## 1mneea2022001 ## Source details **Canonical URL:** [1mneea2022001](https://www.imf.org/-/media/files/publications/cr/2022/english/1mneea2022001.pdf) ## Other formats - [Markdown version](/-/media/files/publications/cr/2022/english/1mneea2022001.pdf.md) - [Structured JSON version](/-/media/files/publications/cr/2022/english/1mneea2022001.pdf.json) --- ### Context and recent macro developments - Montenegro is a unilaterally euroized economy aiming for EU accession by 2025. - Strategic notes: - Strategic Adriatic coast location with potential beyond tourism (renewable energy, other sectors). - Bar‑Boljare highway project began in 2016 (first of four envisaged phases close to completion) and boosted short‑term growth at the cost of a sharp increase in public debt. - Political context: - New government took office in December 2020; first change of power since independence; supported by three parliamentary coalitions with a one‑seat majority. - 2021 annual budget law adopted mid‑June 2021 using temporary financing; 2022 budget passed late‑December 2021 with significant parliamentary amendments. - Public health and vaccinations: - Widespread vaccinations began in May 2021; as of mid‑January 2022, about half the population has received two vaccine doses. - Real economy and tourism: - Real GDP declined by 15.3 percent in 2020. - Tourism receipts fell by 87 percent in 2020. - Foreign tourist overnight stays during January–November 2021 were at 60 percent of 2019 levels. - Q1 2021 contraction was 6.5 percent (y‑o‑y); Q2 2021 growth 19.0 percent (y‑o‑y); Q3 2021 growth about 26 percent (y‑o‑y). - External and reserve position: - Current account deficit widened to 26 percent of GDP in 2020. - Reserve buffer at end‑2020 peaked at €1.7 billion (42 percent of GDP), boosted by: €750 million Eurobond; €74 million IMF RFI; €60 million EU M‑FA. - Authorities intend to keep the 2021 SDR allocation of SDR 60.5 million as reserves. - Fiscal outcomes 2020–2021: - Fiscal deficit widened to 11 percent of GDP in 2020. - Authorities targeted and expected to meet a year‑end 2021 fiscal deficit target of 3.8 percent of GDP; outturn projected around 2 percent of GDP in 2021. - Public debt: 79 percent of GDP in 2019; rose to 107 percent of GDP in 2020 (note: netting central government deposits >20 percent of GDP at end‑2020, general government debt excluding guarantees increased from around 65 percent of GDP in 2019 to around 85 percent in 2020). - A 7‑year €750 million Eurobond issued in December 2020 at a yield of 2.95 percent covered baseline financing needs for 2021 and 2022. ### Outlook and key risks - Growth and inflation projections: - Partial growth rebound of 12 percent expected for 2021 (driven mostly by tourism). - Fiscal retrenchment expected to have contributed a negative 3.7 percentage points to growth in 2021. - Inflation expected to increase to 4.7 percent (e‑o‑p) in 2022, driven mainly by global commodity and food prices. - Medium‑term projections and staff vs. authorities’ views: - Baseline implies a permanent 8.7 percent loss of output relative to pre‑crisis trends (compared with non‑EU CESEE average of 4.1 percent). - Tourism projected to return to 2019 levels only in 2023. - Authorities project growth averaging 5.3 percent in 2022–24 (authorities’ figure exceeds staff baseline and implies no permanent output loss). - Current account deficit expected to stabilize at around 15 percent of GDP. - External debt expected to remain elevated at 197 percent of GDP (see Annex III). - Upside and downside risks (selected): - Upside: lower scarring if labor and capital reallocate promptly; lowering labor tax wedge could attract investment and jobs. - Downside: pandemic setbacks impairing tourism; geopolitical tensions pressuring energy prices and risk premia; unresolved political uncertainty hampering investment. - Domestic downside: disruptions at a major aluminum smelter (accounts for 15‑20 percent of merchandise exports). - Financial sector downside: asset quality could be worse than indicators suggest. - Fiscal sustainability: staff DSA indicates medium‑term debt trajectory must be put on a firm downward path with active debt management. ### Selected net fiscal impacts of COVID‑19 measures (Table 1 totals, 2020) - Health Spending: 25.30 (EUR mn) — 0.60 (Percent of GDP) - Wage Subsidies: 36.40 — 0.87 - Payment Deferrals: 34.60 — 0.83 - Social Benefits: 2.50 — 0.06 - Foregone Revenue: 6.00 — 0.14 - Other: 10.10 — 0.24 - TOTAL Net Fiscal Impact on Budget 2020: 114.92 — 2.74 ### Banking sector and financial stability (key metrics to Q3/2021) - Regulatory capital to risk‑weighted assets: 18.5 (2020) and 18.5 (2021 Dec/Sep). - Regulatory Tier 1 capital to risk‑weighted assets: 17.4 (2020) and 17.5 (2021 Dec/Sep). - Nonperforming loans in percent of gross loans: 4.7 (2019), 5.5 (2020), 5.6 (2021 Sep). - Return on assets: 1.3 (2019), 0.5 (2020), 1.3 (2021). - Return on equity: 10.0 (2019), 3.6 (2020), 10.5 (2021). - Liquid assets to total assets: 22.2 (2020), 27.5 (2021). - Customer deposits to total (noninterbank) loans: 114.4 (2020), 126.3 (2021). - Credit to the private sector growth: 3 percent in 2020 and another 4 percent in the first half of 2021 (text summary); bank credit to private sector series in table (end‑period growth) include 3.4 (2020), 5.4 (2021), 8.1 (2022), 6.1 (2023), 5.0 (2024), 4.5 (2025), 4.4 (2026). ### Data, statistics, and surveillance capacity - Data provision broadly adequate for surveillance but shortcomings exist in labor market indicators and government finance statistics; MONSTAT resource constraints noted. - National Accounts: quarterly GDP by production disseminated since 2012 using an indirect method; methodology needs improvement. - Government Finance Statistics: compiled on a cash basis; gaps remain (units excluded, extrabudgetary units, municipal enterprises, local government arrears). - Monetary and external statistics: CBM compiles BoP according to BPM6; persistent positive net errors and omissions suggest understating of inflows (tourism/remittances). - Selected data‑frequency status (as of Jan‑19‑2022): CPI latest Dec‑2021 (received Jan‑2022, M/M/M); Central government revenue/expenditure latest Nov‑2021 (received Dec‑2021, M/M/M); GDP latest Q3‑2021 (received Dec‑2021, Q/Q/Q). --- ### The ‘Europe Now’ program — measures and parliamentary outcomes - Program measures (as passed into law and described): - Increase of the net minimum wage from €250 to €450 per month. - Elimination of the flat rate employee (8.5 percent) and employer (2.3 percent) healthcare contribution on earnings. - Introduction of a progressive personal income tax: - tax‑free allowance of €700 per month, - rate of 9 percent on earnings of €700‑1,000, - higher rate of 15 percent for earnings above €1,000. - (Existing regime: flat rate of 9 percent with no allowance.) - Introduction of a progressive corporate profit tax: - 9 percent on anything below €100,000; - 12 percent on €100,001‑1,500,000; - 15 percent on anything above €1,500,000. - (Existing regime: flat rate of 9 percent.) - A range of tax administration measures. - Parliamentary outcomes: - Parliament did not approve proposed increases in a range of excise taxes and fuel marking that were initially part of the program. ### Assessment, fiscal implications, and implementation risks - Objectives and expected benefits: - Aim to arrest outward migration, increase employment and living standards, reduce labor market informality, and improve business environment. - Staff baseline expects near‑doubling of net minimum wage, substantial reduction in labor tax wedge, and progressive tax code to boost growth via higher household consumption and potentially increase credit growth. - Fiscal implications: - Staff project deterioration in fiscal position due to net revenue loss from elimination of healthcare contributions and other tax code changes. - Not all originally proposed revenue‑raising measures were approved by Parliament; all revenue‑reducing measures were passed—raising fiscal risks. - Implementation and structural risks: - Design/sequencing risks; resource and administrative capacity constraints (tax enforcement, labor inspection) could produce unintended employment, profit, and investment effects. - Size and distribution of grey economy are hard to measure; envelope payments may be regionally concentrated, increasing uncertainty. - Policy discussion priorities: - Reforms addressing labor tax wedge and tax progressivity while preserving fiscal sustainability. - Proactive management of financial sector vulnerabilities. - Structural policies: labor market measures (including minimum wage sequencing) and SOE reforms. - Governance priorities: financial sector oversight and AML/CFT framework. --- ### 2022 fiscal outlook, medium‑term trajectory, and staff recommendations - 2022 fiscal outlook: - 2022 budget targets a deficit of 5 percent of GDP. - Staff project the fiscal deficit in 2022 will exceed 6 percent of GDP. - Rise in the deficit relative to 2021 is primarily due to fiscal implications of ‘Europe Now’. - Healthcare contributions to earnings (some 4 percent of GDP) were permanently removed from revenues starting in 2022. - Changes in 2022 fiscal deficit relative to 2021 (percentage points of GDP): - Revenues: Health contributions on earnings -3.5; Non‑tax revenues -0.5 - Expenditures: Long‑term spending commitments 0.5; Capital expenditures 1.0; Other expenditures -1.3 (of which COVID‑related expenditures -0.8) - (Source: IMF Staff calculations) - Medium‑term fiscal outlook and required effort: - Authorities’ Medium‑Term Fiscal Strategy projections (selected): - Fiscal balance (% of GDP): 2022 -5.0; 2023‑2024 -1.9 -0.6 - Primary balance (% of GDP): 2022 -3.2; 2023‑2024 -0.3 0.8 - Real growth (%): 2022 6.4 5.1 4.5 - Public debt 1/ (% of GDP): 2022 76.6 73.2 69.9 (1/ does not include local government arrears) - Staff projection: under prevailing policies, fiscal deficit remains high over the medium term, putting public debt on an upward trajectory from 2023 onwards, back towards the currently elevated level of 90 percent of GDP. - Staff advise a significant medium‑term fiscal effort to put debt on a firm downward path. - Target: Authorities advised to target and maintain a primary surplus of around one percent of GDP by 2026. - Staff estimate fiscal measures to the tune of 4 percent of GDP are needed to achieve this target; would support reduction in general government debt to about 77 percent of GDP by 2026. - Illustrative measures to achieve a 1 percent primary surplus (2026 impact, % GDP): - Enact excise policies envisioned in Europe Now (from 2022) 0.3 - Enact fuel marking policy envisioned in Europe Now (from 2022) 0.3 - Increase VAT by 1 percentage point (from 2023) 0.7 - Close selected tax exemptions (from 2023) 0.5 - Flat increase of CIT to 15 percent (from 2023) 0.4 - Reduce public sector workforce by 2% a year (from 2023) 0.8 - Hold growth in goods and services to inflation (from 2023) 0.3 - Hold growth in capital spending at inflation (from 2024) 0.5 - Hold public sector wage increases to CPI (from 2023) 1.4 - (Source: IMF Staff calculations) - Guidance on capital expenditures and PPPs: - Large capital expenditures (e.g., further phases of the Bar‑Boljare Highway) should be considered only when adequate fiscal