While tourism remains the country’s core economic activity, Montenegro has significant potential to turn renewable energy production and ICT into new sources of growth and prosperity
Like many other countries, Montenegro is facing significant challengers when it comes to 2023. However, its responses to the global crisis have to be tailored and fit to country specifics. Remon Zakaria, EBRD Head of Montenegro and EBRD representative on the Montenegrin Foreign Investors Council, believes that the institution he represents is well poised to support Montenegro through the hard times ahead.
The EBRD adopted a new five-year country strategy for Montenegro in September 2021. How relevant is this strategy today given the turbulent global macroeconomic situation?
– The EBRD country strategy remains very relevant in the current macroeconomic context. This turbulent time has demonstrated that energy security is a vital element of resilience and has become more important as a result of emerging security challenges. Our strategic focus on the transition to the green economy – promoting renewable energy and energy efficiency – is therefore key to helping Montenegro’s energy security while preserving its beautiful environment and contributing to its decarbonisation pathway.
Resilience and economic diversification are very closely linked to our second priority in the country strategy: “enhancing cross-border connectivity of transport, energy links, and country-wide access to IT and broadband”. Supporting connectivity among countries helps to increase and diversify trade (in goods and energy), as well as creating economic opportunities for various sectors. This is even more valid today, when global supply chains are facing challenges. IT and broadband connectivity are also critical to allowing the digital economy ecosystem to develop and flourish.
Enhancing private sector competitiveness, the third priority of our strategy, is self-explanatory and very relevant in the context of Montenegro, which is heavily reliant on tourism and has a strong need to improve its competitiveness in the region through skill enhancement, gender and economic inclusion and digitalisation.
The current crisis has to date neither been particularly negative nor positive for Montenegro. Looking back to 2022, in which areas did Montenegro fare better and which areas were particularly concerning?
Montenegro’s economy continued to recover in 2022, despite facing headwinds. And in spite of strong rises in inflation, the consumption impulse persisted, helped by the significant increase in wages at the beginning of the year. The tourism season was successful, marked by notably more visitors and higher revenues compared to 2021, and with space to recover further, given that these indicators remain below the record levels of 2019. It was a particularly good year for Montenegro in terms of attracting foreign investment, with FDI inflows up by nearly 40 per cent year-onyear by the end of October.
Investments in renewable energy are now commercially viable and will not hit the country’s fiscal space negatively. The private sector can play a pivotal role in scaling up investments in this sector
Surging inflation is nonetheless impacting Montenegrin citizens’ cost of living. The annual inflation rates registered were among the highest in the Western Balkan region, with higher prices of imports exacerbated by strong wage growth. We also note the limited contribution of investment on growth, affected by muted public investment and domestic political uncertainty. The biggest portion of the sizeable FDI inflow went into real estate, which generates limited added value and low spill-over onto other economic sectors.
Prolonged political instability is hampering the implementation of reforms. From that perspective, what does the future hold for the country?
– The outlook is marked by particularly high uncertainty, as the global macroeconomic environment remains unfavourable, with risks tilted toward the downside.
Continually high inflation, while expected to be moderate over the next year, is set to dampen domestic demand by eroding gains in real wages. At the same time, the tightening of monetary policy around the world, in an effort to contain inflation, has contributed to worsening global financial conditions. An anticipated slowdown in global growth is set to spill-over onto Montenegro through tourism, trade and investment linkages. On the positive side, Montenegro is among the few Western Balkan countries to have so far avoided an energy crisis. While higher oil prices impact the population, domestic electricity production remains stable and largely sufficient to cater to domestic consumption, while the country is not dependent on gas.
There is significant potential to scale up renewable energy production, particularly if the right regulatory environment is in place to incentivise private investments. This would not only support economic activity, but also support Montenegro on its path to decarbonisation and environmental sustainability. The financial sector has proved resilient throughout the pandemic, fostering growth that’s safeguarded by strong capital requirements and liquidity buffers. In view of the ongoing reshuffling of global supply chains, Montenegro continues to have opportunities thanks to its close proximity to EU markets.
In previous times, so-called “green” transition was reserved for wealthy countries that have considerable fiscal space to invest in this area. How can countries with scarce resources, such as Montenegro, address these questions today?
– The cost of renewable energy technologies has fallen significantly over the past decade – making it the cheapest form of energy today. Montenegro has huge renewable energy potential. With its great sunlight levels and wind resources, it can fulfil the country’s energy demand and export highly demanded clean energy to neighbouring countries, thus contributing to the diversification of its economy. Investments in renewable energy are now commercially viable and will not hit the country’s fiscal space negatively. The private sector can play a pivotal role in scaling up investments in this sector.
