March 1 (SeeNews) - The International Monetary Fund (IMF) on Wednesday downgraded Montenegro's economic growth forecast for this year to 3.25% from 3.6%, as the high cost of Bar-Boljare motorway construction project will expose the country's economy to risks.
"Growth would be driven by investment and to a smaller extent by private consumption, with an expected negative contribution from the external sector. The current account deficit is projected to increase due to the import needs related to capital investments. Credit to the private sector is expected to increase by 5% and inflation is projected to increase by slightly less than 2% on average," the IMF said in a statement following the completion of a staff visit to Montenegro.
Real economic growth in 2016 is estimated at a lower-than-expected 2.4%, partly due to a delay in the highway project, which is projected to increase 2023 GDP by about 150 million euro. The external current account deficit increased to 19% in 2016, partly reflecting machinery imports for the highway, tourism and energy projects, the IMF said.
General government debt is projected to increase to 82% of GDP by 2019, but non-highway capital spending over the next five years may only amount to around 3.5 percent of GDP annually. Large projected government refinancing needs for maturing debt will require some recourse to external markets and will expose Montenegro to more volatile international financial markets, the fund added.
The overall budget deficit in 2017 is projected to grow to 7.5% of GDP, mainly on account of highway spending, which is expected to more than double to 6% of GDP. General government debt will likely end this year at 75% of GDP and the authorities are committed to a medium-term fiscal consolidation plan that would put debt firmly on a downward path after the highway is finished in 2019, the IMF noted.
The IMF recommends a primary surplus target of 4.5% of GDP for 2020, capital spending of 0.5% of GDP and well-targeted social spending of 0.25% of GDP to support growth and soften the impact of adjustment on the most vulnerable parts of the population. The mission estimates that fiscal adjustment measures of 2.75% percent of GDP would be needed to reach the target, the fund noted.
Therefore, the IMF recommends a list of fiscal adjustment measures, such as an introduction of an excise on coal and increase of cigarettes, alcohol, fuel products, and sugary drinks excises, while tariffs for water and waste disposal should also be raised. The lower VAT rate, in turn, could be moved to half of the regular rate, and the VAT for hotel services and marina services could be moved to the regular rate. The mission also recommends raising the higher rate on personal income tax to 13% and extending it through 2022 to ensure a fair contribution to the adjustment by those with higher incomes, as during the financial crisis.
At the same time, the social protection system should be changed to better target the vulnerable parts of the population, while pension costs could be reduced in a fair manner in the short term by including pensions in the taxable base for the personal income tax, which would only affect high earners. The mission concurs with the World Bank’s recommendation to increase the early retirement decrement, abolish eligibility for retirement with 40 years of service, reduce the early retirement period to two years, and make accelerated pensions contributions actuarially fair, the IMF said.
Based on the preliminary findings of this mission, staff will prepare a report that, subject to management approval, will be presented to the IMF Executive Board for discussion and decision.