World Bank and Croatia Sign Agreement Boosting Economic Recovery

30 April 2014

World Bank and Croatia Sign Agreement Boosting Economic Recovery

Minister of Finance, Slavko Linić and the World Bank’s Country Manager for Croatia, Hongjoo Hahm, today signed a Loan Agreement in the amount of EUR150 million (US$206.8 million) for the Second Economic Recovery Development Policy Loan to the Republic of Croatia.

The loan is aimed at supporting the Government of Croatia’s efforts in accelerating sustainable economic recovery through the consolidation of public finances and the strengthening of the investment climate. The World Bank’s Board of Directors approved the loan yesterday, April 29th.

Specifically, the loan supports reforms in two broad areas. The first area focuses on fiscal consolidation efforts through expenditure-based adjustments in public administration, health, pensions, and social welfare areas. These efforts will lead to improvements in the management of public spending, and will strengthen the medium-term sustainability of public finances, with the goal of achieving macroeconomic stability.

Second, the loan supports the growth of the private sector by improving the business environment and reducing state involvement in the corporate sector. Croatian authorities have already taken measures to enhance labor market flexibility, reduce administrative and regulatory barriers for businesses, speed up the privatization of state-owned companies, and strengthen the innovation framework.

Key Expected Results from the Second Economic Recovery Development Policy Loan

  • Primary general government spending reduced by 2 percent in real terms from 2012 to end-2014;
  • General government wage bill reduced by 6 percent in real terms from 2012 to end-2014;
  • Total public health spending reduced by 9 percent in real terms from 2012 to end-2014;
  • Social benefit spending reduced by 6.5 percent in real terms from 2012 to end-2014;
  • Pension spending reduced by 2.6 percent in real terms from 2012 to end-2014;
  • Labor force participation rate (ages 15-64) increased to 61 percent in 2014;
  • Global Competitiveness Index Institutions’ score increased from 3.5 in 2012-2013 to 3.7 in 2014-2015;
  • Private sector share in GDP increased from 70 percent in 2012 to 72 percent in 2014; and
  • Research and development spending increased by 8.5 percent in real terms from 2012 to end-2014.

"We are encouraged that the Croatian authorities are moving forward with the structural reforms in labor, pension, health, and social benefits, as well as in the investment climate areas. These will help reduce the fiscal deficit, stimulate job creation, productivity, and social cohesion," said Hongjoo Hahm, World Bank Country Manager for Croatia. "We would also encourage the authorities to accelerate and deepen the reforms under the Excessive Deficit Procedure to speed up economic recovery. We are committed to supporting the government, in partnership with the European Commission, in this challenging fiscal consolidation process, and at the same time, we will continue supporting the authorities’ efforts in minimizing the impact of this process on the bottom 40 percent of the population."

"This loan is recognition of the reforms implemented by the Government of Croatia in the areas of public administration, health and social welfare, labor markets, and the business climate with the aim of achieving economic growth", stated Slavko Linić, Minister of Finance of the Republic of Croatia. "Fiscal consolidation measures that were implemented relate to: the harmonization of wages of government agencies, civil, and public services; rationalization of health expenditures; consolidation of social benefits and improved targeting of those benefits; improved fiscal and social sustainability of the pension system; and increased labor market flexibility and collective agreement negotiations."

Linić continued, "Since 2012, we also implemented measures which are aimed at improving the business climate and which have been recognized in the World Bank's Doing Business report. These measures include: resolution of insolvency and illiquidity; reduction of business registration costs; and introduction of a single electronic construction permit. The Government of the Republic of Croatia also focused its efforts on increasing the private sector share in the GDP. With this loan, the World Bank is supporting the Government's structural reforms program aimed at economic recovery and fiscal consolidation, which also has the full support of the International Monetary Fund (IMF) and the European Commission."

Some of the measures taken by the Government to pursue fiscal consolidation and speed up economic recovery

  • The role and independence of the Fiscal Board has been strengthened by the establishment of the Fiscal Policy Committee, making fiscal policy more credible, transparent, and sustainable;
  • Public administration will be made more affordable and accountable through the wage harmonization of government agencies, civil, and public services; 
  • Increased efficiency of health spending is being achieved through the national implementation of e-prescriptions, standardized medical and orthopedic devices, and centralized procurement;
  • The social welfare system is becoming more efficient with the introduction of the Management Information System and application of means-tested targeting to several social benefit programs, so that social programs reach those most in need; 
  • The fiscal and social sustainability of the pensions system is being improved by the reduction of privileged pensions by 10 percent, the abolishment of government officials’ privileged pensions, rationalization of military pensions, reducing administrative cost in funded pension pillars, and increasing the retirement age to 67;  
  • The authorities have increased labor market flexibility by increasing the flexibility of collective agreement negotiations and making it easier to hire employees; 
  • Administrative and regulatory barriers to businesses are being reduced through a decrease in business registration costs and the introduction of a single electronic construction permit;
  • The involvement in the enterprise sector was reduced through privatization of two hundred state-owned companies; and
  • The introduction of performance-based financing in higher education and science, will help in the more efficient use of scarce resources to improve academic performance, support young researchers, and increase cooperation of public research institutions with the private sector on technology transfer and commercialization of research results.

The loan is a stand-alone single-tranche Development Policy Loan approved at 6-month EURIBOR for EUR plus a fixed spread, which would currently translate into an interest rate of about 1.2 percent with a 15-year bullet repayment pattern.

Since joining the World Bank in 1993, Croatia has benefited from financial and technical assistance, policy advice, and analytical services provided by the global development institution. To date, the World Bank has supported 50 operations amounting to around US$3.3 billion, and approved 52 grants with a total value of US$70 million.

For more information about the World Bank's work in Croatia, visit www.worldbank.hr