Croatian economy overview

Goals and policy of economic reforms

Croatian economy is one of the strongest and most developed market economies in south-east Europe. Croatia has the status of candidate for joining the EU (negotiations will begin in early 2005) and this will create even better conditions for further economic development. The priority of Croatian economic policy is to continue building a stable and strong market economy, competitive on a global scale. Steps are being undertaken to strengthen boost business and reduce government expenditures, to strengthen the role of science and new technologies in the economy resulting in increased production and growth of export and employment.

In order to achieve these goals, conditions will be created for maintaining high rates of economic growth, primarily through increased competitiveness and market flexibility. Establishing dynamic labour market will contribute to cutting unemployment as one of the most painful problems of domestic economy.

The large foreign debt and the deficit in the balance of payment will be dealt with by the increase in production and exports made easier by new measures of tax and economic policies, such as the stimulation of export activities, restructuring large state-owned companies, and improving competitiveness of Croatian products in the global markets. Furthermore, government expenditure will be reduced by reform and the system of state administration will be downsized in order to reduce foreign loan requirements.

General Characteristics

From 1993 to 2003, direct foreign investments in Croatia amounted to more than US$ 9.5 billion. The largest amount has been invested in telecommunications (21%) and money services (20%), production of pharmaceutical products, oil products and tourist facilities. Industry, agriculture, production of food and construction has not yet been recognised as attractive by potential investors, but hopefully this will change in the forthcoming period.

Agriculture

Agriculture, forestry and fishery account for about 8% of the GDP. The diversity of climate, landscape and soil in Croatia enables a varied agricultural product range, and the low level of pollution is conducive to developing ecological production. In 2003, there were 3.14 million hectares of arable land, 46.5% of which were plough-fields and gardens, 1.8% vineyards, 1.7% orchards and 0.5% olive groves, while the remaining part were meadows and pastures. Out of 1.46% million hectares of plough-fields and gardens, 1.08 (74%) were in crops. Two thirds of arable land belongs to family farms (81.6% of plough-fields, gardens, orchards, olive groves, vineyards, and meadows, and 40.5 of pastures).

As a consequence of the war, and party due to the transition to market economy in the 1990s, cattle industry is still abut 30% lower than before the war.

Fishery

Carp and trout farming the basis for freshwater fish farming (the catch in open waters is negligent in commercial terms). However, in spite of the centuries-old tradition, fish production in mainland Croatia is declining year after year. By contract, seafood farming in the Adriatic has been expanding for several decades now to add to the relatively modest catch (excl. the pelagic fish). In the last few years, tuna farming has developed significantly mostly to meet the demand on Japanese market.

Industry

About one fourth of the total workforce in Croatia is employed in industry which makes about one fifth of the GDP. Of the branches of processing industry (83% of total industrial output) the biggest share in the GDP is accounted for by the production of food, drinks and beverages, the production of chemicals and chemical products, and oil products. They are followed by the production of other non-metal mineral products, metal product (excl. machines and equipment), publishing and printing, and shipbuilding.

Tourism

Croatia offers various forms of tourism, including vacations on the Adriatic coast and islands, diving, hunting, fishing, health tourism with 19 sea and continental spas, yachting with more than 40 marinas and more than 15,000 berths, and other. Owing to its long tradition, tourism in Croatia accounts for a bigger part of the GDP than in most other transition countries. With 46.6 million overnights and expected US$ 5.7 billion in revenues, in 2003 tourism accounted for about 20% of the GDP. Development policy of Croatian Government largely relies on strong development of this sector and attempts to speed up the privatisation of hotels and other tourist capacities. Growing interest and arrival of reputable world hotel operator, as well as better quality of the offer for rich visitors is noticeable.

Construction

During the last decade of the last century, construction industry went through a very difficult time marked not only by the war in the country and the neighbouring region, but also by dismantling large state-owned construction concerns and the loss of traditional markets of the former Soviet Union, Africa and the Middle East. Owing to privatisation and adjustment to new market conditions and the revival of construction works in the country, notably the construction of motorways, this industry is headed for a quick recovery. Construction accounts for about 6% of the GDP. In 2003, construction activities grew by 22.8% compared to the preceding year, for the most part owing to the construction of motorways.

