IMF Executive Board Concludes 2010 Article IV Consultation with Montenegro

Public Information Notice (PIN) No. 10/67
May 27, 2010

Public Information Notices (PINs) form part of the IMF's efforts to promote transparency of the IMF's views and analysis of economic developments and policies. With the consent of the country (or countries) concerned, PINs are issued after Executive Board discussions of Article IV consultations with member countries, of its surveillance of developments at the regional level, of post-program monitoring, and of ex post assessments of member countries with longer-term program engagements. PINs are also issued after Executive Board discussions of general policy matters, unless otherwise decided by the Executive Board in a particular case. The staff report (use the free Adobe Acrobat Reader to view this pdf file) for the 2010 Article IV Consultation with Montenegro is also available.

On April 28, 2010, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with the Montenegro.1


Montenegro has been hit hard by the global financial crisis. Contagion and concerns about the robustness of the banking system have triggered large deposit withdrawals and a credit crunch. Moreover, the unwinding of the real estate boom has generated strong negative wealth effects that depressed demand. Finally, adverse terms of trade shocks have strained the industrial sector. As a result, GDP contracted sharply in 2009 and unemployment inched up. Meanwhile, upward pressures on wages and inflation have eased.

The economic contraction has been contributing to the restoration of internal and external balance, but it has also revealed an underlying fiscal deficit. The heretofore sizeable positive output gap has practically been eliminated and the sharp drop of imports has halved the very high external current account deficit. On the other hand, fiscal revenue plummeted revealing a substantial fiscal deficit that reflects the fundamental inconsistency between low tax rates and the large size of the public sector. Public debt has reached 38.8 percent of GDP and could rise further due to unfavorable debt dynamics, uncertain contingent liabilities, and population aging.

The authorities have taken wide-ranging measures to stabilize the financial system and rekindle lending activity. These included a blanket deposit guarantee; early repayment of government loans; emergency liquidity support and the placement of state deposits with Prva (the largest domestic bank); and the reduction of required reserves. Foreign parents have also stepped in with substantial liquidity infusions while the Central Bank of Montenegro has pressed effectively for capital injections and stepped up its surveillance. Moreover, the revamping of banking legislations is at an advanced stage, and the authorities have issued guarantees for lending supported by International Financial Institutions. On their part, banks have made progress repairing their balance sheets and overhauling their credit risk management systems. Deposits started to reflow in mid-2009.

The authorities have reacted swiftly to the fiscal deterioration. A mid-year revision of the state budget and similar adjustments at the local level stipulated large cuts in capital expenditure, goods and services and the wage bill limiting the actual cash deficit to 3.2 percent of GDP. In their three-year budget plan, the authorities envisage the phasing out the deficit by 2012 but measures remain to be articulated.

Executive Board Assessment

Executive Directors noted that strong capital inflows prior to 2009 had supported rapid economic growth. However, the global crisis exposed the vulnerabilities that had built up, leading to a credit crunch and a sharp contraction in economic activity when those flows reversed. Given the limited policy flexibility, Directors emphasized the need to reduce the large fiscal and external imbalances and to strengthen competitiveness through structural reforms.

Directors stressed the need to reduce the large structural fiscal deficit. They noted that, with euroization, fiscal tightening is critical to support reforms to improve Montenegro’s competitiveness. They welcomed the authorities’ adoption of a medium-term fiscal framework that targets budget balance within the next few years, and encouraged early adoption of policies to support this objective. Directors emphasized the need for both expenditure cuts and revenue measures. They saw merit in reconsidering past tax cuts, rationalizing the extensive transfer programs, exercising prudence in issuing state guarantees, and adopting a proactive approach in dealing with the large unfunded longer-term pension liabilities. They considered that budget borrowing requirements should be better aligned with available financing, and encouraged the authorities to rebuild fiscal reserves to safeguard future stability.

Directors commended the authorities’ prompt response to the financial turmoil by enhancing liquidity in the banking system and providing deposit guarantees. They also welcomed the authorities’ implementation of the recommendations made by the Financial Sector Assessment Program. They stressed the need to further strengthen supervision, and welcomed the authorities’ intention to adopt new legislation on banks and bank bankruptcy in accordance with international best practice, as well as a revised Central Bank Law. It will also be important to closely monitor private sector debt developments.

With the need to lower the current account deficit to sustainable levels, Directors considered it critical to improve competitiveness through structural reforms. They welcomed the recent reform efforts, and recommended additional labor market deregulation, including opt-out clauses from collective bargaining arrangements, easing rules on labor redundancies, and reducing disincentives to hiring. They also underlined the need to improve the business environment further by reducing red tape and infrastructure bottlenecks, and addressing governance weaknesses.

Directors encouraged the authorities to improve macroeconomic statistics to facilitate economic analysis, and supported Fund technical assistance in this area.

Montenegro: Selected Economic Indicators, 2006–10
(Under current policies)

  2006 2007 2008 2009 2010
        Prel. Proj.

Real economy 1/

  (percentage changes unless otherwise stated)      

Nominal GDP (millions of €)

2,149 2,680 3,086 2,941 2,935

Unemployment rate (in percent)

14.7 11.9 10.7 11.4

Real GDP

8.6 10.7 6.9 -6.6 -1.8

Industrial production

1.0 0.1 -2.1 -32.2 ...




16.3 18.8 4.8 1.6 ...


13.9 22.9 6.9 -3.1 ...

Consumer prices (period average) 2/

3.0 4.2 8.5 3.4 -0.6

Money and credit (end of period, 12-month)


Bank credit to private sector

138.9 175.9 25.0 -13.6 ...


112.2 191.0 20.9 -15.4 ...


193.0 153.7 32.0 -10.9 ...

Bank deposits - private sector

119.5 99.5 -14.1 -11.4 ...

General government finances (cash) 3/

(Percent of GDP)

Revenue and grants

41.4 47.7 48.6 43.2 41.8

Expenditure (incl. discrepancy)

39.3 40.9 48.8 46.4 48.9

Overall balance

2.1 6.7 -0.3 -3.2 -7.1

Primary balance

3.3 7.8 0.5 -2.4 -6.0

Privatization receipts

3.7 4.0 1.2 4.2 1.5

General government gross debt (end of period, stock)

34.8 27.5 29.0 38.8 44.0

Balance of payments 1/


Current account balance, excl. grants

-24.1 -39.5 -51.8 -27.2 -17.0

Foreign direct investments

21.7 19.6 18.4 30.6 10.5

Exchange rate


REER (CPI-based; annual average change, in percent)


( - indicates depreciation)

-3.5 -2.2 1.5 5.0 ...

Sources: Ministry of Finance, Central Bank of Montenegro, Statistical Office of Montenegro, Employment Agency of Montenegro; and IMF staff estimates and projections.
1/ In 2007, there is a break in the national accounts and balance of payments data, stemming mainly from the revision of exports and imports.
2/ Cost of living index for 2006-2008.
3/ Includes extra-budgetary funds and, from 2006, local governments, but not public enterprises.

1 Under Article IV of the IMF's Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. A staff team visits the country, collects economic and financial information, and discusses with officials the country's economic developments and policies. On return to headquarters, the staff prepares a report, which forms the basis for discussion by the Executive Board. At the conclusion of the discussion, the Managing Director, as Chairman of the Board, summarizes the views of Executive Directors, and this summary is transmitted to the country's authorities. An explanation of any qualifiers used in summings up can be found here:


Public Affairs    Media Relations
E-mail: E-mail:
Fax: 202-623-6220 Phone: 202-623-7100