This interview with Jehan Arulpragasam, World Bank Country Manager for Croatia and Magdalena Soljakova, Senior Country Officer at the International Finance Corporation, was originally published in the print edition of Lider magazine on July 31, 2025.
The news that the Croatian government has recently adopted a new five-year Country Partnership Framework with the World Bank Group has gone under the radar. This document identifies several pressing challenges of the economy and society as a whole that the government should address: ranging from the enduring issue of productivity to demographic challenges and better management of natural resources. We spoke to Jehan Arulpragasam, Country Manager of the World Bank Office in Croatia, and Magdalena Soljakova, Senior Country Officer at the International Finance Corporation (IFC), to find out how the World Bank Group views these challenges.
Lider: How would you assess the reforms that the Croatian government has implemented over the past eight years, and what has been their positive impact on the economy?
Jehan Arulpragasam: Over the past decade, Croatia has been pursuing a strong reform agenda, embedded more recently in the National Recovery and Resilience Plan. These reforms have supported robust economic performance and improved living standards for Croatia¡¯s citizens. For example, several rounds of tax reform reduced the tax burden for entrepreneurs and citizens. Stronger taxation of property and income generated by renting out property to tourists improve fairness and equity of the tax system, and further efforts for digitalization continue to improve the efficiency of public administration and the justice system. While there are still significant gaps compared to the best performers in the EU, these actions create a more friendly environment for local businesses. There have also been some advances on the social agenda. For example, the roll-out of the Whole Day School experimental program, which the World Bank is supporting, and an increase in the generosity of the social protection system should improve equity in society. Such reforms support economic developments that many would characterize as exceptional. In a decade, Croatia¡¯s GDP per capita in purchasing power parity (PPP) terms increased from 60.7 percent of the average EU27 level in 2015 to 76.8 percent in 2024. Over the last three years, Croatia¡¯s average GDP growth reached 4.8 percent, consistently outdoing average growth in the EU and the euro area.
ľ¹ÏÓ°Ôº Group is very proud to have contributed to some of these achievements with our projects, technical assistance, and advisory services. Recently we formalized the continuation of our engagement through the government¡¯s adoption of a five-year Country Partnership Framework (CPF). Our new strategy focuses on two broad areas. First, activities will focus on increasing investment and creating more productive jobs. This calls for a focus on modernizing public service delivery, strengthening private sector innovation and scaling up innovative investment, and better aligning skills and labor market needs. Second, the strategy includes protecting Croatia¡¯s natural assets by strengthening environmental resilience and sustainability. With our program, we will support the transition to a greener economy, helping make the energy and transport sectors more sustainable, cost efficient, and accessible for both people and businesses. We will also help increase Croatia¡¯s resilience to climate risks by strengthening disaster response capacities.
L: Do you expect an acceleration of reforms given that all elections¡ªparliamentary, presidential, and local¡ªhave been held in recent years?
JA: The Croatian government has a great opportunity and the potential to accelerate the reform momentum and continue to support growth that is sustainable and beneficial to society. The administration has laid out an ambitious reform agenda and has the external financing resources to undertake it. This will require persistent and consistent attention to implementation. However, we need to be aware that many reforms that are yet to be successfully implemented -- like the reforms of the health and pensions systems, or further interventions in the justice sector to improve its efficiency -- take years to design, cost, pilot and finally implement throughout the country. It is therefore of utmost importance to keep the public well informed of all the steps and actions that are being taken to ensure broad support that is crucial for their success. ľ¹ÏÓ°Ôº Group remains ready to support the Government of Croatia in these challenging endeavors.
L: Slow productivity growth has been a persistent problem for the Croatian economy for many years, and this is also emphasized in the new World Bank-Croatia Partnership Framework. How can private sector investment be stimulated to increase productivity, particularly in the context of the Croatian economy and its structure with a large tourism sector?
Magdalena Soljakova: Although Croatia has made progress over the last two decades, labor productivity remains among the lowest compared to its EU peers. For example, it took on average almost three Croatian workers to produce the same value-added generated by a single German worker in 2019. Low firm productivity in Croatia is a reflection of subdued private sector investment for a prolonged period of time, especially in R&D and innovation. Our research has shown that for continued stable and relatively high growth, it is crucial to increase the productivity of the domestic economy, which, on the other hand, requires a significantly higher capital per worker ratio. This could be achieved through significant investments in plants and equipment, with a focus on innovation and technology adoption. Better integration into regional and global value chains would also support productivity gains. Over the past two years we have seen more favorable developments in terms of private investment, meaning that the gap between Croatia and other Central and Eastern European countries is closing. However, for many years we have seen suppressed private sector investments in both machinery and equipment as well as in building construction, including housing. Efforts to further simplify regulations, reduce bureaucracy, improve the efficiency of the justice sector and enhance transparency would help attract and retain private investors. In addition, de-risking investments through more innovative financial products and access to alternative capital would also contribute to increasing private sector investments. At the same time, it will be necessary to further invest in workforce skills, particularly in digital and technical fields.
L: The International Finance Corporation (IFC) intends to invest one billion dollars in Croatian companies by 2030. Which sectors are most interesting to you, and how can Croatian companies access this funding?