Transport and telecommunications

Transport and communications make about 9% of the GDP. 1990s were strongly marked by negative impacts of the war and closed borders. Due to political instability in the east of the region and to establishing alternative traffic corridors, transit transport has not yet been restored to the pre-war level.

Croatia has more than 28,500 km roads with solid base, including about 600 km of motorways. Developing road infrastructure is one of Government's priorities with a view to realising Croatian potentials as a traffic junction. In 2003, more than 150 km of newly-built motorways were opened for traffic.

Croatian railways link all the major cities in Croatia and major Croatian ports with the neighbouring countries. Croatia has currently 2726 km of railways, 36% electric powered. The priority is to modernise the Zagreb-Rijeka and Zagreb-Split lines. Main seaports are Rijeka, Split and Ploce, while the main airports are Zagreb, Split, Pula, Dubrovnik and Zadar. National air carrier Croatia Airlines has links to 14 European countries, and currently has one of the newest fleets in Europe. Telecommunications network in Croatia is maintained by Croatian Telecom which is 51% owned by Deutsche Telekom. There are two GSM operators, HTmobile and VIPnet.

Basic macroeconomic indicators



Gross Domestic Product



In 2003, the GDP was US$ 28.3 billion or US$ 6378 per capita, with real growth of 4.3% and an increase in gross added value of 4.9%. The GDP growth was mostly encouraged by great investments in the construction of roads. Compared with preceding years, private consumption dropped. Balance of payment

In 2003, the deficit in the balance of payment was US$ 2 billion or 7.2% of the GDP owing to the deficit in foreign commodity exchange (US$ 8 billion). Such a high deficit in foreign- trade balance was mostly due to the declining US$:EUR exchange rate by nearly 20%.

Inflation

Croatia is very successful maintaining price stability and the value of national currency, primarily owing to its firm and restrictive monetary policy. From the beginning of 2004, the National Bureau of Statistics has begun to publish a consumer price index as a new measure of inflation which reflects changes in the level of prices for goods and services between two periods.

Foreign currency reserves

The foreign currency reserves of the Republic of Croatia have constantly grown to reach nearly US$ 8.2 billion by the end of 2003, which corresponds to 5.7 months import of goods and services.

Foreign debt

At the end of 2003, the foreign debt of Croatia was about US$ 23.7 billion, or approximately 83% of the GDP. A great part of the increase in debt, however, was caused by the weakening of the US dollar. The share of banks in the foreign debt has grown (31.5%), while the government share actually decreased (from 45.4% in 2001 to 35.6% in 2003).

Unemployment

At the end of 2003, there were 318.7 thousand unemployed in Croatia, and the unemployment rate was 18.1%. In spite of its decrease (it exceeded 23% at the end of 2001), unemployment remains one of the biggest problems of the economy. Note, however, that unemployment in Croatia includes all those without a registered permanent employment, and if the methodology of the International Labour Organisation were applied, unemployment rate would be significantly lower, about 15%.

Credit rating

The credit rating of Croatia with all the prominent credit agencies is approximately at the same level. For quite some time now, Croatia has had BBB- long-term credit rating (Standard&Poor's) or Baa3 (Moody's). Standard&Poor's has recently confirmed its BBB- rating and changed the future prospects of Croatia's creditworthiness from stable to positive. Commodity exchange with the world

According to the final data, the total value of the commodity exchange of Croatia with the world was slightly less than US$ 20.4 billion in 2003, which was 30.5% more than in the preceding year. More than 85% of the commodity exchange was realised with European countries. Last year, Croatia exported US$ 6.2 billion worth of goods or 26.2% more than the year before, while the value of import reached US$ 14.2 billion i.e. 32.5% more than in 2002.The deficit in the balance of the commodity exchange was US$ 8 billion, and the coverage of import by export was only 43.5%.

The biggest trade partners of Croatia by the destination of Croatia's exports are Italy (US$ 1650 million), Bosnia-Herzegovina (892), Germany (733), Slovenia (511), Austria (479); by the sources of Croatia's imports they are Italy (US$ 2581), Germany (2221), Slovenia (1052), Austria (941) and France (749).

As much as 89.8% of commodity exchange involves products of the processing industry. This branch accounts for 94.3% of the total export and 87.9% of the total import. Mining comes second with 6.2%, owing to the import of crude oil and natural gas. These two are followed by agriculture, hunting and forestry with a share in the total commodity exchange of 2.5% or 2% in Croatian import and 2.7% in Croatian export.

