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NewsWorld Bank report: Reduce public spending and solve political uncertainty

World Bank report: Reduce public spending and solve political uncertainty

Montenegro needs to reduce public spending, public finance deficit and public debt, while the main economic challenge is political uncertainty, according to the economic report of the World Bank (WB).

In the report presented today by the head of the SB office for Bosnia and Herzegovina (BiH) and Montenegro, Christopher Sheldon and the senior economist of the World Bank, Mark Schiffbauer, it is stated that last year Montenegro had the highest economic growth rate in the Western Balkans at 13 percent, thanks to the post-pandemic recovery of tourism and services.

For this year, growth is predicted to slow down to 6.3 percent, which would also be the highest growth in the region, Vijesti report. The SB stated that the labor activity rate increased to a record 58.9 percent, while the unemployment rate decreased to a historic minimum of 14.7 percent.

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Newly granted loans last year grew by 31.5 percent, while the capital adequacy and liquidity ratios were well above the legal minimums. It was also stated that liquidity is extremely high and that liquid assets in relation to assets amounted to 30.7 percent.

Last year, there was an increase in the current account deficit due to the increase in import prices. The growth of exports of goods and services increased by 44 percent compared to 2021, while the growth of imports increased by 43 percent.

The collection of value added tax (VAT) increased by 31 percent due to the growth of consumption and prices, while the state income from excise taxes remained at the same level even though the government reduced the amount of excise taxes on fuel. Revenues from contributions and income tax have been reduced as part of the Government’s tax reform, which abolished health insurance contributions and introduced a tax-free portion of earnings.

Consumption has increased due to the growth of social benefits, wages and pensions, as well as the payment of debts of the Health Fund from previous years. Although there are strong political pressures to increase consumption, the fiscal space is limited, and new obligations on the consumption side should be in line with the need to reduce the deficit and debt. The adopted increase in excise duty on tobacco and the expanded scope of excise taxation of sugar products are welcome not only in terms of achieving higher revenues, but also achieving better health and social results – the report states.

The public debt of Montenegro decreased from 84 percent of gross domestic product (GDP) in 2021 to 70.8 percent at the end of last year due to higher nominal GDP, negative net borrowing and the fact that most of the financial needs last year were met from deposit.

Sheldon said that in 2025, Montenegro will contribute a large installment of the old debt and that until then it should work on reducing public spending and the deficit, which last year was 5.2 percent.
The World Bank stated that last year the 42nd and 43rd governments were voted no-confidence, which caused political and institutional stagnation.

The complexity and fragility of the political landscape complicates uncertainty, slows down the reform process and not only diverts the focus from the immediate economic challenges but also intensifies them. Considering the high sensitivity of Montenegro to external shocks, and especially in a very uncertain external environment, which is subject to many negative risks, Montenegro must strengthen its mechanism of internal stability – the report states.

Montenegro, it is added, must fully resolve its political and institutional crisis, conduct a prudent fiscal policy and implement structural reforms for more resilient growth.

The World Bank predicts that inflation will amount to 7.9 percent this year and that it will fall to four percent in the next year. An important external risk is the increase in borrowing costs, especially if the fiscal goals are not strengthened by fiscal prudence.

“Therefore, it is crucial that the Government demonstrates its commitment to the path of debt reduction. Political instability and complexity are the main domestic risks. The seriousness of the challenges, however, requires strong political commitment and actions to mitigate these risks,” the report states.

 

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