Vladimir Kavarić, Minister of Economy of Montenegro

By combining macroeconomic policy measures, structural reforms and the removal of barriers to the entry of investments, Montenegro has laid the foundations for strong and continuous economic growth, as confirmed by many international reference indicators and forecasts, says Vladimir Kavarić, Economy Minister of Montenegro.

The IMF reduced its GDP growth estimate for Montenegro for last year (2%), but increased the expected growth rate for this year (4.6%) above your own initial expectations, while analysts at the Vienna Institute for Comparative Economic Studies estimate growth at 2.3%. Given the results in the first half of the year, what can be considered realistic in your opinion?

– Projections for the economic growth of Montenegro in 2015 and the coming medium term are largely based on the inflow of foreign direct investment and infrastructure projects. According to the government’s conservative estimate, more than €400 million is expected to be invested in the sectors of tourism, transport, industry and agriculture in 2015, in order to reach projected economic growth of 3.5%.

All projects that are taken into account in the design of economic growth for 2015 are implemented according to the planned schedule. Likewise, other indicators in the real sector, such as employment and earnings, show that real GDP growth in the first quarter of 2015 could be between 3.2 to 3.5 per cent, which is in line with annual growth projections.

The European Commission has also improved its forecast for Montenegro in this respect, projecting real economic growth of 3.3% for this year, while the IMF, as you pointed out, gave a more optimistic prognosis, but it was in part also based on the assumption of an earlier start to construction of the first section of the Bar-Boljare motorway.

How satisfied are you with the pace of implementation of large projects that were prepared during the last year?

– The pace of implementation of planned projects in key development areas of the Montenegrin economy in the first half of this year is satisfactory. For the beginning of construction of the first section of the Bar-Boljare motorway, €206 million allocated from the budget for 2015, while for the start of the connecting of the power systems of Montenegro and Italy via submarine cable we have this year set aside €20 million – of the total of €105 million that the Electric Transmission System of Montenegro is obliged to contribute. Moreover, a project has also be initiated to build wind farms on Krnovo, and work has started on another small hydropower plant.

Thanks to its openness and high degree of economic freedom, Montenegro has for years been among the top countries in Europe in terms of FDI in relation to population

Preconditions have been created for the construction of Block II at the Pljevlja power plant, a project worth over €300 million. Activities have continued related to oil and gas exploration. We should add to this investment in tourism, such as Luštica Bay, Porto Montenegro, Kumbor-Porton, Qatari Diar at Plavi Horizont, the initial investment in the construction of ski resorts in the north, etc., as well as investments in agriculture.

In previous years Montenegro has been able to count on foreign investments of just under €500 million a year. What are your expectations for this year?

– Thanks to its openness and a high degree of economic freedom, Montenegro has for years been among the top countries in Europe in terms of FDI in relation to population. Their average share of GDP over the past decade was about 19%, which is more than in all neighbouring countries. If the trend continues from the first quarter of 2015, when net FDI amounted to €86 million, or 9.3% more than in the same period of the previous year, then it can be expected that the net inflow of FDI in 2015 will be at least 11-12% of GDP. This is supported by the fact that we continued to preserve a business environment that’s attractive for investments, here I primarily mean in terms of the tax environment.

How much has Montenegro’s progress in EU integration and the expected accession to NATO contributed to increasing the interest of investors in Montenegro?

– Montenegro opened EU accession negotiations in June 2012. We are already negotiating on 20 chapters, two of which have been closed temporarily. By the end of the year, we expect an invitation for NATO membership.

European and Euro-Atlantic integration contribute significantly to further increase the competitiveness of the economy and the attractiveness of Montenegro as an investment destination. Moreover, increasing the interest of investors has contributed to the constant improvement of the business environment when it comes to attracting investment, which has been recognised by relevant international institutions. Thus, Montenegro further improved its position on the World Bank’s “Doing Business” list by eight places, from 44th to 36th.

Improvements have also been recognised on other reference lists measuring economic freedom: Heritage Foundation, from 68th to 66th position, and the Fraser Institute, from 49th to 38th position, and according to the World Economic Forum’s global competitiveness indicator our position improved from 72nd to 67th among a total of 148 countries. All this has resulted, among other things, in increased interest in investing in Montenegro.

The Programme of economic reforms for Montenegro from 2015 to 2017 has devised a plan for conducting reforms and boosting economic development in the period ahead. What measures would you single out as the most important for promoting economic growth?

