## MONTENEGRO — 1mneea2024001 ## Source details **Canonical URL:** [MONTENEGRO — 1mneea2024001](https://www.imf.org/-/media/files/publications/cr/2024/english/1mneea2024001.pdf) ## Other formats - [Markdown version](/-/media/files/publications/cr/2024/english/1mneea2024001.pdf.md) - [Structured JSON version](/-/media/files/publications/cr/2024/english/1mneea2024001.pdf.json) --- ### CONTEXT - Montenegro is a unilaterally euroized economy. - Growth history and shocks: - tourism-driven growth averaging 4 percent in 2015-19; - contraction by over 15 percent in 2020 due to COVID; - strong recovery since 2021 with tourism exceeding pre-pandemic levels. - War in Ukraine impacts: - real channels: robust consumption growth due to migrants; - nominal channels: inflation; - fiscal position improved; on current policies fiscal position likely to gradually weaken over the medium term. - Political and institutional developments: - Fresh elections in 2023 (presidential March; parliamentary June); - New coalition government formed end-October 2023; - New CBCG Governor took office in December 2023; - Strong social consensus on EU accession, targeted for 2028. ### RECENT DEVELOPMENTS, OUTLOOK, AND RISKS Findings and recent data - Real GDP growth: - 6.4 percent in 2022; - estimated 6 percent in 2023, driven primarily by private consumption in H1 and by net exports in H2. - Migration and labor: - Inflow of affluent Russian and Ukrainian migrants since 2022 estimated at around 10 percent of the country’s population (see Annex I); - More recent inflow from Turkey estimated at around 2 percent of the country’s pre-war population; - Unemployment fell to 13.1 percent in 2023; labor force participation and employment rate increased. - Inflation: - Jumped to 17 percent y-o-y in 2022 (driven by food, fuel, and large domestic policy-induced wage increases); - February 2024 inflation was 4.3 percent y-o-y; - Differential with Euro Area inflation fell from 8 percentage points in December 2022 to around 1.7 percentage points in February 2024. - External sector: - Current account deficit: 26.1 percent of GDP in 2020; 12.9 percent in 2022; 11.4 percent in 2023. - 2023 tourism revenues exceeded pre-pandemic levels by 38 percent. - Current account deficit financed mostly by FDI inflows and high positive errors and omissions (errors and omissions were 10.7 percent of GDP in 2023). - External position in 2023 assessed as substantially weaker than implied by fundamentals and desirable policies (Annex III). - Public finances: - Fiscal deficit: 10.9 percent of GDP in 2020; 1.7 percent of GDP in 2021; 4.1 percent in 2022. - Preliminary 2023 overall general government budget recorded a surplus of ¾ percent of GDP (contrasting with a planned deficit of 5.6 percent of GDP). - Public debt: peaked at 107 percent of GDP in 2020; 71 percent in 2022; estimated 61.5 percent of GDP in 2023. - On March 6, 2024, Montenegro placed a US$750 million Eurobond at an effective rate of 5.9 percent in Euros (following a cross-currency swap). - Banking sector: - NPL ratio: 5.0 percent of total loans in Q4 2023 (post-COVID peak was 6.5 percent in Q1 2022). - Average capital adequacy ratio is nearly twice the regulatory minimum. - Deposit growth 62 percent since end-2020; share of non-resident deposits to total deposits stands at 24 percent in January 2024. - Average deposit rate and lending rate as of February 2024 were respectively 0.1 percentage points lower and 1.0 percentage points higher than end-2021. - Share of real estate loans to gross loans stable at around 20 percent. Outlook and projections (staff baseline) - Growth expected to moderate to 3.7 percent in 2024. - Baseline assumes no further net migrant inflows or outflows. - Current account deficit expected to rise to about 13.6 percent of GDP over the medium term absent structural reforms to raise national saving. - General government fiscal balance expected to weaken from 0.7 percent of GDP in 2023 to -3.2 percent of GDP in 2024 and continue weakening over the medium term. - Public debt expected to reach 66.1 percent of GDP in 2029. Risks - Migration reversal would negatively affect near-term and future growth prospects. - Downside external risks: weaker global growth affecting tourism and FDI. - Financial risks: vulnerability to tightening global financial conditions given high sovereign refinancing needs (averaging 12 percent of GDP in the next five years) and projected deterioration of fiscal balances; potential capital outflows including nonresident deposits, FDI into real estate, and portfolio investment. - Inflation upside risks: wage pressures and shocks to commodity (especially food) prices. - Fiscal risks: fulfillment of all electoral promises would pose significant risks to the fiscal position. ### POLICY DISCUSSIONS — High-level messages - Fiscal policy should maintain a non-negative primary balance, anchored by a prudent debt ceiling of 60 percent of GDP by 2028. - Longer-term structural fiscal reforms are needed to support healthy public finances. - Continued vigilance in the banking sector is essential as the landscape of risks changes. - Future growth prospects can be enhanced by supporting economic diversification, SME development, and female labor force participation rather than ramping up infrastructure expenditures in a short period. ### A. FISCAL POLICY 2024 budget and composition - 2024 budget envisages a sharp rise in the fiscal deficit. - Expenditure increases: - 1.8 percent of GDP increase in social security transfers, mostly due to a more than 50 percent increase of the minimum pension to 450 euros per month. - Higher capital expenditure and higher unallocated reserve fund spending compared to 2023. - Agreement reached in February 2024 to raise wages in the education sector with an estimated annual impact of 0.2 percent of GDP (not yet incorporated into the 2024 budget law). - Revenue measures: - Removal of COVID exemptions and preferential rates for VAT (estimated yield, 0.5 percent of GDP). - Increasing excises on tobacco, plastics, and products containing sugar (estimated yield, 0.3 percent of GDP). - Increasing fees on games of chance (estimated yield, 0.3 percent of GDP). - An additional 0.2 percent of GDP of VAT revenues expected from increased consumption due to higher social transfers. - Combined expected revenue increase from 2024 budget measures: 1.3 percent of GDP (noting this falls short of earlier revenue losses). Fiscal outlook and drivers - 2024 fiscal deterioration reflects higher social transfers and wages, partly offset by revenue measures and expected VAT receipts from higher consumption. - Staff project a general government fiscal balance of -3.2 percent of GDP in 2024 under the baseline. Recommended fiscal adjustment measures and impacts - Strengthen Montenegro Revenues and Customs Administration (improve compliance risk management, use of third-party data, greater digitalization). - IMF estimate: cumulative gains in revenues of 0.9 percent of GDP over four years from this reform. - Limit growth of the public sector wage bill to CPI for two years starting 2025. - Expected savings: 0.6 percent of GDP. - Implement fuel marking reform starting 2025. - Expected increase in excises revenues: 0.3 percent of GDP. - Combined tax policy, tax administration, and expenditure measures expected to achieve a fiscal adjustment of 1.8 percent of GDP relative to baseline and stabilize debt at below 60 percent of GDP over the medium term. - Undertaking deficit reduction measures beginning in 2024 would help bring inflation down faster and close the estimated small positive output gap sooner than in the baseline. Debt anchor and fiscal framework - Recommended debt anchor: a 60 percent debt-to-GDP ceiling to be reached by 2028 (in line with Montenegro’s Law of Budget and Fiscal Responsibility). - Attainment strategy: - Maintain a non-negative primary balance from 2026 onwards. - This would, in practice, keep the overall deficit below 3 percent of GDP. Long-term structural fiscal reforms - Better targeting of social transfers to the most vulnerable. - Contain growth of the public sector wage bill, including rules to limit hiring of permanent and non-permanent staff and review of non-salary compensations. - Address project selection, planning, and risk appraisal issues identified in the 2021 IMF Public Investment Management Assessment. - Ensure public investment planning fully includes implementing agencies to increase efficiency of capital budgeting and implementation. - Strengthen capacity of the newly split Tax Administration and Customs Agency. - Establish a fully functional fiscal council and improve oversight of state-owned enterprises (SOEs). - Restart t-bill/bond auctions and extend the market to the retail investor base to diversify government funding sources. - IMF support: continued capacity development in these areas. Alternative scenario: honoring electoral promises - Electoral promises not in the 2024 budget or medium-term projections include: - Partial to full elimination of pension contributions (up to 7.5 percent of GDP). - Increasing the net minimum wage from 450 to 700 euros per month. - Scenario assuming full implementation starting in 2025: - Projects public debt to surpass 100 percent of GDP in 2029. - Example policy trade-off: - Increasing the VAT rate by 6 percentage points would yield about 4 percent of GDP extra revenue, versus nearly 9 percent adjustment needed to bring the primary balance to zero. Authorities’ views on fiscal matters - Authorities more optimistic on debt trajectory; agree on importance of a debt anchor. - Expect public expenditures, notably the public wage bill, to grow slower than nominal GDP over the medium term. - Optimistic about tapping international markets at more favorable rates relative to staff’s baseline projections (noted March 2024 bond issue). - Ministry of Finance interested in new IMF TA for a medium-term debt strategy; intend to staff the Fiscal Council. ### B. FINANCIAL SECTOR POLICIES Banking sector resilience and vulnerabilities - NPL ratio at 5.0 percent in Q4 2023; capital adequacy nearly twice regulatory minimum. - Liquidity abundant due to deposit growth; banks have increased reserve balances at CBCG and invested in foreign securities. - Conversion of variable rate loans to fixed rate loans reduced share of variable rate loans from 29 percent (mid-2022) to 14 percent (Q4 2023). - Real estate market buoyant; financing mainly from inward FDI rather than local banking system. - Recommendation: banks should provide systematic data on loan-to-value, price-to-income, debt-to-income, and debt service-to-income ratios to inform macroprudential policies. - Removal of forbearance measure on unrealized losses from government securities has enhanced market discipline; supervisory data should reflect market realities. - Monitor banking sector exposure to foreign securities for interest rate and maturity mismatch risks; IMF providing TA on supervision of interest rate risks. Interest rate and funding dynamics - Deposit and lending interest rate dynamics: - Domestic deposit rates unresponsive to ECB tightening; deposit rates remained flat while lending rates rose. - CBCG and government should develop a retail government bond market to diversify funding and provide higher returns for