Montenegro's fiscal gains at risk over wage hike plans - IMF

"The general government budget recorded a surplus in 2023 due to strong VAT revenues, one-off increases in nontax revenues, and lower than planned spending. The 2024 budget envisages a weakening in the fiscal position, mostly due to increases in social security transfers and waning of the one-off effects. These spending increases will be partially offset by welcome measures to increase VAT and excise revenues, as well as fees from games of chance," the IMF's executive board said in a statement earlier this month after concluding Article IV consultations with Montenegro.

While welcoming Montenegro's strong post-pandemic economic rebound and the subsequent improvement in its fiscal position, the IMF encouraged the local authorities to build on these gains by effectively anchoring fiscal policy, further strengthening financial sector supervision, and diversifying the economy, the statement read.

"Directors noted that under current policies fiscal deficits are projected to re emerge from 2024 onward, with debt on a gradual upward path, amidst large financing needs. They concurred that credible adjustment measures will be needed to anchor debt to the 60 percent of GDP threshold in the medium to long run, in line with Montenegro’s Law on Budget and Fiscal Sustainability, thus sending a strong signal of fiscal responsibility," the IMF noted.

Montenegro's current government led by Milojko Spajic took office in October 2023, after his Europe Now party won the parliamentary elections in June 2023 by a slim margin. One of the electoral promises of Europe Now was a 25% increase of net wages in the public and private sectors.

Earlier this week, local media citied Spaijc as saying that the average wage will reach 1,000 euro ($1,073) by the end of 2024. For comparison, the average net monthly wage in Montenegro amounted to 825 euro in March, with the gross average wage totalling 1,032 euro for the month, according to latest available statistics office data.

In late April, local media reported that the planned pension reform won't remove pension contributions or shut down the state pension fund PIO. Instead, it aims to transform PIO into a more effective institution.

In its Article IV consultations conclusions, the IMF also noted that after peaking at 107% of the gross domestic product (GDP) in 2020, Montenegro's public debt fell to 61.5% of GDP in 2023 thanks the post-pandemic recovery and high inflation.

"Under current policies, public debt is projected to slowly increase to about 66 percent of GDP by 2029 as expenditure growth, driven in part by social spending, is expected to exceed the growth of revenues, while interest costs are likely to remain higher than in the past," the IMF said.

The Fund affirmed its previous projection on Montenegro's 3.7% economic growth for 2024, noting growth will further ease to 3% over the medium term, from the robust 6% recorded in 2023 on the back of strong consumption, tourism revenues exceeding pre-pandemic levels. It added that the influx of relatively affluent Russian and Ukrainian nationals due to Russia’s war in Ukraine also contributed to last year's growth.

"Barring fresh shocks to international commodity prices and sizable policy induced domestic wage increases, the differential between the Montenegrin and the Euro Area inflation, currently at 1.7 percentage points, is expected to narrow further. The current account deficit is expected to return to historical average levels of about 13.5 percent of GDP," the report said. It noted that the current unemployment rate has fallen to an all-time low, while inflation has come down significantly from its peak in 2022, aided by easing international food prices.

Selected economic indicators for Montenegro, as given by the IMF:

0.7

61.5

59.1

-11.4

6.3

($ = 0.932)