Radoje Žugić, Governor Of The Central Bank Of Montenegro

We Preserved Economic Stability

We can state with satisfaction that the central bank reacted appropriately under the conditions of heightened uncertainty caused by the COVID-19 pandemic and succeeded in preserving the balance between supporting the economy and the population while preserving the banking system’s health

The Montenegrin economic situation is in the phase of recovering from the strong, negative impact of the COVID-19 pandemic on almost all sectors of the Montenegrin economy.

This year is expected to see a high rate of economic growth, and growth is expected over the course of the next three years. However, a certain dose of concern is caused by the level of public debt, says Central Bank of Montenegro (CBCG) Governor Radoje Žugić

Financial stability in Montenegro was also preserved during the crisis caused by the COVID-19 pandemic, which – among other things – is a result of well-targeted temporary measures that the CBCG created with the aim of alleviating the consequences of the pandemic for the economy and citizens, but also a result of banks’ healthy balance sheets prior to the outbreak of the pandemic, emphasises the central bank governor.

Looking back, how would you rate the success of the Central Bank’s ten packages of measures?

– Over the past year and a half, we’ve implemented ten packages of measures directed towards alleviating the impact of the coronavirus pandemic on the economy and the population. This distinguished us as the central bank with the most comprehensive set of anti-crisis measures in the region and across Europe.

The measures, some of which are still in force, have been directed, among other things, towards postponing and easing the repayment of liabilities, through a moratorium and loan restructuring. In this way, the banking sector “ceded” liquidity to the population and the economy. We enabled all private individuals and legal entities hit by the pandemic to temporarily postpone payments of their obligations to banks, which provided them with a higher level of income and the possibility of settling other obligations. We also allowed banks to treat restructured loans as newly approved ones, which freed them of the additional burden of reservation costs, thus creating the conditions for restructuring loans to citizens and the economy under more favourable conditions.

We also used the monetary instrument that’s at our disposal and reduced the rate of required reserves of banks by 2%, with which we “pumped” 70 million euros of liquidity and increased banks’ credit potential. The CBCG likewise “halved” the prices of withdrawals of mandatory reserve liquidity, securing cheap access to additional sources of bank liquidity when needed.

You recently completed the AQR process. What do the results show?

– With the aim of gaining the most objective possible picture of the state of the banking sector, we initiated and recently concluded a project to assess the quality of assets, so-called AQR [Asset Quality Review]. With this instrument it is determined whether banks have an adequate capital position and how they manage risks. The results of the AQR confirmed the stability of the Montenegrin banking sector, as expressed through an adequate capital position and the satisfactory quality of bank assets. We are particularly proud of these results because we are the first country outside the EU to have conducted the AQR process in accordance with ECB methodology, while encompassing the entire banking system with a high sample of risk-weighted assets of more than 84%.

We paid special attention to directing support towards those categories of the population and economy that were hardest hit by the pandemic

How satisfied are you with the CBCG’s cooperation with the IMF and World Bank?

– We have excellent cooperation with both the IMF and the World Bank, through numerous technical assistance programmes that contribute to improving the functioning and strengthening the capacity of our institution, as well as faster and more successfully adjusting the legislative framework to the best world practice.

In February this year, for the first time since the CBCG’s establishment, the IMF prepared an external analysis of control mechanisms of this institution and confirmed that the CBCG has strong operational control mechanisms of its key functions, including the management of reserves, treasury operations, finance and controlling, operational risks and internal audits.

You’re among those who’ve spent many years advocating for the need to diversify the Montenegrin economy. Where do you see the role of the central bank and the banking system in this, when it comes to supporting sectors of the economy linked to production?

– Viewed historically, the Montenegrin economy is characterised by insufficient diversification of its production structure, with the marked dominance of service activities. This has resulted in a low level of technological equipment and a high level of import dependency. We are also confronted by unequable regional development.

The emergence of the COVID-19 pandemic halted the cycle of economic growth that had been achieved in the 2015-2019 period, when the average growth rate amounted to almost 4%. During this period, our economy’s growth model was based on strong investment activity that incited economic flows within the country. However, the Montenegrin economy’s insufficient diversification reduced the positive effects of investments, precisely due to insufficient and unavailable capacities for the production of goods needed to conduct investments, and this investment cycle was accompanied by high imports.

The Central Bank is not an institution that has a mandate to provide direct support to the manufacturing sector. The CBCG certainly contributes indirectly to achieving this aim by preserving the stability of the financial sector. Finally, the banking system – through credit support – provides a significant contribution to the development of all sectors of the Montenegrin economy.

Do you consider that the most vulnerable sections of the population and enterprises will be in a position to handle the consequences of the pandemic without additional support measures?

