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Aleksandar Damjanović, Montenegrin Finance Minister

Facing Great Unknowns

The Government of Montenegro approached the planning of this year’s budget with an awareness of the numerous risks present on the global market, but also with moderate optimism over the recovery of the tourism sector, and thus also economic growth indicators. This has led to expectations that, provided there are no additional global pressures and market shocks, Montenegro will also round off this budgetary year within the scope of its own capacities

Following 2020’s great decline in the domestic economy, and subsequent partial recovery in 2021, the Montenegrin economy last year achieved relatively positive results, recording high economic growth exceeding seven per cent in the first nine months of the year, with favourable sector-specific trends in the most important branches of the economy, despite the crisis resulting from the war in Ukraine. However, on the other hand, 2022 also saw price growth simultaneously intensify significantly, both at the global level and locally in Montenegro, says Aleksandar Damjanović, Minister of Finance in the Government of Montenegro. “It is with just such parameters that the Montenegrin economy entered 2023,” reveals our interlocutor.

Can Montenegro maintain macroeconomic stability this year and what is that dependent on?

– The assessment is that short-term macroeconomic stability in the country has been preserved, at least for now, while uncertainties remain with regard to further movements of the economy, which depend on both global trends and internal circumstances, primarily political.

The Ministry of Finance has identified the key risks to macro-financial stability in all relevant documents that it has submitted to the Government of Montenegro. These firstly include strong geopolitical uncertainties and increased instability, most markedly in the European region, which could have an adverse impact on further price growth, given that inflation certainly remains this year’s biggest threat to planned economic growth and financial stability. When it comes to internal factors, the political situation in the country, coupled with limited fiscal space and the weakened tempo of implementation of planned investments, could cause a slowdown in the dynamics of economic growth during the current year. Similarly in 2023, following several years of extremely high fluctuations in pretty much all economic parameters, and especially with regard to economic growth, the conditions to stabilise the economy will be met.

At this juncture, the Ministry of Finance projects Montenegro’s economic growth to reach the level of around 4%, which will depend on the aforementioned factors over the rest of the year. We’ve already heard alarming announcements from the International Monetary Fund that recession will hit a large number of countries this year, which will further worsen an already unfavourable external environment. Similar warnings have also been issued by the World Bank in its latest January forecasts, in which it states that a sudden and lasting growth slowdown will hit developing countries particularly hard.

How sensitive is Montenegro when it comes to global macroeconomic trends? What does the major decline and the country’s impressive economic growth during the previous period tell you about that?

– Montenegro is a small economy that’s open to capital and trade flows, and which has a narrow production base and the insufficient diversification of goods. The economic structure, which is predominantly dependent on the service sector, greatly restricts more significant reactions to all the external volatilities and uncertainties that accompany such developments, whether that means price hikes on certain goods on the world market or a slowdown in foreign demand. Also contributing to this was the relatively high dependence on foreign investments as growth drivers, which can prove positive in times of expansion, but is challenging in all crises.

What instils a certain dose of optimism is that foreign direct investments recorded strong growth in Montenegro during the last three years, despite the coronavirus crisis and subsequently also the war in Ukraine

What nonetheless instils a certain dose of optimism is that foreign direct investments recorded strong growth in Montenegro during the last three years, despite the coronavirus crisis and subsequently also the war in Ukraine, though inflows of FDI increased in 2022, predominantly due to the growth of investments in real estate. Notable fluctuations in the growth of the Montenegrin economy depend on the tourism sector, as the largest branch of the domestic economy, which is also greatly susceptible to external trends and the disposable income available to tourists from key source markets. The growth of the Montenegrin economy will this year stabilise at a significantly more sustainable level, though the predicted rate will depend on a large number of both internal and international factors, and will also be subject to the materialisation of numerous risks.

The capital budget for 2023 totals 202.7 million euros. To what extent can these investments support long-term economic growth in the country?

– The adopted budget for 2023 is based on projected planned economic growth and components that comprise the economic structure, in which investments specifically have a high level of participation. According to current assumptions, we expect a gradual recovery of investments from their decline over the past few years, in accordance with relevant announcements from sectors. An additional contribution to this trend will also be provided by the adopted capital budget for 2023, as these projects could stimulate economic activity in the private sector and act as the driving force behind the growth of both foreign and domestic investments. This applies in particular to infrastructure, communal and energy transition projects, the implementation of which will certainly support long-term economic growth and increase the domestic economy’s potential.

What are your predictions for earnings generated by the upcoming summer tourism season?

– The tourism sector has a huge role to play in realising economic growth and generating significant private and public revenue in the domestic economy. Following the decline experienced in the first year of the COVID-19 crisis, tourism revenues have been gradually recovering and approaching the level of the pre-pandemic year of 2019. The key assumption of the current macroeconomic scenario is precisely that tourism revenues will recover fully in 2023 and reach the pre-crisis level. According to Central Bank of Montenegro data for the first nine months of 2022, revenue from tourism totalled €916.2 million, or just over 90% of revenue from the record-breaking year of 2019, which is above both the plans and expectations of the Government, so additional recovery in 2023 is realistically grounded in current forecasts.

