IMF Executive Board Concludes 2012 Article IV Consultation with Montenegro

Public Information Notice (PIN) No. 12/51
May 16, 2012

Public Information Notices (PINs) form part of the IMF's efforts to promote transparency of the IMF's views and analysis of economic developments and policies. With the consent of the country (or countries) concerned, PINs are issued after Executive Board discussions of Article IV consultations with member countries, of its surveillance of developments at the regional level, of post-program monitoring, and of ex post assessments of member countries with longer-term program engagements. PINs are also issued after Executive Board discussions of general policy matters, unless otherwise decided by the Executive Board in a particular case.

On May 11, 2012, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with Montenegro.1


Three years after the sudden end of Montenegro’s boom, there has been considerable progress toward recovery. Strong growth in tourism supported real GDP growth of 2½ percent in 2011, bringing output nearly back to its pre-crisis level in 2008. The recovery is at risk of stalling, however, with the projected downturn in the euro area likely to weigh on growth in 2012. The debt overhang continues to linger, moreover, with domestic liquidity shortages a growing constraint. High-frequency economic indicators depict a weakening of activity in late 2011 and early 2012.

In addition, the policy buffers that have supported growth in recent years have been largely depleted. Public debt has risen sharply since 2007, increasing from 28 to 47 percent of GDP at the end of 2011, as fiscal surpluses quickly turned into large deficits following the collapse of the boom.

Fiscal imbalances have proved difficult to rein in, reflecting a large fall in revenue after the collapse of the boom, rising pension expenditures, and costs stemming from public support for struggling enterprises. However, and notwithstanding an increase in the headline deficit, there was some progress toward fiscal consolidation in 2011. Although the headline deficit rose to 6.3 percent of GDP, this partly reflected payment of called loan guarantees that had been extended in 2009-10 but did not have an impact on demand in 2011. Adjusting for these payments, the fiscal stance tightened by 0.7 percent of GDP. The authorities aim for further consolidation this year and over the medium term, and are in the process of identifying needed measures to achieve this adjustment.

After three years of rapid bank deleveraging, there are indications that conditions are stabilizing. The gradual return of deposits to the banking system continued in 2011, and banks took steps to off-load problem loans and re-align their lending with their domestic deposit base. However, the system remains burdened by high non-performing loans—notwithstanding their recent sharp decline—and is lagging in provisioning. New bank lending remains limited, reflecting the existing debt overhang and the significant uncertainty over the economic outlook.

Executive Board Assessment

Executive Directors commended the authorities’ efforts to stabilize the economy, and welcomed the progress made since the financial crisis. With the recovery now at risk of stalling, Directors called for intensified efforts to address large fiscal and external imbalances, further enhance financial sector stability, and improve competitiveness.

Directors recognized the sizable public expenditure adjustment over the past few years, but underscored the need for further high-quality deficit reducing measures to put public debt on a declining trajectory. While fiscal consolidation will need to rely on both revenue and expenditure measures, the more sizable adjustment should come from further spending cuts. Directors saw the 2012 supplementary budget, adopted by the cabinet, as a step in the right direction. Going forward, Directors recommended further reducing personnel and entitlement spending. They underscored the importance of ending fiscal and quasi-fiscal support to the metals sector and assessing its viability. Directors stressed that revenue measures should focus on improving tax administration, but saw some scope to raise tax rates that are below regional levels. Some Directors cautioned that tax rate increases should be considered only after tax administration is strengthened, given their potential impact on competitiveness.

Directors commended the authorities’ efforts to stabilize the financial sector, and to improve the framework for crisis preparedness and banking resolution. Given remaining vulnerabilities, they stressed the need to further strengthen supervision and regulation, including the macroprudential framework. They underlined the need to enforce capital requirements and improve asset quality, while monitoring liquidity closely and maintaining high prudential buffers.

Directors welcomed progress in advancing structural reforms, and called on the authorities to accelerate efforts to enhance competitiveness and attract foreign investment. In particular, they underscored the need to further improve the business environment and increase labor market flexibility. Directors also saw merit in reforms to ensure that social protection schemes target the neediest and do not impede labor market participation.

Directors called for continued efforts to address shortcomings in economic statistics which hamper policy design and evaluation.

Montenegro: Selected Economic Indicators, 2008-12


    2008 2009 2010 2011 2012


    Est. Proj.

Real economy (percent change, unless otherwise noted)


Nominal GDP (millions of €)

3,086 2,981 3,104 3,260 3,334

Gross national saving (percent of GDP)

-10.0 -3.1 -2.6 -1.2 -0.6

Gross investment (percent of GDP)

40.7 27.1 22.8 19.4 20.3

Real GDP

6.9 -5.7 2.5 2.5 0.2

Industrial production

-2.0 -32.2 17.5 -10.3 ...

Tourist arrivals

4.8 1.6 4.6 8.7 ...

Consumer prices (average)

9.0 3.6 0.7 3.1 2.0

Consumer prices (end of period)

7.2 1.7 0.7 2.8 1.7

Money and credit (end of period, percent change)


Bank credit to private sector

25.0 -15.1 -8.9 -13.0 ...


21.3 -18.0 -11.2 -17.6 ...


31.2 -10.7 -5.7 -2.6 ...

Private sector deposits

-14.2 -4.1 5.9 1.2 ...

General government finances (accrual; percent of GDP) 1


Revenue and grants

48.4 42.6 41.3 37.9 38.0


51.5 47.9 46.0 44.2 43.2

Overall balance

-3.1 -5.3 -4.7 -6.3 -5.2

Primary balance

0.5 -4.4 -3.7 -4.6 -3.3

Privatization receipts

1.2 4.4 0.9 0.5 0.5

General government gross debt (end of period)

31.9 40.7 42.4 46.9 50.2

Balance of payments (percent of GDP)


Current account balance

-50.6 -29.6 -24.6 -19.4 -19.7

Foreign direct investment

18.9 35.8 17.8 11.9 11.4

External debt (end of period, stock) 2

90.8 93.5 96.4 99.9 107.3

REER (CPI-based; average percent change, + indicates appreciation)

1.6 6.4 0.0 -3.2

Sources: Ministry of Finance, Central Bank of Montenegro, Statistical Office of Montenegro, and IMF staff estimates and projections.

1 Includes extra-budgetary funds and local governments, but not public enterprises.

2 Estimate, as private debt statistics are not officially published.

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. 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:


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