Podgorica, Montenegro:
An International Monetary Fund (IMF) team led by Mr. Srikant Seshadri
conducted a staff visit to Montenegro from July 18-27, 2022. At the end of
the visit, Mr. Seshadri issued the following statement:
“The war in Ukraine is casting a long shadow over the global economic
and financial outlook.
This year’s challenging environment could worsen further next year due to
deteriorating growth prospects in Europe, the US, and Asia. Global
financial conditions are likely to remain tight. Credit spreads on emerging
country debt have climbed significantly higher along with global interest
rates. It is a distinct possibility that access to international credit
might even be sharply curtailed next year.
“Montenegro’s economy is similarly entering a period of high
uncertainty.
First quarter growth this year in Montenegro was strong at 7.2 percent
(y-o-y). Available information suggests private consumption has remained
strong during the second quarter, as well. The strength of this year’s
summer tourist season depends on whether lower arrivals from Russia and
Ukraine will be balanced by higher arrivals from elsewhere. Policy makers
should prepare in advance, for the risk of sharply slower global growth
next year. Montenegro’s rich natural endowments in renewable energy have
not shielded it from global inflationary pressures, as food, fertilizer,
gasoline, and construction materials prices have soared. Furthermore, IMF
staff is of the view that inflation is not completely “imported”. Rising
wage pressures due to the recent minimum wage increase and tax reforms also
appear to be playing a role.
“In the context of relatively high public debt, fiscal policy needs to
remain nimble.
There are three keys to strong preparation for possibly increased
turbulence of the coming period:
· First, the state’s revenues must be safeguarded. While tax cuts and other
support measures aimed at protecting the population from rising prices are
understandable, they should be targeted towards the most vulnerable in
society, with a clear view that they will remain in place only so long as
they have served their purposes.
· Second, against a backdrop of already high levels of public debt, this is
a particularly inopportune time to saddle the state with large permanent
increases in current expenditures, or with capital expenditures whose
longer-term economic returns are uncertain. Given the difficult global
conditions, it would be wise to signal much stronger expenditure control
now, to prevent unnecessary future economic hardship.
· Third, to meet financing needs when global conditions are tight, the
state needs the flexibility to consider all possible sources not only for
this year, but also further ahead . It should also be recognized by all
stakeholders in society that the cost of funds is likely to remain high,
relative to the last few years.
“The banking system is performing well.
Last year’s strong economic recovery, combined with forward-looking efforts
by the Central Bank of Montenegro Council (CBCG) to align the legal and
regulatory environment with global standards are paying strong dividends.
Capital adequacy, liquidity, and asset quality indicators for the system
remain strong, allowing lending this year to continue to grow to both the
corporate and household sectors, despite growing economic headwinds. The
IMF also strongly supports the central bank’s efforts to modernize the
country’s payment systems as part of its broader efforts to enhance
integration with the EU.
“Still, continued strong supervisory vigilance is essential as global
risks continue to rise.
Housing prices are rising sharply. Although this appears to be largely
driven by foreign purchases, it will be important to guard against signs of
excessive domestic leverage. Pockets of weakness in the banking system
could emerge, particularly if growth slows sharply in the coming period.
Contingency planning takes on greater significance, to mitigate the risk of
disruptions in such an environment. This includes maintaining close
relationships and information exchange with the home country supervisors of
foreign financial institutions. Finally, efforts to strengthen the Anti
Money Laundering and Combating of the Financing of Terrorism (AML/CFT)
framework, alongside effective risk-based implementation require continuing
attention.
“The IMF is—and will remain—a strong partner of Montenegro. We have been providing candid assessments and advice on the authorities’
budgetary plans, as well as technical assistance in tax and expenditure
policies, public financial management, and debt management. We have also
actively been providing advice and technical assistance to the authorities
in a broad range of areas pertaining to the financial sector from
supervision, to fintech, as well as AML/CFT. We look forward to continuing
our cooperation with the authorities in all these areas.
“The mission held fruitful discussions with Prime Minister Mr. Dritan
Abazović, Minister of Finance Mr. Aleksandar Damjanović, Governor of
the Central Bank of Montenegro Mr. Radoje Zugi ć, government and central bank officials,
regulatory agencies, and representatives from the private sector. The
mission thanks the authorities and all interlocutors for the frank and
constructive dialogue. The IMF looks forward to the 2022 Article IV
Consultation, later this year.”
