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Novica Vuković, Minister of Finance of Montenegro

Good News for Citizens and Investors

The macroeconomic environment is stable, with growth exceeding expectations. And we aim to improve living standards and the investment environment by reforming tax and fiscal policies

Montenegro has a stable financial position, with the continuous collection of budget revenues, which exceeded the planned amount for the first seven months of 2024 by as much as 95.5 million euros, while they are almost 125 million euros, or 8.6%, higher compared to the same period of last year.

This isn’t the only piece of good news that we received from Montenegrin Minister of Finance Novica Vuković in this interview. Specifically, increases in collection were recorded in almost all budget revenue categories during the observed period, both in relation to planned amounts and in relation to last year’s totals, while preliminary data available on revenue collection up to the end of August indicate the continuation of these positive trends.

Credit rating agency Standard & Poor’s (S&P) increased Montenegro’s credit rating in August 2024 from “B” to “B+”, with a stable outlook, which represents confirmation of the success of the Government of Montenegro’s economic policy, particularly given that this is the second consecutive credit rating increase in just the last 10 months.

Supporting Montenegro’s rating are its strong growth prospects, the long-term benefits of structural reforms linked to the EU accession process, and the relatively low costs of servicing debt. “This will impact on increasing Montenegro’s attractiveness as an investment destination and improving its negotiating position in the EU accession process, as the country’s most important foreign policy objective,” explains our interlocutor.

What are the main reasons behind the adoption of the new “Europe Now 2” programme, and how will you use it to address the suggestions of international financial institutions and experts with regard to the first package?

— The main reason for the new “Europe Now 2” programme’s adoption is the Montenegrin Government’s strategic commitment to improve citizens’ living standards, and to do so by reducing the burden of contributions for pension and disability insurance on employees from 15% to 10% and reducing the burden of contributions for pension and disability insurance on employers from 5.5% to 0%, while increasing the minimum wage to a monthly average of €700 (it will total €600 up to 5th level of education qualifications and €800 for education qualifications of level 6 and higher).

The “Europe Now 2” programme has been proposed in a way that’s acceptable to both employees who receive increased wages and employers who are able to reduce the tax burden on earnings while preserving their macroeconomic and fiscal stability.

Labour costs represent the biggest fixed expenditure for employers. Until 2021, wage taxation was based on a proportional tax burden, which stood at 39% for all wage levels, representing a significant limiting factor when it came to increasing the minimum wage, but also of other employee wages. Meanwhile, Montenegro was also the only country in the region to have a proportional income tax rate of 9% and no tax-free part of earnings.

As a result of the high tax burden on labour, the “grey economy” was particularly prominent on the labour market, both through informal employment and partial cash-in-hand payments. Under such conditions, the state lost revenue through reduced payments of taxes and contributions, while employees lost out in particular – given that those employed informally were unable to exercise any right based on an employment contract, while in the case of partial cash-in-hand payments their earnings base for calculating taxes and contributions was lower than the real level, thus reducing their basic threshold for future pensions.

Through the “Europe now 1” economic programme, a “non-taxable part of earnings” was introduced, as well as the progressive calculating of income tax through a higher rate on earnings exceeding €1,000 (basic gross income) and the revoking of the obligation to pay health insurance contributions. A consensus reached between social partners also resulted in the minimum wage being increased to €450.

The government aims to improve citizens’ living standards by increasing minimum and average wages

And despite significant increases in “formal” employment, enabled through the “Europe Now 1” programme’s reduction of the tax burden on wages – as confirmed by official data on the collection of taxes and contributions that were up more than 50% in 2023 compared to 2021 (pension contribution collections totalled €343.7 million in 2021, €405.9 million in 2022 and €526.5 million in 2023), as well as record high employment figures in Montenegro for the previous year – some employers still use the model of partial cash-in-hand salary payments, which leads to tax evasion.

The 44th Government has made a strategic commitment to improve citizens’ standard of living and revoke barriers to doing business in an effort to improve the business and investment environment. It is also worth reminding readers that, as of 1st January 2024, Montenegro’s minimum monthly pension has been increased to 450 euros, while other pensions will be increased as of January 2025.

