Download 1. economic policy framework and goals

MINISTRY OF FINANCE OF MONTENEGRO
MONTENEGRO
ECONOMIC AND FISCAL PROGRAMME
2009 – 2012
Podgorica, January 2010
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TABLE OF CONTENTS
1. ECONOMIC POLICY FRAMEWORK AND GOALS ......................................................... 3
2. ECONOMIC FRAMEWORK ............................................................................................. 9
2.1. ANALYSIS OF THE MACROECONOMIC TRENDS IN MONTENEGRO IN 2008 AND WITHIN THE
PERIOD FROM JANUARY TO SEPTEMBER 2009 ...................................................................... 9
2.1.1. Gross Domestic Product .................................................................................... 10
2.1.2. Inflation .............................................................................................................. 12
2.1.3. Labour market .................................................................................................... 13
2.1.4. Banking sector ................................................................................................... 13
2.1.5. Balance of payments .......................................................................................... 17
2.2 MEDIUM TERM MACROECONOMIC SCENARIO ................................................................. 20
2.2.1. Map of Risks Relevant for the Montenegrin Economy 2010-2012 ...................... 21
2.2.2. “Base Scenario” vs. “Crisis Scenario” ................................................................. 23
3. PUBLIC FINANCES ................................................................................................... - 33 3.1 PUBLIC FINANCES SECTOR – FISCAL FRAMEWORK AND DEBT MANAGEMENT .............. - 35 3.1.1 Public Finances Trends in the Period 2008 - 2009 .......................................... - 35 3.1.2. Fiscal risks in 2010 ......................................................................................... - 39 3.1.3. Goals and basic directions of the fiscal policy in the following medium term
framework ................................................................................................................ - 40 3.1.4. Medium term fiscal framework for 2010 – 2012 .............................................. - 42 3.1.5 Public Debt Management Strategy ................................................................. - 47 3.1.6 Budget implications of main structural reforms ................................................ - 54 3.2 PUBLIC FINANCES QUALITY ....................................................................................... - 56 3.3 PUBLIC FINANCES INSTITUTIONAL FRAMEWORK .......................................................... - 57 4. STRUCTURAL REFORMS OBJECTIVES.................................................................. - 59 4.1. ENTERPRISE SECTOR.............................................................................................. - 59 4.1.1. Privatisation ................................................................................................... - 59 4.1.2. Competition, state aid and public procurement ............................................... - 61 4.1.3. Business environment including tax aspect .................................................... - 64 4.1.4. Network Industries ......................................................................................... - 71 4.2. FINANCIAL SECTOR ................................................................................................. - 87 4.2.1. Banking sector ............................................................................................... - 87 4.2.2. Non-banking sector ........................................................................................ - 93 4.3. LABOUR MARKET .................................................................................................. - 100 4.4. ADMINISTRATIVE REFORMS ................................................................................... - 106 -
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1. ECONOMIC POLICY FRAMEWORK AND GOALS
Implementation of the Euro-Atlantic Agenda that will eventually be materialized through the
membership in the EU and NATO does not represent only political commitment, but also a
type of external anchor for the purpose of completing the transition process that will enable
the citizens of the country to better their living standards and life quality in general. To that
end, it is important that Montenegro received in July 2009 the Questionnaire of the European
Commission as a next step towards the membership in the EU, and then Montenegro
delivered the answers in December 2009. By answering additional questions expected to
come, the conditions will be created for the European Commission to form the opinion, in the
period to come, about the possibilities of Montenegro to acquire the status of candidate and
certainly to start negotiations about the membership.
Comprehensive economic reforms and the development concept based on private
ownership, market principles, openness, free flow of capital and competitive tax policy made
that the Montenegrin GDP rose by 60% in 2005, compared to the year of 2000. The renewal
of the independence represented an accelerator of economic growth, and the GDP in 2008
tripled compared to its value in 2000. At the same time, the GDP was restructured in favour
of the service sector, with increasingly important role of small and medium-size enterprises,
the vitality of which at the time of economic crisis has become an important test of vitality of
the entire economy in the long run. However, a key challenge in the period to come is further
restructuring and reforms in the public spending segments such as state administration, and
the systems of education and health.
