2009 – 2012

Podgorica, January 2010




2.1. Analysis of the macroeconomic trends in Montenegro in 2008 and within the period from January to September 2009

2.1.1. Gross Domestic Product

2.1.2. Inflation

2.1.3. Labour market

2.1.4. Banking sector

2.1.5. Balance of payments

2.2 Medium term Macroeconomic Scenario

2.2.1. Map of Risks Relevant for the Montenegrin Economy 2010-2012

2.2.2. “Base Scenario” vs. “Crisis Scenario”


3.1 Public Finances Sector – Fiscal Framework and Debt Management

3.1.1 Public Finances Trends in the Period 2008 - 2009

3.1.2. Fiscal risks in 2010

3.1.3. Goals and basic directions of the fiscal policy in the following medium term framework

3.1.4. Medium term fiscal framework for 2010 – 2012

3.1.5 Public Debt Management Strategy

3.1.6 Budget implications of main structural reforms

3.2 Public finances quality

3.3 Public finances institutional framework


4.1. Enterprise sector

4.1.1. Privatisation

4.1.2. Competition, state aid and public procurement

4.1.3. Business environment including tax aspect

4.1.4. Network Industries

4.2. Financial sector

4.2.1. Banking sector

4.2.2. Non-banking sector

4.3. Labour market

4.4. Administrative reforms


Implementation of the Euro-Atlantic Agenda that will eventually be materialized through the membership in the EU and NATO does not represent only political commitment, but also a type of external anchor for the purpose of completing the transition process that will enable the citizens of the country to better their living standards and life quality in general. To that end, it is important that Montenegroreceived in July 2009 the Questionnaire of the European Commission as a next step towards the membership in the EU, and then Montenegro delivered the answers in December 2009. By answering additional questions expected to come, the conditions will be created for the European Commission to form the opinion, in the period to come, about the possibilities of Montenegro to acquire the status of candidate and certainly to start negotiations about the membership.

Comprehensive economic reforms and the development concept based on private ownership, market principles, openness, free flow of capital and competitive tax policy made that the Montenegrin GDP rose by 60% in 2005, compared to the year of 2000. The renewal of the independence represented an accelerator of economic growth, and the GDP in 2008 tripled compared to its value in 2000. At the same time, the GDP was restructured in favour of the service sector, with increasingly important role of small and medium-size enterprises, the vitality of which at the time of economic crisis has become an important test of vitality of the entire economy in the long run. However, a key challenge in the period to come is further restructuring and reforms in the public spending segments such as state administration, and the systems of education and health.

Responses to the economic crisis. Economic growth in Montenegro, with the average real rate of 8.7% from 2006 to 2008, was interrupted by negative effects of the global economic crisis. Although the first consequences in most countries were visible already in 2008, Montenegro had even then high real growth rates. Negative delayed global economic crisis effect in Montenegro overlapped with a slight recovery of the world economy, which was eventually reflected through the estimate of negative GDP growth rate of 5.3% in 2009. Economic activitydownturn led to the budget deficit which was estimated to 4.0% of GDP for 2009. Due to the fall in aggregate demand, inflation reduced in 2009 and it was estimated to be below 2%, whereas the unemployment rate was kept at the level similar to the level of the previous year.

Montenegro, as an open and import-dependent system, faced the first signs of the crisis at the end of 2008, when it started the implementation of the set of measures in order to mitigate it. In the spirit of the implemented measures, it has also provided, on one hand, the support to the sound business, with the necessary measures regarding restructuring of the largest industrial systems, whereas, on the other hand, a focus has been the social sustainability of the Montenegrin society in the long run.

The use of the euro as a legal tender in Montenegro, introduced after the economic crisis of the nineties of the last century and the consequences of the hyperinflation, was the initial step in achieving the macroeconomic stability. At the same time, the use of the euro as a legal tender made impossible the use of most quantitative instruments of monetary policy during the financial and economic crisis, making the mandatory reserve rate the only means that can to some extent control the secondary issue. On the other hand, the use of the euro prevented the rapid aggravation of the level of real income in case of assumed accelerated depreciation of the local currency, which would additionally deepen the consequences of the economic crisis in the long run and incite social tension in the short run.