You stated in a previous interview that Montenegro has fantastic potential for renewables and that the EBRD will work very hard to unlock these opportunities. What are your priorities in that respect?
– Our priority is to promote investments in renewable energy and support policy reforms that help unlock the great potential available, applying best market practices from our vast experience in multiple countries of operations.
We recently launched a comprehensive policy support programme with the Government of Montenegro that’s aimed at reforming the sector and introducing auctions for renewable energy. With the right set of reforms, Montenegro can create an enabling environment for private sector investments in Renewables, thus making affordable clean energy available to its citizens.
Alongside policy engagement, the EBRD is also investing in renewable energy directly: we participated in the financing of the first commercial wind farm (Krnovo, 72 MW) and are planning new investments in 2023 that will add another 54.6 MW capacity of wind power. Alongside this, we are considering financing the installation of smallerscale solar panels by a leading retailer for their own use. The EBRD is also working with the national power distribution company and the transmission company to upgrade and digitalise the country’s infrastructure, in order to improve its efficiency and enable the electricity grid to handle the new renewable capacity.
Montenegro has been striving for years to strengthen the competitiveness of its private sector. Where do you see the biggest space for further progress in this area?
– Talking to local SMEs, their number one need is skilled staff, across all industries and sectors. The tourism sector is facing challenges, as many skilled workers switched occupations during the COVID pandemic; the ICT sector is experiencing difficulties due to the shortage of a skilled employee base and outsourcing; the construction sector saw an exodus of many skilled staff to more developed markets. The EBRD is actively promoting advice for small businesses through dedicated programmes to help businesses grow and be more competitive. We provided advisory services to 41 companies in Montenegro during 2022.
The tourism sector is facing challenges, as many skilled workers switched occupations during the COVID pandemic, while the ICT sector is experiencing difficulties due to the shortage of a skilled employee base and outsourcing
Another challenge confronting SMEs is access to finance. We have been working to support the establishment of a credit guarantee fund to help unlock financing from commercial banks to SMEs. We hope to see this implemented in the near future. Improving the country’s business climate is also critical to competitiveness. The EBRD is contributing to this sector with a dedicated technical assistance programme for the Ministry of Economic Development and Tourism, and continued support to the Secretariat to the Competitiveness Council (SCC), a public-private platform aimed at promoting dialogue between the private sector and the Government.
One area of particular interest is ICT and innovation. Do you see them as niches that could lead to the diversification of the Montenegrin economy?
– As a tourism-oriented country that has limited production and exports, Montenegro should focus on the ICT sector as one of the areas for the country’s future economic development and diversification. According to the National Statistics Office, the ICT sector in Montenegro accounts for 4-5% of the country’s GDP, but Montenegro still has a long way to go to fulfil its ICT potential. Around 800 companies are currently operating in the ICT sector in Montenegro, and that number has been growing rapidly due to IT firms displaced by the Russian invasion of Ukraine relocating throughout the region. However, the core business for most of these companies is based on hardware, and the majority of them are working for domestic markets and governments. In order to grow and diversify, skills in this sector are in high demand. A revision of the education system would greatly support its alignment with market needs.
How does your focus on strengthening connectivity and broadband infrastructure contribute to the development of these areas and digitalisation in Montenegro generally?
– Enhanced broadband infrastructure is critical to enable the digital transformation of economies and provide digital services to citizens and SMEs. Our focus, alongside the EU, has been to support the Ministry of Economic Development and Tourism in implementing a feasibility study for the development of broadband infrastructure in Montenegro. This study has shown that investments are needed to upgrade and expand the network, particularly in rural areas, which have reduced access and speed compared to cities. The investment identified as part of this study should enable an additional 72,000 inhabitants to access very high-speed (VHS) internet and use digital services, either for their businesses or for public services.
We are now working on the second phase, which will identify the most efficient market model suitable for implementing and delivering the upgrade jointly with internet providers. Montenegro will be perfectly placed to become the region’s leading country in providing ICT services and to successfully implement a programme to attract digital nomads.
An anticipated global growth slowdown is set to spill-over onto Montenegro through tourism, trade and investment linkages
Given the ongoing reshuffling of global supply chains, Montenegro continues to have opportunities thanks to its close proximity to EU markets
Montenegro will be perfectly placed to become the region’s leading country in providing ICT services and to successfully implement a programme to attract digital nomads