The Ministry of Finance, in accordance with anticipated growth risks, is analysing and drafting additional scenarios that would include their implications, and which refer – among other things – to the worsening prospects of the European economy and falling economic activities, with the consequent impact on the Western Balkan region, which would mean lower tourist consumption in Montenegro, and thus an economic growth slowdown. This is why the strategy partly relies on the region and the positioning of Montenegro within regional tourist flows.

The fields of science and technological development have received significantly higher budget allocations. Do ICT and innovations based on technological solutions represent the new development map of Montenegro?

– The Montenegrin economy is compelled to follow the technological directions of economic development if it aspires to become a developed, high-income country. The productivity of the domestic economy, as well as its competitiveness and long-term growth potential, are also dependent on the development of technology and available production process knowhow. It was previously in this context that Montenegro laid the foundations for major investments in innovative areas by adopting certain regulations and the resulting legal solutions, which stipulated the inclusion of certain tax breaks for the development of research and innovation, as well as for hiring workers in this sector.

Over the previous year, which was marked by the strong influx of foreign citizens as a result of the war in Ukraine, unofficial data show a high increase in newly formed companies, up over 40% compared to 2021, along with a high percentage representation of the activities of newly founded companies by non-residents, large numbers of which hail from the IT sector. This could potentially influence the restructuring of the Montenegrin economy and speed up the transition to a highly competitive economy, while also stimulating digitalisation trends in the private sector. Essential prerequisites in the context of retaining these companies in Montenegro and attracting new ones include the encouraging of a favourable investment environment, alongside investments in potential personnel for work in these sectors. Concrete steps have been taken on that front, with legal regulations also adopted.

Given that 2023 is expected to be an even more difficult and demanding year than 2022, do you envisage Montenegro needing an arrangement with the IMF?

– Our expectations and projections are that, provided there are no additional global pressures and market shocks, we will also round off this budgetary year within the scope of our own capacities. If the need for additional financing nonetheless arises, we certainly won’t avoid making an arrangement with the IMF, as one of the world’s most credible financial institutions, which can mean additional security for the Montenegrin economy and the preservation of public financing stability, but also preserving the country’s image as a reliable partner to the international financial and political public, or to the commercial and investment banking sector.

To what extent does the policy of reducing employers’ contributions, which was introduced at a time when the economic situation was more favourable, impact Montenegro’s fiscal position today?

– If we are talking about the financial indicator of this kind of Decision, abolishing contributions for mandatory health insurance will result in an additional burden of 200 million euros on the state budget, which represents a serious blow, first and foremost when it comes to the sustainability of public health. Thanks to these policies, the Healthcare Fund last year faced accumulated debts and insufficient financing, which led to the healthcare system becoming all but paralysed at one stage. Moreover, as was also recognised in the IMF report, the abolition of these contributions caused numerous challenges to the stability and continuity of local government funding, particularly for less developed municipalities, as well as challenges to micro enterprises and small businesses that operate within the confines of these municipalities.

Due to the limited implementation of essential structural reform measures that address key challenges facing the Montenegrin economy, labour market parameters remain far below the average of developed countries

When the conditions are met, i.e., when the work of the Constitutional Court has been restored to its full capacity, we expect a formal opinion on the legality of adopting such a policy to be forthcoming, after which we will be able to implement long-term planning and regulating of the field of health insurance, while examining the possibility of defining certain contribution rates that will not more significantly overburden employers.

On the other hand, how much did this measure contribute to maintaining the country’s relatively favourable employment levels?

– The labour market began recovering strongly in 2022, following the major deterioration of indicators during the two preceding years, so the average number of employees for the first 11 months of 2022 increased by 19.5% at an annual level, reaching 223,400. Meanwhile, according to the Labour Force Survey, the unemployment rate stood at 13% in the third quarter, which is below the pre-pandemic level and represents the lowest rate recorded to date. This recovery comes predominantly as a consequence of dynamic, seasonal economic activity in the field of tourism.

However, we must keep in mind the fact that, due to the limited implementation of essential structural reform measures that address key challenges facing the Montenegrin economy, labour market parameters remain far below the average of developed countries, and the problems that have been identified in particular include a pronounced grey economy, low employment rates, a high percentage of longterm unemployment and the vulnerability of certain employee categories on the labour market, such as low-skilled labour, young people and women.

In order to garner more complete insight, the Ministry of Finance will work in cooperation with the International Labour Organisation in the period ahead to analyse the impact of abolishing health insurance contributions on the labour market, after which we will also have a quantified presentation of all aspects of this policy.

To what extent will increased allocations for salaries and pensions contribute to improving social stability and maintaining citizens’ living standards?

– Increasing wages and pensions represents a reflection of the Government’s intention to protect citizens from the inflationary shocks that we continue to be exposed to, thereby preserving the existing purchasing power of the population. I consider this to be the responsibility of every serious government, because it is our job, and obligation, to enable the sharing of the burden of the crisis and for it to be carried the most by those who earn the most or have the most. As you know, increases are made in proportion to the growth of inflation, which is reflected in continuous increases in retail prices.

TOURISM

The key assumption of the current macroeconomic scenario is precisely that tourism revenues will recover fully in 2023 and reach the pre-crisis level

ALTERNATIVE

If the need for additional financing arises, we certainly won’t avoid making an arrangement with the IMF, as one of the world’s most credible financial institutions

DEVELOPMENT

The Montenegrin economy must follow the technological directions of economic development if it aspires to become a developed, high-income country