Croatia

Beginning***Europe

Croatia has an economy based mostly on various services and some, mostly light industry. Tourism is a notable source of income. The Croatian economy is post-communist. In the late 1980s, at the beginning of the process of economic transition, its position was favorable, but it was gravely impacted by de-industrialization and war damages. Rapid industrialization and diversification occurred after World War II. Decentralization came in 1965, allowing growth of certain sectors, like the tourist industry. Profits from Croatian industry were used to develop poorer regions in the former Yugoslavia. This, coupled with austerity programs and hyperinflation in the 1980s, led to discontent in both Croatia and Slovenia that fueled the independence movement. Before the dissolution of Yugoslavia, the Republic of Croatia, after Slovenia, was the most prosperous and industrialized area, with a per capita output perhaps one-third above the Yugoslav average. Privatization under the new Croatian Government had barely begun when war broke out. As a result of the Croatian war of independence, the economic infrastructure sustained massive damage in the period 1991-92. By the end of the 1990s, Croatia faced considerable economic problems stemming from: the legacy of longtime communist mismanagement of the economy; damage during the internecine fighting to bridges, factories, power lines, buildings, and houses; the large refugee and displaced population, both Croatian and Bosnian the disruption ofeconomic ties; and mishandled privatization Inflation and unemployment rose and the kuna fell, prompting the national bank to tighten fiscal policy. A new banking law passed in December 1998 gave the central bank more control over Croatia's 53 remaining commercial banks. Croatia is dependent on international debt to finance the deficit. A recently issued Euro-denominated bond was well received, selling $300 million, which helped offset economic losses from the Kosovo crisis. Despite the successful value-added tax program, planned privatization of state controlled businesses, and a revised budget with a 7% across that board cut in spending, the government still projected a $200 million deficit for 1999. Western aid and investment, especially in the tourist and oil industries, is helping restore the economy. The government has been successful in some reform efforts — partially macroeconomic stabilization policies — and it has normalized relations with its creditors. The recession that began at the end of 1998 continued through most of 1999, and GDP in 1999 was flat. Inflation remained in check and the kuna was stable. However, consumer demand was weak and industrial production decreased. Structural reform lagged and problems of payment arrears and a lack of banking supervision continued. Due to the upcoming elections, the HDZ government promised two salary increases to public-sector employees before the end of the year which increased the fiscal deficit. The death of President Tudman in December 1999, and the defeat of his ruling Coatian Democratic Union or HDZ party in parliamentary and presidential elections in January 2000 ushered in a new government committed to economic reform and halting the economic decline. The Racan government carried out a large number of structural reforms and with tourism as the main factor, the country emerged from recession in 2000. Due to overall increase in stability, the economic rating of the country improved and interest rates dropped. As a result of coalition politics and resistance from the unions and the public, many reforms are still overdue, esp. in the legal system. Unemployment reached a peak of circa 22% in late 2002 due to many overdue bankruptcies. It has since been steadily decreasing, powered by growing industrial production and rising GDP rather than only seasonal changes (tourism). The GDP rose to the level it had in 1990 only 2003. Most economic indicators remained positive in this period, except for the external debt. The Croatian National Bank had to take steps to curb further growth of indebtedness of local banks with foreign banks (commonly the same foreign banks that own the local ones). The dollar debt figure is quite adversely affected by the EUR/USD ratio — over a third of the increase in debt since 2002 is due to currency value changes. Any negative trends in the large EU economies such as Germany or Italy also have a negative impact on Croatia as they are its biggest trade partners. By early 2005, the foreign debt of the Government declined in growth, and was surpassed in size by the foreign debt of the banking sector, prompting further interventions by the national bank. Main problems include massive structural unemployment (for 2004 14.4%) followed by an insufficient amount of economic reforms. Of particular concern is the gravely backlogged judiciary system combined with inefficient public administration, especially involving land ownership. The country has since experienced faster economic growth and has been preparing for membership in the European Union, its most important trading partner. In February 2005, Croatia implemented the Stabilization and Association Agreement with the EU and is advancing further towards full EU membership. The country expects some major economic impulses and high growth rates in the following next years (currently Croatia suffers most from its high export deficit and considerable debt). Some big trading companies have already taken advantage of the liberalization of the Croatian market. Croatia is expecting a boom in investments, especially Greenfield investments.
