Preparing for Prosperity: Montenegro and the Next Steps for Economic Growth

Over the past decade, Montenegro has achieved important results: it tripled its per capita income and reduced poverty to single digits.  It is an upper middle-income country, and with a per-capita income of $7,100, it is the richest among the six countries of the Western Balkans.

The World Bank’s Country Economic Memorandum suggests areas where Montenegro needs further reforms in order to prepare the ground for future prosperity.

The report, entitled “Preparing for Prosperity,” argues that Montenegro should be a fiscally strong state with low, sustainable debt, fiscal surpluses, and public investments that are well targeted. Additionally, Montenegro needs to improve financial discipline in the economy, the report says.

The country’s government is implementing some of the memorandum’s key recommendations, especially in strengthening fiscal policy, the financial sector, and the investment climate.

“We understand that just macroeconomic stability is not enough for macroeconomic development, so if we want economic development we cannot just count on the huge FDI inflow, which was the case before the crisis. So we are trying to structure reforms and improve the business climate to improve our competitiveness and productivity,” says Milorad Katnic, Advisor to Montenegro’s Prime Minister for Economy and Finance.

The World Bank’s economic memorandum states that a productivity growth rate of only 0.6 percent could allow for a growth rate of four percent or more in Montenegro. 

Over several decades, a similar growth rate could transform Montenegro’s incomes and living standards, says the report, which emphasizes that the keys to this are knowledge, skills, and education. 

“Skills are very important, so part of the structural reforms is the reforming of the education sector to better prepare the young people for the market –for the fast changes of globalization.  So we are trying to improve more private sector education and to have new programs that people can have the new skills to be better prepared for life and business,” says Katnic.

To ensure fiscal sustainability, Montenegro must move toward fiscal surpluses, build fiscal reserves, eliminate municipal arrears, and adopt and enforce credible fiscal rules.  This, the memorandum argues, will allow for private sector growth, and reassure external investors that Montenegro can responsibly manage finances.

“We are trying to consolidate our public finances, predominantly through the expenditure side,” Katnic says.  “We recognize that state expenditure was too high, too big before the crisis, and after the crisis we started to decrease public expenditures and did significant consolidation on the expenditure side.”

In addition to fiscal reforms, the World Bank report argues that further reforms to Montenegro’s banking system are also needed.  Such reforms, it advises, should include increased supervision of credit risk management, improved bank controls, and the provision of basic services to the country’s disadvantaged. This will help not only increase incomes of Montenegrin people, but will help ensure that incomes and opportunities are more widely shared.