Milo Djukanović, Prime Minister of the Republic of Montenegro

The economies of a large number of countries in the world and Europe are slowly emerging from the crisis, while in the region it continues unabated. Montenegro, as a small and open economy, is highly exposed to exogenous shocks, but regardless of that, we’re talking about a country that is working on the process of Euro-Atlantic integration and in that it is perhaps the fastest in the region. To discuss the economic situation in Montenegro, its European and Euro-Atlantic future, further aspirations and prospects, we speak to the country’s Prime Minister, Milo Djukanović.

How would you assess economic trends in Montenegro today?

– The world’s economy is recovering. Global economic growth will be higher than in previous years. It is estimated that it will reach 3.6% in 2014. Of course, the biggest contribution to global growth “comes” from emerging economies (emerging markets) such as China and India, while growth in the most developed economies is more moderate. Although risks are still present, the eurozone economy is on the road to recovery. It is estimated that after last year’s recession – a drop of 0.5% – this year the eurozone economy will increase by 1.2%.

Those are also encouraging indicators for our region – the Western Balkans and the Montenegrin economy, which to a large extent is dependent on global, and particularly European, economic developments. The Montenegrin economy and our entire region – through trade, investment and tourism flows – mostly address the European market.

Thus, as a result of the financial crisis, reduced investments, freezes on credit and deposit withdrawals, 2009 was one of the worst years in recent economic history, with a drop in real GDP of 5.7%. The following year was marked by efforts to stabilise the macroeconomic situation, to adapt to public policy in the new context and to undertake necessary reforms that will strengthen and accelerate economic development.

Now I can announce with certainty that Montenegro has weathered the economic storm without major consequences. The economic substance has been preserved, the loss has been offset – unemployment did not increase significantly with the decline of GDP in 2009.

We used the time, recognised the new situation and, through fiscal consolidation measures, structural reform and improving the business environment, made ourselves stronger and more competitive. Last year economic growth was restored and stood at 3.5%, which is expected to be up again this year.

In the following medium-term, until 2017, we will come to faster growth of the Montenegrin economy, due to strong growth in investment activity and engagement of local potential, primarily in the construction and related trade sectors, transport and extraction of minerals and stones.

In this period we envisage a strong contribution of the tourism sector and complementary sectors, alongside a reliance on agriculture from domestic sources. A moderate increase in lending activity is also expected.

The average GDP growth rate for the 2014-2017 period will be 3.7%. In the current context, this is a good result, but I believe we have the resources and know-how to create the conditions for the Montenegrin economy to reach a potential growth rate of 5% in the coming period.

The EBRD and IMF have warned that the country is still suffering from a high current account deficit and rising public debt. How do you see that problem and what is the Government doing to reduce them?

– Dynamic economic growth usually carries with it imbalances, especially in terms of the current account deficit and particularly for a small open economy that is predominantly service orientated. Also, the need for infrastructure investment means higher government spending, but also more imports of materials, equipment and other products most of which are not produced in the small Montenegrin economy.

Therefore, major public and private investments in the future will certainly mean pressure on government spending and pressure on the current account deficit. For us, as decision-makers, it is much more important how and on which projects public money is spent. It is crucial that government investments are sustainable and contribute to economic development. It is also important whether or not we’ve created an environment for the private sector to focus their spending on productive investments.

Dynamic economic growth usually carries with it imbalances, especially in terms of the current account deficit and particularly for a small open economy that is predominantly service orientated

However, I want to point out that the Government has recognised the budget deficit problem and the risk of public debt growth and last year, through fiscal consolidation measures, reduced the budget deficit to below 4% of GDP. This year it is estimated that the deficit will amount to less than 2% of GDP, while our intention is for the budget to be in surplus in the medium-term.

At the end of April 2014 public debt totalled 56% of GDP and, according to the public debt strategy, it will not exceed the amount of 60% in the coming years. This means that from this year already Montenegro will be within the Maastricht rules and thus further strengthen its financial position and financial market reputation.

Are you satisfied with the pace at which Montenegro is fulfilling the requirements of European integration?

– Montenegro, eight years after the restoration of independence, can boast of the fact that today it is the only country which is both in the final stages of the process of integration into NATO and a successful negotiation process for EU membership.