Responses to the economic crisis. Economic growth in Montenegro, with the average real
rate of 8.7% from 2006 to 2008, was interrupted by negative effects of the global economic
crisis. Although the first consequences in most countries were visible already in 2008,
Montenegro had even then high real growth rates. Negative delayed global economic crisis
effect in Montenegro overlapped with a slight recovery of the world economy, which was
eventually reflected through the estimate of negative GDP growth rate of 5.3% in 2009.
Economic activity downturn led to the budget deficit which was estimated to 4.0% of GDP for
2009. Due to the fall in aggregate demand, inflation reduced in 2009 and it was estimated to
be below 2%, whereas the unemployment rate was kept at the level similar to the level of the
previous year.
Montenegro, as an open and import-dependent system, faced the first signs of the crisis at
the end of 2008, when it started the implementation of the set of measures in order to
mitigate it. In the spirit of the implemented measures, it has also provided, on one hand, the
support to the sound business, with the necessary measures regarding restructuring of the
largest industrial systems, whereas, on the other hand, a focus has been the social
sustainability of the Montenegrin society in the long run.
The use of the euro as a legal tender in Montenegro, introduced after the economic crisis of
the nineties of the last century and the consequences of the hyperinflation, was the initial
step in achieving the macroeconomic stability. At the same time, the use of the euro as a
legal tender made impossible the use of most quantitative instruments of monetary policy
during the financial and economic crisis, making the mandatory reserve rate the only means
that can to some extent control the secondary issue. On the other hand, the use of the euro
prevented the rapid aggravation of the level of real income in case of assumed accelerated
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depreciation of the local currency, which would additionally deepen the consequences of the
economic crisis in the long run and incite social tension in the short run.
In order to stimulate credit activity of banks and overcome the liquidity crisis in the financial
sector (caused primarily by withdrawing of deposits), and then in the real sector, the
mandatory reserve rate was reduced in June 2009 from 19% to 10%, which is applied only
to sight deposits and term deposits. In December, the Central Bank additionally considered
the policy of provisions for placements for the purpose of faster rehabilitation of the banking
sector and creating the conditions for renewing the crediting of small and medium-size
enterprises, bearing in mind the negative increase of credit placements in 2009.
The measures taken by Montenegro as the response to the crisis mostly rely on the fiscal
policy instruments. The State guaranteed by the Law on Measures for the Protection of the
Banking Sector, in addition to the other measures whose goal was urgent reaction in case of
larger disturbances on the banking market, 100% of households and corporate deposits. In
such a manner, with the first signs of consequences of the crisis in other countries, the State
tried to avoid a negative impact implied by households and corporate sector’s expectations.
Fiscal policy measures are dominantly directed to the expenditure-side of the budget and
reducing the expenditures of the public sector. One of the revised expenditures was the total
wage bill of the public sector. It is estimated that it is possible to restructure the level of
employees in the mid-term, so that the wage bill has been rearranged in order to reduce the
total costs, and the net wages were reduced. The planned savings in 2010 on the basis of
the reduction of gross wages of employees in the public sector are approximately 15 million
euro, which is 4% less compared to the amount envisaged by this item in case the
regulations were not changed. On the revenues side of the budget, amendments to the laws
will create the inflow of funds on the basis of the reduction, holidays and exemptions in case
of personal income tax, as well as the increase of the base of corporate profit tax from 50%
to 100% for the capital gains. One of the Government priorities is further improvement of the
business environment, and the goal of the State is to keep, with the fiscal policy measures,
as favourable as possible investment and business environment that would encourage the
entrepreneurship at the time of the crisis.
Challenges. The global economic and financial crisis has disrupted the achievement of
long-term goals and has set different bases. In spite of slight economic recovery projected
for 2010, Montenegro will face in the middle term a set of challenges caused by the crisis, as
well as structural imbalance in the economy. Currently, the following can be distinguished:
Liquidity crisis is the main cause of the low investment and personal consumption that led to
the economic downturn. This problem is even greater if we take into consideration the
downturn of investment activity on the world market and restrictive credit policy of banks in
Montenegro. Although net investments are at a higher level than expected in this crisis year
of 2009, their incentives and growth in the following years primarily in the sector of small and
medium-size enterprises will have the largest impact on the growth of productivity, and
consequently on employment and aggregate demand.
