Montenegro is an upper-middle-income country with enormous growth potential. Montenegro has been engaged in activities with the World Bank Group (WBG) since 2001 and became a member in 2007. While Montenegro’s economy has huge potential, it is hindered by significant structural, economic, and fiscal risks. The global economic crisis exposed some pre-existing fissures in the foundation of Montenegro’s economy and the combination of a series of economic developments has caused a deeper recession in the country than previously anticipated.
Montenegro’s use of the Euro has helped shield the country from the worst effects of the 2008 financial crisis. Using the Euro as the sole currency has also required policymakers to adopt sound fiscal policies and a legal and institutional framework that encourages private sector activities, while simultaneously addressing the root causes of fiscal imbalances and macroeconomic misalignments in the country.
Annual growth in the period leading up to the global financial crisis averaged almost 9% from 2006-08. However, the combined impact of reduced access to credit and loss of export markets, together with eroding confidence and escalating labor conflicts, led to a severe recession in 2009 - with the output contraction of 5.7%. Following this decline, economic growth in the country averaged 2.9% between 2010-11 before slowing significantly in 2012 - due to the sluggish credit activity, adverse weather conditions that reduced energy production, the bankruptcy of a major steel mill company, and the production decline at a loss-making aluminum plant. In 2013, the economy returned to robust growth, recovering the output lost since 2008. Inflation declined to 2.2% in 2013 - down from 4.1% in 2012 - reflecting the dissipating effect of food and oil prices. Growth is expected to rise to around 3.2% from 2014-2016, supported by Foreign Direct Investment in tourism and energy, as well as public investments.
As part of the country’s European integration efforts, Montenegro opened formal membership negotiations with the European Commission (EC) in 2011. Montenegro was also granted membership status into the World Trade Organization (WTO) in 2011. In June 2012 the country began accession talks with the European Union (EU).
Although Montenegro did not join the World Bank Group (WBG) until 2007, a program of lending and analytical work began soon after the State Union of Serbia and Montenegro joined the WBG in 2001. The Bank’s engagement during the pre-independence period was focused on supporting Montenegro’s efforts to build a market economy and re-establish growth after a period of regional conflict and intense instability, through Analytical and Advisory services (AAA) and new investments - especially in energy and water.
In mid-2007, the WBG and the government of Montenegro developed the country’s first post-independence Country Partnership Strategy (CPS) covering FY07–FY10. In January 2011, the Board approved a $216 million CPS for FY11–14. This current CPS is client-driven, and reflects Montenegro’s status as an upper-middle-income client with well-defined development priorities. This CPS focuses on two strategic priorities:
i) strengthening institutions and competitiveness in line with EU accession requirements
ii) improving environmental management, including reducing the costs of environmental problems
During the period of this CPS, many accomplishments have been made. The country’s business investment climate has been greatly enhanced - with the average time to issue a construction permit decreasing from six months to two months and average registration diminishing from 25 days to 9. With Bank support, Montenegro completed its first agricultural census in 40 years, underpinning further development of the national rural development program. Grants were given to 650 farmers, 60% of whom live in the poorer, northern region of the country, received grants that help them enhance their agricultural production. 14 public sector buildings were retrofitted to improve their energy efficiency, resulting so far in a 50-60% reduction of energy consumption, related operating costs, and improved working and service conditions in public facilities in the education and healthcare sectors.
Analytical and advisory services further contributed to program implementation and policy dialogue. The Country Economic Memorandum outlined possible development strategies as the country embarked on the next stage of the EU integration process. The Labor Market Incentives TA is helping the authorities to identify the main constraints to jobs creation and employment growth and developing policies to remove constraints. The Public Expenditure and Institutional Review provided policy recommendations to underpin a strategy to contain public expenditure growth and increase the “value for money” in public administration. As a complement, the Public Expenditure and Financial Accountability Assessment provided an evaluation of Montenegro’s PFM systems and helped identify reform priorities to further strengthen financial management as a part of the pre-accession process. The Bank’s Vienna-based Financial Sector Advisory Centre (FinSAC) continues to support the banking sector by strengthening the Central Bank’s steering powers and capabilities to assist with commercial banks’ NPL portfolio resolution strategies. Cutting across sectors, the Gender Assessment provided an overview of gender issues in Montenegro.
