Montenegro: 2014 Article IV Consultation—Staff Report
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Summary:
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.
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