2016 
(World  Bank  2019).  Monitoring  systems  need  to 
be  put  in  place  to  assess  the  effectiveness  of  the 
new insolvency framework. 

Digitalisation of business  

Croatian  enterprises  are  slowly  taking  up 
digital  technologies.  On  the  integration  of  digital 
technology  within  businesses,  Croatia  scores 
below EU average. With 15.5% of enterprises at a 
high  and  very  high  level  of  digital  intensity, 
Croatia lags behind the EU average of 18%. Fewer 
than 20% of small businesses are highly digitised, 
compared  to  47%  of  large  companies  (European 
Commission,  2020a).  Croatian  SMEs  have  made 
modest  progress  in  process/product  innovations 
(European  Commission,  2019g).  In  2019,  most 
large  Croatian  companies  (62%)  engaged  in  ICT 
/ 
up-skilling 
the  workforce  with 
specialised 
training  (against  22%  of  SMEs) 
(European  Commission,  2020a).  The  provision  of 
is 
specialised 

trainings  and  workshops 

re-skilling 

ICT 

(50)  Directive (EU) 2015/1535. 

46 

                                                           
                                                           
4.4. Competitiveness reforms and investment* 

particularly limited for micro and small companies 
due  to  costs,  low  availability  of  personnel  or  on 
account  of  pressures  for  subsequent  wage  rises. 
With  the  Croatian  Industry  4.0  strategy,  the 
National  Plan  for  Digital  Transformation  of  the 
Economy  and  the  National  Plan  for  Artificial 
Intelligence,  Croatia  aims 
to  further  digitise 
business and production processes, while reducing 
production costs. 

Croatia  made  limited  progress  in  broadband 
connectivity.  Delays  in  rolling  out  broadband 
access  and  backhaul  networks  will  influence  the 
performance  of  SMEs’  progress  in  digital  skills 
and in providing a range of services. While the fee 
reduction  for  using  radio  spectrum  is  a  positive 
development, Croatia still lacks a focused strategy 
for  the  management  of  the  radio  spectrum  and  a 
roadmap  needed  to  swiftly  assign  the  5G  pioneer 
spectrum bands (700 MHz, 3.6 GHz and 26 GHz) 
and 5G deployment. 

Research, development and innovation 

Investment in R&D increased substantially, but 
largely thanks to ESIF funds, while efficiency of 
spending  is  low.  In  2018,  overall  investment  in 
R&D jumped to 0.97% of GDP, up from 0.86% in 
2017. Public expenditure on R&D rose to 0.51% of 
GDP,  while  business 
investment  expenditure 
increased  to  0.47%  of  GDP.  Stronger  public 
investment on fundamental R&D would play a key 
role in boosting the innovation system. 

The  research  and  innovation  system  produces 
scientific output of modest quality and struggles 
to attract talent. The legal autonomy  enjoyed by 
university  faculties  can  lead  to  low  cooperation 
across  universities  (both  within  and  outside  the 
country,  as  well  as  with  the  business  sector)  and 
hinder  interdisciplinary  research.  Croatia  stands 
out  compared  to  other  countries  in  terms  of  its 
overproduction  of  low-quality  publications,  as 
measured  by  the  number  of  uncited  publications 
per  full-time  equivalent  R&D  personnel,  where 
Croatia  scores  highest  in  Europe  (World  Bank 
2019c).  A  draft  law  on  science  and  higher 
education in Croatia aims to reform the system by 
introducing  measures  to  recognise  and  reward 
research excellence: an efficient promotion system 
for  researchers, 
tenure  track  employment  for 
young  scientists  and  higher  salaries  for  project 
work,  and  rewards  for  international  cooperation. 

The  draft  law  would  bring  in  a  new  system  of 
university  governance,  expand  performance-based 
funding to include science-business cooperation as 
an assessment criterion and spell out guidelines for 
research 
and  properly 
implemented,  this  law  has  the  potential  to  kick-
start  a  modernisation  process  of  the  Croatian 
research and innovation system. 

adopted 

ethics. 

If 

Croatian companies are concentrated in low- to 
medium-tech  sectors,  and  government  support 
to  R&D-based  innovative  firms  is  lacking. 
According to the European Innovation Scoreboard, 
Croatia  is  a  moderate  innovator.  Croatia’s  best 
scores are on non-R&D innovation and its weakest 
points  are  in  knowledge-intensive  service  exports 
and  venture  capital  expenditure.  Companies  are 
concentrated  in  low  and  medium-tech  sectors, 
notably  in  trade  and  tourism,  which  affects  the 
current  low  level  of  investment  in  R&D.  The 
structure  of  the  economy  has  remained  broadly 
unchanged  over  the  past  15  years,  with  no  shift 
towards  more 
sectors 
(European  Commission  2018b).  State-owned 
enterprises,  which  contribute  around  one  fifth  of 
the national economy turnover, lack incentives for 
competition 
innovation  and  research 
(Račić,  et  al.,  2020).  Croatian  firms,  especially 
smaller and younger companies, indicate a positive 
link 
and 
productivity  growth.  Nonetheless,  government 
support  programmes  are  heavily  skewed  towards 
helping  mature  and  larger  companies,  with  less 
support  given  to  diversification  and  new  ventures 
(World  Bank  2019c).  In  addition,  many  support 
programmes  are  overcomplicated  and  poorly 
adapted to business needs. 

between  R&D-based 

knowledge-intensive 

innovation 

through 

Croatia  is  unlocking  its  innovation  potential 
and  performance  through  smart  specialisation. 
Through its Smart Specialisation Strategy, Croatia 
the 
the  fragmentation  of 
to  overcome 
aims 
to  boost  productivity  and 
innovation  system 
innovation.  An 
inter-ministerial  National 
Innovation  Council  and  Thematic  Innovation 
its 
Councils  have  been  set-up 
implementation.  These  initiatives  are  showing 
signs  of  improvement  in  the  governance  and 
coordination of innovation policies. However, their 
impact will depend on whether these Councils will 
be  used  as  platforms  for  regular,  structured 
discussions  on  innovation  policy  under  the  Smart 
Specialisation Strategy. 

to  oversee 

47 

4.4. Competitiveness reforms and investment* 

Network industries 

Competition  in  Croatia's  electricity  and  gas 
wholesale markets is still limited. Wholesale gas 
prices in Croatia are still highly regulated and thus 
discourage  market 
competition. 
entry 
Inefficiencies  in  electricity  markets  affect  the 
deployment  of  renewable  energy  sources,  the 
environment and raise costs for consumers. 

and 

The  opening  of  Croatia’s  gas  market 
is 
proceeding  slowly.  Regional  suppliers  of  gas  to 
households  and  district  heating  units  (public 
service suppliers) enjoy preferred allocation of gas 
storage  and  trade  gas  at  regulated  prices.  In 
addition,  public  service  suppliers  are  able  to 
purchase  gas  from  the  wholesale  market  supplier 
and  the  supplier  of  last  resort  at  regulated  prices. 
Despite the adoption of  a  new  Gas  Market  Act in 
2018, these provisions  will only be  phased out by 
March 2021. The opening of Croatia’s gas market 
is  further  impeded  by  the  incomplete  process  for 
certification  of 
transmission  system 
operator by the national regulator. 

the  gas 

4.4.2.  PUBLIC SECTOR GOVERNANCE  

State-owned enterprises 

State-owned  enterprises  continue  to  play  an 
important role in the economy. In October 2019, 
the  government  adopted 
the  State  Assets 
Management  Strategy,  a  strategic  plan  for  the 
management  of  state  assets  over  the  period  2019-
2025.  Despite  progress  to  improve  governance, 
SOEs  are  still  beset  by  low  profitability  and 
productivity  relative  to  their  privately  owned 
peers,  which  hampers  allocative  efficiency  and 
overall  productivity 
(European  Commission, 
2018c).  

is 

intentions 

in  companies 

State  ownership 
slowly 
reducing. Croatia has committed to selling shares 
and  stakes  in  90  companies  as  part  of  its  ERM  II 
to 
prior-commitments.  Despite 
accelerate  the  divestment  of  shares  and  stakes  in 
companies  owned  by  the  Republic  of  Croatia, 
divestiture  sales  in  2019  were  lower  than  in 
previous  years.  On-going  work  to  define  the 
criteria  for  classifying  ‘legal  entities  of  special 
interest’  is  due  to  be  finalised  by  April  2020.  At 
present, 39 entities are listed as being strategically 
important.  

The adoption of a law on unvalued construction 
land opens up scope for future investments. The 
proposal  for  a  law  on  unvalued  construction  land 
has  been  prepared  and  agreed  upon  by  the 
authorities and is due to become law in early 2020. 
This  law  will  provide  a  clear  legal  framework  for 
settling  property  rights  between  the  Republic  of 
Croatia  and  private  companies,  originating  from 
the conversion and privatisation of land property in 
the  1990s.  The  law  will  provide  clarity  on 
ownership  and  should  lead  to  the  activation  of 
unused  assets  (tourism  land,  land  in  camps  and 
other building land) and  new investments (mainly 
in the tourism sector). 

Progress continues on enhancing and improving 
the  governance  of  state  owned  enterprises.  By 
the  end  of  2019,  government  representatives  on 
supervisory  and  audit  committees  will  have  an 
obligation to attend training sessions. This follows 
the  obligation  on  financial  and  strategic  reporting 
(quarterly  financial  statements,  annual  plans, 
annual  reports,  mid-term  plans  and  mid-term 
statements)  brought  in  in  2018.  In  October  2019, 
the government adopted a decision bringing in the 
obligation  of  all  state  majority  owned  SOEs  to 
create a compliance  function  in the  organisational 
structure  within  six  months.  This  initiative  should 
improve  governance  and  strengthen  the  corporate 
culture of SOEs. 

48 

4.4. Competitiveness reforms and investment* 

Box 4.4.5: Investment challenges and reforms in Croatia 

Section 1. Macroeconomic perspective 

The  Croatian  economy  continues  to  grow  steadily,  with  an  upswing  in  investment  driven  by  the  rising 
uptake of EU funds by both the public and private sectors. Nevertheless, overall investment remains low for 
a  country  with  catch-up  potential  and  in  comparison  to  its  peers.  The  capacity  to  increase  private-sector 
investment  is  curtailed  by  persistently  high  levels  of  indebtedness  in  the  business  sector  and  by  a 
cumbersome  business  environment.  The  low  quality  and  weakness  of  its  institutions,  coupled  with  a  high 
share of state-owned enterprises (SOEs), also hinders the effective flow of investment in Croatia. 

Section 2. Assessment of barriers to investment and ongoing reforms 

Several  factors  are  at  play  that  hold  back  investment  and  productivity  growth  in  Croatia.  Weak 
administrative  capacity  remains  a  barrier  to  investment  and  hinders  the  design  and  implementation  of 
strategic  policies.  An  underdeveloped  capital  market  and  over-reliance  on  bank  credit  limits  access  to 
finance, especially for smaller and innovative firms (see section 4.2). Implementing the reforms outlined in 
this report do, however, have the potential to give a boost to growth and investment. 

