Press Release No. 24/138

IMF Executive Board Concludes 2024 Article IV Consultation with Montenegro

May 3, 2024

Washington, DC: The Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation[1] with Montenegro.

The Montenegrin economy grew robustly by 6 percent in 2023 as consumption remained strong, tourism revenues exceeded pre-pandemic levels, and the influx of relatively affluent Russian and Ukrainian nationals due to Russia’s war in Ukraine also contributed to growth. The unemployment rate has fallen to an all-time low. Inflation has come down significantly from its peak in 2022, aided by easing international food prices.

Growth is expected to moderate to 3.7 percent in 2024 and ease further to about 3 percent over the medium term. Barring fresh shocks to international commodity prices and sizable policy induced domestic wage increases, the differential between the Montenegrin and the Euro Area inflation, currently at 1.7 percentage points, is expected to narrow further. The current account deficit is expected to return to historical average levels of about 13.5 percent of GDP.

The fiscal position has improved substantially in recent years. After peaking at 107 percent of GDP in 2020, public debt fell to an estimated 61.5 percent of GDP in 2023, driven by the post-pandemic recovery and high inflation. The general government budget recorded a surplus in 2023 due to strong VAT revenues, one-off increases in nontax revenues, and lower than planned spending. The 2024 budget envisages a weakening in the fiscal position, mostly due to increases in social security transfers and waning of the one-off effects. These spending increases will be partially offset by welcome measures to increase VAT and excise revenues, as well as fees from games of chance. Under current policies, public debt is projected to slowly increase to about 66 percent of GDP by 2029 as expenditure growth, driven by in part by social spending, is expected to exceed the growth of revenues, while interest costs are likely to remain higher than in the past. The recent improvement in the fiscal position could be jeopardized if electoral promises to significantly increase net wages by partially or fully eliminating pension contributions were to be enacted.

The banking system, overall, 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 nearly twice the regulatory minimum, and record-high deposit growth has resulted in ample liquidity in the banking system. The strong growth in deposits over the past years has not been matched by private sector credit growth, causing the loan-to-deposit ratio to fall. Bank profitability is at record levels because of a widening in net interest margins.

Executive Board Assessment[2]

Executive Directors agreed with the thrust of the staff appraisal. They welcomed the strong post COVID economic rebound, which also contributed to a significant improvement in the fiscal position. However, noting the outlook for slower growth and renewed fiscal pressures, they encouraged the authorities to build on these gains by effectively anchoring fiscal policy, further strengthening financial sector supervision, and diversifying the economy, supported by Fund capacity development where appropriate.

Directors noted that under current policies fiscal deficits are projected to re emerge from 2024 onward, with debt on a gradual upward path, amidst large financing needs. They concurred that credible adjustment measures will be needed to anchor debt to the 60 percent of GDP threshold in the medium to long run, in line with Montenegro’s Law on Budget and Fiscal Sustainability, 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 adherence to a debt anchor and their plans to finalize their Fiscal Strategy and implement a new medium term debt management strategy in 2024.

Directors stressed 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 the oversight of SOEs.

Directors noted that systemwide banking sector indicators appear healthy and underscored 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 by the 2021 safeguards assessment.

Directors welcomed the continued strong progress in aligning Montenegrin regulation and supervision practices with international standards. They underscored the importance of constantly updating supervision capacities to address new risks including those stemming from housing markets, banks’ exposures to foreign securities, crypto assets, digitalization and other fintech initiatives.  Directors encouraged the authorities to continue strengthening the AML/CFT framework, including building on the 2023 MONEYVAL recommendations.

Directors agreed that diversification both within and away from the tourism sector is a key priority. They noted that Montenegro’s strong potential in renewable energy affords opportunities for diversification. Directors also stressed the importance of increasing the labor force participation of women, which can yield significant economic dividends.

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

[1] Under Article IV of the IMF's Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. A staff team visits the country, collects economic and financial information, and discusses with officials the country's economic developments and policies. On return to headquarters, the staff prepares a report, which forms the basis for discussion by the Executive Board.

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