Montenegro: 2019 Article IV Consultation-Press Release; Staff Report; and Statement by the Executive Director for Montenegro

IMF Staff Country Reports, September 10, 2019

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Implementation of large publicly financed infrastructure projects has added economic growth.
The use of fiscal resources accompanying these projects contributed to a large increase in government debt including guarantees, which reached 79 percent of gross domestic product in 2018.
Despite a 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.
Efforts to improve banking and Anti-Money Laundering/Combating the Financing of Terrorism (AML/CFT) supervision are paramount.
Main labor-market priorities are reduction of the labor tax wedge and implementation of the new labor law aimed at increasing labor market flexibility.
Future decisions on the minimum wage should consider a broad set of indicators and require careful analyses of the impact of past increases.

Recent intervention: two non-systemic domestic banks underwent intervention (no systemic banking crisis reported).
Sector-wide indicators:
- asset quality: improving,
- credit growth: strong,
- liquidity: high,
- capitalization: well capitalized.
Supervisory needs:
- shift to risk-based tools for supervision in both off-site and on-site functions,
- establishment of a stronger supervisory structure within the central bank.
AML/CFT supervision: elevated priority alongside banking supervision improvements.

Public debt trajectory driven by large publicly financed infrastructure projects funded by fiscal resources.
Government debt including guarantees: 79 percent of gross domestic product in 2018.
Policy implication: fiscal consolidation and careful management of guarantees and contingent liabilities implied as needed to address elevated debt levels.

Priority reforms:
- reduction of the labor tax wedge,
- implementation of the new labor law designed to increase labor market flexibility.
Minimum wage policy:
- future decisions should be based on a broad set of indicators,
- careful analysis of the impact of past minimum wage increases is required.

Strengthen banking supervision by:
- adopting a risk-based supervisory framework for off-site and on-site activities,
- reinforcing the supervisory structure within the central bank.
Prioritize improvements in AML/CFT supervision.
Implement labor-market reforms to reduce the labor tax wedge and enact the new labor law to enhance flexibility.
Approach minimum wage adjustments cautiously, informed by comprehensive indicators and retrospective impact analyses.
Address fiscal risks from large publicly financed infrastructure projects to stabilize and reduce government debt and guarantees.