Selected barriers to investment and priority actions underway 

1. The business environment in Croatia is overly restrictive and burdened by excessive regulation, limiting 
competition  and  holding  back  investment.  Croatia  has  committed  to  reducing  the  administrative  and 
financial  burden  on  business  by  cutting  the  number  and  overall  volume  of  para-fiscal  charges,  the 
administrative  obligations  for  entrepreneurs  and  by  liberalising  selected  professional  services  (see  section 
4.4). 

2. SOEs play an important role in Croatia’s economy due to their size and presence across different sectors. 
However,  they  are  beset  with  weak  corporate  governance,  low  productivity  and  inefficient  resource 
allocation, which curbs investment and productivity growth. Croatia has committed to reducing the state’s 
holdings of shares and stakes companies that are not of strategic  state interest and to improving corporate 
governance practices in SOEs (see section 4.4). 

The  EU  supports  investment  in  Croatia  also  via  the  European  Fund  for  Strategic  Investments  (EFSI).  By 
September  2019  total  financing  under  the  EFSI  amounted  to  EUR  284  million,  intended  to  trigger  EUR 
1,134 million in additional investments. 

The current experience with the EU financial instruments and the EFSI budgetary guarantee demonstrated a 
need  for  simplification,  streamlining  and  better  coordination  of  the  EU’s  investment  support  instruments 
during the next 2021-27 programming period. By the end of 2020, EFSI and other EU financial instruments 

49 

Regulatory/ administrative burdenCSRTaxationPublic administrationCSRAccess to financePublic procurement /PPPsCSRCooperation btw academia, research and businessJudicial systemCSRFinancing of R&D&ICSRInsolvency frameworkBusiness services / Regulated professionsCSRCompetition and regulatory frameworkRetailEPL & framework for labour contracts ConstructionWages & wage settingCSRDigital Economy / TelecomEducation, skills, lifelong learning CSREnergyCSRTransportCSRLegend:No barrier to investment identifiedSome progressCSRInvestment barriers that are also subject to a CSRSubstantial progressNo progressFully addressedLimited progressPublic administration/ Business environmentFinancial Sector / TaxationR&D&ISector specific regulationLabour market/ Education 
4.4. Competitiveness reforms and investment* 

will  come  under  the  roof  of  the  new  InvestEU  programme  that  promotes  a  more  coherent  approach  to 
financing EU policy objectives and increases the choice of policy implementation options and implementing 
partners  to  tackle  country  specific  market  failures  and  investment  gaps.  In  addition,  under  InvestEU, 
Member  States  can  set-up  a  national  compartment  by  allocating  up  to  5%  of  their  structural  funds  to 
underpin  additional  guarantee  instruments  supporting  the  financing  of  investments  with  a  higher  level  of 
local  specificities.  InvestEU  will  be  policy-driven  and  focus  on:  Sustainable  Infrastructure,  Research, 
Innovation, and Digitisation, Small Businesses, and Social Investment and Skills.  

Public administration 

weak 

policy 

hamper 

highlight 

Public  administration  efficiency 
in  Croatia 
underperforms  the  EU  average.  A  number  of 
indicators 
public-sector 
performance  in  service  delivery,  which  in  turn 
affects  the  level  of  trust  in  the  government 
(European  Commission,  2019h).  A  constrained 
capacity  to  design  and  implement  policies  and 
inefficient  coordination  between 
projects  and 
ministries 
implementation, 
including  in  the  area  of  Cohesion.  Strategic 
planning capacities have deteriorated over the past 
years  (Koprić,  2019),  causing  recurring  delays  in 
the  preparation  of  strategic  documents.  A  new 
strategic planning system – established by the Act 
on  System  of  Strategic  Planning  and  Managing 
Development  – 
the  announced 
together  with 
National  Development  Strategy,  are  expected  to 
yield  better  performance  as  of  2020.  There  has 
been  progress  since  2014  on  improved  access  to 
government  information  (European  Commission, 
2019i).  

analyses contained in previous country reports, one 
of  the  main  weaknesses  of  the  Croatian  public 
administration  is  at  municipal  level.  Numerous 
small  municipalities  are  granted  responsibilities 
and competences in providing public services that 
they  cannot  fulfil  for  lack  of  adequate  financial, 
administrative  and  personnel  resources.  This  in 
turn  creates  large  disparities  in  public-service 
provision between financially and administratively 
strong  and  weak  local  units  across  the  country.  It 
also raises administrative costs and undermines the 
efficiency of resource utilisation. In June 2019, the 
entrust  
parliament 
competences  and  staff  from  branch  offices  of  the 
central  administration  (e.g.  ministries) 
to  the 
county-level  administration.  However,  it  remains 
unclear  to  what  extent  this  measure  will  bring 
efficiency  gains.  No  significant  measures  have 
been  taken  to  address  fragmentation  of  the  public 
administration at municipality level. 

legislation 

adopted 

to 

a 

public 

digital 

increased 

Continuous action has been taken to modernise 
and 
improve  the  uptake  of  e-government 
services.  The  share  of  online  users  actively 
embracing 
administration 
decreased  to  only  75%  in  2019.  The  e-Citizens 
platform 
the  number  of  services 
provided and the authorities are working on a one-
stop-shop  to  facilitate  and  enable  access  to  e-
services  for  citizens  who  do  not  use  digital 
technologies.  The  availability  of  online  services 
improved  (European 
for  businesses  has  also 
Commission, 2019j). A Shared Service Centre, set 
up  to  consolidate  information  infrastructure  and 
pool  the  use  of  ICT  resources  across  all  public 
sector bodies,  became operational in late  2019.  

The  public  administration  remains  highly 
fragmented at local level. As highlighted by  

to 

the 

reducing 

Measures 
public 
de-politicise 
administration and harmonise the regulation of 
state  agencies  are  making  progress.  In  June 
2019, the parliament adopted a law with the aim of 
de-politicising  and  professionalising  the  central 
government  administration  by 
the 
number  of  politically  appointed  state  officials.  In 
particular,  within  ministries,  certain  functions 
performed  by  politically  appointed  officials  (such 
as  assistant  ministers)  will  soon  be  carried  out  by 
senior  civil  servants  selected 
through  open 
competition.  The  stated  aim  of  the  measure  is  to 
term 
ensure 
increased 
in 
continuity 
the  government 
administration  and  strengthen  the  competence  of 
the  civil  service.  The  process  to  streamline  the 
cumbersome  state  agencies  system,  initiated  last 
year, is making progress: 35 out of the 54 selected 
state  agency-type  institutions  have  either  been 

the  medium-long 
the  work  of 
in 

50 

 
 
 
4.4. Competitiveness reforms and investment* 

policies  in  public  procurement  and  in  addressing 
integrity issues.  

Justice system 

in  expanding  electronic 
Despite  progress 
communication 
in  courts,  the  quality  and 
efficiency  of  the  justice  system  remains  a 
challenge.  While  efforts  to  resolve  the  oldest 
pending cases (10 years and older) continued with 
solid  results,  the  2020  EU  Justice  Scoreboard 
(forthcoming) still shows that backlogs and length 
of court proceedings remain  among the  highest in 
the EU. Average length of proceedings in the first 
instance  remains  among  the  longest  in  the  EU  at 
around  855  and  735  days  for  litigious  civil  and 
in 
commercial  cases,  respectively).  Backlogs 
commercial  cases  continued  to  decrease,  mainly 
due to improved business processes initiated by the 
High  Commercial  Court  and  now  partially 
extended  to  the  first  instance  commercial  courts. 
Further  progress  in  reducing  backlogs  was  also 
achieved in civil cases at all instances, but the first 
instance  civil  courts  are  currently  facing  an 
exceptional influx of cases concerning CHF-linked 
loans and personal insolvencies. 

less 

Electronic  communication  and  centralised 
postal  delivery  of  court  documents  are 
gradually advancing, which could bring savings 
in  financial  and  human  resources.  In  2019, 
electronic  communication  with  court  users 
exceeded  90,000  exchanges  in    Commercial  and 
17,000  in  some  Municipal  courts  (mostly  from 
lawyers,  and  insolvency  cases  from  insolvency 
administrators  and  the  Financial  Agency  (FINA), 
and 
from  notaries  and  court  experts). 
Centralised  postal  delivery  of  court  documents 
through  the  Croatian  Post  increased  to  nearly 
100,000 
(about  25%  of  all  paper  post). 
Nevertheless,  room  for  improvement  remains, 
particularly  in  County  and  remaining  Municipal 
courts,  and 
tax 
authority.  Online  publication  of  1st  and  2nd 
instance  court  judgments  remains  very  limited 
the 
(European  Commission,  2020b),  despite 
improved ICT system. The collection of court fees 
remains 
the 
administration, despite offering a 50% discount in 
case of immediate online payment. 

in  communication  with 

considerable 

burden 

the 

for 

a 

closed  or  merged  with  other  agencies  or  into  line 
ministries,  without  staff  cuts.  A  new 
legal 
framework (51)  regulating  the  remaining  agencies 
and  bringing  in  a  higher  degree  of  consistency 
across the system was adopted in December 2019. 
These  measures  form  part  of  Croatia’s  prior 
commitment  in  the  process  of  ERM  II  accession 
and eventually euro adoption. 

New  legislation  on  wage  setting  in  the  civil 
service was postponed several times. Authorities 
are  currently carrying out an independent in-depth 
analysis  of  the  wage  system,  amid  demands  for 
wage  increases  from  several  parts  of  the  public 
sector.  The  aim  of  the  law  is  to  achieve  greater 
harmonisation  of  wage  setting  across  the  central 
public  administration  (and  at  a  later  stage  in  the 
wider public sector) by introducing common wage 
grids  and  job  complexity  coefficients.  Social 
dialogue,  though  showing  positive  developments, 
needs  improvement  in  terms  of  working  methods 
and procedure to have a genuine impact on policy 
preparation and implementation.  

The  institutional  setup  for  public  procurement 
is  improving,  albeit  slowly.  A  2018  State  Audit 
report  indicated  that  staff  capacity  constraints, 
especially  in  the  area  of  ESIF,  are  being  slowly 
overcome.  However,  the  sharp  increases  in  the 
number  of  procurement  contracts  (e.g.  +400% 
annual  rise  in  ESIF  contracts  in  2018)  poses 
challenges.  The  Central  Finance  and  Contracting 
Agency  and  other  intermediate  bodies  providing 
non-obligatory  checks  and  input  to  draft  tender 
documents have reported modest improvements in 
staffing 
of 
and 
documentation.  Robust  workload  analysis  should 
be  undertaken  to  ensure  sufficient  resources  are 
available in future.  

numbers 

quality 

better 

Further improvements to the appeal system are 
including  possible  mandatory  e-
envisaged 
appeals  and  online-fee  payments.  Strengthening 
the  e-procurement  system  and  all  related  digital 
databases  with  a  view  of  boosting  the  capacity  to 
collect and analyse public procurement data would 
be very helpful in developing tailored and efficient 

(51)  The  new  framework  would  define  uniform  criteria 
concerning  the  establishment,  legal  status  of  employees, 
sources  of  funding,  responsibility  and  supervision  of 
agency-like public institutions. 

