## 1mneea2020002

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### EXECUTIVE SUMMARY — Context and Request for Fund Support
- COVID-19 will hit Montenegro hard; tourism is a key industry (around a fifth of the economy).
- Fiscal space has eroded in recent years due to large public capital outlays (notably the Bar-Boljare highway).
- The Montenegrin authorities request financial support under the Rapid Financing Instrument (RFI) in the amount of SDR 60.5 million, equivalent to 100 percent of quota.
- Purpose of RFI resources: address the large and urgent balance of payments financing need, mitigate economic consequences of the pandemic, and preserve macroeconomic stability.

### Impact of COVID-19: Key Findings and Projections
- Short-run health outcome (as of June 8): 324 total cases and nine deaths; Montenegro reported no active cases as of that date.
- Scope of economic contraction:
  - Real GDP projected to decline by nearly 9 percent in 2020 (11.7 percentage points below the pre-virus baseline), assuming tourism receipts are halved versus last year.
  - Balance of payments financing need assessed at EUR 252 million, or 5.7 percent of GDP.
  - GDP projected to grow by 5.2 percent in 2021 and gradually converge to potential.
  - Staff project a permanent 10 percent loss of output relative to pre-crisis trends.
  - Public debt will peak at nearly 90 percent in 2020 and decline over the forecast horizon assuming fiscal consolidation resumes in 2021.
- Pre-/Post-COVID illustrative changes (2020, staff calculations):
  - Real GDP growth: Pre-COVID 3.0; Post-COVID -8.7; ∆ change -11.7
  - Avg. inflation: Pre-COVID 1.3; Post-COVID 0.3; ∆ change -1.0
  - Overall fiscal balance (% of GDP): Pre-COVID -2.7; Post-COVID -10.0; ∆ change -7.3
  - Gross public debt (% of GDP): Pre-COVID 73.4; Post-COVID 89.4; ∆ change 16.0
  - Bank credit to private sector: Pre-COVID 7.0; Post-COVID -12.0; ∆ change -19.0

### Macroeconomic Policy Challenges and Authorities’ Response
- Immediate policy challenge: support activity in 2020 while mitigating medium-term debt sustainability risks arising from uncertain growth, weaker revenues, and high financing needs.
- Authorities’ actions and commitments:
  - Carefully assessed spending needs in 2020 and committed to resuming the ambitious fiscal consolidation implemented since 2017 (temporarily paused in 2020).
  - High level of government deposits at the Central Bank provides a mitigating factor.
  - Reduced current spending, including salary cuts for high-ranking government officials and partial postponement of other expenditures, totaling about 1.5 percent of GDP.
  - Pre-financing and external borrowing: pre-financed in 2019 the EUR 321 million Eurobond maturing Q1 2020; secured syndicated loan of EUR 250 million backed by the World Bank’s Policy Based Guarantee (PBG).
  - Rollover risk: EUR 227 million Eurobond maturing March 2021 will depend on market conditions, motivating retention of deposit buffers and reserves at end-2020.

### Fiscal Sector: Findings and Staff Recommendations
- Fiscal impact and composition (2020, percent of GDP, IMF staff calculations):
  - Headline fiscal deficit projected to increase to 10 percent in 2020.
  - Revenue losses of some 3 percent of GDP.
  - Increased health spending and rescue packages amounting to some 4 percent of GDP.
  - Financing snapshot (percent of GDP): Total revenues and grants 42.6 → 39.6 (∆ -3.0); Total expenditures and net lending 45.3 → 49.6 (∆ 4.3); Overall balance -2.7 → -10.0 (∆ -7.3).
  - Financing composition (percent of GDP): Domestic financing 4.9 → 7.7 (∆ 2.8); Deposit draw-down 5.7 → 8.2 (∆ 2.6); Foreign financing -2.5 → -2.4 (∆ 0.0).
  - Identified exceptional financing 3.6 percent of GDP: IMF 1.7; World Bank 0.6; EU 1.3; Unidentified financing 0.9.
- Staff view: COVID-19 measures are temporary and targeted; authorities committed to auditing crisis-mitigating spending and publishing results.
- Medium-term fiscal guidance:
  - Resume fiscal consolidation in 2021.
  - Staff recommend reaching a primary surplus of at least 2 percent of GDP by 2024 and maintaining these levels until debt has converged to the Maastricht criterion of 60 percent of GDP.
  - Manage capital expenditures carefully and avoid repeating past huge capital spending.

### Fiscal Measures (Selected COVID-19 Measures and Costs)
- Non-highway, non-COVID-19 cyclically-adjusted primary balance trends and costs noted; first phase of the highway expected completed June 2021.
- Selected COVID-19 fiscal support measures (net cost, percent of GDP):
  - Health spending (tests, protective equipment, transportation of supplies, higher salaries for medical personnel for overtime work): 0.38* (plus additional 0.18 percent of GDP funded out of a donations account).
  - Subsidies (wage subsidies for affected workers, childcare, quarantine, newly employed in SMEs): 0.83
  - Payment deferrals (income taxes, social security contributions, tax debt): 2.20
  - Handouts (one-off financial assistance for vulnerable and formally unemployed): 0.03
  - Other (support for agriculture and fisheries, market support, one-off benefits, subsidies to interest rates for IDF credit line, advance payments): 0.16

### Financial Sector: Status and Policy Measures
- Banking sector as of end-Q1 2020: well-capitalized and liquid, but enhanced monitoring warranted.
- Central Bank measures to ease borrower strain and provide liquidity:
  - Loan moratorium: (i) 90-day moratorium on loan repayments, granted on borrower request; (ii) possible second 90-day moratorium for borrowers facing COVID-19 difficulties.
  - Reserve requirements: (i) Reduction in the fee for withdrawing reserve requirement liquidity from 12 percent to 6 percent p.a.; (ii) Reduction in the reserve requirement rate by two percentage points.
  - Dividends: Temporary ban on dividends to shareholders unless in the form of equity.
  - Loan restructuring: Conditions under which banks may reclassify loans as new loans (IFRS-aligned provisioning).
  - Exposure limits: Temporary increases beyond 25 percent with Central Bank prior approval.
- Precautionary steps:
  - Doubled BIS liquidity line to EUR 100 million.
  - Expanded EBRD credit line to EUR 50 million to bolster deposit insurance.
- Risks and oversight:
  - Non-resident deposits are around a quarter of total deposits (current classification standards); small outflows occurred in late March but have since abated.
  - Montenegro’s unilateral euroization limits Central Bank policy options, notably Emergency Liquidity Assistance (ELA).
  - Central Bank plans system-wide Asset Quality Review (AQR); completion expected mid-2021.

