## 1mneea2019003

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### Recent developments and outlook
- Real GDP growth: 4.9 percent in 2018; 3.0 percent projected for 2019; 2.5 percent projected for 2020; medium term around 3 percent.
- Growth drivers: large publicly financed infrastructure projects (notably the Bar-Boljare highway), buoyant tourism, and private energy investment.
- Inflation (consumer prices, average): 2.6 percent in 2018; 1.1 percent in 2019; 1.9 percent projected for 2020.
- Unemployment rate: 15.2 percent in 2018 (prior years: 17.6 (2015), 17.7 (2016), 16.1 (2017)).
- Outlook note: growth expected to moderate toward 3 percent in 2019 and to 2.5 percent in 2020 as highway construction ends; government debt projected to peak in 2019 and decline thereafter if strong primary surpluses are maintained.

### Fiscal situation and Bar‑Boljare highway impacts
- Highway project costs and financing:
  - First 41-kilometer phase cost around €1 billion; initial cost set at €809 million (23 percent of 2014 GDP); overruns potentially raise cost by about 7 percent; subsequent USD appreciation increased cost a further 18 percent.
  - China Ex‑Im Bank loan: USD‑denominated loan covers 85 percent of total cost; loan carries a 2 percent interest rate and a 20‑year repayment period; principal payments begin in 2021.
  - Counterfactual: had the first phase not been built, government debt including guarantees likely would have declined to 59 percent of GDP by 2020 instead of rising to a projected 82 percent of GDP.
- Recent fiscal adjustment and projections:
  - Government debt including guarantees reached 79 percent of GDP in 2018.
  - Authorities implemented 4½ percent of GDP in adjustment measures over 2017‑19.
  - If 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.
- Fiscal balances (selected, percent of GDP):
  - Revenue and grants: 41.4 (2018), 42.0 (2019), 41.0 (2020).
  - Expenditure: 47.7 (2018), 45.7 (2019), 41.9 (2020).
  - Overall fiscal balance: -6.3 (2018), -3.6 (2019), -0.9 (2020).
  - Primary fiscal balance: -4.1 (2018), -1.4 (2019), 1.5 (2020).
  - General government gross debt: 72.6 (2018), 81.1 (2019), 74.8 (2020).
  - General gov’t gross debt (authorities’ definition): 70.8 (2018), 79.4 (2019), 73.1 (2020).
  - General gov’t debt, including loan guarantees: 78.8 (2018), 88.8 (2019), 82.2 (2020).

### Fiscal outlook, scenarios, and highway options
- Primary balance projections for 2021:
  - Staff projection: primary surplus of 2.7 percent of GDP in 2021 (after conclusion of highway spending).
  - Authorities’ projection: primary surplus of 4.6 percent of GDP in 2021.
  - Staff recommendation: maintain a primary fiscal surplus of at least 2 percent of GDP over the medium term.
- Highway completion scenarios:
  - Completion of phases 2–4 could cost an additional 25 percent of GDP.
  - If completed over 2021–26 with new debt financing, general government debt (including guarantees) could remain over 80 percent of GDP for most of the 2020s; baseline reaches 50 percent of GDP by 2030.
  - Restoring baseline by 2030 would require a new round of fiscal adjustment around 3 p.p. of GDP over 2021–23 plus maintenance of primary surpluses averaging nearly 4 percent of GDP over 2026–2030.
- Recommended approach:
  - Pause further highway planning until a new feasibility study completed in 2020.
  - Do not embark on further construction or financing until at least 2023, when general government debt (by the authorities’ definition) is projected to decline below 60 percent of GDP.
  - Phase 2 alone estimated roughly EUR 300 million, or 5 percent of 2023 GDP; assuming grant financing for 20 percent of phase 2 costs and a modest temporary fiscal adjustment of 1 percent of GDP would be sufficient to nearly return debt to the baseline by 2030.
- PPP cautions:
  - PPP arrangements could entail significant fiscal costs if private partner requires state guarantees; Eurostat rules may require project recognition on the government balance sheet; minimum revenue guarantee payments could impose significant expenditures.

### Financial sector status and supervision actions
- Banking sector indicators:
  - Recent interventions in two banks (Atlas and IBM); otherwise sector improving.
  - NPLs: declined from 8 percent at end‑2017 to 7.5 percent at end‑2018; fell further to 5.3 percent in April 2019 after closures.
  - Aggregate capital adequacy ratio: 15.3 percent.
  - Liquid assets: 22 percent of total assets.
  - System: foreign‑owned banks make up nearly ¾ of the banking sector by assets.
- Interventions and immediate effects:
  - IBM: 1 percent of system assets; placed into bankruptcy within one month.
  - Atlas: 5 percent of system assets; placed into bankruptcy in April 2019; prosecutors froze a sizeable portion of Atlas clients’ deposits over money laundering concerns.
  - Deposit Protection Fund (DPF) payouts by early June: paid out 84 and 73 percent, respectively, of eligible insured deposits.
  - No spillovers into broader banking sector observed; system‑wide deposits remained stable.
- Supervisory priorities and reforms:
  - Establishment of a Supervisory Committee; refinements in asset classification rules; off‑site supervision capacity-building.
  - Directors’ recommendations: further risk‑based supervision, introduction of macroprudential measures when warranted, harmonization of banking laws with EU Directives, and completion of a planned asset quality review (AQR) by end‑2020.
  - Key regulatory timelines: IFRS‑9 effective January 2018; asset classification tightening decision July 2019 effective in 2020; AQR completion no later than end‑2020; minimum capital for new banks raised from EUR 5 to EUR 7.5 million; deposit insurance target EUR 100,000.

### Structural constraints, labor markets, and competitiveness
- Main structural weaknesses:
  - Low labor productivity, low employment levels, large informal sector, rigid labor markets, weak demographics.
  - Weaknesses in financial sector oversight, AML/CFT application, tax administration, procurement, and regulatory framework could create vulnerabilities to corruption.
  - Technical capacity in public investment management needs strengthening.
- Labor market measures and specifics:
  - Priorities: reduce the labor tax wedge and implement the new labor law to increase labor market flexibility.
  - Planned measures: 2 percentage point reduction in employers’ health insurance contributions in H2 2019 (estimated fiscal impact: reduce revenues by about 0.5 percent of GDP).
  - Minimum wage: planned 15 percent increase in the second half of 2019; net minimum wage from EUR 193 to EUR 222 per month; minimum‑to‑average wage ratio from 38 to 42 percent.
  - Directors encouraged careful consideration of planned minimum wage increases; future decisions should consider a broad set of indicators and analyses of past impacts.

### External imbalances and external financing
- Current account and external debt:
  - Current account balance (percent of GDP): -17.2 (2018); -17.1 (2019); -14.9 (2020).
  - External debt (end of period, stock, percent of GDP): 167.5 (2018); 180.0 (2019); 178.5 (2020); projected 166.1 (2024).
- Financing and reserves:
  - Net FDI: 7.1 (2018); 8.9 (2019); 8.9 (2020).
  - Gross international reserves (millions USD): 1,195 (2018); 1,541 (2019 projection); 1,025 (2024 projection).
  - Authorities issued a 2.95 percent interest rate instrument with 12‑year maturity and a seven‑year €500 million Eurobond carrying a coupon rate of 3.375 percent in 2018; €362 million used to buy back part of €1.1 billion Eurobonds maturing in 2019‑21.
  - Baseline assumes a new €500 million Eurobond in 2019 to pre‑finance 2020 and 2021 amortizations.
- External vulnerability assessments:
  - EBA‑lite suggests REER overvalued by 12 percent; on balance staff assesses REER overvalued by 10 percent.
  - Montenegro’s heavy dependence on external financing and elevated external debt underscore importance of fiscal and structural reforms.

### Debt sustainability, stress tests, and vulnerabilities
- Baseline public debt path and key baseline indicators (selected exact figures):
  - Nominal gross public debt (percent of GDP): 61.9 (2017), 73.6 (2018), 78.8 (2019), 88.8 (2020), 81.9 (2021), 74.4 (2022), 69.4 (2023), 65.5 (2024).
  - Public gross financing needs (percent of GDP): 10.5 (2017), 15.0 (2018), 19.8 (2019), 13.8 (2020), 14.0 (2021), 9.1 (2022), 6.4 (2023), 6.6 (2024).
  - Real GDP growth (percent): 1.8 (2017), 4.7 (2018), 4.9 (2019), 3.0 (2020), 2.5 (2021), 2.9 (2022), 3.2 (2023), 2.9 (2024).
  - Primary balance (percent of GDP), baseline: -1.4 (2019), 1.5 (2020), 2.7 (2021), 2.2 (2022), 2.2 (2023), 2.2 (2024).
- Stress‑test highlights (selected quantified impacts preserved):
  - Highway Phases 2‑4 scenario (staff): remaining cost €1.2 billion spent equally over 2022‑24; growth increases ¾ percentage point on average over 2022‑24 relative to baseline; public debt ratio increases to 81 percent of GDP by 2024 (compared to 62 percent baseline); gross financing needs peak at 16 percent of GDP in 2023.
  - Growth shock (one standard deviation): real growth lowered by 3.4 percentage points in 2020‑21; public debt ratio remains at 87 percent of GDP in 2020 before falling to 73 percent of GDP in 2024; financing needs in 2021 increase 5 percentage points of GDP relative to baseline.
  - Combined macro shock: debt‑to‑GDP rises to 90 percent in 2020.
  - Financial contingent liability shock: debt ratio increases to 93 percent of GDP in 2020; gross financing needs peak at 22 percent of GDP in 2020.

### Risks (RAM summary) and policy responses
- Key risks and staff‑recommended responses:
  - Weaker‑than‑expected global growth (Relative Likelihood: Medium/High)
    - Policy: let automatic fiscal stabilizers work; accelerate structural reforms to increase competitiveness.
  - Sharp tightening of global financial conditions (Low/Medium)
    - Policy: continue medium‑term fiscal consolidation; intensify adjustment if conditions tighten; develop domestic bond market.
  - Intensification of geopolitical/security risks (High)
    - Policy: let automatic stabilizers work; accelerate structural reforms and labor market reforms; address banking sector weaknesses.
  - Insufficient fiscal discipline (High)
    - Policy: improve medium‑term budgeting and public financial management; consider expenditure limits; suspend further highway construction.
  - Delays/withdrawals from capital projects (Medium)
    - Policy: sustain fiscal consolidation; implement structural reforms and strengthen AML/CFT frameworks.
  - Lingering banking sector concerns (Medium)
    - Policy: complete AQR; require capital increases; strengthen AML/CFT supervision.

### Executive Board / Directors’ assessment and key policy recommendations
- Main messages:
  - Welcome strong recent growth and significant fiscal adjustment since 2017, but stress continued fiscal adjustment, stronger banking sector supervision, and fiscal and structural reforms for inclusive medium‑term growth.
  - Caution on next phases of Bar‑Boljare highway until feasibility, cost‑benefit analyses, and financing issues are fully addressed; weigh trade‑offs versus other priority spending.
  - Approach PPPs with caution to reduce contingent fiscal liability risks.
- Key policy recommendations (selected bullets preserved):
  - Fiscal policy:
    - Maintain a primary fiscal surplus of at least 2 percent of GDP over the medium term.
    - Streamline public employment, reform the pension system, eliminate wasteful tax expenditures.
    - Carefully assess net benefits of further highway construction and weigh against opportunity costs and fiscal risks from PPPs.
  - Financial sector:
    - Improve banking and AML/CFT supervision; shift to risk‑based supervisory tools in off‑site and on‑site functions.
    - Establish a stronger supervisory structure within the central bank.
    - Complete a thorough, independent asset quality review of the banking system no later than end‑2020.
  - Labor markets:
    - Reduce the labor tax wedge and implement the new labor law to increase labor market flexibility.
    - Base future minimum wage decisions on a broad set of indicators and analyses of past increases’ impacts.

