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DOCUMENT OF THE EUROPEAN BANK FOR RECONSTRUCTION AND DEVELOPMENT
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DOCUMENT OF THE EUROPEAN BANK FOR RECONSTRUCTION AND DEVELOPMENT STRATEGY FOR CROATIA As approved by the Board of Directors at its meeting on 25 June 2013 i TABLE OF CONTENTS EXECUTIVE SUMMARY ......................................................................................... ...

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  • August 28, 2024
  • 53
  • 2024/2025
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  • document of the european bank for reconstruction

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DOCUMENT OF THE EUROPEAN BANK
FOR RECONSTRUCTION AND DEVELOPMENT




STRATEGY FOR CROATIA
As approved by the Board of Directors at its meeting on 25 June 2013

, TABLE OF CONTENTS


EXECUTIVE SUMMARY ......................................................................................... 1

1. THE BANK'S PORTFOLIO ............................................................................. 3
1.1 Overview over Bank activities to date ........................................................... 3
1.2 Implementation of the previous Country Strategy ......................................... 4
1.3 Transition impact of the Bank's portfolio ...................................................... 6

2. OPERATIONAL ENVIRONMENT ................................................................. 7
2.1 Political Context............................................................................................. 7
2.2 Macroeconomic context ................................................................................. 8
2.3 Structural reform context ............................................................................... 9
2.4 Business environment .................................................................................. 10
2.5 Social context ............................................................................................... 10
2.6 Legal context ................................................................................................ 11
2.7 Energy efficiency and climate change context ............................................ 12

3. STRATEGIC ORIENTATIONS ..................................................................... 13
3.1. Key Challenges and Operational Responses ............................................... 14
3.2 Environmental and Social Implications of Bank Proposed Activities ......... 17

4. ACCESS TO CAPITAL: PRIVATE AND PUBLIC SOURCES OF
FINANCE .......................................................................................................... 18
4.1 Access to capital .......................................................................................... 18
4.2 Other IFIs and the European Union and co-operation with EBRD .............. 19

ANNEX 1 – POLITICAL ASSESSMENT .............................................................. 22

ANNEX 2 – ASSESSMENT OF TRANSITION CHALLENGES ........................ 30

ANNEX 3 – LEGAL TRANSITION ........................................................................ 40

ANNEX 4 – SMALL BUSINESS SUPPORT .......................................................... 45

ANNEX 5 – TECHNICAL COOPERATION ......................................................... 48

ANNEX 6 – SELECTED ECONOMIC INDICATORS ........................................ 49

ANNEX 7 – GENDER EQUALITY ......................................................................... 50




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,EXECUTIVE SUMMARY

Croatia is committed to and applying the principles of multiparty democracy, pluralism and
market economics in accordance with the conditions specified in Article 1 of the Agreement
Establishing the Bank.

Croatia is on course to become a member of the European Union on 1 July 2013. Croatia’s
accession to the EU will be an important landmark, rewarding many years of comprehensive
reforms and opening new possibilities for accelerated development in many areas. EU
membership is however not in itself a guarantee that economic conditions will be improving
and that the country will attract foreign investment. The continuation of the prudent economic
policies and an accelerated implementation of the reform agenda are essential conditions for
Croatia to make full use of the accession opportunities and the EBRD stands ready to assist it
in this direction.

In the past four years, Croatia has experienced a protracted period of economic stagnation or
recession, largely a result of the global financial crisis. After two years of declining output in
2009-10 and zero GDP growth in 2011, the country re-entered recession in 2012. The
unemployment rate reached 17.5 per cent of the labour force by end-2012 and further layoffs
are likely in the short-term as some major publicly owned companies face significant
restructuring and reduction of staff numbers. The banking system is well-developed by
regional standards, liquid and well-capitalized (the capital adequacy ratio is strong at above
20 per cent as of June 2012). However, the level of non-performing loans has been rising,
reaching around 14 per cent of total loans by end-2012. Deleveraging pressures intensified in
the second quarter of 2012, although they have since abated.