### Modalities of Support and External Financing
- RFI request and expected role:
  - Authorities requested assistance of 100 percent of quota (SDR 60.5 million) under the RFI.
  - Proposed RFI purchase would help mitigate pandemic economic consequences, preserve stability, and act catalytically to crowd in other support and reinforce sovereign market access.
  - The proposed access of 100 percent of quota would cover 30 percent of the financing gap.
- Overall external support sharing and expected coverage of the financing gap:
  - Much of the remainder of the public sector gap to be covered by COVID-19-related lending from the World Bank and the EU.
  - An EU grant expected to fill the residual public sector gap (0.9 percent of GDP).
  - Exceptional lending by other IFIs (EBRD, EIB, IFC, KfW) to domestic banks expected to close the remaining private sector BoP gap (around EUR 150 million or some 3 percent of GDP over 2020–22).
  - Staff support: IMF staff support the authorities’ request for an RFI purchase given the urgency; balance of payments difficulties expected to be resolved within the next 12 months without major policy adjustments beyond those in staff’s baseline.

### Balance of Payments: COVID-19 Impact (Million EUR, 2020)
- Pre-COVID / Post-COVID / ∆ change (selected lines):
  - Current account balance: -825 / -593 / 233
  - percent of GDP: -16.1 / -13.3 / 2.8
  - Trade balance: -2289 / -1421 / 868
  - Services account: 1086 / 563 / -523
  - o/w Tourism receipts: 1158 / 547 / -611
  - Primary income: 56 / 13 / -43
  - Secondary income: 322 / 254 / -69
  - FDI (net inflows): 387 / 192 / -195
  - Portfolio investment (net inflows): 327 / 346 / 20
  - Other investment (net inflows): 473 / 127 / -346
  - Financing gap: 0 / 252 / 252
  - percent of GDP: 0.0 / 5.6 / 5.6
- Exceptional financing to public sector: 202 (millions EUR)
  - IMF: 75
  - World Bank: 25
  - EU: 60
  - Unidentified financing: 42
- Exceptional financing to private sector 1/: 50
  - 1/ IFI loans to domestic banks.

### Risks Highlighted by Staff
- Sharp tourism decline, weaker capital inflows, and uncertain global recovery increase BOP and fiscal risks.
- Rollover risk for EUR 227 million Eurobond maturing March 2021 could strain reserves and deposit buffers.
- Prolonged pandemic could trigger non-resident deposit outflows and intensify banking sector stress despite current buffers.
- Debt sustainability risks depend on future growth, revenue projections, and management of capital spending.
- Large gross financing needs and guarantees exceeding 8 percent of GDP present risks.

### Debt Sustainability and Capacity to Repay
- The Public DSA (Annex 1) shows that public debt, while high, is judged to be sustainable with a sufficient buffer to remain sustainable under a variety of shocks.
- Given prevailing global monetary conditions, nominal interest rates are likely to be below nominal growth rates over the forecast horizon beyond this year.
- Capacity to repay the Fund (Table 6) is adequate, as obligations to the Fund are small relative to exports, reserves, and external debt service.
- Euroization poses risks because it entails a strong direct relationship between fiscal policy choices, the level of government deposits, and NIR.
- The authorities commit to undergoing a safeguards assessment as soon as feasible, have provided Fund staff with the most recent central bank audit reports, and have authorized the external auditors of the central bank to hold discussions with staff.

### Annex I. Public Debt Sustainability Analysis — Key Points
- Public debt expected to reach nearly 90 percent of GDP in 2020, about 10 percentage points above the previous Article IV Staff Report projection.
- The 2020 increase reflects temporary fiscal expansion to combat COVID-19 amid depressed activity.
- Baseline: primary deficit in 2020 expected to reach 7.3 percent of GDP; primary balance projected to improve to a 2.4 percent surplus in 2025 if consolidation resumes in 2021.
- Debt profile and vulnerabilities:
  - Gross general government debt temporarily ~90 percent by end-2020; net debt 83.5 percent of GDP as government maintains deposits.
  - Public debt expected to decline to 74 percent by end-2025 under baseline.
  - Gross financing needs projected to fall below 15 percent in 2021; spike in 2020 largely reflects a Eurobond matured in March 2020; another spike around 15 percent occurs in 2025 due to another maturing Eurobond.
  - Key vulnerabilities include public debt held by non-residents, high external financing needs, and reliance on non-resident bank deposits.
- Stress tests:
  - Combined macro-fiscal shock: debt would rise to 97 percent of GDP in 2021 and decline to 90 percent in 2025.
  - Contingent liabilities shock (10 percent of banking system assets / 7 percent of GDP in 2021): debt rises to 98 percent in 2021, declining to 86.5 percent in 2025.
  - Highway Phase 2–4 scenario (EUR1.2 billion starting 2022) would raise debt to 93.6 percent by 2025.
- Alternative scenarios:
  - Historic scenario: debt increases to 99 percent of GDP in 2025.
  - Constant primary balance scenario: debt would climb to 116 percent of GDP in 2025 (described as unrealistic).
- Key baseline indicators (selected sequences and figures preserved as presented):
  - Nominal gross public debt: 57.5 (2018), 71.9 (2019), 79.4 (2020), 89.4 (2021), 87.9 (2022), 84.0 (2023), 80.0 (2024), 76.1 (2025), 74.2 (end-2025).
  - Public gross financing needs: 12.4 (2018), 19.6 (2019), 12.4 (2020), 24.0 (2021), 13.1 (2022), 8.4 (2023), 6.8 (2024), 8.9 (2025), 15.2 (2025 spike).
  - Net public debt: 56.3 (2018), 66.4 (2019), 68.4 (2020), 85.5 (2021), 83.1 (2022), 80.3 (2023), 77.4 (2024), 73.9 (2025), 70.2 (end-2025).
  - Real GDP growth (selected): -8.7 (2020), 5.2 (2021), 4.2 (2022), 3.1 (2023), 3.2 (2024), 3.3 (2025).

