Montenegro Facing New Challenges Despite Solid Recovery

Experts are in full agreement that restoring the country’s macroeconomic and fiscal sustainability and strengthening its financial sector will be vital if the new Montenegrin government wants to ensure a stable macro environment and stimulate private investment and job creation

Despite a better-than-expected rebound from the recession caused by the Covid-19 pandemic, Montenegro is now facing a new array of economic challenges. Indeed, Montenegro’s economy rebounded sharply in 2021, with its growth of 12.4% marking the highest rate among the six Western Balkan countries. However, the outbreak of war in Ukraine and the post-pandemic consequences of global trade have significantly worsened the outlook for Montenegro in 2022, reducing the growth rate to 3.6% from an estimated 5.9% before Russia’s intervention, according to the latest prognosis of the International Monetary Fund and the Wold Bank. Tourism is expected to be hit strongly, which will in turn slow exports, private consumption and employment recovery.

World Bank Country Manager for Bosnia-Herzegovina and Montenegro Christopher Sheldon warned recently that Montenegro must accelerate its structural reforms, including pension reforms, and be fiscally prudent if it wants to mitigate increasing risks of the Ukraine war on Montenegro’s service-based economy.

In its latest Progress Report on Montenegro, the European Commission stressed the importance of maintaining macroeconomic stability, noting that rapidly rising public debt and high fiscal deficits, together with high external imbalances and high unemployment, are particularly concerning. Moreover, the combined effects of large-scale public infrastructure investments and several new expensive social spending programmes were said to challenge fiscal sustainability.

The Montenegrin government has expressed its commitment to structural reforms aimed at boosting productivity, increasing competition, investing in human capital and strengthening governance

Considering that the expected prolonged war in Ukraine could trigger further disruptions to global trade and energy and food prices, fiscal stability and debt sustainability are becoming a major focus of action for many governments, including Montenegro’s. Indeed, in the limited fiscal space, it will prove very difficult for the government to introduce additional policies to support companies and citizen in times of slowed exports, dwindling private consumption and endangered employment recovery. Furthermore, this would be particularly hard for an economy that relies heavily on capital inflows from abroad to stimulate domestic growth.

Luckily, the Montenegrin government has expressed its commitment to structural reforms aimed at boosting productivity, increasing competition, investing in human capital and strengthening governance. Measures to reduce business regulatory costs, increase market competition, accelerate pension reforms, support labour market participation and strengthen the independence of public institutions are seen as additional measures supporting growth in an uncertain environment.

Despite political changes, consecutive Montenegrin governments have displayed dedication to fiscally prudent policies. That is even more important today, when the risks of the Ukraine war for the service-based economies can be particularly high.

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