PODGORICA, November 1, 2011 – Reforms in key sectors of the economy and business environment conducive to attracting foreign direct investment can help Montenegro to put its economy on sustained growth path, says a new World Bank Report “After the Crisis: Towards a Smaller and More Efficient Government” released today. However, there are risks that could tip the favorable outlook.
“Montenegro’s economy has an enormous growth potential. Nevertheless, to materialize this potential the country needs to further reform some of the key sectors in the economy, such as pensions, wage bill, education, health and social protection,” says Jan-Peter Olters, Country Manager for Kosovo and the main author of the report. “This will require from the government and, ultimately, the whole society to face and find answers to two challenges at the same time: to improve the quality of public services and keep the expenditures at the sustainable level.”
Long-term fiscal consolidation can only succeed if the pension system expenditures are brought under control. Important reforms, including the gradual increase in the pension age to 67, have already been implemented in recent years. Nevertheless, the report warns that the pension system’s current financial position is unsustainable and recommends policies leading to constraining entry benefit levels, benefit indexation, and—to some extent—the inflow of new beneficiaries.
The wage bill represents the principal risk to the overall fiscal sustainability, not only because it is equivalent to 12 % of GDP (about 3 percentage points more than the average of neighboring countries in the Western Balkans) but also because of political pressures to further increase staff levels. It is critical to undertake reforms which would retain and promote qualified and high-performance staff. The report recommends setting up a working group which would design a system to:
- ensure that the salary system is fiscally affordable and, at the same time, competitive in the labor market for well-qualified candidates;
- design measures to improve the transparency of the remuneration system through streamlining legislation, developing a concept of the base pay that consolidates current variable and supplemental pay elements;
- implement the principle of “equal pay for equal work”;
- recognize performance through the pay system in a transparent manner, based on, and subject to, regular performance appraisals;
- improve staff retention through attractive career-development prospects by introducing an adequately decompressed salary structure, objective criteria for pay progression, and support to skill development;
- facilitate decision-making capabilities in Government by ensuring the availability of accurate pay information; and
- develop and implement a time-bound program of measures (and responsible officials) to introduce a new remuneration system for the public sector that is based on the core principles of the pay system and assign resources to implement this program.
The report finds that Montenegro spends as much as other countries in the region on education but doesn’t achieve comparable outcomes. Authors of the report suggest reforms which will lead to achieving better results while keeping the fiscal cost of the education system at a sustainable level. The reforms include addressing issues such as:
- the lack of easily accessible information on spending, staffing, graduation rates, graduate employment, and research output in the education sector;
- the financing of public higher education based on performance – related component
- the fragmentation and internal organization of the public university.
In health sector Montenegro, relative to its per-capita income, spends an above-average amount but also generates above-average outcomes. Reforms are work in progress, with core challenges remaining in the areas of fiscal sustainability and the efficiency of service delivery. Principal recommendations to achieve the policy objectives include the following:
- Providing greater (budgetary) autonomy to—and requiring increased fiscal accountability of—the Health Insurance Fund (HIF), hospitals, and health-service providers while building local health institutions’ capacity for effective management;
- Permitting the Health Insurance Fund to retain savings to allow for the equalization of expenditures over longer periods of time;
- Supporting health awareness by introducing or increasing “sin taxes” on the consumption of alcohol, tobacco, and pre-packed food with high sugar, high salt, and/or fat content;
- Aligning health insurance benefits and health care policies with new medical technologies akin to the already established “positive list” of drugs; and
- Outsourcing specialized health-care services to the private sector.
At present, spending on social assistance does not pose a fiscal risk, it is important to adequately finance the existing programs and to allow them to expand if demand goes up. Whereas keeping the spending on family material support at around 0.5 percent of GDP is desirable, increases in the coverage and spending on child protection (especially on the monthly child allowance) would strengthen social policy and have very positive welfare benefits. It would be reasonable to waive the limit of three children in one recipient family and extend the child allowance to all children in poor families, especially if they attend school. Some potential for savings and opportunities for cost containment could be found within the category of disability benefits.