### Appendix I. Letter of Intent — Authorities’ Commitments and Measures
- Pandemic described as "the most serious threat to Montenegro’s economy since independence."
- Macroeconomic projections cited by authorities and staff:
  - IMF staff: "GDP will drop by 8.7 percent in 2020 before bouncing back to 5.2 percent in 2021."
  - Tourism revenues estimated to "drop by half", representing "a loss of more than 600 million EUR (13.5 percent of GDP)."
  - Fiscal deficit expected to increase to "10 percent of GDP in 2020."
  - Temporary fall in revenues of "3 percent of GDP" and higher expenditures of "4 percent of GDP."
  - Public debt expected to "peak close to 90 percent" in 2020.
  - Authorities’ more optimistic scenario: GDP contraction "6.8 percent" and overall deficit "7.3 percent of GDP."
- Fiscal and social support measures (selected):
  - Health spending: testing, medical and personal protective equipment, higher salaries for medical personnel.
  - Labor and business support: tax deferrals; wage subsidies (two-month subsidies and six-month subsidies for newly employed in SMEs); direct one-off transfers to vulnerable and unemployed; support for agriculture and fisheries.
  - Expenditure control: shelving non-essential expenditures and purchases to contain fiscal gap.
  - Transparency: State Audit Institution to audit crisis-mitigating spending and publish results online within 12 months of the end of the fiscal year; publish public procurement plans, notices, awarded contracts and beneficial owners for crisis-mitigation spending.
- Financial sector and CBCG actions:
  - Banking system Q1 2020 indicators (system level of 13 banks): Capital increased by "16.59%."; Solvency ratio "17.4 percent."; Total profit in Q1 2020: "13.3 million euro."; Non-performing loans: "5.09 percent."
  - CBCG measures: cut reserve requirement rate by "2 percentage points", releasing "approx. 70 million euros"; halved fees for using reserves; doubled bilateral repo line with the BIS to "100 million euro"; prohibited dividend distribution except in bank shares.
  - Borrower relief: automatic, targeted moratorium "90+90 days" on loan repayment; moratorium aimed to provide "155 million euros in the first three months of the pandemic."
  - Planned AQR completion by 2021 (noting elsewhere an AQR to "start in September and will be completed next year").
- Debt and fiscal commitments:
  - Immediate commitment: refrain from construction of further phases of the Bar-Boljare highway until outlook improves.
  - Medium-term fiscal goals: achieve and maintain primary surpluses; target a primary surplus of 2 percent of GDP in the medium term; references to debt target "closer to 60 percent of GDP by 2022" and later "closer to 60 percent of GDP by 2025."
  - Structural reforms: Tax Administration Reform Project; public administration reform; gradual elimination of expensive tax expenditures through 2025.
- Monitoring and publication commitments:
  - Maintain dialogue with the IMF and avoid measures that aggravate BOP difficulties.
  - Comply with IMF Articles of Agreement.
  - Authorities authorize IMF to publish the Letter of Intent and staff report for the RFI request.
  - Authorities will provide IMF staff with necessary data and information for monitoring.
- Operational notes (authorities’ statement):
  - As of June 15, there were "only 325 confirmed cases of COVID-19 and 9 deaths."
  - High-frequency and Q1 2020 indicators: Q1 2020 GDP growth "2.7 percent (annual data)"; net earnings grew "2.3%"; industrial production grew "12.9 percent"; manufacturing grew "17.0 percent"; mining and quarrying grew "21.3 percent"; construction works grew "4.6 percent"; retail turnover grew "7.4 percent"; electricity supply grew "6.9 percent"; annual inflation "0 percent at end-March"; employment fell "2.9 percent"; export of goods fell "5.7 percent"; payment system transactions volume increased "2 percent."

### Staff Appraisal (Selected)
- The outlook has deteriorated due to Montenegro’s dependence on tourism.
- Fiscal position has weakened, but debt remains sustainable with risks.
- Fiscal consolidation needs to resume in 2021 to restore fiscal space; staff recommend reaching a primary surplus of at least 2 percent of GDP by 2024 and maintaining it until debt reaches the Maastricht 60 percent of GDP.
- Staff concur with key elements of the financial sector response, encourage continued monitoring, and welcome authorities’ determination to resume the AQR.
- Staff support authorities’ request for 100 percent of quota (SDR 60.5 million) under the RFI given urgent BOP needs.

_International Monetary Fund—Montenegro: Executive Summary and selected excerpts (June 11, 2020)._

### EXECUTIVE SUMMARY

### EXECUTIVE SUMMARY

### Context and Request for Fund Support
- COVID-19 will hit Montenegro hard; tourism is a key industry (around a fifth of the economy).
- Fiscal space has eroded in recent years due to large public capital outlays (notably the Bar-Boljare highway).
- The Montenegrin authorities request financial support under the Rapid Financing Instrument (RFI) in the amount of SDR 60.5 million, equivalent to 100 percent of quota.
- Purpose of RFI resources: address the large and urgent balance of payments financing need, mitigate economic consequences of the pandemic, and preserve macroeconomic stability.

### Impact of COVID-19: Key Findings and Projections
- Short-run health outcome (as of June 8): 324 total cases and nine deaths; Montenegro reported no active cases as of that date.
- Scope of economic contraction:
  - GDP projected to decline by nearly 9 percent in 2020 (11.7 percentage points below the pre-virus baseline), assuming tourism receipts are halved versus last year.
  - Balance of payments financing need assessed at EUR 252 million, or 5.7 percent of GDP.
  - GDP projected to grow by 5.2 percent in 2021 and gradually converge to potential.
  - Staff project a permanent 10 percent loss of output relative to pre-crisis trends.
  - Public debt will peak at nearly 90 percent in 2020 and decline over the forecast horizon assuming fiscal consolidation resumes in 2021.
- Pre-/Post-COVID illustrative changes (2020, staff calculations):
  - Real GDP growth: Pre-COVID 3.0; Post-COVID -8.7; ∆ change -11.7
  - Avg. inflation: Pre-COVID 1.3; Post-COVID 0.3; ∆ change -1.0
  - Overall fiscal balance (% of GDP): Pre-COVID -2.7; Post-COVID -10.0; ∆ change -7.3
  - Gross public debt (% of GDP): Pre-COVID 73.4; Post-COVID 89.4; ∆ change 16.0
  - Bank credit to private sector: Pre-COVID 7.0; Post-COVID -12.0; ∆ change -19.0

### Macroeconomic Policy Challenges and Authorities’ Response
- Immediate policy challenge: support activity in 2020 while mitigating medium-term debt sustainability risks arising from uncertain growth, weaker revenues, and high financing needs.
- Authorities’ actions and commitments:
  - Carefully assessed spending needs in 2020 and committed to resuming the ambitious fiscal consolidation implemented since 2017 (temporarily paused in 2020).
  - High level of government deposits at the Central Bank provides a mitigating factor.
  - Reduced current spending, including salary cuts for high-ranking government officials and partial postponement of other expenditures, totaling about 1.5 percent of GDP.
  - Pre-financing and external borrowing: pre-financed in 2019 the EUR 321 million Eurobond maturing Q1 2020; secured syndicated loan of EUR 250 million backed by the World Bank’s Policy Based Guarantee (PBG).
  - Rollover risk: EUR 227 million Eurobond maturing March 2021 will depend on market conditions, motivating retention of deposit buffers and reserves at end-2020.

### Fiscal Sector: Findings and Staff Recommendations
- Fiscal impact and composition (2020, percent of GDP, IMF staff calculations):
  - Headline fiscal deficit projected to increase to 10 percent in 2020.
  - Revenue losses of some 3 percent of GDP.
  - Increased health spending and rescue packages amounting to some 4 percent of GDP.
  - Financing snapshot (percent of GDP): Total revenues and grants 42.6 → 39.6 (∆ -3.0); Total expenditures and net lending 45.3 → 49.6 (∆ 4.3); Overall balance -2.7 → -10.0 (∆ -7.3).
  - Financing composition (percent of GDP): Domestic financing 4.9 → 7.7 (∆ 2.8); Deposit draw-down 5.7 → 8.2 (∆ 2.6); Foreign financing -2.5 → -2.4 (∆ 0.0).
  - Identified exceptional financing 3.6 percent of GDP: IMF 1.7; World Bank 0.6; EU 1.3; Unidentified financing 0.9.
- Staff view: COVID-19 measures are temporary and targeted; authorities committed to auditing crisis-mitigating spending and publishing results.
- Medium-term fiscal guidance:
  - Resume fiscal consolidation in 2021.
  - Staff recommend reaching a primary surplus of at least 2 percent of GDP by 2024 and maintaining these levels until debt has converged to the Maastricht criterion of 60 percent of GDP.
  - Manage capital expenditures carefully and avoid repeating past huge capital spending.

