Economic Policies
#35Key Findings
Despite notable recent gains, Croatia scores relatively poorly (rank 35) in international comparison in the area of economic policy. Its score on this measure has improved by 1.0 point since 2014.
After falling into recession, the country’s economy recovered from the COVID-19 induced slowdown well. The government took on considerable new debt to finance furlough schemes and new healthcare spending. This was aided by growing monetary and banking integration with the EU in preparation for adoption of the euro, which positively affected bond yields.
Unemployment has stabilized at a level slightly below the eurozone average. Labor scarcity is a problem, compounded by low employment rates. Average salaries have risen robustly in recent years. Income and corporate taxes fell in 2021, but tax revenues are high for the region. After soaring deficits in 2020, fiscal consolidation is back on the agenda.
A key issue will be how to productively spend massive EU transfers in coming years that will amount to 16% to 18% of budget revenues. Reform of state-owned enterprises remains a pressing concern. The high share of imported energy renders the country vulnerable, but could trigger a green transition.
After falling into recession, the country’s economy recovered from the COVID-19 induced slowdown well. The government took on considerable new debt to finance furlough schemes and new healthcare spending. This was aided by growing monetary and banking integration with the EU in preparation for adoption of the euro, which positively affected bond yields.
Unemployment has stabilized at a level slightly below the eurozone average. Labor scarcity is a problem, compounded by low employment rates. Average salaries have risen robustly in recent years. Income and corporate taxes fell in 2021, but tax revenues are high for the region. After soaring deficits in 2020, fiscal consolidation is back on the agenda.
A key issue will be how to productively spend massive EU transfers in coming years that will amount to 16% to 18% of budget revenues. Reform of state-owned enterprises remains a pressing concern. The high share of imported energy renders the country vulnerable, but could trigger a green transition.
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How successful has economic policy been in providing a reliable economic framework and in fostering international competitiveness?
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Economic policy fully succeeds in providing a coherent set-up of different institutional spheres and regimes, thus stabilizing the economic environment. It largely contributes to the objectives of fostering a country’s competitive capabilities and attractiveness as an economic location.
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Economic policy largely provides a reliable economic environment and supports the objectives of fostering a country’s competitive capabilities and attractiveness as an economic location.
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Economic policy somewhat contributes to providing a reliable economic environment and helps to a certain degree in fostering a country’s competitive capabilities and attractiveness as an economic location.
2
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1
Economic policy mainly acts in discretionary ways essentially destabilizing the economic environment. There is little coordination in the set-up of economic policy institutions. Economic policy generally fails in fostering a country’s competitive capabilities and attractiveness as an economic location.
The Croatian economy generally withstood the test of the COVID-19-induced recession. However, the relatively favorable employment and growth statistics in 2021 have more to do with the government’s decision to offer furlough schemes throughout 2020, as well as to impose one of the mildest sets of epidemiological restrictions in Europe. There was no fundamental restructuring of the way product markets, social protection, collective bargaining or the financial sector work. The decision to open the country to tourists in the summer of 2021 brought about excellent tourist figures, indeed among the best across the EU, if we compare the figures for 2021 with those from 2019. On the fiscal front, the pandemic response was aided by the willingness of Andrej Plenković’s government to signal its commitment to deeper policy integration with the core of the EU, specifically through the pending euro adoption, which has positively affected bond yields and exchange-rate stability.
A look at the internal structure of GDP and the relative contribution to real growth rate shows that personal consumption was the most important factor in propelling the economy during 2021. The Guidelines for Economic and Fiscal Policy 2022-2024 issued by Ministry of Finance point out than personal consumption and gross capital investment will play the most prominent role in the economy through 2024. One of the biggest challenges in the years ahead will be how to spend the large sums of money flowing from the NextGenerationEU (NGEU) program and the EU budget productively. Croatia invested more than 22% of its GDP in 2020 (more than the EU-27 average); 5.63% of GDP was invested by the government, the third-highest such share in the EU. It is noteworthy that Croatia received the highest per capita allocation from the NGEU. There is a risk that the record inflow of money, free of external conditionalities, will weaken the willingness to undertake long-awaited reforms in the healthcare, education and pension systems, or to try to lift the disappointingly low productivity rate. On the other hand, this is a historic opportunity to boost economic convergence and close the development gap. In 2020 Croatia had the third-lowest GDP per capita in the EU-27, with just 64% of the average EU-27 GDP per capita. With regard to goods exports, Croatia boasts one of the highest growth rates with regard to both intra-EU and extra-EU trade over the course of 2021, which is a welcome sign given the existing dependence on the export of services via tourism.
