September 15 (SeeNews) - Montenegro’s economy continues to grow at a moderate pace, and growth should continue over the medium term, but large refinancing needs in coming years are a source of fiscal vulnerability, the International Monetary Fund (IMF) has said
"Staff projects the economy to expand by 3% in 2017 and 2.8% in 2018, with planned fiscal consolidation acting as a moderate drag on growth," the IMF said in the concluding statement of the mission for the 2017 Article IV consultation with Montenegro.
While the economic outlook is positive, risks stemming from the large increase in public debt and external financing needs raise concerns about fiscal sustainability and external stability. Against this background, the IMF stressed the importance of continued fiscal adjustment to reduce debt and meet refinancing needs, sustained efforts to strengthen the financial sector and fiscal and structural reforms to support higher and more inclusive growth.
The IMF welcomed the authorities’ well‑specified, medium‑term fiscal adjustment plan, which includes social protection measures for the most vulnerable. They concurred that, if fully implemented, the plan would place government debt on a strong downward path.
"Given the size of the intended adjustment, Directors saw merit in communicating the need and reasons for adjustment clearly to the public. They also saw scope for a further reduction in government expenditures over the medium term, including through civil service and pension reforms," the IMF said.
Directors also agreed that there is no fiscal space to finance subsequent phases of the Bar-Boljare highway project with debt, and encouraged the government to explore other financing options. While the implementation of large publicly financed infrastructure projects will add to economic growth, the accompanying use of fiscal resources has contributed to a large increase in government debt, which hit 78% of GDP in 2016, the IMF said.
Although declining, non‑performing loans (NPLs) continue to be high, and profitability remains weak. The authorities should seek further reductions in the stock of NPLs while strengthening the supervisory and regulatory frameworks, according to the IMF.
"Directors welcomed the authorities’ intentions to undertake asset quality reviews. Noting that the system may be overbanked, they saw merit in possible efforts to promote consolidation. Directors encouraged the authorities to explore options to improve emergency liquidity assistance and welcomed their intention to expand supervision to cover the non‑bank financial system," the IMF noted.
The IMF underscored the importance of structural reforms to boost competitiveness, productivity, and private sector investment to sustain economic growth over the longer term. It encouraged the authorities to use the new labour law under discussion to improve labour market flexibility, facilitate job creation, and reduce the informal economy.
The IMF also said it supported shifting taxation from social contributions to increased coal excises to promote greater levels of formal employment, reduce energy subsidies, and decrease local pollution. Accelerating privatisation of the remaining state‑owned enterprises was also encouraged.
The executive board of the IMF concluded the Article IV consultation with Montenegro on September 8.