### Fiscal Measures (Selected COVID-19 Measures and Costs)
- Non-highway, non-COVID-19 cyclically-adjusted primary balance trends and costs noted; first phase of the highway expected completed June 2021.
- Selected COVID-19 fiscal support measures (net cost, percent of GDP):
  - Health spending (tests, protective equipment, transportation of supplies, higher salaries for medical personnel for overtime work): 0.38* (plus additional 0.18 percent of GDP funded out of a donations account).
  - Subsidies (wage subsidies for affected workers, childcare, quarantine, newly employed in SMEs): 0.83
  - Payment deferrals (income taxes, social security contributions, tax debt): 2.20
  - Handouts (one-off financial assistance for vulnerable and formally unemployed): 0.03
  - Other (support for agriculture and fisheries, market support, one-off benefits, subsidies to interest rates for IDF credit line, advance payments): 0.16

### Financial Sector: Status and Policy Measures
- Banking sector as of end-Q1 2020: well-capitalized and liquid, but enhanced monitoring warranted.
- Central Bank measures to ease borrower strain and provide liquidity:
  - Loan moratorium: (i) 90-day moratorium on loan repayments, granted on borrower request; (ii) possible second 90-day moratorium for borrowers facing COVID-19 difficulties.
  - Reserve requirements: (i) Reduction in the fee for withdrawing reserve requirement liquidity from 12 percent to 6 percent p.a.; (ii) Reduction in the reserve requirement rate by two percentage points.
  - Dividends: Temporary ban on dividends to shareholders unless in the form of equity.
  - Loan restructuring: Conditions under which banks may reclassify loans as new loans (IFRS-aligned provisioning).
  - Exposure limits: Temporary increases beyond 25 percent with Central Bank prior approval.
- Precautionary steps:
  - Doubled BIS liquidity line to EUR 100 million.
  - Expanded EBRD credit line to EUR 50 million to bolster deposit insurance.
- Risks and oversight:
  - Non-resident deposits are around a quarter of total deposits (current classification standards); small outflows occurred in late March but have since abated.
  - Montenegro’s unilateral euroization limits Central Bank policy options, notably Emergency Liquidity Assistance (ELA).
  - Central Bank plans system-wide Asset Quality Review (AQR); completion expected mid-2021.

### Modalities of Support and External Financing
- RFI request and expected role:
  - Authorities requested assistance of 100 percent of quota (SDR 60.5 million) under the RFI.
  - Proposed RFI purchase would help mitigate pandemic economic consequences, preserve stability, and act catalytically to crowd in other support and reinforce sovereign market access.
  - The proposed access of 100 percent of quota would cover 30 percent of the financing gap.
- Overall external support sharing and expected coverage of the financing gap:
  - Much of the remainder of the public sector gap to be covered by COVID-19-related lending from the World Bank and the EU.
  - An EU grant expected to fill the residual public sector gap (0.9 percent of GDP).
  - Exceptional lending by other IFIs (EBRD, EIB, IFC, KfW) to domestic banks expected to close the remaining private sector BoP gap (around EUR 150 million or some 3 percent of GDP over 2020–22).
  - Staff support: IMF staff support the authorities’ request for an RFI purchase given the urgency; balance of payments difficulties expected to be resolved within the next 12 months without major policy adjustments beyond those in staff’s baseline.

### Risks Highlighted by Staff
- Sharp tourism decline, weaker capital inflows, and uncertain global recovery increase BOP and fiscal risks.
- Rollover risk for EUR 227 million Eurobond maturing March 2021 could strain reserves and deposit buffers.
- Prolonged pandemic could trigger non-resident deposit outflows and intensify banking sector stress despite current buffers.
- Debt sustainability risks depend on future growth, revenue projections, and management of capital spending.

_International Monetary Fund—Montenegro: Executive Summary (June 11, 2020)._

### 13.      Montenegro is assessed as having sustainable debt and adequate capacity to repay the

### 13.      Montenegro is assessed as having sustainable debt and adequate capacity to repay the Fund.

### Debt sustainability and capacity to repay
- The Public DSA (Annex 1) shows that public debt, while high, is judged to be sustainable with a sufficient buffer to remain sustainable under a variety of shocks.
- Given prevailing global monetary conditions, nominal interest rates are likely to be below nominal growth rates over the forecast horizon beyond this year.
- Capacity to repay the Fund (Table 6) is adequate, as obligations to the Fund are small relative to exports, reserves, and external debt service.
- Euroization poses risks because it entails a strong direct relationship between fiscal policy choices, the level of government deposits, and NIR.
- The authorities commit to undergoing a safeguards assessment as soon as feasible, have provided Fund staff with the most recent central bank audit reports, and have authorized the external auditors of the central bank to hold discussions with staff.

### Balance of Payments: COVID-19 Impact (Million EUR, 2020)
- Pre-COVID / Post-COVID / ∆ change
- Current account balance: -825 / -593 / 233
- percent of GDP: -16.1 / -13.3 / 2.8
- Trade balance: -2289 / -1421 / 868
- Services account: 1086 / 563 / -523
- o/w Tourism receipts: 1158 / 547 / -611
- Primary income: 56 / 13 / -43
- Secondary income: 322 / 254 / -69
- FDI (net inflows): 387 / 192 / -195
- Portfolio investment (net inflows): 327 / 346 / 20
- Other investment (net inflows): 473 / 127 / -346
- Financing gap: 0 / 252 / 252
- percent of GDP: 0.0 / 5.6 / 5.6
- Exceptional financing to public sector: 202
  - IMF: 75
  - World Bank: 25
  - EU: 60
  - Unidentified financing: 42
- Exceptional financing to private sector 1/: 50
- Source: IMF staff calculations.
- 1/ IFI loans to domestic banks.

### Risks
- Significant risks to projected growth and fiscal balances — and thereby, to debt sustainability.
- A potential second wave upon reopening could cause further significant disruption.
- A more prolonged global outbreak and uncertainties regarding tourism demand could further paralyze the hospitality industry, jeopardizing prospects for an economic recovery.
- A larger-than-projected drop in government revenue would hamper the ability to achieve the primary surpluses necessary to lower debt to safe levels and to reduce the government’s already large external financing needs.
- Any significant further fiscal slippage beyond this critical juncture (e.g., implementing further phases of the Bar-Boljare project or other large public investment projects), if not promptly addressed, will likely cause concerns regarding debt sustainability.
- Large gross financing needs and guarantees exceeding 8 percent of GDP present risks.
- Protracted volatility in global financial conditions and heightened risk aversion could affect investor appetite for EM debt, constraining authorities’ ability to tap financial markets.
- While the overall banking sector is reportedly healthy, a deeper economic slowdown could hurt smaller, less profitable local banks.