### Selected key statistics (exact values preserved)
- Real GDP (percent change): 3.4 (2015); 2.9 (2016); 4.7 (2017); 4.9 (2018); 3.0 (2019 Proj.); 2.5 (2020 Proj.).
- Nominal GDP (millions of euro): 3,655 (2015); 3,954 (2016); 4,299 (2017); 4,619 (2018); 4,807 (2019); 5,015 (2020).
- Consumer prices (average): 1.5 (2015); -0.3 (2016); 2.4 (2017); 2.6 (2018); 1.1 (2019); 1.9 (2020).
- Bank credit to private sector (end‑period, percent change): 2.4 (2015); 6.3 (2016); 8.4 (2017); 9.1 (2018); 7.0 (2019); 7.0 (2020).
- Current account balance (percent of GDP): -11.0 (2015); -16.2 (2016); -16.1 (2017); -17.2 (2018); -17.1 (2019); -14.9 (2020).
- Foreign direct investment (percent of GDP): 16.9 (2015); 9.4 (2016); 11.3 (2017); 7.1 (2018); 8.9 (2019); 8.9 (2020).
- External debt (end of period, stock, percent of GDP): 166.2 (2015); 160.9 (2016); 159.2 (2017); 167.5 (2018); 180.0 (2019); 178.5 (2020).

_International Monetary Fund staff report content for Montenegro (selected chapter content provided in the source document)._

### 2.5 percent in 2020, with the end of highway construction acting as a drag on growth.

### 2.5 percent in 2020, with the end of highway construction acting as a drag on growth.

### Recent developments and outlook
- Real GDP growth: 4.9 percent in 2018, 3.0 percent projected for 2019, and 2.5 percent projected for 2020.
- Growth drivers: large publicly financed infrastructure projects (notably the Bar-Boljare highway), buoyant tourism, and private energy investment.
- Inflation: average consumer prices 2.6 percent in 2018; consumer prices (average) 1.1 percent in 2019 and 1.9 percent projected for 2020.
- Labor market: unemployment rate 15.2 percent in 2018; unemployment rates prior years: 17.6 (2015), 17.7 (2016), 16.1 (2017).
- Outlook summary: Growth expected to moderate toward 3 percent in 2019 and over the medium term as highway construction ends. Government debt projected to peak in 2019 and decline thereafter if strong primary surpluses are maintained.

### Fiscal situation and the Bar-Boljare highway project
- Fiscal impact of highway:
  - Construction of the first 41-kilometer phase cost around €1 billion; initial cost set at €809 million (23 percent of 2014 GDP) with overruns potentially raising cost by about 7 percent and subsequent USD appreciation increasing cost a further 18 percent.
  - China Ex-Im Bank loan: USD-denominated loan covers 85 percent of total cost; loan carries a 2 percent interest rate and a 20-year repayment period. Principal payments begin in 2021.
  - Had the first phase not been built, government debt including guarantees likely would have declined to 59 percent of GDP by 2020 instead of rising to a projected 82 percent of GDP.
- Recent fiscal adjustment:
  - Government debt including guarantees reached 79 percent of GDP in 2018.
  - The government implemented a 2017 fiscal consolidation strategy; most fiscal measures have been implemented and the underlying fiscal position has improved.
  - If 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.
- Fiscal balances (selected, percent of GDP):
  - Revenue and grants: 41.4 (2018), 42.0 (2019), 41.0 (2020).
  - Expenditure: 47.7 (2018), 45.7 (2019), 41.9 (2020).
  - Overall fiscal balance: -6.3 (2018), -3.6 (2019), -0.9 (2020).
  - Primary fiscal balance: -4.1 (2018), -1.4 (2019), 1.5 (2020).
  - General government gross debt: 72.6 (2018), 81.1 (2019), 74.8 (2020).
  - General gov’t gross debt (authorities’ definition): 70.8 (2018), 79.4 (2019), 73.1 (2020).
  - General gov’t debt, including loan guarantees: 78.8 (2018), 88.8 (2019), 82.2 (2020).

### Financial sector and banking supervision
- Banking sector status:
  - Recent intervention in two non-systemic domestic banks; otherwise overall sector exhibits improving asset quality, strong credit growth, high liquidity, and is well capitalized.
  - Sector concentration: appears crowded for a small country, potentially creating earnings challenges for some banks; foreign-owned banks make up nearly ¾ of the banking sector by assets.
- Supervisory priorities and actions:
  - Measures taken: establishment of a Supervisory Committee, refinements in asset classification rules, ongoing efforts to bolster capacities and resources in off-site supervision.
  - Directors’ recommendations: further risk-based supervision, introduction of macroprudential measures when warranted, harmonization of banking laws with the EU Directives, and completion of a planned asset quality review by end-2020.
  - AML/CFT: encourage strengthening the AML/CFT supervisory framework, including enhanced monitoring of reputational and financial integrity risks posed by the investor citizenship program.
- Monetary constraints: unilateral euroization implies no independent monetary policy.

### Structural constraints, labor markets, and competitiveness
- Structural weaknesses limiting potential growth:
  - Low labor productivity, low employment levels, and a large informal sector.
  - Rigid labor markets and weak demographics.
  - Weaknesses in financial sector oversight, application of AML/CFT framework, tax administration, procurement, and regulatory framework could create vulnerabilities to corruption.
  - Technical capacity in public investment management needs strengthening.
- Labor market policies:
  - Priorities: reduction of the labor tax wedge and implementation of the new labor law to increase labor market flexibility.
  - Minimum wage: Directors encouraged careful consideration of planned minimum wage increases and recommended that future decisions consider a broad set of indicators and careful analyses of past impacts.

### Executive Board assessment and policy recommendations
- Executive Directors’ main messages:
  - Welcome strong recent growth and significant fiscal adjustment since 2017, but stress importance of continued fiscal adjustment, stronger banking sector supervision, and fiscal and structural reforms for inclusive medium-term growth.
  - Caution urged on next phases of the Bar-Boljare highway until feasibility, cost-benefit analyses, and financing issues are fully addressed; consider trade-offs versus other priority spending needs.
  - PPP arrangements should be approached with caution to reduce contingent fiscal liability risks.
- Key policy recommendations (bulleted):
  - Fiscal Policy:
    - Maintain a primary fiscal surplus of at least 2 percent of GDP over the medium term.
    - Streamline public employment, reform the pension system, eliminate wasteful tax expenditures.
    - Carefully assess net benefits of further highway construction and weigh against opportunity costs and fiscal risks from PPPs.
  - Financial Sector:
    - Improve banking and AML/CFT supervision; shift to risk-based supervisory tools in off-site and on-site functions.
    - Establish a stronger supervisory structure within the central bank.
    - Complete a thorough, independent asset quality review of the banking system no later than end-2020.
  - Labor Markets:
    - Reduce the labor tax wedge and implement the new labor law to increase labor market flexibility.
    - Base future minimum wage decisions on a broad set of indicators and analyses of past increases’ impacts.

### Key statistics and indicators (selected exact values from source)
- Real GDP (percent change): 3.4 (2015); 2.9 (2016); 4.7 (2017); 4.9 (2018); 3.0 (2019 Proj.); 2.5 (2020 Proj.).
- Nominal GDP (in millions of euro): 3,655 (2015); 3,954 (2016); 4,299 (2017); 4,619 (2018); 4,807 (2019); 5,015 (2020).
- Consumer prices (average): 1.5 (2015); -0.3 (2016); 2.4 (2017); 2.6 (2018); 1.1 (2019); 1.9 (2020).
- Average net wage (12-month): 0.7 (2015); 4.0 (2016); 2.3 (2017); 0.1 (2018).
- Bank credit to private sector (end-period, percent change): 2.4 (2015); 6.3 (2016); 8.4 (2017); 9.1 (2018); 7.0 (2019); 7.0 (2020).
- Current account balance (percent of GDP): -11.0 (2015); -16.2 (2016); -16.1 (2017); -17.2 (2018); -17.1 (2019); -14.9 (2020).
- Foreign direct investment (percent of GDP): 16.9 (2015); 9.4 (2016); 11.3 (2017); 7.1 (2018); 8.9 (2019); 8.9 (2020).
- External debt (end of period, stock, percent of GDP): 166.2 (2015); 160.9 (2016); 159.2 (2017); 167.5 (2018); 180.0 (2019); 178.5 (2020).

*Source: Montenegro — IMF Staff Report for the 2019 Article IV Consultation (August 8, 2019).*

### 4.5 percent of GDP in 2017 to 4.1 percent of

### 1mneea2019003 - 4.5 percent of GDP in 2017 to 4.1 percent of

### Fiscal developments and fiscal adjustment
- Primary balance: declined from 4.5 percent of GDP in 2017 to 4.1 percent of GDP in 2018.
- Excluding highway spending, the primary balance improved by 3 p.p. of GDP since 2016, indicating continued progress in the underlying fiscal adjustment.
- General government debt (including guarantees) reached 79 percent of GDP, up from 74 percent of GDP in 2017.
- The authorities implemented 4½ percent of GDP in adjustment measures over 2017-19 (Table 1).
- The 2019 budget contained no further setbacks relative to the 2018 supplemental budget.
- Total measures, net of new spending (from Table 1): 1.97, 0.37, 0.81, 0.18, -0.24, -0.34, 0.05, total 2.80 (percent of GDP) by year entries shown in Table 1.
- Highway-related fiscal measures: reduction in highway-related capital spending shows entries 1.03, 3.00, 1.55, 5.58 (percent of GDP) by year in Table 1.
- Total projected fiscal adjustment, including highway (from Table 1): 1.97, 0.37, 1.83, 3.18, 1.31, -0.34, 0.05, total 8.38 (percent of GDP) by year entries shown.

### Banking sector interventions and financial stability
- Authorities intervened in two banks in 2018 (Atlas and IBM).
- IBM: 1 percent of system assets; placed into bankruptcy within one month.
- Atlas: 5 percent of system assets; placed into bankruptcy in April 2019 after unsuccessful capital offerings.
- Deposit Protection Fund (DPF) payouts by early June: paid out 84 and 73 percent, respectively, of eligible insured deposits.
- No spillovers into broader banking sector observed; system-wide deposits remained stable despite frozen withdrawals at the two intervened banks.
- Non-performing loans (NPLs): declined from 8 percent at end-2017 to 7.5 percent at end-2018; following closures, NPLs declined further to 5.3 percent in April 2019.
- Aggregate capital adequacy ratio: 15.3 percent (above minimum of 10 percent).
- Liquid assets: 22 percent of total assets.
- Note: 2019 bank lending data distorted by recent Atlas/IBM bankruptcies (chart footnote).

### External imbalances and external financing
- Current account deficit: increased 1 p.p. in 2018 to 17 percent of GDP.
- Net FDI: declined to 7 percent of GDP from 11 percent of GDP in 2017.
- External debt: increased 8 p.p. to 167 percent of GDP in 2018, driven mainly by the government’s issue of a Eurobond.
- Current account is roughly half financed by FDI (figure annotation).
- Imports increased driven by oil and investment-related goods (including machinery); goods and services exports (especially travel services) expanded but remain small relative to imports.