savers. - Central bank independence and contingency planning: - Resist administrative caps on bank lending rates to avoid curtailed ECB policy transmission, adverse selection, and credit rationing. - Keep contingency planning and bank resolution strategies up to date. - Bolster CBCG buffers for ELA; €250 million EUREP liquidity line with the ECB renewed until January 2025; €100 million BIS liquidity line set up in 2019 renewed. - IMF’s “Central Bank Transparency Code Assessment” to reinforce institutional strength. Regulation, supervision, and AML/CFT - Continue alignment of regulation and supervision with EU frameworks and international standards (Basel Committee, FSB, FATF). - Ensure legal framework and supervision capacities keep pace with digitalization, crypto assets, and fintech initiatives. - Crypto activity judged modest per MONEYVAL; tracing difficulties require vigilance. - Strengthen AML/CFT framework: - Proactive management averted a “grey listing” in recent MONEYVAL plenary session, but more work needed. - Large inflows to real-estate sector require internalization of cross-border money laundering risks. - 2023 MONEYVAL report flagged ineffective AML/CFT preventive measures by real estate agents. - Consider stronger supervision of real-estate agents and legal framework for collection, verification, and public dissemination of beneficial ownership information at time of property transfer. - Surge of net errors and omissions in balance of payments statistics might signal AML risks; IMF TA on improving BOP statistics forthcoming. CBCG governance and supervisory recommendations - Progress made on 2021 safeguards assessment recommendations; legal amendments adopted but governance issues remain. - Preserve credibility by: - Codifying transparent, technically focused, and politically uninfluenced selection procedures for Vice-Governors. - Ensuring Governing Council composition balanced between executive and non-executive members. ### C. STRUCTURAL POLICIES Growth, diversification, and inclusion - Policies to support: - Economic diversification; - SME development; - Increase female labor force participation. - Staff view: growth prospects do not hinge on rapid short-term increases in infrastructure expenditures. Tourism and energy potential - Tourism sector recommendations: - Encourage longer stays and off-season tourism, develop inland destinations (particularly in the North), diversify visitor markets (winter, adventure tourism, “digital nomads”), and improve infrastructure. - Energy potential: - Hydro, solar, and wind production present diversification opportunities and alignment with EU climate acquis. Female labor force participation and gender - Closing the 14-percentage point gap between men and women could theoretically yield around 10 percentage points of GDP in potential output; reducing the gap to the top decile in the region could yield a 4 percentage points gain. - Lack of affordable childcare is a significant impediment; enrolment in formal care in Montenegro is one of the lowest in Europe. - PIT progressivity in 2022 likely had a positive impact on female labor force participation and on reducing the earnings gap, while the mothers’ benefit has negatively impacted incentives for female labor force participation. Public investment management - Address weaknesses identified in the 2021 IMF Public Investment Management Assessment: - Improve project selection, planning, and risk appraisal. - Ensure implementing agencies are fully included in public investment planning. ### ANNEX HIGHLIGHTS — Migration, Inflation, and Macroeconomic Scenarios Annex I — Impact of migrants on growth - Estimated migrant inflow since early 2022: around 10 percent of the country’s pre-2022 population. - Migrants appear relatively well-off and have not created material fiscal costs; no evidence of pressure on the labor market. - Estimated contribution of migrants to 2022 growth: - If migrants = 10 percent of 2021 population, average migrant consumed as much as average resident, and ¾ of imports of goods affected, then migrants’ contribution to 2022 growth of 6.4 percent would be 3.4 percentage points. - Scenarios for employment and potential growth (next 10 years): - Scenario 1 (most pessimistic): UN population projections imply working age population declines at average rate of 0.34 percent per year. - Scenario 2: constant working age population with employment rate gradually converging to EU average of 70 percent; implies average annual employment growth of 1.7 percent. - Scenario 3: convergence plus 12 thousand Russians and Ukrainians permanently join labor force starting 2023; implies average annual employment growth of 2.1 percent and contribution of migrants to potential growth of 0.4 percentage points. Annex II — Inflation dynamics and upside risks - Inflation model: augmented Phillips curve including output gap, international food price inflation, lagged inflation, lagged wage growth, error correction vs Euro Area CPI. - Key empirical results: - High persistence of inflation. - Importance of international food price shocks. - Statistically significant role for lagged wages. - Error correction mechanism for deviations from Montenegro–Euro Area price relationship. - Regression coefficients (selected): - Lagged inflation coefficients: 0.569*** and 0.487*** (standard errors (0.092)(0.093)) - Lagged gross wage growth: 0.103** (0.047) - Lagged net wage growth: 0.085*** (0.026) - International food price inflation: 0.045** and 0.035** (0.018)(0.018) - Upside risks: - Potential further policy-induced wage increases and asymmetric pass-through from international food prices. Minimum wage shock and inflation - Increasing the average monthly net wage from €450 to €700 is estimated to result in a 30 percent increase of the average net wage. - According to the augmented Phillips curve model: - A 30 percent increase in the average net wage would cause a 2.2 percentage points higher annual average inflation compared to baseline. ### DEBT OUTLOOK, DSA, AND RISK ASSESSMENT Baseline public debt trajectory (percent of GDP) - Public debt: - Actual 2023: 61.5 - 2024: 62.3 - 2025: 61.4 - 2026: 62.2 - 2027: 63.2 - 2028: 64.8 - 2029: 66.1 - 2030: 67.9 - 2031: 69.8 - 2032: 71.8 - 2033: 73.9 - Drivers of debt dynamics: - Revenue losses due to 'Europe Now' reforms: - Abolition of health contributions cost about 4 percent of GDP in revenues. - PIT revenues fell by about 1 percent of GDP due to tax-free allowance of 700 euros per month. - CIT revenue increased by 0.7 percent of GDP in 2023. - VAT revenues increased by up to 1.5 percent of GDP. - Revenue measures in the 2024 budget expected to increase revenues by a combined 1.3 percent of GDP. - Structural increases in social expenditures: - 2024 increase in minimum pensions: around 2 percent of GDP. - 2021 quasi-universal child allowance: around 1 percent of GDP. - 2022 mothers’ benefit re-introduction: some 0.8 percent of GDP. - Rising interest costs: - Interest costs projected to increase from 1.6 percent of GDP in 2022 to 2.8 percent in 2029. - Financing needs in 2025 and 2027 expected to near 14 and 16 percent of GDP respectively, when large Eurobond repayments come due. - Gross financing needs (GFN) trajectory (percent of GDP): - 2023: 3.9 - 2024: 10.1 - 2025: 13.9 - 2026: 7.4 - 2027: 16.0 - 2028: 8.8 - 2029: 15.4 - 2030: 12.3 - 2031: 18.9 - 2032: 20.3 - 2033: 16.1 - Debt service (percent of GDP) and currency split: - Debt service: - 2023: 6.4; 2024: 8.7; 2025: 12.5; 2026: 5.9; 2027: 14.5; 2028: 7.3; 2029: 13.8; 2030: 10.7; 2031: 17.2; 2032: 18.5; 2033: 14.2 - Local currency: 2023: 5.6; 2024: 7.7; 2025: 11.5; 2026: 5.0; 2027: 13.7; 2028: 6.5; 2029: 13.1; 2030: 10.0; 2031: 16.6; 2032: 17.9; 2033: 13.7 - Foreign currency: 2023: 0.8; 2024: 1.0; 2025: 0.9; 2026: 0.9; 2027: 0.8; 2028: 0.8; 2029: 0.7; 2030: 0.7; 2031: 0.6; 2032: 0.6; 2033: 0.6 Medium-term risk assessment and signals - DSA indicators: - Fanchart width: 51.4 - Probability of debt non-stabilization (percent): 82.0 - Debt fanchart index (DFI): 2.2 - Risk signal: High - GFN module: - Average baseline GFN (percent of GDP): 11.9 - GFN financeability index (GFI): 20.3 - Risk signal: High - Final medium-term assessment: - Prob. of missed crisis, 2024-2029, if stress not predicted: 54.5 pct. - Prob. of false alarms, 2024-2029, if stress predicted: 6.8 pct. - Commentary: - A fiscal effort of 1.8 percent of GDP over the next 4 years would stabilize debt at below 60 percent of GDP. - Montenegro’s GFNs averaged 12.6% of GDP in 2013-23 and are projected to average 11.9% of GDP over 2024-29. - Diversifying sovereign financing sources, including developing a retail market, is recommended to improve public debt management. Long-term and sectoral fiscal risks - Pensions: - Permanent adjustment needed in the pension system to keep pension assets positive: - 30 years: 2.4% of GDP per year; - 50 years: 2.5% of GDP per year; - Until 2100: 2.5% of GDP per year. - Health / Demographics: - Health-related spending analysis uses Serbia proxies due to data gaps; caution advised in interpretation. - Climate change adaptation: - IMF Climate-driven INFORM Risk Index score: 2.7 (on a scale of 0-10). - Montenegro committed to lowering GHG emissions by 35 percent by 2030 relative to 1990 levels; authorities indicated intention to align with EU target of 55 percent reduction by 2030. ### OTHER STRUCTURAL AND SOCIAL ISSUES Health care and pharmaceuticals - Pharmaceutical expenditures have grown by an average of 18 percent since 2018, reaching 2.5 percent of GDP in 2022. - Policy recommendations: - Strengthen systematic monitoring of pharmaceutical expenditures. - Implement mandatory regular revaluation of clinical treatments for cost effectiveness. - Monitor and address the build-up of arrears in the health care sector; in 2022, 1 percent of GDP was transferred to the Health Insurance Fund to clear arrears. Childcare, multigenerational households, and female labor force participation - 17 percent of the population live in a household with three adults or more. - Less than 10 percent of children under 3 were enrolled in formal childcare in Montenegro. - 77 percent of the population lives in a household where elderly care is needed. - Policy suggestions: - Improve social protection programs to address unpaid care and domestic work imbalances, strengthen paternity leave participation, and improve access to childcare services. - Conduct fiscal and welfare impact assessment of improving access to affordable high-quality childcare services. Gender budgeting and revenue administration - Montenegro integrated gender-responsive budgeting in Budget 2023; no legal framework yet for gender budgeting. - Montenegro Tax Administration workforce: - Share of female workforce approximately 70 percent. - Female executives: more than 50 percent in 2023. - Revenue administration reform: - MRCA split into MTA and Montenegro Customs Administration as of January 1, 2024. - RARP foresees employee and taxpayer satisfaction surveys in 2025. - RARP expected full implementation by September 2025. ### STAFF APPRAISAL AND INSTITUTIONAL NOTE - Staff appraisal: - Montenegro’s economy "looks considerably healthier relative to the last Article IV Consultation in 2021." - Benefiting from strong tourism and increased consumption owing to the 2022 reforms and migrants. - Fiscal position improved; current account deficit narrowed. - External position in 2023 assessed as substantially weaker than implied by fundamentals and desirable policies. - Policy priorities: - (i) diversify the economy, particularly in renewable energy production; - (ii) maintain strong public finances underpinned by a credible medium-term fiscal strategy; - (iii) bolster oversight of the banking system whilst strengthening the AML/CFT framework; - (iv) fully utilize untapped potential of women in the labor force. - Institutional/surveillance note: - Next Article IV consultation expected on the standard 12-month cycle. *Source: MONTENEGRO — INTERNATIONAL MONETARY FUND, 2024 (IMF staff report content provided).