Christopher Sheldon, World Bank Country Manager For Bosnia-Herzegovina And Montenegro

Three Pillars Of Stability And Growth

The strength and resilience of the economic recovery over the medium term depends on the government’s growth strategy. The first cornerstone is financial sector stability. The second requires making health, education and social protection services more inclusive and efficient, and the third cornerstone is better natural resource management

The economic crisis resulting from COVID-19 is the deepest the world has seen since WWII. The majority of world economies suffered recessions in 2020 and most of them are showing signs of faster than expected recovery in 2021. Montenegro is no exception: it was hard hit by the COVID-19 crisis, given its dependence on tourism. And while tourism was the main culprit for the economic downturn in 2020, it is now driving the economic revival, says Christopher Sheldon, World Bank Country Manager for Bosnia-Herzegovina and Montenegro. “A much stronger than expected peak summer season has led to a faster recovery of economic activity. We now estimate Montenegro’s economy to grow by almost 11 per cent in 2021.”

The growth outlook is positive, but our interlocutor warns that there are many risks. The strong recent rise in economic fluctuations, however, poses a bigger question over the resilience of Montenegro’s pre-crisis growth strategy. “As with previous crises, the pandemic has exposed the country’s structural vulnerabilities,” says Sheldon. “Moving forward, the strength and resilience of the economic recovery over the medium term depends on the government’s growth strategy.”

The first cornerstone to strengthen economic resilience is to ensure macroeconomic and financial sector stability and raise domestic private sector productivity by guaranteeing fair and equal enforcement of rules and regulations in the private sector, thus encouraging more entrepreneurship and innovation. This would support the creation of well-paid formal sector jobs and lead to the diversification of investment and ownership structures, broadening the sources and beneficiaries of growth. The second cornerstone requires making health, education and social protection services more inclusive and efficient, as well as further strengthening the incentives to work to help address high unemployment and inactivity.

This will provide better opportunities for all Montenegrins to benefit from economic growth. The third cornerstone is better natural resource management, representing the basis of Montenegro’s comparative advantage in tourism and clean energy. While legislative progress has been made, limited enforcement of environmental regulations and standards have undermined more tangible progress. Strengthening public institutions that enforce legislation and prioritise medium-term planning is therefore the foundation for implementing these reforms successfully.

What are Montenegro’s options for diversification, given the structure of the economy?

– Montenegro has significant potential to diversify investments within tourism, as well as to other economic activities where Montenegro has a comparative advantage, such as clean energy. In order to expand its sources of growth, the country needs to encourage the development of innovative entrepreneurs to raise firms’ productivity. This includes diversifying investments within tourism, which has so far focused on high-end real estate that has proven to generate few linkages with local suppliers and services. In the case of diversification, services supporting and related to tourism – such as those in transport, retail and restaurants, finance, or professional services and ICT – will have significant growth potential.

Post-crisis tourism should be transitioned towards a more sustainable model based on social inclusion and the restoration and protection of the environment. Moreover, investing in water, solar and wind energy leverages Montenegro’s comparative advantage in green energy and allows funds from the EU Green Deal to be absorbed. The recently completed undersea cable with Italy further boosts the potential for clean energy exports to the EU.

The most important policy to improve living conditions in the North is to improve citizens’ access to quality social services, on par with those across the rest of the country

How well is government responding to different challenges related both to the business climate and fiscal risks?

– A faster than expected recovery in tourism and the economy in 2021 has led to strong revenue growth, which was further supported by the introduction of the new e-fiscalization system. The authorities have further kept current spending in check and followed prudent debt management. The sound fiscal policy has so far contributed to reducing the fiscal deficit and debt. The authorities have further reduced fiscal risks by signing a hedging agreement to protect against exchange rate risk as it started repaying the loan for the construction of the first section of the Bar-Boljare Highway. Continuing a prudent macroeconomic policy is a prerequisite to ensure a resilient economic recovery over the medium term.

Which aspects of the current macroeconomic situation worry you the most, and how is the World Bank helping?

– Public debt is still at high levels and calls for continued strong fiscal and debt management. This embeds strengthening revenues and tax administration and a sustained consolidation on the spending side. Only then can the primary fiscal balance (excluding net interest payments on general government liabilities) turn into a surplus. Running a primary fiscal surplus over the medium term will be critical to reduce debt, as the repayment period for the large outstanding Eurobonds starts in 2025.