### Growth outlook, highway impacts, and medium-term projections
- Baseline assumes no further highway construction past phase 1 because authorities have not defined model or timing for further phases.
- Growth projections:
  - 2019: 3.0 percent, driven by domestic demand.
  - 2020: decline towards 2.5 percent as public investment acts as a drag when highway construction ends.
  - Medium term: increase to around 3 percent.
- Private investment expected to remain strong at around 21 percent of GDP over the medium term, driven by tourism and energy.
- Household consumption growth, household credit, and employment growth projected to moderate to around 2 percent over the medium term, compared to an average of 4.5 percent over 2016-18.
- Medium-term supply-side effects of highway completion are uncertain; estimated to be moderate due to low economic rate of return.
- Highway demand-side and supply-side effects shown as percentage point contributions to real GDP growth in staff estimates and projections (chart series 2019–2024).

### Outlook and risks
- Main external risk: need to refinance Eurobonds maturing in 2020/21 leaves Montenegro (B+/B1 rating) vulnerable to tightening global financial conditions; risks could be largely mitigated with a successful Eurobond issue later this year.
- Current account deficit projected to remain elevated, underlining dependence on FDI and external debt financing.
- A significant slowdown in growth in Europe could pose risks for tourism receipts; conversely, new tourism investments could increase tourism receipts.
- Domestic risks:
  - Sustaining fiscal consolidation is at risk, especially with parliamentary elections due in 2020 that could pressure fiscal discipline.
  - Pressures to proceed with further highway phases or other large projects without fiscal space could be difficult to resist.
  - Any further banking sector weakness could erode confidence and adversely affect financial stability and fiscal sustainability.

### Sectoral and activity highlights
- Private sector credit growth strengthened to 9.1 percent in 2018, led by household lending.
- Industrial production: weather-induced recovery in electricity production drove industrial production growth in 2018.
- Tourism:
  - Travel service exports are the highest in the region and provide significant support to the current account.
  - Foreign tourists in Montenegro in 2018: 2.08 million.
  - Tourism arrivals have grown strongly since 2015 and remain concentrated in the summer months.
  - Employment in accommodation and food services is high compared to regional peers.
- Inflation increased in 2018, driven by oil prices and a VAT increase.
- Strong nominal GDP growth has contained increases in the debt/GDP ratio since 2016.

### Policy discussions and recommendations
- Policy discussions focused on three key issues:
  - Consolidating the gains from fiscal adjustment, while carefully weighing costs and benefits of further near-term construction of the Bar-Boljare highway.
  - Strengthening banking and AML/CFT supervision to safeguard financial stability.
  - Improving labor market outcomes.
- Governance-related priorities include:
  - Reviewing the structure of financial sector oversight.
  - Developing stronger AML/CFT supervision tools.
  - Increasing capabilities of tax administration.
- Fiscal policy guidance emphasizes preserving fiscal adjustment and implementing a medium-term reform agenda to rebuild fiscal space.

_International Monetary Fund staff assessment based on Montenegro country material._

### 2.7 percent of GDP in 2021 (after the conclusion

### 1mneea2019003 - 2.7 percent of GDP in 2021 (after the conclusion

### Fiscal outlook and debt dynamics
- Primary fiscal balance projections:
  - Staff projection: primary surplus of 2.7 percent of GDP in 2021 (after conclusion of highway spending).
  - Authorities’ projection: primary surplus of 4.6 percent of GDP in 2021.
  - Staff underscored need to maintain a primary fiscal surplus of at least 2 percent of GDP over the medium term.
- Debt and refinancing developments:
  - 2018: authorities pre-financed 2019 financing needs by issuing a new €500 million Eurobond and exchanged 1/3 of €1 billion Eurobonds maturing in 2019–21.
  - Authorities exploring €500 million Eurobond issuance in 2019; successful issuance would pre-finance 2020 and 2021 amortizations and increase general government debt with guarantees to 89 percent of GDP.
  - With Eurobond issue, central government will accumulate sizeable deposits as pre-financing for 2020/21 Eurobond amortizations; net of deposits, general government debt with guarantees increases from 72 percent of GDP in 2018 to 76 percent of GDP in 2019.
  - Under current policies (without further highway construction past phase 1), government debt including guarantees projected to decline strongly beginning in 2020, reaching 61 percent of GDP in 2024.
  - In the unlikely event of prolonged external market closure, achieving a peak primary surplus of 4½ percent of GDP by 2021, along with additional domestic funds, would be necessary to fully meet financing needs.

### Fiscal reforms and revenue/expenditure measures
- Government employment:
  - Authorities aim to reduce central government employment by 5 percent and local government employment by 10 percent by 2020.
  - Limited progress in 2018 noted; staff recommend review of active labor market policies to transition redundant employees to the private sector.
  - Staff view zero-interest loans to start businesses as not well targeted.
- Tax expenditures:
  - Authorities intend to eliminate VAT tax exemptions in 2019; estimated VAT tax exemptions totaled some 0.8 percent of GDP in 2018.
  - Staff recommendation: establish a transparent benchmark tax system to estimate and phase out tax expenditures related to the VAT and other taxes.
- Pensions:
  - Recommendations: tighten eligibility for early retirements; increase early retirement actuarial penalties; valorize pensions by wages and index wages and benefits to inflation.
  - Link eligible pension ages to life expectancies.
- Fiscal institutions:
  - Need for a comprehensive medium-term budget framework with more binding medium-term expenditure limits and reconciliation/justification of deviations.
  - Any legislation with budgetary consequences should require an assessment by the Ministry of Finance.

### Upside revenue opportunities and cautions
- Potential additional revenues (not included in baseline due to uncertainty): airport concessions, economic citizenship, electronic fiscalization.
- Staff caution: refrain from spending resources that have not yet materialized given timing and magnitude uncertainties.

### Bar-Boljare highway: assessment, scenarios, and recommendations
- Economic return and opportunity cost:
  - Past feasibility studies estimated a low economic return on the overall highway due to limited toll revenue potential.
  - Staff advise weighing the highway against alternative uses for scarce public resources (e.g., waste water treatment, targeted education and health spending).
- Cost and fiscal impact of completing phases 2–4:
  - Completion of phases 2–4 could cost an additional 25 percent of GDP.
  - If completed over 2021–26 with new debt financing, general government debt (including guarantees) could remain over 80 percent of GDP for most of the 2020s; baseline reaches 50 percent of GDP by 2030.
  - Restoring baseline by 2030 would require a new round of fiscal adjustment around 3 p.p. of GDP over 2021–23 plus maintenance of primary surpluses averaging nearly 4 percent of GDP over 2026–2030.
- Recommended approach and phased option:
  - Pause further highway planning until a new feasibility study completed in 2020.
  - Do not embark on further construction or financing until at least 2023, when general government debt (by the authorities’ definition) is projected to decline below 60 percent of GDP.
  - Phase 2 alone estimated roughly EUR 300 million, or 5 percent of 2023 GDP, and could deliver significant benefits.
  - Assuming grant financing for 20 percent of phase 2 costs and a modest temporary fiscal adjustment of 1 percent of GDP (returning the primary balance to the current baseline during construction) would be sufficient to nearly return debt to the baseline by 2030.
- PPP considerations:
  - PPP structure could entail significant fiscal costs if private partner requires state guarantees; Eurostat rules may require project recognition on the government balance sheet.
  - Minimum revenue guarantee payments could impose significant expenditures over lengthy concession contracts.
- Institutional recommendations:
  - Strengthen legislative and institutional framework for project analysis, fiscal risk identification, and give the Finance Ministry a strong role.
  - Authorities drafted a new Law on PPPs strengthened through FAD input; staff advised considering a Public Investment Management Assessment (PIMA) TA from FAD.

### Financial sector policies and banking supervision
- Bank failures and immediate effects:
  - Initial CBM steps regarding Atlas/IBM could not prevent their eventual failure.
  - IBM placed into bankruptcy within one month of interim administration; prosecutors froze a sizeable portion of Atlas clients’ deposits over money laundering concerns, severely lowering Atlas’ liquidity.
  - No immediate fiscal and real economy spillovers materialized; closed banks had limited credit creation role. Some local governments lost uninsured deposits (coastal municipality of Tivat lost approximately EUR 2 million).
  - Central government will not compensate uninsured deposit losses.
- Supervisory strengthening and AQR:
  - Need to strengthen CBM supervisory structure, make supervision more risk based, and improve credit risk supervision tools.
  - Establishment of a supervisory committee to vet supervisory decisions and consolidate expertise (including AML).
  - Off-site supervision capacities need strengthening with well-qualified and appropriately-compensated staff.
  - A thorough asset quality review (AQR) is essential and needs to be completed no later than end-2020 by reputable international assessors.
  - Decisive action required to address residual banking sector vulnerabilities informed by the AQR and ongoing supervision.
- Macroprudential and regulatory changes:
  - CBM monitoring rapid growth of uncollateralized consumer lending; implement macroprudential measures as needed.
  - Credit registry modernized and covers a broader range of institutions.
  - IFRS-9 implemented in January 2018.
  - July 2019: asset classification rules tightened by reducing the possibility that adequate collateral prevents a reduction in asset classification.
  - July decision to remove reference to “prime” collateral for asset classification, effective in 2020.
- Legislation and deposit protection:
  - Comprehensive package of legislation prepared to harmonize banking laws with EU directives; legislative approval expected later this year.
  - New legislation will increase minimum capital requirement for new banks from EUR 5 to EUR 7.5 million.
  - Banks required to develop clear recovery plans; CBM to establish a resolution fund financed by banks with a special resolution unit within the CBM.
  - Deposit protection fund to double insured deposit coverage to EUR 100,000, gradually shorten payout time, and be permitted to use resources to finance purchase and assumption of insured deposits from unresolvable banks to healthy ones.

### Banking sector indicators, structure, and risks
- Bank numbers and structure:
  - Montenegro has 13 banks; after purchase of Société Générale’s subsidiary by OTP, number will fall to 12.
  - High fixed costs and increasing regulatory costs pose earnings challenges for small banks.
- Profitability, capital, and NPLs:
  - Excluding Atlas’ large loss, banking sector was profitable in 2018.
  - NPL ratios and provisioning have improved to levels comparable to regional peers; continued credit growth expected to further improve NPL ratios.
  - Room to improve debt recovery ratios compared to peers.
  - System generally well capitalized; some banks more vulnerable to credit risk.
- Risks and governance:
  - Rapid growth of uncollateralized consumer lending (long maturities, higher interest rates) noted as a systemic risk.
  - AML/CFT regime improved by new law and CBM guidelines, but AML/CFT supervision needs risk-based tools for offsite monitoring and onsite inspections; fit and proper tests for owners and managers need formalization and consistent application.
  - Investor citizenship program creates potential financial integrity and reputational risks; authorities should implement comprehensive due diligence on applicants, including source of wealth/funds and publish names of new citizens.
- Key regulatory timelines and metrics:
  - IFRS-9 effective January 2018.
  - Asset classification tightening: July 2019 decision with removal of “prime” collateral reference effective in 2020.
  - AQR completion deadline: no later than end-2020.
  - Minimum capital increase for new banks: from EUR 5 to EUR 7.5 million.
  - Deposit insurance coverage target: EUR 100,000.

*International Monetary Fund — Montenegro: selected chapter content as provided in the source material.*

### 605. Database updated July 2018.

### 605. Database updated July 2018.

### Banking sector and supervision
- Overall banking system: "remained stable, highly liquid, and well capitalized."
- Profitability: "Apart from Atlas/IBM, the overall sector was profitable."
- Ongoing measures:
  - Contain remaining pockets of vulnerability, including efforts to strengthen a third weak bank.
  - Improved credit registry and tightened asset classification to improve credit risk assessment and reduce information asymmetries.
  - Studying increase in uncollateralized cash loans and plans to shortly introduce macroprudential measures.
  - Established a supervisory committee; offsite unit to be strengthened with additional staff.
  - Separate AML Directorate formed; additional staff being hired.
  - Move to more risk-based supervisory approach.
  - Legislative package transposing pertinent EU banking directives expected to be adopted in late 2019 to align supervision and crisis management with EU practices.
  - Commitment to complete an AQR of the banking system by end-2020; action plan, timetable, and draft terms of reference for independent international assessors begun.
- Staff advice and expectations:
  - Asset quality review should be completed no later than end-2020, with any identified weaknesses promptly addressed.
  - Forceful application of prudential regulation, including fit-and-proper requirements; be judicious in granting any new bank licenses.
  - Refinement of non-performing loan definition to eliminate any role of collateral in asset classification is welcomed.