* ### 2024. The team comprised S. Seshadri (head), A. Kara, G. Minasyan, ### MONTENEGRO ### CONTEXT - Montenegro is a unilaterally euroized economy that experienced: - tourism-driven growth averaging 4 percent in 2015-19; - contraction by over 15 percent in 2020 due to COVID; - a strong recovery since 2021 with tourism exceeding pre-pandemic levels. - The war in Ukraine affected Montenegro via: - real channels (robust consumption growth due to migrants), - nominal channels (inflation), - and has improved the fiscal position; on current policies the fiscal position is likely to gradually weaken over the medium term. - Political developments: - Fresh elections in 2023 (presidential March; parliamentary June); - New coalition government formed end-October 2023; - New CBCG Governor took office in December 2023; - Strong social consensus on EU accession, targeted for 2028. ### RECENT DEVELOPMENTS, OUTLOOK, AND RISKS Findings and recent data - Real GDP growth: - 6.4 percent in 2022; - estimated 6 percent in 2023, driven primarily by private consumption in H1 and by net exports in H2. - Migration and labor: - Inflow of affluent Russian and Ukrainian migrants since 2022 estimated at around 10 percent of the country’s population (see Annex I); - More recent inflow from Turkey estimated at around 2 percent of the country’s pre-war population; - Unemployment fell to 13.1 percent in 2023; labor force participation and employment rate increased. - Inflation: - Jumped to 17 percent y-o-y in 2022 (driven by food, fuel, and large domestic policy-induced wage increases); - February 2024 inflation was 4.3 percent y-o-y; - Differential with Euro Area inflation fell from 8 percentage points in December 2022 to around 1.7 percentage points in February 2024. - External sector: - Current account deficit: 26.1 percent of GDP in 2020; 12.9 percent in 2022; 11.4 percent in 2023. - 2023 tourism revenues exceeded pre-pandemic levels by 38 percent. - Current account deficit financed mostly by FDI inflows and high positive errors and omissions (errors and omissions were 10.7 percent of GDP in 2023). - External position in 2023 assessed as substantially weaker than implied by fundamentals and desirable policies (Annex III). - Public finances: - Fiscal deficit: 10.9 percent of GDP in 2020; 1.7 percent of GDP in 2021; 4.1 percent in 2022. - Preliminary 2023 overall general government budget recorded a surplus of ¾ percent of GDP (contrasting with a planned deficit of 5.6 percent of GDP). - Public debt: peaked at 107 percent of GDP in 2020; 71 percent in 2022; estimated 61.5 percent of GDP in 2023. - On March 6, 2024, Montenegro placed a US$750 million Eurobond at an effective rate of 5.9 percent in Euros (following a cross-currency swap). - Banking sector: - NPL ratio: 5.0 percent of total loans in Q4 2023 (post-COVID peak was 6.5 percent in Q1 2022). - Average capital adequacy ratio is nearly twice the regulatory minimum. - Deposit growth 62 percent since end-2020 (driven by post-COVID recovery and large nonresident deposit inflows); share of non-resident deposits to total deposits stands at 24 percent in January 2024. - Average deposit rate and lending rate as of February 2024 were respectively 0.1 percentage points lower and 1.0 percentage points higher than end-2021. - Share of real estate loans to gross loans stable at around 20 percent. Outlook and projections (staff baseline) - Growth expected to moderate to 3.7 percent in 2024. - Baseline assumes no further net migrant inflows or outflows. - Current account deficit expected to rise to about 13.6 percent of GDP over the medium term absent structural reforms to raise national saving. - General government fiscal balance expected to weaken from 0.7 percent of GDP in 2023 to -3.2 percent of GDP in 2024 and continue weakening over the medium term. - Public debt expected to reach 66.1 percent of GDP in 2029. Risks - Migration reversal would negatively affect near-term and future growth prospects. - Downside external risks: weaker global growth affecting tourism and FDI. - Financial risks: vulnerability to tightening global financial conditions given high sovereign refinancing needs (averaging 12 percent of GDP in the next five years) and projected deterioration of fiscal balances; potential capital outflows including nonresident deposits, FDI into real estate, and portfolio investment. - Inflation upside risks: wage pressures and shocks to commodity (especially food) prices. - Fiscal risks: fulfillment of all electoral promises would pose significant risks to the fiscal position. ### POLICY DISCUSSIONS High-level messages - Fiscal policy should maintain a non-negative primary balance, anchored by a prudent debt ceiling of 60 percent of GDP by 2028. - Longer-term structural fiscal reforms are needed to support healthy public finances. - Continued vigilance in the banking sector is essential as the landscape of risks changes. - Future growth prospects can be enhanced by supporting economic diversification, SME development, and female labor force participation rather than ramping up infrastructure expenditures in a short period. ### A. FISCAL POLICY 2024 budget and composition - The 2024 budget envisages a sharp rise in the fiscal deficit. - Expenditure increases: - 1.8 percent of GDP increase in social security transfers, mostly due to a more than 50 percent increase of the minimum pension to 450 euros per month. - Higher capital expenditure and higher unallocated reserve fund spending compared to 2023. - Agreement reached in February 2024 to raise wages in the education sector with an estimated annual impact of 0.2 percent of GDP (not yet incorporated into the 2024 budget law). - Revenue measures: - Removal of COVID exemptions and preferential rates for VAT (estimated yield, 0.5 percent of GDP). - Increasing excises on tobacco, plastics, and products containing sugar (estimated yield, 0.3 percent of GDP). - Increasing fees on games of chance (estimated yield, 0.3 percent of GDP). - An additional 0.2 percent of GDP of VAT revenues expected from increased consumption due to higher social transfers. - These revenue measures were originally planned under ‘Europe Now’ to partially compensate for the revenue loss caused by abolition of health contributions and were included in the World Bank Development Program Facility. Fiscal outlook and drivers - The 2024 budget’s fiscal deterioration reflects higher social transfers and wages, partly offset by revenue measures and expected VAT receipts from higher consumption. - The overall general government balance is expected to fall (from the 2023 surplus of 0.7 percent of GDP), with staff projecting a general government fiscal balance of -3.2 percent of GDP in 2024 under the baseline. ### B. FINANCIAL SECTOR POLICIES - Banking sector resilience: - NPL ratio at 5.0 percent in Q4 2023; capital adequacy nearly twice regulatory minimum. - Liquidity abundant due to deposit growth; banks have increased reserve balances at CBCG and invested in foreign securities. - Vulnerabilities and supervisory response: - Pockets of vulnerability under close supervision and subject to tighter standards set by CBCG. - CBCG seeks technical assistance from IMF Statistics Department on surge in errors and omissions. ### C. STRUCTURAL POLICIES - Staff emphasized policies to: - Support economic diversification; - Support SME development; - Increase female labor force participation. - Staff view: growth prospects do not hinge on rapid short-term increases in infrastructure expenditures. *MONTENEGRO — INTERNATIONAL MONETARY FUND, 2024.* ### 0.7 to -3.2 percent of GDP in 2024. (Text Table 1 ). Both the higher spending and the revenue raising ### 1mneea2024001 - 0.7 to -3.2 percent of GDP in 2024. (Text Table 1 ). Both the higher spending and the revenue raising ### Fiscal outlook and debt dynamics - Baseline projection: public debt increases from 61.5 percent in 2023 to 66.1 percent by 2029 and continues growing further. - Three main drivers of debt dynamics: - Revenue losses due to 'Europe Now' reforms: - Abolition of health contributions cost about 4 percent of GDP in revenues. - Personal Income Tax (PIT) revenues fell by about 1 percent of GDP due to the introduction of a generous tax-free allowance of 700 euros per month. - Corporate Income Tax (CIT) revenue increased by 0.7 percent of GDP in 2023 due to the progressivity of the CIT system coming into effect for 2023. - VAT revenues increased by up to 1.5 percent of GDP, supported by higher private consumption and inflow of migrants. - Revenue measures in the 2024 budget are expected to increase revenues by a combined 1.3 percent of GDP, still falling short of compensating for the losses in healthcare contributions and PIT. - Structural increases in social expenditures: - 2024 increase in minimum pensions: around 2 percent of GDP. - 2021 introduction of quasi-universal child allowance: around 1 percent of GDP. - 2022 re-introduction of mothers’ benefit: some 0.8 percent of GDP. - Rising interest costs: - Interest costs projected to increase from 1.6 percent of GDP in 2022 to 2.8 percent in 2029. - Financing needs in 2025 and 2027 expected to near 14 and 16 percent of GDP respectively, when large Eurobond repayments come due. - Both the higher spending and the revenue raising measures are expected to contribute moderately to inflation in 2024. ### Recommended fiscal adjustment measures and impacts - Strengthen Montenegro Revenues and Customs Administration (improve compliance risk management, use of third-party data, greater digitalization). - IMF estimate: cumulative gains in revenues of 0.9 percent of GDP over four years from this reform. - Limit growth of the public sector wage bill to CPI for two years starting 2025. - Expected savings: 0.6 percent of GDP. - Implement fuel marking reform starting 2025. - Expected increase in excises revenues: 0.3 percent of GDP. - Combined tax policy, tax administration, and expenditure measures expected to achieve a fiscal adjustment of 1.8 percent of GDP relative to baseline and stabilize debt at below 60 percent of GDP over the medium term. - Undertaking deficit reduction measures beginning in 2024 would help bring inflation down faster and close the estimated small positive output gap sooner than in the baseline. ### Debt anchor and fiscal framework - Recommended debt anchor: a 60 percent debt-to-GDP ceiling to be reached by 2028 (in line with Montenegro’s Law of Budget and Fiscal Responsibility). - Attainment strategy: - Maintain a non-negative primary balance from 2026 onwards. - This would, in practice, keep