### Authorities’ views
- The authorities’ macroeconomic and fiscal projections are more optimistic.
  - They expect a smaller contraction of tourism receipts in 2020, seeing a swift recovery in regional tourism and a bounce-back in Q4 from pent-up demand.
  - They project GDP to contract 6.8 percent for the year.
  - They expect correspondingly higher revenue outturns in 2020 (on VAT and social security contributions) and a smaller overall deficit of 7.3 percent of GDP.
- The authorities are keenly aware of limited fiscal space.
  - They have committed to refrain from further large capital expenditures until the outlook for public finances significantly improves and risks to debt sustainability are decisively mitigated (see LOI).
  - To raise the likelihood of realizing the required primary surpluses, they are making progress on public administration reform (a condition for the World Bank’s PBG) and the gradual elimination of expensive tax expenditures each year through 2025, although immediate savings would be limited from both measures.
  - There are plans to improve the medium-term budget framework to enhance spending efficiency.
- The authorities view the financial sector as healthy going into the crisis.
  - The focus is to provide targeted support to borrowers while maintaining credit flowing to the private sector (including by mobilizing IFI funding to domestic banks).
  - With foreign-owned banks dominating the sector, the central bank expects parent banks to support their subsidiaries in an event of need.
  - Authorities pointed to their smooth management of the resolution of two banks last year and reaffirmed readiness to swiftly respond to financial stability risks.

### Staff appraisal
- The outlook has deteriorated.
  - Economic prospects for 2020 have declined dramatically given Montenegro’s heavy dependence on tourism.
  - Encouraging preliminary Q1 readings, positive epidemiological results from swift and decisive containment measures and the associated reopening of the economy could lend some upside, despite the significant uncertainty around the pace of recovery of European tourism.
- The fiscal position has weakened, but debt remains sustainable.
  - Despite major fiscal pressures and an elevated debt burden, the country’s debt is assessed as sustainable—albeit with risks due to uncertain growth prospects and high financing needs (see DSA).
- Fiscal consolidation needs to resume in 2021 to restore fiscal space.
  - Prudent management of finances, particularly the restraint on large capital expenditures for the foreseeable future, is required to bring down debt levels.
  - Staff recommend reaching a primary surplus of at least 2 percent of GDP by 2024 and maintaining these levels till debt has reached the Maastricht criterion of 60 percent of GDP.
- Staff concur with key elements of the financial sector response.
  - Staff encourage the authorities to continue close monitoring of the system and to stand ready to take additional measures if required.
  - The authorities’ determination to resume the AQR in the second half of the year, conditions permitting, is encouraging.
- Against this backdrop, staff support authorities’ request for 100 percent of quota (SDR

*Source: IMF staff report excerpt.*

### 60.5 million) under the RFI. Montenegro faces urgent balance of payments needs due to the

### Montenegro: Selected Findings and Projections (excerpts from IMF staff tables)

### Immediate balance of payments needs and IMF support
- Montenegro faces "urgent balance of payments needs due to the impact of the COVID-19 global pandemic".
- Fund credit and RFI:
  - Fund disbursement (millions Euro): 75.0
  - Fund stock (millions Euro): 74.7; 74.7; 74.7; 55.9; 18.6; -
  - Disbursement (millions SDR): 60.5
  - Stock (millions SDR): 60.5; 60.5; 60.5; 45.4; 15.1; -
  - Fund credit outstanding: In percent of quota: 100.0; 100.0; 100.0; 75.0; 25.0; -
  - Fund credit outstanding: In percent of GDP: 1.7; 1.6; 1.5; 1.1; 0.3; -
- Identified exceptional financing to public sector (Table 3a / Table 4 memorandum):
  - Total: 202 (millions of euro)
  - IMF: 75
  - World Bank: 25
  - EU: 60
  - Unidentified: 42

### Macroeconomic projections and key indicators (time series as presented)
- Real economy (selected series, exact values in sequence as presented):
  - Nominal GDP (millions of €): 3,655 3,954 4,299 4,663 4,903 5,123 4,461 -663 4,759 5,028 5,268 5,529 5,813
  - Gross national saving (percent of GDP): 9.1 9.9 14.1 14.9 13.8 13.2 11.0 -2.2 14.5 15.2 14.7 15.3 15.3
  - Gross investment (percent of GDP): 20.1 26.1 30.2 31.9 29.0 29.3 24.3 -5.0 24.9 24.7 24.4 24.8 24.9
  - Unemployment rate (percent): 17.6 17.7 16.1 15.2 ...................................
  - Real GDP growth: 3.4 2.9 4.7 5.1 3.4 3.0 -8.7 -11.7 5.2 4.2 3.1 3.2 3.3
  - Consumer price inflation (period average): 1.5 -0.3 2.4 2.6 0.4 1.3 0.3 -1.0 0.6 1.2 1.5 1.6 1.7
  - GDP deflator (percent change): 2.2 5.1 3.8 3.2 1.6 1.3 -0.4 -1.7 1.4 1.4 1.6 1.7 1.8
- Balance of payments (percent of GDP, current account balance): -11.0 -16.2 -16.1 -17.0 -15.2 -16.1 -13.3 2.8 -10.5 -9.5 -9.6 -9.5 -9.6
- Memorandum items (exact sequences):
  - Nominal GDP Growth (in percent): 5.7 8.2 8.7 8.5 5.1 4.4 -9.0 -13.4 6.7 5.6 4.8 5.0 5.1
  - Gross international reserves in millions of USD: 679 794 1,003 1,195 1,518 1,202 1,119 -82.5 1,183 1,142 1,093 1,071 1,200
  - In months of imports of goods and services: 3.1 3.3 3.4 4.0 5.1 3.7 5.2 1.5 4.6 4.0 3.7 3.4 3.6

### Balance of payments — levels (Table 2, selected lines, exact sequences)
- Current account balance (millions of euro): -402 -642 -691 -793 -744 -825 -593 233 -499 -479 -508 -524 -557
- Trade balance (millions of euro): -1,464 -1,658 -1,860 -2,049 -2,065 -2,289 -1,421 868 -1,720 -1,879 -1,973 -2,064 -2,173
- Services account (millions of euro): 789 769 852 937 1,020 1,086 563 -523 959 1,102 1,160 1,225 1,292
  - Receipts (millions of euro): 1,214 1,255 1,382 1,563 1,698 1,776 1,082 -694 1,549 1,751 1,841 1,939 2,044
  - Expenditures (millions of euro): 425 486 531 627 678 690 520 -171 589 649 681 714 751
- Foreign direct investment, net (millions of euro): 169 94 111 69 70 76 43 -3.2 6.4 6.7 6.7 6.7 6.7 (percent of GDP series also provided)
- Financial account (millions of euro): -375 -690 -774 -900 -1,198 -533 275 61 -460 -389 -463 -502 -669
- Change in official reserves (+ denotes increase) (millions of euro): 78 129 97 202 316 -292 -368 -765 0 -40 -45 -21 111
- Financing gap (millions of euro): 0 252 89 50 0 0 0 0 (Table note: Financing gap series shows 0 252 89 50)