We have completed the negotiating structure, which includes civil society, and we have successfully completed the screening phase. So far we have opened negotiations on nine chapters, two of which we have temporarily closed. We exert maximum effort in order to continue our good trend in the negotiation process. We expect to be in a position to open all negotiation chapters in which we have no initial criteria i.e. the remaining 13 chapters, by the end of 2014.

The government has also adopted the Programme for the Accession of Montenegro to the European Union for the 2014-2018 period (PPCG), which represents the basic strategic document in the field of European integration. This is a document that envisages, in a thorough and comprehensive manner, the measures necessary in order to fully comply with the EU acquis, administrative capacity building for its effective implementation, devising an appropriate strategic framework for all the chapters of the acquis, as well as calculating the costs of achieving these activities.

Considering this, we can express our complete satisfaction with the pace of progress towards the EU, especially bearing in mind that through deadlines we have always confirmed the quality of our reform process.

How much has the European integration process helped Montenegro to stabilise as a society and stabilise its economy?

– The issue of Montenegro’s membership in the EU is perhaps the only issue characterised by general social consensus and agreement of all political entities in the country, which results in high public support for the realisation of this important foreign policy priority.

We perceive integration into the EU and NATO as the best framework for implementing necessary reforms, which are a prerequisite for further economic development and achieving a European quality of life for our citizens.

In the first half of its term, in tandem with the implementation of the EU and NATO agendas, the government has also been focused on maintaining stable public finances, structural reforms, improving the business environment – all with the aim of securing strategically important foreign investments.

We are convinced that comprehensive reforms and harmonisation with EU standards will contribute to further strengthening our institutions, creating a faster and more efficient administration and general progress in all spheres of society.

How do you see the economic environment in Montenegro; how enticing is it for investors and what does it lack in order to be more attractive?

– According to the evaluations of relevant institutions like the World Bank and the World Economic Forum, the economic environment in Montenegro is constantly improving. Thus, for example, the World Bank’s latest report on the ease of doing business ranked Montenegro 44th in the world, which is an improvement of 7 places compared to last year and an improvement of over 40 places compared to a few years ago.

What is even more important, the inspiring business environment in Montenegro is recognised by both local and foreign investors. The number of investors from over 100 countries around the world and the number of their investments rank Montenegro among the countries with the largest amount of investment per capita and as a share of GDP.

Credit for this result certainly goes to our geographical position and the resources we possess, but it primarily goes to the institutions we are building and the political stability and security that we have managed to preserve even in the most difficult times in regional conflicts. Furthermore, we are improving the business environment, reducing transaction costs, removing barriers and bureaucratic costs. The Euro, as our official currency, the free trade agreements we have signed and the free flow of capital, ensure we are much bigger than the local market.

We have recognised the problems faced by investors, especially in the area of insufficiently developed infrastructure, a lack of connectivity and the availability of Montenegro as an investment and tourist destination, inefficient government, especially local administration, and barriers that exist in the area of contract enforcement, issuing building permits and the cadastre system. We are working systematically and continuously to eliminate all these restrictions and problems.

You have announced that the government is this year focused on eliminating barriers to doing business. What does that mean exactly and how much progress has been made so far?

– The Government of Montenegro, led by the current economic policy, and considering its role in facilitating the growth of the private sector through incentives in the regulatory environment, has launched radical reforms to encourage businesses to invest and grow. The state sector is aware that increasing the cost of doing business will mean entrepreneurs find it difficult to succeed on the market. Montenegro’s efforts to implement reforms in the area of creating a stable business environment have also been recognised in international reports.

An improved position in the international context provides enough room for the promotion of Montenegro, particularly in the context of a better picture of the investment climate for foreign investment. In this field, significant reform steps have been achieved that is aimed at strengthening competitive advantages, primarily in regional terms. Reports have identified low or critical areas that should be the focus of attention for the next period, which is certainly in line with commitments to our economic policy.

Porto Montenegro is the first major new project in Montenegro when it comes to tourism and we could say, with the entry of Aman to Sveti Stefan and Miločer, that it in fact represents a milestone in the nation’s status as a high-quality tourist destination

The reforms that have been implemented by the government, and those currently being implemented with the aim of eliminating barriers to doing business, relate to the improvement of procedures for business registration, construction permits, accessing credit, paying taxes, registering property, enforcing contracts, administrative procedures, and the like.

In addition to this, another recognised priority is the obligation to establish a more efficient state administration, which will accelerate the realisation of all aforementioned activities, and which was officially set as a task of the government through the adoption of the document “Plan for the reorganisation of the public sector.”

