Croatia Bar




  • The completion of EU accession negotiations is a key milestone for Croatia. The country is scheduled to join the European Union on 1 July 2013 after a convincing endorsement of the Accession Treaty in a referendum and subsequently by parliament.
  • Important progress has been made in the transport sector. Road sector reform has advanced significantly over the years, a concession for Zagreb airport has been awarded and restructuring of the railways is under way.
  • Economic performance remains exceptionally weak. Economic output remained constant in 2011 after two years of negative growth, but is falling again in 2012, largely due to adverse external developments. However, efforts are being made to shore up the fiscal position and reduce the government deficit.


  • The key priority is the implementation of a credible reform programme to boost growth prospects and prepare the country for EU membership. This will require strengthening the institutional capacity to absorb EU funds, enhancing competitiveness by overhauling some of the restrictive practices that make the labour market inflexible and hinder the smooth setting-up and running of businesses, and improving payment discipline in public sector companies.
  • Regional connections in the energy sector need further development. In addition, there is scope to develop further the power transmission and distribution network in order to adapt to increased wind power generation.
  • Successful privatisations in the financial sector could send an important signal about the willingness to reduce the size of the state. The sale of the postal bank and a major insurance company could attract investments and strengthen competition and the provision of services in these sectors.


The economy is back in recession. Croatia experienced one of the most protracted recessions in the region as a result of the global financial crisis. After two years of declining output in 2009-10, and zero growth in 2011, GDP declined by 1.3 and 2.1 per cent respectively in first and second quarters of 2012 on the back of weak domestic demand and a decline in gross fixed capital formation.  These trends reflect both spillovers from the ongoing eurozone crisis and the persistence of deep structural problems. Inflation has been rising since March 2012 and stood at 4 per cent year-on-year as of August 2012. The increase was partly related to a rise in the VAT rate by two percentage points to 25 per cent, which became effective in March, and partly to further deregulation of energy prices. Economic difficulties have resulted in pressure on the kuna this year, and the Croatian National Bank has intervened several times on FX markets to prop up the currency.

The government has begun to implement a fiscal consolidation plan. Changes in the tax system have been introduced. In addition to the aforementioned increase in the VAT rate, the government implemented a new tax on dividend payouts and abolished a tax on reinvested profits. Proposals for the introduction of property, capital gains and dividend taxes are also planned for later this year. The general government deficit in 2011 was 5.1 per cent of GDP (on ESA methodology), slightly below target. In 2012 the government is targeting a narrower deficit of 3.9 per cent of GDP, but given the worsening economic outlook and the GDP figures for the first quarter, this target will be difficult to achieve.

The prospects for recovery are bleak. The outlook is very uncertain given the protracted crisis in the eurozone and the risks on the downside are high. Under current baseline projections, Croatia will be in recession again in 2012, with output falling by around 1 per cent, and only a modest recovery is likely to take place in 2013. Over the medium term, however, there are hopes that the country will be boosted by EU accession and perhaps by the introduction of long-awaited reforms to public administration and the labour market, as well as the restructuring of publicly owned infrastructure companies.


Croatia is scheduled to join the European Union in July 2013. Following the completion of accession negotiations during 2011, Croatia and the European Union signed the Accession Treaty in December 2011. The Treaty was endorsed in a national referendum on 22 January 2012 and subsequently ratified in March by the Croatian parliament. Ratification by EU member countries is ongoing. Continuing pre‑accession screening by the European Commission (EC) of reforms in the areas of judiciary, competition policy, and of the fight against corruption is helping to address remaining problems. In May 2012 the government adopted an action plan of 51 measures needed to fulfil the remaining obligations of EU membership. In its latest comprehensive monitoring report on Croatia, published in October 2012, the EC noted the continued good progress towards membership while identifying a limited number of issues where increased efforts are needed. A final monitoring report will be issued in spring 2013.

A significant privatisation agenda still lies ahead. The government has said it is hoping to raise about HRK 2 billion (€260 million) this year in revenues from the sale of assets such as Hrvatska Postanka Banka, the insurance company Croatia Osiguranje and some smaller assets. In July 2012 the government launched a tender for an adviser on the privatisation of Croatia Osiguranje, for which a 50 per cent stake will be offered for sale. Efforts to restructure and sell the country’s shipyards are ongoing, and the first transaction was signed in summer 2012.

Reforms to the business environment are under way. Enterprises in Croatia continue to face a number of persistent problems, according to cross-country studies. The 2012 World Bank Doing Business Report places Croatia at 80th out of 183 countries on overall ease of doing business, down one place from the previous year. Dealing with construction permits and protecting investors are identified as particular problems in this report. The government is planning to decentralise the process of granting construction permits to the county level and to introduce e-permitting. In addition, a new law on investment promotion, was adopted by parliament in September 2012.

Road sector reform is at an advanced stage. All contracts for road construction, rehabilitation and periodic maintenance are tendered on a competitive basis to the private sector. An automatic tolling system is now in place as of 2011 and procurement practices have been improved. Several road concession projects have been or are being implemented, although not always in line with best international practice.

Railways restructuring is being prepared. Reforms in this sector have been limited to date. There is limited private sector participation and competition in the market, and the state-owned railway company, Hrvatske Zeljeznice (HZ) continues to receive significant subsidies from the central government. The government has prepared a restructuring programme under which the holding structure will be dismantled, the cargo company privatised and a labour restructuring programme implemented. Plans are under way to restructure the airline company, Croatia Airlines, as well as the state-owned motorway companies, HAC and Rijeka-Zagreb Motorway.

The banking sector is well developed but credit is falling. The banking system is well developed by regional standards, and the capital adequacy ratio is strong at above 20 per cent as of June 2012. However, the overall non-payment of suppliers is severely affecting working capital, with an increasing number of corporate accounts blocked due to the failure to meet official payments. The level of non-performing loans had risen to 13.3 per cent by June 2012. Deleveraging intensified in the second quarter of 2012. Negative credit growth was recorded for five consecutive months to July 2012.

Pension and labour market reforms are envisaged. The new government is facing a number of persistent problems with regard to the functioning of labour and pension markets in Croatia. The unemployment rate is 17.3 per cent as of June 2012, and the employment rate is just over 50 per cent, well below the EU average. Although the stagnant economy and restrictive labour practices are factors underlying low levels of employment, part of the reason is the structure of the pension system: the retirement age is officially 65 but the average age of pensioners is significantly lower, because previous governments had promoted early retirement for “excess” labour. The country has a three-pillar pension system, with a ratio of pension funds to GDP of around 10 per cent. 


icon-pdfOther Reports

Annual Report 2012
pdf English
pdf French
pdf German
pdf Russian

Financial Report 2012
pdf English
pdf French
pdf German
pdf Russian

pdf Donor Report 2013

pdf Sustainability Report 2012