The short-term economic outlook is uncertain and will be related to the pace of the overall
economic growth in the Eurozone. Under current baseline projections, the economy is
unlikely to grow in 2013. Over the medium term, Croatia’s economy will be boosted by EU
accession and perhaps by the introduction of long-awaited reforms to public administration
and the labour market. The downside risks are significant, however. Croatia is a small open
economy with strong trade and investment ties to the Eurozone and a high level of external
debt. As a result, the country is vulnerable to further deterioration in economic conditions in
this region.

Croatia has made significant progress in transition but the process remains unfinished.
Although the country is assessed as quite advanced in certain areas, it still faces significant
transition challenges in key sectors. The economy is broadly liberalised and exhibits a
relatively high degree of sophistication in financial services. There has also been progress
over the years on infrastructure reform. The banking sector weathered the financial crisis well
and remains sound and liquid. However, the role of the state remains large compared with
many other transition countries. Major reforms are still pending in areas such as public
administration, labour market flexibility, and land registry and cadastre reform. Although
various reforms have been introduced to improve the quality of the business environment
over the years and in particular during 2012, the full effects of these efforts have not yet been
realised, Croatia continues to face significant challenges in this area, as revealed in several
cross-country surveys and analyses of competitiveness and ease of doing business.

In short, although reforms have advanced significantly in a number of areas since the mid-
1990s, the economy still faces a number of fundamental restructuring challenges, both in the


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, public sector, which remains large and inefficient, and in the private sector. In the
forthcoming strategy period, therefore, the Bank’s main strategic directions will include:

 Mitigating the impact of the crisis and restoring sustainable growth. Croatia was one
of the worst-hit countries in the region by the global crisis of 2008-09, and has struggled
towards recovery ever since. In the context of the new joint IFI action plan for growth in
central and south-eastern Europe, the Bank will tailor its financing to meet potential
demand for long-term investment as well as working capital financing,
operational/financial restructuring. Support to the corporate sector will be aimed both at
foreign investors and local companies, including through financial intermediaries for
SMEs. The Bank’s investments will be strengthened by policy dialogue to promote
economic restructuring, diversification and improved business climate conditions and
corporate governance.
 Leveraging the benefits of EU accession to advance transition. EU accession is
expected to bring substantial benefits to Croatia, but these will depend in part on further
developing the country’s administrative capacity and deepening structural reforms. Once
Croatia joins the EU it will have access to substantial amounts of EU structural funds, but
experience shows that new members often have difficulty absorbing these funds
effectively. In addition, private sector companies may find it difficult to meet the
challenge of enhanced competition in the single market. The Bank will work closely with
the authorities and the EU in selected areas with significant transition gaps where
structural funds can be blended with those of the Bank to accelerate transition, including
in the municipal sector where the Bank will seek to facilitate the consolidation process.
The Bank will also provide financing, mainly though financial intermediaries, to facilitate
investments by corporates to enhance their competitiveness in EU markets.
 Restructuring and commercialising public sector enterprises. One of the reasons for
the economy’s continued stagnation is the delay in restructuring large infrastructure
utilities. The government has started addressing this problem, with the first restructuring
steps taken with Croatian Railways. Croatia’s EU accession makes reforming public
sector entities an even more urgent task, as the country’s absorption capacity for EU
structural funds is conditioned on capacity enhancement, financial and operational
improvement at public utilities. The Bank will work with the authorities to accelerate the
reform of publicly-owned companies in the infrastructure sector.

In all these activities the Bank will seek to align its operations with the priorities of the
Government of Croatia and will work closely with other international financial institutions,
multilateral and bilateral donors, including the European Union. The Bank will engage in
active policy dialogue and continue to provide technical assistance in various sectors to
maximise transition impact in Croatia.




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