State-owned enterprises remain bloated and unreformed. There is no clear strategy or set of key performance indicators for managing state-owned assets. Moreover, Croatia’s score in implementing the country specific recommendations (CSR) issued by the European Commission prior to the onset of the global pandemic shows a lack of political commitment to structural reforms. The reluctance to propose an elaborate healthcare reform in 2021 vindicates those who predicted the continuation of the muddle-through approach. However, given the fact that there are no major elections in sight until 2024, the timing for reforms seems to be ideal.
Among the set of risks which might negatively impact economic growth in the following years is imported inflation in the form of rising energy prices. Currently, Croatia imports 53.6% of all energy consumed (82.6% of its oil needs, 53.2% of its natural gas, 32.5 % of its electricity, and 100% of its coal needs). It remains to be seen whether this threat will be used as an opportunity to speed up the green transition.
A look at the internal structure of GDP and the relative contribution to real growth rate shows that personal consumption was the most important factor in propelling the economy during 2021. The Guidelines for Economic and Fiscal Policy 2022-2024 issued by Ministry of Finance point out than personal consumption and gross capital investment will play the most prominent role in the economy through 2024. One of the biggest challenges in the years ahead will be how to spend the large sums of money flowing from the NextGenerationEU (NGEU) program and the EU budget productively. Croatia invested more than 22% of its GDP in 2020 (more than the EU-27 average); 5.63% of GDP was invested by the government, the third-highest such share in the EU. It is noteworthy that Croatia received the highest per capita allocation from the NGEU. There is a risk that the record inflow of money, free of external conditionalities, will weaken the willingness to undertake long-awaited reforms in the healthcare, education and pension systems, or to try to lift the disappointingly low productivity rate. On the other hand, this is a historic opportunity to boost economic convergence and close the development gap. In 2020 Croatia had the third-lowest GDP per capita in the EU-27, with just 64% of the average EU-27 GDP per capita. With regard to goods exports, Croatia boasts one of the highest growth rates with regard to both intra-EU and extra-EU trade over the course of 2021, which is a welcome sign given the existing dependence on the export of services via tourism.
State-owned enterprises remain bloated and unreformed. There is no clear strategy or set of key performance indicators for managing state-owned assets. Moreover, Croatia’s score in implementing the country specific recommendations (CSR) issued by the European Commission prior to the onset of the global pandemic shows a lack of political commitment to structural reforms. The reluctance to propose an elaborate healthcare reform in 2021 vindicates those who predicted the continuation of the muddle-through approach. However, given the fact that there are no major elections in sight until 2024, the timing for reforms seems to be ideal.
Among the set of risks which might negatively impact economic growth in the following years is imported inflation in the form of rising energy prices. Currently, Croatia imports 53.6% of all energy consumed (82.6% of its oil needs, 53.2% of its natural gas, 32.5 % of its electricity, and 100% of its coal needs). It remains to be seen whether this threat will be used as an opportunity to speed up the green transition.
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How effectively does labor market policy address unemployment?
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Successful strategies ensure unemployment is not a serious threat.
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Labor market policies have been more or less successful.
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Strategies against unemployment have shown little or no significant success.
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Labor market policies have been unsuccessful and rather effected a rise in unemployment.
In 2021 Croatia staged a remarkable economic recovery from the depths of recession experienced in the previous year. Unlike the experience of past recessions, which were deep and prolonged, Croatia managed this time around to bounce back faster than many other crisis-affected countries. At the end of 2021, Croatia had an unemployment rate of 7%, which was slightly higher than the average rate in the EU-27, but lower than the average rate in the euro zone. On the downside, the unemployment rate among young people (below the age of 25) was significantly higher at 20%, as compared to an EU-wide rate of 15.9%. This exemplifies the persistence of a dual-track labor market with adverse prospects for the least-skilled or least-protected employees. The sharpest contrast between labor market insiders and labor market outsiders is observed with respect to public versus private sector employment. Public sector jobs offer greater security and are also financially more rewarding. Furthermore, the lack of any performance-based criteria for assessing public servants enables and supports a rather inefficient and non-responsive public administration.
