IMF Executive Board concludes 2024 Article IV consultation with Montenegro

IMF Executive Board concludes 2024 Article IV consultation with Montenegro

May 3, 2024

Washington D.C.: The Executive Board of the International Monetary Fund (IMF) concluded the Article IV(1) consultation with Montenegro.

The Montenegrin economy grew solidly by 6 percent in 2023, as consumption remained strong, tourism revenues exceeded pre-pandemic levels, and the influx of relatively wealthy Russian and Ukrainian citizens due to Russia’s war in Ukraine also contributed to growth. The unemployment rate has fallen to a record low. Inflation has decreased significantly from its peak in 2022, helped by the flexibility of international food prices.

Growth is expected to moderate to 3.7 percent in 2024 and further reduce to around 3 percent in the medium term. Barring further shocks to international commodity prices and sizeable policy-induced increases in domestic wages, the differential between Montenegrin and euro area inflation, currently at 1.7 percentage points, is expected to , is reduced even further. The current account deficit is expected to return to historical average levels of around 13.5 percent of GDP.

The fiscal situation has improved substantially in recent years. After peaking at 107 percent of GDP in 2020, public debt fell to about 61.5 percent of GDP in 2023, driven by post-pandemic recovery and high inflation. The general government budget posted a surplus in 2023 due to strong VAT revenues, exceptional increases in non-tax revenues and lower-than-planned spending. The 2024 budget foresees a weakening of the fiscal situation, mainly due to increases in social security transfers and the decrease in one-off effects. These spending increases will be partially offset by welcome measures to increase VAT and excise duty revenues, as well as gambling fees. Under current policies, public debt is expected to rise slowly to around 66 percent of GDP by 2029, as spending growth, driven in part by social spending, is expected to outpace income growth, while that interest costs are likely to remain higher than in the past. The recent improvement in the fiscal situation could be threatened if electoral promises to significantly increase take-home pay by partially or completely eliminating pension contributions are enacted.

The banking system, in general, appears to have weathered the recent shocks well. The NPL ratio continues to fall despite the withdrawal of COVID support measures, average capital adequacy is almost double the regulatory minimum and record deposit growth has resulted in ample liquidity in the banking system. The strong growth in deposits in recent years has not been accompanied by growth in private sector credit, leading to a fall in the loan-to-deposit ratio. Bank profitability is at record levels due to a widening of net interest margins.

Executive Board Evaluation(2)

Executive directors agreed with the thrust of the staff evaluation. They welcomed the strong post-COVID economic rebound, which also contributed to a significant improvement in the fiscal situation. However, noting the prospects for slower growth and renewed fiscal pressures, they encouraged the authorities to build on these developments by effectively anchoring fiscal policy, further strengthening supervision of the financial sector and diversifying the economy, with support of the Fund’s capacity development where appropriate.

Directors noted that, under current policies, fiscal deficits are expected to reappear from 2024, with debt on a gradual upward trajectory, amid large financing needs. They agreed that credible adjustment measures will be needed to anchor debt at the 60 percent of GDP threshold in the medium and long term, in line with the Law on Budget and Fiscal Sustainability of Montenegro, thus sending a strong signal of fiscal responsibility. They agreed that maintaining a non-negative primary balance will help keep debt below 60 percent of GDP. Directors welcomed the authorities’ commitment to fiscal prudence and compliance with a debt anchor and their plans to finalize their fiscal strategy and implement a new medium-term debt management strategy in 2024.

Directors emphasized that structural fiscal reforms are essential for healthy public finances, including strengthening revenue administration, improving the targeting of social spending, containing the growth of the public wage bill, and improving oversight of state companies.

Directors noted that system-wide banking sector indicators appear healthy and stressed the importance of proactively addressing any pockets of weakness. They strongly reiterated their support for the operational independence of the central bank and encouraged the authorities to fully implement the reforms recommended in the 2021 safeguards assessment.

Directors welcomed the continued strong progress in harmonizing Montenegro’s regulatory and supervisory practices with international standards. They underlined the importance of constantly updating supervisory capabilities to address new risks, including those arising from real estate markets, banks’ exposure to foreign securities, crypto assets, digitalization and other financial technology initiatives. Directors encouraged authorities to continue strengthening the AML/CFT framework, including the development of the 2023 MONEYVAL recommendations.

Directors agreed that diversification both within and outside the tourism sector is a key priority. They noted that Montenegro’s great potential in renewable energy offers diversification opportunities. Directors also highlighted the importance of increasing women’s participation in the workforce, which can generate significant economic dividends.

The next Article IV consultation with Montenegro is expected to be held in the standard 12-month cycle.

Montenegro: selected economic indicators, 2023-2025

2023 2024 2025 Production Real GDP growth (%) 6.0 3.7 3.0 Employment Unemployment (%) 13.1 — — Prices 1/ Inflation (average, %) 8.6 4.2 2.7 Inflation (eop, %) 4.3 4.2 2.1 General government finances Revenue (% GDP) 41.8 41.0 40.5 Expenditure (% GDP) 41.1 44.2 44.0 General fiscal balance (% GDP) 0.7 -3.2 -3.5 Primary fiscal balance (% GDP) 2.6 -1.4 -1.5 General government debt (% GDP) 61.5 62.3 61.4 General government debt net of deposits (% GDP) 59.1 58.0 58.2 Money and credit Credit to the private sector (percentage change) 6.9 5.6 5.5 Non-performing loans (% of total loans) 5.0 — — Balance of payments Current account (% GDP) -11.4 -12.4 -13.5 Foreign direct investment (% GDP) 6.3 8.5 9.3 1/ Montenegro is unilaterally euroized. Sources: Ministry of Finance, Central Bank, Statistical Office of Montenegro and IMF staff estimates.

(1) Under Article IV of the IMF Articles of Agreement, the IMF holds bilateral discussions with its members, normally annually. A team of staff visits the country, collects economic and financial information and analyzes with officials the country’s economic developments and policies. Upon returning to headquarters, staff prepare a report that forms the basis for the Executive Council’s discussion.

(2) At the conclusion of the discussion, the Managing Director, as Chairman of the Board, summarizes the views of the Executive Directors, and this summary is transmitted to the country’s authorities. An explanation of the qualifiers used in the summaries can be found here: http://www.IMF.org/external/np/sec/misc/qualifiers.htm.