Montenegro: IMF Executive Board Concludes 2018 Article IV Consultation
IMF News, May 21, 2018
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- Published: May 21, 2018
Economic growth and outlook
- Montenegro’s economy is growing strongly, boosted by large investment projects including the construction of the Bar-Boljare highway.
- Staff projects:
- Real GDP growth of 3 percent in 2018.
- Real GDP growth of 2½ percent in 2019.
- Highway construction is expected to end next year and to moderate growth thereafter; fiscal consolidation is also a moderate drag on growth.
- The supply-side boost from the highway section and other large investment projects should help sustain growth over the medium term.
Fiscal developments, vulnerabilities, and medium-term plan
- Government debt increased substantially due to publicly financed infrastructure projects, reaching 75 percent of GDP in 2017.
- Large refinancing needs over 2019-21 are a source of fiscal vulnerability.
- The authorities are implementing a medium-term fiscal consolidation strategy (announced in 2017); most fiscal measures have been legislated and implemented.
- Staff projections if the strategy is fully carried out:
- Primary fiscal surplus of 4½ percent of GDP by 2020.
- Government debt to fall to 53 percent of GDP by 2020.
- Staff projection on debt dynamics if plan continues:
- Primary surplus of 4½ percent of GDP in 2020.
- General government debt (including guarantees) peaking at 80 percent of GDP in 2019 and falling quickly thereafter.
- Primary surpluses may decline to around 3 percent of GDP after 2020 but maintaining surpluses will be necessary for rapid debt reduction.
- Policy recommendations:
- No fiscal space exists to finance remaining highway phases with debt; completion via PPP should meet standard cost-benefit criteria and avoid large contingent liabilities.
- Strengthen fiscal institutions, including fiscal rules and budgetary processes.
- Implement fiscal reforms to improve revenue and expenditure composition:
- Right-size the public-sector workforce and implement civil service reform.
- Strengthen central oversight over local government finances and increase municipalities’ incentives and capacity to raise own revenues.
- Tighten eligibility for early retirement; shift pensions to wage valorization and CPI indexation.
- Review the fiscal cost of tax exemptions.
- Maintain concerted political efforts to preserve fiscal discipline and complete the underlying adjustment.
Banking and financial sector
- Conditions are strengthening: improving asset quality, recovering credit growth, and high liquidity.
- The sector appears crowded, posing challenges for bank profitability.
- Authorities’ actions and staff recommendations:
- Closed supervisory gaps by bringing non-bank financial institutions under central bank supervision.
- Implement supervisory action plans for weak banks and intervene if necessary.
- Conduct asset quality reviews to improve loan classification and provisioning practices as soon as possible.
- Adopt a definition of non-performing loans that does not exclude impaired assets with adequate collateral.
- Be cautious in granting new banking licenses and promote consolidation.
- Continue to improve the AML/CFT framework and implement outstanding recommendations of the 2015 FSAP.
Labor market, productivity, and structural reforms
- Structural constraints:
- Low labor productivity, low employment levels, and a large informal sector limit potential growth.
- Structural labor market impediments discourage labor force participation and formal-sector employment.
- Montenegro’s external position is weaker than consistent with medium-term fundamentals.
- Policy recommendations:
- Implement a unified strategy to improve labor market outcomes by:
- Reducing the labor tax wedge.
- Reforming withdrawal of social benefits.
- Adopting amendments to the labor law that balance worker protection with increased labor market flexibility.
- Review state involvement in the economy to limit it to areas of market failure.
- Strengthen the framework for public-private-partnerships to minimize the risk of large public liabilities.
Executive Board assessment (summary)
- Economic growth should remain strong in 2018 despite fiscal consolidation and maintain momentum over the medium term, slowing moderately as consolidation continues and highway construction ends.
- Authorities are appropriately focused on fiscal adjustment to lower government debt to safer levels; front-loaded adjustment is appropriately timed.
- The medium-term fiscal adjustment plan is well specified and socially balanced; continued implementation would restore sustainable government finances.
- Strengthening fiscal institutions, fiscal rules, and budgetary processes is recommended to support sound fiscal decisions.