space is available (including sizable grant financing) and public debt is on a sustainable footing. - Use of PPPs requires integration into a robust public investment management process, with fiscal risks identified and monitored; extra caution for PPPs that could introduce significant fiscal liabilities. ### Corporate income tax recommendation - Consider a flat‑rate corporate income tax (CIT) with a special SME regime to reduce distortions. - Increasing the CIT rate to 15 percent would raise revenue and limit revenue leakage due to arbitrage between CIT and PIT. --- ### Labor market distortions, informality, and SOE reform - Labor market and informality: - Overall labor tax wedge similar to European average, but flat 2021 PIT and social contribution regimes produced a relatively high tax burden on low‑wage employees and contributed to high informality among low‑wage earners. - Authorities believe many low‑wage earners receive substantial informal ‘envelope payments’ of at least €130 per month. - Under the Europe Now package, tax wedge on those earning below €700 per month declined from 42 to 22 percent of the gross wage; for those earning €1,500 per month, effective rate fell from 42 to 31 percent. - Net minimum wage increased from €250 to €450 per month. - Risks: uncertainty over size/distribution of envelope payments; some employers could face large increases in labor costs, potentially reducing formal employment and competitiveness. - Policy advice: consider Active Labor Market Policies (ALMPs) to improve training and education alongside business‑climate measures. - State‑owned enterprises (SOEs): - Around 40 SOEs; fixed assets estimated at around 70 to 100 percent of GDP; performance varies across sectors. - Authorities established a holding company ‘Montenegro Works’ LLC in August 2021 to monitor and analyze SOE finances and support reforms. - Design features needed: clearly defined ownership, strong legal/institutional arrangements, safeguards against capture, and sufficient professional expertise. - IMF staff ready to assist on SOE oversight reforms. ### Public reform priorities to support debt reduction and governance - Complete the merger of revenue administration (tax, customs, gambling) smoothly to strengthen capacity and minimize disruptions. - Public Administration Reform strategy with substantive functional review recommended. - Pensions: new pension legislation (July 2020) changed pensionable age and indexation; authorities discussing reform plans with the World Bank to ensure sustainability. - Tax expenditures estimated at over 2 percent of GDP (particularly VAT); need for simple, transparent benchmark tax system. - Adhere to PIMA framework for project selection/appraisal; restrict labeling projects as ‘strategic’ within stringent standards. - Further deepen program‑based budgeting (PBB) across public sector units. --- ### Risk Assessment Matrix (selected entries) - Pandemic‑related risks: - Uncontrolled local outbreaks: Relative Likelihood High; Impact High; Policy Response: speed up vaccination; recalibrate fiscal/financial support without increasing macro stability risks. - Global resurgence: Relative Likelihood Medium; Impact High. - Macroeconomic/financial market risks: - De‑anchoring of U.S. inflation expectations → rising core yields and risk premia: Relative Likelihood Medium; Impact Medium; Policy Response: resume fiscal consolidation; develop domestic bond market. - Asset quality worse than indicators: Relative Likelihood Medium; Impact Medium; Policy Response: vigilant supervision and contingency planning. - Fiscal policy risks: - Stalling fiscal consolidation: Relative Likelihood High; Impact High; Policy Response: credible medium‑term plan to put debt on a downward path; strict adherence to public investment management. - Reform‑related scenarios: - Economy responds dynamically to Europe Now (upside): Relative Likelihood Medium; Impact High; Policy Response: reduce informality and boost labor force participation. - Lower labor tax wedge and higher minimum wage may formalize envelope payments rather than raise unemployment: Relative Likelihood Medium; Impact High; Policy Response: reduce informality and boost participation. --- ### Debt sustainability, stress tests, and financing needs (Annex III / IV highlights) - Public debt peaked at 107 percent of GDP in 2020. - Staff projections (baseline): - Projected gross debt: 89 percent of GDP in 2021; 81 percent in 2022; debt moves onto gradual upward trajectory from 2023‑2026; under prevailing policies staff project return toward ~90 percent of GDP by 2026. - Gross financing needs: 14 percent of GDP in 2022 and 2023 (baseline); over 25 percent of GDP in 2025; peak at 35 percent of GDP in 2025 in highway completion stress scenario. - Projected financing over projection period amounts to approximately €5 billion. - Stress test scenarios (selected impacts): - Growth shock (one standard deviation, 6.2 p.p.): public debt ratio rises to 102 percent of GDP in 2023 and to 111 percent by 2026; gross financing needs increase ~10 p.p. in 2023 relative to baseline. - Interest rate shock (+375 basis points on new debt in 2022–26): debt increases by 4 p.p. in 2026 relative to baseline; financing needs +2 p.p. of GDP in 2026. - Combined macro shock: debt‑to‑GDP rises to 106 percent in 2023 and to 117 percent by 2026; gross financing needs rise ~10 p.p. in 2023. - Highway Phases 2–4 (debt‑financed €1.2 billion equally over 2023–25): public debt ratio increases to 113 percent of GDP by 2026; gross financing needs peak at 35 percent of GDP in 2025. - Recommended policy actions: - More decisive policy action to keep debt on a firm downward trajectory. - Target a primary surplus of 1 percent of GDP by 2026. - Manage financing needs via responsible fiscal policy, active debt management, lengthening maturities, smoothing repayments, and exchange‑rate hedging where market conditions permit. --- *Source: IMF staff report — 1. Key Features of the ‘Europe Now’ Program.* ### 1. Key Features of the ‘Europe Now’ Program __________________________________________________________ 8 ### 1. Key Features of the ‘Europe Now’ Program ### Context - Montenegro is a unilaterally euroized economy aiming for EU accession by 2025. - Strategic strengths and vulnerabilities: - Strategic and scenic location along the Adriatic coast; significant potential to diversify beyond tourism into renewable energy and other sectors. - After independence in 2006, recovery from the global financial crisis was aided by a tourism boom pre-COVID-19. - The Bar-Boljare highway project began in 2016 (first of four envisaged phases close to completion) and boosted short-term growth at the cost of a sharp increase in public debt. - Political context: - New government took office in December 2020; first change of power since independence; supported by three parliamentary coalitions with a one-seat majority. - The 2021 annual budget law was adopted in mid-June 2021 using temporary financing procedures for H1 2021; the 2022 budget was passed in late-December 2021 with significant parliamentary amendments. ### Recent developments - Public health and vaccinations: - Successive pandemic waves met with varying containment; initial highly restrictive border policies in 2020, open-border policy in most of 2021 tourist season without vaccination or testing requirements. - Widespread vaccinations began in May 2021; as of mid-January 2022, about half the population has received two vaccine doses. - Real economy: - Real GDP declined by 15.3 percent in 2020 (average growth was 4 percent in the preceding four years). - Tourism receipts fell by 87 percent in 2020. - Foreign tourist overnight stays during January–November 2021 were at 60 percent of 2019 levels. - Q2 2021 growth was 19.0 percent (y-o-y); Q3 2021 growth about 26 percent (y-o-y); Q1 2021 contraction was 6.5 percent (y-o-y). - External and reserve position: - Current account deficit widened to 26 percent of GDP in 2020. - Reserve buffer at end-2020 peaked at €1.7 billion (42 percent of GDP), boosted by: - €750 million Eurobond, - €74 million through the IMF’s Rapid Financing Instrument (RFI), - €60 million in Macro-Financial Assistance from the EU. - Authorities intend to keep the 2021 SDR allocation of SDR 60.5 million as reserves. - Repayment of a large Eurobond in March 2021 and a modest fiscal deficit led reserves to decline from the end-2020 peak, though they remain above historical averages. - External position in 2021 was moderately weaker than the level implied by fundamentals and desirable policies (Annex II). - Fiscal developments: - Fiscal deficit widened to 11 percent of GDP in 2020 due to revenue collapse and emergency support measures. - Authorities targeted and expected to meet a year-end 2021 fiscal deficit target of 3.8 percent of GDP. - In 2021, wage subsidies supported job preservation, particularly in tourism. - Public debt and financing: - Public debt was 79 percent of GDP in 2019 (pre-highway impact); rose to 107 percent of GDP in 2020. - Note: netting central government deposits of over 20 percent of GDP at end-2020, general government debt (excluding guarantees) increased from around 65 percent of GDP in 2019 to around 85 percent in 2020. - A 7-year €750 million Eurobond issued in December 2020 at a yield of 2.95 percent covered baseline financing needs for 2021 and 2022. - Government commenced repayments on USD-denominated highway-related loan with the Ex-Im Bank of China; in July 2021 secured a currency risk hedging arrangement on this loan with several international banks. - Banking sector and financial stability: - Headline banking system metrics (as of Q3 2021) indicate the system appears well-capitalized and liquid; deposit growth strong and private credit recovering. - CBCG introduced crisis support measures in 2020; while most expired, some measures were still in effect as of Q3 2021—raising potential for forbearance to mask asset quality deterioration. - An Asset Quality Review (AQR) was completed; results paint an overall comforting picture; weaknesses identified in one bank are being addressed. - Selected net fiscal impacts of COVID-19 measures (Table 1 totals): - Health Spending: 25.30 (EUR mn) — 0.60 (Percent of GDP) - Wage Subsidies: 36.40 — 0.87 - Payment Deferrals: 34.60 — 0.83 - Social Benefits: 2.50 — 0.06 - Foregone Revenue: 6.00 — 0.14 - Other: 10.10 — 0.24 - TOTAL Net Fiscal Impact on Budget 2020: 114.92 — 2.74 - Central Bank support measures (selected, status as of late 2021): - Temporary and targeted loan moratoria for tourism, businesses, individuals: introduced in 1H 2020; expired for corporates during 2021; in effect only for households. - Temporary increase of exposure limits to single or related parties: introduced Q1 2020; expired in June 2021. - Loan restructuring agreements (no reclassification as NPLs): introduced several rounds in 1H 2020; expired for corporates as of end-October 2021; in effect for households. - Prohibition of paying out dividends to shareholders: introduced Q1 2020; in effect until further notice. - Reduction in share of demand deposits counted as due liabilities from 30 to 20 percent: introduced Q1 2020; in effect until further notice. - Reduction in reserve requirement rate and fee for withdrawing reserve liquidity: introduced