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International Monetary Fund. European Dept.
COVID-19 hit the economy hard, but a strong recovery is underway. Public debt, already elevated before the pandemic, has increased further. The government has embarked on a reform program ‘Europe Now’, which aims to arrest outward migration through a sharp minimum wage increase, labor tax wedge reduction, and the introduction of a progressive tax code. The financial sector appears to have withstood the COVID-19 shock well.
International Monetary Fund. European Dept.

On behalf of the Montenegrin authorities, we would like to thank Mr. Seshadri and his team for their in-depth report and constructive engagement, including the in-person consultations in Podgorica last November. We would like to offer the following comments. Recent Economic Developments and Outlook After taking a severe toll in the first year of the pandemic, primarily due to the negative impact on tourism, Montenegro has been on a strong recovery path since the start of 2021 . The staff growth estimate has been revised from 7 percent last October to 12

International Monetary Fund. European Dept.
KEY ISSUES Context: Moderate growth is continuing; however credit and wage growth are weak. The level of nonperforming loans (NPLs) remains high and public debt has risen sharply in recent years. Fiscal policy: Medium-term funding needs to roll over existing debt and to fund budget deficits are large. A new highway, budgeted to cost about one quarter of GDP, will cause deficits to widen and add to public debt. The draft 2015 budget shows appropriate restraint on other spending, but a long period of strong fiscal discipline will be needed to manage fiscal risks. Laying out clear long-term plans for managing the public finances would boost credibility and reduce risks to market access. Fundamental expenditure reform, especially of the pension system and the public sector wage bill, would be an essential part of such plans. Financial sector: The banking system’s liquidity appears comfortable; however, profitability is low and lending spreads are high. Regulatory provisioning is set higher than that reported under international accounting standards, but a wide range of provisioning levels across banks and weak incentives to take losses remain concerns. A more transparent and comprehensive reporting environment would be beneficial. Reforms to ensure better enforcement of contracts and collateral would help bring down structural lending risk premia. Structural reform: Higher levels of labor participation and employment are needed to boost potential growth and safeguard the public finances. Ensuring that wages adjust in line with productivity alongside reforms to achieve better employment outcomes and boost productivity would enhance the economy’s ability to respond to macroeconomic shocks, and are even more important in a country that lacks its own currency and with decreasing fiscal buffers.
International Monetary Fund. European Dept.

observed/trend real GDP and observed/trend real revenues) Sources: Montenegrin authorities and IMF staff calculations 7. Estimations of the elasticity of expenditures to the output gap suggest that expenditure policies have been pro-cyclical in Montenegro . With the exception of certain automatic stabilizers, expenditures in most countries are generally not thought to vary automatically with the output gap, and elasticities are frequently assumed to be zero. Following the same procedure as for the revenue gap (including adjustments for one-off expenditures), 4

International Monetary Fund

Montenegrin authorities have informed the staff that they expect to resolve the issue satisfactorily, albeit with a delay owing to legal complications. They explained that the proposed legislation could not be adopted because the original law that established the legal framework for the offshore banks in 1996 included a provision precluding amendment for 15 years. The Constitutional Court has not yet decided on this issue as it awaits the opinion of the Parliament of Montenegro, which had not been in session for two months and has recently given priority to the issue of

International Monetary Fund. European Dept.

has weakened Montenegro’s economic outlook. With tourism accounting for around a fifth of the economy, Montenegro could experience the largest contraction since independence. GDP is projected to decline by nearly 9 percent in 2020 (11.7 percentage points below the pre-virus baseline), but GDP is expected to grow by 5.2 percent in 2021 and gradually converge to potential. To mitigate the impact of the pandemic on the economy, the Montenegrin authorities are implementing a package of fiscal and financial sector measures to sustain economic activity during the crisis

International Monetary Fund. European Dept.

will hit Montenegro hard, as tourism is a key industry. Fiscal space has eroded in recent years due to large public capital outlays, and the COVID-19 crisis is creating new budgetary strains as health spending and other expenditures rise, while the economic contraction lowers revenues. Request for Fund Support . The Montenegrin authorities are requesting financial support under the Rapid Financing Instrument (RFI) in the amount of SDR 60.5 million, equivalent to 100 percent of quota. These funds will be used to address the large and urgent balance of payments

International Monetary Fund. European Dept.

) Metric Target level Gross reserves Net of bank excess reserves Months of import cover 3.0 3.7 1.6 Reserves to short-term external debt (%) 100.0 295.0 124.7 Bank Deposits (%) 20.0 34.8 14.7 Sources: Montenegrin authorities and IMF staff calculations 5. The level of international reserves excluding banks’ excess reserves falls short on some metrics, but the CBM could easily raise required reserves to meet the targets . The high level of bank excess reserves held at the CBM is a symptom of the high liquidity

International Monetary Fund

January 16, 2008 The Montenegrin authorities greatly appreciate this opportunity to benefit from the Article IV consultation discussions in the Board, two days before the first anniversary of Montenegro's membership of the Fund. The authorities highly appreciate the staff's analysis and contribution to the domestic economic debate, and the resulting comprehensive set of papers. They attach great value to the close relationship with the Fund in meeting the challenges ahead. Recent developments Modest economic growth in the beginning of the decade has

International Monetary Fund. European Dept.

On behalf of the Montenegrin authorities, we would like to express our gratitude to management for the timely response and strong support to the request made by Montenegro at a challenging time. We would also like to thank the Mission Chief Srikant Seshadri and his team for the in-depth report and constructive engagement. The COVID-19 pandemic has taken a severe toll on Montenegro, a country dependent on tourism. The authorities took timely, swift and decisive action to stop the virus from spreading (by closing borders, airports and seaports, schools, and all