Christopher Sheldon, World Bank Country Manager for Bosnia and Herzegovina, and Montenegro

The World Bank continues to work with the Government of Montenegro and other development partners in providing financial and reform support to ensure Montenegro’s stronger and more inclusive growth

As a small country, Montenegro is extremely vulnerable to external shocks, as was evident during the Covid-19 pandemic when the country experienced a historic recession. The economy nevertheless rebounded robustly, driven primarily by the solid recovery of tourism, but also helped by an influx of foreigners, says Christopher Sheldon, World Bank Country Manager for Bosnia and Herzegovina, and Montenegro, with whom we discussed the current state of the country’s economy and the support to its major reforms that’s provided by the World Bank.

Montenegro’s real GDP actually grew at an average rate of 8.5% from 2021 to 2023, with the economy returning to pre-pandemic levels in 2022. Growth continued strongly into the first quarter of 2024, with GDP expanding by 4.4%, driven by still solid private consumption. In the post-pandemic period, strong economic activity has been complemented by significant labour market improvements.

“However,’ notes Sheldon, “despite these positive developments, Montenegro faces substantial debt repayments from 2025 to 2027, which require the country to be fiscally prudent and to carefully manage its debt in order to maintain macroeconomic stability”.

What are the main challenges to implementing structural reforms in Montenegro, given the political instability and polarisation?

— Montenegro aspires to become the next EU Member State, and despite recent political complexity and instability, joining the EU remains its main strategic objective. On this path, Montenegro is committed to significant structural reforms, particularly in the rule of law, which is foundational for other reforms, including improvements to the business environment. Montenegro’s political environment remains complex. However, it is encouraging that EU accession is a common goal for all political parties, showing a collective will to advance these reforms to accelerate the EU integration process.

Large debt repayments pose a risk amid high financing costs. To address this, the World Bank is collaborating with the Ministry of Finance to secure €80 million in favourable financing for 2024

Strengthening administrative capacities will be crucial to implementing impactful reforms more swiftly. The World Bank is supporting Montenegro’s government in these efforts. For example, the ongoing Second Montenegro Institutional Development and Agriculture Strengthening Project aims to strengthen administrative capacities, increase and diversify income generation opportunities for individuals and enterprises, contribute to job creation and enhance resilience to climatic pressures in Montenegro’s agricultural sector.

How does the World Bank see its role in supporting Montenegro’s efforts to achieve sustainable public finances and reduce public debt?

— The World Bank remains a partner to the Government of Montenegro, providing both financial support and technical assistance in order to maintain healthy public finances. Montenegro reduced its public debt successfully, from 103.5 per cent of GDP in 2020, at the height of the pandemic, to 60.3 per cent in 2023, aided largely by high nominal GDP growth (a denominator effect), but also by the government’s fiscal management.

As I’ve already said, this has been a significant achievement, but upcoming major debt repayments represent a vulnerability in an environment in which the cost of financing remains high. In that aspect, the World Bank is working together with the Montenegrin Ministry of Finance to provide financing of €80 million under favourable terms in 2024. This financing is built on a jointly agreed reform programme that aims to strengthen fiscal sustainability and enable more resilient and sustainable economic development. Furthermore, the World Bank is partnering with the French Development Agency and the OPEC Fund, which will provide a total of €100 million of additional financing under the same reform programme. A second tranche, totalling €180 million, is expected in 2025.

What specific reforms does the World Bank consider crucial to improving Montenegro’s business climate; and how is the Bank supporting these reforms?

— The private sector plays a key role in Montenegro’s economy and the country has exerted significant efforts to enhance its business climate, particularly through its continuous reforms streamlining administrative processes, improving regulatory frameworks and strengthening the rule of law. However, informality and inconsistent enforcement of regulations continue to hinder competitiveness. Inefficiencies in the institutional and regulatory environment, including in taxation, and corruption are among the key drivers of informality, with a disproportionate impact on SMEs. Informality erodes the tax base and therefore reduces the scope and quality of government services. Informal workers, who tend to work in agriculture, construction and tourism, lack legal protections and social benefits.

In the context of Montenegro’s EU integration aspirations, which initiatives is the World Bank involved in as part of its efforts to support the country’s transition to a green economy?

— Montenegro is committed to reducing its greenhouse gas emissions by 55 per cent by 2030. As a signatory to the 2020 Sofia Declaration on the Green Agenda for the Western Balkans, which is aligned with the EU’s Green Deal, Montenegro also supports the aim of achieving carbon neutrality in Europe by 2050. Achieving these ambitious targets requires coordinated efforts among all stakeholders in the country.

Political stability, good governance and fiscal management are all key to investor confidence, alongside the addressing of polarisation, judicial inefficiencies and diversification

The World Bank is committed to supporting the Government of Montenegro in this regard, through its technical support, but also through financing. The development policy loan of the World Bank supports improvements to the legal framework on climate action (Law on Forests, Law on Renewable Energy, Law on Climate Change) that will lay the foundation for greenhouse gas emission reductions and climate change adaptation, including harmonisation with the EU Acquis. The Bank is also supporting Montenegro in developing a Strategy on Low-Carbon Development and a carbon pricing methodology. The forthcoming five-year strategy between the World Bank and Montenegro will support decarbonisation in Montenegro by focusing on key policy reforms and investments, as well as building on the findings of the upcoming Western Balkans Country Climate and Development Report (CCDR).

How involved is Montenegro in regional initiatives like the EU Growth Plan for the Western Balkans; and how does the World Bank support these initiatives?

— The EU Growth Plan for the Western Balkans emphasises connectivity, digitalisation and economic convergence – all areas in which Montenegro has shown its commitment through infrastructure projects, reforms and policy alignments with EU standards. By participating in this initiative, Montenegro isn’t only preparing to integrate into the European market ahead of full EU membership, but is also proving its capability and readiness to become the next EU member state, thereby contributing significantly to the stability and prosperity of the region.

In an effort to align with EU standards, Montenegro is implementing comprehensive governance reforms, including on anticorruption measures, judicial reforms and public administration. The process also promotes economic development through the adoption of EU market regulations, encouraging foreign investment and enhancing trade opportunities. The World Bank supports Montenegro’s accession aspirations by aligning its projects and initiatives with the reforms required for EU membership. For example, within its forthcoming five-year strategy programme with Montenegro, the World Bank will support the country in improving public financial management, fostering economic competitiveness and improving natural resource management, in line with EU requirements. It will also provide funding and technical assistance for public administration reforms, for example, under the proposed development policy operations, where agreed policy actions and legal reforms are aligned with EU accession objectives.