Q1 2020; in effect until further notice. ### Outlook and risks - Growth and inflation projections: - Partial growth rebound of 12 percent is expected for 2021, driven mostly by tourism. - Fiscal retrenchment (from lower spending) is expected to have contributed a negative 3.7 percentage points to growth in 2021. - Inflation is expected to increase to 4.7 percent (e-o-p) in 2022, driven mainly by global commodity and food prices. - Medium-term output and external projections: - Baseline projections imply a permanent 8.7 percent loss of output relative to pre-crisis trends (compared with non-EU CESEE average of 4.1 percent). - Tourism is projected to return to 2019 levels only in 2023. - Authorities project growth averaging 5.3 percent in 2022–24 (authorities’ figure exceeds staff baseline and implies no permanent output loss relative to pre-pandemic trend). - Current account deficit expected to stabilize at around 15 percent of GDP. - External debt expected to remain elevated at 197 percent of GDP (see Annex III). - Government proposing a new program of capital investments starting in 2022 as phase 1 of Bar-Boljare highway nears completion. - Key upside and downside risks: - Upside: lower scarring if labor and capital reallocate promptly and lowering of the labor tax wedge attracts investment and jobs. - Downside: pandemic setbacks could impair tourism recovery; geopolitical tensions could pressure energy prices and risk premia; unresolved political uncertainty could hamper investment. - Domestic downside: disruptions at a major aluminum smelter (accounts for 15-20 percent of merchandise exports) could hurt exports and growth. - Financial sector downside: asset quality could be worse than indicators suggest; high premium on authorities’ preparedness. - Fiscal sustainability: Public Debt Sustainability Analysis (Annex IV) indicates medium-term debt trajectory needs to be put on a firm downward path along with active debt management to reduce high gross financing needs. ### The ‘Europe Now’ program: key features (Box 1) - The ‘Europe Now’ program includes: - An increase of the net minimum wage from €250 to €450 per month. - The elimination of the flat rate employee (8.5 percent) and employer (2.3 percent) healthcare contribution on earnings. - The introduction of a progressive personal income tax, with: - a tax-free allowance of €700 per month, - a rate of 9 percent on earnings of €700-1,000, - a higher rate tax of 15 percent for earnings above €1,000. - (The existing regime has a flat rate of 9 percent with no allowance.) - The introduction of a progressive corporate profit tax: - 9 percent on anything below €100,000; - 12 percent on €100,001-1,500,000; - 15 percent on anything above €1,500,000. - (The existing regime has a flat rate of 9 percent.) - A range of tax administration measures. - Parliamentary outcomes: - Parliament did not approve proposed increases in a range of excise taxes and fuel marking that were initially part of the program. ### Assessment of ‘Europe Now’ and policy implications - Objectives and potential benefits: - Program aims to arrest outward migration by increasing employment and living standards, reduce labor market informality, and improve the business environment. - Measures (near doubling of net minimum wage; substantial reduction in labor tax wedge; introduction of progressive tax code) expected in staff baseline to boost growth via higher household consumption and possibly increase credit growth by making more income officially “bankable.” - Fiscal implications and risks: - Staff project the fiscal position to deteriorate due to a net loss in revenues from elimination of healthcare contributions and other tax code changes. - Not all originally proposed revenue-raising measures were approved by Parliament, while all revenue-reducing measures were passed—raising fiscal risks. - Implementation and structural risks: - Design and sequencing risks, resource and administrative capacity constraints (tax enforcement, labor inspection) could generate unintended consequences on employment, corporate profits, and investment. - Difficulty in accurately measuring size and distribution of the grey economy complicates impact assessment; variation and concentration of undeclared wages across regions and sectors increase uncertainty. - Policy discussion priorities: - Reforms to address the labor tax wedge and tax progressivity while preserving fiscal sustainability. - Proactive management of financial sector vulnerabilities that might have increased after the crisis. - Structural policies focusing on the labor market (including minimum wage increase) and state-owned enterprise (SOE) reforms. - Governance priorities: financial sector oversight and the AML/CFT framework. - Fiscal performance update: - The 2021 budget targeted a deficit of 3.8 percent of GDP with reductions in discretionary spending. - Revenues met budget projections due to robust summer tourism and successful e-fiscalization measures. - Expenditure reductions reflected less spending on support measures, under-execution of capital spending, and curtailment of administrative expenses, leading to a projected deficit of around 2 percent of GDP in 2021. *Source: IMF staff report — 1. Key Features of the ‘Europe Now’ Program.* ### 16. The 2022 budget deficit, however, will rise ### 16. The 2022 budget deficit, however, will rise ### 2022 fiscal outlook and drivers - The 2022 budget targets a deficit of 5 percent of GDP. - Staff currently project that the fiscal deficit in 2022 will exceed 6 percent of GDP. - The rise in the deficit relative to 2021 is primarily due to the fiscal implications of ‘Europe Now’. - Healthcare contributions to earnings (some 4 percent of GDP) were permanently removed from revenues starting in 2022. - Not all proposed revenue-raising measures to offset the fiscal loss were passed (e.g., excise tax increases, fuel marking, a VAT increase for the hospitality industry). - Adopted revenue-raising measures face notable uncertainty in yields and durability; several measures (e.g., tax debt rescheduling, taxation of undeclared income) assume strong enforcement and administrative capacity. - Ongoing merger of revenue administration entities may complicate successful implementation of reforms. - Other increases in permanent spending (including newly legislated family benefits) contribute to higher deficits. ### Changes in 2022 fiscal deficit relative to 2021 (percentage points of GDP) - Revenues - Health contributions on earnings -3.5 - Non-tax revenues -0.5 - Expenditures - Long-term spending commitments 0.5 - Capital expenditures 1.0 - Other expenditures -1.3 - of which COVID-related expenditures -0.8 - Source: IMF Staff calculations ### Policy recommendations on sequencing and design of ‘Europe Now’ - Adopt initially proposed revenue measures to moderate risks associated with ‘Europe Now’. - Introduce the program in carefully calibrated steps to allow stronger administrative and enforcement preparedness and enable course corrections. - Front-load revenue-raising measures while phasing in revenue-reducing measures gradually. - Pre-announce staged increases to the minimum wage and tax-free allowance to enable smoother adjustment for the economy and labor market. - Utilize political scope to refine implementation by adopting initially proposed revenue-raising measures to regain fiscal space. ### Corporate income tax recommendation - Consider a flat-rate corporate income tax (CIT) with a special SME regime to reduce distortions. - Increasing the CIT rate to 15 percent would not only raise revenue but would also limit revenue leakage due to arbitrage between CIT and PIT. ### Medium-term fiscal outlook and required effort - Authorities’ Medium-Term Fiscal Strategy projects: - Fiscal balance (% of GDP): 2022 -5.0; 2023-2024 -1.9 -0.6 - Primary balance (% of GDP): 2022 -3.2; 2023-2024 -0.3 0.8 - Real growth (%): 2022 6.4 5.1 4.5 - Public debt 1/ (% of GDP): 2022 76.6 73.2 69.9 - 1/ does not include local government arrears - Source: Ministry of Finance and Social Welfare - Staff projection: based on currently prevailing policies, the fiscal deficit will remain high over the medium term, putting public debt on an upward trajectory from 2023 onwards, back towards the currently elevated level of 90 percent of GDP. - Staff advise a significant medium-term fiscal effort to put debt on a firm downward path. - Target: Authorities are advised to target and maintain a primary surplus of around one percent of GDP by 2026. - Staff estimates that fiscal measures to the tune of 4 percent of GDP are needed to achieve this target. - This would support a reduction in general government debt to about 77 percent of GDP by 2026. - Achievability: a mix of expenditure and revenue measures specified over four years, including revenue-raising measures initially envisaged in ‘Europe Now’ that were not passed in the 2022 Budget. ### Illustrative measures to achieve a 1 percent primary surplus (2026 impact, % GDP) - Enact excise policies envisioned in Europe Now (from 2022) 0.3 - Enact fuel marking policy envisioned in Europe Now (from 2022) 0.3 - Increase VAT by 1 percentage point (from 2023) 0.7 - Close selected tax exemptions (from 2023) 0.5 - Flat increase of CIT to 15 percent (from 2023) 0.4 - Reduce public sector workforce by 2% a year (from 2023) 0.8 - Hold growth in goods and services to inflation (from 2023) 0.3 - Hold growth in capital spending at inflation (from 2024) 0.5 - Hold public sector wage increases to CPI (from 2023) 1.4 - Source: IMF Staff calculations ### Guidance on capital expenditures and PPPs - Large capital expenditures (e.g., further phases of the Bar-Boljare Highway, other highway projects) should be considered only when adequate fiscal space is available (including sizable grant financing) and public debt is on a sustainable footing. - Use of PPPs requires integration into a robust public investment management process, with fiscal risks identified and monitored. - Extra caution is needed regarding PPP arrangements that could introduce significant fiscal liabilities. ### Structural fiscal issues and reform priorities - Merger of revenue administrations: ongoing merger of tax, customs, and gambling administrations into a single Revenue Administration entity has faced challenges; smooth implementation is crucial to strengthening capacity and minimizing disruptions. - Fiscal Council: options under an EU-funded project are being considered; legislation and careful design will be required. - Public Investment Management Assessment (PIMA): framework relatively strong but not necessarily adhered to in project selection, planning, and risk appraisal; need to fully utilize the existing framework and restrict labeling of projects as ‘strategic’ within stringent standards. - Program-based budgeting (PBB): further reforms needed to deepen PBB across all relevant public sector budgeting units. - Additional reforms (not in baseline) to create long-term fiscal space: - Public Administration Reform Strategy with a substantive functional review. - Pensions: new pension legislation (July 2020) changed pensionable age, basis of pension calculations, and indexation formula; Authorities are discussing reform plans with the World Bank to ensure social and fiscal sustainability and avoid long-term decline in replacement rates. - Tax expenditures: estimated at over 2 percent of GDP, particularly in VAT; not all tax expenditures fully identified; need for a simple, transparent benchmark tax system. ### Safeguards, audits, and transparency - Safeguards assessment (April 2021) found strong operational controls at the central bank; recommended amendments to the Central Bank Law to address governance issues; technical assistance concluded. - Financial audit related to COVID-19 spending (‘Verification of the healthcare costs related to COVID-19’) completed and published in December 2021; performance audit ongoing. - Recommend active ex-post assessments of COVID-19 program effectiveness, investigation of potential abuse, transparency on distribution of relief funds and loans (including beneficial ownership information of successful bidders), open public procurement processes, and selective audit of procurement contracts once the crisis abates. ### Authorities’ views - Authorities are confident targets regarding fiscal position and debt trajectory will be met and that ‘Europe Now’ reforms will result in strong and sustained economic growth. - They expect further revenue-raising measures to be adopted later in 2022 (reintroduce excise and VAT increases and a new law on games of chance). - Authorities understand the need to reduce the fiscal deficit in the medium term with clearly identified measures and stress they would not increase the debt burden of the country when considering large capital projects. *Source: IMF Staff and Authorities, as presented in the chapter "The 2022 budget deficit, however, will rise" (Montenegro).