Investment in the Republic of Croatia

Investment surroundings

Legal framework for investment

Investment possibilities in Croatia



Investment surroundings

The establishment of a business incentive surrounding, in co-ordnance with the standards which prevail in the EU and countries with expanded market economies, is one of the primary aims of the economic policy of the Government of the Republic of Croatia.

Being aware of the importance of direct foreign investment for the future development of the country and it's strong contribution to the restructurisation and modernisation of the economy, the strengthening of international competition and the creation of new jobs, the Government is firmly committed to the further development of conditions for the growth of direct foreign investment. It's commitment to reform the national economy, with the aim of increasing the attractiveness of the Republic of Croatia to foreign investors, is something the Government wants to achieve both on the local and international fronts.

At home, with the security of political stability, the Government is carrying out the policy of macro-economic stability and control of public finances, the improvement of fiscal balance and control of budget expenditure, encouraging the expansion of small and medium enterprises, the regulation and liberalisation of energy markets, privatisation of large enterprises in the public sector and the strengthening of regulations and control mechanisms in the financial sector. The restrictive monetary policy of the Croatian National Bank is securing stability and the internal convertibility of the local currency.

The Division for Encouraging Export and Investment at the Ministry of Economy, Labour and Entrepreneurship is responsible for the implementation of the Law on Encouraging Investment, that is, for providing incentives and tax and tariff preferences to both domestic and foreign investors. Furthermore, the said Division is also responsible for providing all the necessary information on starting businesses and investing in Croatia. In 2002, Agency for the Promotion of Export and Investment was set up within the Ministry of Economy, Labour and Entrepreneurship and is responsible for the promotion of Croatia's export and investment potential abroad.

On the international front, Croatia is actively co-ordinating it's legislature with WTO standards and is also taking part in a new round of negotiations, is a signatory of the Stabilisation and Association Agreement with the European Union as well as a temporary Agreement regulating the economic relations between Croatia and the EU since the beginning of 2002, closely co-operates with the International Monetary Fund with whom the execution of a Stand-by arrangement was successfully completed in the first half of the year, and is executing the Programme for the removal of Administrative barriers as a part of the Loan for Structural Adaptation from the World Bank.

Special attention is given to the liberalisation of trade based primarily on reciprocal bilateral Agreements on Free Trade co-ordinated with the standards of the European Union and the World Trade Organisation. Including the temporary Agreement with the EU, Croatia has signed Agreements on Free Trade with 30 European countries. About 80% of Croatia's total foreign trade exchange takes place under the conditions of free trade, without the burden of customs. Full membership in CEFTA is expected during 2002 and under the shelter of the Pact for Stability, together with the other member states, the Agreement of Understanding on the liberalisation and facilitation of trade has been signed and is being implemented.

Legal framework for investment

Foreign investment in Croatia is protected by the decrees of the Constitution of the Republic of Croatia and is regulated by the Law on trading companies and other legal regulations.

Basic principles:

Domestic treatment of foreign investors, equality of foreign investors with local companies, whilst fulfilling any reciprocal conditions. Constitutional guarantees that investment rights can not subsequently be annulled or reduced. Free repatriation of profits after the fulfilment of all obligations and payment of taxes. The free repatriation of capital when withdrawing investments is also guaranteed by the Constitution of the Republic of Croatia.

Types of Foreign investment:

A foreign investor can establish any type of legal entity foreseen by the Law on trade companies. Foreigners, like locals, can establish branches, companies with limited liability, share companies, command companies and public trade companies.

Foreigners can make investments independently or as a group investment together with a local legal entity or person, with the share of foreign ownership being unlimited.

Incentive measures and privileges:

Depending on the size of the investment and the number of newly opened jobs, the Law on incentives for investments allows investors notable incentive measures, tax relief and customs privileges.

Incentive measures: the granting of permits for construction, the issuing of property or other infrastructural objects for use, owned by the Republic of Croatia or units of local self-government, under favourable commercial conditions, assistance in opening new jobs in the form of a single award of 15,000 kn per employee, assistance in professional education or retraining by allowing up to 50% of the cost of the education or retraining.

