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Croatia-Country-Partnership-Framework-For-The-Period-Of-FY19-FY24.Pdf COUNTRY Public Disclosure Authorized PARTNERSHIP FRAMEWORK FOR THE REPUBLIC OF CROATIA FOR THE PERIOD FY19-FY24 Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized © 2019 International Bank for Reconstruction and Development/ The World Bank Office, Croatia Radnička cesta 80/IX 10000 Zagreb Telephone: +385 1 2357 222; Internet: www.worldbank.org/croatia This report is a product of the staff of the World Bank Group with external contributions. The findings, in- terpretations, and conclusions expressed in this work do not necessarily reflect the views of The World Bank Group, its Board of Executive Directors, or the governments they represent. The World Bank Group does not guarantee the accuracy of the data included in this work, which is drawn from multiple external sources. The boundaries, colors, denominations and other information shown on any map in this work do not imply any judgement on the part of the World Bank Group concerning the legal status of any territory or the endorsement or acceptance of such boundaries. Nothing herein shall constitute, or be considered to be, a limitation upon or waiver of the privileges and immunities of The World Bank Group, all of which are specifically reserved. Rights and Permissions The material in this work is subject to copyright. Because The World Bank encourages dissemination of this knowledge, this work may be reproduced, in whole or in part for noncommercial purposes as long as full attribution to this work is given. Any queries on rights and licenses, including subsidiary rights, should be addressed to World Bank Pub- lications, The World Bank Group, 1818 H Street NW, Washington, DC 20433, USA; fax: 202-522-2625; e-mail: [email protected]. COUNTRY PARTNERSHIP FRAMEWORK FOR THE REPUBLIC OF CROATIA FOR THE PERIOD FY19-FY24 May 2019 Europe: Central, South & Baltics Country Management Unit Europe and Central Asia The International Finance Corporation Europe and Central Asia The Multilateral Investment Guarantee Agency Managers and staff responsible for this Country Partnership Framework: IBRD Vice President Cyril Muller Regional Director Arup Banerji Task Team Leaders Elisabetta Capannelli and Andrea Kucey IFC Vice President Georgina Baker Regional Director Wiebke Schloemer Task Team Leaders Thomas Lubeck/Levent Karadayi/Magdalena Soljakova MIGA Vice President Keiko Honda Regional Director Merli Margaret Baroudi Task Team Leader Gianfilippo Carboni ACKNOWLEDGEMENTS The World Bank Group greatly appreciates the collaboration and contributions of the Croatian government in the preparation of this CPF, under the leadership of the Ministry of Finance. The additional contributions by many who were consulted during CPF preparation, including repre- sentatives of civil society, private sector and other groups and individuals, are equally appreciat- ed. The CPF preparation was led by Arup Banerji, Regional Director for the European Union, Elisa- betta Capannelli, Country Manager for Croatia and Slovenia and Andrea Kucey, Country Program Coordinator, supported by a core team comprised of the following World Bank Group staff: Josip Funda, Kazimir Luka Bacic, Ljiljana Tarade, Magdalena Soljakova, Vanja Frajtic, Bogdanka Krtinic. Preparation of this CPF has been a team effort with the active participation of the entire Croatia Country Team as well as staff from global practices and other units of the World Bank Group. 2 TABLE OF CONTENTS ABBREVIATIONS AND ACRONYMS 4 I. INTRODUCTION 5 II. COUNTRY CONTEXT AND CHALLENGES 11 Trends in Poverty and Shared Prosperity 13 Development Challenges and Institutional Assessment 20 III. WORLD BANK GROUP PARTNERSHIP FRAMEWORK 27 A. Government Program and Medium-Term Strategy 29 B. Proposed WBG Country Partnership Framework 29 Lessons from FY14-18 CPS Completion Report 29 Lessons from Public Consultations 30 Overview of World Bank Group Strategy 31 C. Implementing the FY19-24 Country Partnership Framework 44 Citizen Engagement and Gender 46 Partnerships and Coordination 47 D. Managing risks 48 ANNEXES 49 Annex 1. CPF Results Framework FY19-24 51 Annex 2. Selected Indicators of Bank Portfolio Performance and Management (As of 02/28/2019) 61 Annex 3. Operations Portfolio (IBRD/IDA and Grants) (As of 02/28/2019) 67 Annex 4. Statement of IFC’s Held and Disbursed Portfolio (As of 12/31/2018) 65 Annex 5. CPF Consultations 67 Annex 6. Citizen Engagement Roadmap 71 Annex 7. Croatia Gender Roadmap 73 Annex 8. Completion and Learning Review 75 3 ABBREVIATIONS AND ACRONYMS BERD Business expenditure on R&D MFD Maximizing Finance for CCA Croatian Competition Agency Development CDS Credit Default Swap NDS National Development Strategy CEE Central Eastern Europe NEET Neither employed nor in education CEPEJ European Commission for the or training Efficiency of Justice NPLs Non-Performing Loans CNB Croatian National Bank NUTS The Nomenclature of Territorial CPF Country Partnership Framework Units for Statistics CSRs European Commission’s Country OECD The Organisation for Economic Specific Recommendations Co-operation and Development EBRD European Bank for Reconstruction PIM Public Investment Management and Development PISA Programme for International EC European Commission Student Assessment ECA Europe and Central Asia PLR Progress and Learning Review ECEC Early childhood education and care PMR Product market regulations EU European Union PPP Purchasing Power Parity ESIF European Structural and RAS Reimbursable Advisory Services Investment Funds R&D Research and Development FDI Foreign direct investment SAFE Survey on the Access to Finance of GDP Gross Domestic Product Enterprises GNI Gross National Income SCD Systematic Country Diagnostic GVCs Global Value Chains SOE State-owned enterprises IBRD International Bank for STARS Strategic Transformation in Reconstruction and Development Agriculture and Rural Space IFC International Finance Corporation STEM Science, technology, engineering HBOR Croatian Bank for Reconstruction and mathematics and Development STP2 Second Science and Technology HCI Human Capital Index Project HRK Croatian Kuna TIMSS Trends in International LGBTI Lesbian, gay, bisexual, transgender, Mathematics and Science Study intersex TFP Total Factor Productivity MIGA Multilateral Investment Guarantee TVET Technical and Vocational Education Agency and Training MoSE Ministry of Science and Education WBG World Bank Group The date of the last Country Partnership Strategy (CPS) was June 27, 2013 and the date of the last Performance and Learning Review of the CPS August 31, 2016. CURRENCY EQUIVALENTS (Exchange Rate Effective as of January 7, 2019) Currency Unit = Kuna USD 1.00 = 6.48 HRK; 1 HRK = 0.15 USD 4 I. INTRODUCTION I. INTRODUCTION Croatia is a small, open economy and the latest entrant to the European Union. After being severely affected by the global financial crisis, Croatia’s economy is recovering, with growth averaging around 3 percent over the last four years. Public finances have improved significantly—fiscal imbal- ances have been reduced and the country’s debt profile has improved from very high initial levels. The country’s natural endowment and location continue to support a dynamic tourism industry,1 which serves as the major driver of growth. Joining the European Union (EU) in mid-2013 has helped boost exports, from below 40 percent of GDP in 2008 to above 50 percent in 2018. Despite recent progress, the global financial crisis revealed underlying vulnerabilities to exogenous shocks and had a lasting impact on poverty and shared prosperity. Croa- tia suffered a six-year recession following the global financial crisis, which resulted in a loss of eco- nomic output of 12 percent and one of the largest increases in poverty among EU member states. Unemployment surged, and emigration of young and skilled workers increased. The share of poor and vulnerable households2 rose from one quarter to one third of the population.3 While Croatia has a relatively high GNI per capita,4 the geographic distribution of incomes is uneven, and the crisis widened the gap between more prosperous cities and less developed regions. Croatia’s institutional challenges are evident in the country’s uneven pattern of devel- opment. The country has not fully diversified its sources of growth and relies heavily on one natural resource-based sector—tourism—which might be vulnerable to the external environment. This is combined with a still large presence of the state in productive sectors. The country’s geographic and categorical disparities in income and human capital further indicate institutional challenges related to protecting the poor and most vulnerable and creating economic opportunities for all. Positive economic trends, underpinned by government action on public finance manage- ment, have created an environment where the return on further reforms can be high. In 2017, Croatia achieved its first fiscal surplus since independence, and public finances continue to be tightly managed. The European Commission Country Report for 20195 confirms that the stock of macroeconomic imbalances continued to be reduced in Croatia, largely driven by a positive eco- nomic environment and prudent management of government finances. This is helping boost private sector activity, and as a result, unemployment is falling and demand for labor is increasing. The im- proved fiscal and economic outlook have also helped Croatia regain investment grade status as of March 2019.6 However, the country’s demographic profile (which features an aging population and
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