May 22 (SeeNews) - Montenegro needs to improve the flexibility of its economy to sustain growth over the long run as low labour productivity and employment levels and a large informal sector limit the potential economic expansion, the International Monetary Fund (IMF) said late on Monday.
The government's plans to reform labour laws and tax wedge provide an opportunity to improve the flexibility of labour market outcomes, boost participation rates, and reduce informality, although the lack of an independent currency and limited fiscal space constrain Montenegro's ability to absorb shocks, the IMF said in the concluding statement of the mission for the 2018 Article IV consultation with Montenegro.
"Staff projects a primary surplus of 4.5% of gross domestic product (GDP) in 2020, leading general government debt (including guarantees) to fall quickly after peaking at 80 percent of GDP in 2019. The maintenance of primary surpluses after 2020 will be necessary for debt to fall rapidly, although surpluses could decline to around 3 percent of GDP," the Fund said.
Montenegro's economy is growing strongly, boosted by the implementation of large investment projects, including the construction of the Bar-Boljare highway, the IMF noted.
"Growth should continue over the medium term, albeit at a more moderate pace as highway construction ends. Staff projects the economy to expand by 3% in 2018 and 2.5% percent in 2019, with fiscal consolidation also acting as a moderate drag on growth."
While the implementation of large publicly financed infrastructure projects has added to economic growth, the accompanying use of fiscal resources has contributed to a large increase in government debt, which reached 75% of GDP in 2017. Large refinancing needs over 2019-21 have also been a source of fiscal vulnerability.
Over the medium term, the authorities should implement fiscal reforms to improve the composition of revenues and expenditures. The authorities should implement a strategy to right-size the public-sector workforce and implement a civil service reform. Central oversight over local government finances should be strengthened, and municipalities' incentives and capacity to raise their own revenues should be increased.
Tightening eligibility for early retirement should strengthen pension sustainability, and shifting pensions to wage valorisation and consumer price indexation would improve long-term fiscal and social sustainability. The IMF is of the opinion that the authorities should also review the fiscal cost of tax exemptions.
According to the IMF, taken together, these reforms would increase fiscal space over the medium term for greater high-productivity capital spending and well-targeted social spending or provide offsets for unforeseen fiscal slippages, which are a domestic risk.
It is expected that the next Article IV consultation with Montenegro will be held on the standard 12-month cycle.