### External competitiveness
- Staff assessment: external position "weaker than fundamentals and desirable policy settings warrant."
- REER developments:
  - Since 2010, the REER has appreciated 4 percent.
  - EBA-lite current account model suggests the REER is overvalued by 12 percent.
  - REER regression model estimates the REER to be in line with fundamentals.
  - On balance, staff believes the REER is overvalued by 10 percent due to: persistently large current account deficits, high unit labor costs, stagnant productivity, and weak goods export performance.
- Reserves: "Gross international reserves appear adequate."

### Labor markets: outcomes, reforms, and measures
- Outcomes and structural features:
  - Unemployment rate: "still high at 15 percent."
  - Informal economy: employs "an estimated quarter of the labor force."
  - Temporary contracts: "more than 30 percent of workers are employed on temporary contracts, the highest rate in Europe."
  - Labor force participation: "remains low" despite recent improvement.
- Labor tax wedge:
  - Tax wedge: "nearly 40 percent," "the second highest in the Western Balkans."
  - Authorities intend to implement in the second half of 2019 a "2 percentage point reduction in employers’ health insurance contributions," which "would reduce the cost of employment."
  - Fiscal impact: "Such a reduction will reduce revenues by about 0.5 percent of GDP."
  - Authorities expect an increase in the minimum wage will partially offset revenue losses.
  - Staff recommendation: ensure lost revenues are fully offset through a reduction in tax expenditures; consider extending the 11 percent upper tax rate on personal income past end-2019 (current expiry date).
- Minimum wage:
  - Government plans to increase the minimum wage "15 percent in the second half of 2019, the first increase since 2013."
  - Net minimum wage change: from "EUR 193 to 222 per month."
  - Minimum-to-average wage ratio: increases from "38 to 42 percent."
  - Context: the hike "exceeded both accumulated inflation and average wage gains of 6 percent since the last increase in 2013."
  - Staff advice: assess impact of prior minimum wage increases and consider broad labor market indicators (poverty line, average growth, productivity, migration).
- Draft Labor Law:
  - Aims to ease the most rigid employment protections, including large severance payments under regular contracts.
  - Extends maximum length of fixed term contracts from "24 to 36 months," with greater exemptions for seasonal activities.
  - Staff caution: ensure requirements for organizational charts and classification of positions do not impose an unreasonable administrative burden on micro enterprises.
- Authorities’ view:
  - Expect labor market reforms to positively impact employment and informality.
  - View the minimum wage increase and labor tax wedge reduction as a negotiated package with social partners.
  - Expect increased formal salary payments to raise tax revenues and partially offset revenue loss from tax wedge reduction.
  - Believe the new labor law will significantly increase labor market flexibility.

### Remittances (Box 2)
- Population expatriation: "About 38 percent of the population living in Montenegro has resettled abroad."
- Recorded remittance inflows: "appear low" relative to high expatriated share; recorded inflows remain lower than FDI inflows.
- Underreporting: reported remittances mainly based on bank reports and likely underestimate actual cash inflows; unreported cash transfers may support family incomes and new real estate construction and contribute to informality.

### Staff appraisal and policy recommendations
- Recent performance:
  - "Over the last two years, the Montenegrin economy has performed well, and public finances have improved."
  - Growth expected to moderate in 2019 as highway investment peaks.
  - "Private investment and tourism should underpin continued growth of around 3 percent over the medium-term," conditional on stable external conditions.
  - Authorities implemented most measures from fiscal adjustment strategy begun in 2017.
  - Underlying fiscal position (excluding highway investment) improved by "3 p.p. of GDP since 2016."
- Fiscal sustainability:
  - High public debt limits room for countercyclical fiscal maneuver and investment.
  - Need a balance between debt reduction and more efficient public spending.
  - Required primary surplus: "The primary surplus needs to be at least 2 percent of GDP over the medium-term for debt to reach safer levels."
  - Priorities: prioritize resources to deliver highest economic and social returns; improve technical capacity in public investment assessment and management.
- Bar-Boljare highway:
  - Urges a cautious and prudent approach; careful evaluation against other uses of scarce resources.
  - Financing the rest of the highway with debt would prevent projected decline in debt and likely jeopardize fiscal sustainability.
  - Recommend proceeding only after a new and credible feasibility study; resolve feasibility and financing questions without jeopardizing fiscal sustainability.
  - Extra caution on PPPs due to contingent fiscal liabilities.
- Fiscal reforms recommended:
  - Formulate a disciplined medium-term budget framework linking short-term debt reduction and medium-term strategic priorities with binding expenditure limits.
  - Further expenditure reforms: government employment levels, tax expenditures, pension reforms to increase fiscal space for high-productivity capital spending and targeted social spending.
- Financial sector supervision:
  - Recent measures welcome; need robust action to further improve supervision and address remaining vulnerabilities.
  - Efficacy depends on development and use of risk-based approaches to financial sector and AML/CFT supervision.
  - Transposal of EU banking directives into domestic law will provide new supervisory tools.
- Labor market initiatives:
  - Proposed initiatives are "well-motivated."
  - Authorities should offset foregone revenues from labor tax wedge reduction.
  - Draft labor law appropriately aims to reduce gap between temporary and open-ended contract protections.
  - In setting minimum wage level, authorities should assess prior impacts and consider a broad set of labor market indicators.

### Key statistics and projections (selected from tables and figures)
- Nominal GDP (millions of €):
  - 2014: 3,458
  - 2015: 3,655
  - 2016: 3,954
  - 2017: 4,299
  - 2018: 4,619
  - 2019: 4,807
  - 2024: 6,081
- Real GDP growth (percent):
  - 2014: 1.8
  - 2015: 3.4
  - 2016: 2.9
  - 2017: 4.7
  - 2018: 4.9
  - 2019 (projection): 3.0
  - 2024 (projection): 2.9
- Unemployment rate:
  - 2014: 18.0 percent
  - 2017: 16.1 percent
  - 2018: 15.2 percent
  - Most recent cited: "still high at 15 percent."
- Consumer price inflation (period average):
  - 2018: 2.6
  - 2019 (projection): 1.1
  - 2024 (projection): 1.9
- Bank credit to private sector (end of period growth):
  - 2014: -0.7
  - 2018: 9.1
  - 2019 (projection): 7.0
- General government finances (percent of GDP):
  - Revenue and grants 2018: 41.4
  - Expenditure 2018: 47.7
  - Overall fiscal balance 2018: -6.3
  - Overall fiscal balance 2019 (projection): -3.6
  - Primary balance 2018: -4.1
  - Primary balance 2019 (projection): -1.4
  - Non-highway primary balance 2018: 2.0
  - Non-highway primary balance 2019 (projection): 3.4
- General government gross debt:
  - 2014: 63.4 percent of GDP
  - 2017: 66.3 percent of GDP
  - 2018: 72.6 percent of GDP
  - 2019 (projection): 81.1 percent of GDP
  - 2024 (projection): 54.7 percent of GDP
- General government debt, including loan guarantees:
  - 2018: 78.8 percent of GDP
  - 2019 (projection): 88.8 percent of GDP
- Current account balance (percent of GDP):
  - 2014: -12.4
  - 2017: -16.1
  - 2018: -17.2
  - 2019 (projection): -17.1
  - 2024 (projection): -9.5
- Foreign direct investment, net (percent of GDP):
  - 2018: 7.1
  - 2019 (projection): 8.9
  - 2024 (projection): 8.9
- External debt (end of period, stock, percent of GDP):
  - 2018: 167.5
  - 2019 (projection): 180.0
  - 2024 (projection): 166.1
- REER: since 2010 appreciation "4 percent"; staff overvaluation assessment "10 percent."
- Gross international reserves (millions of USD):
  - 2018: 1,195
  - 2019 (projection): 1,541
  - 2024 (projection): 1,025
- Tourism (arrivals growth 2018): 12.7 percent; nights (growth 2018): 8.2 percent.
- Minimum wage:
  - Net minimum wage before increase: EUR 193 per month.
  - Net minimum wage after planned increase: EUR 222 per month.
  - Planned increase: 15 percent in the second half of 2019.
  - Minimum-to-average wage ratio change: from 38 to 42 percent.

*Source: 1mneea2019003 - 605. Database updated July 2018.*

### 1. Revenue1,4971,4691,6301,7251,9012,0092,0442,1202,1952,3012,414

### 1. Revenue

### Revenue levels and composition (Millions of euro)
- Total revenues and grants: 1,505 1,477 1,635 1,732 1,912 2,021 2,057 2,133 2,208 2,315 2,429
- Total revenues: 1,495 1,464 1,617 1,701 1,882 1,971 2,027 2,103 2,178 2,285 2,399
- Current revenues: 1,488 1,456 1,613 1,695 1,871 1,960 2,014 2,090 2,165 2,271 2,384

Taxes (Millions of euro)
- Taxes: 950 926 1,013 1,104 1,220 1,281 1,338 1,404 1,468 1,538 1,614
- Personal income tax: 137 136 160 146 163 167 170 180 187 193 203
- Corporate income tax: 45 42 45 49 68 68 71 74 73 77 80
- Property taxes / Taxes on turnover of real estate: 15 15 13 15 18 19 20 21 22 23 24
- Value added tax: 498 457 501 549 617 652 682 714 749 784 823
- Excises: 156 170 183 225 221 234 250 263 277 293 308
- Taxes on international trade: 22 23 24 25 27 28 29 31 32 34 35
- Local government taxes: 7 7 6 7 7 8 6 9 6 10 11 05 11 01 15 12 11 27 (source table entries show compacted sequence)
- Other taxes: 6 7 9 9 9 12 12 12 12 12 13

Social contributions and nontax (Millions of euro)
- Social security contributions: 401 392 414 441 467 472 470 485 510 536 563
- Nontax revenues: 137 138 186 149 184 207 206 200 188 197 207
- Grants: 9 14 17 30 29 49 30 30 30 30 30

### Revenue composition (Percent of GDP)
- 1. Revenue: 43.3 40.2 41.2 40.1 41.1 41.8 40.8 40.4 39.8 39.7 39.7
- Taxes: 27.5 25.3 25.6 25.7 26.4 26.6 26.7 26.8 26.6 26.5 26.5
- Personal income tax: 4.0 3.7 4.0 3.4 3.5 3.5 3.4 3.4 3.4 3.3 3.3
- Corporate income tax: 1.3 1.2 1.1 1.1 1.5 1.4 1.4 1.4 1.3 1.3 1.3
- Value added tax: 14.4 12.5 12.7 12.8 13.4 13.6 13.6 13.6 13.6 13.5 13.5
- Excises: 4.5 4.7 4.6 5.2 4.8 4.9 5.0 5.0 5.0 5.1 5.1
- Social security contributions: 11.6 10.7 10.5 10.3 10.1 9.8 9.4 9.2 9.2 9.3 9.3
- Nontax revenues: 4.0 3.8 4.7 3.5 4.0 4.3 4.1 3.8 3.4 3.4 3.4
- Grants: 0.3 0.4 0.4 0.7 0.6 1.0 0.6 0.6 0.5 0.5 0.5

### Observations on revenue trends
- VAT is the largest single tax revenue source: 498 457 501 549 617 652 682 714 749 784 823 (Millions of euro).
- Social security contributions are a significant revenue component: 401 392 414 441 467 472 470 485 510 536 563 (Millions of euro).
- Total revenues increase from 1,495 (2014) to projected 2,399 (2024) (Millions of euro).