the overall deficit below 3 percent of GDP. - Policy design notes: - Targeting the current balance (overall fiscal balance excluding capital spending) would not necessarily stabilize debt. - Include commitment to the debt anchor and adherence strategy in the Macroeconomic and Fiscal Policy Guidelines and budget documentation. ### Long-term structural fiscal reforms - Better targeting of social transfers to the most vulnerable. - Contain growth of the public sector wage bill, including rules to limit hiring of permanent and non-permanent staff and review of non-salary compensations. - Address project selection, planning, and risk appraisal issues identified in the 2021 IMF Public Investment Management Assessment. - Ensure public investment planning fully includes implementing agencies to increase efficiency of capital budgeting and implementation. - Strengthen capacity of the newly split Tax Administration and Customs Agency to raise fiscal revenues smoothly. - Establish a fully functional fiscal council and improve oversight of state-owned enterprises (SOEs). - Restart t-bill/bond auctions and extend the market to the retail investor base to diversify government funding sources. - IMF support: continued capacity development in these areas. ### Alternative scenario: honoring electoral promises - Electoral promises not in the 2024 budget or medium-term projections include: - Partial to full elimination of pension contributions (up to 7.5 percent of GDP). - Increasing the net minimum wage from 450 to 700 euros per month. - Scenario assuming full implementation starting in 2025: - Projects public debt to surpass 100 percent of GDP in 2029. - Financing challenges: - Example: increasing the VAT rate by 6 percentage points would yield about 4 percent of GDP extra revenue, versus nearly 9 percent adjustment needed to bring the primary balance to zero. - Such a VAT increase would be distortionary, regressive, and highly inflationary. ### Authorities’ views on fiscal matters - Authorities more optimistic on debt trajectory; agree on importance of a debt anchor. - Expect public expenditures, notably the public wage bill, to grow slower than nominal GDP over the medium term. - Optimistic about tapping international markets at more favorable rates relative to staff’s baseline projections (noted March 2024 bond issue). - Ministry of Finance interested in new IMF TA for a medium-term debt strategy; intend to staff the Fiscal Council. - Ministry of Finance and Revenue administration committed to improving tax administration and appreciate Fund support. ### Financial sector policies and risks - Systemic financial sector risk indicators are low, but emerging risks warrant close monitoring by CBCG. - Loan portfolio risk mitigation: - Conversion of variable rate loans to fixed rate loans reduced share of variable rate loans from 29 percent (mid-2022) to 14 percent (Q4 2023). - Real estate market buoyant; financing mainly from inward FDI rather than local banking system. - Recommendation: banking sector should provide systematic data on loan-to-value, price-to-income, debt-to-income, and debt service-to-income ratios to inform macroprudential policies. - Removal of forbearance measure on unrealized losses from government securities has enhanced market discipline; supervisory data should reflect market realities. - Monitor banking sector exposure to foreign securities for interest rate and maturity mismatch risks; IMF providing TA on supervision of interest rate risks. - Deposit and lending interest rate dynamics: - Domestic deposit rates unresponsive to ECB tightening; deposit rates remained flat while lending rates rose, boosting banking profits. - Factors: high liquidity, high market concentration, limited profitable lending opportunities, challenges for depositors to access higher yields. - Recommendation: CBCG and government should develop a retail government bond market to diversify funding and provide higher returns for savers. - Central bank independence: - Resist administrative caps on bank lending rates to avoid curtailed ECB policy transmission, adverse selection, and credit rationing. - Keep contingency planning and bank resolution strategies up to date. - Bolster CBCG buffers for ELA; €250 million EUREP liquidity line with the ECB renewed until January 2025; €100 million BIS liquidity line set up in 2019 renewed. - IMF’s “Central Bank Transparency Code Assessment” to reinforce institutional strength. ### Regulation, supervision, and AML/CFT - Continue alignment of regulation and supervision with EU frameworks and international standards (Basel Committee, FSB, FATF). - Ensure legal framework and supervision capacities keep pace with digitalization, crypto assets, and fintech initiatives. - Crypto activity judged modest per MONEYVAL; tracing difficulties require vigilance. - Strengthen AML/CFT framework: - Proactive management averted a “grey listing” in recent MONEYVAL plenary session, but more work needed. - Large inflows to real-estate sector require internalization of cross-border money laundering risks. - 2023 MONEYVAL report flagged ineffective AML/CFT preventive measures by real estate agents. - Consider stronger supervision of real-estate agents and legal framework for collection, verification, and public dissemination of beneficial ownership information at time of property transfer. - Surge of net errors and omissions in balance of payments statistics might signal AML risks; IMF TA on improving BOP statistics forthcoming. ### CBCG governance and supervisory recommendations - Progress made on 2021 safeguards assessment recommendations; legal amendments adopted but governance issues remain. - Preserve credibility by: - Codifying transparent, technically focused, and politically uninfluenced selection procedures for Vice-Governors. - Ensuring Governing Council composition balanced between executive and non-executive members. ### Structural policies for growth and inclusion - Economic diversification to reduce susceptibility to shocks; leverage skilled migrant labor and capital to boost knowledge-intensive businesses. - Tackle high informality, corruption, and tax non-compliance to support SME development. - Tourism sector potential: - Encourage longer stays and off-season tourism, develop inland destinations (particularly in the North), diversify visitor markets (winter, adventure tourism, “digital nomads”), and improve infrastructure. - Energy potential: - Hydro, solar, and wind production present diversification opportunities and alignment with EU climate acquis. - Public investment management: - Better practices essential to deliver high social returns in infrastructure and climate adaptation/mitigation investments. - Female labor force participation: - Closing the 14-percentage point gap between men and women could theoretically yield around 10 percentage points of GDP in potential output; reducing the gap to the top decile in the region could yield a 4 percentage points gain. - Lack of affordable childcare is a significant impediment; enrolment in formal care in Montenegro is one of the lowest in Europe. - PIT progressivity in 2022 likely had a positive impact on female labor force participation and on reducing the earnings gap, while the mothers’ benefit has negatively impacted incentives for female labor force participation. *Source: IMF staff analysis as presented in the provided content.* ### 27. The authorities recognize the importance of diversification both within and away from ### The authorities recognize the importance of diversification both within and away from ### Diversification, infrastructure, and climate strategy - Authorities plan to increase investment in infrastructure—particularly in the country’s relatively underdeveloped Northern regions—to open up new forms of tourism, and to increase economic growth more broadly. - Plans are underway to develop a national climate strategy which will facilitate a discussion on climate issues and renewable energy production prospects during the next Article IV cycle. ### Gender disparities and female labor participation - Authorities welcomed staff’s analysis of gender disparities, and the importance placed on raising female labor participation. - Discussions highlighted the need to better understand deeper drivers of gender inequalities, including cultural factors. - It was agreed that childcare challenges play a significant role, and that other countries can offer valuable lessons in overcoming them. - Authorities acknowledged the value of considering, ex-ante, the gender impacts of economic policies—particularly in improving the targeting of social benefits with a view to increasing female labor force participation. ### Staff appraisal: growth drivers and vulnerabilities - Montenegro’s economy "looks considerably healthier relative to the last Article IV Consultation in 2021." - Economy is benefitting from strong tourism and increased consumption owing both to the 2022 reforms, and to migrants. - Fiscal position has improved; the current account deficit narrowed. - However, "the external position in 2023 was assessed to be substantially weaker than the level implied by fundamentals and desirable policies." - Policy priorities to mitigate economic volatility: - (i) diversifying the economy, particularly in renewable energy production; - (ii) maintaining strong public finances underpinned by a credible medium-term fiscal strategy; - (iii) bolstering oversight of the banking system whilst strengthening the AML/CFT framework; - (iv) fully utilizing the vast untapped potential of women in the labor force. ### Fiscal outlook and debt dynamics - On current policies, "debt is likely to rise gradually over the coming years." - "The fall of public debt from its 2020 peak has been sharp and a budget surplus was recorded in 2023." - "However, a return to deficits is expected from 2024 onwards and debt is expected to rise gradually." - Since 2022 there have been permanent revenue losses due to the abolition of health contributions and introduction of the PIT tax-free allowance, as well as increases in social expenditures. - "The revenue enhancing measures introduced in the 2024 budget are welcome. Still, additional measures are necessary to stabilize debt." - A credible and well-communicated medium-term fiscal strategy is essential: - Committing to a debt-to-GDP ceiling of 60 percent is appropriate and aligned with Montenegro’s Law on Budget and Fiscal Responsibility. - This commitment can be achieved by 2028 (the authorities’ target year for EU accession) with a cumulative primary balance adjustment of about 2 percent of GDP compared to staff’s baseline over the next 4 years. - "However, further revenue losses and/or structural expenditure increases, would raise the required level of fiscal consolidation to reach this target." - The Fund stands ready to assist the Montenegrin authorities in strengthening the fiscal framework. ### Structural fiscal reform priorities - Main areas requiring attention: - (i) better targeting of social transfers; - (ii) containing the growth in the public sector wage bill; - (iii) improving public investment management practices; - (iv) strengthening the capacities of tax revenue and customs administrations; - (v) establishing a fully functioning fiscal council; - (vi) improving the oversight of SOEs; - (vii) strengthening the domestic debt market by extending it to the retail sector. - "The IMF has and will continue to support the Montenegrin authorities through the provision of capacity development in these and other areas." ### Financial sector oversight and risks - "Continued close supervision of the financial sector by a strong and independent central bank is essential." - Systemwide financial stability indicators appear healthy amid ample liquidity, but lingering spots of weakness need to be addressed. - CBCG is taking appropriate steps; staff reiterates support for operational independence of the central bank and will continue to offer capacity development. - Recommendations for supervision and AML/CFT: - Stronger and more systematic monitoring of domestic leverage to improve macroprudential policy design. - Continue aligning regulation and supervision practices with international standards. - Digitalization, crypto assets, and fintech initiatives should be accompanied by a legal framework aligned with emerging guidelines from standard setters such as the Basel Committee on Banking Supervision, FSB, ECB, and the FATF. - Large inflows to the real estate sector need close AML scrutiny. - "The operationalization of an effective risk-based AML/CFT framework requires further efforts." ### Institutional and surveillance note - "It is expected that the next Article IV consultation with Montenegro will be held on the standard 12-month cycle." *Source: IMF staff report content provided.