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Croatia

Executive Summary

Croatia became a member of the EU in 2013, which enhanced its economic stability and provided new opportunities for trade and investment.  Croatia is accessing a substantial amount of available EU funds, but many direct benefits of EU entry are still to come.  The Croatian government pledged to take legislative and administrative steps to reduce barriers to investment, streamline bureaucracy and public administration, and program EU funds more efficiently, but it has been slow to deliver promised reforms.

The government is willing to meet at senior levels with interested investors and to assist in resolving problems.  Prime Minister Andrej Plenkovic is a former member of the European Parliament and has signaled his commitment to wide-ranging structural reforms in line with recommendations from the EU and global financial institutions. His government is working with the World Bank and other international institutions to improve the ease of doing business in Croatia and to attract investment.  Relative strengths in the Croatian economy include low inflation, a stable exchange rate, and developed infrastructure.  Historically, the most promising sectors for investment in Croatia have been tourism, telecommunications, pharmaceuticals, and banking.

Although the Croatian economy was stable ahead of the COVID-19 global epidemic, the government assessed in late April that GDP will drop by at least 9.4 percent in 2020.  Tourism directly contributes 12 percent of Croatia’s GDP and up to 20 percent when indirect contributions of the sector are included; the tourism sector is expected to suffer tremendous losses due to the COVID-19 crisis.  The COVID-19 impact is not entirely negative.  The government sped up the digitalization of many public administration services and will likely expand this effort.  The economy is burdened by a large government bureaucracy, underperforming state-owned enterprises, and low regulatory transparency, all of which contributes to poor performance and relatively low levels of foreign investment.  Following a decade of growth from the end of the war in 1995, investment activity in Croatia slowed substantially in 2008 and remained under historic levels despite the economy’s emergence from the recession at the end of 2015, relatively robust growth in 2016, and continued moderate growth through 2019.

The banking system weathered the global financial crisis well but was saddled with financial costs related to the government-mandated conversion of Swiss Franc loans into euros in 2015.

In the last three years, the government implemented a number of financial incentives and measures designed to attract investment and support entrepreneurship.  However, these incentives are not corrective for profound deficiencies in the investment climate which are predominantly linked to an inefficient, unpredictable judicial system that is slow to resolve legal disputes.  Investors continue to face high “para-fiscal” fees, rigid labor laws, and slow and complex permitting procedures for most investments.

Before the COVID-19 crisis, the government maintained a budget deficit well within EU-recommended levels, but now expects a 6.8 percent budget deficit for 2020.  In March 2020, the government announced the fourth economic reform package of PM Plenkovic’s tenure.  This package is expected to create sustainable economic growth and development, to connect education to the labor market, and to sustain public finances.  Significant structural reform is still needed.  Although the government continues to make incremental improvements to the business environment, its primary focus remains on preventing job losses from state-owned enterprises and “strategic” sectors.  In the last year, the government provided state guarantees for two major shipbuilding companies.

Table 1: Key Metrics and Rankings
Measure Year Index/Rank Website Address
TI Corruption Perceptions Index 2019 63 of 180 https://www.transparency.org/
country/HRV
World Bank’s Doing Business Report 2020 51 of 190 https://www.doingbusiness.org/en/
data/exploreeconomies/croatia
Global Innovation Index 2019 42 of 128 https://www.globalinnovationindex.org/
gii-2019-report#
U.S. FDI in partner country ($M USD, stock positions) 2019 $83.4 Host government, Croatian National Bank
https://www.hnb.hr/statistics/statistical-
data/rest-of-the-world/foreign-direct-investments
World Bank GNI per capita 2018 $23,316 https://data.worldbank.org/indicator/
NY.GNP.PCAP.PP.KD?name_desc=false

Investment Climate Statements
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