### External financing needs and financing composition (Table 4)
- Financing requirements (millions of euro): 1,076 (2019); 1,017 (2020); 823 (2021); 638 (2022)
- Financing requirements breakdown:
  - Current Account deficit: 744 (2019); 593 (2020); 499 (2021); 479 (2022)
  - Government: 332; 424; 324; 159
  - Eurobond repayments: 169.1; 321.1; 227.5; 0.0
  - Foreign loans amortization: 162.8; 103.4; 97.0; 159.2
- Available financing (millions of euro): 1,062; 765; 735; 588
  - Government available financing: 695; 372; 446; 145
  - Eurobond issuance: 500; 0; 320; 0
  - Foreign loans disbursements: 195; 372; 126; 145
  - FDI (net): 345; 192; 304; 339
  - Bank financing (net change in liabilities): 112; -16; 22; 63
  - Other sectors financing (net change in liabilities): 445; -69; 67; 29
  - Change in gross international reserves: -316; 368; -50; 40
- Financing gap (millions of euro): 0 (2019); 252 (2020); 89 (2021); 50 (2022)
- Exceptional financing to public sector (memorandum): 202 (2019); 39 (2020) with IMF: 75; World Bank: 25; EU: 60; Unidentified: 42; Exceptional financing to private sector: 50; 50; 50 (note 2/ includes Covid-related loans by IFIs)

### Fiscal position and projections (consolidated general government, Tables 3a/3b)
- Total revenues and grants (millions of euro): 1,477 1,635 1,732 1,911 2,090 2,185 1,767 -418 2,032 2,073 2,201 2,324 2,441
- Total expenditures and net lending (millions of euro): 1,695 1,879 2,029 2,200 2,208 2,323 2,213 -109 2,156 2,154 2,237 2,343 2,448
- Overall Balance (millions of euro): -218 -244 -297 -290 -118 -138 -446 -308 -125 -81 -36 -19 -7
- Overall fiscal balance (percent of GDP): -6.0 -6.2 -6.9 -6.2 -2.4 -2.7 -10.0 -7.3 -2.6 -1.6 -0.7 -0.3 -0.1
- Primary balance (millions of euro): -132 -159 -195 -189 -8 -22 -327 -305 -183 48 61 116 141
- Primary balance (percent of GDP): -3.6 -4.0 -4.5 -4.0 -0.2 -0.4 -7.3 -6.9 -0.4 0.7 1.6 2.1 2.4
- General government gross debt (percent of GDP): 68.8 66.4 66.2 71.9 79.4 73.4 89.4 16.0 87.7 83.8 79.8 75.9 74.2
- General government debt, including guarantees (percent of GDP): 76.2 73.9 73.5 78.1 84.4 80.6 98.0 17.4 95.8 91.4 87.1 82.9 80.9
- Memo: Financing gap identified exceptional financing: 160 (Table 3a line "Identified exceptional financing" and financing gap lines)

### Banking sector financial soundness indicators (Table 5, selected indicators)
- Regulatory capital as a percent of risk-weighted assets (Dec): 14.7 14.4 16.2 15.5 16.0 16.4 15.6 17.7 17.4 (Mar 2020)
- Regulatory Tier 1 capital as a percent of risk-weighted assets (Dec): 12.9 13.0 14.4 14.2 14.7 15.0 14.4 18.1 17.8 (Mar 2020)
- Capital as a percent of total assets (Dec): 9.1 8.2 9.0 8.7 8.7 8.6 8.4 10.1 10.4 (Mar 2020)
- Nonperforming loans (gross) as a percent of total loans (Dec): 17.3 20.6 18.8 14.8 11.5 8.4 7.4 5.1 5.6 (Mar 2020)
- Return on equity (ROE, annual basis) (Dec): -30.2 0.7 6.0 -0.7 1.5 7.6 8.5 10.0 9.4 (Mar 2020)
- Return on assets (ROA, net income to average total assets, annual) (Dec): -3.1 0.1 0.8 -0.1 0.2 1.0 1.0 1.3 1.2 (Mar 2020)
- Loans as a percent of deposits (Dec): 99.0 96.5 110 123 126 132 123 116 110 (Mar 2020)
- Liquid assets as a percent of total assets (Dec): 16.0 20.0 22.2 24.8 24.5 25.3 22.6 20.8 20.9 (Mar 2020)

### Indicators of Fund credit and public-sector external debt service (Table 6 memo items)
- GDP (millions euro): 4,469 4,764 5,035 5,277 5,540 5,824
- Quota (millions SDR): 60.5 60.5 60.5 60.5 60.5 60.5
- Quota (millions euro): 75.0 74.5 74.5 74.5 74.5 74.6
- Exports of goods and services (millions euro): 1,454 1,972 2,211 2,327 2,452 2,584
- Gross official reserves (millions euro): 1,076 1,126 1,027 1,058 948 994
- External public debt service (millions euro): 534 452 320 329 366 874
- EUR/SDR exchange rate: 1.23 1.23 1.23 1.23 1.23 1.23

_Italic: Source — IMF staff tables and projections as presented in the provided content._

### Annex I. Public Debt Sustainability Analysis

### Annex I. Public Debt Sustainability Analysis

### Executive summary and assessment
- Montenegro’s public debt is expected to reach nearly 90 percent of GDP in 2020, exceeding the level envisaged in the last Article IV Staff Report by about 10 percentage points.
- The 2020 increase reflects temporary fiscal expansion to combat COVID-19 amid extraordinarily depressed economic activity.
- Assuming the crisis subsides and authorities resume fiscal consolidation starting in 2021 while managing debt prudently, public debt is assessed to be sustainable.
- Significant risks to this assessment include uncertainty of future growth, the projected path of fiscal adjustment, and large public and external financing needs.
- Sizable government deposits at the central bank (3.9 percent of GDP in 2020) are a mitigating factor.

### Baseline assumptions and fiscal path
- Primary deficit in 2020 is expected to reach 7.3 percent of GDP reflecting COVID-19-related emergency health and social spending and a precipitous drop in revenue due to a tourism-dependent economy slowing dramatically.
- Starting 2021, the primary fiscal balance is projected to improve, reaching a 2.4 percent surplus in 2025.
- The projection is contingent on:
  - Resumption of fiscal consolidation policies that began in 2017.
  - Authorities refraining from new borrowing to finance further phases of the Bar-Boljare highway, or other large capital expenditures.
- Borrowing structure and financing assumptions:
  - Medium and long-term debt dominates the structure of borrowing.
  - Borrowing from the IMF, the EU, and the World Bank, and support of the World Bank PBG (a contract for EUR 250 million with a consortium of banks signed in early May 2020) will help meet the financing need in 2020.
  - Domestic borrowing is assumed to grow to reflect steady development of the domestic debt market, but private foreign financing is assumed to provide residual financing given limited domestic capacity.
  - Interest rates are projected to remain low reflecting prevailing global monetary conditions, an increasing share of multilateral debt, and stable interest spreads.