The Government of Montenegro has undertaken a set of measures to face the problem of
general illiquidity and create the environment for investment growth. One such measure is to
restrict current public spending (if donations and programme loans are excluded from the
balance of the current budget, it can be concluded that it has a structural surplus) and to
keep a high share of capital expenditures. Although by doing so, the conditions for the State
budget sustainability are primarily created, and the fall in wages may cause additional drop
in liquidity in the short run, the State has chosen to take the measure that will not
significantly affect the increase of taxes to solve short-term budget problems, thus reducing
already pronounced liquidity problem of the economic sector that includes the majority of
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total employees. On the other hand, the goal of measures to improve business environment
is to eliminate business barriers and give Montenegro a place on a ranking list that will be a
positive signal to every future investor regarding his decision to invest.
Structural reforms in the area of health, education and labour and social welfare tend to
rationalize, increase efficiency and open greater possibilities for introducing the private
sector to perform public services. By encouraging the private sector and by increasing
efficiency of the state administration, the productivity and the growth of wages from
productivity are increased and consequently aggregate demand is increased, which
potentially leads to higher growth of investments.
Foreign trade deficit, together with economic growth, represents a constant problem of the
Montenegrin economy during the recession as well. It was to be expected that a small
country at the time of expansive economic growth would satisfy the increased investment
and final demand from the import. However, a significant and constant share of some goods
in the import may be an initial signal of high demand for such goods. If Montenegro has
adequate resources, the import of such goods could be compensated by their production in
Montenegro. In such a manner, the import-dependability would be reduced and the basis
would be created for the growth of competitiveness. Resources for the production of
competitive products that could be offered on the domestic and foreign market (including a
million of foreign tourists per year and foreign investors) are in the areas such as energy,
agriculture, wood industry, production of construction material and similar. Measures for
encouraging entrepreneurship and successful and sound companies within the small and
medium-size business, creation of favourable business environment with no business
barriers, and promotion of Montenegrin products on the domestic and foreign market, and
projects in these areas may generate growth of the overall economy and reduce import
dependence.
Regional development imbalance as a consequence of the developed south and the
undeveloped north of Montenegro was especially pronounced during the economic boom
and faster economic growth of the south than the north area. Balanced economic
development of all regions represents a challenge of all economic growth and development
strategies. The construction of new energy facilities, Bar-Boljari Highway, the incitement of
entrepreneurship, the incentive policy for employment and development of small and
medium-size enterprises, opening of university units in northern municipalities, and rural
development policy, mark the beginning of the process of reducing the development
differences of the region. However, the goal for developing the north of Montenegro should
not be equalization with the development of the south, but exploitation of the potentials
whose productive use is at extremely low level. In the following period, the policy for the
north development should be directed to stimulating young population to find an interest in
education, work and forming families in their place and municipality of birth. To that end, the
support for the development of the north should be through the strengthening of educational,
administrative and economic capacities in the area of energy and mining, agriculture, wood
processing and tourism.
Structural unemployment has occurred as a pronounced problem during the economic boom
in Montenegro. The growth of demand for labour force, on one side, and constant long-term
unemployment of people having certain qualifications, on the other side, are still the
characteristics of the labour market of Montenegro at the time of the economic crisis.
However, the structural unemployment is a problem and challenge for Montenegro that
needs to be faced with now in a proper manner in order for the economic growth to be
supported by adequate labour market and reduction in the unemployment rate.
The national employment strategy and a set of documents that create employment policy
assume the application of measures that primarily relate to the harmonization of the
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education system with the needs of the labour market, life-long learning, encouraging the
entrepreneurship and innovations and integration of the older population, women and
disabled persons in the labour market. The vision for the development of the Montenegrin
economy, the initiated and planned projects involving foreign and domestic investments and
their further development, the path to EU integrations, encouraging the sector of small and
medium-size enterprises, and reduction of public expenditures are the first signal for the
system of education and labour market of the need for certain specialized knowledge and
skills.