The  quality  and  efficiency  of  the  criminal 
justice system remain a challenge. Backlogs and 

51 

                                                           
4.4. Competitiveness reforms and investment* 

2020  is  currently  underway.  National  assessments 
on  the  results  of  the  implementation  of  the 
activities  foreseen  for  2019  show  that  70%  of  the 
partially 
activities  were 
implemented. Further efforts are needed to address 
corruption 
the 
perception of corruption  remains high. 

issues  more  effectively,  as 

implemented 

or 

Control and sanction mechanisms remain weak, 
in particular at the local level. Although there is 
a  considerable  number  of 
investigations  and 
indictments in cases related to organised crime and 
corruption, the inefficiencies of the justice system, 
such  as  lengthy  court  proceedings,  often  impede 
closure.  Official  statistics  also  show 
that  a 
significant  proportion  of  corruption  offences  are 
recorded  at  local  level.  The  Law  on  Local  and 
Regional  Self-Governance,  which  gives  elected 
local  officials  considerable  discretion  in  decision-
making  without 
to  asset 
subjecting 
declarations or other forms of oversight, remains a 
concern.  The  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  create  scope  for  corruption.  It 
would  be  important  that  measures  to  increase 
transparency 
the 
framework 
functioning  of 
local  government  units  are 
accompanied  by  enhanced  corruption  oversight  at 
the local level.  

them 

and 

the 

for 

For  businesses, 
issues  of  corruption  and 
conflicts of interest remain widespread in public 
procurement.  67%  of  businesses  consider 
conflicts of interest in the evaluation of bids to be 
widespread  and  71%  consider 
tailor  made 
specification 
for  particular  companies,  and 
collusive bidding to be common. At the local level, 
74%  consider  corruption  widespread  in  public 
procurement  managed  by 
local 
authorities, an 11 point increase since 2013. These 
increased  by  numerous 
concerns  are  further 
complaints  causing  delays,  and  a  decline  in  the 
average  number  of  tenderers  from  3.5  in  2017  to 
2.8  in  2018,  which  further  increases  corruption 
risks. 

regional  or 

lawyers 

length  of  proceedings  increased  in  first  instance 
cases at Municipal and County courts (to  678 and 
930  days  on  average,  respectively),  also  due  to 
focusing on resolving old cases. A reported lack of 
procedural  discipline  by 
in  court 
proceedings for approving indictments often leads 
to  considerable  delays,  but  amendments 
to 
criminal  procedure,  which  entered  into  force  in 
January 2020, are expected to bring improvements. 
The administrative capacity of the State Attorney’s 
Council, with only a few employees, remains low. 
Despite 
the  States 
Attorney’s Office, the lack of specialised financial 
investigators  could  hamper  the  effective  fight 
against economic and financial crime. In 2018, the 
prosecution  service  processed  more  criminal 
charges than it received (a clearance rate of 104%) 
(SAO,  2018),  which  lowered  the  backlogs.  More 
than 90% of investigations led by prosecutors take 
up to 6 months to complete. 

resources 

increased 

in 

to 

improve 

is  exploring  ways 

The  perception  of  judicial  independence,  both 
among  business  and  among  the  general  public, 
remains  very  low.  Surveys  among  businesses 
show  that  the  perceived  judicial  independence 
decreased  even  further  from  an  already  low  level 
(European Commission, 2020b). The State Judicial 
Council 
the 
reasoning  in  its  decisions  and  opinions,  following 
successful  challenges  by  candidate  judges  before 
the Constitutional Court. The publication of assets 
of judges and prosecutors is now expected in 2020 
due  to  adopted  legislative  amendments,  which 
addressed  data  protection  requirements.  However, 
the  assets  database  is  not  connected  with  the  tax 
authority and the land registry. This would enable 
the State Judicial Council and the State Attorney’s 
Council  to  verify  the  declarations  already  prior  to 
their publication. 

Fight against corruption  

Corruption  remains  an  area  of  concern. 
Following the implementation of previous Actions 
Plans,  for  2015  and  2016,  as  well  as  2017  and 
2018,  efforts  to  implement  the  measures  of  the 
the  field  of 
national  strategic  documents 
corruption  prevention  are  ongoing.  This 
is 
indicated  by  the  results  of  the  implementation  of 
the  Action  Plan  2017-2018.  According  to  the 
activities  were 
authorities, 
implemented 
implemented. 
Implementation  of  the  Action  Plan  for  2019  and 

the 
partially 

83% 
or 

of 

in 

52 

4.5.  ENVIRONMENTAL SUSTAINABILITY 

Graph 4.5.1:  Municipal waste treatment: Croatia and peers 

Developing  a  coherent,  long-term  vision  for 
improving  environmental  sustainability  is  of 
crucial importance for Croatia’s socio-economic 
development  in  the  coming  years.  Croatia  has 
made  good  progress  in  improving  public  finances 
since  the  crisis  and  unemployment  rate  continues 
to  drop,  which  contributes  to  raising  the  living 
standards  of  its  citizens.  Croatia  is  expected  to 
meet  the  Europa  2020  targets  in  renewables 
(except  in  transport)  and  energy  efficiency  and  is 
on  track  to  reaching  its  target  for  lowering 
greenhouse  gas  emissions.  Still,  the  Croatian 
economy faces important sustainability challenges, 
affecting  its  future  competitiveness  as  well  as 
social  cohesion.  A  broad  political  consensus 
around a coherent set of decisive policy measures, 
involving  different  stakeholders  including  civil 
society organisations would be important to tackle 
these challenges. It  would be key to  put  measures 
in  place  which  aim  to  direct  public  and  private 
investments  into  areas  and  sectors  that  will  help 
transform  Croatia  into  a  climate  neutral  and 
circular  economy.  New  legislative  measures  and 
economic  incentives,  but  also  aligning  education 
and upskilling with the future labour market needs 
would be important. 

There  is  still  a  long  way  to go  in  the  transition 
from a linear to a circular economy in Croatia. 
Resource productivity (52) in Croatia (EUR 1.14/kg 
in  2018)  is  significantly  below  the  EU  average 
(EUR  2.24/kg).  Given 
resource 
productivity  and  low  recycling  rates  in  Croatia, 
promoting  a  circular  economy  and  improving 
resource efficiency could stimulate investment and 
assets. 
reduce 
Nevertheless,  besides  some  isolated  initiatives, 
Croatia  has  no  comprehensive  circular  economy 
strategy. 

stranded 

losses 

from 

low 

the 

the 

(52)  Resource productivity is defined as the ratio between gross 
and  domestic  material 
(GDP) 

domestic  product 
consumption (DMC).  

Source: Eurostat 

Despite  some  progress,  shifting  waste  from 
landfilling towards recycling remains a priority. 
In  line  with  the  Sustainable  Development  Goals, 
the EU  has set up ambitious  recycling targets and 
policy instruments in the recast Waste Framework 
Directive as well as through the Circular Economy 
Action  Plan.  In  Croatia,  25%  of  municipal  waste 
was  recycled  in  2018  –  a  big  improvement  from 
4%  in  2010,  but  still  substantially  below  the  EU 
average  of  47%.  Landfilling  of  municipal  waste 
remains  high  at  66%  (EU  average  22%).  A 
continued  strong  effort  would  help  Croatia  to 
converge 
the  EU  average  and  ultimately 
contribute to achieving the European target of zero 
pollution.  Around  EUR  193  million  of  EU  funds 
are  already  committed  for  projects  supporting 
sustainable  production  and  consumption  (12th 
Sustainable  Development  Goal).  Nonetheless, 
further efficient and targeted investments in waste 
management and a focus towards prevention, reuse 
and recycling are essential in a transition towards a 
investment 
more  circular  economy.  Croatia’s 
needs  required  to  reach  the  EU  recycling  targets 
for municipal and packaging waste are estimated at 
EUR 222 million in 2021-2035 (Eumonia, 2019). 

to 

Recent  policy  developments  are  promising,  but 
governance  challenges  in  waste  management 
remain.  Although  a  national  Waste  Management 
in  place 
Plan  has  been 
its 
across 
varies 
implementation 
numerous  local  levels.  The  island  of  Krk  and  the 
city  of  Prelog  remain  rare  examples  of  successful 

since  2017, 

substantially 

53 

050100150200250300350400450500EU 28HRHUSKSICZPLkg / capitaLandfillingIncineration and recoveryComposting and digestionRecycling 
 
                                                           
  
4.5. Environmental sustainability 

waste  management  focused  on  quality  collection 
services,  including  door-to-door  collection.  The 
recently  adopted  decision  on 
the  closure  of 
landfills,  which  prescribes  the  dynamics  of  the 
closure  of  non-hazardous  waste  landfills,  should 
provide  an  impetus  to  the  shift  away  from 
landfilling 
and 
recycling.  Additionally,  the  latest  amendments  to 
the  Municipal  Waste  Management  Regulation 
encourage the local government units to implement 
measures to reduce the amount of mixed municipal 
waste generated in their area (53).  

collection 

separate 

towards 

Air  pollution  continues  to  have  a  significant 
impact on health. For the year 2016, the European 
Environment  Agency  estimated  that  around  12.2 
years  of  life  lost  per  1,000  inhabitants  were 
attributable  to  exposure  to  fine  particulate  matter 
(PM2.5)  in  Croatia,  substantially  above  the  EU 
average  of  8  years.  Reducing  air  pollutant 
emissions  and  concentrations  requires  a  further 
reduction of emissions  from  electricity production 
and heat generation using solid fuels, promotion of 
efficient  and  clean  heating  and  increase  in  the 
efficiency and uptake of public transport. 

Sewage  systems  are  underdeveloped  and  the 
water  supply  networks  face  high  leakage  rates. 
Only  54.6%  of  the  population  is  connected  to  the 
sewage  system  and  86%  are  connected  to  the 
public  water  supply,  which  has  a  leakage  rate  of 
44%  (almost  double  the  EU  average  of  23%). 
Much  of  the  collected  wastewater  is  discharged 
without appropriate treatment. This can become an 
issue  particularly  when  infrastructure  use  peaks 
during summer months. In effect, the poor state of 
the  sewage  systems  harms  the  ecosystems  on 
which  Croatia’s  tourism  depends  on.  As  regards 
drinking  water,  in  addition  to  high  leakage  rates, 
quality  requirements  are  still  not  met  in  some 
areas, most notably Eastern Slavonia. 

