IMF Executive Board Concludes 2019 Article IV Consultation with Montenegro
IMF News, September 10, 2019
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- Published: September 10, 2019
Growth outlook and macroeconomic context
- Montenegro has enjoyed strong economic growth in recent years, boosted by the implementation of large investment projects, including the construction of the Bar‑Boljare highway.
- Growth projections:
- Staff projects the economy to expand by 3 percent in 2019 and 2.5 percent in 2020, with the end of highway construction acting as a drag on growth.
- The lack of an independent currency and declining fiscal space constrain Montenegro’s ability to absorb shocks and underscore the need to improve economic flexibility to sustain growth over the long run.
- Low labor productivity and employment levels and a large informal sector limit potential growth.
Fiscal developments, debt dynamics, and policy recommendations
- Fiscal outcomes and trajectory:
- Government debt including guarantees reached 79 percent of GDP in 2018.
- If the fiscal adjustment is maintained, the primary fiscal surplus should exceed 2 percent of GDP beginning in 2021, leading government debt to decline to 61 percent of GDP by 2024.
- Authorities’ actions:
- The government has continued to implement its 2017 fiscal consolidation strategy. Most of the fiscal measures have been implemented, and the underlying fiscal position has improved.
- Executive Board recommendations:
- Continued fiscal adjustment is necessary to reduce public debt.
- Improve the efficiency of public spending by carefully managing infrastructure investment, rationalizing government employment and tax expenditures, and furthering pension reforms.
- Develop medium‑term budgetary and public investment management frameworks to create fiscal space for high‑productivity capital spending and targeted social spending and to promote fiscal and debt sustainability.
- Exercise caution in implementing next phases of the Bar‑Boljare highway project until feasibility, cost‑benefit analyses, and financing issues are fully addressed.
- Approach PPP arrangements with caution to reduce the risk of assuming significant contingent fiscal liabilities.
Banking sector and financial stability
- Recent developments and assessment:
- Despite the recent intervention in two non‑systemic domestic banks, the overall banking sector exhibits improving asset quality, strong credit growth, high liquidity, and is well capitalized.
- The sector appears crowded for a small country, which may create earnings challenges for some banks.
- Executive Board recommendations:
- Strengthen banking sector supervision, including furthering risk‑based supervision, introducing macroprudential measures when warranted, harmonizing banking laws with the EU Directives, and completing the planned asset quality review by the end of 2020.
- Strengthen the AML/CFT supervisory framework, including through enhanced monitoring of potential reputational and financial integrity risks posed by the investor citizenship program.
- Continue measures already taken, including the establishment of a Supervisory Committee, refinements in asset classification rules, and efforts to bolster capacities and resources in off‑site supervision.
Structural reforms and labor market
- Recommended reforms to boost competitiveness, inclusive growth, and external position:
- Further structural reforms to improve labor market outcomes and external position over the medium term.
- Continue efforts to reduce the labor tax wedge.
- Carefully consider the impact of planned minimum wage increases.
- Consider the proposed labor law to selectively reduce some gaps in employment protection between temporary versus open‑ended contracts.
Executive Board Assessment (summary of Directors’ views)
- Directors welcomed:
- Strong recent growth performance bolstered by large investment projects and buoyant tourism.
- Significant fiscal adjustment since 2017 and the improved underlying fiscal position over the last two years.
- Directors emphasized:
- The necessity of maintaining a strong primary fiscal surplus over the medium term for government debt to decline to safer levels.
- The need for fiscal and structural reforms, stronger banking supervision, and careful management of infrastructure projects and PPPs.
- Strengthening AML/CFT supervision and monitoring risks from the investor citizenship program.
Selected Economic Indicators, 2015–20
- Output, prices and labor market (percent change, unless otherwise noted)
- Real GDP (percent change): 2015: 3.4, 2016: 2.9, 2017: 4.7, 2018: 4.9, 2019: 3.0, 2020: 2.5
- Nominal GDP (in millions of euro): 2015: 3,655, 2016: 3,954, 2017: 4,299, 2018: 4,619, 2019: 4,807, 2020: 5,015
- Industrial production: 2015: 8.2, 2016: -2.9, 2017: -4.4, 2018: 22.5, 2019: ...
- Tourism (Overnight stays): 2015: 5.3, 2016: 8.4, 2017: 10.5
- Unemployment rate (in percent): 2015: 17.6, 2016: 17.7, 2017: 16.1, 2018: 15.2
- Consumer prices (average): 2015: 1.5, 2016: -0.3, 2017: 2.4, 2018: 2.6, 2019: 1.1, 2020: 1.9
- Consumer prices (end of period): 2015: 1.4, 2016: 1.0, 2017: 1.7, 2018: 2.3, 2019: 1.6
- Average net wage (12-month): 2015: 0.7, 2016: 4.0, 2017: 0.1
- General government finances (percent of GDP) 1
- Revenue and grants: 2015: 40.4, 2016: 41.3, 2017: 40.3, 2018: 41.4, 2019: 42.0, 2020: 41.0
- Expenditure: 2015: 46.4, 2016: 47.5, 2017: 47.2, 2018: 47.7, 2019: 45.7, 2020: 41.9
- Overall fiscal balance: 2015: -6.0, 2016: -6.2, 2017: -6.9, 2018: -6.3, 2019: -3.6, 2020: -0.9
- Primary fiscal balance: 2015: -4.0, 2016: -4.5, 2017: -4.1, 2018: -1.4
- General government gross debt: 2015: 69.0, 2016: 66.6, 2017: 66.3, 2018: 72.6, 2019: 81.1, 2020: 74.8
- General gov’t gross debt (authorities’ definition) 2: 2015: 64.6, 2016: 64.4, 2017: 70.8, 2018: 79.4, 2019: 73.1, 2020: ...
- General gov’t debt, including loan guarantees: 2015: 76.4, 2016: 74.1, 2017: 73.6, 2018: 78.8, 2019: 88.8, 2020: 82.2
- Monetary sector (end-period, percent change)
- Bank credit to private sector: 2015: 6.3, 2016: 9.1, 2017: 7.0
- Enterprises: 2015: 2.0, 2016: 5.2
- Households: 2015: 2.8, 2016: 11.0, 2017: 10.3, 2018: 12.5
- Private sector deposits: 2015: 9.0, 2016: 6.0
- Balance of payments (percent of GDP, unless otherwise noted)
- Current account balance: 2015: -11.0, 2016: -16.2, 2017: -16.1, 2018: -17.2, 2019: -17.1, 2020: -14.9
- Foreign direct investment: 2015: 16.9, 2016: 9.4, 2017: 11.3, 2018: 7.1, 2019: 8.9
- External debt (end of period, stock): 2015: 166.2, 2016: 160.9, 2017: 159.2, 2018: 167.5, 2019: 180.0, 2020: 178.5
- REER (CPI-based; average change, in percent; - indicates depreciation): 2015: 0.4, 2016: 0.6, 2017: 0.5
IMF Executive Board Concludes 2019 Article IV Consultation with Montenegro, September 10, 2019.
