Croatia Systematic Country Diagnostic Update

Croatia is a high-income country with solid macroeconomic fundamentals, which has contributed to the country’s accelerated income convergence with the rest of the EU in recent years. The sustained inflow of EU funds, including from structural funds and NGEU, will continue to support relatively high growth over the next few years, but sustainable income convergence will hinge on addressing key structural constraints. Croatia is well positioned to achieve substantial progress on multiple fronts if it seizes the opportunities provided by macroeconomic and financial stability, green and digital transitions, and access to sizable EU funds. In addition to labor supply constraints, Croatia’s workface faces a relatively low skills base, calling for improvements in the country’s education, health, and social protection systems. An inadequate base of skills in the workforce also constrains Croatia’s long-term growth and productivity, the latter of which is expected to remain low absent reforms. Another potential constraint for sustainable growth is the slow progress on the green agenda. While Croatia’s greenhouse gas (GHG) emission levels have generally been falling, emission intensity remains significantly above the EU average. Additional efforts to lower GHG emissions are needed, especially in the transport, energy, manufacturing, and building sectors, which are currently the biggest GHG emitters in the Croatian economy. In terms of greening the energy sector, further improvements are constrained by insufficient investments in renewables, largely due to cumbersome administrative procedures. To address these constraints and seize the opportunities that lie ahead, this SCD Update lays out four broad outcome areas (High-Level Outcomes, or HLOs) that are required to achieve inclusive, resilient, and sustainable growth to improve the long-term wellbeing of people in Croatia.