Croatia strategy overview

Full strategy  (0.5Mb) Approved 14  May 2007

Strategija za Republiku Hrvatsku  (0.8Mb)

Summary of public comments  (0.1Mb)

Croatia continues to meet the conditions specified in Article 1 of the Agreement Establishing the Bank.

EU accession talks

On 3 October 2005 the European Council announced that negotiations for Croatia’s EU accession could begin forthwith and talks with the EU duly started. Croatia had already had its candidacy application for EU membership approved at the EU leaders’ summit in Brussels on 17 June 2004. However, in December 2004 the European Council, while approving in principle the opening of official talks on Croatia’s EU accession, stipulated that the Croatian authorities should be deemed to be fully cooperating with the International Criminal Tribunal for the Former Yugoslavia (ICTY) at The Hague. The October 2005 decision reflected ICTY’s confirmation that such cooperation was indeed forthcoming. The arrest in December 2005 of General Ante Gotovina, the fugitive war crimes suspect, and his extradition to The Hague, paved the way to the commencement of accession talks. Croatia may be expected to join later in the decade depending on its own merits and ability to comply with the conditions for EU membership, as well as EU’s integration capacity.

Getting EU candidacy status and the opening of EU talks represented a notable political success for Ivo Sanader, Prime Minister since the victory of his centre-right party, the HDZ, in the November 2003 elections. Sanader has continued the previous centre-left government’s policy of improving relations with Serbia (as well as the Serbian and other minorities in Croatia). Sanader’s minority government continues to rely on the support of parties representing old-age pensioners and national minorities.

Economic outlook

The economic outlook remains positive, although the fiscal deficit and high external debt pose continuing risks. Real GDP growth reached 4.3 per cent in 2005, and increased to 4.8 per cent in 2006. Private investment more than offset the impact of declining public investment and exports performed better than expected.

There was some upward pressure on prices in 2005, mainly due to rising energy and food costs as well as higher excise taxes. This led to an increase in annual average inflation from 2.1 per cent in 2004 to 3.3 per cent in 2005. The inflation rate dropped slightly to 3.2 per cent in 2006. The Croatian National Bank (CNB) remains committed to tight monetary policies, mainly aimed at exchange rate stability. The general government deficit in 2005 was below the target of 4.2 per cent of GDP (it was actually 4.0 per cent of GDP), and decreased to the target of 3.0 per cent in 2006 according to the preliminary estimates.

Sustained growth of between 3-5 per cent is forecast for the medium term, assuming some improvement in the external environment. The fiscal consolidation programme, as outlined in the Government’s Economic and Fiscal Policy Guidelines 2007-2009, is expected to help the government to strengthen fiscal discipline, further reduce the current account deficit and cut the level of external indebtedness. The main risk to growth stems from the strong expansion in domestic credit and the growing corporate and commercial banks’ external indebtedness. These may have a negative effect on the already high foreign debt levels and may create appreciation pressures.

Important challenges

In the coming two years, the Republic of Croatia faces important challenges to prepare for EU Accession. These include restructuring and privatisation of industries which benefit from generous government subsidies. Small scale privatisation - including the tourism sector - needs to be completed. Further reform is needed to improve the effectiveness of the judiciary and to reduce corruption. Significant levels of investment in public infrastructure will be necessary. To address such challenges, the Croatian authorities should:

1. enhance regional trade and development by investing in regional transport infrastructure and continuing support for regional trade initiatives;
2. proceed with restructuring in sensitive sectors, e.g. agriculture and shipbuilding;
3. privatise enterprises in the tourism sector and update and fully implement the existing “Croatian Tourism Development by 2010” strategy adopted by the Government in September 2003;
4. promote private sector participation in infrastructure at national, regional and the local, municipal levels;
5. promote investments in infrastructure to improve security and diversity of energy supply, energy efficiency and put in place legislation to facilitate development of the market for renewable energy;
6. strengthen efforts to enhance transparency and efficiency of the judiciary and public administration to meet EU standards.

EBRD operations

Since the last Country Strategy, the Bank's commitments in Croatia have increased to an aggregate of EUR 1.74 billion, with nearly EUR 3 billion mobilised from the Bank’s co-financiers and partners. Since 1999 the Bank has invested an average of EUR 150 million a year in Croatia. Gross disbursements totalled EUR 1.3 billion while the Bank's outstanding portfolio as of 31 December 2006 was EUR 840 million. In line with the previous Strategy (2005-2006), the Bank has substantially increased its involvement in the enterprise sector and in infrastructure, including at the municipal level. The Bank's operations have had good transition impact through continuous policy dialogue with the authorities, preparation of projects for ISPA cofinancing, improvement in corporate governance standards at enterprise level, enhancement of regional economic integration, and support for capital markets development. In 2006 the Bank supported the largest regional food and beverage company, Agrokor, with an equity investment to assist its preparation for an initial public offering.

Focus areas

Over the coming two to three years, the Bank has an opportunity to work closely with the Croatian authorities, to support the country’s further transition to market economy. Focus will be on investment in the following sectors, with the highest priority given to regional support for Croatian corporates, commercial finance of national and municipal infrastructure, SME finance, and tourism.

In the enterprise sector, the Bank will focus on privatisation and restructuring of state-owned companies, including in the tourism sector. In addition, the Bank will focus on supporting the further expansion and modernisation of Croatian companies in the region, by providing debt or equity finance as needed. The Bank may also finance acquisitions to support consolidation in local industries. The Bank will continue to seek investment opportunities in economically-depressed regions of the country.

In the infrastructure and environment sector, at the local level, the Bank will work with a number of large and medium-sized municipalities to develop their infrastructure projects for prospective IPA co-financing. The Bank will continue to support national infrastructure projects, typically when such projects can be financed on a commercial basis. The Bank will also work with local and regional authorities to prepare regional infrastructure projects. The Bank will finance infrastructure investments, such as the Port of Gruz project in Dubrovnik, which support tourism. In the energy sector, the Bank will promote energy efficiency and focus on infrastructure needed for security and diversity of supply, including renewable energy projects. Infrastructure financing will be closely co-coordinated with other IFIs, in particular the European Investment Bank, the IBRD and the EU, leading to joint financing arrangements and mobilisation of IPA funds, where practicable.

In the financial sector, the Bank will pursue SME finance with the support of the EU under the EU/EBRD SME Finance Facility. The Bank will further develop financing for leasing companies and other non-bank financial institutions, such as factoring companies. The Bank will seek to introduce securitisation of assets, to help the Croatian banks better manage their balance sheets. Finally, the Bank will also consider equity participation in the privatisation of the state-owned postal bank and insurance company.