Press Release: Statement by IMF Mission to Serbia and Montenegro

November 3, 2005

The following statement was issued today in Podgorica, Montenegro:

"An IMF mission visited Podgorica in Montenegro from October 20-31, 2005 to review economic developments and the implementation of the government's economic program. The mission met with the Prime Minister Milo Djukanovic, other senior representatives of the government, Central Bank Governor Ljubisa Krgovic and the private sector representatives. The implementation of the program is broadly on track.

"Economic developments in 2005 appear to have been favorable, but a weak statistical base makes a detailed assessment difficult. Real growth is estimated to have reached 3.8 percent in the first nine months of 2005 marked by a successful tourism season, and increased activity in trade and construction. Demand was boosted by an increase in consumption and investment, fed by rapid credit growth, and increases in real wages and remittances. Inflation remained moderate, despite high international oil prices.

"The current account improved slightly in the first eight months of 2005 compared to the same period last year. The service balance greatly improved on account of tourism revenues, but there was a sharp deterioration of the trade balance due to adverse developments in world market prices for aluminum and oil, and problems at a thermo power plant. FDI inflows have been very strong, preparing the foundation for future growth.

"Fiscal performance in the first nine months of 2005 was good. VAT performance exceeded expectations. A revision of the budget in July shifted resources to infrastructure investment keeping the annual deficit target unchanged. Large privatization revenues have been used to reduce domestic debt to 9.4 percent of GDP. The external public debt rose slightly to 30.7 percent of GDP due to project financing.

"The banking sector is getting stronger. Credit growth is accelerating and the composition of lending has improved in favor of long-term enterprise loans. The reduction of public debt induced a downward trend of interest rates, but the interest rate spread has remained high. After the successful sale of Podgorica Bank to Societe Generale and the expected arrival of other foreign banks in the local market, these positive trends should continue.

"The challenges ahead will be to continue with tight fiscal policies, strictly limit wage increases and adopt performance oriented wage policies, and continue the pace of privatization. The IMF welcomes the government's plan for 2006 to further reduce the public sector deficit by one percent of GDP to improve the current account and lower public debt. Especially savings in current spending are needed. To protect competitiveness, it will be key to agree with unions on a moderate increase in the minimum wage, to which all other public sector wages are linked with coefficients. Decisive steps are necessary to prepare a medium-term investment plan. The government has prepared an ambitious list for privatization projects which will bring important expertise and resources to Montenegro."


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