---

### Expense summary (Millions of euro)
- Total expenditures and net lending: 1,529 1,696 1,879 2,029 2,203 2,195 2,102 2,098 2,188 2,292 2,402
- Total expenditures: 1,539 1,692 1,875 2,022 2,197 2,188 2,096 2,092 2,182 2,286 2,395
- Current expenditures: 1,350 1,479 1,624 1,614 1,706 1,732 1,794 1,859 1,932 2,023 2,114

Key current expenditure components (Millions of euro)
- Gross salaries and other personal income: 395 403 434 452 467 471 490 513 539 568 596 (aggregate line in opening table); detailed breakdown also lists Gross salaries 381 383 419 438 450 453 472 494 519 547 574 and Other personal income 14 20 15 14 17 17 18 19 18 19 20
- Use of goods and services: 140 188 187 173 188 186 190 204 220 231 243
- Interest payments: 7 8 8 6 8 5 10 3 10 1 10 7 122 110 99 105 108 (table shows compacted sequence; percent of GDP line: 2.3 2.4 2.2 2.4 2.2 2.2 2.4 2.1 1.8 1.8 1.8)
- Subsidies to enterprises: 19 20 28 29 32 33 35 36 38 40 42
- Other current outflows: 374 551 546 155 575 962 656 8 (source table entries compacted)
- Social security transfers: 492 488 556 539 545 557 574 596 618 641 668
- Other transfers: 154 230 263 243 285 286 296 309 323 339 354
- Repayment of guarantees: 18 0 0 0 9 0 0 0 0 0 (compact entries)
- Reserves: 16 19 21 22 27 28 30 31 32 34 36

### Capital and net lending (Millions of euro)
- Net acquisition of nonfinancial assets: 181 205 247 401 480 444 290 220 236 249 266
- Capital revenue: -7 -8 -4 -7 -11 -12 -12 -13 -13 -14 -15
- Capital expenditure: 189 213 251 408 491 456 302 233 250 263 281
- Net lending (+) / borrowing (-) (= 3 - 4): -34 -215 -241 -290 -285 -168 -394 126 293 4
- Overall Balance (Table 7): -24 -219 -244 -297 -291 -174 -463 4 20 23 27 (projections table shows overall balance-24-219-244-297-291-174-4634202327 in compacted form)

---

### Financial operations and financing (Millions of euro)
- Net acquisition of financial assets: 132 2 -224 730 735 7 -245 -196 -411 49
  - Domestic: 132 2 -224 730 735 7 -245 -196 -411 49
  - Currency and deposits: 35 27 -144 924 832 2 -241 -202 -478 3
  - Loans: -104 4 76 66 66 67 7
  - Equity and investment fund shares: -12 -10 -11 -9 53 29 -11000 -1
- Net incurrence of liabilities: 117 178 199 296 613 525 -206 -236 -67 -16 -25
  - Domestic: 19 -43 76 36 71 107 -365 558 -359 8
  - Foreign: 98 22 11 23 26 05 434 18 -169 -291 -126 19 -123 (compact entries)
- Financing (Table 7): 93 160 225 256 313 174 46 -34 -20 -23 -27
  - Domestic financing: -16 -7 19 1 -13 -177 -215 204 257 105 -439 5 (compact entries)
  - Foreign financing: 98 22 11 23 26 05 434 18 -169 -291 -126 19 -123

---

### Balance indicators (Percent of GDP and memo items)
- Gross operating balance (= 1 - 2): 4.3 -0.3 0.2 2.6 4.2 5.7 5.0 5.0 4.8 4.8 4.9
- Net acquisition of nonfinancial assets (percent of GDP): 5.2 5.6 6.2 9.3 10.4 9.2 5.8 4.2 4.3 4.3 4.4
- Net lending (+) / borrowing (-): -1.0 -5.9 -6.1 -6.7 -6.2 -3.5 -0.8 0.8 0.5 0.5 0.6
- Primary balance (Memorandum): 1.6 -3.6 -4.0 -4.5 -4.1 -1.4 1.5 2.8 2.2 2.2 2.3
- Current balance (Memorandum): 4.0 -0.6 -0.3 1.9 3.6 4.7 4.4 4.4 4.2 4.3 4.4

Key debt and GDP figures (Millions of euro and Percent of GDP)
- Nominal general government debt (Millions of euro): 2,191 2,520 2,633 2,850 3,352 3,900 3,750 3,556 3,484 3,463 3,323
- Nominal gen. gov. debt, with guarantees (Millions of euro): 2,473 2,791 2,931 3,163 3,640 4,271 4,121 3,927 3,855 3,834 3,694
- Nominal GDP (Millions of euro): 3,458 3,655 3,954 4,299 4,619 4,807 5,015 5,247 5,511 5,796 6,081
- General government debt (gross) as percent of GDP: 63.4 69.0 66.6 66.3 72.6 81.1 74.8 67.8 63.2 59.8 54.7
- Gen. govt debt, including guarantees as percent of GDP: 71.5 76.4 74.1 73.6 78.8 88.8 82.2 74.8 69.9 66.1 60.7

---

### Projections and notable accounting items
- Projections cover 2020–2024 with revenue growth to Total revenues 2,027 2,103 2,178 2,285 2,399 (Millions of euro) and expenditures projected at 2,096 2,092 2,182 2,286 2,395 (Millions of euro).
- Highway-related pre-payments: reflected in “Change in foreign accounts receivable” and notes regarding Bar-Boljare highway pre-payments that exceed the pace of actual capital expenditure.
- Historical discrepancy: shown as differences between reported financing and that derived from monetary and debt data; discrepancy figures appear in tables (e.g., Discrepancy (= 5 - 6 + 7) 2/ 69 -59 -19 -4 12 200 000 0 in compacted form).

_ Sources: Ministry of Finance; and Fund staff estimates and projections._

### Annex I. Risk Assessment Matrix

### Annex I. Risk Assessment Matrix

### Overview
- Scale used: High, medium, or low.
- The Risk Assessment Matrix (RAM) shows events that could materially alter the baseline path. The relative likelihoods are staff subjective assessments: "low" ≈ probability below 10 percent, "medium" ≈ between 10 and 30 percent, and "high" ≈ 30 percent or more.
- Non-mutually exclusive risks may interact and materialize jointly.

### 1. Weaker-than-expected global growth
- Relative Likelihood: Medium/High
- Impact if Realized:
  - The global growth slowdown could be synchronized as weakening outlooks in the U.S., Europe, and China feed off each other and impact on earnings, asset prices, and credit performance.
  - High: A protracted slowdown in the EU and neighboring countries could adversely impact the appetite for external and public financing (especially FDI flows and tourism infrastructure developments). A significant slowdown of consumption in the EU could impact tourism flows, a significant source of Montenegro’s service exports.
- Policy Response:
  - Let automatic fiscal stabilizers work.
  - Accelerate structural reforms to increase competitiveness and reduce structural bottlenecks that impede credit to the private sector.

### 2. Sharp tightening of global financial conditions
- Relative Likelihood: Low/Medium
- Impact if Realized:
  - Causes higher debt service and refinancing risks; stress on leveraged firms, households, and vulnerable sovereigns; capital account pressures; and a broad-based downturn.
  - The tightening could be a result of market expectations of a tighter U.S. monetary policy triggered by strong wage growth and higher-than-expected inflation or a sustained rise in the risk premium in reaction to concerns about debt levels in some euro area countries; a disorderly Brexit; or idiosyncratic policy missteps in large emerging markets.
  - Medium: Montenegro is highly reliant on external financing. External financial needs are covered in 2019, but the sovereign will need to rollover maturing Eurobonds in 2020 or 2021. Gross external financing needs average 40 percent of GDP over 2019-2021.
- Policy Response:
  - Let automatic fiscal stabilizers work.
  - Continue to implement the medium-term fiscal consolidation plan that puts debt on a strongly downward trajectory. Intensify adjustment if tighter conditions are permanent.
  - Continue implementing the medium-term debt strategy with an emphasis on developing the domestic bond market.

### 3. Intensification of security risks in parts of Africa, Asia, Europe, Latin America, and/or the Middle East
- Relative Likelihood: High
- Impact if Realized:
  - Intensification of conflicts in the Middle East and Africa could lead to sharp rises in migrant flows into Europe. Failure to implement and improve the common policy to deal with asylum seekers and other migrants to the EU could deepen political divisions. Border control regional socio-economic and political disruptions could restrict movement of goods, services, and labor in the single market. Limited integration of asylum seekers could raise unemployment, exert pressure on national budgets, and put social cohesion at risk.
  - Medium: Given important tourism and real estate links, such restrictive developments could undermine FDI inflows and thus weaken growth prospects, depress real estate prices, and further limit Montenegro’s capacity to absorb shocks. However, as a competitor for tourism, Montenegro could benefit from instability in rival destinations. Montenegro is not a transit country for refugees and thus the direct impact should be muted.
- Policy Response:
  - Let automatic fiscal stabilizers work.
  - Speed up structural reforms to improve the business environment and competitiveness.
  - Intensify reforms to improve the labor markets with a focus on job creation.
  - Accelerate policies to resolve concerns about pockets of banking sector weakness and encourage a revitalization of bank lending.

### 4. Insufficient fiscal discipline
- Relative Likelihood: High
- Impact if Realized:
  - The authorities do not have a strong track record of prolonged fiscal consolidation. Political pressures to construct further phases of the highway could override concerns about debt sustainability or fiscal risks from a PPP. It will be politically difficult to maintain the primary surpluses needed to keep public debt on a strong downward path. The ruling coalition has a small majority in parliament.
  - High: Given high public debt, a loss of fiscal discipline could lead to future financing difficulties and potentially result in debt sustainability problems.
- Policy Response:
  - Improve medium-term budgeting and public financial management practices. Consider implementation of an overall expenditure limit based on envelope of medium-term budget.
  - Improve public communication regarding the need for fiscal adjustment.
  - Suspend further highway construction.

### 5. Delays and withdrawals from capital investment projects
- Relative Likelihood: Medium
- Impact if Realized:
  - Ongoing geopolitical tensions, weak administrative procedures on land development, and concerns regarding fiscal sustainability could threaten capital investments in tourism and industry.
  - Medium: Construction and activity associated with large-scale investment projects (both tourism and infrastructure based) are key drivers of growth.
- Policy Response:
  - Sustain the medium-term fiscal consolidation effort to safeguard fiscal sustainability.
  - Implement structural reforms to improve the business environment and strengthen anti-corruption and AML/CFT frameworks.

### 6. Lingering concerns about pockets of weakness in banking sector
- Relative Likelihood: Medium
- Impact if Realized:
  - Following the bankruptcy of two small/medium domestic banks, concerns may linger regarding the health of some other (particularly domestic) banks in the system.
  - Medium: A perception of other weak banks in the system could raise concerns about banking sector stability, leading to possible deposit outflows and disintermediation.
- Policy Response:
  - Carry out asset quality review and require shareholders to increase capital levels to address any shortfalls revealed.
  - Strengthen AML/CFT legal and supervisory framework.