Moreover, the authorities need to address some longstanding structural weaknesses, including socially and fiscally unsustainable elements in the pension and health system and reducing the tax on formal employment, to ensure that the recovery will revive the labour market.

Would it be possible for Montenegro to maintain its strong investments in infrastructure and the development of tourism in the northern part of the country, under the new circumstances of high exposure to external debt?

– The tourism sector has great potential to provide well paid sources of income for households in the North. Tourism sub-sectors that also have higher potential to generate demand for local services and products include ecotourism, agritourism and the rural hospitality sector, linking gastronomy, cultural heritage and agriculture, and thus creating job opportunities and infrastructure. It is critical, however, to follow and enforce a more sustainable (tourism) development strategy for the North based on the restoration and protection of the environment to safeguard the medium-term benefits of tourism development. Such a development strategy would also diversify investment and ownership structures, broadening the sources and beneficiaries of growth.

The most important policy to improve living conditions in the North, however, is to improve citizens’ access to quality social services, on par with those provided across the rest of the country.

What are the most important steps to retain the current positive fiscal situation?

– Prudent macroeconomic policy is a prerequisite to ensure a resilient economic recovery over the medium term. This includes continuing the current sound fiscal and debt management policies and closely monitoring financial sector stability. It further requires instigating key structural reforms to address some longstanding vulnerabilities, such as high taxes on formal employment, socially and fiscally unsustainable elements in the pension and health systems, or inefficiencies in public administration.

To what extent can the current government’s “Marshal Plan” counter the increase in unemployment and poverty rates? What are your thoughts and suggestions when it comes to that plan?

-The announced major structural reform has the potential to raise formal sector employment and growth in Montenegro, while reducing informality, poverty and income inequality. Montenegro has one of highest labour taxes in the region, due to high social security contributions, constraining formal job creation. As all Montenegrins have access to health insurance, it is more efficient to finance it from general revenues instead of placing the full burden of costs on formal employment, which accounts for little more than a third of the working-age population.

In fact, the core of the reform is consistent with recent World Bank recommendations based on the analysis in the Growth and Jobs report, published in June 2021. Specifically, our report recommends reducing social security contributions and financing those contributions from higher marginal tax rates for higher income earners (progressive personal income taxation). It also recommends introducing personal income tax allowances for low-wage earners to further reduce the tax on formal labour for this group. Several Latin American countries with comparably high pre-reform labour taxes have had positive experiences with similar reforms in recent years, by financing part of social security contributions imposed on formal labour from higher income tax rates. The reform should be carefully designed and backed by sufficient analysis.

The recently published World Bank Systematic Country Diagnostic 2020 provides detailed analysis of the causes and consequences of Montenegro’s strong boom and bust cycles and provides policy options to safeguard sustainable and inclusive development

How worrisome are increased volumes of nonperforming loans among citizen and businesses? How well has the country’s central bank addressed these issues?

-The financial sector has so far been resilient in this crisis. As expected, nonperforming loans have increased since the start of the pandemic, but the average capital adequacy ratio in the financial sector is at a healthy level that’s well above the regulatory minimum. As the economic activity started recovering, the outstanding loans and deposits reached historic highs in August, although a significant share of credits remain in the moratorium. It should be noted, however, that the full impact of the crisis on bank asset quality will only be clear once the generous loan moratoriums expire and if corporate bankruptcies rise after the phasing out of government crisis response programmes.

What does the future hold, at least when it comes to 2022 and 2023?

-The pandemic continues to pose challenges, as new virus variants raise doubts about the pace of the global recovery. The evolution of the pandemic and the share of the population vaccinated will largely shape the near-term economic outlook. Assuming a full recovery of tourism in 2022 and 2023, growth is expected to remain strong, at 5.6 and 4.8 per cent respectively. That positive outlook, however, is subject to multiple downside risks. Looking at external risks, a new wave of COVID-19 infections in Europe could slow Montenegro’s economic recovery. Moreover, inflationary pressures in the U.S. and EU may accelerate monetary tightening, which could translate into more expensive external financing. Domestic risks stem from lower vaccination rates and hesitancy, where possible new containment measures could delay the recovery. Political polarisation also remains high.


The announced “Europe Now” structural reform agenda has the potential to raise formal sector employment and growth in Montenegro, and to reduce informality and income inequality


The World Bank stands ready to support the government in providing technical, international best practice expertise in designing and implementing critical structural reforms


Continuing a prudent macroeconomic policy is a prerequisite to ensuring a resilient economic recovery over the medium term

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