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Economy and Trade

The lands that today comprise Croatia were part of the Austro-Hungarian Empire until the close of World War I. In 1918, the Croats, Serbs, and Slovenes formed a kingdom known after 1929 as Yugoslavia. Following World War II, Yugoslavia became a federal, independent, communist state under the rule of Marshal Tito. Although Croatia declared its independence from Yugoslavia in 1991, it took four years of sporadic, but often bitter, fighting before occupying Serb armies were mostly cleared from Croatian lands. Under UN supervision, the last Serb-held enclave in eastern Slavonia was returned to Croatia in 1998. Once one of the wealthiest of the Yugoslav republics, Croatia’s economy suffered badly during the 1991–1995 war, as output collapsed, and the country missed the early waves of investment in Central and Eastern Europe that followed the fall of the Berlin Wall. Since 2000, however, Croatia’s economic fortunes have begun to improve. A rebound in tourism, and credit-driven consumer spending helped the country’s economy to generate growth, although unemployment remains high.

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Economic Policy over 12 Months

The government faces some severe challenges, all of which are being made more difficult by the global downturn. Unemployment remains high, the country faces a growing trade deficit, and the regions are developing at different speeds, with some lagging behind badly. The role of the state in the economy, a legacy of Croatia’s socialist past, is generally regarded as too high, but there is considerable public resistance to moves to privatize state assets. Similarly, public opposition makes it extremely difficult for the government to move forward on structural reforms.

However, at the time of writing, Croatia was due to become a full member of NATO at the next NATO summit in April 2009 (along with Albania). Croatia received an invitation to join NATO at the April 2008 NATO summit in Bucharest.

Perhaps more importantly for the immediate economic prospects of the country, Croatia is also bidding to join the European Union. However, its accession to EU membership is being blocked by its neighbor, Slovenia, with whom it has a long-running border dispute (Croatia first opened EU accession negotiations in 2005).

In its 2009 Budget, issued in October 2008, the Croat government said that it planned to reduce its budget deficit to close to zero through 2009, while maintaining economic growth at around 4%. In the budget, Croat finance minister, Ivan Suker, said the country was moving towards a balanced budget, while ensuring the refinancing of its maturing debt. He also announced that Croatia plans to draw all US$1.8 billion of available loans from a four-year partnership framework agreement with the World Bank. The Bank regards Croatia as an upper-middle-income country and a fully fledged market economy. It welcomes the fact that Croatia has opened its economy to global markets, through membership of both the World Trade Organization and the Central European Free Trade Agreement (CEFTA). According to the World Bank, Croatia’s main development objective is to reach 75% of the EU’s average per capita income by 2013. Today, with the per capita income of Croatian citizens being around US$11,500, it has only reached around 56% of the European Uniomn average. To join the European Union, the country will have to make further progress on judicial and public administration reforms, competition, anti-corruption policies, and environmental issues and agriculture. However, the EU Commission announced early in 2009 that Croatia is well placed to conclude its accession negotiations by November 2009.

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Economic Performance over 12 Months

In the first decade after independence in 1991, the country built the structures of a new state, created a new currency, and repaired large-scale war damages. It initiated reforms for the transition to a market economy so successfully that, by 1997, the country was awarded an investment-grade rating. The economy has been growing moderately since the 1990s: at a rate of 4–5% on average, with investments and private consumption being the main growth contributors. Output has now recovered to the pre-war level, but state aid to industry in 2008 remains almost triple the EU15 level.

With a high level of public spending, at about 49% of GDP, which is 9 percentage points of GDP above the public spending levels in new EU member states, Croatia has one of the largest public sectors in Europe. The high level of public spending contributed significantly to the progressive increase in the country’s overall indebtedness. The external debt-to-GDP ratio, in US dollar terms, stood at 95.2% at the end of 2007. In this context, the country’s 2009 Budget announcement is being widely welcomed as a sign that the debt issue is at last being addressed seriously (source: World Bank country report). On another positive note, more than 90% of Croatian bank assets are now held by the private sector, and public confidence in the banking system has been restored, following the country’s banking crisis of 1998. The telecommunications, transport, and energy sectors have all benefited from market liberalization, and there is now a high level of competition, in particular in the mobile phone market. More than one-third of the population are Internet users, and “e-government” has become a priority of the current government. Railway restructuring is gaining pace, with full market liberalization scheduled for early 2010. Since 2008, all energy consumers are free to choose their energy provider, either within the country or from abroad.

Interest has been strengthened in long-term foreign direct investment in Croatia since EU talks started in 2005. FDI amounted to around US$4.6 billion in 2007, an increase of 45% compared to 2006. However, additional efforts are needed to boost the investment climate so that the private sector can prosper. Croatia’s private-sector share of GDP increased from 60% to 70% in the period from 2003 to 2007 (source: World Bank). A tightening of monetary policy helped to stabilize a worrying growth of domestic credit expansion. Croatia’s current-account deficit is still widening, but falling oil and commodity prices should have a positive impact. The deficit reached 8.6% of GDP in 2007, and is expected to pass 9% in 2008, before narrowing again in 2009.

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Support for Inward Investment and Imports

While Croatia has a good macroeconomic framework, and sufficient infrastructure, there are continuing weaknesses in the judiciary. The World Bank has been urging Croatia to improve the investment climate.

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Tax Exemptions

Croatia operates a number of business zones, which offer direct and indirect state incentives. See www.apiu.hr for details, or contact the Ministry of Economy, Labor, and Entrepreneurship.

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Statistics

GDP growth: 4.8%

GDP per capita: US$16,900

CPI: 6.3%

Key interest rate: 9.33%

Exchange rate versus dollar: Kuna per US dollar—4.98 (2008)

Unemployment: 14.8% (2008)

FDI: US$19.5

Current account deficit: −U$6.156 billion

Population: 4,489,409 (July 2008)

Source: CIA World Factbook except where stated

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Further reading on Croatia

Websites:

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