The government proposed a set of tax and fiscal policy reforms for its Fiscal Strategy, which imply, among other things, a significant increase in wages for all employees in the economy and a strong increase in citizens’ living standards. This measure has an additional impact in terms of reducing the grey economy’s presence on the labour market, given that so-called partial “cash-in-hand” salary payments are still noticeable, which reduces workers’ labour rights, but also associated public revenue.

Simultaneously, the tax burden on labour will be reduced for employers as a compromise measure with social partners, through reductions in allocations for pension and disability insurance contributions, from a total of 20.5% to 10%. Montenegro thereby becomes the country with the lowest taxes on employee earnings in Europe, which provides a strong indicator to investors that the country’s investment environment has advanced – considering that wage costs represent a large fixed expense for employers.

To ensure these reform measures will have a fiscally neutral effect, the Government has proposed amendments to the tax policy that compensate for lost revenues on the basis of reduced contributions, through an increase in the tax base and the struggle to combat the grey economy. Likewise, in order to avoid unjustified price hikes, the Government has adopted a decision that limits the margins on food and other basic goods at large retail outlets, which is a measure that will run until the end of January 2025 and will have effects that, I believe, will be felt by citizens.

How do you view the opportunities and risks of establishing the Development Bank of Montenegro?

— In accordance with Montenegro’s strategic development direction, as well as the need to diversify the Montenegrin economy and improve its competitiveness continuously, a need exists to further develop institutions and mechanisms that ease access to finance, both for private businesses and public companies, as well as local governments. This will be enabled, among other things, through the establishment of the Development Bank of Montenegro, which will serve segments of the market that commercial banks don’t serve adequately.

The Development Bank, as well as part of the Investment and Development Fund (IDF), will now have a key role to play in supporting strategic infrastructure and development projects and ensuring the inclusion of vulnerable groups, like youth, women and individual agricultural producers, in an effort to further motivate the inclusion of interested segments in the creation of additional economic value.

The improvement of the country’s credit rating, as one of the key economic parameters, represents a a strong indicator of the stability and progress that Montenegro has achieved, particularly in terms of fiscal policy and economic reforms

The Development Bank of Montenegro will represent one of the mechanisms for strengthening the Montenegrin economy’s competitiveness through easier access to the grants of EU funds, the creation of new financial instruments based on the example of development banks in the EU, and the strengthening of the export potential of Montenegrin companies. This new financing model will enable various financial instruments to be offered that will provide users with more favourable conditions – lower interest rates, longer maturity periods, reduced requirements for collateral and similar benefits, with significant positive impacts on the economy and the improved allocation of resources.

The Development Bank of Montenegro will offer a new service in the form of export insurance against non-market risks, with the aim of supporting Montenegrin exports and increasing the competitiveness of companies on foreign markets, which is particularly important in the context of eliminating barriers and creating a unified regional market. Apart from this service, the development bank would also take on the role of an export credit agency, providing additional support to the Montenegrin economy, in accordance with the legal framework.

You recently took on the position of Chairman of the Board of Directors of the Centre of Excellence in Finance (CEF). What does this position mean for the country, and for you personally?

— For the Ministry of Finance, and myself as the head, it is certainly a pleasure and an obligation to chair the Board of Directors of this international organisation with a longstanding reputation. Specifically, the CEF, headquartered in Ljubljana, was founded in 2001 and serves as a regional centre for exchanges of knowledge and capacity building for public sector officials in the fields of managing public finances, central banking and managing reforms.

Montenegro took on the one-year chairmanship of this organisation at the annual meeting of the CEF Board of Directors, which was held in Chișinău on 13th June 2024.

Apart from continuous successful cooperation that contributes to our administrative capacity building, as well as the opportunity to intensify it further through the chairmanship and the design and implementation of joint initiatives, I believe that taking on the chairmanship of such a successful international organisation contributes to improving the position and reputation of our institution, but also that of the country at the international level.

SUSTAINABILITY

The Development Bank will focus on responsible and sustainable operations, as the IRF has done to date, with the footnote that the aim isn’t to maximise profit, but to achieve a clear development goal

ATTRACTIVENESS

Montenegro is becoming the country with the lowest taxes on employee earnings in Europe, which provides a strong indicator to investors that the country’s investment environment has advanced

CONCERN

Some employers still use the model of partial cash-in-hand salary payments, which leads to tax evasion