* ### 36. Tax and regulatory burdens, along with weak enforcement, exacerbate this problem. ### 36. Tax and regulatory burdens, along with weak enforcement, exacerbate this problem. ### Labor market distortions and informality - The overall labor tax wedge is similar to the European average, but the flat nature of the 2021 personal income tax and social contribution regimes made for a relatively high tax burden on low-wage employees. - This, and other factors, contributes to the high-rates of informality amongst low-wage earners. - Historically, inflexible labor legislation, including significant obstacles to dismiss employees and limits on fixed-term contracts, hindered mobility. - A new Labor Law introduced in January 2020 addressed some issues, including by narrowing the gap between temporary and regular contracts; however, the pandemic makes a current assessment of this new law difficult. - Anecdotal evidence suggests that lax enforcement makes it relatively easy for employers and employees to evade at least some taxes and regulation. - Authorities believe many low-wage earners receive substantial informal ‘envelope payments’ of at least €130 per month that are not declared to the tax administration. ### "Europe Now" package — measures and quantified impacts - Under the package, the overall tax wedge on those earning below €700 per month declined from 42 to 22 percent of the gross wage. - For those earning €1,500 per month, the effective rate fell from 42 to 31 percent. - The net minimum wage increased from €250 to €450 per month. - The Authorities expect the impact on overall labor costs to be partially absorbed by the large decline in the tax wedge. - Authorities believe the increase in the minimum wage would force employers to formalize envelope payments, but not substantially increase the cost of labor. ### Risks to formal employment and competitiveness - There is significant uncertainty over the size of envelope payments and substantial differences between regions and industries. - Some employers could face a very significant increase in the cost of labor, which could reduce formal employment and weaken competitiveness. - Authorities are urged to consider active labor market policies (ALMPs) that facilitate better training and education of the workforce, in addition to measures related to the business climate. ### State-owned enterprises (SOEs) reform agenda - There are around 40 SOEs in Montenegro, with fixed assets estimated at around 70 to 100 percent of GDP and a widely varying economic performance across sectors. - The Authorities established a holding company ‘Montenegro Works’ LLC in August 2021 to monitor and analyze the financial situation in SOEs and provide expert support in implementing reforms. - Important design features for Montenegro Works include clearly defined ownership backed by strong legal and institutional arrangements, safeguards against capture by vested interests, and sufficient professional expertise. - The Authorities intend to structure this company along similar lines as Greece’s HCAP. ### Authorities’ views on labor and SOE reforms - The Authorities recognize the structural weaknesses in the labor market and state that the primary motivation for ‘Europe Now’ is to arrest what is seen as a rapid ‘brain drain’. - They implemented the package urgently in a single step beginning in 2022, confident the minimum wage increase will not harm official employment or inflation, given the proposed decline in the tax wedge and existence of envelope payments. - The Authorities emphasized the package has the support of the Social Council (comprising both employers and unions). - The Authorities are confident that Montenegro Works will obtain required decision-making power and expertise to manage performance and the privatization agenda of the sector. ### Fiscal and macro context relevant to reforms - The economy is recovering but remains fragile; the human cost of COVID-19 was compounded by a significant decline in economic activity. - Temporary but targeted support to the most vulnerable deserves consideration given lingering unemployment. - The fiscal deficit is projected to widen in 2022 and remain high in the medium term due to a permanent reduction in revenues and an increase in long-term spending commitments. - The Authorities should pursue parliamentary approval for offsetting measures (e.g., excise tax increases, fuel marking, and a VAT increase for the hospitality industry) at the earliest possible opportunity. - A substantial reduction in public debt over the medium term is the overarching fiscal priority. - The Authorities’ decision to issue a Eurobond in December 2020 provided time and liquidity to recover from the pandemic shock. - With widening deficits in 2022 and structural fiscal loosening, debt is projected to rise further in the medium term if corrective measures are not implemented. - Staff advise targeting a primary surplus of about 1 percent of GDP through a combination of revenue and expenditure measures. - Additional measures could include raising the general rate of VAT, and closing selected tax exemptions (total revenues forgone could be between 0.8 to 2 percent of GDP). - Restricting growth in capital spending to inflation could be supported by stronger prioritization of investment projects as recommended by the PIMA. - Measures to reduce growth in spending in public sector compensation could be identified and implemented through the upcoming Public Administration Reform. ### Public reform priorities to support debt reduction and governance - Effective completion of the ongoing merger of the revenue administration agencies is important to ensure minimal disruptions to revenue collection. - ‘Montenegro Works’ would require robust institutional and legal frameworks, legal and financial capacity, political independence, and proper oversight to be successful. - IMF staff stand ready to help the Authorities on assistance to strengthen SOE oversight, drawing on lessons learned from international experience. - A new Public Administration Reform strategy is needed to maximize the value that taxpayers realize from the public sector. - It is key to adhere to the framework for the selection and appraisal of public investment projects – including PPPs – keeping in mind that they are an integral part of the public sector balance sheet. *Source: Ministry of Finance and Social Welfare and IMF Staff calculations* ### 2.51 million ### 2.51 million ### Banking Sector: Capital, Profitability, Liquidity, Credit, and NPLs - Regulatory capital to risk-weighted assets: time series up to 2021 Q3 with plotted values (2010–2021). Regulatory Tier 1 capital to risk-weighted assets shown alongside CAR regulatory minimum. - Bank profits: "Bank profits increased in 2021 after a modest drop in 2020." Return on assets and return on equity presented (up to 2021 Q3). - Liquidity: "Liquidity has stayed comfortable." Liquid assets to total assets and liquid assets to short-term liabilities series shown (up to 2021 Q3). Net open position in foreign exchange to capital also reported. - Credit growth: "Credit to the private sector grew by 3 percent in 2020 and another 4 percent in the first half of 2021." Bank lending by sector through December 2020 shows Credit to Enterprises and Credit to Households series; 2019 data distorted by recent Atlas/IBM bankruptcies. - Income composition and efficiency: "Net interest income remains the main source of income for banks." Interest margin to gross income and noninterest expenses to gross income, plus return on equity series (up to 2021 Q3) are provided. - Nonperforming loans: "NPLs are low, likely in part thanks to crisis support." Nonperforming loans series up to 2021 Q3 include: - Nonperforming loans to total gross loans (principle only) - Nonperforming loans to total gross loans (CBCG internal definition) - Nonperforming loans net of provisions to capital - Selected level and ratio snapshots: - Regulatory capital as percent of risk-weighted assets: 16.2 (2014), 15.5 (2015), 16.0 (2016), 16.4 (2017), 15.6 (2018), 17.7 (2019), 18.5 (2020), 18.5 (2021 Dec/Sep) - Regulatory tier 1 capital as percent of risk-weighted assets: 14.4 (2014), 14.2 (2015), 14.7 (2016), 15.0 (2017), 14.4 (2018), 18.1 (2019), 17.4 (2020), 17.5 (2021 Dec/Sep) - Nonperforming loans in percent of gross loans: 15.9 (2014), 12.6 (2015), 10.3 (2016), 7.3 (2017), 6.7 (2018), 4.7 (2019), 5.5 (2020), 5.6 (2021 Sep) - Return on assets: 0.8 (2014), -0.1 (2015), 0.2 (2016), 1.0 (2017), 1.0 (2018), 1.3 (2019), 0.5 (2020), 1.3 (2021) - Return on equity: 6.0 (2014), -0.7 (2015), 1.5 (2016), 7.6 (2017), 8.5 (2018), 10.0 (2019), 3.6 (2020), 10.5 (2021) - Interest margin to gross income: 60.2 (2014), 58.7 (2015), 58.6 (2016), 54.5 (2017), 56.1 (2018), 56.6 (2019), 61.5 (2020), 57.3 (2021) - Liquid assets to total assets: 22.2 (2014), 24.8 (2015), 24.5 (2016), 25.3 (2017), 22.6 (2018), 20.8 (2019), 22.2 (2020), 27.5 (2021) - Customer deposits to total (noninterbank) loans: 116.1 (2014), 110.3 (2015), 104.5 (2016), 105.2 (2017), 108.3 (2018), 109.7 (2019), 114.4 (2020), 126.3 (2021) ### Labor Markets: Unemployment, Participation, Wages, and Public Employment - Unemployment: "The official unemployment rate increased sharply in 2020 and remains high." Unemployment rate series through 2020 Q2 and 4Q moving average presented (2011–2020). - Labor force participation: "...and labor force participation also dropped significantly." Labor force participation rate series and 4Q moving average shown (2011–2020). - Wages and productivity: "Wage growth remained strong, supported by subsidies... despite a steep fall in productivity." Public and private wage growth series (2013–2020) reported. - Public sector employment: "Public sector wage growth has consistently exceeded that in the private sector.... with public employment also relatively high compared to peers." Small European Economies: Government Employment (Percent of total employment, latest available data) chart includes comparisons (KOSLUX, CYP, CESEE Avg.