Recession as the possibility for starting a new development cycle. Every recession
results in adjustment of the rules of the game, and brings new players and market games.
Montenegro has realized that a reaction needs to be prompt at the time of crisis, and that
long-term consequences of measures for its mitigation need to be taken into consideration. It
is even greater danger if measures are taken that have short-term positive and long-term
negative effects. Therefore, Montenegro tends to have a reform-based approach to
measures it takes, in the manner to improve the basis for a sustainable economic growth
and development after recession and create conditions for growth of investments and
employment, taking into consideration groups that are in social need and the importance of
the role of the State within that context.
Over the last 20 years Montenegro has gone through various phases of growth and
development substantially conditioned by both regional circumstances and changes on the
world economic scene. The path to its firstly economic and then State independence was
followed by innovative, creative and often risky moves of decision makers. A small
Montenegrin system, although it has natural predispositions, would have been hardly
attractive for investors if economic reforms had not been implemented that have created the
basic parameters of the economic environment as a competitive one compared to other
countries in the region. By summing up the experiences, both positive and negative ones,
the experiences regarding the transition, the economic boom and the recession, Montenegro
is at the beginning of the new economic period. This is the moment when it is necessary to
make moves and have sufficient capacity and consider the results in the long rum and based
on several scenarios. Strategic orientation, directed to a continuing process of EU and
NATO accession, is supported by a clear vision of improving the living standard of every
single individual in Montenegro: to be a member of the European Union not only on a paper
but also in everyday real life. The platform to achieve that goal is: rule of law, efficient
administration, open economic system and specialization in certain business activities.
The approach of Montenegro to overcome the crisis will be primarily based on the following
commitments:
The role of the State is crucial on that path. A good state organization will be limited to those
activities that it is better at than the private sector. For a small country such as Montenegro,
this is also important due to other reason: cost of public administration must be adjusted to a
small number of citizens, i.e. taxpayers. The goal is to have the state administration that is
efficient and productive in the tasks it performs, and to have good quality and efficient
regulations not only as the basis for the development, but also as a factor of diversity in the
globalized world. Fiscal reforms tend to create a positive business environment and
encourage entrepreneurship, thus improving comparative advantages of Montenegro as
investment destination. Structural reforms in the area of health, education and labour and
social welfare and the creation of the opportunities to form a partnership between the State
and the private sector will create the basis for efficient and effective system of public
services and for further growth of investments. In other words, state administration will
represent the means that will contribute to and not be an obstacle to the growth of the
standard of living.
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Rule of law in the system such as the Montenegrin one is the condition for the survival and
the growth of sound and sustainable investments. Efficient execution of contracts and
protection of investors are the key elements of the economic aspect of the rule of law. A
small country such as Montenegro, at the international level, cannot be an economic force.
Starting the integration process represents a high quality manner for Montenegro to adopt
and apply the rules and standards that will enable a faster and simpler flow of people and
capital, and adjust them to the characteristics of its political and economic system.
Specialization in certain areas is an important precondition for the development of a small
country in the globalized world. Bearing in mind quantitatively and qualitatively limited labour
force, and in accordance with its economic system, geographic position and resources, as
well as cultural heritage, Montenegro should be competitive and should specialize its human
and material capital in order for the idea to become real. Although the largest share in GDP
is metal industry, lack of competitiveness of Montenegro in this area at the international
market and the problems associated with the relics of socialist economic structure and
manner of thinking have influenced the direction of the development vision of Montenegro
and adjusted it based on its comparative advantages in the region and beyond. Economic
growth and development generators of Montenegro are the areas for the development of
which Montenegro primarily has the base in the natural and geographic predispositions:
tourism and energy. In addition to the aforementioned, Montenegro has resources for
agricultural production, wood processing, production of construction material, mining and
quarrying, building construction works and civil engineering construction works and trade. By
systematic and competitive approach, these areas may be complementary to the
development of tourism and energy as priority branches, and at the same time contribute to
the total growth of the economy. The Master Plan until 2025 envisages that the development
of tourism is the priority branch of economy that has generated over the past years 17% of
GDP and 3.5% of capital investments, and it employed 13.5% of the total employees. The
mission of the Plan is to create its own tourist profile, so that it would not be possible to
confuse Montenegro as destination with another one because it will be unique as such. This
will be achieved by the creation of high quality and diversified tourist offering in accordance
with the contrasted geographic terrains and by prolonging the season throughout the year.
