The International Monetary Fund (IMF) believes that the rush to complete the highway from Bar to Boljari will endanger state finances, that is, fiscal sustainability, and that completing the highway through new loans would require new fiscal adjustment measures.
Work on the first section of the highway from Smokovac to Matesevo, which was due to be completed in May this year, was extended until October next year. The first stock will cost the state about 900 million without interest and exchange differences between dollars and euros. Since public debt has increased significantly due to the construction of the first section, the government has been forced to initiate fiscal adjustment measures, including wage cuts, higher excise duties and VA. The IMF estimates public debt at 88 percent of GDP at the end of 2019.
"The rush to complete the highway is likely to jeopardize fiscal sustainability. Completion of other stocks could cost an additional 25 percent of GDP. If the government decides to complete the highway between 2021 and 2026 through new loans, government debt (including guarantees) will remain above 80 percent of GDP in 2020. Without new debt, public debt could be reduced to 50 percent of GDP by 2030," the IMF estimates.
As they explain, in the case of a new loan, the return of debt to its initial level in 2030 would require a new round of fiscal adjustment of about three percentage points of GDP between 2021 and 2023. GDP is now 4.8 billion euros, so an annual "fiscal adjustment" would mean that about 140 million euros should be provided through savings or taxes.
"Completing and maintaining a new fiscal adjustment of this size would be difficult," the IMF said.
The IMF believes that further planning of the highway should be paused until a credible feasibility study is conducted that should assess the economic return relative to the construction of another section. The IMF recalls that the Montenegrin government has commissioned a new feasibility study, due to be completed next year.
“If it decides to continue the highway work, we advise the Government not to undertake further construction or financing until at least 2023 when public debt should drop, estimated at below 60 percent of GDP. The construction of the second section is likely to be cheaper (by about 300 million euros) and will provide further benefits in connection with the north and tourist areas," the IMF said.
The IMF mission advised the authorities to carefully weigh the benefits of the highway Bar-Boljare project over the alternative use of scarce public resources.
"As the first section of total four is due to be completed by 2020, authorities are weighing options to build a second section. Past feasibility studies, completed several years ago, have estimated the low economic return of the entire highway, based on the limited potential of toll revenue in relation to costs, ”the IMF said.
This organization also points out that continuing to build a highway using the Private-Public Partnership (PPP) model could also entail significant fiscal costs.
“The government wants to investigate the PPP structure to complete the highway and avoid new loans. If a feasibility study suggests that the rest of the project is unlikely to meet the required rate of return on the private partner, it is likely to seek guarantees from the state.
The assumption of certain risks - including construction, availability and demand risks - under Eurostat rules requires that the project is recognized in the country's balance sheet, thereby achieving equal effect, as well as financing the project by a loan from the government. The need to pay the minimum guaranteed budget revenue could also impose significant expenditures due to a long concession contract, ”the IMF estimates.
Without fiscal sustainability, there is no construction of another stock
The IMF mission states that the Government has informed them that it will prudently proceed with further construction of the highway and that, by the time of the new feasibility study in 2020, it will analyze models for the construction of the second section.
"Authorities state that completing the first section is their top priority and will not start the second section if its solutions are fiscally unsustainable," the IMF said.
Text by Marija Mirjacic, on September 17th, 2019, read more at Vijesti