The total number of people in employment is the highest since the Great Recession of 2008. The problem of unemployment has gradually turned into one of labor scarcity, which is compounded by the fact that Croatia still has one of the lowest employment rates in the EU, at 63.6%. Only Greece, Italy, Spain and Bulgaria fare worse. On the upside, Croatia is among the rare group of countries that have increased this ratio as compared to 2019, managing to close the gap between the national ratio and the EU-27 average. The real average salary has increased by a respectable 17.3% since 2016. Moreover, the rise in real salary has been more pronounced in the lower income brackets, especially the first two deciles. The real average monthly salary amounted to HRK 7,140 (approximately €950).
The percentage of temporary contracts as a share of total employment has shrunk from 15.5% to 13.0%. At the same time, the government has continued with its political commitment to raise the minimum wage. This rose from HRK 3,250 per month in 2020 to HRK 3,400 in 2021, and will increase by an additional 350 Croatian kuna (HRK) in 2022.
In order to alleviate the scarcity of skilled workers, the government decided to scrap the quota for foreign workers in 2021, which will be especially important for tourism and the construction sector. However, employers will still have to formally demonstrate that they are unable to find suitable employees from the domestic pool of workers or unemployed people.
The participation rate of adults in education and training is among the lowest in the EU, amounting to only 3.2% in 2020. Rates among young people are also low. In the case of young people, the expansion of active labor market programs has led to a neglect of other ways of entering the labor market, such as internships and apprenticeships. The additional factor that reduces the pool of qualified labor is the very low employment rate for persons aged 50-74. In Croatia, the employment rate in this group is a paltry 36.1%, compared to the EU average of 47.1%.
The total number of people in employment is the highest since the Great Recession of 2008. The problem of unemployment has gradually turned into one of labor scarcity, which is compounded by the fact that Croatia still has one of the lowest employment rates in the EU, at 63.6%. Only Greece, Italy, Spain and Bulgaria fare worse. On the upside, Croatia is among the rare group of countries that have increased this ratio as compared to 2019, managing to close the gap between the national ratio and the EU-27 average. The real average salary has increased by a respectable 17.3% since 2016. Moreover, the rise in real salary has been more pronounced in the lower income brackets, especially the first two deciles. The real average monthly salary amounted to HRK 7,140 (approximately €950).
The percentage of temporary contracts as a share of total employment has shrunk from 15.5% to 13.0%. At the same time, the government has continued with its political commitment to raise the minimum wage. This rose from HRK 3,250 per month in 2020 to HRK 3,400 in 2021, and will increase by an additional 350 Croatian kuna (HRK) in 2022.
In order to alleviate the scarcity of skilled workers, the government decided to scrap the quota for foreign workers in 2021, which will be especially important for tourism and the construction sector. However, employers will still have to formally demonstrate that they are unable to find suitable employees from the domestic pool of workers or unemployed people.
The participation rate of adults in education and training is among the lowest in the EU, amounting to only 3.2% in 2020. Rates among young people are also low. In the case of young people, the expansion of active labor market programs has led to a neglect of other ways of entering the labor market, such as internships and apprenticeships. The additional factor that reduces the pool of qualified labor is the very low employment rate for persons aged 50-74. In Croatia, the employment rate in this group is a paltry 36.1%, compared to the EU average of 47.1%.
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How effective is a country’s tax policy in realizing goals of revenue generation, equity, growth promotion and ecological sustainability?
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Taxation policy fully achieves the objectives.
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Taxation policy largely achieves the objectives.
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Taxation policy partially achieves the objectives.
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Taxation policy does not achieve the objectives at all.
At the beginning of 2021, tax reductions in the domain of income and corporate taxes kicked in. Those reductions were described in detail in the Bertelsmann Stiftung’s publication “Croatia Report: Sustainable Governance in the Context of the COVID-19 Crisis.” The reductions did not interfere in any significant way with the OECD’s initiative for a minimum global corporate tax rate. All Croatian businesses that have total revenue less of than €1 million will be able to rely on a competitive tax rate of 10%. Furthermore, the first pillar of the OECD initiative could be a boon for Croatia, since the country will be able to tap into a new revenue stream stemming from the activities of large multinational corporations. Taxes on dividends to foreign shareholders and shareholders that are not natural persons were reduced from 12% to 10%. In spite of the aforementioned tax-reduction agenda, tax revenue as a percentage of GDP still amounted to 37.3% in 2020, the second-highest such rate among EU’s post-socialist member states. At the same time, Croatia was the third-poorest EU member state, a fact that invites the introduction of a more competitive tax system to galvanize its economic convergence.