¹, LTU LVA EST MLT MNE ISL). Note: "1/ Excluding Hungary." ### Selected Economic Indicators, 2016–2026 (Under Current Policies) - Nominal GDP (millions of €): 3,954 (2016), 4,299 (2017), 4,663 (2018), 4,951 (2019), 4,186 (2020), 4,810 (2021 est.), 5,308 (2022), 5,640 (2023), 5,896 (2024), 6,165 (2025), 6,463 (2026) - Gross national saving (percent of GDP): 9.9 (2016), 14.1 (2017), 14.9 (2018), 17.7 (2019), 5.0 (2020), 10.2 (2021), 11.1 (2022), 9.8 (2023), 10.0 (2024), 10.2 (2025), 10.1 (2026) - Gross investment (percent of GDP): 26.1 (2016), 30.2 (2017), 31.9 (2018), 32.0 (2019), 31.2 (2020), 25.9 (2021), 26.2 (2022), 24.8 (2023), 25.0 (2024), 25.2 (2025), 25.2 (2026) - Unemployment rate (percent): 17.7 (2016), 16.1 (2017), 15.2 (2018), 15.1 (2019), 17.9 (2020) [series continues with dots in source] - Real GDP growth (year-on-year): 2.9 (2016), 4.7 (2017), 5.1 (2018), 4.1 (2019), -15.3 (2020), 12.0 (2021), 6.0 (2022), 2.8 (2023), 2.5 (2024), 2.8 (2025), 3.0 (2026) - Consumer price inflation (period average): -0.3 (2016), 2.4 (2017), 2.6 (2018), 0.4 (2019), -0.2 (2020), 2.4 (2021), 4.1 (2022), 2.7 (2023), 1.7 (2024), 1.6 (2025), 1.6 (2026) - Bank credit to private sector (end-period growth, various series reported): e.g., 6.3, 8.4, 11.0, 5.0, 3.4, 5.4, 8.1, 6.1, 5.0, 4.5, 4.4 (table formatting preserved in source) - General government gross debt (percent of GDP): 66.4 (2016), 66.2 (2017), 71.9 (2018), 78.8 (2019), 107.3 (2020), 88.2 (2021), 79.4 (2022), 82.2 (2023), 85.0 (2024), 88.0 (2025) [continued formatting in source] - Current account balance (percent of GDP): -16.2 (2016), -16.1 (2017), -17.0 (2018), -14.3 (2019), -26.0 (2020), -15.7 (2021), -15.0 (2022), -14.9 (2023), -14.9 (2024), -14.9 (2025), -15.0 (2026) - Gross international reserves in millions of USD: 794 (2016), 1,003 (2017), 1,195 (2018), 1,519 (2019), 2,116 (2020), 1,602 (2021), 1,252 (2022), 1,234 (2023), 1,257 (2024), 1,273 (2025), 1,289 (2026) - Memorandum: GDP per capita (USD): 7,032 (2016), 7,800 (2017), 8,855 (2018), 8,911 (2019), 7,689 (2020) [ellipsis follows in source] ### Savings and Investment Balances, 2016–2026 (Percent of GDP) - Gross national savings: 9.9 (2016), 14.1 (2017), 14.9 (2018), 17.7 (2019), 5.0 (2020), 10.2 (2021), 11.1 (2022), 9.8 (2023), 10.0 (2024), 10.2 (2025), 10.1 (2026) - Gross domestic investment: 26.1 (2016), 30.2 (2017), 31.9 (2018), 32.0 (2019), 31.2 (2020), 25.9 (2021), 26.2 (2022), 24.8 (2023), 25.0 (2024), 25.2 (2025), 25.2 (2026) - Savings - investment balance: -16.2 (2016), -16.1 (2017), -17.0 (2018), -14.3 (2019), -26.2 (2020), -15.7 (2021), -15.1 (2022), -15.0 (2023), -15.0 (2024), -15.0 (2025), -15.1 (2026) - Foreign direct investment (net, percent of GDP): 9.4 (2016), 11.3 (2017), 6.9 (2018), 6.2 (2019), 11.2 (2020), 7.9 (2021), 7.5 (2022), 7.5 (2023), 7.5 (2024), 7.5 (2025), 7.5 (2026) - External debt (percent of GDP): 162.8 (2016), 161.0 (2017), 163.7 (2018), 169.0 (2019), 224.1 (2020), 205.3 (2021), 190.5 (2022), 189.5 (2023), 192.2 (2024), 194.7 (2025), 196.8 (2026) ### Contribution to Real GDP Growth, 2016–2026 - Real GDP growth contributions (selected totals and components): - Gross domestic product: 2.9 (2016), 4.7 (2017), 5.1 (2018), 4.1 (2019), -15.3 (2020), 12.0 (2021), 6.0 (2022), 2.8 (2023), 2.5 (2024), 2.8 (2025), 3.0 (2026) - Consumption contribution: 5.1 (2016), 3.4 (2017), 5.6 (2018), 3.1 (2019), -4.1 (2020), 4.4 (2021), 5.1 (2022), 4.3 (2023), 4.1 (2024), 4.0 (2025), 4.1 (2026) - Investment and gross fixed capital formation: Investment total and gross fixed capital formation entries provided (2016–2026) with positive contributions notably in 2016 and 2017, negative in 2020, recovery thereafter. - Net exports: negative contributions in several years; exports and imports contributions series provided including services and goods breakdowns. ### Consolidated General Government Fiscal Operations, 2016–2026 (Millions of euro and Percent of GDP) - Revenues and expenditures (millions of euro): Total revenues and grants: 1,635 (2016), 1,732 (2017), 1,911 (2018), 2,090 (2019), 1,817 (2020), 2,067 (2021 est.), 2,060 (2022), 2,187 (2023), 2,291 (2024), 2,398 (2025), 2,516 (2026) - Total expenditures and net lending (millions of euro): 1,879 (2016), 2,025 (2017), 2,200 (2018), 2,177 (2019), 2,275 (2020), 2,163 (2021), 2,382 (2022), 2,503 (2023), 2,642 (2024), 2,792 (2025), 2,954 (2026) - Overall fiscal balance (millions of euro): -244 (2016), -293 (2017), -290 (2018), -88 (2019), -458 (2020), -96 (2021), -321 (2022), -316 (2023), -351 (2024), -394 (2025), -438 (2026) - Key fiscal ratio highlights (percent of GDP): - Total revenues and grants: 41.3 (2016), 40.3 (2017), 41.0 (2018), 42.2 (2019), 43.4 (2020), 43.0 (2021), 38.8 (2022), 38.8 (2023), 38.9 (2024), 38.9 (2025), 38.9 (2026) - Total expenditures and net lending: 47.5 (2016), 47.1 (2017), 47.2 (2018), 44.0 (2019), 54.4 (2020), 50.0 (2021), 44.9 (2022), 44.9 (2023), 44.8 (2024), 45.3 (2025), 45.7 (2026) - Overall Balance: -6.2 (2016), -6.8 (2017), -6.2 (2018), -1.8 (2019), -10.9 (2020), -2.0 (2021), -6.1 (2022), -5.6 (2023), -6.0 (2024), -6.4 (2025), -6.8 (2026) - Primary balance: -4.0 (2016), -4.4 (2017), -4.0 (2018), 0.4 (2019), -8.2 (2020), 0.5 (2021), -4.2 (2022), -3.6 (2023), -3.6 (2024), -3.6 (2025), -3.6 (2026) - General government debt (gross percent of GDP): 66.4 (2016), 66.2 (2017), 71.9 (2018), 78.8 (2019), 107.3 (2020), 88.2 (2021), 79.4 (2022), 82.2 (2023), 85.0 (2024), 88.0 (2025), 90.9 (2026) - Financing composition (domestic and foreign) and memorandum items provided in detailed tables (2016–2026). ### Financial Accounts, Balance of Payments, and External Sector, 2016–2026 - Current account balance (millions of euro): -642 (2016), -691 (2017), -793 (2018), -706 (2019), -1,090 (2020), -753 (2021), -798 (2022), -843 (2023), -880 (2024), -920 (2025), -971 (2026) - Trade balance (millions of euro): -1,658 (2016), -1,860 (2017), -2,049 (2018), -2,066 (2019), -1,642 (2020), -1,968 (2021), -2,185 (2022), -2,255 (2023), -2,350 (2024), -2,454 (2025), -2,573 (2026) - Services account (millions of euro): 769 (2016), 852 (2017), 937 (2018), 1,020 (2019), 182 (2020), 795 (2021), 917 (2022), 914 (2023), 953 (2024), 998 (2025), 1,044 (2026) - Receipts: 1,255 (2016), 1,382 (2017), 1,563 (2018), 1,698 (2019), 674 (2020), 1,416 (2021), 1,630 (2022), 1,766 (2023), 1,851 (2024), 1,936 (2025), 2,028 (2026) - Expenditures: 486 (2016), 531 (2017), 627 (2018), 678 (2019), 492 (2020), 621 (2021), 713 (2022), 852 (2023), 898 (2024), 939 (2025), 984 (2026) - Primary income (millions of euro): 358 (2016), 855 (2017), 556 (2018), 561 (2019), 187 (2020), 104 (2021), 113 (2022), 117 (2023), 120 (2024), 125 (2025), 128 (2026) - Compensation of employees, net: 224 (2016), 234 (2017), 216 (2018), 216 (2019), 216 (2020), 255 (2021), 281 (2022), 299 (2023), 313 (2024), 327 (2025), 343 (2026) - Investment income, net: -190 (2016), -146 (2017), -162 (2018), -161 (2019), -155 (2020), -168 (2021), -177 (2022), -186 (2023), -196 (2024), -207 (2025), -218 (2026) - Financial account (millions of euro): -690 (2016), -774 (2017), -886 (2018), -1,175 (2019), -1,368 (2020), -332 (2021), -470 (2022), -814 (2023), -888 (2024), -924 (2025), -977 (2026) - Foreign direct investment, net: -372 (2016), -484 (2017), -322 (2018), -305 (2019), -468 (2020), -382 (2021), -398 (2022), -420 (2023), -440 (2024), -462 (2025), -485 (2026) - Gross external debt (percent of GDP): 162.8 (2016), 161.0 (2017), 163.7 (2018), 169.0 (2019), 224.1 (2020), 205.3 (2021), 190.5 (2022), 189.5 (2023), 192.2 (2024), 194.7 (2025), 196.8 (2026) - Of which: Government external debt (percent of GDP): 53.8 (2016), 54.3 (2017), 59.2 (2018), 63.2 (2019), 91.6 (2020), 76.6 (2021), 68.3 (2022), 68.4 (2023), 72.4 (2024), 75.6 (2025), 77.7 (2026) - Memorandum (percent of GDP): Current account balance -16.2 (2016), -16.1 (2017), -17.0 (2018), -14.3 (2019), -26.0 (2020), -15.7 (2021), -15.0 (2022), -14.9 (2023), -14.9 (2024), -14.9 (2025), -15.0 (2026) ### Summary Financial System Accounts and Ratios, 2016–2026 - Central bank, banking system, and consolidated system balance-sheet aggregates presented in percent of GDP for 2016–2026 (Net foreign assets, Net domestic assets, Net credit to the nonfinancial public sector, Credit to the private sector, Deposits, Equity, Broad money). Examples: - Credit to the private sector / GDP: 48.6 (2016), 48.5 (2017), 49.6 (2018), 49.0 (2019), 60.0 (2020), 55.0 (2021), 53.9 (2022), 53.8 (2023), 54.1 (2024), 54.0 (2025), 53.8 (2026) - Banks' capital / credit to private sector: 25.8 (2016), 25.4 (2017), 22.2 (2018), 24.6 (2019), 23.5 (2020), 20.1 (2021), 19.5 (2022), 19.2 (2023), 18.6 (2024), 18.0 (2025), 18.2 (2026) - Broad money (memo, absolute): 2,240.5 (2016), 2,546.8 (2017), 2,625.0 (2018), 2,581.2 (2019), 2,484.4 (2020), 2,710.3 (2021), 2,856.0 (2022), 2,967.4 (2023), 3,079.6 (2024), 3,207.9 (2025), 3,343.9 (2026) *Sources: Ministry of Finance; Central Bank of Montenegro; Statistical Office of Montenegro; and IMF staff estimates and projections.* ### Annex I. Risk Assessment Matrix ### Annex I. Risk Assessment Matrix ### Pandemic-related risks - Uncontrolled COVID-19 local outbreaks and subpar/volatile growth in affected countries. - Relative Likelihood: High - Impact if Realized: High. The economic impact would be high primarily because of loss of the tourism market to competitors with better epidemiological conditions. - Policy Response: Appropriate measures, including speeding up vaccination may lessen the probability of a local outbreak. If realized, fiscal and financial support measures may need to be recalibrated, without increasing macro stability risks. - Global resurgence of the COVID-19 pandemic. - Relative Likelihood: Medium - Impact if Realized: High, due to the high dependency on tourism. - Policy Response: Fiscal and financial support measures may need to be recalibrated, without increasing macro stability risks. ### Macroeconomic and financial market risks - De-anchoring of inflation expectations in the U.S. leads to rising core yields and risk premia. - Relative Likelihood: Medium - Impact if Realized: Medium. Montenegro is vulnerable because of high dependence on external financing. - Policy Response: Fiscal consolidation needs to resume to put debt on a declining path. A more aggressive tightening may be required if financing costs increase substantially. To gradually reduce reliance on external financing, the domestic bond market should be developed. - Asset quality may be worse than indicators currently suggest. - Relative Likelihood: Medium - Impact if Realized: Medium. Deterioration of the asset portfolio may become a burden, especially for local banks, preventing them from effectively supporting the recovery. - Policy Response: The supervisor needs to continue vigilant monitoring of asset quality. Contingency planning would need to be accelerated, ensuring that bank resolution strategies are well-tailored and credible. ### Structural, labor