The  water  sector  lags  considerably  behind  EU 
standards.  The  estimated  total  investment  gap  in 
the  water  utility  sector  is  HRK  28  billion,  almost 
7% of Croatia’s 2019 GDP (OECD, forthcoming). 
Almost one quarter concerns investments in public 
water supply, with more than three quarters related 

of 

budget 

constraints 

lays  down 

to public sewage system and wastewater treatment. 
A significant share of necessary funding is eligible 
under  the  European  Structural  and  Investment 
Funds.  The  long-awaited  reorganisation  of  the 
water  utility  sector  is  expected  to  speed  up  the 
implementation of projects in the water sector and 
resolve 
smaller 
municipalities. The recently adopted Water Service 
Act 
this 
reorganisation,  while  the  forthcoming  Regulation 
of Service Areas will delineate water service areas, 
reducing  the  number  of  water  utility  companies 
from almost 200 to 40. Improved efficiency in the 
water sector, including through more cost-effective 
measures, as well as increased consolidation could 
help  reduce  the  financing  gap.  An  ambitious 
update  of  the  national  water  investment  plan  is 
expected to guide the prioritisation of investments. 

foundation 

the 

for 

Croatia’s  economy  and  in  particular  tourism 
are relatively dependent on a preserved natural 
environment.  One  third  of  Croatia’s  land  area  is 
included in the Natura 2000 network, reflecting not 
only  the  country’s  strong  commitment  to  nature 
conservation  but  also  its  biodiversity.  Biological 
and  landscape  diversity  are  the  foundations  of 
Croatian tourism attractiveness and its comparative 
advantage  on  the  global  market  (Carić,  2018). 
Croatia  is  currently  finalising  its  Priority  Action 
Framework,  the  key  programming  document  for 
nature  and  wider  biodiversity 
the  next 
Multiannual Financial Framework. This document 
is expected  to enable strategic long-term planning 
by establishing a well defined project pipeline and 
facilitating 
authorities 
responsible  for  nature,  agriculture,  fisheries  and 
other relevant sectors. 

dialogue 

between 

for 

depends 

decarbonisation 

Croatia’s 
on 
ambitious  energy  efficiency  and  renewable 
energy  measures.  Investing  in  renewable  energy 
and  energy  efficiency  will  enable  the  country  to 
contribute  to  the  UN  Sustainable  Development 
Goals,  and  achieve  the  EU’s  collective  targets,  as 
set  out  in  Croatia’s  National  Energy  and  Climate 
Plan (NECP) (54). , Investing in green energy  will 
also  tap  new  potential  for  economic  growth,  job 
creation and innovation. The  recent assessment of 

(53)  The “incentive fee” is paid by local government units to the 
Fund  for  environment  protection  and  energy  efficiency. 
The  per-tonne  rate  applicable  to  a  given  unit  is  inversely 
proportional 
the  amount  of  separately  collected 
to 
municipal waste in that unit.  

(54)  Croatia  submitted  its  NECP  on  30  December  2019.  The 
Commission  will  assess,  in  the  course  of  2020,  the  final 
national  energy  and  climate  plans  submitted  by  the 
Member States. 

54 

                                                           
                                                           
4.5. Environmental sustainability 

share  of  renewable  energy 

The 
sources 
stagnates  as  Croatia  adopts  a  more  ambitious 
target.  The  share  of  renewable  energy  sources  in 
the total mix was 28.0% in 2018. Meanwhile, in its 
National  Energy  and  Climate  Plan  (NECP), 
Croatia set an ambitious objective  of 36.4% share 
of  renewable  energy  sources  in  2030.  In  order  to 
achieve  this,  additional  efforts  are  needed  in 
heating  and  cooling,  but  also  in  the  transport 
sector,  where  Croatia  is  set  to  miss  its  2020  and 
2030  targets.  The  “Clean  Energy  for  EU  Islands 
Initiative'' was launched in May 2017 with the aim 
of helping islands and their inhabitants to generate 
their own sustainable low-cost energy, to embrace 
renewable  energy,  create 
jobs  and  economic 
growth and reduce greenhouse gas emissions. Four 
island  communities  in  Croatia  (Cres/Lošinj,  Hvar, 
Korčula and Brač) were selected to participate in a 
pilot project. For these unique territories investing 
in  renewable  sources  would  reduce  the  island's 
energy  dependency  from  the  mainland,  especially 
in summer months when consumption is highest. 

energy 

Hydropower is well developed, while regulatory 
obstacles  stifle  new  investments  in  renewables. 
Hydropower  accounts  for  the  bulk  of  renewable 
energy  in  Croatia,  whereas  the  share  of  solar  and 
wind  energy  in  the  total  installed  electricity 
generation  capacity  is  12.8%  in  2017,  less  than 
half  of  EU  average  of  27.5%.  At  the  same  time, 
there is vast untapped cost-competitive potential in 
wind and solar: depending on the cost of capital up 
to  11.8  and  3.2  GW,  respectively,  (together  about 
three times the installed capacity) (IRENA, 2017). 
Realising  this  potential  would  benefit  the  security 
of 
industrial 
production and the trade balance of Croatia, which 
is a net importer of energy. This rests on removing 
regulatory  and  administrative  hurdles.  The  often 
excessively  rigid  regulations  or  the  interpretation 
thereof by local energy distributors and authorities 
have  been  creating  obstacles  for  deployment  of 
small-scale  projects.  In  2018,  requirements  were 
somewhat eased through new rules for connecting 
households  to  the  grid.  However,  bigger  projects 
restrictive 
remain  more 
regulations  and  the  gap  left  by  the  phasing  out  of 
the  old  feed-in  tariffs  system,  which  has  not  yet 
been succeeded by the planned premium system. 

affected  by  both 

employment, 

supply, 

The  share  of  renewable  energy  sources  in 
transport  is  low  as  incentives  are  limited.  At 
3.9% in 2018, the share of renewables in Croatia is 

(European  Commission 

the  impacts  of  compliance  with  the  Paris  Climate 
Agreement 
(2019l), 
Eurofound  (2019))  shows  a  positive  effect  on 
employment  in  Croatia  (up  to  0.4%  increase  in 
employment rate) by 2030.  

Croatia  is  set  to  meet  its  2020  greenhouse  gas 
emissions  target  with  ease,  while  additional 
measures  would  be  needed  to  meet  the  2030 
target.  Preliminary  data  shows 
that  Croatia 
overachieved  its  target  in  2018  by  10  percentage 
points.  It  is  projected  to  fall  a  little  short  of  its 
2030 target if no new measures are taken, but with 
additional  measures  it  is  projected  to  continue 
over-achieving.  The  new  Energy  development 
Strategy  highlights  two  scenarios:  a  ‘moderate’ 
and  an  ‘accelerated’  energy  transition,  identifies 
key  priorities  and  projects  effects  of  the  energy 
transition.  The  draft  Climate  Adaptation  strategy 
and  Law  on  Climate  Change  and  Ozone  Layer 
Protection have been adopted d in December 2019. 
In the period 2005-2018, the emission intensity of 
Croatia’s economy has dropped by a quarter, but is 
still 70% above the EU average. Transport remains 
the sector contributing the most to greenhouse gas 
emissions (30%), followed by industry (23%)  and 
agriculture (13%). 

final 

energy 

Croatia  risks  missingits  energy  savings  targets 
for the period 2014-2020,  as legislation gaps are 
unaddressed. Energy consumption has risen every 
year  since  2015,  especially  in  transport,  services 
and industry. In 2018, Croatia consumed 8.2 Mtoe 
of  primary  energy  and  6.9  Mtoe  of  final  energy. 
Therefore,  the  country  is  likely  to  achieve  its 
indicative  national  energy  efficiency  targets  for 
2020, which were set at 10.7 Mtoe primary energy 
consumption, 
and  7.0  Mtoe 
respectively.  However,  in  the  period  2014-2017, 
Croatia  achieved  only  38%  of  the  cumulative 
energy  savings 
the  Energy 
Efficiency  Directive  for  the  period  2014-2020.  
The  observed  delays  in  adopting  the  needed 
legislation in the field of energy efficiency, and to 
operationalise  the  energy  efficiency  obligation 
scheme  are  in  part  responsible  for  this  limited 
progress. Moreover, to meet its contribution to the 
EU  energy  efficiency  target  of  32.5%  by  2030,  it 
would  be 
increase 
Croatia’s  investments  in  energy  efficiency,  as 
focusing on greening the energy supply will not be 
sufficient. 

required  under 

to  significantly 

important 

55 

4.5. Environmental sustainability 

one  of  the  lowest  among  EU  Member  States  and 
well  below  the  2020  target  of  10%.  Although  the 
number  of  electric  vehicle  charging  points  in 
Croatia is above the EU average, the market share 
of newly registered electric passenger cars remains 
the lowest in the EU, at 0.05% in 2017, compared 
to the EU average of 1.5%. In order to increase the 
share  of  renewable  energy  sources  in  transport, 
significant  obstacles  need  to  be  addressed.  The 
funding  of 
incentives  for  purchasing  electric 
vehicles is limited. Incentives are  prone  to budget 
constraints  and  the  timing  of  funding  calls  is 
unpredictable.  In  addition,  currently  there  is  no 
market for used alternative fuel vehicles. 

High  external  costs  of  transport  negatively 
affect the environment, productivity and health 
spending. A recent study (European Commission, 
2019m)  estimated  the  total  external  costs  of 
transport  for  road,  rail  and  inland  waterways  in 
Croatia  at  6.9%  of  GDP  in  purchasing  power 
parity terms, compared to 5.7% at the level of EU. 
Almost  half  of  the  external  costs  are  related  to 
accidents,  which  are  well  above  EU  average. 
Improving  road  safety  would  reduce  lives  lost  in 
traffic  accidents,  but  also  economic  losses  and 
healthcare costs, benefitting labour productivity. It 
would  also  help  improve  the  sustainability  of 
Croatia’s  cities  and  communities  (SDG  11,  see 
Annex  E).  Shifting  some  of  the  passenger  and 
freight  transport  volume  from  road  to  rail  would 
have  a  similar  effect  through  the  reduction  of  air 
pollution and congestion (see Dechezleprêtre et al., 
2019). 

industries 

There is no particular regional concentration of 
carbon  dependent 
in  Croatia. 
However, two NUT3 level regions stand out in the 
GHG  emissions:  Istria  (56)  County  (coal  power 
plant  Plomin  and  cement  industry)  and  Sisak  – 
Moslavina  County  (oil  refinery  and  fertilisers 
production). The latter is among the most deprived 
NUTS3  level  regions  in  Croatia,  with  GDP  per 
capita  at  43.9%  of  EU  average  in  2016  and  the 
highest  unemployment  rate  of  24.3%  in  2018. 
Therefore,  Sisak-Moslavina  County  could  benefit 
from  the  approach  adopted  in  the  catching-up 
region  of  Slavonia,  where  a  thorough  analysis  of 
the  challenges/potential  and  targeted  investments 
was  carried  out.  This  approach  would  promote 
economic  diversification  and  the  reskilling  of  the 
labour  force  in  line  with  the  Smart  Specialisation 
Strategy.  This  would  be  necessary  in  order  to 
anticipate 
the  negative  economic  and  social 
consequences  that  could  arise  on  account  of  the 
greening  of  carbon  intensive  industries.  This 
would  be  particularly 
the 
important share they hold in the region’s economy 
and  considering  the  employment  structure.  The 
Commission’s  proposal  for  a  Just  Transition 
Mechanism will also help ensure that the transition 
towards  climate  neutrality  is  fair  by  helping  most 
affected  regions  address  the  social  and  economic 
consequences (see Annex D). 

important  given 

Consumer  Market  Scoreboard  Croatia  remains  among  the 
five lowest ranking Member States. 