What needs to be done in order for Montenegro to achieve higher than conventional growth rates?

– We need to work more and with more quality; to attract as many reputable foreign investors as possible in a competitive environment; to promote the further development of domestic entrepreneurship and SMEs by eliminating recognised limitations, the hardest of which is the level of entrepreneurial culture. Only then will valuable foreign investments be fully effectuated. And the most crucial step in this direction is further thoughtful and courageous education reform.

Of course, we must improve institutional effectiveness on a daily basis, continue with structural reforms and improve the business environment. With continuous investment in infrastructure development and sustainable exploitation of real development resources, I am convinced Montenegro will realise very dynamic growth and development in the future.

Do you agree with the Wall Street Journal’s John Fund, who assessed Montenegro as the economic leader in the region, but said that the EU could help improve the country’s legal system?

– The EU can also assist in improving the legal system and in encouraging the development of Montenegro and the region of the Western Balkans. I’m afraid that the European integration strategy for our region is too defensive. From this follows a reduced and therefore erroneous plan of establishing legal order in the Balkans as an autonomous target.

The Balkans are not predetermined for crime, corruption and violence, but rather this is all a result of economic and democratic backwardness that deepened so much overtime that it now represents an insoluble problem without the help of developed countries. Logically, this means primarily the EU, because we are part of European security and economic frameworks.

Montenegro, once the least developed country in the former Yugoslavia, is today at the forefront of the region, as illustrated primarily by the tripling of GDP, increasing foreign direct investment and the stage of the integration process in which we have moved ahead of our neighbours, if we exclude Croatia, which is already a member of NATO and the EU. However, we are only 20 per cent of the average living standard in the developed countries of the EU.

NATO and EU integrations are political priorities and strategic objectives for Montenegro, but not in and of themselves. Rather, this is precisely so we can confirm our security, strengthen stability and improve the rule of law and institutional effectiveness. We understood NATO and EU integration as a tool – an instrument to accelerate our economic development.

Here we must consider that membership in the European Union and NATO is not being imposed on Montenegro, rather that’s our choice, primarily because Montenegro and the region are a natural part of Europe, which should be referred to in the first person plural. So, “us” Europeans. The European Union is our choice, while we perceive the standards we should achieve on that road as an added value and not as an “imposed task.”

Despite being initially challenged and viewed with suspicion, the Porto Montenegro project has become a globally recognised brand. Following this example, other similar projects are planned. How far advanced are the implementations of the projects Plavi Horizonti, Kumbor etc.; and what’s next after that?

– Porto Montenegro is the first major new project in Montenegro when it comes to tourism and we could say, with the entry of Aman to Sveti Stefan and Miločer, that it, in fact, represents a milestone in the nation’s status as a high-quality tourist destination, while the project also serves as an example of the successful conversion of military property into a resort and is often a topic of conversation among professionals in the real estate sector.

Right after the successful implementation of this really impressive project, the implementation of other projects began and these are now also important projects for Montenegro in the field of tourism and real estate.

With the goal of further developing existing projects and launching new ones, Montenegro is striving to attract investors who raise the standards and who, as operators, follow the trends of well-known hotel brands. The more significant tourism projects that are underway or are in the final stages of preparation are Luštica, PortoNovi, the Aman resort, Queen’s Beach, Blue Horizons, Maljevik – Bar, EcoLodge Vranjina, Bigovo-Trašte, Bjelasica and Komovi.

Here the stand-out project is first and foremost the Luštica Bay project, where the investor is the Swiss-Egyptian concern Orascom and where the total investment is around €1 billion. Next is PortoNovi in Herceg Novi, which has a value of over €500 million and, of particularly importance, when the complex opens in 2016 the operator will be one of the world’s most prestigious brands: One and Only.

Mutual agreements on free trade, but also free trade agreements with the EU, make trade and investment flows easier and with lower transaction costs, while our individual local markets become part of a much larger European market

Also of great importance is the project Plavi horizonti (Blue Horizons) in Tivat, where the investor is a renowned global company Qatari Diar. Open property issues have been overcome and planning documentation is harmonised, so that conditions have been created for the effective implementation of this important project.

I would also mention the implementation of the future Kraljičina plaža (Queen’s Beach) project, where the investor will be the Royal Group from the UAE, which will undoubtedly significantly raise the overall level of the tourist offer of Montenegro.