The income tax system is moderately progressive and serves the goal of tax equity. Almost 50% of workers do not pay income tax due to existing exemptions and personal deductions. In that regard, income tax plays a rather limited role in tackling poverty and social exclusion. The only viable solution is to boost the country’s relatively low levels of productivity growth as an underlying factor driving higher incomes and living standards, which could in turn broaden the tax base. There is not much room for rebalancing the existing tax structure from income to consumption-based taxes in the light of the fact that Croatia already has the second-highest share of VAT revenue in GDP among the EU member states. Interestingly, Croatia is also among the most efficient EU member states in terms of VAT collection.
Furthermore, there are no property taxes in Croatia, and the country has the second-highest home ownership rate in the EU. Many people possess two or even more living units. Therefore, this type of tax, if introduced properly and at moderate rates, could lead the way in further reducing income taxes, which would be a highly beneficial outcome in light of the fact that Croatia faces a pressing need to retain and/or attract workers. Despite the need to ensure fiscal sustainability, there are limited options for reliance on additional taxes. Hence, carefully controlling state expenses in line with the country’s potential growth rate plus expanding the tax base will be of utmost importance.
In 2020, environmental taxes made up 3.28% of GDP compared to the EU-27 average of 2.24%. Gasoline, diesel, fuel oils, natural gas, coal, electricity and carbon dioxide (CO2) are all subject to taxation. Motor vehicle owners pay transport taxes, and there is a “one-off” tax on the import/sale of equipment. There is not much room to expand this category of taxes to help the green transition if policymakers want to ensure economic competitiveness and avoid a drop in living standards. However, there is one type of environmental tax that has not yet been utilized in Croatia at all, namely a landfill tax to improve waste collection and management. Croatia is one of the few EU member states without such a tax in its policy toolkit. Correspondingly, Croatia represents a laggard in waste management.
The income tax system is moderately progressive and serves the goal of tax equity. Almost 50% of workers do not pay income tax due to existing exemptions and personal deductions. In that regard, income tax plays a rather limited role in tackling poverty and social exclusion. The only viable solution is to boost the country’s relatively low levels of productivity growth as an underlying factor driving higher incomes and living standards, which could in turn broaden the tax base. There is not much room for rebalancing the existing tax structure from income to consumption-based taxes in the light of the fact that Croatia already has the second-highest share of VAT revenue in GDP among the EU member states. Interestingly, Croatia is also among the most efficient EU member states in terms of VAT collection.
Furthermore, there are no property taxes in Croatia, and the country has the second-highest home ownership rate in the EU. Many people possess two or even more living units. Therefore, this type of tax, if introduced properly and at moderate rates, could lead the way in further reducing income taxes, which would be a highly beneficial outcome in light of the fact that Croatia faces a pressing need to retain and/or attract workers. Despite the need to ensure fiscal sustainability, there are limited options for reliance on additional taxes. Hence, carefully controlling state expenses in line with the country’s potential growth rate plus expanding the tax base will be of utmost importance.
In 2020, environmental taxes made up 3.28% of GDP compared to the EU-27 average of 2.24%. Gasoline, diesel, fuel oils, natural gas, coal, electricity and carbon dioxide (CO2) are all subject to taxation. Motor vehicle owners pay transport taxes, and there is a “one-off” tax on the import/sale of equipment. There is not much room to expand this category of taxes to help the green transition if policymakers want to ensure economic competitiveness and avoid a drop in living standards. However, there is one type of environmental tax that has not yet been utilized in Croatia at all, namely a landfill tax to improve waste collection and management. Croatia is one of the few EU member states without such a tax in its policy toolkit. Correspondingly, Croatia represents a laggard in waste management.
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To what extent does budgetary policy realize the goal of fiscal sustainability?
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Budgetary policy is fiscally sustainable.
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Budgetary policy achieves most standards of fiscal sustainability.
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Budgetary policy achieves some standards of fiscal sustainability.
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Budgetary policy is fiscally unsustainable.