(56)  Istria  is  one  of  the  most  prosperous  NUTS3  regions  in 
Croatia  with  77%  of  the  average  EU  GDP  per  capita  in 
2016 and 4.9% unemployment in 2018 

lack  of  any  substantial  progress 

The  modernisation  and  upgrading  of  the 
Croatian  rail  network  is  progressing  slowly. 
Even though investments in rail infrastructure have 
been increasing in recent years, there is still a clear 
investment  backlog,  which  slows  the  modal  shift. 
A 
the 
restructuring of the sector’s state owned companies 
further  hinders the progress.  Removing regulatory 
restrictions  and  facilitating  cooperation  between 
railway  companies,  private 
the 
infrastructure  managers  would 
operators  and 
improve  competitiveness  and  quality  of  services 
(55) in the railway sector. 

state-owned 

in 

(55)  Although  consumer  satisfaction  with  rail  transport  in 
Croatia  has  increased  since  2013,  according  to  the  2018 

56 

                                                           
                                                                                   
ANNEX A: OVERVIEW TABLE 

CSR  1:  Reinforce  the  budgetary  framework 
and  monitoring  of  contingent  liabilities  at 
central  and  local  level.  Reduce  the  territorial 
fragmentation  of  the  public  administration 
and  streamline  the  functional  distribution  of 
competencies. 

Reinforce  the  budgetary  framework  and 
monitoring  of  contingent  liabilities  at 
central and local level. 

Reduce the territorial fragmentation of the 
public  administration  and  streamline  the 
functional distribution of competencies. 

CSR  2:  Deliver  on  the  education  reform  and 
improve both access to education and training 
at  all  levels  and  their  quality  and  labour 
market  relevance.  Consolidate  social  benefits 
and improve their capacity to reduce poverty. 
Strengthen 
labour  market  measures  and 
institutions and their coordination  with social 
services.  In  consultation  with 
the  social 
partners,  introduce  harmonised  wage-setting 
frameworks  across  the  public  administration 
and public services. 

the  education  reform  and 
Deliver  on 
improve  both  access 
to  education  and 
training  at  all  levels  and  their  quality  and 
labour market relevance. 

Croatia  has  made  limited  progress  in  addressing 
CSR 1. 

Limited  progress.  The  new  Budget  Act  should 
improve  both  the  short  and  medium  term  budgetary 
framework  at  central  and  local  level  and  address 
vulnerabilities 
system  of  government 
guarantees, but it has still not been adopted. 

the 

in 

Some  progress.  In  December  2019,  the  Croatian 
parliament adopted a new legal framework regulating 
agency-type  institutions  and  introducing  a  higher 
degree of homogeneity across the system. Territorial 
fragmentation  at  local  government  level  remains  a 
challenge.  

Croatia has made some progress in addressing CSR 
2. 

the  curricular  reform 

Some  progress.  Croatia  has  started  the  incremental 
in  all 
implementation  of 
primary  and  secondary  schools.  In  VET, 
the 
experimental programme ‘Dual Education in VET’ is 
being  expanded.  The  adoption  of  occupation  and 
qualification 
slowly. 
Ongoing  investments  in  Early  Childhood  Education 
and Care aims to increase availability and access. 

is  proceeding 

standards 

Consolidate  social  benefits  and  improve 
their capacity to reduce poverty. 

Limited progress. The authorities are in the process 
of establishing a categorisation and regular reporting 
mechanisms  for  the  social  benefits  granted  by  the 
local  government 
level.  However,  most  policy 
measures are still at the preparatory stage. 

57 

 
Strengthen  labour  market  measures  and 
institutions  and 
their  coordination  with 
social services. 

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

harmonised 

and 

railway 

transport, 

CSR  3:  Focus  investment-related  economic 
policy on research and innovation, sustainable 
urban 
energy 
efficiency,  renewables  and  environmental 
infrastructure,  taking  into  account  regional 
the  administration's 
disparities. 
capacity  to  design  and  implement  public 
projects and policies. 

Increase 

Focus  investment-related  economic  policy 
on research and innovation, 

sustainable urban and railway transport,  

efficiency, 

and 
energy 
environmental  infrastructure,  taking  into 
account regional disparities.  

renewables 

A. Overview table 

Some  progress.  The  package  of  Active  Labour 
Market Policy measures has been refocused to make 
them  more  effective.  The  Croatian  Employment 
Service  has  developed  and  is  testing  new  IT  tools 
aimed  at  improving  the  mediation  and  referrals.  It 
will be crucial to establish good monitoring system in 
order to evaluate the outcomes. 

Limited progress. The long-due legislation on civil-
service wages, which aims to further harmonise wage 
setting  across  the  central  public  administration  (and 
at  a  later  stage  in  the  wider  public  sector)  has  been 
postponed,  pending 
from  an 
independent body. 

further  analysis 

Croatia  has  made  limited  progress  in  addressing 
CSR 3.  

Limited  progress.  Investment  in  R&D  increased 
substantially,  but  its  efficiency  remains  low  and 
highly dependent on EU funds. Investment is focused 
towards  ‘close–to-market’  initiatives  run  by  bigger 
companies, leaving research activities underfunded.  

Some  progress.  Croatia  signed  several  contracts  for 
key railway projects in 2019 and opened the first new 
railway  line  in  over  50  years.  It  made  progress  on 
expanding the TEN-T rail network but no significant 
progress on sustainable urban transport. 

in  adopting 

Limited  progress.  Energy  efficiency  of  private  and 
public  buildings  improved  in  2019.  However,  there 
have  been  delays 
the  necessary 
legislation  and  the  energy  efficiency  obligation 
scheme is not yet fully operational. Despite advanced 
project  selection,  progress  in  the  implementation  of 
the  water  and  waste  infrastructural  projects  remains 
limited.  Investment  in  wind  and  solar  energy  is 
hampered by administrative hurdles and by delays in 
putting in place the premium support scheme. 

58 

A. Overview table 

Limited  progress.  The  authorities  established  an 
institutional framework for strategic planning, also at 
the  local  level.  However,  it  has  not  yet  been 
National 
implemented. 
Development  Strategy  for  2030  has  not  yet  been 
adopted. 
limited 
administrative  capacities  have  not  been  properly 
addressed either.  

Inefficiencies 

overarching 

resulting 

The 

in 

Croatia  has  made  limited  progress  in  addressing 
CSR.  

Increase  the  administration's  capacity  to 
design  and  implement  public  projects  and 
policies.  

CSR  4:  Improve  corporate  governance  in 
State-owned enterprises and intensify the sale 
of such enterprises and non-productive assets. 
Enhance  the  prevention  and  sanctioning  of 
corruption,  in  particular  at  the  local  level. 
Reduce the duration of court proceedings and 
improve  electronic  communication  in  courts. 
the  most  burdensome  parafiscal 
Reduce 
charges  and  excessive  product  and  services 
market regulation. 

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

Limited  progress.  Croatia  adopted  an  obligation  to 
introduce  a  compliance  function  in  all  majority-
owned  state-owned  enterprises  was  adopted.  The 
disposal of state assets is slowly progressing. 

Enhance the prevention and sanctioning of 
corruption, in particular at the local level. 

Limited  progress.  Although  Croatia  adopted 
legislation  on  the  protection  of  whistle-blowers 
(effective  from July 2019) the resources allocated to 
the Ombudsman’s office, in charge of whistle-blower 
protection,  are  insufficient.  No  clear  progress  was 
made  on  other  initiatives  needed  to  prevent  and 
penalise corruption, at national and local level. 

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

Some  progress.  Croatia  is  gradually  extending  the 
use  of  electronic  communication  and  has  reduced 
backlogs in commercial courts. 

Reduce  the  most  burdensome  parafiscal 
charges. 

Limited  progress.  There  has  been  limited  progress 
in  reducing  or  removing  parafiscal  charges.  The 
register of parafiscal charges was updated in 2019. 

and excessive product and services market 
regulation. 

Some  progress.  A  number  of  action  plans  and 
measures  aimed  at  the  alleviation  of  excessive 
administrative  obligations  for  entrepreneurs  were 
adopted, as well as liberalisation measures in selected 
professional services. 

59 

A. Overview table 

(1) 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. 

Europe 2020 (national targets and progress)  

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

The  employment  rate  in  Croatia  has  slowly  but 
steadily  increased  (from  57.2%  in  2013  to  65.2%  in 
2018).  Croatia  has  achieved  its  national  target,  but 
the employment rate  is  still among the  lowest in  the 
EU, and well below the EU average. 

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

Investment  in  R&D  equals  0.97%.  Croatia  is  not  on 
track to meet the target. 

60 

A. Overview table 

Table continued 

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

Croatia reduced its total greenhouse gas emissions by 
22.5%  from  1990  to  2018.  Based  on  the  latest 
national  projections  submitted  to  the  Commission, 
and taking into account existing measures, Croatia is 
on  track  to  meet  its  greenhouse  gas  emission  target 
by a wide margin. 

2020 renewable energy target: 20% 

With  a  renewable  energy  share  of  28%  in  2018, 
Croatia is well above its target for 2020. 

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

With  a  3.9%  share  of  renewable  energy  in  transport 
in 2018, Croatia is well below its 2020 target. 

Energy  efficiency,  2020  energy  consumption 
targets:  

Croatia’s  primary  and  final  energy  consumption 
remains below its 2020 energy efficiency targets. 

  11.2 Mtoe (primary energy consumption); 

  8.2 Mtoe (primary energy consumption, 2018) 

  7 Mtoe (final energy consumption). 

  6.9 Mtoe (final energy consumption, 2018) 

Early school leaving (ESL) target: 4% 

Tertiary education target: 35% 

With  a  rate  of  3.3%,  Croatia  remained  among  the 
leading EU Member States in ensuring that its young 
people complete secondary education. It comfortably 
met both  the  national target of 4% and the  EU-level 
target of 10%. 

Croatia’s  tertiary  education  attainment  rate  has  risen 
to 34.1% in 2018. The national target could therefore 
be reached in 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  1.008 
million in 2018. Croatia has already  met its  national 
target.   

