Montenegro: Staff Concluding Statement of the 2021 Article IV Mission
IMF News, November 17, 2021
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- Published: November 17, 2021
Mission overview and timing
- An International Monetary Fund mission conducted the 2021 Article IV Consultation between October 25 and November 17. The team visited Podgorica from November 10 to 17.
- Publication date: November 17, 2021.
Summary findings and near-term outlook
- The economy is recovering strongly in 2021, due to the rebound in tourism that was supported by targeted government measures.
- The growth rate in 2021 is expected to be in double digits.
- Medium-term prospects appear promising but subject to numerous risks, notably the pandemic and high public and external debt.
- Short-term priority: accelerate vaccination rates to reduce downside public-health and economic risks.
- Central medium-term priority: lower public and external debt levels to increase capacity to support growth and respond to shocks.
- The government made a strong start toward debt-reduction objectives in 2021.
Economic recovery and labor market
- Montenegro experienced the largest decline in GDP in Europe in 2020, primarily due to the collapse in tourism.
- Tourism revival has helped growth rebound in 2021; strong Q2 performance and a robust summer tourist season in Q3 support expectations of double-digit growth in 2021.
- Labor market: as of Q2, the unemployment rate according to the labor force survey is 17.1 percent.
- Many people remain without work; the statement notes that continuing temporary but targeted support to the most vulnerable deserves strong consideration.
- Medium-term growth potential: tourism, renewable energy, and the IT sector—best unlocked by stable public finances, a healthy financial sector, reduced labor market rigidities, and a stronger business environment.
- Risks to the outlook:
- The pandemic could disrupt tourism recovery.
- Public and external debt remain very high.
- Rising chances of tightening global financial conditions limit shock-absorption capacity.
- Global inflationary forces may persist longer than currently believed.
Public debt, fiscal stance, and public investment
- Public debt dynamics:
- Pre-pandemic: first phase of the Bar-Boljare highway caused a significant rise in debt, leaving limited fiscal space.
- In 2020, gross public debt exceeded GDP.
- IMF staff expect gross public debt to decline to around 90 percent of GDP (medium-term projection tied to strong growth and lower expenditure).
- IMF view on December 2020 Eurobond: viewed as appropriate—provided more time to recover at a very favorable interest rate—but resources should be carefully conserved and used to safeguard sustainability.
- Fiscal targets and strategy:
- The authorities’ 2021 deficit target seems well within reach due to buoyant revenues from growth and lower expenditure.
- The government aims to achieve a primary surplus in the medium-term; IMF staff emphasize maintaining large enough primary surpluses to put public debt on a steady downward path.
- Public Investment Management:
- IMF completed a Public Investment Management Assessment (PIMA).
- Key need: clear framework for selection and appraisal of projects, including PPPs, recognizing PPPs as part of the public sector balance sheet.
Public sector reforms and governance
- Tax administration reform:
- Ongoing merger of the tax, customs, and games of chance agencies into a single entity—completion and effective operation are important to implement planned revenue reforms.
- SOE reform:
- Government plans to establish “Montenegro Works” to restructure and/or sell SOEs.
- Success requires robust institutional and legal frameworks, legal and financial capacity, political independence, and proper oversight.
- IMF staff are discussing possible cooperation to strengthen SOE oversight, drawing on international lessons.
- Public administration:
- Authorities are working on a new Public Administration Reform strategy to maximize taxpayer value from the public sector.
"Europe Now" reform package — design, risks, and sequencing
- Main elements of the proposed package (as described by authorities):
- Net minimum wage increase from 250 euros to 450 euros a month.
- Abolition of healthcare contributions (of some 4 percent of GDP).
- Exemption from personal income tax for wages up to 700 euros a month.
- Stated objectives of the package:
- Reduce the gap between the minimum wage and the minimum consumption basket.
- Entrench a progressive personal income tax.
- Reduce the size of the grey economy.
- Attract investment and create jobs via a lower labor tax wedge.
- IMF staff appraisal:
- Support priorities but note potential economic risks if implemented in a single step.
- Identified risks of single-step implementation:
- Higher overall unemployment and/or rise in informal employment.
- Compounding inflationary forces and/or reduced global competitiveness if wage increases are not matched by productivity growth.
- Possible revenue losses to state and local governments if revenue-raising measures do not yield sustained results or are not fully implemented.
- Recommended mitigation via phased implementation:
- Far-reaching reforms require robust design and administrative preparation.
- From an implementation perspective, begin with revenue-raising aspects; phase in elements that imply revenue losses later.
- Implement minimum wage increases in distinct and clearly communicated phases.
- Acknowledge uncertainty over the size and regional/sectoral variation of undeclared “under the table” wages, which the package assumes are large.
- A phased approach allows corrections along the way; IMF staff stand ready to provide technical advice on phasing.
Financial sector resilience and supervision
- CBCG COVID-19 support measures (e.g., moratoria on debt repayments, temporary easing of reporting requirements) provided significant cushion to households, companies, and the financial system.
- As the economy recovers, most pandemic support measures are appropriately being phased out.
- Banking sector metrics and assessments:
- Successful completion of the Asset Quality Review (AQR) is welcomed; it provided a reassuring picture of banking system balance sheets as of end-2019.
- System-wide capital adequacy ratio is above the regulatory minimum and liquidity remains adequate.
- As support measures are phased out, system-wide non-performing loans could increase but are expected to remain manageable.
- Vigilant monitoring and supervision required during the transition.
- Remaining challenges and policy actions:
- Some banks may face larger-than-average deterioration in asset quality.
- IMF staff welcome the new Law on Resolution of Credit Institutions and encourage CBCG to ensure credible, well-tailored bank resolution strategies.
- The new Law on Credit Institutions will ensure alignment with EU frameworks.
- AML/CFT progress:
- Encouraging progress in strengthening the AML/CFT framework, including the legal framework and steps to implement relevant EU legislation.
- The second National Risk Assessment (NRA) in December 2020 is helping shape measures to reduce money laundering and terrorism financing risks.
- Strong implementation is key to prepare for the upcoming 2023 AML/CFT assessment by the Council of Europe.
- On modifying the Investor Citizenship Program, authorities are encouraged to focus on the strongest financial integrity safeguards (e.g., robust vetting of applicants and enhanced measures for transparency and oversight).
Concluding engagement
- The mission thanks the authorities and interlocutors for hospitality and constructive discussions.
- IMF looks forward to further strengthening relationships through regular dialogue to help Montenegro realize its aspirations and meet future challenges.
IMF staff concluding statement, November 17, 2021.
Content in this bundle
- Crna Gora: Završna izjava članova MMF-a Misije o konsultacijama za 2021. u vezi sa Članom IV