The Guidelines for Economic and Fiscal Policy 2022-2024 issued by the Ministry of Finance forecast a gradual reduction in the general government deficit and public debt in the years ahead. After a massive fiscal deficit of 7.4% of GDP in 2020, the country was expected to end 2021 with a 3.8% deficit. Projections for 2022 and 2023 were respectively 2.6% and 1.9%. The public debt-to-GDP ratio is planned to shrink from a high of 88.7% in 2020 to 76.8% in 2024. The fiscal support measures adopted in 2020 to alleviate the population’s health and economic suffering, and especially to finance extensive furlough schemes and hospitalizations, was broad and decisive. This would not have been possible on favorable lending terms unless the government and the Croatian National Bank had not taken important steps such as entering the EU’s Exchange Rate Mechanism (ERM II) and signing the swap-line agreement with the European Central Bank (ECB) in 2020. However, after reaching the highest absolute level of public debt in Croatian history, as well as a relatively swift bounce back from recession, the government decided in 2021 to set a moderate pace of fiscal consolidation over the medium run.
This pace will be supported by record transfers from the EU’s Recovery and Resilience Facility (RRF) plus transfers from the former and existing Multiannual Financial Framework. In 2022 and 2023, those transfers will account for a staggering 16% to 18% of total budget revenues. The aforementioned fiscal consolidation will be important not only from the standpoint of adjustment to the period after the deactivation of EU’s “general escape clause” – that is, by installing habits of fiscal responsibility – but also from the standpoint of the government’s ambition to adopt the euro as soon as possible. Unfortunately, these favorable developments have been counterbalanced by government inertia with regard to ensuring long-term fiscal sustainability. Namely, the largest spenders of public money, the pension and healthcare systems, have not been put on a sustainable trajectory. When it comes to the pension system, the system itself covers less than 60% of payments made to the retirees by ongoing workers’ contributions. The rest is financed out of taxes and debt, which will face some constraints in light of the shrinking workforce and rising interest rates. Furthermore, since the onset of the global pandemic healthcare expenses have skyrocketed, in spite of the fact that the volume of non-COVID-19 treatments has been reduced by 20% to 30%. Interestingly, Minister of Health Vili Beroš opted for an increase in revenues in his reform plan, which was then discarded by Minister of Finance Zdravko Marić, who prefers savings and improved management. However, as of this writing there are no viable reforms of either system on the horizon, in spite of an effort by the Ministry of Finance to set up at least some hard budget constraints in the ongoing negotiations.
This pace will be supported by record transfers from the EU’s Recovery and Resilience Facility (RRF) plus transfers from the former and existing Multiannual Financial Framework. In 2022 and 2023, those transfers will account for a staggering 16% to 18% of total budget revenues. The aforementioned fiscal consolidation will be important not only from the standpoint of adjustment to the period after the deactivation of EU’s “general escape clause” – that is, by installing habits of fiscal responsibility – but also from the standpoint of the government’s ambition to adopt the euro as soon as possible. Unfortunately, these favorable developments have been counterbalanced by government inertia with regard to ensuring long-term fiscal sustainability. Namely, the largest spenders of public money, the pension and healthcare systems, have not been put on a sustainable trajectory. When it comes to the pension system, the system itself covers less than 60% of payments made to the retirees by ongoing workers’ contributions. The rest is financed out of taxes and debt, which will face some constraints in light of the shrinking workforce and rising interest rates. Furthermore, since the onset of the global pandemic healthcare expenses have skyrocketed, in spite of the fact that the volume of non-COVID-19 treatments has been reduced by 20% to 30%. Interestingly, Minister of Health Vili Beroš opted for an increase in revenues in his reform plan, which was then discarded by Minister of Finance Zdravko Marić, who prefers savings and improved management. However, as of this writing there are no viable reforms of either system on the horizon, in spite of an effort by the Ministry of Finance to set up at least some hard budget constraints in the ongoing negotiations.
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To what extent does research and innovation policy support technological innovations that foster the creation and introduction of new products?
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Research and innovation policy effectively supports innovations that foster the creation of new products and enhance productivity.
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Research and innovation policy largely supports innovations that foster the creation of new products and enhance productivity.
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Research and innovation policy partly supports innovations that foster the creation of new products and enhance productivity.