_Annex II. Public Debt Sustainability Analysis summary follows in the source document._

### 2.95 percent interest rate and 12-year maturity. They also issued a seven-year €500 million

### 1mneea2019003 - 2.95 percent interest rate and 12-year maturity. They also issued a seven-year €500 million

### Financing operations and baseline assumptions
- In 2018 the authorities issued a 2.95 percent interest rate instrument with 12-year maturity and a seven-year €500 million Eurobond carrying a coupon rate of 3.375 percent.
- €362 million of the seven-year €500 million Eurobond was used to buy back part of the €1.1 billion in Eurobonds set to mature in 2019-21.
- These two operations increased government deposits at the central bank in 2018 by €200 million, which were used to amortize the remainder (€169 million) of the 2019 Eurobond.
- Baseline financing assumptions for 2019–2020:
  - Issue a new €500 million Eurobond in 2019 to pre-finance the remainder of the 2020 Eurobond (€321 million) and the 2021 Eurobond (€228 million).
  - A second World Bank PBG raising €155 million in 2020 is assumed.

### Heatmap and debt-profile vulnerabilities
- Debt level: Risks from the debt level are deemed high as debt exceeds the 70 percent of GDP benchmark in 2014; debt only falls below this level in 2022 in the baseline and expands in some shock scenarios.
- Gross financing needs: Proactive debt management reduced gross financing needs below the 15 percent of GDP threshold in the baseline, but this threshold is still exceeded in some shocks.
- Public debt held by non-residents (Eurobonds and the China Ex-Im Bank loan) constitutes a vulnerability.
- Shocks to economic growth have the largest impact on the debt profile.

### Realism of baseline assumptions
- Forecast track record 2009–2017:
  - Median forecast errors for real GDP growth (actual minus projection) suggest on average an optimistic bias in staff’s past projections.
  - Median forecast error for the primary balance suggests staff projections have been somewhat pessimistic on average over this period.
- Fiscal adjustment realism:
  - The three-year adjustment in the cyclically-adjusted primary balance is very large (in the 4th percentile of observations for advanced and emerging economies over 1990 to 2011), but most of the adjustment comes from the reduction in highway spending, which will occur automatically after completion of the first phase in 2020.

### Domestic debt markets
- The stock of government securities is small and consists primarily of T-bills, mostly held by domestic banks.
- Authorities have received MCM TA on developing the local debt market.
- A domestic debt issuance in early 2019 successfully placed new domestic debt securities with banks and non-bank creditors, including retail customers.
- Baseline incorporates a more regular offering of domestic bonds, increasing the share of domestic debt from 16 percent in 2018 to 20 percent in 2024.

### Alternative scenarios (summary of outcomes)
- Historical scenario: If the primary balance follows the average level of the last ten years, a primary deficit of 3.6 percent of GDP over 2020-24 would lead debt to increase to 94 percent of GDP by 2024.
- Constant 2019 primary balance scenario: If the primary balance stayed at the projected 2019 level of -1.4 percent of GDP, debt would remain nearly stable around 80 percent of GDP, instead of declining to 62 percent of GDP in the baseline.

### Shocks and stress tests — general findings
- Debt and gross financing needs would still decline over time under all standard stress tests, though stress tests show substantial effects from shocks.
- Growth shocks have a substantial effect on the debt path.
- Fiscal shocks, including funding the remaining highway phases with debt, would have a major impact on fiscal sustainability.

### Montenegro-specific stress tests
- Highway Phases 2-4 scenario:
  - Staff assumes remaining Bar-Boljare highway cost of €1.2 billion, equally spent over 2022-24.
  - Assumes a low spending multiplier of 0.2 during construction because at least 70 percent of inputs are imported and modest supply effects upon completion.
  - Growth impact: economic growth would increase ¾ percentage point on average over 2022-24 relative to the baseline.
  - Fiscal impact: the primary balance declines in line with highway spending; public debt ratio increases to 81 percent of GDP by 2024 (compared to 62 percent in the baseline).
  - Gross financing needs would peak at 16 percent of GDP in 2023, 9 percentage points higher than in the baseline.
  - Conclusion: debt-financing completion of the highway could jeopardize fiscal stability and sustainability.

### Standard stress-test scenarios (selected quantitative impacts preserved)
- Growth shock:
  - Real output growth rates lowered in 2020 and 2021 by one standard deviation (3.4 percentage points).
  - Public debt ratio remains at 87 percent of GDP in 2020 before falling to 73 percent of GDP in 2024.
  - Gross financing needs ratio in 2021 increases 5 percentage points of GDP relative to the baseline.
- Interest rate shock:
  - Increase in interest rates on new debt by 249 basis points in 2020–24.
  - Debt increases by 1 percentage point in 2024 relative to the baseline.
  - Financing needs increase by 1 percentage point of GDP in 2024.
- Combined macro shock:
  - Recession in 2020 and 2021, a 249 basis-point interest rate increase, a real exchange rate shock, and a sharp rise in expenditures in 2020-21.
  - Debt-to-GDP ratio rises to 90 percent of GDP in 2020 and substantially increases gross financing needs.
- Financial contingent liability shock:
  - Expenditures increase in 2020 equivalent to 10 percent of the size of the banking sector, combined with shocks to GDP and interest rates.
  - Debt ratio increases sharply to 93 percent of GDP in 2020.
  - Gross financing needs would peak at 22 percent of GDP in 2020 and stay well above the baseline over the medium term.
- Primary balance shock:
  - Assumes an expenditure shock and a rise in interest rates leading to a 1.5 p.p. deterioration in the primary balance over 2020-21.
  - Deterioration in the debt ratio by about 2 percent of GDP by 2024.
  - Impact on gross financing needs peaks at 2 percentage points of GDP in 2020.
- Real exchange rate shock:
  - Assumes a 13 percent depreciation of the real exchange rate in 2020.
  - Debt ratio would fall marginally from the baseline because a larger GDP deflator on total debt outweighs the increase in relatively modest foreign currency debt, conditional on an exchange rate pass-through to inflation of 25 percent.

### Key baseline indicators and projections (selected exact figures)
- Nominal gross public debt (percent of GDP): 61.9 (2017), 73.6 (2018), 78.8 (2019), 88.8 (2020), 81.9 (2021), 74.4 (2022), 69.4 (2023), 65.5 (2024), cumulative change -17.0.
- Public gross financing needs (percent of GDP): 10.5 (2017), 15.0 (2018), 19.8 (2019), 13.8 (2020), 14.0 (2021), 9.1 (2022), 6.4 (2023), 6.6 (2024), 5.7 (2024 noted elsewhere).
- Real GDP growth (in percent): 1.8 (2017), 4.7 (2018), 4.9 (2019), 3.0 (2020), 2.5 (2021), 2.9 (2022), 3.2 (2023), 2.9 (2024).
- Inflation (GDP deflator, in percent): 2.6 (2017), 3.8 (2018), 2.4 (2019), 1.0 (2020), 1.8 (2021), 1.7 (2022), 1.9 (2023), 2.0 (2024).
- Primary balance (percent of GDP), baseline: -1.4 (2019), 1.5 (2020), 2.7 (2021), 2.2 (2022), 2.2 (2023), 2.2 (2024).
- Effective interest rate (in percent): 3.3 (2017), 3.9 (2018), 3.5 (2019), 2.9 (2020), 2.9 (2021), 2.7 (2022), 2.6 (2023), 2.8 (2024), 3.0 (final).
- Public debt composition: domestic debt share rising from 16 percent in 2018 to 20 percent in 2024 under the baseline.

### Policy-relevant observations (from text)
- Proactive debt management and pre-financing operations lowered short-term refinancing risks in the baseline.
- Further development of the domestic government debt market could help mitigate future financing risks.
- Decisions to take on large, debt-financed infrastructure projects (e.g., highway phases) could jeopardize fiscal stability and sustainability.

*Source: IMF staff.*

### Annex III. External Debt Sustainability Analysis

### Annex III. External Debt Sustainability Analysis

### Overview
- External debt increased by about 38 percentage points of GDP since 2007 to an estimated 168 percent of GDP in 2018.
- Increase driven partly by sharp increase in the general government external debt ratio, which tripled over this period and comprises 37 percent of Montenegro’s external debt.
- Current account deficit continues to weigh adversely on external debt dynamics.
- Baseline projection: external debt increases to 180 percent of GDP in 2019 before slowly declining to 166 percent of GDP in 2024.
- Montenegro’s heavy dependence on external financing reinforces the importance of fiscal and structural reforms to safeguard market access.

### Composition of external debt and recent drivers
- At 168 percent of GDP at end-2018, external debt is high and projected to further increase to 180 percent of GDP in 2019 and slowly decline thereafter.
- More than one-third of external debt is general government debt, which has increased by 31 percentage points of GDP since 2010.
- About half of external debt comes from the non-bank private sector, nearly evenly distributed between:
  - long-term intercompany debt, and
  - long-term loans contracted by private and public non-financial corporations.
- Share of private sector short-term debt (including non-resident bank deposits) is 12 percent of external debt.
- Construction of the Bar-Boljare highway has played a key role in the increase in government external debt.

### Projections and key statistics (selected figures from Table 1 and text)
- Baseline external debt (percent of GDP): 2014: 149.4; 2015: 162.9; 2016: 160.9; 2017: 159.2; 2018: 167.5; 2019: 180.0; 2020: 178.5; 2021: 175.6; 2022: 173.0; 2023: 170.0; 2024: 166.1.
- Change in external debt (line 2): varies, e.g., 2018: 8.3; 2019: 12.5; 2024: -3.9.
- Current account deficit, excluding interest payments (line 4): 2014: 15.6; 2015: 14.0; 2016: 19.7; 2017: 17.6; 2018: 20.6; 2019: 19.7; 2024: 12.4.
- Net non-debt creating capital inflows (line 8): consistently -7.5 in projections (2020–24).
- Gross external financing need (in billions of US dollars) (line): 2014: 1.2; 2015: 1.3; 2016: 1.6; 2017: 1.5; 2018: 1.9; 2019: 2.1; 2020: 2.3; 2021: 2.3; 2022: 2.2; 2023: 2.2; 2024: 2.3.
- External debt-to-exports ratio (percent): e.g., 2018: 406.4; 2019: 372.8; 2024: 367.9.
- Key macro assumptions (selected): Real GDP growth (percent) baseline series includes values such as 2018: 4.9; 2019: 1.9; 2020: 3.4; 2024: 2.9. Nominal external interest rate (percent) examples: 2018: -2.1; 2019: 0.4; 2024: -1.8.

### Shocks and stress tests — scenarios and quantified impacts
Standardized stress tests indicate particular sensitivity to several shocks. Individual scenario results include:
- Growth shock:
  - Description: baseline real GDP growth permanently reduced by one-half standard deviation (recent 10-year period ending in 2018).
  - Corresponds to average growth during 2020–24 of 1.2 percent, compared with baseline average of 2.9 percent.
  - Impact: external debt ratio increases by 10 percentage points (compared to baseline) to 176 percent of GDP in 2024.
- Interest rate shock:
  - Description: increase in nominal external interest rates on new debt by one-half standard deviation during 2020–24.
  - Implied average increase in interest rates of 20 basis points.
  - Impact: external debt increases by 1 percentage point to 167 percent of GDP by 2024.
- Non-interest current account shock:
  - Description: permanently increases the non-interest current account deficit by one-half standard deviation in 2020–24.
  - This amounts to an increase of 2.5 percentage points given historical variability.
  - Impact: external debt increases by about 10 percentage points to 177 percent of GDP by 2024 (absent offsetting non-debt-creating flows).
- Combined macro shock:
  - Description: permanent 1/4 standard deviation shock applied to the real interest rate, the growth rate, and the current account deficit during 2020–24.
  - Impact: external debt ratio up by about 10 percentage points to 176 percent of GDP by 2024.
- Real exchange rate shock:
  - Description: one-time 30 percent devaluation in the real exchange rate in 2020 applied to the estimated stock of external debt in foreign currency (not in euros). For public sector, highway construction represents 20 percent of public external debt. For private sector, assumption of 100 percent non-euro external debt used as upper-bound.
  - Impact: external debt-to-GDP ratio increases by 19 percentage points of GDP by 2024.
  - Gross financing needs rise by 10 percentage points of GDP, on average, over 2020-24 relative to the baseline.