market, and political risks - Disorderly transformations. - Relative Likelihood: Medium - Impact if Realized: High. The baseline already assumes significant economic scarring in Montenegro. It can be exacerbated if the reallocation of resources is impeded further, for example due to labor market rigidities. - Policy Response: Strengthen active labor market policies, boost labor force participation (particularly of women), and improve the quality of education. Ensure that the banking sector intermediates effectively to support the reallocation of resources. - Political/social instability. - Relative Likelihood: Medium - Impact if Realized: Medium. The economic impact will depend on the scale of disruptions but can potentially be significant. - Policy Response: The integrity and credibility of economic institutions should be safeguarded. ### Fiscal policy risks and reform-related scenarios - Stalling of fiscal consolidation efforts. - Relative Likelihood: High - Impact if Realized: High. Given high public debt, lack of fiscal discipline could increase future financing costs and result in debt sustainability problems. - Policy Response: Commit to a credible medium-term plan to put debt on a downward path. Ensure strict adherence to the public investment management framework. - The economy may respond dynamically to ‘Europe Now’ reforms (upside risk). - Relative Likelihood: Medium - Impact if Realized: High. Growth could be higher than in the baseline in the medium term. There would also be positive fiscal effects, through higher revenues and lower debt relative to GDP. - Policy Response: To facilitate the realization of this upside risk, the authorities should focus on reducing the informal economy and boosting labor force participation. - The lower labor tax wedge and higher minimum wage may lead to formalization of ‘envelope payments’, and not to higher unemployment and informality. - Relative Likelihood: Medium - Impact if Realized: High. - Policy Response: (See above—focus on reducing informality and boosting labor force participation.) *Source: Annex I. Risk Assessment Matrix* ### Annex III Figure 1. Montenegro: External Debt Sustainability: Bound Tests ### Annex III Figure 1. Montenegro: External Debt Sustainability: Bound Tests ### Baseline debt dynamics and key outcomes - Public debt falls under the baseline from its 2021 levels but is on a gradually increasing trajectory by the end of the projection horizon. - Public debt peaked at 107 percent of GDP in 2020. - Debt is projected to fall to 89 percent of GDP in 2021 and to 81 percent of GDP in 2022, then move onto a gradual upward trajectory from 2023-2026. - Under currently specified and legislated policies, staff project the medium-term fiscal deficit to remain above 6 percent of GDP and debt to move back towards 90 percent of GDP by 2026. - Gross financing needs remain high, and in some years rise above 20 percent of GDP due to amortizations of Eurobonds. ### Macroeconomic and fiscal assumptions - Real GDP growth assumptions: - Rebound to 12 percent in 2021. - Growth does not reach pre-crisis trend by end of projection period in 2026. - Fiscal scenario assumptions: - Fiscal deficit widens to around 6 percent of GDP in 2022 due to the ‘Europe Now’ reform (permanent fiscal loosening). - Primary deficit projected to rise from 0.5 percent of GDP in 2021 to 4.2 percent in 2022. - Primary deficit then remains between 3.3 to 3.6 percent of GDP between 2023 and 2026. - Realism of baseline: - Median forecast errors for real GDP growth (2011-2019) are modest but show slight pessimistic bias. - Median forecast errors for the primary balance are modest but somewhat pessimistic on average. - 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). ### Financing needs and debt management recommendations - Projected financing over the projection period amounts to approximately €5 billion (about 20 percent more than was issued in 2016-2021 in nominal terms). - Gross Financing Needs: - Climb from 14 percent of GDP in 2022 and 2023 to over 25 percent of GDP in 2025, reflecting maturing Eurobonds. - In the highway completion stress scenario, gross financing needs peak at 35 percent of GDP in 2025. - Authorities’ past actions: - Recent issuances and instruments: IMF RFI purchase of €74 million, PBG syndicated loan of €250 million, Eurobond issuance of €750 million. - Government deposits built up to about 10 percent of GDP in 2021. - Hedging of the Chinese Ex-Im bank loan to reduce currency risk. - Recommended policy actions: - More decisive policy action to keep debt on a firm downward trajectory is needed. - Targeting a primary surplus of 1 percent of GDP by 2026 would likely be sufficient to bring debt onto a strong downward and sustainable path. - Manage financing needs through responsible fiscal policy, management of fiscal risks, active debt management, lengthening debt maturities, smoothing debt repayments, and using exchange rate hedging where market conditions permit. ### Alternative scenarios and results - Historical scenario: - Historical average primary balance over the last ten years yields a primary deficit of 3.4 percent of GDP over 2021-26, producing a similar debt trajectory to the baseline. - If the primary deficit instead stayed at the projected 2021 level of 0.4 percent of GDP, debt would continue to fall to 67 percent of GDP. - Constant Primary Balance scenario: - Primary Balance assumed at 0.4 percent of GDP across 2021-2026 (see underlying assumptions table). - Montenegro-specific scenario — Highway Phases 2-4: - Debt-financed construction costing €1.2 billion equally spent over 2023-25. - Public debt ratio increases to 113 percent of GDP by 2026. - Gross financing needs peak at 35 percent of GDP in 2025, 10 percentage points higher than the baseline. - Conclusion: Authorities cannot afford to take on new debt to complete the remainder of the highway over the medium term. ### Standard stress tests and impacts - Growth shock: - Real output growth rates lowered in 2022 and 2023 by one standard deviation (6.2 percentage points). - Public debt ratio rises to 102 percent of GDP in 2023 and to 111 percent of GDP by 2026. - Gross financing needs ratio in 2023 increases around 10 percentage points of GDP relative to the baseline. - Interest rate shock: - Increase in interest rates on new debt by 375 basis points in 2022–26. - Debt increases by 4 percentage points in 2026 relative to the baseline. - Financing needs increase by 2 percentage point of GDP in 2026. - Combined macro shock: - Recession in 2022 and 2023, 375 basis-point increase in interest rates, real exchange rate shock, and sharp rise in expenditures in 2022-23. - Debt-to-GDP ratio rises to 106 percent in 2023 and to 117 percent by 2026. - Gross financing needs rise by about 10 percentage points in 2023 relative to the baseline. - Financial contingent liability shock: - Expenditures increase in 2022 equivalent to 10 percent of the size of the banking sector, combined with shocks to GDP and interest rates. - Debt ratio increases to 99 percent of GDP in 2023. - Gross financing needs rise by 8 percent of GDP in 2022 and remain well above baseline over the medium term. - Primary balance shock: - Assumes expenditure shock and rise in interest rates leading to 1.5 p.p. deterioration in the primary balance over 2022-23. - Debt ratio deteriorates by about 5 percent of GDP by 2026; gross financing needs peak at 3 percentage points of GDP in 2023. - Real exchange rate shock: - Assumes 13 percent depreciation of the real exchange rate in 2022 (maximum experienced over 2011-20). - Debt ratio falls only marginally from the baseline under this shock, given assumed exchange rate pass-through to inflation of 25 percent. ### Selected exact figures and indicators (as presented) - Peak gross debt in 2020: 107 percent of GDP. - Projected gross debt: 89 percent of GDP in 2021; 81 percent of GDP in 2022; debt around 88 percent of GDP by 2026 under baseline (text also notes 88 percent by 2026 in paragraph 7 and 88 percent by 2026 in paragraph 5/7 inconsistently presented as 88 and 89 in different contexts). - Eurobond issuances and financing: - Eurobond issuance: €750 million. - Two large Eurobond redemptions in 2020 and early 2021 totaling €548 million. - IMF RFI purchase: €74 million. - PBG syndicated loan: €250 million. - Projected financing over projection period: approximately €5 billion. - Gross Financing Needs: - 14 percent of GDP in 2022 and 2023 (baseline). - Over 25 percent of GDP in 2025 (baseline). - Peak at 35 percent of GDP in the highway scenario in 2025. - Real GDP growth rates (selected): - 2020: -15.3 percent. - 2021: 12.0 percent. - 2022: 6.0 percent. - 2026: 3.0 percent. - Inflation (GDP deflator) (selected): - 2020: -0.2 percent. - 2021: 2.6 percent. - 2022: 4.1 percent. - 2026: 1.8 percent. - Effective interest rate (in percent) (selected): - 2019: 3.6. - 2020: 3.3. - 2021: 2.9. - 2026: 3.6. - Change in gross public sector debt (cumulative contributions, selected): - 2020: 28.6 (percentage points). - 2021: -18.8. - 2022: -9.2. - Identified debt-creating flows (cumulative, selected): - Primary deficit cumulative contribution: 17.9 (2019-2026). - Primary (noninterest) revenue cumulative total: 236.8 (2019-2026). - Primary (noninterest) expenditure cumulative total: 254.7 (2019-2026). - Debt-stabilizing primary balance: -0.9 (percent of GDP). *IMF staff. Annex III Figure 1 and Annex IV (selected text and figures) from Montenegro staff report.* ### Annex IV. Figure 4. Montenegro: Public DSA – Stress Tests ### Annex IV. Figure 4. Montenegro: Public DSA – Stress Tests ### Macro-fiscal stress test scenarios and underlying series - Baseline / reported macro variables (years 2021–2026): - Real GDP growth: 12.0 6.0 2.8 2.5 2.8 3.0 - Inflation: 2.6 4.1 3.4 2.0 1.7 1.8 - Primary balance: 0.4 -5.6 -4.7 -3.6 -3.6 -3.6 - Effective interest rate: 2.5 2.3 2.6 2.9 3.2 3.6 - Primary Balance Shock (years 2021–2026): - Real GDP growth: 12.0 6.0 2.8 2.5 2.8 3.0 - Inflation: 2.6 2.6 1.8 2.0 1.7 1.8 - Primary balance: 0.4 -7.6 -10.2 -3.6 -3.6 -3.6 - Effective interest rate: 2.5 2.3 2.6 3.4 3.6 3.9 - Real GDP Growth Shock (years 2021–2026): - Real GDP growth: 12.0 -0.2 -3.4 2.5 2.8 3.0 - Inflation: 2.6 2.6 1.8 2.0 1.7 1.8 - Primary balance: 0.4 -4.2 -3.3 -3.6 -3.6 -3.6 - Effective interest rate: 2.5 2.3 2.8 3.6 4.4 5.5 - Real Interest Rate Shock (years 2021–2026): - Real GDP growth: 12.0 6.0 2.8 2.5 2.8 3.0 - Inflation: 2.6 8.6 3.4 2.0 1.7 1.8 - Primary balance: 0.4 -4.2 0.8 1.0 1.1 1.2 - Effective interest rate: 2.5 2.3 2.4 2.7 3.0 3.5 - Real Exchange Rate Shock (years 2021–2026): - Real GDP growth: 12.0 6.0 2.8 2.5 2.8 3.0 - Inflation: 2.6 2.6 1.8 2.0 1.7 1.8 - Primary balance: 0.4 -4.2 -3.3 -3.6 -3.6 -3.6 - Effective interest rate: 2.5 2.4 2.9 3.1 3.3 3.7 - Combined Shock (years 2021–2026): - Real GDP growth: 12.0 -0.2 -3.4 2.5 2.8 3.0 - Inflation: 2.6 2.6 1.8 2.0 1.7 1.8 - Primary balance: 0.4 -7.6 -10.2 -3.6 -3.6 -3.6 - Effective interest rate: 2.5 2.3 2.9 3.9 4.6 5.6 ### Additional stress tests (contingent liability and project shocks) - Contingent Liability Shock (years 2021–2026): - Real GDP growth: 12.0 -0.2 -3.4 2.5 2.8 3.0 - Inflation: 2.6 2.6 1.8 2.0 1.7 1.8 - Primary balance: 0.4 -11.2 -3.3 -3.6 -3.6 -3.6 - Effective interest rate: 2.5 2.4 2.9 3.1 