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NewsMontenegro, the country needs structural reforms and a plan to consolidate public...

Montenegro, the country needs structural reforms and a plan to consolidate public finances

Unstable political situation, inflation and decline in investments will adversely affect the economic recovery of the country, the Center for Economic and European Studies (CEES) announced, adding that the country badly needs structural reforms and a serious plan to consolidate public finances.

“Taking into account the effects of inflation, and the decrease in the number of tourists from Ukraine and Russia, a moderate growth in tourism revenue of around five percent can be expected this year,” CEES said, adding that they estimate that the real growth of the economy in Montenegro would Gori could be around two percent.

Considering the current situation on the financial markets and the trend of interest rate growth, the big challenge, according to them, will be the borrowing that Montenegro will have to realize. “What our country desperately needs is a set of structural reforms and a serious plan for the consolidation of public finances, in order to reduce the high deficit of public finances as quickly as possible and establish a downward trend of public debt,” according to CEES.

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CEES, as reminded by its representatives, previously announced that the Government should urgently propose a package of fiscal consolidation measures of at least one to 1.5 percent of gross domestic product (GDP) per year, within the framework of a new and credible fiscal strategy, in order to contribute faster reduction of the public finance deficit, i.e. achieving a primary surplus in 2025. While economic recovery was expected after the crisis caused by the coronavirus pandemic, events on the global level, together with political instability and expansive fiscal policy in Montenegro, led to new challenges and uncertainties.

“The increase in food and energy prices due to the war in Ukraine caused strong inflation of as much as 17.5 percent in November of last year, which was further fueled by the increase in salaries, pensions and social benefits, as well as the consumption of a significant number of refugees from Ukraine and Russia,” representatives of CEES announced.

They added that last year was also characterized by an increase in interest rates, both for states and for companies and the population. In addition, numerous economic and political challenges in Montenegro have a negative impact on the perception of investors, and thus interest rates are higher. “On the stock exchange in Frankfurt, Montenegrin bonds are quoted with an interest rate of 8.2 percent, which is significantly higher than that of the last bond issue in 2020, which was 2.875 percent. We also witnessed recent borrowing at extremely high interest rates of over seven percent for the least desirable purpose – financing the deficit of current consumption,” said CEES.

They explained that the complicated political situation, characterized by institutional instability and crisis, had a negative impact on the economy and led to a 2.7 percent decrease in investment. Also, the negative balance of exports and imports increased by 29.1 percent.
“When everything is summed up, inflation has significantly reduced the effects of the achieved growth”, specified the CEES.

They added that the real growth of the economy for the first three quarters of last year was high and amounted to 7.1 percent. This growth is predominantly determined by the growth of household consumption of 11.6 percent. Government spending was 0.6 percent higher in real terms. “With the assumption of real GDP growth of two to four percent in the fourth quarter, real growth at the level of last year would be in the range of 5.8 to 6.3 percent,” CEES said.

CEES announced that the key feature of the economic policy last year was expansion, through an increase in wages, that is, personal consumption, which is significantly financed from loans. They, however, believe that a real increase in wages can only occur through an increase in productivity. “The increase in wages in Montenegro is, however, much faster than the increase in productivity, and it, like the increase in pensions and social benefits, is not based on real foundations, but is a consequence of administrative, that is, political decisions.” These increases were financed from the general revenues of the budget, because the payment of health care contributions was abolished, and the deficit of the Pension and Disability Insurance Fund (PIO) was additionally increased,” CEES added.

When it comes to living standards, they referred to inflation, stating that the average increase in net earnings during the first ten months of last year was 33 percent, but due to inflation, that increase was actually 14 percent compared to the end of 2021. “In October, the average pension was six percent higher than at the end of 2021, but high inflation devalued this increase as well, so the real increase in pensions is two percent.” Also, if we take into account the fact that unemployment is still high in Montenegro, especially among young people, then, bearing in mind the high inflation, it is difficult to talk about an increase in the standard of living of these categories of residents”, the CEES said.

The quality of life of citizens, as they claim, is influenced by other factors, which are not only related to salary. “We witnessed shortages of medicines and other resources in healthcare, investments in capital infrastructure projects were reduced, and there were big challenges in the education sector as well. Therefore, a higher salary does not mean much, if, for example, you have to pay extra from it for medicines or medical equipment that was previously provided by the state”, added CEES.

Also, as they stated, uncertainty is increasing due to the institutional crisis in the country, which is transmitted to all spheres of society and affects the quality of life. “Therefore, the increase in the standard of living depends on several factors, except for the average salary, which was increased in the last year,” they said from CEES.

Speaking about the possibility of borrowing by the state and whether they consider that move to be brave, risky or imminent, CEES answered that borrowing is inevitable, but also brave and risky. “High borrowing needs in the medium term, through planned borrowing abroad of around EUR 2.1 billion, as well as on the domestic market of around EUR 420 million, put Montenegrin finances in a very dangerous situation due to the strained external environment and strong political instability in the country “, CEES warned.

Borrowing prices for developing countries are very high, and the space for borrowing narrowed, due to the monetary policy of the European Central Bank (ECB), which seeks to reduce inflation through continuous increases in interest rates.
“An additional unfavorable circumstance is the announcement by the ECB that, in order to fight against inflation, it will place part of the sovereign debt from its portfolio accumulated during the previous period.” These measures make borrowing significantly more expensive, and the liquidity of the market also decreases,” announced CEES.

The representatives of CEES are concerned about the expansive fiscal policy led by the Government, which implies an increase in spending – salaries, pensions and social benefits, without real coverage. The above, along with the reduction of the capital budget, i.e. the reduction of investments, calls into question the somewhat optimistically projected economic growth and the income growth based on it.

“This further means difficult opportunities to reduce the huge deficit of public finances, which the government has projected in the medium term to about six percent of GDP per year or about EUR 370 million this year. Such a deficit in a country with a very limited fiscal space, such as Montenegro, and a high public debt, leads public finances to instability and unsustainability”, they said from CEES.

That is why the Government and the Assembly must urgently work on the consolidation of public finances, that is, the adoption of measures to reduce the deficit as soon as possible. “Thus, we would reduce the need for expensive borrowing to cover it”, CEES concluded.

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