Croatia’s Defence Budget has experienced a significant reduction in nominal values in the last few years. This drop is also reflected in the percentual GDP allocation to Defence. In 2015, the Defence Budget reached some HRK 4.6 billion, corresponding to 1.37% of the GDP. Furthermore, forecasts indicated an increased portion of the defence budget to be allocated for the next couple of years (2017 – confirmed by the release of the 2017 Procurement Plan by the MoD-, and 2018), for procuring equipment and modernising the Croatian Armed Forces, as far as for example the continuation of the acquisition and overhaul of self-propelled PzH 2000 Howitzers, the procurement of OH-58D Kiowa Warrior helicopters, the overhaul of Mi-171Sh helicopters, and the M-84 tanks upgrade.

Croatia is a rich in natural resources country; about 1/3 of the country is covered by forests, and about 40% of the land by agricultural areas . Great opportunities appear in relation to agriculture and wine production, while high priority has been placed on the utilisation of the country’s maritime potential, including tourism, shipping and ship building.

Undoubtedly, travel & tourism is one of the most important drivers of economic development in the Republic of Croatia. In 2015, Travel & Tourism contributed 23.2% of the country’s GDP (HRK 77.92 Billion) including all direct, indirect and induced activities. This was expected to further grow to HRK 79.43 Billion (or 23.3% of the GDP) in 2016. The sector’s contribution to the GDP, is expected to further grow by 4.2% per annum, up to 2026, reaching some 29.7% of the total GDP (projected at some HRK 120.32 Billion), for that year.

Extremely reliant on low cost and highly seasonable tourism, related revenues were heavily hit by the 2009 economic crisis. Starting to recover in 2010, the sector largely contributed to a marginal trade balance surplus in 2012, while in conjunction with the low oil prices and the resulting increase of tourists’ arrivals, the trade balance was projected to further improve up to 2015 (reaching some 3.2% of the GDP).

Having faced significant difficulties due to armed conflicts in its early years of independence and the transition from a socialist to a market-based economy, the Croatian financial indicators improved significantly at the beginning of the new century, recording a steady annual growth of some 4 to 5%. Moreover, several socioeconomic indicators improved, including household income. Towards the improvement of the economy, a series of measures were taken since 2012, including spending cuts, while the government raised additional revenues through more stringent tax collection and by raising the value-added tax. Within this context, acceleration of privatization of non-strategic assets was attempted, but with mixed success.

The access to the EU in 2013, has put more pressure on Croatia for further restructuring of the country. As part of its membership in the EU, Croatia will need to allocate 1.8% of its GDP to the EU budget, during the 2014-2020 period. On the opposite side, access to EU funds has already contributed to the short-term recovery of its economy, as well as to placing the foundations for the potential growth of the country in the longer term.

As mentioned above, before the 2008 crisis, Croatia recorded a sustained economic growth, affecting positively various macroeconomic indicators (including employment, wages, etc.). The global financial crisis though, in conjunction with the delayed implementation of structural reforms, exposed the weaknesses of the Croatian economy, leading to a prolonged recession in the country. Economic growth has been stagnant, if not negative during the recent economic years.

During these years, the country’s high foreign debt, reduced exporting activity and low touristic revenue greatly influenced the associated economic results. The global financial crisis derailed the Croatian Economy and the country had to struggle with six years of recession. Between 2008 and 2014, GDP shrunk by more than 19%. It was only in 2015, when Croatia returned to positive economic growth (1.6%).

Under the structural reforms introduced, recovery is expected to continue over the next few years, despite the persistent risks, while GDP growth is forecasted to amount to 2.4% in 2018.

Trade and especially the retail sector, has a significant role in the Croatian economy. The sector contributes 10% of the GDP, while it employs 22.1% of the total number of employed people.

The capital Zagreb, has a dominant economic, political and financial role in the Republic of Croatia, accounting for the 37% of total exports and 60% of total imports of the country, and the very significant 53% of total revenues. The predominant sectors include service activities (38% of total revenues) and the processing industry (electric machines/devices, chemical, pharmaceutical, textile and food processing). Moreover, the largest number of associated companies are related with trade, followed by those offering scientific and technical services.

It should be noted that Croatia’s exporting ability (in relation to goods) was affected by lost competitiveness, adverse geographic and sectorial shocks and the delayed integration in the EU. It is indicative that the trade balance has recorded for the last decade or so, continuous deficits, as imports always override the exports of the country. However, as part of the improved overall economic performance of the country in 2015, confirming expectations, the associated deficit reached its lowest value since 2005, namely some US $7.7 billion.

Since its accession to the EU, Croatia has recovered some of its lost share in export markets, when compared to the previous years. However, still today Croatia’s integration in the global supply chains, is limited.

In 2015, the main exporting commodities (according to HS 6-Digit level), included Petroleum oils and products, Electrical energy, Medicaments, Parts of seats, Articles of leather and leather products.

The top 5 exports destinations included Italy, Slovenia, Germany, Bosnia and Herzegovina and Austria.

In the same year, major volumes of goods were mostly imported from Germany, Italy, Slovenia, Austria and Hungary.

These imports (according again to HS 6-Digit level), mainly included Petroleum oils (of various types), Electrical energy, Medicaments and automobiles.

Today, the majority of Croatian citizens, are employed in the Services sector, followed by Industry and finally the Agricultural sector.

From the beginning of the crisis, unemployment surged from below 9% to over 17% for 2013 -2014 (see chart below). Today, Croatia’s unemployment levels are among the highest in the EU; the number of unemployed people still remains high, especially for the youth (43% in 2015) and low skilled.

However, within the improved financial environment, and the reforms undertaken by the government (including reforms for the enhancement of the flexibility of the labour market), in the next couple of years, unemployment is expected to contract further, to about 14% by the end of 2017.

After experiencing a period of growth between 2005 and 2008, foreign direct investment inflows to Croatia collapsed from 2009 onwards, affected by the global economic crisis. Only in 2014 were there some signs of recovery, however in the following year (2015) the associated FDI inflows dropped significantly once again.

As low productivity (as a result of the contraction in employment, inefficient allocation of resources, low investment in R&D and weak business environment) remains a challenge for Croatia, investment into specific areas of the economy in necessary. Despite investments slowly gaining lost ground, structural reforms need to be further implemented in order to achieve a sustained pace of public (boosted by EU funds) and private investment.

However, in order to create further revenues in the country, modernisation of the taxation system seems imperative; broadening of the tax base through removal of some tax exemptions, reduction of high social contribution –such as the health insurance contribution, could promote growth and increase productivity, as a result of new additional jobs.