Montenegro: Staff Concluding Statement of the 2024 Article IV Mission

IMF News, February 12, 2024

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Published: February 12, 2024

Economic Outlook

2023 growth: estimated 6 percent, driven by tourism surpassing 2019 levels and inflow of migrants supporting private consumption.
2024 growth projection: expected to moderate to 3.7 percent as tourism growth moderates and, if there are no further net migrant inflows, consumption growth slows.
Labor market: employment and labor force participation levels increased in 2023.
Inflation: fell from a 2022 peak of 17.2 percent to 4.3 in December 2023; future path depends on international commodity prices and domestic wage pressures.
External current account: narrowed sharply to an estimated 11 percent of GDP in 2023.
Financing of current account deficit: FDI inflows into the real estate sector remain the dominant identifiable source.
Medium-term current account outlook: as tourism growth moderates, deficit expected to return to its historical average of around 13 percent of GDP.

Maintaining Fiscal Sustainability

Findings

2023 general government fiscal position: recorded a fiscal surplus, driven mainly by one-off factors.
2024 fiscal outlook: a fiscal deficit of around 3.5 percent of GDP is expected.
Drivers of 2023 surplus: continued strong tax revenue performance, temporary increases in nontax revenues, and lower than budgeted spending.
Policy changes affecting revenues: removal of covid exemptions and preferential rates for VAT, increases in excise taxes, and higher revenues from games of chance expected to partially offset planned spending increases in the 2024 budget.
Public debt dynamics: fall from 2020 peak of 107 percent of GDP to an estimated 62 percent in 2023 aided by post-pandemic recovery, high inflation, and use of deposits accumulated through large debt issuance in 2020.
Since 2022: permanent revenue losses due to abolition of health contributions and introduction of the PIT tax-free allowance, and increases in social expenditures; partially offset by higher pension contributions, VAT, and CIT revenues attributable to higher private consumption and economic growth, and the reforms of 2022.
Financing needs: estimated at 14 and 17 percent of GDP in 2025 and 2027 respectively.

Recommendations and required measures

Debt anchor: Montenegro’s Law on Budget and Fiscal Responsibility specifies a debt-to-GDP ceiling of 60 percent; convergence to this ceiling by 2028 can be achieved by maintaining a non-negative primary balance from 2026 onwards.
Fiscal consolidation needed: to reach a primary balance by 2026, fiscal tightening of around 1.5 percent of GDP will be necessary.
Risks to consolidation: further revenue losses and/or structural expenditure increases would raise the required level of fiscal consolidation.
Governance and strategy: recommend prominently including a strong commitment to the debt anchor and the authorities’ strategy to adhere to it in the upcoming Macroeconomic and Fiscal Policy Guidelines and reiterating it in budget documentation.
Institutional and structural reforms to support finances:
- Better targeting of social transfer eligibility to those most vulnerable.
- Contain growth in the public sector wage bill over the medium-term.
- Include implementing agencies actively in public investment planning to increase efficiency of capital budgeting and implementation.
- Strengthen capacity of the newly split Tax Administration and Customs Agency to raise fiscal revenues smoothly.
- Establish a fully functional fiscal council.
- Improve oversight of state-owned enterprises (SOEs) to reduce aggregate budgetary burden.
IMF support: IMF stands ready to assist the Montenegrin authorities with capacity development in these areas.

Preserving Financial Stability

Financial sector health and risks

Systemwide indicators: bank capital adequacy, liquidity, and profitability indicators are high; NPLs have continued to decline despite withdrawal of COVID support measures and stricter asset classification standards.
Deposits and credit: record-high deposit growth driven by strong post-COVID recovery and large nonresident deposit inflows; private sector credit growth has slowed and loan-to-deposit ratio has fallen.
Real estate exposure: despite expanding real estate sector activity, banks’ exposure to the sector has remained contained.
Profitability drivers: widening spread between lending and deposit rates has driven strong profits in the banking sector.
Low deposit rates drivers: high liquidity, high market concentration in the banking sector, limited opportunities for profitable lending, and challenges for local depositors to tap higher yields abroad or “home bias”.
Suggested market development: developing a retail government bond market would help provide diversification for savers.

Supervision, macroprudential policy, and regulatory alignment

Central bank actions: reduction of the share of variable rate loans in total loans, prompted by CBCG guidance to banks to offer conversion options to borrowers, has helped contain loan portfolio risk.
Capital measurement: CBCG removed its forbearance measure allowing banks to exclude unrealized losses from holdings of government securities from regulatory capital calculation, aligning supervisory data with market realities.
Monitoring and contingency planning: close monitoring of domestic leverage through regular reporting and analysis of key macroprudential indicators is essential; lingering pockets of vulnerability warrant continued close monitoring by the CBCG and contingency planning.
Central bank independence: maintaining the Central Bank’s independence and credibility is of paramount importance to achieve its mandate.
Regulatory alignment and supervision capacity: continue aligning regulation and supervision practices with international standards and ensure adequate supervision capacities to understand complex global risks from digitalization, crypto assets, and fintech.
AML/CFT concerns: potential risks from large inflows in the real estate sector warrant close monitoring from an AML perspective; implementation of a practical and fully operational risk-based AML/CFT framework is essential.

Supporting Economic Diversification and Female Labor Force Participation

Economic diversification

Tourism: improve infrastructure connectivity, boost tourism in the North, and expand into niche tourism markets to diversify the tourism sector and leverage comparative advantages.
Energy: leverage natural endowments in hydro, solar and wind power to increase energy production and exports while supporting climate goals.
Public investment management: improved practices are key to prioritizing high return public investments in physical and digital infrastructure.
Informality and SMEs: effective policies to reduce informality will help create a conducive environment for the SME sector and enable it to benefit from skilled migrant labor.

Female labor force participation Findings and potential gains

Gender participation gap: labor force participation gap between men and women is 14 percentage points.
Macroeconomic gain potential: raising female labor force participation to the third quartile of neighboring countries could increase GDP by 6 percentage points.
Labor market gender disparities: women are under-represented in employment and are paid less across most sectors.
Education and STEM: relatively low enrollment and graduation of women in STEM fields despite overall overperformance of women in educational attainment.

Policy recommendations

Childcare: improve access to affordable and accessible high-quality childcare services to address unpaid care work barrier.
Tax policy effects: recent tax reforms to increase progressivity are likely to have contributed to reducing gender gaps in employment.
Gender budgeting: recent efforts to introduce gender budgeting are welcome; deepening gender budgeting can further improve resource allocation and policy design to reduce gender inequalities.

Closing

The mission thanks the Montenegrin authorities and counterparts for warm hospitality, engaging discussions, and productive collaboration.

IMF Communications Department — Montenegro: Staff Concluding Statement of the 2024 Article IV Mission (February 12, 2024)