In order to stimulate credit activity of banks and overcome the liquidity crisis in the financial sector (caused primarily by withdrawing of deposits), and then in the real sector, the mandatory reserve rate was reduced in June 2009 from 19% to 10%, which is applied only to sight deposits and term deposits. In December, the Central Bank additionally considered the policy of provisions for placements for the purpose of faster rehabilitation of the banking sector and creating the conditions for renewing the crediting of small and medium-size enterprises, bearing in mind the negative increase of credit placements in 2009.

The measures taken by Montenegro as the response to the crisis mostly rely on the fiscal policy instruments. The State guaranteed by the Law on Measures for the Protection of the Banking Sector, in addition to the other measures whose goal was urgent reaction in case of larger disturbances on the banking market, 100% of households and corporatedeposits. In such a manner, with the first signs of consequences of the crisis in other countries, the State tried to avoid a negative impact implied by households and corporatesector’s expectations.

Fiscal policy measures are dominantly directed to the expenditure-side of the budget and reducing the expenditures of the public sector. One of the revisedexpenditures was the total wage bill of the public sector. It is estimated that it is possible to restructure the level of employees in the mid-term, so that the wage bill has been rearranged in order to reduce the total costs, and the net wages were reduced. The planned savings in 2010 on the basis of the reduction of gross wages of employees in the public sector are approximately 15 million euro, which is 4% less compared to the amount envisaged by this item in case the regulations were not changed. On the revenues side of the budget, amendments to the laws will create the inflow of funds on the basis of the reduction, holidays and exemptions in case of personal income tax, as well as the increase of the base of corporate profit tax from 50% to 100% forthe capital gains. One of the Government priorities is further improvement of the business environment, and the goal of the State is to keep, with the fiscal policy measures, as favourable as possible investment and business environment that would encourage the entrepreneurship at the time of the crisis.

Challenges. The global economic and financial crisis has disrupted the achievement of long-term goals and has set different bases. In spite of slight economic recovery projected for 2010, Montenegro will face in the middle term a set of challenges caused by the crisis, as well as structural imbalance in the economy. Currently, the following can be distinguished:

Liquidity crisis is the main cause of the low investment and personal consumption that led to the economic downturn. This problem is even greater if we take into consideration the downturn of investment activity on the world market and restrictive credit policy of banks in Montenegro. Although net investments are at a higher level than expected in this crisis year of 2009, their incentives and growth in the following years primarily in the sector of small and medium-size enterprises will have the largest impact on the growth of productivity, and consequently on employment and aggregate demand.

The Government of Montenegro has undertaken a set of measures to face the problem of general illiquidity and create the environment for investmentgrowth. One such measure is to restrict current public spending (if donations and programme loans are excluded from the balance of the current budget, it can be concluded that it has a structural surplus) and to keep a high share of capital expenditures. Although by doing so, the conditions for the State budget sustainability are primarily created, and the fall in wages may cause additional drop in liquidity in the short run, the State has chosen to take the measure that will not significantly affect the increase of taxes to solve short-term budget problems, thus reducing already pronounced liquidity problem of the economic sector that includes the majority of total employees. On the other hand, the goal of measures to improve business environment is to eliminate business barriers and giveMontenegro a place on a ranking list that will be a positive signal to every future investor regarding his decision to invest.

Structural reforms in the area of health, education and labour and social welfare tend to rationalize, increase efficiency and open greater possibilities for introducing the private sector to perform public services. By encouraging the private sector and by increasing efficiency of the state administration, the productivity and the growth of wages from productivity are increased and consequently aggregate demand is increased, which potentially leads to higher growth of investments.

Foreign trade deficit, togetherwith economic growth, represents a constant problem of the Montenegrin economy during the recession as well. It was to be expected that a small country at the time of expansive economic growth would satisfy the increased investment and final demand from the import. However, a significant and constant share of some goods in the import may be an initial signal of high demand for such goods. If Montenegro has adequate resources, the import of such goods could be compensated by their production in Montenegro. In such a manner, the import-dependability would be reduced and the basis would be created for the growth of competitiveness. Resources for the production of competitive products that could be offered on the domestic and foreign market (including a million of foreign tourists per year and foreign investors) are in the areas such as energy, agriculture, wood industry, production of construction material and similar. Measures for encouraging entrepreneurship and successful and sound companies within the small and medium-size business, creation of favourable business environment with no business barriers, and promotion of Montenegrin products on the domestic and foreign market, and projects in these areas may generate growth of the overall economy and reduce import dependence.