– The economic reform programme 2015-2017, within the framework of economic governance of the state, in addition to fiscal policy as the main instrument of economic policy and structural reforms with a macro-fiscal influence, places the emphasis on sector-based and structural reforms with the aim of removing obstacles to economic growth and development and, consequently, increasing competitiveness.

The programme envisages real economic growth of 3.5% in 2015, 3.8% in 2016 and four per cent in 2017. With the aim of achieving the projected economic growth, the most important structural reform measures with macro fiscal impact are those in the areas of the manufacturing market and the business environment, financial stability, education, labour markets and public finances.

In order to accelerate Montenegro’s economic growth in the medium term, it is necessary to achieve systematic expansion of the economy’s production and export base

In addition to this, other important measures for the further growth of the economy are those at the sectoral level in the fields of physical capital, such as construction of the first section of the Bar-Boljare motorway, improving other transport, energy and utility infrastructure, human capital through reforms in the education system and its harmonisation with labour market needs, improving industrial structures, advancing the business environment and trade integration…

How much has the impact of the financial crisis and the long recession in Europe changed the profile of foreign investors in Montenegro?

– The impact of the global and European economic crisis, which has lasted for six years, and the slowing of economic growth in Europe, caused an increased level of investor caution when it comes to making new decisions about the placement of capital, especially in countries outside the EU. Montenegro is characterised by investments from over a hundred countries, and in the last few years, there has been an increasing share of FDI from EU countries and Switzerland in total FDI inflows, while we have a slight reduction in inflows on this basis from the Russian Federation. Furthermore, Montenegro is also characterised by FDI from other countries, such as the U.S., Turkey, UAE and so on, but their share is still relatively low.

Earlier this year you announced special incentives for investors, in addition to the already existing favourable tax treatment. What kinds of incentives does this relate to specifically?

– In addition to the existing favourable tax and business environment, the Montenegrin government has also adopted the Regulation on stimulating direct investments, with which we have secured additional incentives in the form of subsidies for newly created jobs. The Regulation stipulates that the investor may, depending on the satisfying of criteria, gain a financial incentive in the amount of 3,000 to 10,000 euros, on condition that they invest at least €500,000 and create at least 20 new jobs over a period of three years, or in the period considered as the investment period.

We expect that, through the criteria defined for receiving funds, we will attract investors whose investment projects will impact on the productivity of suppliers and other business entities from Montenegro who operate in the same sector of industry, then influencing the sustainability of the investment project, as well as the effects of investment projects related to research and development. In addition to this, investors who realise the effects of investment projects on human resources, evaluations of environmental impact, the volume of international trade exchange, and the effects of investment projects on the development of less developed local government units, can expect financial incentives in accordance with the regulation.

What are the projects in the energy sector which have been announced can be considered operational this year?

– Late last year and earlier this year saw the completion of the construction of seven small hydropower plants, with usage permits issued for four of these small hydro plants. This year also sees the start of construction works for wind farms in Krnovo and Možura. There is also the aforementioned project linking Montenegro and Italy via an underwater cable, for which more than 140 kilometres of the cable has already been laid from the Italian side.

Considering the structure of the Montenegrin economy, how feasible is further economic diversification and which sectors would you single out as possible new carriers of economic growth?

– In order to accelerate Montenegro’s economic growth in the medium term, it is necessary to achieve systematic expansion of the economy’s production and export base. Exports of goods, especially if we exclude metals, has a very small share of the country’s GDP and is significantly lower than in many developed small countries.

Montenegro further improved its position on the World Bank’s “Doing Business” list by eight places, while improvements have also been recognised on other reference lists measuring economic freedom: Heritage Foundation, Fraser Institute and the World Economic Forum

In this sense, our country has a great need for the product diversification of the economy, in order for us to reduce the rather high current account deficit, which accounts for around 15% of GDP. We have significant room for diversification of export-oriented production in the food industry and energy. When it comes to participation of services in export, the greatest significance for its increase, naturally, is in the further development of tourism.

In your opinion, what is the optimal model for investing in Montenegro’s business zones?

– Business zones are a project designed to attract investment, by offering investors land partially or fully equipped in terms of infrastructure and a range of incentives at the state and local level, alongside all other measures we have taken to ensure an attractive environment for investment.