The energy sector has been increasingly distinguished over the past years as a potential
generator of the Montenegrin economy growth, on one side, and infrastructure-related
support to the development of the overall economy and the society, on the other side.
Montenegro is import-dependent as far as energy is concerned. However, by new
investments in the Electrical Company of Montenegro (EPCG), and by starting large
greenfield investments in 2010 in the area of exploitation of lignite, and by the construction of
thermo and hydro energy plants, the new development phase of energy sector of
Montenegro has been initiated. Although there are significant reserves of high quality coal,
Montenegro as ecological country will be committed to renewable energy sources and the
use of clean technologies in fuel exploitation. Currently, 20% of the total electrical energy
consumption is covered by the electricity from renewable sources. By using only 50% of the
total hydro-potential, envisaged by the Strategy, Montenegro will cover 25% of the total
consumption by 2025. If we add to the aforementioned, the wind and solar energy, coal
reserves and the importance of geo-strategic position of Montenegro from the aspect of gas
pipeline networks, we are reaching the conclusion that Montenegro can go from importdependency to exporter of electrical energy. In addition, every energy-related project is
based on the sustainable development principles.
Openness of the economic system is a key of its success. Although the global crisis shows
that inter-connection of economies means a negative multiplicative effect at the time of
recession, Montenegro must build its strength on the openness as well. The target market of
Montenegro is far beyond its State borders. Large countries protect their products that can
generate profit on the domestic market as well, in the form of customs. Closed economy is
expensive for Montenegro. Free trade creates at the same time large opportunities for the
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economic growth, by encouraging investments, innovations and know-how transfer. As the
most recent events on the world economic scene have shown, small economies, small and
medium-size enterprises, through openness, flexibility and vitality, have succeeded to adapt
faster to changes than large systems.
Scenarios. Due to the fact that because of the economic crisis Montenegrin economy will be
exposed, within the following midterm, to significant risks, this year Economic and Fiscal
Programme is also based on the development of two macroeconomic and fiscal scenarios
for the period from 2010 to 2012. The development of such scenarios, in the conceptual
sense, is the continuation of the work initiated in the former Economic and Fiscal
Programme, which proved to be very useful instrument for managing the economic policy at
the time of the crisis. This year scenarios take as a basis the risks that Montenegro was
exposed to in 2009 (they were identified and articulated in the former Economic and Fiscal
Programme). A special focus is placed on the projection of macroeconomic indicators
regarding the year of 2010, bearing in mind that the period from 2011 to 2012 is extremely
uncertain. The basic difference between the two scenarios is whether and to which extent
macroeconomic and financial risks from 2009 would be continued in 2010. The basis for
creation of the scenarios is not any more the elaboration of risks that the Montenegrin
economy is exposed to, but the analysis of its resistance or non-resistance in case of further
deepening of the crisis in 2010. Thus, the first scenario called “base scenario” that the State
budget for 2010 is based on envisages a slight recovery of the economy in 2010 – a real
GDP growth of 0.5%, with the reduction of illiquidity of the private sector and slight increase
of the credit activity. The second scenario called “crisis scenario” is based on further
deepening of the crisis in 2010, a real retraction of GDP of 2%, with further stagnation of
external demand, stagnation of export due to the loss of the market, lower inflow of FDI due
to further decline in real estate prices, failure to realize the privatization plan for 2010, as well
as on stagnation of new investment projects, and ongoing illiquidity of the private sector that
drastically reduces the level of investments in gross fixed capital. This scenario is developed
for the purpose of determining “resistance point” of the Montenegrin economy in case of
deepening of the financial crisis in the following period. It is especially necessary to
emphasize that the realization of this “crisis scenario” would occur only under the conditions
of the simultaneous occurrence of all aforementioned negative trends, which is unlikely to
happen. However, if some of the negative trends do occur, real performances of the
economy would be somewhere between the “base scenario” and the “crisis scenario”.
