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Montenegro needs fiscal adjustment, stronger banking supervision - IMF

Author Radomir Ralev
Montenegro needs fiscal adjustment, stronger banking supervision - IMF IMF Author (bnm) License: all rights reserved.

PODGORICA (Montenegro), September 10 (SeeNews) - Montenegro has enjoyed strong economic growth in recent years, boosted by the implementation of large investment projects, but the lack of an independent currency and declining fiscal space constrain the country’s ability to absorb shocks, the International Monetary Fund (IMF) said on Tuesday.

Continued fiscal adjustment, further efforts to strengthen banking sector supervision, and fiscal and structural reforms are needed to support inclusive growth over the medium term, the IMF said in the concluding statement of the mission for the 2019 Article IV consultation with Montenegro.

Staff projects the economy to expand by 3% in 2019 and 2.5% in 2020, with the end of highway construction acting as a drag on growth, the IMF said.

"The lack of an independent currency and declining fiscal space constrain Montenegro’s ability to absorb shocks, which underscores the need for an improvement in economic flexibility to sustain growth over the long run. Low labor productivity and employment levels and a large informal sector limit potential growth."

Caution is needed in implementing the next phases of the Bar-Boljare highway project until feasibility, cost-benefit analyses, and financing issues are fully addressed, the fund noted. 

The IMF welcomed the authorities’ continued implementation of Montenegro's medium-term adjustment strategy, which has improved the underlying fiscal position over the last two years. Amid high debt levels, the maintenance of a strong primary fiscal surplus over the medium term is necessary for government debt to decline to safer levels.

The fund also called for further efforts to improve the efficiency of public spending, including by carefully managing infrastructure investment, rationalising government employment and tax expenditures and furthering pension reforms. In this context, the IMF encouraged the authorities to move forward with their plans to develop medium-term budgetary and public investment management frameworks. 

The country has strengthened banking supervision, including the establishment of a Supervisory Committee, recent refinements in asset classification rules and ongoing efforts to bolster the capacities and resources in off-site supervision, but the country needs to further risk-based supervision, introduce macroprudential measures when warranted, harmonise banking laws with the EU Directives, and complete the planned asset quality review by the end of 2020. 

The IMF said in April it expects Montenegro’s economy to expand by a real 2.8% in 2019, increasing its forecast for 2.5% growth projected in October last year. Montenegro's GDP is expected to grow 2.5% in 2020 and 2.9% in 2021, the IMF said in its April 2019 World Economic Outlook report.