### Debt profile, vulnerabilities, and financing needs
- Gross general government debt is estimated to temporarily increase to about 90 percent by end-2020.
  - This corresponds to net debt of 83.5 percent of GDP as the government maintains high precautionary deposits.
- Over the medium term public debt is expected to decline to 74 percent by end-2025, remaining above the 70-percent DSA threshold for high risk of debt distress.
- Gross financing needs:
  - Projected to fall below 15 percent in 2021.
  - A spike in 2020 largely reflects a Eurobond that matured in March 2020 (pre-financed on favorable terms in 2019). Another spike to around 15 percent occurs in 2025 due to another maturing Eurobond.
- Key vulnerabilities:
  - Public debt held by non-residents (Eurobonds and the China Ex-Im Bank loan).
  - High external financing needs with a large contribution from non-resident bank deposits.
  - Shocks to economic growth and primary balance have the largest impact on the debt profile.
- Debt management expectations:
  - Authorities’ record of proactive debt management (including pre-financing and accessing private funds via the PBG) supports expectations of lengthening maturities and smoothing repayments as market conditions permit.

### Realism of baseline projections
- Median forecast errors for real GDP growth and the primary balance (actual minus projection) in 2010-2018 suggest, on average, a pessimistic bias in staff’s past projections.
- Improvements in the cyclically adjusted primary balance are driven largely by reductions in highway spending (which has a large import component) and are assessed to be consistent with recovery of growth.
- The three-year adjustment in the cyclically adjusted primary balance largely reflects automatic reduction in highway spending after completion of the first phase.
  - A more plausible three-year fiscal adjustment using cyclically adjusted primary balance net of highway expenditure and exceptional COVID-19 spending is about 2.5 percent of GDP.

### Stress tests and scenario results
- Standard shocks produce higher debt levels but generally declining debt trajectories under the baseline.
- Combined macro-fiscal shock:
  - Incorporates shocks to GDP, inflation, primary balance, real interest rate and exchange rates.
  - Debt would rise in 2021 to 97 percent of GDP and subsequently decline to 90 percent of GDP in 2025.
- Contingent liabilities shock:
  - A 2021 contingent liabilities shock equivalent to 10 percent of banking system assets (7 percent of GDP) raises debt to 98 percent of GDP in 2021, declining to 86.5 percent of GDP by 2025.
- Additional stress-test results (selected):
  - Under the Real GDP Growth Shock scenario, real GDP growth path is -8.7 (2020), 3.0 (2021), 2.0 (2022), 3.1 (2023), 3.2 (2024), 3.3 (2025). Primary balance path is -6.5 (2020), -1.5 (2021), -1.5 (2022), 1.6 (2023), 2.1 (2024), 2.4 (2025).
  - Under the Combined Macro-Fiscal Shock scenario, real GDP growth path is -8.7 (2020), 3.0 (2021), 2.0 (2022), 3.1 (2023), 3.2 (2024), 3.3 (2025). Primary balance path is -6.5 (2020), -3.4 (2021), -1.5 (2022), 1.1 (2023), 1.9 (2024), 2.3 (2025). Effective interest rates under this shock rise to 3.9 by 2025.
- Under the contingent-liability “Highway Phase 2-4” additional stress test, gross nominal public debt trajectories and public gross financing needs rise substantially through 2025.

### Alternative scenarios and risks to sustainability
- Historic scenario:
  - With primary deficits (including transitory highways spending) of 3.2 percent of GDP and growth of 2.8 percent, debt increases to 99 percent of GDP in 2025.
  - Baseline averages: 1.1 percent of GDP average primary surplus and 3.8 percent average growth.
- Constant primary balance scenario:
  - If the primary balance of 2020 persisted, debt would climb to 116 percent of GDP in 2025. This scenario is described as unrealistic because it assumes transitory COVID-19 factors persist.
- Highway borrowing scenario (Bar-Boljare phases 2–4):
  - EUR1.2 billion projected cost starting in 2022 would lead debt to grow to 93.6 percent of GDP by 2025, following a temporary decline in 2021.
  - This scenario is provided for illustrative purposes and is considered unlikely given authorities’ commitments to fiscal adjustment and refraining from further capital expenditures that would undermine sustainability.

### Key baseline indicators and projections (selected figures)
- Nominal gross public debt: 57.5 (2018), 71.9 (2019), 79.4 (2020), 89.4 (2021), 87.9 (2022), 84.0 (2023), 80.0 (2024), 76.1 (2025), 74.2 (end-2025).
- Public gross financing needs: 12.4 (2018), 19.6 (2019), 12.4 (2020), 24.0 (2021), 13.1 (2022), 8.4 (2023), 6.8 (2024), 8.9 (2025), 15.2 (2025 spike).
- Net public debt: 56.3 (2018), 66.4 (2019), 68.4 (2020), 85.5 (2021), 83.1 (2022), 80.3 (2023), 77.4 (2024), 73.9 (2025), 70.2 (end-2025).
- Real GDP growth: 1.5 (2018), 5.1 (2019), 3.4 (2020), -8.7 (2020 contraction), 5.2 (2021), 4.2 (2022), 3.1 (2023), 3.2 (2024), 3.3 (2025).
- Inflation (GDP deflator): 2.2 (2018), 3.2 (2019), 1.6 (2020), -0.4 (2020), 1.4 (2021), 1.4 (2022), 1.6 (2023), 1.7 (2024), 1.8 (2025).
- Effective interest rate (percent): 3.5 (2018), 3.5 (2019), 3.3 (2020), 2.9 (2021), 2.7 (2022), 2.7 (2023), 2.8 (2024), 2.9 (2025), 3.1 (end-2025).
- Change in gross public sector debt (cumulative): 3.6 (2018), 5.7 (2019), 7.5 (2020), 10.0 (2021), -1.6 (2022), -3.9 (2023), -4.0 (2024), -4.0 (2025), -1.9 (cumulative), -5.2 (cumulative through projection horizon).

*Source: IMF staff.*

### Appendix I. Letter of Intent

### Appendix I. Letter of Intent

### Overview and context
- The COVID-19 pandemic is described as "the most serious threat to Montenegro’s economy since independence."
- Early containment measures: curtailed travel, closed schools, banned public gatherings; "no new cases recorded since May 4" and gradual easing to restart the economy.
- Tourism accounts for "about one-fifth of GDP" and its loss is central to the economic shock.