- Stress-test sensitivity summary:
  - External debt is particularly sensitive to current account shocks (e.g., decline in tourism receipts), growth shocks, and euro depreciation.
  - Combined deterioration in macro environment or overruns on highway construction costs would significantly raise gross financing needs.

### Current account, external position, and sectoral flows
- Current account has been in persistent deficit since independence. After peaking at nearly 50 percent of GDP in 2008, it has persisted between 10 to 20 percent of GDP since 2010.
- In 2018, current account deficit reached 17 percent of GDP, above five-year average of 15 percent of GDP, boosted by imports for large-scale infrastructure projects and robust domestic demand.
- Trade in goods deficit in 2018: 44 percent of GDP.
- Services trade surplus in 2018: 20 percent of GDP, primarily driven by tourism.
- Primary and secondary incomes provided a surplus of 7 percent of GDP in 2018, reflecting growing remittances.
- Goods exports volume estimated to have declined by 27 percent since 2007, principally due to reduction in aluminum exports after closure of KAP.
- Montenegro’s share in world goods exports has fallen since 2007; services exports have more than doubled since 2007 driven by tourism.
- EBA-lite current account model results for 2018:
  - Unadjusted current account gap: -7.4 percent of GDP (CA norm -10.3 percent of GDP; actual CA -17.2 percent of GDP).
  - With highway treated as one-off: cyclically-adjusted CA -14.1 percent of GDP; adjusted current account gap -4.4 percent of GDP; REER overvaluation nearly 12 percent.
  - REER gap (percent) reported as 19.6 (standard) and 11.7 (with adjustment) in table.

### Exchange rate, IIP, and reserves
- REER has appreciated 4 percent since 2010; in 2018 REER appreciated 2.5 percent driven by positive inflation differential.
- From 2009-18, unit labor costs relatively stable; labor productivity growth stagnated.
- Authorities beginning to publish international investment position (IIP); released data for 2016 and 2017 show net IIP of -189 percent of GDP in 2017 driven by high foreign FDI.
- At end-2018, gross external debt estimated at 168 percent of GDP and expected to peak around 180 percent of GDP in 2019.
- About a third of external debt is government debt, which has increased by 32 percentage points of GDP since 2010 due to Eurobond issuances and borrowing from China Ex-Im Bank for highway construction.
- FDI inflows finance most of the current account deficit:
  - Annual net FDI averaged 12 percent of GDP since 2010 versus average current account deficit of 15 percent of GDP.
  - Gross FDI inflows nearly 9 percent of GDP in 2018.
- Reserves:
  - Gross international reserves estimated at 23 percent of GDP at end-2018.
  - Reserves estimated at 159 percent of the standard IMF metric for reserve adequacy and projected to further exceed the ARA metric in 2019 as government increases CBM deposits following anticipated Eurobond issuance.

### Policy implications and recommended focus
- Fiscal and structural reforms are important to safeguard market access given Montenegro’s heavy external financing dependence and elevated external debt.
- A real exchange rate depreciation driven by wage restraint and productivity improvements from structural reforms to strengthen competitiveness would help reduce imbalances over the medium term.
- The large current account deficit also reflects large fiscal deficits; current account deficit projected to decline over medium term once highway construction concludes and fiscal deficit improves.
- Continued construction of large energy and tourism projects could continue to put pressure on the current account deficit in coming years, implying continued monitoring of project financing and external vulnerabilities.

*Source: Annex III. External Debt Sustainability Analysis (text and tables provided).*

### Annex V. Implementation of Past IMF Recommendations

### Annex V. Implementation of Past IMF Recommendations

### Fiscal Policies
- Recommendation: Continue to implement fiscal consolidation strategy, aiming to deliver a primary fiscal surplus of 4½ percent of GDP by 2020.
  - Implemented policies:
    - Authorities continued implementation of the fiscal consolidation strategy, with two setbacks in the 2018 supplemental budget.
    - Tobacco excise increases were revised after being assessed to incentivize smuggling; excise revenue projections were lowered.
    - Additional allocations to the government wage bill were necessary to account for new hiring in 2017.
    - With these modifications, staff assesses that the primary fiscal surplus will peak around 2.7 percent of GDP in 2021.
    - The 2019 budget contained no further deviations from the fiscal consolidation strategy.
- Recommendation: Strengthen fiscal institutions, including fiscal rules and budgetary processes.
  - Implemented policies:
    - Starting in 2019, the budget has been presented on a three-year basis, but it remains only indicative for years 2-3, with no requirement to explain the difference between indicative levels and actual levels in subsequent budgets.
    - Authorities plan to adopt a detailed medium-term budget in 2021.
- Recommendation: Reform public sector employment, the pension system, and local government finances. Review the cost of tax expenditures.
  - Implemented policies:
    - Authorities adopted in 2018 an ambitious public administration optimization plan that aims to reduce by 2020 the levels of central and local government employment by 5 and 10 percent, respectively; progress was limited in 2018.
    - Pension reform was attempted in 2018 but ultimately put on hold after negotiations with unions did not move in a reform direction.
    - The law on local government finances was amended in 2018 to shift allocation of central government transfers relatively more towards more underdeveloped municipalities; the law includes new reporting requirements to the Ministry of Finance and penalties for municipalities in breach.
    - Authorities have begun a comprehensive review of tax expenditures—with FAD technical assistance—and plan to eliminate many VAT tax expenditures in 2019.

### Financial Sector Policies
- Recommendation: Implement policy recommendations from the FSAP to address financial sector vulnerabilities, including an independent asset quality review (AQR) for banks and measures to enhance emergency liquidity assistance (ELA).
  - Implemented policies:
    - Authorities have been considering options to strengthen ELA capacity.
    - The central bank has initiated planning for an AQR to be carried out and completed in 2020.
- Recommendation: Supervisory action plans (SAPs) for problem banks should be implemented forcefully, with intervention if necessary.
  - Implemented policies:
    - The CBM intervened in 2018 to impose interim administration on two banks, later placing them into bankruptcy.
    - The CBM has continued to implement a supervision action plan with a third bank and carried out an on-site supervision.
- Recommendation: Adopt a definition of non-performing loans that does not exclude impaired assets that are deemed to have adequate collateral.
  - Implemented policies:
    - In 2018, the CBM Council adopted a “Decision on Minimum Standards for Credit Risk Management in Banks” which reduces the possibility that banks can classify assets as performing solely on the basis of adequate collateral. This decision comes into effect in July 2019.
    - A subsequent decision adopted in July 2019 will eliminate references to “prime” collateral, beginning in 2020.
- Recommendation: Consider measures to promote consolidation of the banking system such as an increase in the minimum amount of capital. Be judicious in granting any new bank licenses.
  - Implemented policies:
    - The draft Law on Credit Institutions would increase the minimum capital requirement for a new bank from EUR 5 million to EUR 7.5 million.
    - The authorities have not issued any new bank licenses.

### Structural Policies
- Recommendation: Implement a unified strategy to address structural labor market impediments, including by reducing the labor tax wedge and reforming the withdrawal of social benefits.
  - Implemented policies:
    - Authorities plan to reduce the employers’ contribution for health insurance by 2 p.p. in H2 2019.
- Recommendation: Adopt amendments to the labor law that balance the need for worker protection with an increase in labor market flexibility.
  - Implemented policies:
    - The draft labor law (to be adopted in 2019) aims to reduce large severance payments required for firing a worker with a regular contract and will extend the maximum length of fixed term contracts from 24 to 36 months.
- Recommendation: Review the involvement of the state in the economy to ensure that it is limited to areas of market failures.
  - Implemented policies:
    - Authorities are considering restructuring options to bolster the viability of Montenegro Airlines, a state-owned enterprise that has been a drain on the state budget.
- Recommendation: Strengthen the framework for PPPs to minimize the risk of large liabilities being transferred to the public sector.
  - Implemented policies:
    - Authorities have drafted a new Law on PPPs which they expect to adopt in 2019.

*Annex V. Implementation of Past IMF Recommendations — IMF staff summary from the source document.*

### Annex VIII. Montenegro’s Government Wage Bill

### Annex VIII. Montenegro’s Government Wage Bill

### Overview
- General government wage bill peaked at 11.5 percent of GDP in 2012 and declined to 9.8 percent in 2018.
- Decline driven more by strong nominal GDP growth than spending restraint.
- In the Western Balkans, Montenegro has the highest wage bill as a percent of GDP except Bosnia and Herzegovina.

### Government employment and size considerations
- In 2017, government employment accounted for 10 percent of the working age population in Montenegro, above the Western Balkan average of 8 percent.
- Montenegro’s small population (approximately 622,000) constrains economies of scale.
- Among a sample of other small European countries, Montenegro’s ratio of government employment is only exceeded by Iceland and Latvia.

### Recent wage dynamics
- In 2016, government employees were granted a wage increase averaging 8 percent.
- The carryover impact of the 2016 wage increase was largely responsible for increases in the nominal wage bill in 2016 and 2017.
- Government wages have been partially frozen since 2016: across-the-board wage increases were not granted in 2017-19.
- Salaries of senior officials were reduced by 8 percent in the 2017 budget, followed by a further reduction of 6 percent later in 2017.
- Average government wage growth declined to approximately zero in 2018.

### Public administration optimization plan (2018) — targets and instruments
- Authorities adopted an ambitious public administration optimization plan in 2018 focused on reducing employment, improving HR management, enhancing efficiency, and deepening coordination with municipal governments.
- Targets (relative to 2017 levels): reduce central government employment by 5 percent and local government employment by 10 percent by 2020.
- Instruments to achieve targets: strict limits to new hiring, termination of existing fixed-term contracts, and consensual termination of employment.

### Progress in 2018 and projection scenarios
- Authorities aimed to decrease general government employment by 3.5 percent in 2018, but employment increased by 1.2 percent.
- Local governments reduced employment by 3.9 percent in 2018; central government employment grew by 2.8 percent, led by new hiring in health and education.
- Staff projection (baseline) conservatively assumes government employment will not change over the projection period and that the partial wage freeze will continue through 2019, after which nominal wage growth will resume.
- If the planned employment reductions are implemented, the government wage bill would fall to 8.9 percent of GDP in 2020, versus staff’s current projection of 9.5 percent of GDP.

### Risks and implementation challenges
- Initial 2018 progress on employment reductions was disappointing due to central government growth in health and education.
- Cross-country experience indicates wage bill reductions achieved during fiscal adjustment are rarely maintained over the long term.
- Implementation challenges include incomplete functional reviews, limited HR planning, insufficient transition support for separated employees, weak data integration, and difficulties collecting employee data at the local level.

### Policy recommendations and implementation priorities
- Functional analysis:
  - Treat functional reviews as high priority; incomplete reviews hinder identification of redundancies.
- Severance packages:
  - Limit the number of available severance packages and provide alternatives for employees not admitted into the optimization program to avoid adverse selection.
- HR management:
  - Create and maintain a registry of former public employees who received severance packages to mitigate migration to state-owned enterprises (SOEs).
- Transition to the private sector:
  - Take stock of active labor market policies to facilitate transitions to the private sector.
  - Avoid promotion of early retirements.
  - Note: the plan to offer zero interest credit from the Investment and Development Fund (IDF) is not well targeted.
- Data integration and monitoring:
  - Merge salary and personnel databases and expand coverage to more employees.
  - Combine personnel and payroll databases with stricter audits to help identify ghost workers.
  - Implement data-driven monitoring to track reductions and shifts of responsibilities related to EU pre-accession requirements.
- Cooperation across governance levels:
  - Sustain implementation at the local level through enhanced cooperation with municipal governments and improved local employee data collection.