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Research and innovation policy has largely failed to support innovations that foster the creation of new products and enhance productivity.
Croatia lacks a coherent and integrated policy framework for policy formulation, implementation and evaluation in the domain of research and development (R&D). Generally, most companies in the country have low technological capacity to support innovation, and technology-transfer mechanisms are inadequate. Since 2008, the World Bank’s index measuring university-industry collaboration in R&D has shown a steady decline. In this area, Croatia is the worst performer among comparable member states. On the positive side, there are nascent ICT and electromobility companies with global presence and aspirations, but their success is more the result of individual talent and vision as opposed to the state’s systemic support. It is to be hoped that their presence alone might have positive spill-over effects on other stakeholders, especially on policymakers, which might be induced to start catering to the needs of businesses by crafting and upgrading horizontal support measures.
Total gross domestic spending on R&D increased from 0.74% of GDP in 2010 to 1.27% in 2020, but this was primarily due to a fall in the value of the denominator. However, despite a severe recession in 2020, the absolute figure dedicated to R&D increased to €626 million. This was the 18th highest such share of GDP in the EU. The higher education, business and government sectors all increased their R&D spending. The NGEU program and the MFF 2021-2027 funds offer unprecedented potential for boosting the innovation agenda and driving further digitalization. In that regard, financial constraints will no longer constitute a plausible cover for underperformance or continuation of the status quo. On the other hand, potential bottlenecks are to be found in the excessive bureaucratization of the innovation process (e.g., public tenders) and a lack of policy coordination among key stakeholders.
In terms of the number of patent applications to the European Patent Office (EPO), Croatia fares poorly in contrast to other EU-27 countries, but has boosted its performance. For example, in 2018, Croatia filed 14 patents with the EPO, while in 2020 it managed to obtain a record-breaking 22 patents. Finally, according to the EU Innovation Scoreboard, the country was categorized as an “emerging innovator” in 2021, demonstrating an upward trend over the last couple of years.
Total gross domestic spending on R&D increased from 0.74% of GDP in 2010 to 1.27% in 2020, but this was primarily due to a fall in the value of the denominator. However, despite a severe recession in 2020, the absolute figure dedicated to R&D increased to €626 million. This was the 18th highest such share of GDP in the EU. The higher education, business and government sectors all increased their R&D spending. The NGEU program and the MFF 2021-2027 funds offer unprecedented potential for boosting the innovation agenda and driving further digitalization. In that regard, financial constraints will no longer constitute a plausible cover for underperformance or continuation of the status quo. On the other hand, potential bottlenecks are to be found in the excessive bureaucratization of the innovation process (e.g., public tenders) and a lack of policy coordination among key stakeholders.
In terms of the number of patent applications to the European Patent Office (EPO), Croatia fares poorly in contrast to other EU-27 countries, but has boosted its performance. For example, in 2018, Croatia filed 14 patents with the EPO, while in 2020 it managed to obtain a record-breaking 22 patents. Finally, according to the EU Innovation Scoreboard, the country was categorized as an “emerging innovator” in 2021, demonstrating an upward trend over the last couple of years.
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To what extent does the government actively contribute to the effective regulation and supervision of the international financial architecture?
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The government (pro-)actively promotes the regulation and supervision of financial markets. It demonstrates initiative and responsibility in such endeavors and often acts as an international agenda-setter.
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The government contributes to improving the regulation and supervision of financial markets. In some cases, it demonstrates initiative and responsibility in such endeavors.
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The government rarely contributes to improving the regulation and supervision of financial markets. It seldom demonstrates initiative or responsibility in such endeavors.
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The government does not contribute to improving the regulation and supervision of financial markets.
Croatia’s accession to the EU has facilitated greater international integration of the financial system. The EU’s single passport system for financial institutions allows banks regulated by their home country authority to set up branches in Croatia. Those trends have been amplified since Croatia joined the ERM II system and banking union in July 2020 as a formal prerequisite for euro adoption as early as 2023.