61 

 
 
 
 
ANNEX B: COMMISSION DEBT SUSTAINABILITY ANALYSIS AND 

FISCAL RISKS 

62 

General government debt projections under baseline, alternative scenarios and sensitivity tests2018201920202021202220232024202520262027202820292030Gross debt ratio74.871.267.764.462.260.759.758.457.155.754.152.450.4Changes in the ratio (-1+2+3)-3.2-3.6-3.5-3.3-2.2-1.5-1.0-1.3-1.3-1.4-1.6-1.7-2.0of which(1) Primary balance (1.1+1.2+1.3)2.62.31.91.81.51.20.90.80.80.80.91.01.1(1.1) Structural primary balance (1.1.1-1.1.2+1.1.3)2.11.40.91.01.00.90.90.80.80.80.91.01.1(1.1.1) Structural primary balance (bef. CoA)2.11.40.91.01.01.01.01.01.01.01.01.01.0(1.1.2) Cost of ageing0.00.10.10.20.20.20.0-0.1-0.2(1.1.3) Others (taxes and property incomes)0.00.00.00.00.00.00.00.0-0.1(1.2) Cyclical component0.50.91.00.80.60.30.00.00.00.00.00.00.0(1.3) One-off and other temporary measures0.00.00.00.00.00.00.00.00.00.00.00.00.0(2) Snowball effect (2.1+2.2+2.3)-1.0-1.3-1.6-1.4-0.7-0.3-0.2-0.5-0.5-0.6-0.7-0.7-0.8(2.1) Interest expenditure2.32.21.91.81.61.41.31.21.11.00.90.80.7(2.2) Growth effect-2.0-2.1-1.8-1.6-0.8-0.4-0.3-0.5-0.5-0.5-0.5-0.5-0.5(2.3) Inflation effect-1.4-1.4-1.7-1.6-1.5-1.3-1.2-1.2-1.1-1.1-1.1-1.1-1.0(3) Stock-flow adjustments0.30.00.00.00.00.00.00.00.00.00.00.00.0Note: For further information, see the European Commission Debt Sustainability Monitor (DSM) 2019. 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 after that) to bring the debt-to-GDP ratio to 60 % by 2034. The critical values used are 0 and 2.5 pps of GDP. The DSA classification is based on the results of five 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 and the DSM 2019.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. 404550556065707580859020172018201920202021202220232024202520262027202820292030Debt as % of GDP -HRBaselineEnhanced lower GDP growth scenarioAdverse combined scenarioEnhanced higher interest rate scenario40506070809020172018201920202021202220232024(% of GDP)Stochastic debt projections 2020-2024 -HRp10_p20p20_p40p40_p60p60_p80p80_p90p50Baseline404550556065707580859020172018201920202021202220232024202520262027202820292030Debt as % of GDP -HRBaselineHistorical SPB scenarioSGP scenario404550556065707580859020172018201920202021202220232024202520262027202820292030Debt as % of GDP -HRBaselineHigher interest rate scenarioNegative shock on the SPBLower GDP growth scenarioBaselineHistorical SPBLower GDP growthHigher interest rateNegative shock on SPBStochastic projectionsRisk categoryLOWMEDIUMLOWLOWLOWMEDIUMDebt level (2030)50.463.153.653.852.1Debt peak year20192019201920192019Percentile rank39.0%66.0%Probability debt higher26.3%Dif. between percentiles37.7LOWLong termLOW(S2 = -2.1)S1S2Short termLOW(S0 = 0.2)DSALOWDebt sustainability analysis (detail)Medium termLOWLOW(S1 = -2) 
ANNEX C: STANDARD TABLES 

Table C.1: 

Financial market indicators 

(1) Latest data Q3 - 2019. Includes not only banks but all monetary financial institutions excluding central banks. 
(2) Latest data Q2 - 2019. 
(3) Quarterly values are annualised. 
Source: European Commission (long-term interest rates); World Bank (gross external debt); Eurostat (private debt); ECB (all 
other indicators). 

63 

201420152016201720182019Total assets of the banking sector (% of GDP)(1)133.1129.8124.6119.2117.0112.0Share of assets of the five largest banks (% of total assets)72.372.773.072.879.4-Foreign ownership of banking system (% of total assets)(2)90.290.590.190.890.691.0Financial soundness indicators:(2)              - non-performing loans (% of total loans)13.613.010.78.87.36.9              - capital adequacy ratio (%)20.419.220.821.421.120.7              - return on equity (%)(3)3.9-6.88.95.98.811.3Bank loans to the private sector (year-on-year % change)(1)-1.7-2.40.54.54.43.6Lending for house purchase (year-on-year % change)(1)-2.8-1.9-2.12.72.94.7Loan-to-deposit ratio(2)92.089.285.382.182.182.2Central bank liquidity as % of liabilities(1)0.00.10.30.40.60.6Private debt (% of GDP)117.2111.9104.197.893.9-Gross external debt (% of GDP)(2) - public36.136.432.530.127.226.9    - private57.354.450.647.144.842.9Long-term interest rate spread versus Bund (basis points)*288.8305.5339.6245.0177.6159.9Credit default swap spreads for sovereign securities (5-year)*276.1273.1240.1148.494.588.1 
 
 
  
 
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 and/or living in households with zero or very low work intensity. 
(2) Unemployed persons are all those who were not employed but had actively sought work and were ready to begin 
working immediately or within two weeks. 
(3) Gross disposable household income is defined in unadjusted terms, according to the draft 2019 joint employment report. 
(4) Reduction in percentage of the risk-of-poverty rate, due to social transfers (calculated comparing at-risk-of-poverty rates 
before social transfers with those after transfers; pensions are not considered as social transfers in the calculation). 
(5) Average of first three quarters of 2019 for the employment rate, unemployment rate and gender employment gap. 
Source: Eurostat 

64 

201420152016201720182019 5Equal opportunities and access to the labour marketEarly leavers from education and training (% of population aged 18-24)2.82.82.83.13.3:Gender employment gap (pps)10.09.59.610.610.211.0Income inequality, measured as quintile share ratio (S80/S20)5.15.25.05.05.0:At-risk-of-poverty or social exclusion rate(1) (AROPE)29.329.127.926.424.8:Young people neither in employment nor in education and training (% of population aged 15-24)19.318.116.915.413.6:Dynamic labour markets and fair working conditionsEmployment rate (20-64 years)59.260.661.463.665.266.6Unemployment rate(2) (15-74 years)17.216.113.411.08.47.0Long-term unemployment rate (as % of active population)10.110.26.64.63.42.6Gross disposable income of households in real terms per capita(3) (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)::2.30:::Public support / Social protection and inclusionImpact of social transfers (excluding pensions) on poverty reduction(4)35.135.528.624.824.9:Children aged less than 3 years in formal childcare17.111.815.715.917.8:Self-reported unmet need for medical care3.31.91.71.61.4:Individuals who have basic or above basic overall digital skills (% of population aged 16-74):51.055.041.0:: 
 
  
 
C. Standard tables 

Table C.3: 

Labour market and education indicators 

* Non-scoreboard indicator 
(1) Long-term unemployed are people who have been unemployed for at least 12 months. 
(2) Difference between the average gross hourly earnings of male paid employees and of female paid employees as a 
percentage of average gross hourly earnings of male paid employees. It is defined as "unadjusted", as it does not correct for 
the distribution of individual characteristics (and thus gives an overall picture of gender inequalities in terms of pay). All 
employees working in firms with 10 or more employees, without restrictions for age and hours worked, are included. 
(3) PISA (OECD) results for low achievement in mathematics for 15 year-olds. 
(4) Impact of socio-economic and cultural status on PISA (OECD) scores. Values for 2015 refer to mathematics and those for 
2018 refer to reading. 
(5) Average of first three quarters of 2019. Data for youth unemployment rate is seasonally adjusted. 
Source: Eurostat, OECD 

65 

Labour market indicators201420152016201720182019 5Activity rate (15-64)66.166.965.666.466.366.3Employment in current job by durationFrom 0 to 11 months11.611.514.114.213.8:From 12 to 23 months6.07.58.89.09.6:From 24 to 59 months14.112.913.614.816.1:60 months or over68.368.062.460.758.7:Employment growth* (% change from previous year)2.71.20.32.21.81.5Employment rate of women(% of female population aged 20-64)54.255.956.658.360.161.1Employment rate of men (% of male population aged 20-64)64.265.466.268.970.372.2Employment rate of older workers* (% of population aged 55-64)36.239.238.140.342.844.0Part-time employment* (% of total employment, aged 15-64)5.36.05.64.85.25.2Fixed-term employment* (% of employees with a fixed term contract, aged 15-64)16.920.222.220.719.918.1Transition rate from temporary to permanent employment(3-year average)29.829.432.234.134.9:Youth unemployment rate (% active population aged 15-24)44.942.331.827.223.419.0Gender gap in part-time employment2.72.62.72.23.23.7Gender pay gap(2) (in undadjusted form)8.7:11.111.6::Education and training indicators201420152016201720182019Adult participation in learning(% of people aged 25-64 participating in education and  training)2.83.13.02.32.9:Underachievement in education(3):32.0::::Tertiary educational attainment (% of population aged 30-34 having successfully completed tertiary education)32.130.829.328.734.1:Variation in performance explained by students' socio-economic status(4):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 

201320142015201620172018Expenditure on social protection benefits* (% of GDP)Sickness/healthcare6.96.87.17.06.9:Disability2.72.62.52.32.2:Old age and survivors9.09.39.19.08.9:Family/children1.61.91.91.81.8:Unemployment0.50.50.60.50.4:Housing0.00.00.00.00.0:Social exclusion n.e.c.0.20.30.30.30.3:Total21.021.421.420.920.5:of which: means-tested benefits1.11.11.11.00.9:General government expenditure by function (% of GDP)Social protection15.215.615.714.614.3:Health6.46.66.56.46.3:Education5.04.84.84.84.7:Out-of-pocket expenditure on healthcare8.811.311.011.011.0:Children at risk of poverty or social exclusion (% of people aged 0-17)*29.329.028.226.625.823.7At-risk-of-poverty  rate(1) (% of total population)19.519.420.019.520.019.3In-work at-risk-of-poverty rate (% of persons employed)6.25.75.95.65.85.2Severe material deprivation rate(2)  (% of total population)14.713.913.712.510.38.6Severe housing deprivation rate(3), by tenure statusOwner, with mortgage or loan5.82.36.15.46.25.2Tenant, rent at market price7.116.015.07.65.57.5Proportion of people living in low work intensity households(4) (% of people aged 0-59)14.814.714.413.012.211.2Poverty thresholds, expressed in national currency at constant prices*193301958520544215682329324426Healthy life yearsFemales5.95.84.54.94.8:Males5.56.04.75.25.0:Aggregate replacement ratio for pensions(5)0.40.40.40.40.40.4Connectivity dimension of the Digital Economy and Society Index (DESI)(6):29.935.442.045.0:GINI coefficient before taxes and transfers*50.850.151.049.949.4:GINI coefficient after taxes and transfers*30.930.230.629.829.9: 
 
  
 
C. Standard tables 

Table C.5: 

Product market performance and policy indicators 

*While the indicator values from 2003 to 2013 are comparable, the methodology has considerably changed in 2018. As a 
result, past vintages cannot be compared with the 2018 PMR 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) Simple average of the indicators of regulation for lawyers, accountants, architects and engineers. 
(9) 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 indicators201320142015201620172018Labour productivity per person1 growth (t/t-1) in %Labour productivity growth in industry3.441.163.614.88-0.07-5.47Labour productivity growth in construction-2.421.04-2.220.037.49-2.49Labour productivity growth in market services1.74-4.230.06-0.44-1.932.66Unit Labour Cost (ULC) index2 growth (t/t-1) in %ULC growth in industry0.18-2.53-0.97-4.041.783.91ULC growth in construction-1.85-3.044.26-2.195.471.93ULC growth in market services-1.021.58-0.900.030.801.91Business environment201320142015201620172018Time needed to enforce contracts3 (days)650650650650650650Time needed to start a business3 (days)22.522.522.522.522.522.5Outcome of applications by SMEs for bank loans40.190.880.310.600.100.36Research and innovation201320142015201620172018R&D intensity0.810.780.840.860.860.97General government expenditure on education as % of GDP5.004.804.804.804.70:Employed people with tertiary education and/or people employed in S&T as % of total employment363738383839Population having completed tertiary education5171920202122Young people with upper secondary education6949696969696Trade balance of high technology products as % of GDP-1.49-1.52-1.75-1.85-1.19-1.71Product and service markets and competition2003200820132018*OECD product market regulation (PMR)7, overall::2.081.43OECD PMR7, retail::1.421.22OECD PMR7, professional services8::3.701.60OECD PMR7, network industries9::2.751.53 
 