Regional development imbalance as a consequenceof the developed south and the undeveloped north of Montenegro was especially pronounced during the economic boom and faster economic growth of the south than the north area. Balanced economic development of all regions represents a challenge of all economic growth and development strategies. The construction of new energy facilities, Bar-Boljari Highway, the incitement of entrepreneurship, the incentive policy for employment and development of small and medium-size enterprises, opening of university units in northern municipalities, and rural development policy, mark the beginning of the process of reducing the development differences of the region. However, the goal for developing the north of Montenegro should not be equalization with the development of the south, but exploitation of the potentials whose productive use is at extremely low level. In the following period, the policy for the north development should be directed to stimulating young population to find an interest in education, work and forming families in their place and municipalityof birth. To that end, the support for the development of the north should be through the strengthening of educational, administrative and economic capacities in the area of energy and mining, agriculture, wood processing and tourism.

Structural unemployment has occurred as a pronounced problem during the economic boom in Montenegro. The growth of demand for labour force, on one side, and constant long-term unemployment of people having certain qualifications, on the other side, are still the characteristics of the labour market of Montenegro at the time of the economic crisis. However, the structural unemployment is a problem and challenge for Montenegro that needs to be faced with now in a proper manner in order for the economic growth to be supported by adequate labour market and reduction in the unemployment rate.

The national employment strategy and a set of documents that create employment policy assume the application of measures that primarily relate to the harmonization of the education system with the needs of the labour market, life-long learning, encouraging the entrepreneurship and innovations and integration of the older population, women and disabled persons in the labour market. The vision for the development of the Montenegrin economy, the initiated and planned projects involving foreign and domestic investments and their further development, the path to EU integrations, encouraging the sector of small and medium-size enterprises, and reduction of public expenditures are the first signal for the system of education and labour market of the need for certain specialized knowledge and skills.

Recession as the possibility for starting a new development cycle. Every recession results in adjustment of the rules of the game, and brings new players and market games. Montenegro has realized that a reaction needs to be prompt at the time of crisis, and that long-term consequences of measures for its mitigation need to be taken into consideration. It is even greater danger if measures are taken that have short-term positive and long-term negative effects. Therefore, Montenegro tends to have a reform-based approach to measures it takes, in the manner to improve the basis for a sustainable economic growth and development after recession and create conditions for growth of investments and employment, taking into consideration groups that are in social need and the importance of the role of the State within that context.

Over the last 20 years Montenegro has gone through various phases of growth and development substantially conditioned by both regional circumstances and changes on the world economic scene. The path to its firstly economic and then State independence was followed by innovative, creative and often risky moves of decision makers. A small Montenegrin system, although it has natural predispositions, would have been hardly attractive for investors if economic reforms had not been implemented that have created the basic parameters of the economic environment as a competitive one compared to other countries in the region. By summing up the experiences, both positive and negative ones, the experiences regarding the transition, the economic boom and the recession, Montenegro is at the beginning of the new economic period. This is the moment when it is necessary to make moves and have sufficient capacity and consider the results in the long rum and based on several scenarios. Strategic orientation, directed to a continuing process of EU and NATO accession, is supported by a clear vision of improving the living standard of every single individual in Montenegro: to be a member of the European Union not only on a paper but also in everyday real life. The platform to achieve that goal is: rule of law, efficient administration, open economic system and specialization in certain business activities.

The approach of Montenegro to overcome the crisis will be primarily based on the following commitments:

The role of the State is crucial on that path. A good state organization will be limited to those activities that it is better at than the private sector. For a small country such as Montenegro, this is also important due to other reason: cost of public administration must be adjusted to a small number of citizens, i.e. taxpayers. The goal is to have the state administration that is efficient and productive in the tasks it performs, and to have good quality and efficient regulations not only as the basis for the development, but also as a factor of diversity in the globalized world. Fiscal reforms tend to create a positive business environment and encourage entrepreneurship, thus improving comparative advantages of Montenegro as investment destination. Structural reforms in the area of health, education and labour and social welfare and the creation of the opportunities to form a partnership between the State and the private sector will create the basis for efficient and effective system of public services and for further growth of investments. In other words, state administration will represent the means that will contribute to and not be an obstacle to the growth of the standard of living.