Overall, over the last 10 years the World Bank has helped improve people's lives in Montenegro by financing 12 projects in the total amount of about $277.86 million.
Additionally, the International Finance Corporation (IFC) has worked with Montenegro since 2007. The IFC’s current portfolio in Montenegro stands at $43.1 million and focuses on increasing access to finance by supporting the development of local financial institutions, particularly ones that lend to small and medium enterprises (SMEs). The IFC’s advisory services in Montenegro aim to improve the investment climate and the performance of private sector companies, and to attract private sector participation in the development of infrastructure projects.
The World Bank Group has worked with Montenegro for more than 10 years, helping the country on its path toward further European integration. Priority areas for this partnership include education, energy, land administration and agriculture.
Some of Montenegro’s development results include:
Education: In recent years Montenegro has made education a development priority, investing steadily in primary education – including on upgraded infrastructure, new equipment, revised textbooks, and teacher training. From 2006-10 the Government of Montenegro spent an average of 4.5% of Gross Domestic Product (GDP) on public education and succeeded in enrolling almost all (non-Roma) children in primary education. In addition, the enrollment rate for secondary education, at 87.6%, is close to the average for the Organization for Economic Cooperation and Development (OECD). The school reform process is geared towards ensuring improved quality in learning and academic outcomes for students, starting with elementary schools. Despite these improvements, the higher education system in Montenegro continues to face funding and institutional constraints. As part of the Government’s effort to address these issues Montenegro is currently implementing the Higher Education Research for Innovation and Competitiveness Project (HERIC) – directed at strengthening the quality and relevance of higher education and research in the country by reforming the higher education finance and quality assurance systems and strengthening research and development capabilities.
Energy: In the early 2000s, Montenegro – much like many of its neighbors – faced growing regional and domestic constraints on energy capacity. Montenegro was importing 33% of its electricity and was facing the increasing possibility of power interruptions. A 2005 report noted that energy consumption in Serbia and Montenegro was twice as high as in Europe. In response to this situation the country began prioritizing investments in new capacity and transmission infrastructure, as well as reforming its domestic energy sector. Two projects which were developed as part of this response are the Montenegro Energy Efficiency Project (MEEP) - which aims to improve energy efficiency in targeted public buildings and demonstrate a basis for the development of a national sustainable energy-efficiency improvement program - and the recently closed Energy Community of Southeast Europe Adaptable Program Loan 3 (ECSEE APL 3) - which aimed at improving the efficiency and reliability of the national power system through better supply security and closer integration into regional markets.
Agriculture and Rural Development: The agriculture sector is of particular importance in Montenegro, accounting for 10% of country’s GDP and five percent of its exports. Furthermore, more than 50% of the poorest households in Montenegro live in rural areas and 70% of rural incomes in in the country are derived from agriculture. Despite having abundant water resources, significant agricultural land, a favorable climate, and a strong demand for agricultural products, Montenegro faces structural and institutional challenges that undermine further growth in the sector. Moreover, the quality and productivity of farming in Montenegro is undermined by limited capital, outdated technology, weak supply chains, underdeveloped standards in agriculture and food security, and inadequate extension services. The World Bank Group continues to support Montenegro in improving its capacity to deliver, manage, and monitor agriculture assistance. The Montenegro Institutional Development and Agricultural Strengthening (MIDAS) project - which is designed to improve the delivery of government assistance for sustainable agriculture and rural development in a manner consistent with the European Union’s (EU’s) pre-accession requirements - is part of this support.
Montenegro: Commitments by Fiscal Year (in millions of dollars)*
*Amounts include IBRD and IDA commitments