- Further measures are needed to improve financial sector health, labor market flexibility, productivity, and external competitiveness.
Selected economic indicators (2014–2019; as reported)
- Output, prices and labor market (percent change, unless otherwise noted):
- Real GDP (percent change): 2014: 1.8; 2015: 3.4; 2016: 2.9; 2017: 4.4; 2018 (Prel./Proj.): 3.0; 2019 (Proj.): 2.4.
- Nominal GDP (in millions of euro): 2014: 3,458; 2015: 3,655; 2016: 3,954; 2017: 4,237; 2018 (Proj.): 4,492; 2019 (Proj.): 4,692.
- Industrial production: 2014: -11.5; 2015: 8.2; 2016: -2.9; 2017: -4.5; 2018: ...
- Tourism (Overnight stays): 2014: -9.2; 2015: 5.3; 2016: 8.4; 2017: 10.5.
- Unemployment rate (in percent): 2014: 18.0; 2015: 17.6; 2016: 17.7; 2017: 16.1.
- Consumer prices (average): 2014: -0.7; 2015: 1.5; 2016: -0.3; 2017: 2.8.
- Consumer prices (end of period): 2014: 1.4; 2015: 1.0; 2016: 1.9; 2017: 2.7.
- Average net wage (12-month): 2014: -0.5; 2015: 0.7; 2016: 4.0; 2017: 2.3.
- General government finances (percent of GDP):
- Revenue and grants: 2014: 43.5; 2015: 40.4; 2016: 41.3; 2017: 40.9; 2018 (Proj.): 43.4; 2019 (Proj.): 42.4.
- Expenditure: 2014: 44.2; 2015: 46.6; 2016: 47.5; 2017: 47.8; 2018 (Proj.): 46.1; 2019 (Proj.): 44.4.
- Overall fiscal balance: 2014: -6.2; 2015: -7.0; 2016: -2.7; 2017: -2.0; 2018: (not shown); 2019: (not shown).
- Primary fiscal balance: 2014: 1.6; 2015: -3.8; 2016: -4.0; 2017: 0.1.
- General government gross debt: 2014: 63.4; 2015: 68.8; 2016: 66.4; 2017: 67.2; 2018 (Proj.): 72.5; 2019 (Proj.): 70.9.
- General gov’t gross debt (authorities’ definition): 2014: 59.9; 2015: 66.1; 2016: 64.4; 2017: 65.3; 2018 (Proj.): 70.7; 2019 (Proj.): 69.2.
- General gov’t debt, including loan guarantees: 2014: 71.5; 2015: 76.2; 2016: 73.9; 2017: 74.6; 2018 (Proj.): 80.1; 2019 (Proj.): 78.2.
- Monetary sector (end-period, percent change):
- Bank credit to private sector: 2014: -0.4; 2015: 2.2; 2016: 6.4; 2017: 7.2; 2018 (Proj.): 7.5.
- Enterprises credit: 2014: -2.5; 2015: 1.7; 2016: 6.1; 2017: (not separately shown); 2018: (not shown).
- Households credit: 2014: 11.1; 2015: 10.4; 2016: (not shown); 2017: (not shown).
- Private sector deposits: 2014: 9.0; 2015: 6.0; 2016: 15.1.
- Balance of payments (percent of GDP, unless otherwise noted):
- Current account balance: 2014: -15.2; 2015: -13.2; 2016: -18.1; 2017: -18.9; 2018 (Proj.): -18.8; 2019 (Proj.): -17.6.
- Foreign direct investment: 2014: 10.2; 2015: 16.9; 2016: 9.4; 2017: 11.2; 2018 (Proj.): 11.3.
- External debt (end of period, stock): 2014: 163.1; 2015: 161.8; 2016: 158.8; 2017: 159.7; 2018 (Proj.): 164.2; 2019 (Proj.): 166.3.
- REER (CPI-based; average change, in percent; negative indicates depreciation): 2014: -0.1; 2015: 0.4; 2016: -1.9.
Press Release No. 18/187 — Montenegro: IMF Executive Board Concludes 2018 Article IV Consultation (May 21, 2018)
