IMF Executive Board Concludes 2019 Article IV Consultation with Montenegro
September 10, 2019
On September 6, 2019 the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with Montenegro. [1]Montenegro has enjoyed strong economic growth in recent years, boosted by the implementation of large investment projects, including the construction of the Bar-Boljare highway. Growth should continue over the medium term, though at a more moderate pace as highway construction ends. Staff projects the economy to expand by 3 percent in 2019 and 2.5 percent in 2020, with the end of highway construction acting as a drag on growth.
While the implementation of large publicly financed infrastructure projects has added economic growth, the accompanying use of fiscal resources has contributed to a large increase in government debt including guarantees, which reached 79 percent of GDP in 2018. Recognizing the need to reduce public debt, the government has continued to implement its 2017 fiscal consolidation strategy. Most of the fiscal measures have been implemented, and the underlying fiscal position has improved. If the fiscal adjustment is maintained, the primary fiscal surplus should exceed 2 percent of GDP beginning in 2021, leading government debt to decline to 61 percent of GDP by 2024.
Despite the recent intervention in two non-systemic domestic banks, the overall banking sector exhibits improving asset quality, strong credit growth, high liquidity, and is well capitalized. However, the sector appears crowded for a small country, which may create earnings challenges for some banks.
The lack of an independent currency and declining fiscal space constrain Montenegro’s ability to absorb shocks, which underscores the need for an improvement in economic flexibility to sustain growth over the long run. Low labor productivity and employment levels and a large informal sector limit potential growth.
Executive Board Assessment [2]
Executive Directors welcomed the strong recent growth performance of the Montenegrin economy, bolstered by large investment projects and buoyant tourism, and took positive note of the significant fiscal adjustment since 2017. Notwithstanding these achievements, Directors stressed the importance of continued fiscal adjustment, further efforts to strengthen banking sector supervision, and fiscal and structural reforms to support inclusive growth over the medium term.
Directors welcomed the authorities’ continued implementation of their medium‑term adjustment strategy, which has improved the underlying fiscal position over the last two years. Amid high debt levels, Directors concurred that the maintenance of a strong primary fiscal surplus over the medium term is necessary for government debt to decline to safer levels. Directors also called for further efforts to improve the efficiency of public spending, including by carefully managing infrastructure investment, rationalizing government employment and tax expenditures and furthering pension reforms. In this context, Directors encouraged the authorities to move forward with their plans to develop medium‑term budgetary and public investment management frameworks. They noted that such initiatives would help create fiscal space over the medium term for greater high‑productivity capital spending and targeted social spending and promote fiscal and debt sustainability.
Directors underlined that caution is needed in implementing the next phases of the Bar‑Boljare highway project until feasibility, cost‑benefit analyses, and financing issues are fully addressed. In this context, Directors underscored the need to consider the trade‑offs between undertaking the highway investment vis‑à‑vis other priority spending needs to meet Montenegro’s development goals. In a similar vein, Directors agreed that PPP arrangements should be approached with caution to reduce the risk of assuming significant contingent fiscal liabilities.
Directors welcomed recent measures to strengthen banking supervision, including the establishment of a Supervisory Committee, recent refinements in asset classification rules and ongoing efforts to bolster the capacities and resources in off‑site supervision. Notwithstanding these efforts, Directors underscored the importance of furthering risk‑based supervision, introducing macroprudential measures when warranted, harmonizing banking laws with the EU Directives, and completing the planned asset quality review by the end of 2020. Directors also encouraged the authorities to strengthen the AML/CFT supervisory framework, including through enhanced monitoring of potential reputational and financial integrity risks posed by the investor citizenship program.