*Source: Annex VIII. Montenegro’s Government Wage Bill (IMF staff report content provided).*

### 2011. Montenegro’s National Summary Data Page

### 2011. Montenegro’s National Summary Data Page (NSDP)

### National Summary Data Page and Data Dissemination
- The NSDP went live in September 2017.
- The NSDP disseminates key macroeconomic indicators recommended in the context of the Enhanced General Data Dissemination System (e-GDDS).
- No data ROSC available.
- Revision note: In July 2019, the CBM revised international reserves and its NFA to correct misclassification of CBM’s holdings of Montenegrin government bonds and SDR holdings.

### Table of Common Indicators Required for Surveillance (as of July 17, 2019) — Frequency and Latest Observations
- International Reserve Assets and Reserve Liabilities of the Monetary Authorities:
  - Date of latest Observation: May-2019
  - Date Received: Jun-2019
  - Frequency of Data: M
  - Frequency of Reporting: M
  - Frequency of Publication: M
- Reserve/Base Money:
  - Date of latest Observation: May-2019
  - Date Received: Jun-2019
  - Frequency of Data: M
  - Frequency of Reporting: M
  - Frequency of Publication: M
- Central Bank Balance Sheet:
  - Date of latest Observation: May-2019
  - Date Received: Jun-2019
  - Frequency of Data: M
  - Frequency of Reporting: M
  - Frequency of Publication: M
- Consolidated Balance Sheet of the Banking System:
  - Date of latest Observation: May-2019
  - Date Received: Jun-2019
  - Frequency of Data: M
  - Frequency of Reporting: M
  - Frequency of Publication: M
- Interest Rates:
  - Date of latest Observation: May-2019
  - Date Received: Jun-2019
  - Frequency of Data: M
  - Frequency of Reporting: M
  - Frequency of Publication: M
- Consumer Price Index:
  - Date of latest Observation: Jun-2019
  - Date Received: Jul-2019
  - Frequency of Data: M
  - Frequency of Reporting: M
  - Frequency of Publication: M
- Revenue, Expenditure, Balance and Composition of Financing – General Government:
  - Date of latest Observation: 2018
  - Date Received: Mar-2019
  - Frequency of Data: A
  - Frequency of Reporting: A
  - Frequency of Publication: A
- Revenue, Expenditure, Balance and Composition of Financing – Central Government:
  - Date of latest Observation: Apr-2019
  - Date Received: Jun-2019
  - Frequency of Data: M
  - Frequency of Reporting: M
  - Frequency of Publication: M
- Stocks of Central Government and Central Government-Guaranteed Debt:
  - Date of latest Observation: Q4-2018
  - Date Received: Mar-2018
  - Frequency of Data: Q
  - Frequency of Reporting: Q
  - Frequency of Publication: Q
- External Current Account Balance:
  - Date of latest Observation: Q1-2019
  - Date Received: Jun-2019
  - Frequency of Data: Q
  - Frequency of Reporting: Q
  - Frequency of Publication: Q
- Exports and Imports of Goods and Services:
  - Date of latest Observation: Q1-2019
  - Date Received: Jun-2019
  - Frequency of Data: Q
  - Frequency of Reporting: Q
  - Frequency of Publication: Q
- GDP/GNP:
  - Date of latest Observation: Q1-2019
  - Date Received: Jun-2019
  - Frequency of Data: Q
  - Frequency of Reporting: Q
  - Frequency of Publication: Q
- Gross External Debt:
  - Date of latest Observation: Q4-2017
  - Date Received: Jul-2019
  - Frequency of Data: A
  - Frequency of Reporting: A
  - Frequency of Publication: A
- International Investment Position:
  - Date of latest Observation: Q4-2017
  - Date Received: Jul-2019
  - Frequency of Data: A
  - Frequency of Reporting: A
  - Frequency of Publication: A

### Authorities’ Statement (September 6, 2019)
- Appreciation expressed for IMF staff engagement and constructive policy findings.
- Authorities broadly agree with staff’s appraisal.
- Continued implementation commitments:
  - Fiscal consolidation measures.
  - Medium-Term Debt Management Strategy (MTDMS) to put debt on a downward path and reduce refinancing risks.
  - Improvements in the AML/CFT framework and implementation of remaining 2016 FSAP recommendations.
  - Implementation of the Economic Reform Program (ERP) for 2019-2021.

### Recent Economic Development and Outlook
- Monstat first results: positive economic developments from 2018 continued during Q1-2019.
- Growth drivers in Q1-2019: broad-based across sectors, particularly tourism activities and investments.
- Medium-term projection:
  - Real GDP growth projected to remain robust.
  - Average annual growth rates will decelerate to 3 percentage points due to the end of the first phase of the highway.
  - Projection is higher compared to average growth rate recorded in 2014-2016 and consistent with expected rise in economic activity in most EU countries.
- Authorities expect expansion from:
  - Further expansion of tourism.
  - Investments in renewable energy sector and agriculture.
  - Ambitious structural reforms sustaining domestic demand and exports.

### Fiscal Policy and Debt Management
- Commitment to fiscal consolidation strategy (FCS) that started in 2017.
- FCS implementation:
  - Measures from the 2017–2021 Budget Deficit and Public Debt Recovery Plan and 2017–2020 Fiscal Strategy have been largely implemented.
- Main fiscal objective (medium-term):
  - Maintain the primary surplus of 2 percent of GDP.
  - Reduce level of public debt, excluding state guarantees, close to 60% by 2022.
- Highway (Bar-Boljare) project:
  - Launched in 2014 in four phases; financing for the first and most expensive phase secured on an international tender.
  - First phase increased public debt but significantly boosted economic growth.
  - Authorities will refrain from new major debt-financed investment projects and continue second phase only after public debt is on a more sustainable level and favorable financing conditions are secured, potentially with a grant element.
  - Preparatory work for second phase continues (legal documentation) with EU grant funding for Preliminary Design and Environmental and Social Impact Assessment; Cost Benefit Analysis and Feasibility Study for entire project will be prepared.
  - Authorities highlight EU recognition of the project’s national, regional, and international significance and expected benefits (decrease travel time, reduce emissions and accidents, lower vehicle operating costs, improve trade flows).
- Revenue measures and expected impacts:
  - Montenegrin Tax Administration (MTA) granted full autonomy as of January 1, 2019; efficiency improved and tax arrears significantly reduced.
  - MTA adopted a reform program supported by IMF technical assistance.
  - Electronic issuing of fiscal invoices to be introduced as of January 1, 2020.
  - Economic Citizenship Program expected budget impact:
    - Around 30 million EUR in three years from fees.
    - 500 million EUR in investments with further multiplying effects on budget revenues and economic activity (0.6 and 10.6 percent of GDP respectively).
  - Additional measures scheduled for 2019 and 2020: increase in excise taxes on carbonated water and ethyl alcohol, introduction of coal excise, reduction of tax arrears through Law on Rescheduling Tax Receivables, implementation of Law on Local Self-Government Financing, legalization of informally constructed buildings.
- Expenditure-side measures:
  - Rationalize current expenditures; implement 2018–2020 Public Administration Optimization Plan; freeze on employment in public sector.
  - Aim to reduce number of public sector employees and reduce aggregate gross wage bill.
  - Implement “consolidated public procurement” to rationalize common costs.
- Public-Private Partnerships (PPP) and investment management:
  - Preparing strong legislative and institutional PPP framework; draft PPP law prepared and agreed with the European Commission.
  - Working with IFC, IMF, and bilateral partners on law preparation.
  - Emphasize strong role of Ministry of Finance in approving and supervising PPPs, limits on number and value of projects.
  - Ministry of Finance requested PFRAM support by FAD for staff capacity development.
- Fiscal oversight enhancements:
  - Considering models for establishing a Fiscal Council; expert assistance sought from the European Union.
  - Three-year budgeting to be formally introduced as of 2020 (first year mandatory; following two indicative).

### Financial System and Policies
- Banking system assessment:
  - Very liquid, well-capitalized, and adequately profitable despite recent challenges with two small banks.
  - Interventions in two non-systemic banks had no spillover effects to broader sector.
- Banking system KPIs for 13 banks (without Atlas bank and Invest bank Montenegro):
  - Assets growth: 4.2% (compared to December 2018)
  - Loans growth: 7.6% (compared to December 2018)
  - Deposits growth: 1.3% (compared to December 2018)
  - Capital growth: 14.3% (compared to December 2018)
- Non-performing loans (NPLs):
  - Systemic level of NPLs decreased to 4.8 percent at end-June 2019, compared to 8.2 percent in July 2017.
  - Provision coverage ratio: 83.2 percent at end-June 2019.
  - Coverage with regulatory reserves: 94.7 percent.
  - Authorities note NPLs are not a systemic risk but remain a challenge for some small banks; vigilance will be maintained.
  - Amendments announced to Decision on Minimum Standards for Credit Risk Management in Banks introducing a strict NPL definition that does not exclude impaired assets with adequate or prime collateral.
- Banking supervision and organizational improvements:
  - Established a Supervisory Committee to support senior management decisions.
  - Ongoing staffing for off-site supervision to implement risk-based supervisory assignments.
  - Establishment of a separate unit for off-site banking supervision and a separate unit responsible for issuing/monitoring measures, compliance, and penalties.
  - Preparing for an AQR to be executed by end-2020; AQR will be conducted by reputable international assessors and supported by an international provider to assure robustness.
- AML/CFT supervision:
  - Significant organizational and staffing changes in CBM’s Unit for Supervision of prevention of money laundering and terrorist financing from September 2018 to August 2019.
  - February 2019: separate Directorate for supervision in ML/TF and a sub-unit for protection of users of financial services established.
  - Highly qualified Director appointed; procedure almost finalized for employing a higher examiner; plan to fill all vacancies with highly qualified personnel.
  - Drafted and adopted “Guidelines for developing risk analysis and risk factors for the purposes of the prevention of ML and TF by reporting entities under the supervision of the Central Bank of Montenegro”; Guidelines sent to Fund Mission team for comments.
  - Development of an AML/CFT manual underway as part of a twinning project to develop a risk-based approach for control of reporting entities.

### Structural Reforms and Competitiveness
- Strategic objective in ERP: sustainable and inclusive economic growth to reduce development gap relative to EU average and increase quality of life.
- Key challenges: migration and labor shortages in key industrial sectors.
- Labor market and education measures:
  - Decision passed to decrease employers’ health insurance contributions by 2 percentage points to decrease the tax wedge and lower labor costs for employers.
  - Draft version of new labor law submitted in coordination with the European Commission to ease currently rigid labor protection.
  - Vocational Education Development Strategy to 2020:
    - Goal: ensure vocational education is relevant to the labor market.
    - Developing qualifications based on learning outcomes to match labor market needs and designing modular curricula.
    - Plan to fully implement new curricula in the next two years.
- Monitoring of ERP implementation:
  - Reform measures from the ERP are monitored through regular reports by the Competitiveness Council, established by the Government in 2017, in accordance with European Commission recommendations.

*IMF. Montenegro: National Summary Data Page and authorities’ statement (as presented in the provided content).*

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_Source: https://www.imf.org/-/media/files/publications/cr/2019/1mneea2019003.pdf_