  
 
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) Energy intensity: gross inland energy consumption (in kgoe) divided by GDP (in EUR)  
(3) Carbon intensity: greenhouse gas emissions (in kg CO2 equivalents) divided by GDP (in EUR)  
(4) Resource intensity: domestic material consumption (in kg) divided by GDP (in EUR)  
(5) Waste intensity: waste (in kg) divided by GDP (in EUR)  
(6) Energy balance of trade: the balance of energy exports and imports, expressed as % of GDP.   
(7) Weighting of energy in HICP: the proportion of 'energy' items in the consumption basket used for the construction of the HICP.  
(8) Difference between energy price change and inflation: energy component of HICP, and total HICP inflation (annual % change).  
(9) Real unit energy cost: real energy costs as % of total value added for the economy.  
(10) Industry energy intensity: final energy consumption of industry (in kgoe) divided by gross value added of industry (in 2010 EUR).  
(11) Real unit energy costs for manufacturing industry excluding refining: real costs as % of value added for manufacturing sectors.  
(12) Share of energy-intensive industries in the economy: share of gross value added of the energy-intensive industries in GDP.  
(13) Electricity and gas prices for medium-sized industrial users: consumption band 500–20 00MWh and 10 000 -100 000 GJ; figures excl. 
VAT.  
(14) Recycling rate of municipal waste: ratio of recycled and composted municipal waste to total municipal waste.  
(15) Public R&D for energy or for the environment: government spending on R&D for these categories as % of GDP.  
(16) Proportion of GHG emissions covered by EU emissions trading system (ETS) (excluding aviation): based on GHG emissions (excl. 
land use, land use change and forestry) as reported by Member States to the European Environment Agency.  
(17) Transport energy intensity: final energy consumption of transport activity including international aviation (kgoe) divided by gross 
value added in transportation and storage sector (in 2010 EUR).  
(18) Transport carbon intensity: GHG emissions in transportation and storage sector divided by gross value added in transportation 
and storage sector (in 2010 EUR).  
(19) Energy import dependency: net energy imports divided by gross inland energy consumption incl. consumption of international 
bunker fuels.  
(20) Aggregated supplier concentration index: Herfindahl index covering oil, gas and coal. Smaller values indicate larger 
diversification and hence lower risk.  
(21) Diversification of the energy mix: Herfindahl index covering natural gas, total petrol products, nuclear heat, renewable energies 
and solid fuels. Smaller values indicate larger diversification. 
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 performance201320142015201620172018MacroeconomicEnergy intensity kgoe / €0.200.190.190.180.190.18Carbon intensity kg / €0.560.540.540.530.52-Resource intensity (reciprocal of resource productivity)kg / €0.970.880.920.910.860.92Waste intensity kg / €-0.09-0.11--Energy balance of trade % GDP-5.1-4.0-3.4-2.7-2.9-3.2Weighting of energy in HICP%15.7416.4914.8710.7811.5112.12Difference between energy price change and inflation p.p.2.6-0.2-2.7-4.4-5.33.0Real unit of energy cost% of value added9.08.79.09.3--Ratio of environmental taxes to labour taxesratio0.140.140.150.160.17-Environmental taxes% GDP2.93.23.43.53.53.6Sectoral Industry energy intensity kgoe / € 0.120.120.120.110.12-Real unit energy cost for manufacturing industry excl. refining% of value added5.55.45.55.6--Share of energy-intensive industries in the economy% GDP9.299.339.429.709.59-Electricity prices for medium-sized industrial users€ / kWh0.090.090.090.090.090.10Gas prices for medium-sized industrial users€ / kWh0.040.040.040.030.020.03Public R&D for energy % GDP0.000.000.000.000.000.00Public R&D for environmental protection% GDP0.000.000.000.010.010.01Municipal waste recycling rate%14.916.518.021.023.625.3Share of GHG emissions covered by ETS*%36.736.435.034.133.430.2Transport energy intensitykgoe / €1.361.381.441.401.43-Transport carbon intensitykg / €0.790.730.730.740.71-Security of energy supplyEnergy import dependency%47.544.348.948.553.3-Aggregated supplier concentration indexHHI28.119.514.612.611.2-Diversification of energy mixHHI27.427.526.526.928.028.4 
  
 
ANNEX D: INVESTMENT GUIDANCE ON JUST TRANSITION FUND 

2021-2027 FOR CROATIA 

Building on the Commission proposal, this Annex presents the  preliminary Commission services’ views 
on  priority  investment  areas  and  framework  conditions  for  effective  delivery  for  the  2021-2027  Just 
Transition Fund investments in Croatia.(57)  

These priority investment areas are derived from the broader analysis of territories facing serious socio-
economic challenges deriving from the transition process towards a climate-neutral economy of the Union 
by 2050 in Croatia, assessed in the report. This Annex provides the basis for a dialogue between Croatia 
and the Commission services as  well as the  relevant guidance for the  Member States in preparing their 
territorial just transition plans, which will form the basis for programming the Just Transition Fund. The 
Just Transition Fund investments complement those under Cohesion Policy funding for which guidance 
in the form of Annex D was given in the 2019 Country Report for Croatia58. 

In Croatia, two regions were identified on the basis of greenhouse gas (GHG) emissions intensity: Sisak–
Moslavina  and  Istria  county.  GHG  emissions  in  Sisak-Moslavina  county  are  generated  mostly  due  to 
chemical  industries and refined petroleum products, as a  result. These energy intensive  industrial  value 
chains employ a significant number of people. The carbon intensity of local industry highlights scale of 
decarbonisation  challenge,  which  requires  reorientation  of  long-term  investments  towards  innovative, 
climate-neutral technologies,  while tapping into potential of local  workforce. Based on this preliminary 
assessment,  it  appears  warranted  that  the  Just  Transition  Fund  concentrates  its  intervention  on  these 
regions. 

In  Istria  county  environmental  challenges  are  closely  linked  with  electricity  production  and  cement 
industry.  Being  one  of  the  most  prosperous  region  in  the  country  it  has  a  coal  power  plant,  which 
produces  6%  of  energy  output  for  the  whole  country.  On  the  other  hand,  Sisak-Moslavina  county  is 
among one of the most deprived regions. It hosts, among others, a chemical company and refinery, which 
is currently undergoing shift from a loss-making crude oil towards more sustainable alternative industrial 
activities. It is estimated that this transition will affect around 7% of total population employed in Sisak-
Moslavina county. 

Significant  skills  mismatches  observed  at  the  labour  market  in  Croatia  could  become  one  of  the  most 
acute transition obstacles. This may become particularly challenging for Sisak-Moslavina county with the 
highest unemployment rate (24.3%) registered in Croatia (2018 data). 

Challenges towards accomplishing climate neutral transition of local economy would require creation of 
new  businesses  and  job  opportunities,  while  addressing  the  demand  for  higher  skills  and  qualifications 
needed for just transition of highly emitting industrial sectors. 

Investment  needs  have  been  identified  to  tackle  these  challenges,  while  alleviating  the  socio-economic 
costs of transition and improving environmental sustainability and resource efficiency. Key actions of the 
Just Transition Fund could target in particular: 

• 

• 

productive  investments  in  SMEs,  including  start-ups,  leading  to  economic  diversification  and 
reconversion; 

investments 
technologies; 

in  research  and  innovation  activities  and  fostering  transfer  of  advanced 

(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  Just  Transition  Fund  2021-2027  (COM(2020)  22)  and  the  EC  proposal  for  a  Regulation  of  the  European 
Parliament and of the Council laying down  common provisions on the European Regional Development Fund, the European 
Social Fund Plus, the Cohesion Fund, and the European Maritime and Fisheries Fund and financial rules for those and for the 
Asylum and Migration Fund, the Internal Security Fund and the Border Management and Visa Instrument (COM(2020) 23) 

58 SWD(2019) 1001 final 

69 

 
                                                           
D. Investment guidance on Just Transition Fund 2021-2027 for Croatia 

• 

• 

• 

• 

investments in the deployment of technology and infrastructures for affordable clean energy and 
in greenhouse gas emission reduction; 

investments in digitalisation; 

investments in enhancing the circular economy; 

upskilling and reskilling of workers. 

Sisak–Moslavina  and  Istria  county  industrial  sites,  performing  activities  listed  in  Annex  I  to  Directive 
2003/87/EC,  employ  a  substantial  number  of  workers  and  their  activity  is  at  risk  due  to  their  high 
greenhouse gas emissions. Support to investments to reduce the emissions could be considered, provided 
that they achieve a substantial reduction of emissions (going substantially below the relevant benchmarks 
used  for  free  allocation  under  Directive  2003/87/EC)  and  on  the  condition  that  the  investments  are 
compatible with the European Green Deal. 

70 

ANNEX E: PROGRESS TOWARDS THE SUSTAINABLE 

DEVELOPMENT GOALS (SDGS) 

Assessment of Croatia’s short-term progress towards the SDGs (59) 

Table E.1 shows the data for Croatia and the EU-28 for the indicators included in the EU SDG indicator 
set used by Eurostat for  monitoring progress towards the SDGs in an EU context (60). As the short-term 
trend at EU-level is assessed over a 5-year period, both the value at the beginning of the period and the 
latest available value is presented. The indicators are regularly updated on the  SDI dedicated section of 
the Eurostat website. 

Table E.1: 

Indicators measuring Croatia’s progress towards the SDGs 

 (59) Data  extracted  on  9  February  2020 

from 

the  Eurostat  database 

(official  EU  SDG 

indicator 

set; 

see 

https://ec.europa.eu/eurostat/web/sdi/main-tables).  

(60)  The EU SDG indicator set is aligned as far as appropriate with the UN list of global indicators, noting that the UN indicators are 
selected for global level reporting and are therefore not always relevant in an EU context. The EU SDG indicators have strong 
links with EU policy initiatives. 