– Setting out from the positive impact achieved through the implementation of the Central Bank’s ten packages of temporary measures, as well as the Government of Montenegro’s five packages of measures, GDP growth projections, available indicators and assessments of economic recovery encouraged by the strong recovery of the tourism sector, we can conclude that conditions have been met for the relative normalisation of operations.

With the application of the Decision on temporary measures to mitigate the negative effects of the epidemic of the infectious disease COVID-19 on the financial system, on the date of 30.09.2021, the moratorium includes loans amounting to 5.23 million euros, or 0.18% of total loans, while loans restructured under favourable conditions amount to 203.93 million euros, or 6.90% of total loans. At the same time, about 30 million euros in new loans under favourable repayment conditions were approved for the sectors of tourism, agriculture, fisheries and forestry, as well as other vulnerable activities.

It is clear that these temporary measures cannot last for an indefinite period of time. However, the CBCG will continue actively monitoring the further development and impact of the COVID-19 pandemic on the financial system, the Montenegrin economy and citizens, as well as analysing macroeconomic and financial system developments in order to support the recovery and further growth and development of the Montenegrin economy, through adequate and timely macroprudential and monetary measures.

What kind of results will the banking sector have as it awaits the end of 2021?

– Data on the operations of banks confirm that the banking system is stable, profitable and liquid. Assets amounted to approximately 5.2 billion euros at the end of the third quarter of this year, which is 12.5% higher than at the end of 2020. The solvency ratio, as a relative indicator of capital adequacy, exceeded 18.5% on 30th September 2021, which is almost twice as much as the prescribed minimum. Deposits have grown since the beginning of the year by over 600 million euros and now total almost four billion euros, which is an historical maximum.

The negative impact of the pandemic on the operations of banks is reflected in a slight increase of NPLs, which is nonetheless limited thanks to the CBCG’s timely implementing of measures. It is realistic to expect the reduced volume of economic activity and increased unemployment to result – at some point following the lifting of temporary measures – in the worsening of this important parameter that predominantly impacts on capital adequacy. This will have a further negative impact on banks’ revenues, through an increase in value adjustments, i.e., reserves for expected lending losses.

Officials of the IMF and World Bank assessed that the crisis measures of the CBCG were “created and implemented in a timely, adequate and strong manner, and that correct steps were taken towards building a strong and credible institution.”

What lessons would you draw from this experience for some similar future crises?

– We assessed that, when it comes to taking action under unforeseen circumstances like the COVID-19 pandemic, it is crucial to have a swift institutional response in the form of profiling adequate macroprudential and monetary policy measures to combat the emergence of risks in the financial system and prevent them from materialising, as well as the timely implementation of these measures.

Second, it is essential to coordinate the activities of all policymakers responsible for preserving macroeconomic and financial stability in the synchronised creation and implementation of protective measures, and this was confirmed by the Government of Montenegro and the CBCG with their actions.

Third, the focus of the CBCG was on protecting the financial position of banks’ clients – private individuals and legal entities, in the narrower sense, or preserving the solvency and liquidity of the banking sector, in the broader sense. The CBCG worked proactively, and in a timely manner, to secure 350 million euros from the European Central Bank and the Bank for International Settlements for cases of urgent liquidity support to banks in the case that unforeseen circumstances arose. We are pleased that this didn’t happen, but we were also prepared for that scenario.

The fourth important lesson is that it is necessary to prepare for crisis conditions during times of stability and that reserves should then be accumulated.

What kinds of effects could inflation have on the Montenegrin economy’s macroeconomic balance and economic growth over the next two years?

– The projections and reactions of key central banks and international financial institutions indicate that inflation should slow as we approach the middle of next year, i.e., with the fading of the base effect of strong price growth. We are of the opinion that there is a significant risk of global inflation lasting sometime longer. Specifically, a continuation of the standstill in supply chains, with the consequent further growth of energy prices and their additional pressure on prices of other goods and services, would additionally contribute to the growth of inflation expectations. Likewise, we shouldn’t overlook multi-year expansive monetary policies that could impact on the long-term growth of inflation.

When it comes to energy sources, the growth of prices may have an adverse influence over economic trends in Montenegro. This relates, first and foremost, to growth in the value of imports, a worsening situation with the balance of payments and the further growth of inflation. On the other hand, Montenegro uses negligible volumes of gas, so the country will not be impacted directly by the international gas crisis.


One of the key reasons why the banking system remained stable even during the pandemic is that its high liquidity and solvency were secured in the period prior to the crisis.


The slight growth of NPLS is not a cause of concern for now, but we have intensified and are very dedicated in our efforts to monitor and analyse the situation and movements in the banking system, using all tools at our disposal


The period of the pandemic exposed the high level of dependence of the economy on the service sector, which simultaneously showed that the Montenegrin economy is highly sensitive to external shocks

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