Directors noted the importance of structural reforms to boost competitiveness and inclusive growth and improve Montenegro’s external position and labor market outcomes over the medium term. While welcoming the authorities’ recent efforts to reduce the labor tax wedge and the proposed labor law to selectively reduce some gaps in employment protection between temporary versus open‑ended contracts, Directors encouraged the authorities to carefully consider the impact of the planned minimum wage increases.
|
2015 |
2016 |
2017 |
2018 |
2019 |
2020 |
||
|
Proj. |
Proj. |
||||||
|
Output, prices and labor market (percent change, unless otherwise noted) |
|||||||
|
Real GDP (percent change) |
3.4 |
2.9 |
4.7 |
4.9 |
3.0 |
2.5 |
|
|
Nominal GDP (in millions of euro) |
3,655 |
3,954 |
4,299 |
4,619 |
4,807 |
5,015 |
|
|
Industrial production |
8.2 |
-2.9 |
-4.4 |
22.5 |
... |
... |
|
|
Tourism (Overnight stays) |
5.3 |
8.4 |
10.5 |
8.2 |
... |
... |
|
|
Unemployment rate (in percent) |
17.6 |
17.7 |
16.1 |
15.2 |
... |
... |
|
|
Consumer prices (average) |
1.5 |
-0.3 |
2.4 |
2.6 |
1.1 |
1.9 |
|
|
Consumer prices (end of period) |
1.4 |
1.0 |
1.9 |
1.7 |
2.3 |
1.6 |
|
|
Average net wage (12-month) |
0.7 |
4.0 |
2.3 |
0.1 |
... |
... |
|
|
General government finances (percent of GDP) 1 |
|||||||
|
Revenue and grants |
40.4 |
41.3 |
40.3 |
41.4 |
42.0 |
41.0 |
|
|
Expenditure |
46.4 |
47.5 |
47.2 |
47.7 |
45.7 |
41.9 |
|
|
Overall fiscal balance |
-6.0 |
-6.2 |
-6.9 |
-6.3 |
-3.6 |
-0.9 |
|
|
Primary fiscal balance |
-3.6 |
-4.0 |
-4.5 |
-4.1 |
-1.4 |
1.5 |
|
|
General government gross debt |
69.0 |
66.6 |
66.3 |
72.6 |
81.1 |
74.8 |
|
|
General gov’t gross debt (authorities’ definition) 2 |
66.3 |
64.6 |
64.4 |
70.8 |
79.4 |
73.1 |
|
|
General gov’t debt, including loan guarantees |
76.4 |
74.1 |
73.6 |
78.8 |
88.8 |
82.2 |
|
|
Monetary sector (end-period, percent change) |
|||||||
|
Bank credit to private sector |
2.4 |
6.3 |
8.4 |
9.1 |
7.0 |
7.0 |
|
|
Enterprises |
2.0 |
1.5 |
6.3 |
5.2 |
... |
... |
|
|
Households |
2.8 |
11.0 |
10.3 |
12.5 |
... |
... |
|
|
Private sector deposits |
9.0 |
6.0 |
15.2 |
6.0 |
... |
... |
|
|
Balance of payments (percent of GDP, unless otherwise noted) |
|||||||
|
Current account balance |
-11.0 |
-16.2 |
-16.1 |
-17.2 |
-17.1 |
-14.9 |
|
|
Foreign direct investment |
16.9 |
9.4 |
11.3 |
7.1 |
8.9 |
8.9 |
|
|
External debt (end of period, stock) |
166.2 |
160.9 |
159.2 |
167.5 |
180.0 |
178.5 |
|
|
REER (CPI-based; average change, in percent; |
0.4 |
0.6 |
0.5 |
2.5 |
... |
... |
|
|
- indicates depreciation) |
|||||||
|
Sources: Montenegro authorities; and IMF staff estimates and projections 1/ Includes extra-budgetary funds and local governments, but not public enterprises. 2/ The authorities do not include the arrears of local governments in their definition of general government gross debt. |
|||||||
1 Under Article IV of the IMF's Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. A staff team visits the country, collects economic and financial information, and discusses with officials the country's economic developments and policies. On return to headquarters, the staff prepares a report, which forms the basis for discussion by the Executive Board.
[2] At the conclusion of the discussion, the Managing Director, as Chairman of the Board, summarizes the views of Executive Directors, and this summary is transmitted to the country's authorities. An explanation of any qualifiers used in summings up can be found here: http://www.imf.org/external/np/sec/misc/qualifiers.htm .
IMF Communications Department
MEDIA RELATIONS
PRESS OFFICER: Gediminas Vilkas
Phone: +1 202 623-7100Email: MEDIA@IMF.org