IMF Completes Staff Visit to Montenegro

IMF News, December 12, 2022

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IMF staff visit led by Mr. Srikant Seshadri conducted from December 5-12, 2022.
End-of-Mission press release dated December 12, 2022.
Statement clarifies views are those of IMF staff and do not necessarily represent the views of the IMF’s Executive Board; the mission will not result in a Board discussion.

Russia’s war in Ukraine has had significant repercussions for the Montenegrin economy.
Inflation reached record highs, described as "close to 17 percent as of October."
Short-term drivers: higher global food and energy prices; inflows and consumption supported by Ukrainian and Russian nationals taking up temporary residence.
Growth and inflation projections:
- Real GDP rose by "10 percent year-on-year" in the first half of 2022, driven by private consumption, tourism recovery, and strong credit growth.
- Growth is expected to "wane in 2023" as those effects fade and higher prices constrain household spending; weak global growth could negatively affect tourism.
- Inflation is expected to "decline in 2023," conditional on import prices stabilizing or falling, but keeping wage pressures in check is crucial.
- IMF staff currently forecast that inflation will remain high "at around 9-10 percent."

Labor markets have strengthened; unemployment returned to pre-pandemic levels, aided by an apparent increase in labor force participation.
The large minimum wage increase at the beginning of the year "does not seem to have had a notable impact on measured formal employment," though data limitations hinder full assessment.
Policy advice: IMF staff "advise against further large increases in the minimum wage in current economic conditions," noting that slowing growth will make it harder for businesses—particularly small and medium-sized enterprises—to sustain higher costs without fueling further rises in inflation.

Strong revenue growth this year is masking underlying fiscal weaknesses.
- VAT performance benefited from strong consumption growth "exceeding 20 percent year-on-year in the first half of this year" and high inflation, compensating for declines in personal income tax and other labor contributions following 2022 tax and wage reforms.
- Health sector is noted as "struggling with arrears."
- IMF staff project the fiscal deficit in 2022 will be "3-4 percent of GDP," subject to uncertainty around capital budget execution.
Fiscal recommendations:
- "Containing the fiscal deficit is imperative over the coming years."
- Immediate consideration should be given to a credible fiscal adjustment with attention to both expenditure and revenue measures.
- Targets: at least a "zero primary balance by 2025" and at least a "1 percent primary surplus by 2026."
- The required pace of fiscal adjustment "may need to be quicker, depending on prevailing global financial conditions."
- Warns that further unfunded spending or tax cuts will need to be avoided to preserve public finance sustainability, especially ahead of the "2025 Eurobond amortization."

Banking sector resilience:
- "System-wide bank capital adequacy and liquidity ratios remain high and NPLs are low" despite pandemic-related measures expiring.
Risks and supervisory priorities:
- Recent strong credit growth amid rising global interest rates calls for careful monitoring by the Central Bank.
- Continued supervisory vigilance is essential in a rising interest rate environment.
- The introduction of a risk-based framework for Anti Money Laundering and Combating of the Financing of Terrorism (AML/CFT) is welcome and requires emphasis on effective implementation.
Central bank governance:
- Central bank independence is emphasized as critical for credibility and stability.
- The existing appointment procedure—Governor appointed by Parliament upon a proposal by the President of Montenegro—is described as "in line with international best practice."
- The "double veto" procedure (separating nomination and appointment between two separately and directly elected powers) is said to provide strong and transparent institutional checks and balances while preserving Central Bank independence.

The mission held discussions with Minister of Finance Damjanović, Governor Zugić of the Central Bank of Montenegro, government and central bank officials, Members of Parliament, and private sector representatives.
IMF staff thanked authorities and interlocutors for frank and constructive dialogue.
IMF maintains commitment to providing Montenegro with constructive advice and technical assistance across a broad range of areas and looks forward to the 2023 Article IV Consultation.

IMF Completes Staff Visit to Montenegro — Press Release No. 22/424, December 12, 2022.

PR22/424 Završena je posjeta zaposlenih MMF-a Crnoj Gori
- PR22/424 Završena je posjeta zaposlenih MMF-a Crnoj Gori (Markdown version)
- PR22/424 Završena je posjeta zaposlenih MMF-a Crnoj Gori (PDF)