* ### 7. Net incurrence of liabilities9.716.9-2.6-1.00.05.52.73.94.04.84.4 ### 7. Net incurrence of liabilities9.716.9-2.6-1.00.05.52.73.94.04.84.4 ### Net incurrence of liabilities — Domestic and Foreign - Domestic: 2.7- 1.62.11.41.0-2.7-0.3-0.60.20.20.2 - Foreign: 7.018.5-4.7-2.4-1.08.23.14.53.84.54.2 ### Memorandum items — Balances (percent of GDP) - Primary balance: 0.6-8.10.7-2.52.6-1.4-1.5-1.5-1.5-1.5-1.6 - Current balance: 6.1-4.72.80.44.21.10.80.60.50.1-0.1 *Sources: Ministry of Finance; and Fund staff estimates and projections.* --- ### Balance of Payments — Key figures (Millions of euros and percent of GDP) ### Current account and trade - Current account balance (2019–2029): -707 -1,090-456-766-782-918 -1,069 -1,113 -1,184 -1,245 -1,312 - Trade balance (2019–2029): -2,066 -1,642 -1,915 -2,670 -2,983 -3,293 -3,549 -3,688 -3,853 -4,009 -4,170 - Exports (2019–2029): 466409526763716731704764779815851 - Imports (2019–2029): 2,5312,0512,4413,4343,6994,0244,2544,4524,6324,8245,021 ### Services and income - Services account (2019–2029): 1,0181779561,3171,6951,8061,8811,9492,0162,0842,154 - Receipts: 1,7056791,5972,2892,7692,9743,1183,2463,3733,5033,638 - Expenditures: 6875036419721,0741,1671,2361,2981,3571,4191,484 - Primary Income (2019–2029): 566710211867898987858276 - Compensation of employees, net: 216216283286278314333352370389409 - Investment income, net: -160-150-180-168-211-225-244-264-285-307-334 - Secondary Income (2019–2029): 284308401469438479510540568597628 - Government, net: 4951664259677379838892 - Other sectors, net: 236258335427379412437461485510536 ### Financial account and capital flows - Financial account (2019–2029): -1,175 -1,372-110-347503 -1,079 -1,000 -1,125 -1,190 -1,285 -1,305 - Foreign direct investment, net: -305-471-582-783-429-634-731-820-864-909-956 - Portfolio investment, net: -337-394548175446-471-4024225526832 - General government, net change in liabilities: 319424-22700688270000250 - Eurobond: 331429-22700688270000250 - Disbursements (increase in liabilities): 50075000068877007500750 - Amortization (reduction in liabilities): -169-321-227000-5000-7500-500 - Derivatives, net: 647128-14-40-21740414526 - Other investment, net: -534-507-7726148526-229-547-581-644-381 - General government: 9-322-191741107727-373-332-417-158 - Commercial banks: -222-69-89-10319121127132138144150 - Other sectors: -320-116319856-172-383-306-387-370-373 ### Other items - Errors and omissions: -15295276570736000000 - Change in official reserves (+ denotes increase): 3163747165-483161-6812640-6 ### Memorandum ratios (percent of GDP and other indicators) - Current account balance: -14.3-26.1-9.2-12.9-11.4-12.4-13.5-13.4-13.5-13.5-13.6 - Trade balance: -41.7-39.2-38.7-45.1-43.6-44.3-45.0-44.4-44.0-43.6-43.1 - Exports: 9.49.810.612.910.59.88.99.28.98.98.8 - Imports: 51.149.049.358.054.054.253.953.552.952.451.9 - Services account: 20.64.219.3 22.224.824.323.923.423.022.722.3 - Receipts: 34.416.232.238.640.440.039.539.038.538.137.6 - Payments: 13.912.012.916.415.715.715.715.615.515.415.3 - Income account: 1.11.62.12.01.01.21.11.11.00.90.8 - Current transfers, net: 5.77.48.17.96.46.46.56.56.56.56.5 - Foreign direct investment, net: -6.2-11.2-11.7-13.2-6.3-8.5-9.3-9.9-9.9-9.9-9.9 - Portfolio investment, net: -6.8-9.411.13.06.5-6.3-0.52.92.92.90.3 - Other investment, net: -10.8-12.1-1.64.47.10.4-2.9-6.6-6.6-7.0-3.9 - Gross external debt: 169.0224.1191.5161.8138.5139.4140.5142.9145.5148.4150.7 - of which: Government: 63.291.674.460.752.056.356.157.758.760.361.6 - Real goods import growth: 1.0-17.67.419.87.67.44.93.72.92.82.7 - Real goods export growth: 7.3-11.417.329.7-8.9-0.2-6.06.0-0.12.52.4 - Real service export growth: 7.8-60.3129.232.314.74.62.72.11.91.91.9 *Sources: Central Bank of Montenegro; and IMF staff estimates and projections.* --- ### Banking sector financial soundness indicators (2014–2023) ### Capital adequacy and quality - Regulatory capital as percent of risk-weighted assets (Dec 2014–Sep 2023): 16.215.516.016.415.617.718.518.519.320.7 - Regulatory tier 1 capital as percent of risk-weighted assets: 14.414.214.715.014.418.117.417.418.420.1 ### Asset composition and quality - Nonperforming loans in percent of gross loans: 15.912.610.37.36.74.75.56.25.75.0 - Nonperforming loans net of provisions in percent of capital: 68.852.538.328.921.014.921.222.621.418.3 ### Earnings, profitability, and efficiency - Return on assets: 0.8-0.10.20.90.71.20.50.81.72.6 - Return on equity: 5.6-0.91.26.94.99.03.75.913.920.3 - Interest margin to gross income: 60.258.558.354.556.156.660.855.654.055.3 - Noninterest expenses to gross income: 76.181.176.373.782.575.074.472.358.457.6 - Personnel expenses to noninterest expenses: 41.137.036.836.034.935.935.931.637.330.9 - Spread between reference lending and deposit rates (basis points): 736555552546544540541531566623 ### Liquidity and funding - Liquid assets to total assets: 22.124.624.325.122.320.621.826.030.725.7 - Liquid assets to short-term liabilities: 66.887.051.449.235.431.135.139.742.935.3 - Net open position in foreign exchange to capital: 0.62.11.60.80.00.60.70.10.10.0 - Customer deposits to total (noninterbank) loans: 110110105105108110114131152156 *Source: Central Bank of Montenegro.* --- ### Annex I — The Impact of Migrants on Economic Growth (summary of findings and scenarios) ### Key empirical findings - Estimated migrant inflow since early 2022: around 10 percent of the country’s pre-2022 population. - Migrants appear relatively well-off and have not created material fiscal costs; no evidence of pressure on the labor market. - Estimated contribution of migrants to 2022 growth: - If migrants = 10 percent of 2021 population, average migrant consumed as much as average resident, and ¾ of imports of goods affected, then migrants’ contribution to 2022 growth of 6.4 percent would be 3.4 percentage points. - Sectoral impact: IT sector registered 30 percent real growth in 2022, contributing 1.5 percentage points to total growth in 2022; IT sector growth continued at 3 percent yoy in first 9 months of 2023. - Additional impacts: rents increased by 31 percent yoy in 2022 and by another 10 percent in 2023; strong tax revenue performance, especially indirect taxes; financial inflows. ### Scenarios for employment and potential growth (next 10 years) - Historical decomposition: employment growth contributed 2.5pp on average to annual growth over past 10 years; labor productivity growth contributed 0.6pp. - Scenario 1 (most pessimistic): UN population projections imply working age population declines at average rate of 0.34 percent per year. - Scenario 2: constant working age population with employment rate gradually converging to EU average of 70 percent; implies average annual employment growth of 1.7 percent. - Scenario 3: convergence of employment rate to EU average plus 12 thousand Russians and Ukrainians (5 percent of total number of employed in 2022) permanently join labor force starting 2023 and over next 10 years; implies average annual employment growth of 2.1 percent and contribution of migrants to potential growth of 0.4 percentage points. ### Policy implications and recommendations - Reconsider policies that would lower labor input (example: electoral promise to shorten workday from 8 to 7 hours) as potentially negative for potential growth given low part-time work (<5 percent). - To achieve potential GDP growth of 3 percent or above, need to increase labor productivity growth above historical average of 0.6 percent. - Factors to increase labor productivity include: - Productive investment in physical and digital infrastructure, including FDI. - Improvements in human capital through better education. - Structural reforms to improve the business environment. - Migrants can aid productivity by contributing to knowledge-intensive sectors; IT sector labor productivity ~ twice the economy average. *Prepared by Gohar Minasyan (EUR).* --- ### Annex II — Inflation Dynamics and Upside Risks (summary) ### Stylized model results and drivers - Inflation modeled via augmented Phillips curve including: output gap, international food price inflation, lagged inflation, lagged wage growth, error correction term vs Euro Area CPI. - Key empirical results: - High persistence of inflation. - Importance of international food price shocks. - Statistically significant role for lagged wages. - Error correction mechanism for deviations from long-term Montenegro–Euro Area price relationship. - Output gap coefficient not statistically significant. ### 2022 inflation surge — contributing factors - Concurrent shocks in 2022: rapid recovery from COVID, minimum wage hike effective January 2022, global food and energy price increases, large inflow of migrants increasing aggregate demand. - Observations: - Average wage increase in 2022 occurred in January (minimum wage increase) and preceded international commodity price shocks in March 2022. - Minimum wage increase likely prevented or delayed some wage demands that would have followed higher cost of living. - Minimum wage increase largely “financed” by government through elimination of healthcare contributions: net wage increase much higher than gross (30 percent average net wage growth vs 10 percent average gross wage growth in Q1, 2022). - Implication: 2022 wage increase affected inflation mostly through the demand channel (higher disposable income) and partially through production cost channel. ### Regression summary (selected coefficients) - Phillips curve regression highlights: - Lagged inflation coefficients: 0.569*** and 0.487*** (standard errors (0.092)(0.093)) - Lagged gross wage growth: 0.103** (0.047) - Lagged net wage growth: 0.085*** (0.026) - Lagged error correction term: -32.812*** and -30.044*** (9.489)(9.108) - International food price inflation: 0.045** and 0.035** (0.018)(0.018) - Observations: 62 and 62; R-squared: 0.59 and 0.62 - Long-run CPI regression: - Euro Area Log CPI coefficient: 1.322*** (0.018) - Constant: -1.491*** (0.085) - Observations: 64; R-squared: 0.988 ### Upside risks - Important upside risks to inflation stem from potential further policy-induced wage increases and asymmetric pass-through from international food prices. *Prepared by Gohar Minasyan (EUR).