IMF Executive Board Concludes 2021 Article IV Consultation with Montenegro
IMF News, February 24, 2022
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- Published: February 24, 2022
Economic impact and recovery
- The Montenegrin economy was hit hard by COVID-19, with significant human and economic costs amplified by strong tourism dependence, constrained fiscal space, and labor market rigidities.
- Authorities’ pandemic support measures included wage subsidies, tax deferrals, financial assistance to the vulnerable, and loan moratoria; these helped contain economic effects.
- Growth rebound expected:
- 2021: 12 percent
- 2022: 6 percent
- Medium-term growth projection: around 3 percent.
Financial sector assessment
- Headline banking system metrics indicate resilience and the sector appears to have withstood the COVID-19 shock well.
- Concern: possible hidden deterioration in asset quality masked by forbearance measures.
- Most crisis support measures introduced by the Central Bank in 2020 have been withdrawn over the past months.
- Central Bank completed an independent asset quality review using data as of end-2019, indicating the banking sector was generally in a solid position at the onset of the pandemic.
- Directors’ recommendations and observations:
- Gradual withdrawal of remaining support measures as the economy recovers.
- Vigilance for emerging risks, including a possible rise in NPLs.
- Continue implementation of FSAP recommendations.
- Strengthen bank supervision and resolution frameworks.
- Reinforce the AML/CFT framework to help align regulation and supervision with EU frameworks.
Growth, external position, and drivers
- Recovery driven primarily by the normalization of tourism.
- Current account expected to revert to the pre-pandemic average as tourism normalizes.
- External risks noted: pandemic resurgence could stymie tourism recovery; geopolitical tensions could place sustained upward pressure on energy prices and risk premia.
Fiscal situation and 'Europe Now' reform program
- Public debt was elevated prior to the pandemic in part due to the Bar-Boljare highway project; the pandemic caused a further increase in public debt levels.
- Authorities passed the ‘Europe Now’ reform program beginning in 2022 with aims to arrest outward migration through measures including:
- Near doubling of the net minimum wage.
- Substantial reduction in the labor tax wedge.
- Introduction of a progressive tax code.
- Fiscal implications and concerns:
- Reductions in revenue from the removal of healthcare contributions in ‘Europe Now’ and increases in some long-term spending commitments are currently projected to keep the fiscal deficit and public debt elevated absent effective offsetting measures.
- Effects of reforms on inflation and formal employment are uncertain and depend on the extent to which higher formal wages are absorbed by a commensurate fall in ‘grey wages’, which are likely to be variable across regions and sectors.
Risks, uncertainty, and scenarios
- Uncertainty surrounding projections is exceptionally high.
- Upside scenario drivers:
- Medium-term growth could be higher if labor and capital reallocate promptly to viable firms and sectors.
- Reduction in the labor tax wedge could attract significant new investment.
- Downside scenario drivers:
- Pandemic negative surprises that hinder tourism recovery.
- Geopolitical tensions raising energy prices and risk premia.
- Reforms related to ‘Europe Now’ expected to provide a short-term growth boost, but inflation and formal employment outcomes remain uncertain.
Executive Board assessment and policy recommendations
- Directors commended the authorities’ targeted pandemic response and welcomed the strong economic rebound with the pick-up in tourism.
- Directors cautioned that downside risks from pandemic resurgence, persistent inflationary pressures, tightening global financial conditions, and political uncertainty warrant vigilance and contingency planning.
- Fiscal policy guidance:
- Continue targeted pandemic-related spending in the near term.
- Commit to a credible and ambitious medium-term fiscal consolidation to preserve fiscal and debt sustainability.
- Aim for a primary surplus of about 1 percent of GDP over the medium-term through a combination of revenue and expenditure measures to place debt on a downward path.
- Implement initially proposed revenue-raising measures to enable fiscal recalibration alongside ‘Europe Now’.
- Structural and fiscal governance reforms:
- Enhance efficiency of revenue administration agencies.
- Adopt a new Public Administration Reform strategy.
- Enhance public investment management and exercise caution in the use of PPPs.
- Consider large capital expenditures only once adequate fiscal space exists.
- Strengthen oversight and transparency of SOEs and establish institutional and legal frameworks for “Montenegro Works”.
- Financial sector reforms:
- Continue implementing FSAP recommendations.
- Strengthen bank supervision and resolution frameworks.
- Reinforce the AML/CFT framework.
- It is expected that the next Article IV consultation with Montenegro will be held on the standard 12-month cycle.
Selected economic indicators (2017–2022)
- Output
- Real GDP growth (%): 2017: 4.7; 2018: 5.1; 2019: 4.1; 2020: -15.3; 2021 Est.: 12.0; 2022 Proj.: 6.0
- Employment
- Unemployment (%): 2017: 17.0; 2018: 15.2; 2019: 15.1; 2020: 17.9; 2021: --
- Prices
- Inflation (avg, %): 2017: 2.4; 2018: 2.6; 2019: 0.4; 2020: -0.2; 2021: (not reported)
- General government finances
- Revenue (% GDP): 2017: 40.3; 2018: 41.0; 2019: 42.2; 2020: 43.4; 2021: 43.0; 2022: 38.8
- Expenditure (% GDP): 2017: 47.1; 2018: 47.2; 2019: 44.0; 2020: 54.4; 2021: 45.0; 2022: 44.9
- Overall fiscal balance (% GDP): 2017: -6.8; 2018: -6.2; 2019: -1.8; 2020: -10.9; 2021: -2.0; 2022: -6.1
- Primary fiscal balance (% GDP): 2017: -4.4; 2018: -4.0; 2019: -8.2; 2020: 0.5; 2021: -4.2
- General government debt (% GDP): 2017: 66.2; 2018: 71.9; 2019: 78.8; 2020: 107.3; 2021: 88.2; 2022: 79.4
- Gen. govt. debt including guarantees (% GDP): 2017: 73.5; 2018: 78.1; 2019: 83.7; 2020: 112.6; 2021: 92.2; 2022: 83.0
- Money and credit
- Credit to the private sector (% change): 2017: 8.4; 2018: 11.0; 2019: 5.0; 2020: 3.4; 2021: 5.4; 2022: 8.1
- Non-performing loans (% of total loans): 2017: 7.3; 2018: 6.7; 2019: 5.5
- Balance of payments
- Current account (% GDP): 2017: -16.1; 2018: -17.0; 2019: -14.3; 2020: -26.0; 2021: -15.7; 2022: -15.0
- Foreign direct investment (% GDP): 2017: 11.3; 2018: 6.9; 2019: 6.2; 2020: 11.2; 2021: 7.9; 2022: 7.5
- Reserves (months of imports): 2017: 4.0; 2018: 8.2; 2019: 3.7
- Exchange rate
- REER (% change): 2017: 2.7; 2018: -1.5; 2019: -0.6
Source: IMF Executive Board Concluding Statement, "IMF Executive Board Concludes 2021 Article IV Consultation with Montenegro", February 24, 2022.