Tax relief is approved according to the size of the investment and the securing of the employment of a specific number of employees as per following criteria:

Size of Investment Tax rate on profit Duration of privilege Minimum number of employees 10 mil.kn 7% 10 yrs 30 20 mil.kn 3% 10 yrs 50 60 mil.kn 0% 10 yrs 75

Special privileges are granted to investors who are situated in the areas of Special State Care where tax on profits are charged at 5, 10 or 15%, depending on the area in which they operate.

Customs privileges relate to the waiving of the payment of custom duty on the import of equipment which forms a part of the investment (except for personal automobiles with a motor capacity of more than 1500 ccm).

Investment in Free Zones

Apart from the usual exemption from paying taxes and customs for all goods produced in the free zone and intended for export, users of the zone who invest over 130,000 EUR in infrastructure are exempt from profit tax for a period of five years. Other users of the zone pay 50% of the standard rate of profit tax.

Property ownership rights:

Respecting the principle of reciprocity and by the approval of the Ministry of Foreign Affairs, a foreigner can obtain ownership rights for property in the Republic of Croatia.

When a foreigner opens company in Croatia, that company is treated as local and is permitted to obtain ownership rights without limitation.

Concession rights:

Concession rights can be issued to foreigners depending on the results of a public tender for a maximum of 99 years or 40 years in the case of agricultural land.

Taxes and tax rates:

Profit tax - 20% Income tax - 15, 25 and 35%, depending on the amount of income Value added tax - 22%, apart from exemptions which are 0% Transfer of property tax - 5% Inheritance of gifts tax - 5% Luxury goods tax - 30% and so on

Investment possibilities in Croatia

The economy of the Republic of Croatia is relatively modern. In the structure of the Gross Domestic Product, two thirds of the newly made assets come from the services sector, a little under 10% from agriculture, about 5% from construction, with the remainder coming from industry, including mining, the extraction and supply of electrical energy, gas and water.

The Croatian economy is not heavily reliant on any particular activity. However, some sectors and some activities are more prospective, propulsive and have more potential than others. With its dominance in the formation of the GNP, the services sector stands out as having the leading role, a position it will surely keep in the future, especially as far as tourism, the financial section and trade are concerned. According to experts, other areas attractive for investment are industry, agriculture and food production, construction, transport, communications, etc.

Direct foreign investment

According to the figures by the Croatian National Bank, from 1993 until the end of 2003, direct foreign investments in Croatia totalled USD 9,5 bil. It is important to note that until 1996, only ownership investments were registered, while from 1997 total investment included reinvested profits and other non-ownership arrangements.

Graph 1: Direct foreign investment in Croatia per year

Source: Croatian National Bank

The first notable foreign investments in Croatia took place after 1995 and the completion of the successful military liberation operations in the country, while the notable privatisation of the large State systems and Banks in 1999.

Graph 2: Direct foreign investment in Croatia, 1993-first quarter of 2004 (by sectors)

Source: Croatian National Bank

In the 1993-2003 period, direct foreign investment in Croatia was realised in a number of sectors. Due to the privatisation of Croatian Telecommunications, large Croatian banks and the sale of Pliva shares on European markets, 52% of all foreign investment was concentrated in telecommunications, banking and pharmaceutical industry sectors. These were followed by investments in oil industry, cement production, hotels, restaurants, etc. In the first quarter of 2004,. most investment went to the trade sector (cca 70%), crude oil and natural gas extraction (7,8%), beer industry (7,3%) and construction (6,3%).

Graph 3: Direct foreign investment in Croatia, 1993-first quarter of 2004 (by countries of origin)

Source: Croatian National Banka

According to investments by country of origin, the largest single investor in Croatia during this period was Austria, making up for more than 25% of all foreign investment. The second largest investor is Germany with over 20%, while the USA was third with 16%. They were followed by Luxembourg, the Netherlands, Great Britain with Northern Ireland, Slovenia, Italy, Liechtenstein, Sweden and so on.

The total of direct foreign investments for the 1993-first quarter of 2004 period reached USD 1,16 bil. The largest part went to the pharmaceutical industry (58,5%), followed by maritime and coastal transport, telecommunications, financial mediation, etc. During that period, Croatian companies mostly invested in Switzerland (33,5%), Bosnia and Herzegovina (16,5%), and Poland (13,5%).

This document originates from Ministry of Foreign Affairs of the Republic of Croatia website www.mfa.hr

BROKER, real estate agency team.