Staff Concluding Statement of the 2018 Article IV Mission published on March 07th, 2018 includes vital points of the visit, but also an overview of recent developments and economic outlook. Although the mission is satisfied with current efforts toward fiscal adjustment and an economy performance, there is also a concern about the further economic development of Montenegro.
Primarily, the public debt is very risky, and at this moment it’s 66 percent of GDP. Montenegro is a small country that is still going through the transition. Most of the industries are not developed, and tourism which is considered to be established industry is not reaching its potential yet. On the other side, most of the debts are not results of investments, but the results of maintaining social programs and benefits. According to the Ministry of Finance, state debt to foreign organisations and investors is 84 percent of the total public debt. And just today, Minister of Finance, Mr Darko Radunovic announced that Montenegro would borrow additional 500 million euros which will serve for implementation of projects, as well for public debt refinancing duties, budget financing and reserve creation.
With low GDP annual growth rate, of just 3 percent, it is questionable if Montenegro economy will be stable and sustainable as concluded in the IMF’s report. GDP is still under 4 billion of euros, and an annual growth rate is the lowest after Bosnia and Herzegovina according to World Bank Data. Kosovo and Albania are regional leaders when it comes to annual growth rate, but still, they are not too far ahead of their neighbours.
And it’s not surprising. All Western Balkans countries are having problems with business regulations, bureaucracy and the rule of law. Some of the IMF’s recommendations are focused on these fields. As they stated in their report, productivity growth should be supported by improving the business environment and the rule of law. In Montenegro, political turbulences are affecting business development. Constant boycotts, lack of dialogue among politicians and national intolerance could cost Montenegro a lot in the future. Instead of stimulating the private sector, Government is expanding public administration to secure social peace. Unofficially, it is believed that over 70 thousand of people are working in the public administration, which is the large number for a country of 650 thousand of citizens. Lack of expertise, informatic illiteracy and dysfunctionality of people in public administration are causing a lot of problems to the private sector and economic growth which furthermore is stimulating informal economy and corruption. To avoid this, Government of Montenegro should consider improving the business environment by enhancing the rule of law and deregulating business. It is the way to create an atmosphere which could produce new domestic private enterprises and attract a lot of foreign investments.
The tax system in Montenegro, according to International Monetary Fund mission, should be reconsidered and more compatible. The focus is on labour market reforms and other forms of taxation. It is evident that the tax system on labour is not efficiency and represent the burden for the private sector. For example, an employer needs to pay 68% of the employee’s salary to the state. For an average salary of 500 euros, an employer needs to pay 340 euros tax. That’s why many employers decide to pay a minimum wage of 200 euros (136 euros tax) and to give the rest of the money through illegally, creating on that way informal economy. That’s why a majority of employees in Montenegro are in the grey zone, and their official salary is around 200 euros. It’s evident that Government will need to focus on this question regardless of the possible losses for them. On the other hand, The IMF believes that revenue losses from reforms to labour taxation could be replaced by increased environmental taxes and lowered tax expenditures. Minister of Finance also thinks it’s a good trend and that they will tend to examine potential gains from this initiative.
But, will Government of Montenegro be ready to face all challenges and initiatives The IMF put in front of them?
It will be difficult for authorities, but also for citizens to adopt these changes if there is no improvement of the rule of law and business atmosphere. The legal system needs to be independent, more efficient and prompt. Business atmosphere involves a possibility to register your business fast, to avoid bureaucracy and unnecessary paperwork, lower labour taxes and strong laws that are protecting cooperation and exchange. It is the only way to reach economic boom at this moment, and it’s the only way to bring prosperity and progress to the country.
But maybe The Government is not ready for these steps yet?