{
  "title": "Serbia and Montenegro--2006 Article IV Consultation and Post-Program Monitoring--Montenegro: Concluding Statement of the Mission",
  "publication": "IMF News, June 22, 2006",
  "sourceUrl": "https://www.imf.org/en/news/articles/2015/09/28/04/52/mcs062206",
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  "summary": "Describes the preliminary findings of IMF staff at the conclusion of certain missions (official staff visits, in most cases to member countries).",
  "publishDate": "2006-06-22",
  "sections": [
    {
      "heading": "Mission summary and context",
      "content": "- Mission type: Concluding Statement of IMF staff at end of the mission.\n- Date: June 22, 2006.\n- Core aim: Offer macroeconomic suggestions to capitalize on Montenegro's declaration of independence and to support sustained increases in economic growth, employment, and real incomes as a foundation for eventual EU accession.\n- Positive developments noted:\n  - Low inflation.\n  - Public debt trending downwards.\n  - VAT strongly underpins revenue.\n  - FDI is up with more expected.\n  - Banks privatized; credit is booming.\n  - Preferential access to EU markets; prospects for SAA agreement, WTO, and PfP membership are good."
    },
    {
      "heading": "A. Independence — legal and fiscal arrangements",
      "content": "- Immediate actions recommended:\n  - Establish in Montenegro's own right agreements formerly held by Serbia and Montenegro on regional free trade, veterinary standards, double taxation, etc., to secure orderly economic conditions.\n  - Clarify legal framework for economic relations with Serbia, including residency status, eligibility for social benefits, and work permits.\n  - Consider a Free Trade Agreement (FTA) to secure continuation of prior trade arrangements.\n  - Complete calculation of the former net fiscal transfer to the Union by subtracting costs the Montenegrin budget will now bear as Union functions shift to Montenegro; this will assist implementation of the 2006 budget and design of the 2007 budget."
    },
    {
      "heading": "B. Medium-term policies — framework and reforms",
      "content": "- Monetary and external context:\n  - Euro is sole legal tender; open capital accounts.\n  - No independent monetary policy; domestic interest rates = euro area rates + \"Montenegro risk premium\".\n  - Banking data suggest the Montenegro risk premium could be some 250-300 basis points currently.\n\n- Flexibility: identified constraints and reform areas\n  - Labor market:\n    - High dismissal costs: 6 months of average salary.\n    - High tax wedge: about 41 percent of total labor costs.\n    - Inflexible employment contracts and wage determination mechanisms.\n    - Recommendation: labor reforms including strengthened active labor market policies.\n  - Corporate governance:\n    - Privatization to strategic investors is key; envisaged sales should proceed swiftly.\n    - Active use of exit mechanisms, notably bankruptcy, is recommended.\n  - Financial sector:\n    - Review arrangements for collateral assignation and collection.\n    - Strengthen corporate accounting standards.\n    - Continue efforts to bolster banking system, including additional foreign bank entry.\n    - Forthcoming Financial Sector Assessment Program (FSAP) missions to assess further.\n  - Automatic fiscal stabilizers:\n    - Allow budget balances to weaken during downturns and strengthen during upswings to cushion cycles.\n\n- Sustainability and the Montenegro risk premium\n  - Market confidence in fiscal sustainability is key to a low risk premium.\n  - Policies that raise the premium and borrowing costs can undo beneficial effects (including tax cuts).\n\n- Fiscal anchor recommendation\n  - Adopt a target for total budget sector debt covering:\n    - Central government debts and arrears.\n    - Municipalities.\n    - Extra-budgetary funds.\n    - Debts of public and municipal enterprises not run on a strictly commercial basis.\n  - Target design:\n    - Use a 5 year average relative to GDP (rather than a single-year target) to allow automatic stabilizers.\n    - Set a separate target for public guarantees.\n  - Proposed public debt target:\n    - 35 percent of GDP on average between 2007-2011.\n    - Assumptions underpinning target:\n      - Strong structural reforms yielding average annual GDP growth of 5½ percent over 2007-2011.\n      - Implementation of the second pension pillar.\n      - Consistent with 3 percent per annum growth in real public spending.\n      - Public debt below 30 percent of GDP in 2011.\n      - Anticipates labor tax revenue reductions of over 2 percentage points of GDP due to rate cuts over that period.