3.3 3.7 - Highway Phase 2–4 contingent shock: implied scenario sweep of project realization from 50 to 120 (percent scale shown in figure). ### Debt and financing vulnerability indicators (as presented) - Gross Nominal Public Debt (in percent of GDP): charts show trajectories across 2021–2026 under Baseline and shocks with scales up to 300+ percent of GDP in stress cases. - Gross Nominal Public Debt (in percent of Revenue): charts show trajectories across 2021–2026 with values up to 320+ percent of Revenue in stress cases. - Public Gross Financing Needs (in percent of GDP): charted across 2021–2026 with scales up to 40 percent of GDP. - Heat‑map risk assessment benchmarks and indicators (2020 observations quoted in figure): - Bond spread (long-term over German bonds, average over last 3 months, 13-May-21 through 11-Aug-21): 451 bp - External Financing Requirement benchmarks: 5 and 15 (percent of GDP) - Change in share of short-term debt benchmarks: 0.5 and 1 (percent) - Public debt held by non-residents benchmarks: 15 and 45 (percent) - Share of foreign-currency denominated debt benchmarks: 20 and 60 (percent) - Reported public guaranteed debt stock at end‑2020 (in related text elsewhere): €218.8 million (about 5 percent of GDP) ### Notes on methodology and visual elements (as labeled) - Stress tests include: Primary Balance Shock, Real GDP Growth Shock, Real Interest Rate Shock, Real Exchange Rate Shock, Combined Macro-Fiscal Shock, and Contingent Liability Shock. - Predictive density evolution of Gross Nominal Public Debt is shown with percentiles: 10th-25th, 25th-75th, 75th-90th across 2019–2026 under Baseline and restricted/asymmetric distributions. - Restrictions on shock magnitudes (labels in figure): - 1 is the max positive growth rate shock (percent) - 0.5 is the max negative interest rate shock (percent) - 1 is the max positive primary balance shock (percent of GDP) - No restriction on the exchange rate shock - Restrictions on upside shocks: 15; 45 *Source: IMF Staff.* ### 2022. It is aligned with Basel III standards and will ### 1mneea2022001 - 2022. It is aligned with Basel III standards and will ### Financial-sector regulatory alignment and supervision - In 2020 the CBCG adopted all implementing regulations arising from these two laws: 24 regulations from the area of supervision of credit institutions and 14 regulations from the area of resolution of credit institutions. - The Law on Credit Institutions (to become effective January 2022) includes solutions transposed from the current EU regulations related to enhancement of supervision on a consolidated basis. - The Law sets up basic principles for risk management; details are given in implementing regulations adopted at the end of 2020: - Decision on Minimum Standards for Risk Management in Credit Institutions. - Decision on Liquidity Risk Management in Credit Institutions. - Recommendation status entries (selected): - Introduce effective consolidated supervision (CBCG). Timing: NT, I. Progress: Done (see Law on Credit Institutions effective January 2022). - Improve the regulatory and supervisory framework for liquidity and credit risks (CBCG). Timing: NT, I. Progress: Done (implementing regulations). ### Nonperforming assets and risk management - Recommendation: Tighten prudential norms for identification, classification, and reclassification of nonperforming assets (CBCG). Timing: NT. Progress: Done. - Measures adopted: - Decision on Minimum Standards for Risk Management in Credit Institutions with the Guidelines for managing non-performing and forborne exposures (adopted end of 2020) — fully aligned with current EU regulations. - Decision on the Criteria and the Manner of Classification of Assets and Calculation of Provisions for Potential Loan Losses of a Credit Institution (adopted end of 2020). - Implementation: Both decisions will start on the effectiveness date of the Law on Credit Institutions. ### Insurance supervision and Solvency II transition (ISA) - Recommendation: Adopt risk-based supervision (ISA). Timing: I. Progress: In progress. - Since 2016 ISA has been implementing a risk assessment framework for annual supervisory review. - Further steps in risk-based supervision planned after adoption of the new Insurance Law (currently in development). - Recommendation: Incrementally implement Solvency II (ISA). Timing: NT. Progress: In progress. - An EU-funded project developed a new information system for supervisory reporting, completed, providing a technical platform for future transition to risk-based reporting in line with EU frameworks. - Since June 1, 2021, digitalization of supervisory reporting to ISA is in place. - Comprehensive implementation of Solvency II will be achieved after adoption of the new Insurance Law aligned with Solvency II. ### Payment systems and liquidity risk mitigation - Recommendation: Implement risk mitigation measures to minimize liquidity risks in the RTGS system and to eliminate the possibility of partial unwinding in the DNS system (CBCG). Timing: I. Progress: In progress. - The CBCG emergency liquidity facility was adopted in 2017. - An in-house solution for linkage to central securities depository is being considered; it implies pledging of additional eligible securities toward the end of opening hours. - Implementation is delayed until availability of IT resources and some legal issues are resolved. ### Resolution framework and deposit protection - Recommendation: Finalize national risk assessment and ensuing action plan and ensure that high money laundering/terrorist financing risks are adequately mitigated (CBCG). Timing: NT. Progress: Done. - The new national risk assessment and Action plan were adopted at the end of 2020 and used in examination planning for 2021. - Recommendation: Set strict and objective criteria for determining the systemic importance of banks to determine eligibility for capital support (CBCG/MOF). Timing: NT. Progress: Done. - Decision on Identifying Other Systemically Important Credit Institutions adopted end of December 2020. - Implementation starts on effectiveness date of the Law on Credit Institutions; regulations are fully aligned with current EU regulations. - Recommendation: Strengthen resolution-funding options (MOF). Timing: NT. Progress: Done. - Law on Deposit Protection Fund adopted in December 2019, effective January 3, 2020. - New laws on Credit Institutions and on Resolution of Credit Institutions also address resolution-funding. - Recommendation: Organize a dedicated resolution unit within the CBM, and initiate bank-specific resolution planning, prioritizing the weakest CAMEL-rated banks (CBCG). Timing: I. Progress: Done, in progress. - In 2020 the CBCG established a Directorate for resolution, independent from supervision. - Resolution plans for all banks (including systemic banks) to be prepared within six months from the date of effectiveness of the Law on Resolution of Credit Institutions (January 2022). - CBCG has adopted internal procedures for drafting resolution plans and begun work, starting with systemic banks. - Recommendation: Implement risk-based contributions and shorten the pay-out term for DPF (DPF/MOF). Timing: NT. Progress: Done. - Law on the Deposit Protection Fund (effective since 2020) envisages shortening of the pay-out term. - Methodology for calculation of risk-based premiums adopted and implemented quarterly since 1 January 2021. ### Data, statistics, and surveillance capacity - General: Data provision has some shortcomings but is broadly adequate for surveillance. Most affected areas: labor market indicators and government finance statistics. MONSTAT suffers from resource constraints and limited capacity. - National Accounts: - MONSTAT compiles annual production and expenditure accounts in current and previous year’s prices; production GDP estimates reconciled with expenditure estimates through supply and use framework. - Montenegro started disseminating quarterly GDP by production in 2012 using an indirect method; methodology needs improvement. Quarterly GDP estimates compiled for 2010-2018. - MONSTAT participating in a Dutch funded IMF project running until end of 2019 to improve national accounts coverage and consistency. - Need to improve the industrial production index. - Price statistics: MONSTAT compiles monthly CPI broadly following international standards; PPI coverage could be expanded to include services. - Labor market statistics: LFS and administrative sources used; unemployment rate computed according to ILO; limits due to large informal sector and frequent methodological revisions. - Government Finance Statistics: - Fiscal data compiled on a cash basis by MOF based on new GFS institutional classification; since 2006 include local governments and social security funds. - Gaps remain: some units of general government excluded; own revenues/expenditures of extrabudgetary units excluded; frequent re-classifications; incomplete alignment with GFSM 2001/2014. - MOF established unit for SOE data, but satisfactory public sector fiscal balance compilation requires further effort. Data on municipal enterprises and stock of local government arrears need strengthening. Stocks of financial assets and liabilities are incomplete. - Montenegro does not report annual or high frequency GFSM 2001 based data to the IMF; renewed TA resumed in 2017 and STA field diagnostic missions occurred. - Monetary and Financial Statistics: - CBM reports monthly monetary statistics covering CBM balance sheet and balance sheet of commercial banks only, using non-standardized Report Forms. - Financial Soundness Indicators (FSIs): Montenegro does not report FSIs to the IMF. - External sector statistics: - BoP compiled by CBM according to BPM6; CBM adjusts exports/imports from MONSTAT from CIF to FOB. - Persistent positive net errors and omissions suggest understated inflows; tourism-related and remittance inflows may be underestimated due to cash transactions. - CBM released first IIP data for 2016-17 in June 2019; 2018 IIP planned for September 2019. In July 2019 CBM revised BoP changes in international reserves and related Primary Income to exclude CBM holdings of Montenegrin government securities and SDR misclassifications over 2015-17. - CBM received STA technical assistance and plans methodological changes to reduce net errors and omissions and produce quarterly IIP data. - Montenegro participates in the CDIS (inward positions only); has not participated in CPIS or prepared the Reserves Data Template. - Data dissemination and standards: - Participant in e-GDDS since December 2011; e-GDDS Implementation mission in July 2017; NSDP went live in September 2017. - No data ROSC available. ### Selected data-frequency status (as of Jan-19-2022) - International Reserve Assets and Reserve Liabilities of the Monetary Authorities: Date of latest Observation Nov-2021; Date Received Jan-2022; Frequency of Data M; Frequency of Reporting M; Frequency of Publication M. - Reserve/Base Money: Date of latest Observation Nov-2021; Date Received Jan-2022; Frequency M / M / M. - Central Bank Balance Sheet: Date of latest Observation Nov-2021; Date Received Jan-2022; Frequency M / M / M. - Consolidated Balance Sheet of the Banking System: Date of latest Observation Nov-2021; Date Received Jan-2022; Frequency M / M / M. - Interest