### Macroeconomic impact and projections
- IMF staff projected:
  - "GDP will drop by 8.7 percent in 2020 before bouncing back to 5.2 percent in 2021."
  - Tourism revenues estimated to "drop by half", representing "a loss of more than 600 million EUR (13.5 percent of GDP)."
  - Fiscal deficit expected to increase to "10 percent of GDP in 2020."
  - Temporary fall in revenues of "3 percent of GDP" and higher expenditures related to a healthcare and rescue package of "4 percent of GDP."
  - Public debt is expected to "peak close to 90 percent" in 2020.
- Authorities’ more optimistic scenario:
  - Output fall "below 7 percent of GDP in 2020."
  - Budget deficit "below 8 percent of GDP."
- Historical and pre-crisis performance:
  - "The economy grew by 3.6 percent in 2019" and was expected to grow by "3.0 percent in 2020" prior to the pandemic.
  - "Primary deficit declined by over 3 percentage points of GDP from 2017-19 (corresponding to a primary surplus of 2.7 percent of GDP at end-2019, excluding phase I of the Bar-Boljare highway)."
  - Authorities had run "a 2 percent primary surplus in each of the last two years" notwithstanding the highway project.
  - Pre-financing helped with a Eurobond that matured in March 2020.

### Fiscal position and financing
- IMF staff projection for 2020 primary deficit: "7.3 percent of GDP."
- Financing sources expected: "drawdown of government deposits, market borrowing and additional foreign assistance."
- Requested IMF support under the Rapid Financing Instrument (RFI):
  - Amount: "SDR 60.5 million (about EUR 75 million)", corresponding to "100 percent of Montenegrin quota."
  - RFI would cover "30 percent of the financing gap" and is expected to be catalytic for other IFIs.
- Additional financing requests: World Bank and the European Union.

### Policy measures: fiscal and social support
- Health-related spending: testing, medical and personal protective equipment, higher salaries for medical personnel.
- Labor and business support measures:
  - Tax deferrals and payment deferrals on income taxes, social security contributions and tax debt.
  - Wage subsidies: two-month subsidies for workers in affected sectors and those unable to work due to childcare or quarantine; six-month wage subsidies for newly employed in SMEs.
  - Direct one-off transfers to the vulnerable and unemployed.
  - Direct financial support for agriculture and fisheries.
- Expenditure control: shelving all non-essential expenditures and purchases to contain the fiscal gap.
- Transparency and governance for crisis spending:
  - "State Audit Institution of Montenegro will audit crisis-mitigating spending" and "publish the results online within 12 months of the end of the fiscal year."
  - Publish online "all public procurement plans, notices, and awarded contracts for crisis-mitigation spending," including names of awarded entities and their beneficial owners.

### Financial sector measures and CBCG actions
- Banking system starting position: "low NPLs, high liquidity, and abundant capital."
- Banking system Q1 2020 indicators (system level of 13 banks):
  - Capital increased by "16.59%."
  - Solvency ratio "17.4 percent."
  - Total profit in Q1 2020: "13.3 million euro."
  - Non-performing loans: "5.09 percent."
- CBCG liquidity and capital measures:
  - Cut the reserve requirement rate by "2 percentage points", releasing "approx. 70 million euros" to banks.
  - Halved the fees for using reserves and "halved the liquidity withdrawal requirement rate of the reserve requirement."
  - Doubled its bilateral repo line with the BIS to "100 million euro."
  - Prohibited banks from distributing dividends to shareholders (except payments in the form of bank shares).
- Borrower relief:
  - Introduced an automatic, targeted moratorium "90+90 days" on loan repayment, binding on banks.
  - The moratorium aimed to provide "155 million euros in the first three months of the pandemic."
  - Second 90 days are more flexible for those under severe strain.
- Medium-term banking relief:
  - Targeted loan restructuring to be treated as newly approved, relieving banks of additional provisioning costs.
  - Temporary allowance for banks to increase exposure to one person or a group of related parties, subject to prior CBCG approval; implementation to be vigilantly monitored and to cease after pandemic effects subside.

### Supervision, safeguards, and reforms
- Ongoing and planned supervisory improvements:
  - Established a supervisory committee at the CBCG aligned with IMF recommendations.
  - Increased off-site monitoring and intensified dialogue with banks.
  - Harmonized banking laws with EU directives on capital and liquidity management.
  - Set up a bank resolution fund and increased the size and efficiency of the deposit insurance fund.
  - Augmented liquidity backstops for the banking system.
  - Committed to completing the planned AQR of the banking system by 2021 and addressing any deficiencies rapidly thereafter; elsewhere in the document an AQR is noted to "start in September and will be completed next year."
- Anti–money laundering/combating financing of terrorism:
  - Adopted a new AML/CFT law with new guidelines for banks.
- Safeguards and IMF collaboration:
  - Authorities are ready to collaborate on a safeguards assessment.
  - Memorandum of understanding prepared between the Ministry of Finance and the Central Bank of Montenegro to establish modalities for repayment to the Fund.
  - Intend to use the domestic-currency equivalent (euro) of the IMF purchase for budgetary financing.

### Debt sustainability and medium-term commitments
- Immediate commitment: maintain fiscal restraint and refrain from large capital expenditures that could jeopardize debt sustainability (specifically "not to undertake construction of further phases of the Bar-Boljare highway" until outlook improves).
- Medium-term fiscal goals:
  - Aim to "achieve and maintain primary surpluses until public debt declines to safe levels."
  - Observe a path of fiscal consolidation "towards a primary surplus of 2 percent of GDP in the medium term."
  - Debt target initially cited as "closer to 60 percent of GDP by 2022" and later as "a debt target closer to 60 percent of GDP by 2025."
- Structural reforms to support fiscal targets:
  - Implement the Tax Administration Reform Project to generate higher revenues.
  - Further reform public administration and streamline tax expenditures to ensure needed primary surpluses over the medium-term.

### Monitoring, publication, and commitments to the Fund
- Authorities will maintain dialogue with the IMF and "avoid measures or policies that would aggravate" balance of payments difficulties.
- Will comply with IMF Articles of Agreement, including regarding restrictions on payments and transfers under Article VIII.
- Authorities authorize IMF to publish this Letter of Intent and the staff report for the RFI request.
- Authorities will provide IMF staff with necessary data and information for monitoring implementation.

- Additional operational notes from authorities’ statement:
  - As of June 15, there were "only 325 confirmed cases of COVID-19 and 9 deaths" in Montenegro.
  - High-frequency and Q1 2020 indicators cited as supporting a less severe near-term hit: Q1 2020 GDP growth "2.7 percent (annual data)"; net earnings grew "2.3%"; industrial production grew "12.9 percent"; manufacturing grew "17.0 percent"; mining and quarrying grew "21.3 percent"; construction works grew "4.6 percent"; retail turnover grew "7.4 percent"; electricity supply grew "6.9 percent"; annual inflation "0 percent at end-March"; employment fell "2.9 percent"; export of goods fell "5.7 percent"; payment system transactions volume increased "2 percent."

### Conclusion
- Authorities consider the requested RFI financing appropriate and catalytic to close urgent BoP needs and preserve macroeconomic stability.
- They commit to resume fiscal consolidation and return debt to a downward trajectory once COVID-19 consequences are contained.
- Authorities will continue to consult with the Fund and provide data necessary for program monitoring.

*Appendix I. Letter of Intent — Montenegro (June 11, 2020), as provided in the source PDF.*

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_Source: https://www.imf.org/-/media/files/publications/cr/2020/english/1mneea2020002.pdf_