(Continued on the next page) 

71 

 
 
                                                           
 
  
 
References 

Table (continued) 

(Continued on the next page) 

72 

 
 
 
 
   
 
References 

Table (continued) 

(Continued on the next page) 

73 

 
 
 
 
   
 
References 

Table (continued) 

(Continued on the next page) 

74 

 
 
 
 
   
 
References 

Table (continued) 

Source: Eurostat 

75 

 
 
 
   
 
References 

REFERENCES 

Bađun, M. and S. Smolić (2018), Predictors of early retirement intentions in Croatia 

Bauer,  P.,  Fedotenkov,  I.,  Genty,  A.,  Hallak,  I.,   Harasztosi,  P.,  Martinez  Turegano,  D.,  Nguyen,  D., 
Preziosi,  N.,  Rincon-Aznar,  A.,  Sanchez  Martinez,  M.,  (2020),  Productivity  in  Europe:  Trends  and 
Drivers in a Service-Based Economy. JRC Technical Report. Joint Research Centre. Brussels, Belgium 

Buković,  N  and  T.  Matković  (2018),  Cedefop  opinion  survey  on  vocational  education  and  training  in 
Europe: 
Croatia. 
(http://libserver.cedefop.europa.eu/vetelib/2018/opinion_survey_VET_Croatia_Cedefop_ReferNet.pdf) 

Carić,  H.  (2018)  Perspectives  of  greening  tourism  development  -  the  concepts,  the  policies,  the 
implementation, Institute for Tourism, Zagreb, Croatia 

Dechezleprêtre, A., N. Rivers and B. Stadler (2019),  The economic cost of air pollution: Evidence from 
Europe, OECD Economics Department Working Papers, No. 1584, OECD Publishing, Paris 

Dobrotić, I. and al. (2018),  Analiza pristupačnosti, kvalitete,  kapaciteta i financiranja sustava ranoga i 
predškolskog odgoja i obrazovanja u Republici Hrvatskoj, Ministry of Demography, Family, Youth and 
Social Policy, Zagreb 

Eumonia, COWI (2019), Study on investment needs in the waste sector and on the financing of municipal 
waste  management  in  Member  States  (https://op.europa.eu/en/publication-detail/-/publication/4d5f8355-
bcad-11e9-9d01-01aa75ed71a1) 

Eurofound  (2019),  Future  of  manufacturing  –  Energy  scenario  Employment  implications,  Eurofound 
Research Report, February 2019 

European Centre for the Development of Vocational Training  – CEDEFOP (2018),  2018 skills forecast 
Croatia 
(https://www.cedefop.europa.eu/en/publications-and-resources/country-reports/croatia-2018-
skills-forecast) 

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

European  Commission  (2018a),  Fundamentals-based  private  debt  benchmarks:  enhanced  sample  and 
robustness checks. Note to LIME, not published 

European  Commission  (2018b),  European  Science,  research  and  innovation  performance  of  the  EU 
2018:  Strengthening 
future,  European  Commission,  Brussels 
(https://op.europa.eu/en/publication-detail/-/publication/16907d0f-1d05-11e8-ac73-
01aa75ed71a1/language-en) 

for  Europe's 

foundations 

the 

European  Commission  (2018c),  An  Analysis  of  Public  Assets  and  their  Management  in  the  European 
Union,  European  Commission,  Brussels  (https://ec.europa.eu/info/evaluation-reports-economic-and-
financial-affairs-policies-and-spending-activities/analysis-public-assets-and-their-management-european-
union_en) 

European  Commission  (2019a),  2020  Alert  Mechanism  Report,  European  Commission,  Brussels 
(https://ec.europa.eu/info/publications/2020-european-semester-alert-mechanism-report_en) 

76 

 
 
References 

European Commission (2019b), 2019 European Semester: Assessment of progress on structural reforms, 
prevention  and  correction  of  macroeconomic  imbalances,  and  results  of  in-depth  reviews  under 
Regulation 
Brussels 
(https://ec.europa.eu/transparency/regdoc/rep/1/2019/EN/COM-2019-150-F1-EN-MAIN-PART-1.pdf) 

Commission, 

1176/2011, 

European 

(EU) 

No 

European  Commission 
(https://ec.europa.eu/eurostat/statistics-explained/index.php/Housing_statistics#Type_of_dwelling)  

European  Commission,  Brussels 

(2019c),  Housing 

Statistics, 

European Commission (2019d), Proposal for a Joint Employment Report 2020, Publications Office of the 
European Union, Luxembourg (https://ec.europa.eu/social/main.jsp?catId=738&langId=en&pubId=8270) 

European  Commission  (2019e),  Case  study  Report  on  Croatia  accompanying  the  Report  on  the 
evaluation  of  the  Council  Recommendation  on  the  integration  of  the  long-term  unemployed  into  the 
labour market 

European  Commission  (2019f),  Education  and  Training  Monitor  2019  —  Country  Analysis,  Croatia, 
Luxembourg 
the 
Publications 
(https://ec.europa.eu/education/sites/education/files/document-library-docs/et-monitor-report-2019-
croatia_en.pdf) 

European 

Union, 

Office 

of 

European 
(https://ec.europa.eu/docsroom/documents/38781/attachments/1/translations/en/renditions/native) 

Commission 

Scoreboard, 

Innovation 

European 

(2019g), 

Luxembourg 

Commission 

European 
2019 
(https://ec.europa.eu/commfrontoffice/publicopinionmobile/index.cfm/Survey/getSurveyDetail/surveyKy/
2255) 

Eurobarometer 

Standard 

(2019h), 

Autumn 

92, 

European Commission (2019i), Digital Economy and Society Index 2019 

European Commission (2019j) Digital Government Factsheet 2019 

European Commission (2019k), Flash Eurobarometer 48, Businesses’ attitudes towards corruption in the 
EU 

European Commission (2019l),  Employment and Social Developments in Europe: Annual Review 2019, 
Publication office of the European Union, Luxembourg 

European 
(https://ec.europa.eu/transport/themes/sustainable-transport/internalisation-transport-external-costs_en)  

Internalisation 

Commission 

transport 

(2019m) 

external 

of 

costs 

European Commission (2020a), Digital Agenda Scoreboard 2020 

European Commission (2020b, forthcoming), EU Justice Scoreboard 2020 

European 
(https://ec.europa.eu/taxation_customs/sites/taxation/files/tax_policies_in_the_eu_survey_2020.pdf) 

Commission 

European 

(2020c), 

policies 

Tax 

the 

in 

Union 

European  Environment  Agency  (EEA)  (2016),  Landfill  taxes  and  bans  overview  2017;  European 
Environment  Agency  and  Confederation  of  European  Waste-to-Energy  Plants 
(CEWEP) 
(http://www.cewep.eu/wp-content/uploads/2017/12/Landfill-taxes-and-bans-overview.pdf) 

European 
for  Gender  Equality 
(https://eige.europa.eu/publications/gender-equality-index-2019-croatia) 

(2019),  Gender  Equality 

Institute 

Index  2019:  Croatia 

77 

 
References 

Flachenecker,  F.,  Gavigan,  J.,  P.,  Goenaga,  X.,  Pasi,  G.,  Preziosi,  N.,  Stamenov,  B.,  Testa,  G.,  (2020), 
High  Growth  Enterprises:  demographics,  financing  &  policy  measures.  JRC  Technical  Report.  Joint 
Research Centre. Brussels, Belgium 

International  Renewable  Energy  Agency  (IRENA)  (2017),  Cost-competitive  renewable  power 
generation: 
(http://www.irena.org/-
/media/Files/IRENA/Agency/Publication/2017/IRENA_Cost-competitive_power_potential_SEE_2017.p
df), page 48 

Potential 

Europe, 

across 

South 

East 

Koprić,  I.  (2019),  Public  administration  characteristics  in  Croatia,  part  of  the  report  The  Public 
Administration in the EU 27: An insight in the characteristics, capacity and performance of EU Public 
Administrations, European Commission, Luxembourg 

Ministry  of  Labour  and  Pension  System  (2019),  Izvješće  o  provedbi  Smjernica  za  razvoj  i  provedbu 
aktivne  politike  zapošijavanja  u  Republici  Hrvatskoj  za  razdoblje  od  2018.  do  2020.  godine,  za  2018. 
godinu 

Ministry  of  Demographics,  Family,  Youth  and  Social  Policy  (2016),  National  social  report:  2016, 
Zagreb, 
Croatia 
(https://mdomsp.gov.hr/UserDocsImages/avuga/Medunarodna_suradnja_i_EU/NATIONAL%20SOCIAL
%20REPORT_%202016%20EN.pdf) 

Ministry  of  Science  and  Education  –  MZO  (2019),  Register  of  Higher  Education  Programmes 
(http://mzos.hr/dbApp/search.aspx?appName=StudProgrami) 

OECD (2019a), Measuring social protection for long-term care in old age 

OECD  (2019b),  PISA  2018  results,  where  all  students  can  succeed.  Volume  II.  (https://www.oecd-
ilibrary.org/education/pisa-2018-results-volume-ii_b5fd1b8f-en)  

OECD  (2019c),  TALIS  2018  Results  (Volume  I):  Teachers  and  School  Leaders  as  Lifelong  Learners, 
TALIS (http://www.oecd.org/education/talis/) 

OECD  (2020,  forthcoming):  OECD  Product  Market  Regulation  (PMR)  Indicators:  How  does  Croatia 
compare?, Programme for Effective Market Regulation, OECD, Paris 

OECD (forthcoming), Investment needs of and financing needs for the EU water sector 

OECD, European Observatory on Health Systems and Policies (2019),  Croatia: Country Health Profile 
2019, State of Health in the EU, OECD Publishing, Paris/European Observatory on Health Systems and 
Policies, Brussels. 

Ombudsperson for Gender Equality of the Republic of Croatia (2019),  Izvješće o radu pravobraniteljice 
za  djecu  za  2018.  godinu,  Pravobranitelj  za  djecu,  Republika  Hrvatska,  Zagreb,  page  181  ( 
https://www.prs.hr/attachments/article/2645/Izvje%C5%A1%C4%87e%20o%20radu%20Pravobraniteljic
e%20za%20ravnopravnost%20spolova%20za%202018.%20godinu_~.pdf) 

Račić,  D.,  Švarc,  J.  and  Pasi,  G.,  (2020)  RIO  Country  Report  2019:  Croatia.  Joint  Research  Centre. 
Brussels. Available at JRC Scientific Knowledge Portal 

Sachs,  J.,  Schmidt-Traub,  G.,  Kroll,  C.,  Lafortune,  G.,  Fuller,  G.,  (2019),  Sustainable  Development 
Report 2019. New York: Bertelsmann Stiftung and Sustainable Development Solutions Network (SDSN) 
(https://www.sdgindex.org/reports/sustainable-development-report-2019/) 

78 

 
References 

SAO  (2018),  Izvješće  glavnog  državnog  odvjetnika  republike  hrvatske  o  radu  državnih  odvjetništava, 
Zagreb (http://www.dorh.hr/fgs.axd?id=4130 

(2018),  An  Unfair  Start: 

UNICEF 
(https://www.unicef-irc.org/publications/pdf/an-unfair-start-inequality-children-education_37049-RC15-
EN-WEB.pdf) 

in  Children’s  Education 

in  Rich  Countries 

Inequality 

World Bank (2019a), Growth and Jobs in Slavonia, Baranja and Srijem, Rapid Diagnostics 

World  Bank 
reports/doing-business-2020) 

(2019b),  Doing  Business  2020 

(https://www.doingbusiness.org/en/reports/global-

World  Bank  (2019c),  Analysis  of  the  Quality  and  Coherence  of  the  Policy  Mix.  First  Report  prepared 
under the Reimbursable Advisory Services Croatia Public Expenditure Review 

World 
(http://www3.weforum.org/docs/WEF_TheGlobalCompetitivenessReport2019.pdf) 

Economic 

(2019), 

Global 

Forum 

The 

Competitiveness 

Report 

79