\n    - Adjust the target mid-course if:\n      - Privatization receipts from planned sales and second pillar costs differ markedly from projections.\n      - Nominal GDP estimates are raised to reflect the grey economy.\n      - Permanent unanticipated real external shocks occur.\n      - Estimates of the initial debt stock alter.\n    - Suggested action: adopt and announce this fiscal framework and target with the 2007 budget.\n\n- Public debt stock and privatization receipts\n  - Estimated public debt stock at end 2005: some €740 million (44.5 percent of GDP, including borrowing from banks and excluding debts of public enterprises).\n  - Ongoing accounting may reveal more debt from restitution, military, and municipal liabilities.\n  - Estimated prospective privatization receipts: well over 15 percent of 2006 GDP over the next five years.\n  - International evidence cited: economic instability in developing countries with public debts above 30 percent of GDP underscores case for reducing debt.\n\n- Pace of debt reduction considerations\n  - If high-return public investment projects are ready now, debt trajectory should be back-loaded to allow implementation.\n  - If implementation capacity is limited and privatization receipts are expected early, downward trajectory should be front-loaded.\n\n- Financial sector assessment\n  - Progress noted:\n    - Sharp increases in private sector deposits.\n    - Work underway on new banking law incorporating new standards.\n    - Progress in strengthening risk-based supervision and compliance monitoring.\n  - Concerns:\n    - Accounting standards.\n    - Possible deterioration in credit quality during recent credit boom.\n  - Forthcoming FSAP mission will provide fuller assessment and policy recommendations.\n\n- Statistical issues\n  - Significant scope for improvement.\n  - National accounts not available beyond 2003; external data unstable.\n  - Strengthening national accounts data is urgent to reduce investor uncertainty and risk premium.\n\n- Supply-side reforms\n  - Key constraints to remove: state ownership, former-Yugoslav labor institutions, implicit energy subsidies, weak enterprise exit procedures.\n  - Support for:\n    - Ambitious program of privatization.\n    - Modernization of labor legislation.\n    - Improving public sector productivity.\n    - Lowering tax burden, especially on labor.\n    - Significant increases in public investment, coupled with increased capacity to design and implement capital projects.\n  - Caution: privatization procedures should be efficient, fair, and perceived as such to avoid undermining investor participation.\n  - Social considerations: provide social safety net for those adversely affected in the short term.\n\n- Strategic choice regarding privatization receipts\n  - Warning: using privatization receipts to postpone broader real and budgetary reforms will yield temporary public debt reductions and eventual fiscal sustainability problems when receipts stop; growth and employment performance likely to remain disappointing (Text Table 1).\n  - Recommendation: accompany privatization with ambitious structural reforms and reductions in non-productive budget spending to secure permanent growth, robust real public spending growth, and reductions in the tax burden (Text Table 2)."
    },
    {
      "heading": "C. Economic outlook and policies for 2006-07",
      "content": "- GDP growth projections:\n  - 2006: 5½ percent.\n  - 2007: 6 percent.\n  - Drivers: past structural reforms, exports, strong bank credit growth.\n- Fiscal performance and 2006 indicators:\n  - First quarter 2006 data show a surplus €15 million, largely due to strong VAT collections.\n  - Suggested fiscal outcome for 2006: deficit outturn of 0.2 percent of GDP and an end-2006 public debt stock of 37 percent of GDP.\n- 2007 budget guidance:\n  - Budget should demonstrate commitment to a strong medium-term framework.\n  - Accelerate preparations for key public investment in 2007.\n  - Proceed with ambitious reform to personal income tax (PIT), but:\n    - Estimated budgeted revenue loss from PIT reform: 1.8 percent of GDP.\n    - Recommendation: match the 1.8 percent of GDP revenue loss with corresponding reductions in current expenditure.\n    - Make appropriate arrangements for effects on municipalities of the PIT reform.\n  - With public investment assumed at 3.8 percent of GDP in 2007, the budget should target a deficit of consolidated general government of 0.3 percent of GDP, consistent with the medium-term public debt target.\n  - Structural reforms should commence vigorously alongside the budget.\n\n- Policy objective:\n  - Establish a high growth, high employment, low tax, low debt, and flexible economy led by the private sector."