General Information: Before the disintegration of Yugoslavia in 1991, Croatia was the federation’s second most prosperous and industrialized republic after Slovenia, with a per capita output approximately one-third above the Yugoslav average. Although Croatia was part of a communist, one-party system from the mid-1940s until 1990, Yugoslav socialism was decentralized. Enterprises, although under state ownership and control and subject to occasional political interference, were generally free to make their own pricing and investment decisions and allowed to compete with one another. Before the war in 1991 nearly two-thirds of Croatia’s land was under cultivation. Sugar beets, wheat, oats, rye, barley, and corn were the principal agricultural products. Mining, notably of bauxite and brown coal, played some role in Croatia’s socialist economy. Other industries included food processing, petroleum refining, iron and steel production, shipbuilding, and the manufacture of chemicals, machinery, cement and concrete, metals, and textiles. Croatia also enjoyed a thriving tourist industry along the Dalmatian coast.
War and Economic Decline: With the outbreak of war in 1991, Croatia’s economy went into steep decline. The country’s gross domestic product (GDP) began a downward spiral, falling from $12.4 billion in 1991 to $9.9 billion in 1992. Inflation levels soared, rising from around 120 percent in 1991 to nearly 1,500 percent in 1993. Unemployment continued to climb throughout the war, reaching about 17 percent in 1993. A shortage of jobs, especially for young people, continues to be a critical economic problem. Much of Croatia’s infrastructure, including roads and tourism facilities, were badly damaged during the war, and rebuilding that infrastructure has taken on special economic importance.
Steps to Recovery: In 1993 Croatia began a slow economic recovery. That year the country joined the International Monetary Fund (IMF) and the International Bank for Reconstruction and Development (World Bank). A stabilization plan introduced by the government in late 1993 brought inflation under control, and in 1994 Croatia introduced a new national currency, the kuna. The IMF and other international lenders rewarded Croatia with reconstruction loans that spurred an economic recovery. By 1995 inflation had declined to less than 4 percent. Croatia’s economy expanded through the late 1990s and, following a brief economic slump in 1999, has continued to experience positive economic growth. In late 2000 Croatia was admitted to the World Trade Organization (WTO). By the end of 1993 the government had transferred a substantial proportion of state-owned companies to private hands. In subsequent years the progress of privatization was fitful, slowing markedly in 2002 due to political infighting and lack of clarity over property rights. However, capital investment in infrastructure, especially the building of new roads, and industrial production, grew rapidly. Today, privatization continues to move forward in several key sectors, including the important energy sector. In 2003 Croatia’s total GDP measured $28.8 billion. Croatia’s labor force numbered 2.1 million in 2003, with some 54 percent of the working population employed in services, 30 percent in industry, and 16 percent in agriculture. In 2003, 30 percent of the GDP was generated by industry and 8 percent by agriculture. The country’s principal industrial products include chemicals, processed metals, wood products, building materials, textiles, ships, and food products. The revival of the tourism trade and the shipbuilding industry helped drive Croatia’s economic recovery. However, agricultural revival has proceeded slowly, as large sections of the country’s arable farmland were damaged during the war.
Energy and Transportation: While Croatia has some oil and gas deposits, the country remains heavily dependent on imported fuels for energy. Electricity production is currently growing more slowly than the GDP, reflecting increases in energy efficiency. Croatia has 23,634 km (14,686 mi) of hard-surfaced public roads and 2,726 km (1,694 mi) of railroad track. An ambitious program of highway construction is under way, including rebuilding roads damaged during the war. The government is working to improve the railroad system with the help of the World Bank and the European Bank for Reconstruction and Development (EBRD).
Foreign Trade, Currency and Banking: Croatia’s major trading partners include Germany, Italy, Slovenia, Austria, Russia, and Bosnia and Herzegovina. Exports include foodstuffs, chemicals, and complex machinery such as ships. Machinery, consumer goods, equipment, fuel, and food dominate imports. The Croatian currency is the kuna. Since its introduction in 1994, the kuna has remained relatively stable against the United States dollar. Croatia’s central bank and the bank of issue is the National Bank of Croatia, which has pursued a policy of tightening supervision over commercial banks. In 2003 Croatia joined the Central European Free Trade Association (CEFTA) and applied for membership in the European Union (EU). Croatia became an official EU candidate country in 2004, and it hopes to be formally admitted into the organization in 2007.