December 21 2004 the World Bank’s Board of Executive Directors discussed a new Country Assistance Strategy (CAS) for Croatia. The CAS details the Bank’s objectives, strategy, and work plan to assist client countries in achieving their development goals. It outlines the Bank’s planned operations in the country lending, analytical work and technical assistance. The new CAS for Croatia covers 2005-2008 and envisages a four year lending program of up to USD 1.5 billion, depending upon performance, compared to USD 660 million for the previous CAS.

The main objective of the CAS is to support the government’s growth and reform strategy for successful EU accession and integration, while ensuring broad participation in growth and sustainable natural resource management. The strategy calls for a shift in the sources of growth from public sector expenditures and consumption to private sector investment and productivity.

„The goal of the new CAS is to support much of the effort Croatia needs to undertake during the next four years to meet challenging EU accession requirements, and thus we welcome the proposed start of negotiations in March,“ says Anand K. Seth, World Bank Country Director for Croatia, „However, the CAS goes beyond supporting harmonization initiatives required by the Acquis and focuses on accelerating important structural and institutional reforms to ensure faster and equitable growth and enhance Croatia’s ability to cope with competitive pressures in the EU.“

Since the 1999 recession, Croatia has enjoyed solid but moderate economic growth with low inflation. However, the current growth pattern, mainly driven by public sector investment and consumption, is not sustainable. Croatia’s top priority is to enter the EU with a competitive and growing economy and the institutional capacity to meet the demands of membership. The new government’s strategy emphasizes reforms that would lead to accelerated and sustained growth within a framework of social cohesion.

The CAS is organized around four central themes:

1. Improving macroeconomic sustainability through more efficient public spending,
   together with strengthened budget management. Reduced subsidies to the enterprise sector, a road financing strategy, and efficiency gains in health and social benefits programs will significantly improve fiscal sustainability. This, combined with strengthened debt management, will in turn improve Croatia’s macroeconomic sustainability.
2. Sustainable private sector-led growth through enforcement of financial discipline and competitive conditions in the enterprise sector; linkage of energy and other infrastructure to the EU market; lower administrative and regulatory barriers and simplified business registration procedures; and rationalization of the public administration and judicial system.
   The new CAS will support Croatia in building the capacity needed to take on the challenge of accession negotiations, maximize effective use of pre-accession resources available from the EU, and implement structural reform.
3. Broad participation in growth through modernization of the education system; improved targeting and delivery of health care, social benefits and mitigation measures, and pensions; and implementation of a social and economic recovery program as well as a regional development strategy. While Croatia’s poverty rates are low overall, some groups are still highly vulnerable, especially in war-affected areas and among the 40 percent of Croatia’s population that has eight years or less of schooling.
4. Sustainable natural resource management through strengthening of environmental management capacity, upgrading of wastewater and water supply infrastructure, and investment and policy measures to improve energy efficiency. Given the importance of the tourism sector to the Croatian economy, sustainable natural resource management is a key factor in the country’s future economic growth.

The previous CAS for Croatia covered 1999-2003 and envisaged a lending program of about USD 660 million. In the framework of this strategy, the Bank helped the government to: (i) implement reforms in fiscal sustainability and financial sector stability; (ii) improve governance and strengthen market institutions and competitiveness; (iii) facilitate infrastructure investment, including post-war reconstruction; and (iv) help improve social protection programs. In particular, under the 2002 Structural Adjustment Loan, the government began to tackle loss making public enterprises, upgraded the functioning of labor markets, and improved the insolvency process and corporate governance to accelerate enterprise restructuring.

Investment projects financed under the previous CAS included the construction of four border crossings facilitating traffic links with Europe and benefiting business development; construction of a wastewater treatment plant and sewage pump stations in the Adriatic Kastela Bay; construction of new roads and rehabilitation of infrastructure, as well as mine clearance, to revitalize war-affected areas; and modernization of 80 Land Registry offices to reduce case backlogs.

The new CAS was prepared in partnership with the government of Croatia and in consultation with representatives of civil society organizations in the cities of Zagreb, Osijek, Knin, Split and Cakovec. The goal of the consultations was to seek their feedback on the World Bank’s proposed strategy of assistance to the country. Priorities expressed during these consultations (including the need for an improved education system) are reflected in the CAS.