IMF Executive Board Concludes 2011 Article IV Consultation with Montenegro

Public Information Notice (PIN) No. 11/51
May 6, 2011

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 2011 Article IV Consultation with Montenegro is also available.

On April 29, 2011, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with Montenegro.1


A tentative recovery is taking hold, following the global crisis that exerted heavy blows upon the economy. In 2010, a good tourism season was followed by resumed metal production, while heavy rains in the region boosted electricity production and exports. After contracting for almost two years, industry began to grow again in the second half of 2010. Nevertheless, industrial production at end-2010 was still considerably below its pre-crisis peak. Expected large-scale infrastructure foreign direct investment has so far not materialized and construction activity remains depressed. Overall 2010 GDP growth is estimated at 1.1 percent, keeping output below its 2008 level.

The needed rebalancing of the economy has begun. Inflation and wage growth decelerated sharply and the current account deficit halved to around 26 percent of GDP in 2010. While most of the improvement was due to a weather related boost in electricity exports and rebounding metals production, the nascent adjustment in costs has also improved competitiveness. The improved fundamentals have also contributed to the September 2010 debut Eurobond issuance of €200 million, subsequent spread tightening, and a further €180 million issuance in April 2011.

Fiscal consolidation has commenced. Reflecting mainly significant capital expenditure cuts, the 2010 fiscal deficit is estimated to have declined by 1½ percent of GDP to 3.9 percent, though, loan guarantees of 3.6 percent were extended to industrial companies. Going forward, the authorities aim at balancing the budget in 2012 and achieving a sizeable surplus thereafter in order to bolster sustainability, lower financing risk, and boost the economy’s resilience to shocks.

In the banking sector, confidence has begun to return, as evidenced by increasing deposits, though they are still below their levels in the third quarter of 2007. However, non-performing loans have not yet leveled off and Financial Soundness Indicators have continued to deteriorate. Stagnant lending at the current juncture primarily reflects the dearth of creditworthy projects.

Executive Board Assessment

Executive Directors noted that, although the recovery is gaining momentum, limited policy space and incomplete reforms pose risks to the outlook. Accordingly, Directors encouraged the authorities to step up efforts to reconstitute fiscal, external, and financial buffers and to address rigidities in product and labor markets.

Directors welcomed the start of fiscal consolidation and supported the authorities’ plan to balance the central government budget by 2012, and run surpluses thereafter. They considered that a durable fiscal adjustment should encompass both revenue and expenditure measures, including steps to increase the yield from property taxes and curb the public sector wage bill. An early implementation of pension reform would also strengthen the public finances, as would further efforts to avoid expenditure arrears and direct budget support to private companies.

Directors stressed the importance of restoring the soundness of the banking system to bolster the resilience of the economy and promote private sector-led growth. They welcomed recent steps to reinforce the legal and prudential frameworks and encouraged stronger supervisory practices. In particular, noting that full euroization limits the ability of the central bank to provide liquidity support to banks, Directors called for conservative capital and liquidity requirements and an early unwinding of regulatory forbearance.

Noting the importance of strengthened competitiveness for securing external stability, Directors agreed that structural reforms should remain a top policy priority. Greater flexibility in wage setting and employment protection would support job creation in the private sector, while addressing unemployment and poverty traps would boost labor participation and market attachment. Improvements in the business environment and investment climate are also part of the unfinished agenda.

Directors cautioned that long-standing weaknesses in economic statistics hamper policy design and evaluation. They encouraged the authorities to make further progress in addressing them.

Montenegro: Selected Economic Indicators, 2008–11
(Under current policies)


2008 2009 2010 2011


    Est./Prel. Proj.

Real economy


Nominal GDP (millions of €)

3,086 2,981 3,023 3,111

Gross national saving (percent of GDP)

-10.0 -3.1 -3.6 -2.5

Gross investment (percent of GDP)

38.2 26.8 22.0 22.0

(Annual percentage change)

Real GDP

6.9 -5.7 1.1 2.0

Industrial production

-2.1 -32.2 15.0 ...




4.8 1.6 6.0 ...


6.9 -3.1 5.0 ...

Consumer prices (period average) 1/

8.5 3.4 0.5 3.1

Consumer prices (end of period) 1/

7.2 1.5 0.7 3.0

GDP deflator

7.7 2.4 0.3 0.9

Average net wage (12-month) 2/

23.4 11.3 -1.8 ...



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


Bank credit to private sector

24.7 -15.1 -8.9 4.0


20.9 -15.4 -15.0 ...


32.0 -10.9 -7.0 ...

Private sector deposits

-14.2 -4.1 6.0 6.0

(In percent of GDP)

General government finances (cash) 3/


Revenue and grants

48.3 42.4 42.2 42.3

Expenditure (incl. discrepancy)

48.6 47.7 46.0 45.7

Overall balance

-0.3 -5.3 -3.9 -3.4

Primary balance

0.5 -4.4 -2.8 -1.8

Privatization receipts

1.2 4.4 0.8 0.7



General government gross debt (end of period, stock)

31.9 40.7 44.1 44.0

Balance of payments


Current account balance, excl. grants

-50.9 -30.4 -26.2 -25.4

Foreign direct investments

17.9 30.8 17.9 15.4

External debt (end of period, stock)

93.3 98.9 99.3

REER (CPI-based; annual change; + indicates appreciation)

1.5 5.9 0.2

Sources: Ministry of Finance, Central Bank of Montenegro, Monstat, Employment Agency of Montenegro; and IMF staff estimates and projections.

1/ Cost of living index for 2008.

2/ 2008-2009 wage data have been adjusted to reflect a change in the methodology by Monstat starting January 1, 2010.

3/ Includes extra-budgetary funds and 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:


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