* ### 3. Analyzing the relationship between wages and inflation in Montenegro is complicated ### 3. Analyzing the relationship between wages and inflation in Montenegro is complicated by the presence of “envelope wages” ### Envelope wages and minimum wage dynamics - Key argument for the minimum wage increase in 2022: actual wages were much higher than the previous statutory minimum wage but wages above the minimum were paid unofficially as “envelope” payments. - Open question: To what extent the 2022 minimum wage increase resulted in reported wages converging to actual wages versus actual wages experiencing a genuine increase is an important question and a subject of further research. - Even being agnostic about the size of the “envelope payments”, it is safe to argue that they would be lower when the minimum wage is €450 than when the minimum wage was €250. - Implication for the proposed hike to €700: the average wage increase following the proposed new minimum wage hike to €700 will likely reflect less wage formalization and more actual wage increase than in 2022. ### Wage distribution and projected wage change from €450 to €700 - Increasing the average monthly net wage from €450 to €700 is estimated to result in a 30 percent increase of the average net wage. - Current distributional facts (as of Q2, 2023): - About ¾ of wage recipients earn less than €700 per month. - Significant bunching: about 33 percent of the wage distribution is at the current minimum wage level of €450. - Observed effect of the previous minimum wage hike to €450: it did not seem to have caused a shift in the distribution of wages beyond the new minimum wage. - Under the assumption that a further minimum wage increase causes no second-round effects beyond re-bunching around the new minimum (while recognizing upside risks to this assumption), the average net wage would increase by about 30 percent. - If pension contributions are eliminated in full simultaneously with the minimum wage increase: - The average gross wage and therefore the average labor cost to employers will stay roughly the same. - Rationale: the gain to employers from not paying the pension contributions would compensate for the loss due to having to pay higher minimum wages. - As in 2022, the new minimum wage hike is expected to affect inflation mostly through the demand channel. ### Inflation impact from a 30 percent wage increase (augmented Phillips curve) - According to the augmented Phillips curve model used: - A 30 percent increase in the average net wage would cause a 2.2 percentage points higher annual average inflation compared to baseline. - Scenario assumptions in the calculations: - Same assumptions on international food prices and euro area inflation in both scenarios. - No wage increases in the baseline. - A one-off 30 percent increase of the average net wage in Q2, 2024. - Dynamic considerations: - Persistence of inflation causes the effect of the wage increase to linger. - The error correction term works in the opposite direction, gradually pulling inflation back closer to the inflation in the Euro Area. ### Asymmetric pass-through of international to local food prices and inflation risks - Risk summary: - Montenegro faces upside risks to inflation due to asymmetric pass-through of international to local food prices. - While international food prices are expected to moderate, risks to commodity price volatility remain. - Further upside shocks to international food prices are possible due to supply disruptions related to conflicts, uncertainty, and export restrictions. - Empirical findings from a simple VAR: - Responses of food price inflation to positive shocks to international food prices tend to be larger, more often statistically significant, and more persistent compared to responses to negative shocks in Montenegro. - The picture is similar in most other Western Balkan economies. - Literature and channels: - Empirical literature finds pass-through of commodity price shocks to domestic prices is often asymmetric, with higher pass-through of price increases than of price decreases. - Potential mechanisms include: - Importer and retailer margins reacting asymmetrically to input cost shocks (margins increase by more when input costs decline than they decrease when input costs rise). - Asymmetric menu costs (in the presence of trend inflation, menu costs may lead to more resistance to lower prices than to increase them). - Productivity shifts triggered by commodity price shocks. - Policy implication and research needs: - Further research is needed to determine whether the apparent asymmetric pass-through in Montenegro is linked with anti-competitive practices within the retail sector. - If confirmed, enforcing competition and limiting margins of importers and retailers, if well designed, may have merit in ensuring low and stable inflation in the context of commodity price fluctuations. *Source: IMF staff report excerpt (chapter/section content provided).* ### 1. De bt cove rage in the DSA: 1/CGGGNFPSCPSOther ### 1mneea2024001 - 1. De bt cove rage in the DSA: 1/CGGGNFPSCPSOther ### Coverage and consolidation - Chosen coverage: general government (GG), which includes central government, SSF, Health Fund, and local government. - Inclusion status by subsector: - Budgetary central government: Yes - Extra budgetary funds (EBFs): No - Social security funds (SSFs): Yes - State governments: No - Local governments: Yes - Public nonfinancial corporations: No - Central bank: No - Other public financial corporations: No - Authorities report consolidated accounts of GG including SSF and the Health Fund. - Commentary: Fiscal risks may stem from potential deterioration of the Health Fund and Social Security Fund balances if the elimination of healthcare contributions and, potentially, reduction of pension contributions are not fully compensated by the central government. ### Debt consolidation, accounting and recording - Reporting on intra-government debt holdings: Nonfinancial public corporations — GG: expected; State govt. — Local govt. — CG — CPS — Not applicable (as shown in the source table). - Basis of recording: Not applicable (per the source). - Valuation of debt stock: Not applicable (per the source). - Instrument and accounting principles entries are unspecified in the supplied content. ### Public debt structure and creditor composition (end-2023 commentary) - Commentary: 70 percent of debt as of end-2023 was held by external private creditors, including the China EXIM Bank debt, denominated in USD accounting for 16 percent. - Domestic financing: Domestic sources of financing remain undiversified with no retail market for government debt. ### Baseline scenario (Table 4) — selected levels and flows (Percent of GDP unless indicated otherwise) - Public debt: - Actual 2023: 61.5 - 2024: 62.3 - 2025: 61.4 - 2026: 62.2 - 2027: 63.2 - 2028: 64.8 - 2029: 66.1 - 2030: 67.9 - 2031: 69.8 - 2032: 71.8 - 2033: 73.9 - Change in public debt: - 2023: -9.1 - 2024: 0.8 - 2025: -0.9 - 2026: 0.8 - 2027: 1.0 - 2028: 1.7 - 2029: 1.2 - 2030: 1.8 - 2031: 1.9 - 2032: 2.0 - 2033: 2.1 - Contribution of identified flows (selected): - Primary deficit: - 2023: -2.6 - 2024: 1.4 - 2025: 1.5 - 2026: 1.5 - 2027: 1.5 - 2028: 1.5 - 2029: 1.6 - 2030: 1.6 - 2031: 1.7 - 2032: 1.7 - 2033: 1.9 - Noninterest revenues: 2023: 41.8; 2024–2033 (each year): 41.0, 40.5, 40.4, 40.4, 40.4, 40.4, 40.4, 40.4, 40.4, 40.4 - Noninterest expenditures: 2023: 39.2; 2024: 42.4; 2025: 41.9; 2026: 41.9; 2027: 41.9; 2028: 42.0; 2029: 42.0; 2030: 42.1; 2031: 42.1; 2032: 42.1; 2033: 42.3 - Automatic debt dynamics: - 2023: -8.1 - 2024: -2.8 - 2025: -1.5 - 2026: -0.9 - 2027: -0.7 - 2028: -0.4 - 2029: -0.4 - 2030: -0.2 - 2031: -0.1 - 2032: -0.1 - 2033: 0.0 - Real interest rate and relative inflation (percent): - 2023: -3.3; 2024: -0.6; 2025: 0.4; 2026: 0.9; 2027: 1.1; 2028: 1.4; 2029: 1.5; 2030: 1.7; 2031: 1.9; 2032: 2.0; 2033: 2.1 - Real growth rate: - 2023: -4.0; 2024: -2.2; 2025: -1.8; 2026: -1.8; 2027: -1.8; 2028: -1.8; 2029: -1.9; 2030: -1.9; 2031: -2.0; 2032: -2.0; 2033: -2.1 - Other identified flows / Other transactions: - 2023: 0.7 - 2024: 2.3 - 2025: -0.8 - 2026: 0.2 - 2027: 0.2 - 2028: 0.5 - 2029: 0.0 - 2030: 0.4 - 2031: 0.3 - 2032: 0.3 - 2033: 0.3 - Contribution of residual: - 2023: 0.9 - 2024: -0.1 - 2025: -0.1 - 2026–2033: 0.0 each year - Gross financing needs (GFN): - 2023: 3.9 - 2024: 10.1 - 2025: 13.9 - 2026: 7.4 - 2027: 16.0 - 2028: 8.8 - 2029: 15.4 - 2030: 12.3 - 2031: 18.9 - 2032: 20.3 - 2033: 16.1 - Of which: debt service: - 2023: 6.4 - 2024: 8.7 - 2025: 12.5 - 2026: 5.9 - 2027: 14.5 - 2028: 7.3 - 2029: 13.8 - 2030: 10.7 - 2031: 17.2 - 2032: 18.5 - 2033: 14.2 - Debt service by currency: - Local currency: 2023: 5.6; 2024: 7.7; 2025: 11.5; 2026: 5.0; 2027: 13.7; 2028: 6.5; 2029: 13.1; 2030: 10.0; 2031: 16.6; 2032: 17.9; 2033: 13.7 - Foreign currency: 2023: 0.8; 2024: 1.0; 2025: 0.9; 2026: 0.9; 2027: 0.8; 2028: 0.8; 2029: 0.7; 2030: 0.7; 2031: 0.6; 2032: 0.6; 2033: 0.6 - Memo: - Real GDP growth (percent): 2023: 6.0; 2024: 3.7; 2025–2033: 3.0 (each year) - Inflation (GDP deflator; percent): 2023: 9.0; 2024: 4.6; 2025: 3.1; 2026: 2.3; 2027: 2.2; 2028: 2.1; 2029: 2.1; 2030: 2.1; 2031: 2.1; 2032: 2.1; 2033: 2.1 - Nominal GDP growth (percent): 2023: 15.6; 2024: 8.5; 2025: 6.2; 2026: 5.4; 2027–2033: 5.2 (each year) - Effective interest rate (percent): 2023: 2.8; 2024: 3.2; 2025: 3.6; 2026: 3.9; 2027: 4.0; 2028: 4.5; 2029: 4.6; 2030: 4.9; 2031: 5.0; 2032: 5.1; 2033: 5.2 - Commentary: Other flows mainly account for government deposits at the Central Bank, which are expected to be maintained at a level to cover 1 month of central government spending on average. ### Medium-term risk assessment (Table 5) — key indicators and signals - Debt fanchart module: - Fanchart width: 51.4 - Final fanchart (pct of GDP): 0.7 - Probability of debt non-stabilization (percent): 82.0 - Terminal debt-to-GDP x: 35.4 - Debt fanchart index (DFI): 2.2 - Risk signal: High - Gross financing needs (GFN) module: - Average baseline GFN (percent of GDP): 11.9 - Initial Banks' claims on the gen. govt (pct bank assets): 14.0 - Change in banks' claims in stress (pct banks' assets): 35.0 - GFN financeability index (GFI): 20.3 - Risk signal: High - Medium-term index: Risk signal — Final assessment: Prob. of missed crisis, 2024-2029, if stress not predicted: 54.5 pct. Prob. of false alarms, 2024-2029, if stress predicted: 6.8 pct. - Commentary: The mechanical signal of the Fanchart module points to high risk over the medium term. While in the baseline debt is expected to rise slowly, a fiscal effort of 1.8 percent of GDP over the next 4 years would stabilize debt at below 60 percent of GDP. The GFN module highlights high baseline GFNs and financeability risks. Montenegro is a small economy with historically similar GFN to GDP ratios: GFNs averaged 12.6% of GDP in 2013-23 and are projected in the