The Croatian banking sector is among the most highly capitalized in the EU. The total capital ratio is more than 25%. Of all 27 member states, only Latvia and Estonia fare better than Croatia on that count. Liquidity coverage ratio is beyond 190%, as compared to the required minimum of 100%, and is significantly above the average level for the EU-27. Over the last several years, the share of non-performing loans (NPL) has been on a steady decline. In spite of the impact of COVID-19 on the Croatian economy in 2020, this share has stayed below 6%. The coverage ratio for non-performing loans and advances (NPL) is 62%, putting Croatia in the league of the EU’s top performers with regard to the ability to absorb potential losses from outstanding loans. There has been no change in the value of the Herfindahl-Hirschman index of concentration regarding total banking assets. The number of credit institutions in the country has remained stable since 2018. In 2021, the return on equity (RoE) of Croatian banks surpassed that from 2020, and is slightly above the average cross-EU level.
The aforementioned indicators also look favorable due to credit-support measures such as loan guarantees and loan moratoriums adopted in early 2020 to cushion the liquidity shock facing businesses during the COVID-19 lockdowns. Those credit-support measures amounted to approximately 6.5% of GDP.
All in all, Croatia is a responsible rule-taker in terms of EU’s macro-prudential regulation. Regulatory compliance has been ensured by the hitherto highly independent Croatian National Bank (CNB). The CNB has at times been criticized for displaying a rather reactive stance in response to rare episodes of financial fraud allegedly perpetrated by certain credit institutions, for instance by Raiffeisen Bank Leasing. This particular case is still the subject of a lengthy investigation by state prosecutors.
Croatia has a dormant stock exchange that could do more to improve capital allocation. Nevertheless, the Croatian financial system remains an anchor of stability.
In 2021, Croatia joined the new framework for international tax reform, aimed at ensuring that large multinational enterprises pay tax where they operate and earn profits, based on criteria such as the location of assets, employment and turnover. The framework also envisages tax-related reforms related to introduction of a minimum corporate tax rate of 15% for companies with annual turnover greater than €750 million. Nevertheless, at the beginning of 2022, this international effort largely stalled. This will hamper the potential reduction of the tax burden for SMEs, which could otherwise be compensated for by taxes paid by MNCs.
Citations:
Croatian National Bank (2021).Standard Presentation Format. https://www.hnb.hr/en/-/spf
The Croatian banking sector is among the most highly capitalized in the EU. The total capital ratio is more than 25%. Of all 27 member states, only Latvia and Estonia fare better than Croatia on that count. Liquidity coverage ratio is beyond 190%, as compared to the required minimum of 100%, and is significantly above the average level for the EU-27. Over the last several years, the share of non-performing loans (NPL) has been on a steady decline. In spite of the impact of COVID-19 on the Croatian economy in 2020, this share has stayed below 6%. The coverage ratio for non-performing loans and advances (NPL) is 62%, putting Croatia in the league of the EU’s top performers with regard to the ability to absorb potential losses from outstanding loans. There has been no change in the value of the Herfindahl-Hirschman index of concentration regarding total banking assets. The number of credit institutions in the country has remained stable since 2018. In 2021, the return on equity (RoE) of Croatian banks surpassed that from 2020, and is slightly above the average cross-EU level.
The aforementioned indicators also look favorable due to credit-support measures such as loan guarantees and loan moratoriums adopted in early 2020 to cushion the liquidity shock facing businesses during the COVID-19 lockdowns. Those credit-support measures amounted to approximately 6.5% of GDP.
All in all, Croatia is a responsible rule-taker in terms of EU’s macro-prudential regulation. Regulatory compliance has been ensured by the hitherto highly independent Croatian National Bank (CNB). The CNB has at times been criticized for displaying a rather reactive stance in response to rare episodes of financial fraud allegedly perpetrated by certain credit institutions, for instance by Raiffeisen Bank Leasing. This particular case is still the subject of a lengthy investigation by state prosecutors.
Croatia has a dormant stock exchange that could do more to improve capital allocation. Nevertheless, the Croatian financial system remains an anchor of stability.
In 2021, Croatia joined the new framework for international tax reform, aimed at ensuring that large multinational enterprises pay tax where they operate and earn profits, based on criteria such as the location of assets, employment and turnover. The framework also envisages tax-related reforms related to introduction of a minimum corporate tax rate of 15% for companies with annual turnover greater than €750 million. Nevertheless, at the beginning of 2022, this international effort largely stalled. This will hamper the potential reduction of the tax burden for SMEs, which could otherwise be compensated for by taxes paid by MNCs.
Citations:
Croatian National Bank (2021).Standard Presentation Format. https://www.hnb.hr/en/-/spf