In the tourism development plan, additional attention is paid to the north, so a significant part of public works planned for the next year is directed towards that region. We have intensified our activities aimed at improving and building transportation, utilities and energy infrastructure in this part of Montenegro and we believe the time is right, following that state investment, for high-quality private investors, primarily foreign, to show interest in investing in that part of our development resources in tourism and agriculture.

Considering all of the aforementioned, we can already say that with the realisation of initiated and planned projects, Montenegro will become one of the fastest-growing investment destinations in the region. I am primarily directed towards such optimism by an awareness of untapped resources in the fields of infrastructure, energy, tourism and food production. Likewise, my optimism also stems from the presence of renowned investors in Montenegro, already signed contracts and already launched projects that are being implemented here.

What needs to be done within Montenegro to reduce the gap in the level of development between the north and south of the country?

– The gap between the north and south of Montenegro is one of the few constants and is a result of social industrialisation, which does not mean that at some point there won’t be a reversible process in the sense that the northern region, which is extremely rich in energy, agriculture and tourism potential, could capitalise on its comparative advantages.

What the state can and should do is build high-quality infrastructure in order for the north to be more accessible and closer to not only the centre and south of Montenegro but also a larger market. State and local government must arrange planning documents and create the conditions for investment.

Moreover, through strategic partnerships, public-private partnerships and concession arrangements, the state and local governments must put into operation the natural resources that the North possesses. And it is precisely in these areas that the efforts of the government are focused.

With the vast natural resources we possess, but also good policies in terms of institution building and a good business environment, I am sure we can become the most dynamic part of the European continent

We will soon start a highway project that needs to connect the north of the state, and Montenegro as a whole, to key transport corridors. We are in the process of choosing partners for the construction of block II of the thermal power plant and have selected dozens of concessionaires for small hydropower plants in the north. Through spatial plans and investment in infrastructure, we are creating the preconditions for private investment, especially in the tourism and food production sectors.

I certainly have no illusions that regional differences can be completely “ironed out”, despite all the efforts and strategies we are making. There will always be more or less developed regions and municipalities. All forms of administrative equalisation usually come at the expense of overall backwardness and impoverishment.

The EU has also defined dozens of regional strategies, yet the differences between the EU’s most developed and least developed regions are still huge. However, in Montenegro we can and must create conditions in order to make better use of the resources we have in the north and, as I said previously, this is part of government policy and the efforts we are exerting.

How would you assess regional stability and cooperation, as an important prerequisite for attracting new investment to the region?

– As being critically important. Regional stability and good neighbourly relations are a prerequisite for investment and economic development. I always highlight this fact – both in conversations with my colleagues from the region and in talks with representatives of the international community. I am pleased that everyone recognises Montenegro as a good example of a state that managed, even in the most difficult times, to maintain stability and multi-ethnic harmony and as a country that builds the best relations with its neighbours.

Does it seem to you that the region lacks joint projects that would, on the one hand, raise the competitiveness of individual countries, while on the other hand being easier to attract major foreign investors?

– That’s right. And that’s why I advocated at the regional investment conference in London, which was organised by the EBRD at the beginning of the year, for better and closer regional co-operation, but also for the support of international institutions, especially the EU, EIB and EBRD, in defining and financially supporting the implementation of priority infrastructure projects in the region. This is because the high quality infrastructure will not only bind us together better economically and bring us closer to bigger markets but will also contribute to political stability. I think Europe also needs to recognise its political and economic interests in this.

On what do you base your optimism that the Balkans can be the economically most dynamic part of the European continent?

– The Western Balkans sadly missed out on the “golden transitional years” that were used by the countries of Central and Eastern Europe. And while Poland, the Czech Republic, Slovakia and other transition countries developed economically and joined the EU, our region stumbled into regional disputes and conflicts.

That’s why, despite a short period of dynamic economic growth, we were left with low and middle-income countries “in the process” of integration. However, never in history has the Western Balkans been more developed and stable. I would say that it’s also never had better prospects of approaching the standards of the most developed countries. Intergovernmental cooperation has advanced. All states are in the process of EU integration.

Mutual agreements on free trade, but also free trade agreements with the EU, make the trade and investment flow easier and with lower transaction costs, while our individual local markets become part of a much larger European market. With the vast natural resources we possess, but also good policies in terms of institution-building and a good business environment, I am sure we can become the most dynamic part of the European continent.