baseline to average 11.9% of GDP over 2024-29. An important model element contributing to the high risk assessment is the potentially large increase in domestic banks' claims on the general government if other financing sources become unavailable. Diversification of sources of sovereign financing, in particular by developing the retail market, is one of staff's recommendations to improve the government's public debt management. ### Realism of baseline assumptions and volatility - Commentary: Being a small and undiversified economy, high volatility of macro variables as well as of forecast revisions is a characteristic of Montenegro. Government fiscal plans and outturns have also been highly volatile. ### Triggered modules, long-term risks and sectoral notes - Large amortizations: - Commentary: The model points to high risks from large amortizations. Montenegro's GFNs averaged 12.6% of GDP in 2013-23 and are projected in the baseline to average 11.9% of GDP over 2024-29. - Pensions: - Pension financing needs: - Permanent adjustment needed in the pension system to keep pension assets positive for: (charts indicate) 30 years: 2.4% of GDP per year; 50 years: 2.5% of GDP per year; Until 2100: 2.5% of GDP per year. - Commentary: Total benefits paid by the pension system exceed pension contributions, and this difference has increased due to the recent hike of the minimum pension, resulting in higher pension financing needs. The module may overstate long term fiscal risks because it embeds population projections that imply a population decline, while preliminary results from the recent 2023 census show that population actually increased by 2.1% between 2011 and 2023. - Health / Demographics: - Commentary: Because of lack of data on health spending by age group in Montenegro, respective ratios for Serbia have been used as proxies. These data limitations imply that model results should be interpreted with caution. While health related spending is likely an important source of fiscal risk for Montenegro over the long term, this module may overstate such risks because it embeds population projections that imply a population decline, while preliminary results from the recent 2023 census show that population actually increased by 2.1% between 2011 and 2023. - Climate change adaptation: - Montenegro is exposed to climate risks such as flooding, drought, extreme heat, and wildfires, but fiscal risks and costs of adaptation are currently understood to be relatively low. - Montenegro’s overall IMF Climate-driven INFORM Risk Index score: 2.7 (on a scale of 0-10). - Montenegro committed to lowering GHG emissions by 35 percent by 2030 relative to 1990 levels; authorities have indicated intention to align with the EU target of 55 percent reduction by 2030. - Commentary: Authorities are still developing their national climate adaptation and mitigation strategy; climate-related discussions deferred to the 2025 Article IV cycle. ### Policy recommendations and possible fiscal measures (Annex VI) - Revenue administration reforms: - Reinvigorate the Reform Project of the Montenegro Revenues and Customs Administration. - Focus: improving compliance risk management, use of third-party data, greater digitalization. - Early indications from the IMF’s Tax Administration – Assessment and Yield Tool (TA-AYT) show potential to increase the tax-to-GDP ratio by a cumulative 0.9 percent per year in four years if tax administration reforms are fully implemented in line with international good practice. - Further Capacity Development assistance from the IMF could support acceleration. - Tax policy changes: - Implement the remaining revenue raising measures originally planned under 'Europe Now'. - Implement proposed laws on fuel marking to raise approximately 0.2 percent of GDP. - Raising VAT by one percentage point would raise collection by about 0.7 percent of GDP. - Containing the public wage bill: - Limiting the wage bill growth to inflation for one year is estimated to generate savings of 0.3 percent of GDP. - Rationalizing and improving targeting of social expenditures: - Mothers’ benefit: Not well-targeted; reintroduced in 2022; entitles mothers of three or more children to a benefit equivalent to between 40-70 percent of the previous year’s average net wage in Montenegro. Controversial and expected to reduce incentives for female labor force participation. - The increase of minimum pensions in 2024 is expected to gradually reduce the uptake of the mothers’ benefit; its fiscal costs are expected to decline over time. - Child allowance: Introduced May 2021 for children under age 6 and expanded end-2022 to all children under 18. UNICEF estimates less than 40 percent of the expanded child allowance is spent on the poorest quintile. Improving targeting to low-income families could further reduce expenditures. *Source: IMF staff estimates and projections.* ### 3. Other structural fiscal issues should be addressed. ### 3. Other structural fiscal issues should be addressed. ### Health care sector spending efficiency - Pharmaceutical expenditures have grown by an average of 18 percent since 2018, reaching 2.5 percent of GDP in 2022. - Policy recommendations and actions: - Strengthen systematic monitoring of pharmaceutical expenditures. - Implement mandatory regular revaluation of clinical treatments for cost effectiveness, as highlighted by the 2023 World Bank Development Policy Loan. - Monitor and address the build-up of arrears in the health care sector to avoid accumulation; in 2022, 1 percent of GDP was transferred to the Health Insurance Fund to clear arrears from previous years. ### Public investment management - Findings: - The 2021 IMF Public Investment Management Assessment identified issues in project selection, planning, and risk appraisal. - Policy recommendation: - Address weaknesses in project selection, planning, and risk appraisal to strengthen the efficiency of expenditures on capital projects. ### Structural reforms underway and continuity needed - Creation of a fiscal council: - A March 2023 amendment to the Law on Budget and Fiscal Responsibility provided for the establishment of a fiscal council. - The fiscal council will be obliged to provide opinions on fiscal strategy, the budget law and whether fiscal responsibility criteria have been respected. - Implementation considerations for effectiveness: - Clearly define information access requirements and relationships with government institutions. - Ensure the council is staffed with adequate technical capacity. - Gender budgeting: - Additional information on gender impacts of budget programs is being included into the performance information system and in a new gender budget statement. - Progress to improve the quality and presentation of information should continue. - Further IMF Capacity Development could support future reform steps. - Program budgeting: - Reforms to classify the budget by program have supported publication of a wider range of presentations of the budget. - Policy recommendation: - Continue efforts to use program classification in budget preparation and to inform parliamentary and public debate, with greater explanation, analysis and transparency. *Prepared by Vincent Tang (FAD).* ### 8. Many households are multigenerational in Montenegro, which has specific ### 8. Many households are multigenerational in Montenegro, which has specific ### Multigenerational households and childcare - 17 percent of the population live in a household with three adults or more. - Comparison: Greece or Serbia: 20 percent; Montenegro: 17 percent; EU average: (much lower, exact EU average not provided). - Childcare enrollment: less than 10 percent of children under 3 were enrolled in formal childcare in Montenegro, compared to 36 percent in the EU. - 77 percent of the population lives in a household where elderly care is needed. - Implications and concerns: - Young parents can rely on other generations for childcare, potentially reducing immediate demand for formal childcare. - Low formal childcare enrollment raises concerns for future child outcomes, as quality and affordable education and care help improve children’s long-run performance, especially those with a disadvantaged background. - Policy suggestions in the text: - Improve social protection programs to address imbalances in unpaid care and domestic work, including strengthening participation in paternity leave and improving access to childcare services. - Conduct a fiscal (and welfare) impact assessment of improving access to affordable and accessible high-quality childcare services to identify priority options by type of service and public support. ### Mother’s Benefit and female labor force participation - Historical design and impacts: - In 2015, a benefit for mothers of three or more children was introduced: 70 percent of the average net salary for women with 25 years of employment and 40 percent of salary for women with 15 years of unemployment. - Approximately 22,000 women enrolled (approximately 7 percent of the female population). - The benefit was removed after 2017 following a constitutional court decision deeming it discriminatory, then reinstated in 2022 for previously eligible non-working beneficiaries. - Current status and projections: - Beneficiaries have reduced to around 15,000 and will continue to fall as many approach retirement age or migrate to the state pension. - The overall impact on the female labor force is likely to be marginal now, and the impact will reduce over time. - Recommendation: - Assess the impact of social benefit design on incentives for women’s labor force participation to create positive incentives. ### Tax policies and gender - No explicit gender-biases found in the tax system; personal taxation does not create biases against second earners. - Pre-2021 regime: - Flat-rate income tax: 9 percent. - Social security system rate: 8.5 percent. - 2021 reforms: - Introduced a progressive income tax system with a tax-free allowance for income up to 700 euros a month and two rates, 9 and 15 percent. - Social security contributions were reduced from 33 percent to 16 percent. - Effects and limitations: - IMF simulation: reform reduces the tax burden on women relative to men due to increased progressivity; when social security contributions are considered, improvements in progressivity are less evident because the upper threshold at which social security contributions are capped makes social security contributions regressive. - Revenue administration data available only for 2017, precluding empirical analysis of reform effects on labor market outcomes. - Behavioral responses estimated using labor supply elasticities from studies of similar eastern European countries. - Estimated outcomes: - Reforms could help narrow gender gaps in sectors where women are under-represented. - At the country level, the increase in take-home pay is not sufficient to reduce gender gaps in net income because higher-earning individuals (larger male representation) also benefit. - Given labor supply elasticity assumptions, women are predicted to increase labor supply more than men, potentially narrowing the differential in labor force participation rates between women and men by over three percentage points. - Recommendation: - Further assessment of combined income tax and