    },
    {
      "heading": "Key statistics and selected table figures",
      "content": "- Estimated public debt stock end-2005: €740 million (44.5 percent of GDP).\n- Montenegro risk premium estimate: 250-300 basis points.\n- Proposed medium-term public debt target: 35 percent of GDP (average 2007-2011).\n- Privatization receipts estimate: well over 15 percent of 2006 GDP over the next five years.\n- GDP growth projections: 2006: 5½ percent; 2007: 6 percent.\n- First quarter 2006: surplus €15 million.\n- Suggested 2006 fiscal outturn: deficit 0.2 percent of GDP; end-2006 public debt stock 37 percent of GDP.\n- PIT reform estimated revenue loss: 1.8 percent of GDP.\n- Assumed public investment in 2007: 3.8 percent of GDP.\n- Target deficit for consolidated general government in 2007: 0.3 percent of GDP.\n\n- Selected figures from Text Table 1 (No reforms scenario, percent of GDP unless noted):\n  - Fixed investments (2005): 23.7\n  - Revenues (2005): 40.1\n  - Fiscal balance (cash, before grants) (2005): -1.9\n  - Privatization revenues (2005): 9.9\n  - Public debt (end of period, stock) (2005): 44.5\n  - Average public debt 2006-11 (percent of GDP): 38.0 (memo)\n\n- Selected figures from Text Table 2 (Reforms scenario highlights):\n  - Average public debt (percent of GDP): 33.2\n  - Real public expenditures growth (average 2007-11): 2.8\n\n- Selected figures from Text Table 3 (Public Finance Budget Indicators, percent of GDP):\n  - Revenue and grants (2003): 40.7\n  - Of which: PIT (2003): 6.1\n  - Expenditure (2003): 45.5\n  - Of which: Wages (2003): 11.8\n  - Cash balance (after grants) (2003): -5.4\n  - Privatization receipts (2003): 2.4\n  - Nominal GDP (2003): 1,392\n\nSource: Montenegro: Concluding Statement of the Mission (Article IV Consultation and Post-Program Monitoring), IMF, June 22, 2006.\n\n---\n\n Content in this bundle\n\n- 062206spdf (PDF){rel=\"external\" type=\"application/pdf\"}\n\n---\n\n References\n\n- Montenegro and the IMF\n- Serbia and Montenegro and the IMF\n- Republic of Serbia and the IMF\n- Mission Concluding Statements\n- PRESS CENTER\n- Article IV\n- Serbia\n- https://www.imf.org/en/home\n\nSource: https://www.imf.org/en/news/articles/2015/09/28/04/52/mcs062206"
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    "Published: June 22, 2006",
    "Mission type: Concluding Statement of IMF staff at end of the mission.",
    "Date: June 22, 2006.",
    "Core aim: Offer macroeconomic suggestions to capitalize on Montenegro's declaration of independence and to support sustained increases in economic growth, employment, and real incomes as a foundation for eventual EU accession.",
    "Positive developments noted:",
    "Immediate actions recommended:",
    "Monetary and external context:",
    "Flexibility: identified constraints and reform areas",
    "Sustainability and the Montenegro risk premium",
    "Fiscal anchor recommendation",
    "Public debt stock and privatization receipts",
    "Pace of debt reduction considerations",
    "Financial sector assessment",
    "Statistical issues",
    "Supply-side reforms",
    "Strategic choice regarding privatization receipts",
    "GDP growth projections:",
    "Fiscal performance and 2006 indicators:",
    "2007 budget guidance:",
    "Policy objective:",
    "Estimated public debt stock end-2005: €740 million (44.5 percent of GDP).",
    "Montenegro risk premium estimate: 250-300 basis points.",
    "Proposed medium-term public debt target: 35 percent of GDP (average 2007-2011).",
    "Privatization receipts estimate: well over 15 percent of 2006 GDP over the next five years.",
    "GDP growth projections: 2006: 5½ percent; 2007: 6 percent.",
    "First quarter 2006: surplus €15 million.",
    "Suggested 2006 fiscal outturn: deficit 0.2 percent of GDP; end-2006 public debt stock 37 percent of GDP.",
    "PIT reform estimated revenue loss: 1.8 percent of GDP.",
    "Assumed public investment in 2007: 3.8 percent of GDP.",
    "Target deficit for consolidated general government in 2007: 0.3 percent of GDP.",
    "Selected figures from Text Table 1 (No reforms scenario, percent of GDP unless noted):",
    "Selected figures from Text Table 2 (Reforms scenario highlights):",
    "Selected figures from Text Table 3 (Public Finance Budget Indicators, percent of GDP):",
    "[062206spdf (PDF)](/-/media/websites/imf/imported/external/np/ms/2006/srp/_062206spdf.pdf){rel=\"external\" type=\"application/pdf\"}",
    "[Montenegro and the IMF](http://www.imf.org/external/country/MNE/index.htm)",
    "[Serbia and Montenegro and the IMF](http://www.imf.org/external/country/SCG/index.htm)",
    "[Republic of Serbia and the IMF](http://www.imf.org/external/country/SRB/index.htm)",
    "[Mission Concluding Statements](https://www.imf.org/en/news/searchnews)",
    "[PRESS CENTER](http://presscenter.imf.org/)",
    "[Article IV](https://www.imf.org/external/pubs/ft/aa/aa04.htm)",
    "[Serbia](https://www.imf.org/external/np/ms/2006/062706.htm)",
    "[https://www.imf.org/en/home](https://www.imf.org/en/home)"
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