Overview

Strategy

The overarching objective of the World Bank Group’s (WBG) new Country Partnership Frame-work covering the period FY16–20 is to support Montenegro on the path of more sustainable and inclusive growth.

The new framework will selectively support Mon-tenegro’s development agenda, with a particular focus on creating employment and economic opportunities and restoring fiscal balance in order to accelerate long-term inclusive growth. Montenegro faces the significant challenge of creating good jobs for its people; solving this problem requires action to strengthen the sup-ply of labor as well as to increase the demand for labor from potential employers. Young job seekers need to be equipped with relevant skills, while less-skilled and more vulnerable segments of the population need access to opportunities and jobs.

Today, the growing fiscal deficits and public debt levels are making it more difficult to finance long-term private sector development at a pace needed for Montenegro to become a prosperous high-income country and move forward with EU accession. Restoring macroeconomic and fiscal sustainability and strengthening the financial sector will be critical to ensuring a stable macro environment that stimulates private investment and job creation in the long term. Implement-ing these measures will also be an opportunity to improve the quality of public spending for more inclusive social and employment services for poor and vulnerable populations so that all Montenegrin citizens benefit from future development. 

Key Engagement

Building on the successes of the original Montenegro Institutional Development and Agriculture Strengthening Project (MIDAS), in September 2016, the World Bank approved an additional financing loan in the amount of €3.0 million to further strengthen rural aeas and increase the country’s preparedness for EU accession requirements. This additional financing will allow for an expansion of the institutional capacity building achieved to date in order to manage public funds dedicated to agricultural support.

The original MIDAS project has so far assisted in establishing Montenegro’s capacity to implement an Instrument for Pre-Accession Assistance in Rural Development (IPARD)-compatible system, a paying agency, a farm registry, and a pilot IPARD-like grant scheme supporting investments in agriculture holdings and the introduction of agri-environmental measures through five rounds of grants. Around 660 farmers, 60% of whom live in the poorer north, have received IPARD-like grants to enhance their agricultural production.

The project also supported the strengthening of the country’s Food Safety System, including by developing the regulatory framework, building a Border Inspection Post, and upgrading national reference labs.

MIDAS is also an example of excellent collaboration between the Ministry of Agriculture and Rural Development of Montenegro, the EU, and the World Bank.

Last Updated: Apr 20, 2017

Economy

Recent Economic Developments

Growth slowed down in 2016 to an estimated 2.1% after a growth of 3.2% in 2015, due to delays in highway construction, struggling industry, and only moderate levels of tourism. The labor market stagnated in 2016, despite the growth. Starting in 2016, amendments to the Law on Social Care and Child Protection provided a lifetime benefit to mothers with three or more children, who can qualify based on 15 years of registered unem-ployment or 15 or 25 years of employment. Since then, the number of registered unemployed has increased by more than 10,000, and around 4,000 women have left formal jobs to receive the benefit.

At the same time, led by public sector wage growth, real wages grew by 3.4% in 2016, well above productivity growth, indicating a rise in unit labor cost by over 7% in 2016. Some poor households have seen increased income due to the mother benefit, even though as designed, it is not poverty targeted, discourages work, and represents a fiscal burden (close to 2% of GDP). With these developments and an economic recovery starting in 2012, poverty (measured at US$5/day in 2005 purchasing power parity [PPP]) declined from its peak of 19.6% in 2012 to an es-timated 12.8% in 2016.  The general government deficit declined to 4% of GDP in 2016 from 8% in 2015, mostly on the back of capital spending cuts. Public debt grew to 68% of GDP.

Lending activity recovered slightly, while nonperforming loans (NPLs) declined to 10.3% in 2016. Credits to households grew substantially by close to 11%, thanks to the low base effect, and after reaching a yearly low in September, corporate lending recovered as well, growing by 1.9% in December 2016. Deposits grew by above 9%.

The current account deficit (CAD) further widened to 19.2% on a four-quarter basis in 2016, on the back of the rising construction-related imports and the large dividend payout. Net foreign direct investment (FDI) also declined to 10% of GDP, covering around half of the CAD financing

Economic Outlook

The economy is expected to grow by an average of 2.8% in 2017–19 on large public investments and personal consumption. Yet, once the large public investment impetus to growth slows down, the overall growth rate will decline too, further exposing existing weaknesses in fiscal and external balances. External imbalances are set to widen again to close to 21% of GDP, which, together with a further rise in the fiscal deficit and debt, would add to the already high vulner-ability to external shocks. Inflation is projected at 2% in the period 2017–19.

The fiscal deficit is projected to expand to above 6% in 2017–18 and then come down to around 4% of GDP by 2019. Poverty (measured at US$5/ day in 2005 PPP) is estimated to decline slowly to 11.5% in 2017, subject to an employment rebound, including in construction and tourism.

The economic outlook is positive, but downside risks have increased. Unsustainable fiscal deficits call for ambitious fiscal consolidation to cre-ate the space for an orderly servicing of large refinancing needs of above 16% of GDP in the 2019–2021 period. Reducing the deficit will not be easy but is of utmost urgency, given the need to reassure markets and allow for a successful rollover of existing obligations under a credit rat-ing of B+ with a negative outlook.

Large external imbalances are still widening, adding to the already high external vulnerabil-ity. Domestic policy uncertainty and the slow pace of structural reforms are compounded by a complicated political environment. Although fiscal consolidation is a step forward, additional measures on both the spending and revenue sides would be needed to reach a sustainable trajectory for public finances. These measures would have to be distributional, and any short-term social impacts would need to be taken into account when designing policy reforms

Last Updated: Apr 20, 2017

Project Spotlight

Through the Montenegro Energy Efficiency Project (MEEP), the World Bank has supported the Montenegrin Government’s efforts to improve energy-efficiency performance in public sector buildings, energy-efficiency implementation practices and capacity in public institu-tions, and energy-efficiency service providers in the country.   

MEEP is investing in energy saving retrofits in about 27 schools and hospitals. It is insulating roofs and buildings and upgrading heating systems, substations, and networks. Facilities were selected for retrofits based on their energy savings potential, geographic distribution, number of users, and social and demographic impact.

So far, the project has helped with the retrofitting of 20 education and health sector buildings. Social surveys of users show very high end-user satisfaction with the results as well as increased awareness of the importance of energy efficiency.

Technical monitoring and evaluation before and after the investment have verified significant energy savings attributable to energy-efficiency investments in targeted public sector buildings; savings in heating energy have ranged between 30 and 67%, with an average of 46.7%.