MS: Indeed, the IFC is committed to investing up to $1 billion in Croatia by 2030 to support private sector development in areas aligned with the country¡¯s economic priorities. The focus is on sectors that can drive sustainable growth, innovation, and resilience, including renewable energy, efficient transport and freight, digital and technology transformation in manufacturing and services sectors, sustainable tourism, SME finance, and municipal infrastructure. IFC is also expanding the scope of clients through selectively increasing its work with state-owned enterprises (SOEs) and municipalities to address development constraints in the waste management, energy, and transport sectors. Croatian companies can access IFC funding directly from IFC or through local financial intermediaries, or private equity and venture capital funds, through a palette of financial instruments, such as long-term loans, bonds, mezzanine and equity. The program¡¯s growth will be driven by increased mobilization of private capital while IFC will prioritize de-risking private sector investments. IFC¡¯s focus will be on financing through risk-sharing and playing an active role in the capital market development by anchoring corporate bonds, such as green, blue and sustainable linked bonds and providing scarce risk capital like equity and mezzanine.
L: How much has the IFC invested in Croatia to date?
MS: Since 1991, IFC has invested over $2 billion through projects supporting private sector development, with significant investments in sectors such as transport, food retail, food processing, value-added manufacturing, banking, and played a critical role is supporting the first blue, green and sustainable linked financing and provided equity for Croatia¡¯s companies sustainable growth. Some notable IFC investments were early equity in post-war damaged companies like Beli??e and Pliva, financing the first wind farms in the country, providing capital for the construction of the new terminal of Zagreb airport, the first blue loan in the country with Maistra, anchoring Zagreb Holding¡¯s sustainability-linked bond and supporting our client banks, Erste bank and Raiffeisen bank with their climate bonds issuances.
L: The strained situation in the labor market caused by the outflow of workers abroad is being compensated by importing labor from Asia, which now accounts for 10 percent of total employment in Croatia. How should Croatia manage the influx of foreign labor?
JA: Indeed, in recent years, Croatia has been undergoing a shift from being primarily a country of emigration to increasingly depending on foreign labor. The growing demand for foreign workers indicates an expanding economy with an evolving labor market. However, this trend also carries significant implications for the country's economic and social landscape. Although recent reforms have enhanced the governance framework related to migration, notable challenges persist regarding the selection, employment, and integration of foreign workers. A recent World Bank report highlights five broad areas where Croatia could focus on to better harness the economic and social benefits of well-managed immigration. First of all, Croatia could further strengthen immigration governance by developing a comprehensive migration strategy with action plans, timelines, and funding to attract, train and integrate foreign workers effectively. Secondly, it is necessary to establish better licensing and monitoring of recruitment agencies to reduce migrants¡¯ costs and enhance their legal protection. Croatia should also invest in ensuring labor law compliance by employers. Next, by enhancing the Labor Market Information System the selection process of migrant workers could be better aligned with labor market needs and made more transparent, trackable, and streamlined. Finally, to ensure a more effective matching of skills and integration of migrants, Croatia could improve information provision to migrants during recruitment, as well as improve access to services once they arrive to the country.
L: ľ¹ÏÓ°Ôº recently published an Analysis and Recommendations for Improving the Long-term Adequacy and Sustainability of the Croatian Pension System. In this document, the World Bank proposes that the retirement age for both men and women should reach 72 years by 2065, with early retirement age at 69 years. Isn't such a proposal excessive?
JA: At the request of Croatia¡¯s Ministry of Labour, Pension System, Family and Social Policy, the World Bank analyzed the pension system and suggested ways to improve pension adequacy without putting excessive strain on government finances. Recently, Croatia made some changes to improve pension adequacy, such as adjusting how pensions are calculated and updated. ľ¹ÏÓ°Ôº recommended measures that could sustain increased pension adequacy by, among other things, encouraging people to work longer before retiring, as this would automatically increase their pensions. Currently, Croatians have some of the shortest working careers in the European Union. In addition, as people are living longer and healthier lives, it also makes sense to gradually increase the retirement age. For example, if the retirement age increased by 1.5 months per year on average that would match the rate of increase of life expectancy, and the average time spent in retirement would stay the same. However, simulations of the retirement age increases with life expectancy showed that they are insufficient to financially balance the pension increases legislated in July. This would require raising the retirement age by 2 months per calendar year (by 7 years until 2065). Alternatively, the government could consider increasing the contribution rate paid by current workers, or a combination of both measures. This is the only way to ensure that Croatians receive an adequate pension in their old age while ensuring that the pension system remains financially sustainable for future generations.
L: Housing unaffordability in Croatia has also been recognized by the World Bank. In your opinion, how much will the recently adopted Housing Strategy and property tax alleviate this problem?
JA: A property tax that recently replaced the holiday house tax is a step in the right direction because it should bring some of the currently empty apartments back onto the market. We hope the government will take additional steps, over time, allowing it to introduce a modern value-based property tax. These steps would improve the efficiency and equity of the tax system and create room for additional labor tax reduction.
The sequence and success of implementation of the proposed reforms and measures, as a comprehensive package, is what will determine the impact on housing affordability. This is of course not a unique problem, globally or in the EU context, but a crucial first step is exactly what Croatia has done in acknowledging and debating the challenge and then seeking solutions that incorporate a strong focus on the role of both public and private sectors.
