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PODGORICA (Montenegro), March 7 (SeeNews) - Montenegro’s economy is performing well and the financial sector is improving, but many short- and medium-term challenges need to be addressed to achieve higher levels of inclusive growth and lower levels of economic vulnerabilities, the International Monetary Fund (IMF) said on Wednesday.
The challenge going forward will be to generate and maintain the large primary surpluses required to reduce debt and fiscal and external deficits to safer levels. Fiscal institutions should be strengthened to safeguard debt sustainability and prevent short-term oriented policymaking, the IMF said.
"In 2018, the economy is projected to grow 3%, supported by private sector demand and notwithstanding some drag from the further fiscal adjustment. Average inflation is projected at 2.8%, reflecting energy price increases and tax increases as part of the fiscal adjustment," the IMF said in the concluding statement of the mission for the 2017 Article IV consultation with Montenegro.
The authorities should make the tax system more growth compatible by reducing labour taxation and relying more on other forms of taxation, notably consumption and environmental taxes. Expenditure efficiency could be raised through public administration, pension, and local government reforms while increasing productive capital spending and improving the social safety net.
"The authorities should continue their efforts to improve banking supervision and encourage more financial intermediation. Safeguarding financial stability through strong supervision is particularly important in a unilaterally euroised economy," the IMF said.
Labour market reforms are necessary to reduce the informal economy and structural unemployment. Social partners should ensure that the labour code promotes job creation and allows wages to respond to macroeconomic conditions such as productivity and inflation to improve and preserve competitiveness, the Fund noted.
Productivity growth should be supported by improving the business environment and the rule of law. State involvement in the economy should be reviewed to reduce fiscal and productivity losses, according to the IMF.
An IMF mission visited Podgorica from February 21 to March 7 to conduct the 2018 Article IV consultations.