social security design, with attention to caps and regressivity of social security contributions, to better target narrowing gender gaps. ### Gender budgeting - Montenegro integrated gender-responsive budgeting in Budget 2023 within broader program budget reform. - Budget submissions in 2023 asked to include information about gender goals and indicators through the budget management information system and explain how budget programs contribute to reduction of gender gaps. - The Ministry of Finance is involved in developing capacity and guidance. - Performance and gaps: - Montenegro performs relatively well on Parliamentary oversight and Disaggregated fiscal data per the IMF Gender Budgeting Survey. - Parliamentary oversight examples: hearings on gender equality issues, committee on gender issues, reviews in annual reports or financial statements of gender equality initiatives. - Disaggregated fiscal data: collects and publishes data disaggregated by gender in most sectors. - Montenegro lacks a legal framework for gender budgeting. - No legal provision for gender budgeting; the Ministry of Human and Minority Rights coordinates gender discussions. - Recommendation: - Build on Budget 2023 initiatives to further integrate gender budgeting practices into the Public Financial Management (PFM) system and consider establishing a legal framework for continuity and systematic prioritization of gender policies. ### Gender and revenue administration - Montenegro Tax Administration (MTA) workforce: - Share of female workforce is growing year-on-year and is currently approximately 70 percent of the total workforce. - Female executives: more than 50 percent female executives in 2023, after a declining trend during 2018–2021; this is higher than the average in Montenegro’s public sector. - Female participation is spread among all functions, including a high participation of female auditors. - Institutional developments and surveys: - As of January 1, 2024, the Montenegro Revenue and Customs Administration (MCRA) was split into the MTA and the Montenegro Customs Administration. - MRCA’s Revenue Administration Reform Project (RARP) foresees an employee satisfaction survey and a taxpayer satisfaction survey, classified by gender, in the first year of project implementation in 2025. - The RARP is funded by the World Bank; original scheduled completion March 2023, delayed and now expected to be fully implemented by September 2025. - Gaps and recommendations for the MTA: - The MTA does not currently have an HR strategy. When developing an HR strategy, consider: - Implementing flexible working arrangements. - Providing for continuing career development during career breaks. - Encouraging women to develop broader networks. - Spotlighting women leaders as role models. - Developing a new strategic plan provides options to: - Lower barriers restricting women. - Tailor services and products for women taxpayers. - Reduce gender-related compliance and enforcement bias. - Planned gender-related activities: - Gender-related employee satisfaction surveys are foreseen in 2025 as part of RARP implementation. *Source: https://www.imf.org/-/media/files/publications/cr/2024/english/1mneea2024001.pdf* ### 2011. In July 2017 Montenegro received an e-GDDS ### 1mneea2024001 - 2011. In July 2017 Montenegro received an e-GDDS ### Recent economic developments and performance - Activity achieved a robust growth of 6.0 percent and more in 2022-23, outperforming regional peers. - Tourism receipts rebounded strongly (+44 percent), reaching record highs above pre-pandemic levels. - Demand-side contributions (annual changes cited): - Exports of goods and services grew by 8.6 percent. - Private consumption grew by 5.4 percent. - Gross investments in fixed assets grew by 4.8 percent. - Labor market indicators (employment and unemployment) were significantly better than pre-pandemic levels in 2023. - Inflation reached 5.5 percent year-on-year in March 2024; food and non-alcoholic beverages contributed the most. - Government response to elevated food inflation: temporary profit margin caps on some basic food items for large wholesalers and retailers for a period of two months. - Current account deficit narrowed in 2023 due to robust growth of exports of goods and services; surpluses of the primary and secondary income balance were somewhat lower in line with slowing EU growth and lower remittances. - A surge of net errors and omissions in the balance of payments statistics—likely driven by recovery of tourism and large foreign influx—will be explored in forthcoming IMF technical assistance (TA). - In March 2024, S&P upgraded Montenegro's outlook from stable to positive, based on strong growth and stronger fiscal performance. ### Outlook and risks - Medium-term drivers of growth: private consumption (expected to moderate but remain a main driver), start of a new investment cycle, and implementation of planned structural reforms. - EU accession priorities and the New Growth Plan for the Western Balkan are cited as supporting medium-term prospects. - Authorities and staff view risks as balanced: - Downside risks: narrow export base exposed to international demand fluctuations; deterioration of financing conditions; postponement of planned structural reforms; weaker dynamics in planned investments. - Upside potential: reinvigorated European integration efforts could bolster more dynamic medium-term growth. ### Fiscal policy, revenue, and debt - 2023 fiscal outturn: - Budget achieved a surplus of 0.6 percent of GDP. - Record revenue collection of 43 percent of GDP. - Expenditures amounted to 42.4 percent of GDP, mainly for infrastructure and social/business environment initiatives. - Fiscal rule/limit: The deficit will remain within the 3 percent of GDP limit by 2026. - New borrowings: planned to be solely allocated to infrastructure projects. - Tax administration reform priorities: improving compliance risk management, use of third-party data, and greater digitalization; authorities appreciate IMF TA. - Gross financing and market access: - Montenegro placed a $750 million Eurobond at a favorable effective rate of 5.88 percent in euros, following a cross-currency swap transaction. - Demand for the issuance reached $4.75 billion from 250 investors. - Ongoing negotiations aim for a Development Policy Loan (DPL) arrangement totaling €180 million with the World Bank and other partners. - Debt trajectory and management: - Public debt reduced from 105 percent of GDP in 2020 to 60.3 percent in 2023. - Share of debt in euro increased to 98.11 percent by 2023. - Share of debt in US dollars subsided from 17.14 percent to 0.34 percent. - A hedging arrangement related to the dollar loan with the Exim China Bank was conducted, close to fully protecting public debt from currency risk. - Policy intentions: - Authorities intend to finalize the Fiscal Strategy by the end of June. - Plan to implement a new medium-term debt management strategy for 2025-2027 by end-2024, aligned with the Fiscal Strategy, and have requested IMF TA. - Debt management priorities: reducing refinancing risk and achieving a more balanced maturity profile over the medium-term. - Gross financing gap financing instruments: domestic and international markets, issuing bonds, or entering into commercial agreements. ### Financial sector stability and supervision - Banking system: remained sound and stable despite geopolitical tensions and external shocks; capital adequacy, liquidity, and profitability indicators are strong; NPLs have continued to decline despite withdrawal of COVID-19 support measures and stricter asset classification standards. - Macroprudential and borrower-based measures: - CBCG adopted a decision to raise the countercyclical buffer rate from 0 percent to 0.5 percent, effective from April 1, 2025, mainly due to dynamics in the real estate market. - CBCG developed a template to collect monthly data on ratios for borrower-based measures (LTV, LTI, LSTI, DTI, DSTI) and their components; reporting period for all newly approved loans and receivables starts on May 15. - Regulatory alignment and priorities: - CBCG has aligned key laws on credit institutions and resolution of credit institutions with EU regulations and continues to harmonize supervision practices with EU frameworks. - CBCG recognizes risks associated with digitalization and crypto assets and stresses alignment with guidelines from Basel Committee on Banking Supervision, FSB, ECB, and FATF. - Payment systems and AML/CFT: - Montenegro is the first country in the Western Balkans to submit a pre-application for SEPA; awaiting EC approval to complete procedure. - CBCG, supported by the World Bank, plans to enhance internal capacity and facilitate bank transitions to SEPA schemes; CBCG is working with the Bank of Italy on implementing fast payment systems. - CBCG prioritizes AML monitoring and strengthening operational risk-based AML/CFT framework; Montenegro completed MONEYVAL evaluation, requiring regular reporting every two years. - Climate and green finance: - CBCG adopted the Strategy Related to Climate Change Challenges and action plans. - CBCG joined the Network for Greening the Financial System (NGFS). ### Structural reforms and development priorities - Economic diversification and regional development: - Authorities prioritize diversification within and beyond tourism to reduce vulnerability to shocks. - Efforts include increasing infrastructure investment, particularly in less developed northern regions, to expand tourism opportunities. - Energy and green agenda: - Economic Reform Program for the next two years will prioritize enhancing energy security through renewable energy sources and climate change-related reforms to foster the green economy. - Continued investments in renewable energy and infrastructure aim to consolidate Montenegro's position as a regional energy hub. - Gender and labor participation: - Authorities value staff analysis of gender gaps and emphasize increasing female labor participation. - Significant childcare challenges are acknowledged; authorities are open to learning from other countries’ experiences. - Authorities consider assessing the gender impact of economic policies in advance to improve targeting of social benefits and promote female labor participation. - Continued engagement with the IMF: authorities look forward to continued close engagement and appreciate IMF technical assistance received so far. ### Statistical and technical notes - Historical statistical actions: In July 2019, the CBM revised international reserves and its NFA to correct misclassification of CBM’s holdings of Montenegrin government bonds and SDR holdings. - International investment position (IIP) and external position data: annual IIP and external position data were released for the first time in June 2019, starting with the data for 2016 and 2017. - Data dissemination and compilation: - Montenegro received an e-GDDS Implementation mission in July 2017; the National Summary Data Page (NSDP) went live in September 2017. - No data ROSC available. *Statement by Mr. Luc Dresse, Alternate Executive Director for Montenegro and Ms. Maja Ivanovic, Advisor to the Executive Director, May 1, 2024.* --- _Source: https://www.imf.org/-/media/files/publications/cr/2024/english/1mneea2024001.pdf_