Rates: Date of latest Observation Nov-2021; Date Received Jan-2022; Frequency M / M / M. - Consumer Price Index: Date of latest Observation Dec-2021; Date Received Jan-2022; Frequency M / M / M. - Revenue, Expenditure, Balance and Composition of Financing – General Government: Date of latest Observation 2020; Date Received Jul-2021; Frequency A / A / A. - Revenue, Expenditure, Balance and Composition of Financing – Central Government: Date of latest Observation Nov-2021; Date Received Dec-2021; Frequency M / M / M. - Stocks of Central Government and Central Government-Guaranteed Debt: Date of latest Observation Q2-2021; Date Received Sep-2021; Frequency Q / Q / Q. - External Current Account Balance: Date of latest Observation Q3-2021; Date Received Dec-2021; Frequency Q / Q / Q. - Exports and Imports of Goods and Services: Date of latest Observation Q3-2021; Date Received Dec-2021; Frequency Q / Q / Q. - GDP/GNP: Date of latest Observation Q3-2021; Date Received Dec-2021; Frequency Q / Q / Q. - Gross External Debt: Date of latest Observation 2020; Date Received Sep-2021; Frequency A / A / A. - International Investment Position: Date of latest Observation 2020; Date Received Sep-2021; Frequency A / A / A. ### Fiscal developments, outlook, and policy measures - Recent recovery and growth outlook: - Staff growth estimate revised from 7 percent (last October) to 12 percent (current staff estimate for 2021), close to the authorities’ baseline scenario. - Authorities’ Medium-Term Fiscal Strategy assumptions: GDP growth decelerating from 6.4 percent in 2022, to 5.1 percent in 2023, and 4.5 percent in 2024. - Staff projection: 2022 GDP growth 2.8 percent and 2023 GDP growth 2.5 percent (stronger deceleration over the two outer years than authorities). - Divergence in medium-term fiscal position and debt trajectory stems mainly from different growth outlooks; authorities expect primary surplus by 2024 and public debt below 70 percent of GDP by 2024, while staff foresees return to higher deficit and debt in the medium-term. - 2021 fiscal consolidation outcomes: - Overall deficit shrank from 10.9 percent of GDP in 2020 to an actual deficit of 2 percent of GDP in 2021 (lower than the 3.6 percent projection). - Cyclically adjusted balance improved by 4 percentage points, from -5.2 percent of GDP in 2020 to -1.2 percent of GDP in 2021. - Primary balance turned from a deficit of -8.2 percent of GDP to a surplus of 0.5 percent of GDP. - 2022 budget and "Europe Now" fiscal package: - The 2022 budget departs temporarily from consolidation as a package of fiscal reforms has been adopted; some revenue-side measures are yet to be approved. - Measures include: - Net minimum wage increased from 250 euro to 450 euro a month. - Healthcare contributions eliminated. - Progressive personal income tax introduced together with a tax-free allowance of 700 euro per month. - Progressive corporate tax on profits introduced. - Objectives: (i) reduce the gap between minimum wage and minimum consumption basket; (ii) entrench fairer personal income taxation; (iii) reduce size of informal economy; (iv) attract investment and support job creation via lower labor tax wedge. - Staff calculations: under this package overall tax wedge declined substantially. - Authorities' stance: - Authorities disagree with staff’s fiscal projections in the medium-term on revenue and expenditure sides (differences mainly from different growth outlook and assumptions). *Source: Montenegro — Staff Report for the 2021 Article IV Consultation (Informational Annex), February 3, 2022.* ### introduction of a series of revenue-enhancing measures; and (iii) the different assessment on the ### 1mneea2022001 - introduction of a series of revenue-enhancing measures; and (iii) the different assessment on the ### Revenue developments and plans - Recent revenue outturns stronger than expected: - Excise duties increased by 3.1 percent in 2021 (7.7 million euro) and continued this trend in January 2022, with excise duties’ collection above plan by 2.1 million euro. - Social security contributions for January 2022 and (preliminary) for February remained sustained despite the elimination of healthcare contributions, as taxpayers pay overdue contributions, especially for healthcare insurance. - Among non-tax revenues, the “digital dividend” already generated higher than planned revenues. - Conclusion: the starting point for revenues collection in 2022 appears underestimated. - Authorities’ revenue projections and planned measures: - Maintain higher VAT projections for 2023 and 2024, considering projected economic growth and expected effects of reducing the informal economy via the electronic fiscalization project and enhanced enforcement by inspection services. - For 2023-2024, plan to resubmit to Parliament revenue-enhancing measures included in the initial Europe Now program, including: - Amend the Law on Excise Tax to increase taxes on cigarettes, other tobacco products, carbonated beverages, and introduce excises on new products. - Repropose a law to increase VAT on food preparation and services, bottled drinking water and non-alcoholic non-carbonated beverages in restaurants and catering facilities. - Amendments to the Law on Energy prescribing a fuel marking obligation to further reduce tax evasion opportunities. ### Expenditure assessments and differences with staff - Wage bill and salaries: - Realized expenditures for January 2022 on gross salaries remained broadly unchanged except for increased salaries for medical personnel. - Authorities project the Europe Now package would lead to a more moderate growth of the wage bill over 2023-2026: 10 million euro rather than staff’s 30 million euro. - Interest payments and fiscal deficits: - Authorities consider interest payments may not reach as high as 200 million euro by 2026 (staff projection would be more than double the current level). - Differences stem from divergent estimates regarding medium-term fiscal deficits and financing needs. - Social security transfers and recent legislative changes: - Additional costs from recently legislated changes (increase of the minimum pension from October 2021; return of maternity benefits starting from April 2022; regular harmonization of social benefits) have been included in the 2022 budget. - Authorities’ spending assessment: 703 million euro in 2023 and 712 million euro in 2024, compared to staff’s 734 million euro in 2023 and 772 million euro in 2024. - Other expenditure-item differences noted by authorities: - “Other outflows”: payments relate to existing obligations in signed contracts and do not tend to increase. - “Other transfers”: some relatively small one-off compensations for former employees in the metals sector compared to the 2021 baseline. - “Reserves”: authorities believe smaller amounts will be needed after the pandemic ends. - Fiscal stance: - Notwithstanding different assumptions, authorities remain committed to fiscal consolidation and a downward debt trajectory. ### Financial sector resilience, oversight, and contingency planning - Banking system performance and resilience (end-2021 / comparisons to December 2020): - Liquidity: 26.4 percent of total assets. - Q3 solvency ratio at 18.5 percent. - Preliminary Q4 ROE at 9.5 percent. - KPIs indicate recovery with increases compared to December 2020: assets 16.2 percent, loans 6.37 percent, deposits 24.6 percent, and capital 6.8 percent. - Asset Quality Review (AQR) and follow-up: - A system-wide AQR, conducted in line with ECB methodology by reputable international assessors, improved confidence, transparency of asset quality, and risk management. - AQR findings led to a slight decrease in capital adequacy ratio by 0.40 percentage point. - One bank implemented timely corrective measures for capital conservation. - Banks required to validate and, if necessary, recalibrate existing impairment and provisioning models by 30 June 2022. - Non-performing loans and moratoria unwinding: - Authorities note risk that unwinding temporary crisis support measures could increase impaired loans but will rely on data and close supervision. - NPLs rose only moderately: from 5.47 percent at end-December 2020 to 6.17 percent in December 2021; loans overdue more than 90 days stagnated. - Based on micro-data, authorities do not expect a systemic rise of impaired loans. - Regulatory alignment and institutional strengthening: - Implementation of the Law on Credit Institutions and the Law on Resolution of Credit Institutions (incorporating the Capital Requirements Directive, the Capital Requirements Regulation and the BRRD) to strengthen capital requirements and establish liquidity and capital frameworks for systemically important institutions. - Amendments to the Law on Resolution of Credit Institutions harmonized with Directive 2019/879/EU to improve operational execution of resolution and strengthen resolution authorities’ competences. - Corporate governance and transparency standards for credit institutions have significantly improved. - Contingency planning, deposit protection, and resolution capacity: - Law on Deposit Protection Fund (DPF) effective January 2020; target coverage of 10 percent of guaranteed deposits by 2024. - CBCG established a Resolution Fund and adopted internal procedures to guide drafting of resolution plans; work on individual-bank resolution plans started with systemic banks. - Aim to have credible and fully operational contingency plans for each bank by end-June 2022. - Safeguards and central bank governance: - Authorities welcome Safeguards’ Assessment findings on strong operational controls at the central bank. - IMF technical assistance requested and finalized to address recommended amendments to the Central Bank of Montenegro Law relating to governance structures. - Authorities prepared amendments to strengthen central bank independence and relevant governance structures. - AML/CFT framework: - Authorities committed to fully aligning AML/CFT framework with the EU Acquis and FATF standards. - Public consultation on the new Law on Prevention of Money Laundering and Terrorist Financing completed; proposal to be sent to the EU Commission for comments. - Central bank representatives involved in drafting the new Law and enabling regulations; contributed to the Strategy for prevention and suppression of terrorism, money laundering and terrorist financing adopted by the Government in December 2021. - Supervision capacity of the Directorate for AML/CFT was strengthened. ### Structural reforms and SOEs governance - Labor market and Europe Now program objectives: - Authorities agree with staff on structural weaknesses: need to increase labor force participation and reduce structural unemployment and emigration. - Main motivations for the Europe Now program: reduce the tax wedge, raise the minimum wage, reduce informality, increase labor participation (especially for women and youth), and retain the qualified workforce. - State-owned enterprises (SOEs): - Authorities are confident that the consolidated company “Montenegro works” will improve SOEs’ performance and promote the reform agenda. *Source: https://www.imf.org/-/media/files/publications/cr/2022/english/1mneea2022001.pdf* --- _Source: https://www.imf.org/-/media/files/publications/cr/2022/english/1mneea2022001.pdf_