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2. ECONOMIC FRAMEWORK
2.1. Analysis of the macroeconomic trends in Montenegro in 2008 and within
the period from January to September 2009
It is necessary to divide macroeconomic trends in Montenegro in 2008 and within the first
nine months of 2009 into two periods. The first period includes the first three quarters of
2008, i.e. the months of still relatively good economic performances. The second period
includes the trends from the last quarter of 2008 to the end of the third quarter of 2009, i.e.
the period when the global financial and economic crisis has fully spread to the economy of
Montenegro. Statistical data in Table 1 clearly show those two periods. For example:
In 2008, Montenegro still had a real economic growth of even 6.9%. Within the period from
January to September 2009, a downturn in economic growth was estimated to 4.0%, and the
activities’ downturn happened in almost all sectors.
In 2008, an annual inflation rate, measured by consumer price index, was 6.9% which was at
least partially caused by extremely strong economic activity. Inflation reduced to only 1.7%
by September 2009.
In 2008, a growth rate of import of goods and services was even 21.9% (rate of export of
goods and services was only 4.6%). Within the first nine months of 2009, the import was
drastically reduced – by even 36.5% (export of goods and services dropped by 18.9%). As a
consequence of such trends, a negative balance of the current account of the balance of
payment declined from 35.2% of GDP in 2008 to 24.8% within the period from January to
September of 2009.
In spite of the crisis, the country demonstrated some very favourable trends. One of such
areas is the growth of employment in the formal sector, i.e. the reduction of the
unemployment rate. So, contrary to majority of other countries, Montenegro in 2009
recorded both growth of formal employment of 5.5% and reduction of unemployment (from
10.7% in 2008 to 10.3% in September 2009). On the other hand, the data of the survey
about labour force show the reduction of number of employees, which implies that the loss of
jobs due to the crisis was in the sector of grey economy.
Furthermore, net foreign direct investments (FDI) in 2008 were 567.6 million euro, and within
the period from January to September 2009, they were even 764.7 million euro. A
significant growth of FDI was largely the result of successful sale and recapitalization of
Electrical Company of Montenegro. Inflow on such a basis was 420 million euro, out of which
the State generated on the basis of the sale of shares around 100 million euro, which is also
the amount generated by EPCG on the basis of the recapitalization.
TABLE 1: Montenegro: Main economic indicators, 2007-2009
2007
GDP – real growth, %
10.7
1
Inflation, %
8.0
Employment growth (persons), %
6.1
Unemployment rate, %
11.9
Export of goods and services, current prices, in million 1,217.5
1
2008
6.9
6.9
6.3
10.7
1,273.4
I - IX 2009
-4.0
1.4
5.5
10.3
818.2
The year of 2007 inclusive, retail price index was used as inflation indicator, whereas consumer price index has
been used from January 2008.
9
euro
Growth rates of export of goods and services, %
14.2
4.6
Import of goods and services, current prices in million 1,936.7
2,359.9
euro
Growth rates of import of goods and services, %
12.7
21.9
Balance of trade in goods and services, current prices in -719.2
-1,086.5
million euro
Balance of trade in goods and services, % GDP
-26.8
-35.2
Balance of current account, current prices in million euro -642.8
-1,005.7
Balance of current account, % of GDP
-24.0
-32.6
Gross capital formation, in current prices, in million euro 867.1
1,180.2
Gross capital formation, % of GDP
32.3
38.3
Foreign debt in million euro
462.1
481.7
Foreign debt, % of GDP
17.2
15.6
Net foreign direct investments, current prices, in million 524.9
567.6
euro
Net foreign direct investments, % of GDP
19.6
18.4
Source: Central Bank of Montenegro (CBCG), Ministry of Finance, Monstat
-18.9
1,425.5
-36.5
-607.3
-24.6
-332.1
-13.5
645.2
21.02
764.7
31.0
2.1.1. Gross Domestic Product
Real growth of GDP in 2008 was 6.9%. Together with a high level of FDI, this growth was
dominantly caused by the growth of: service activities with the increase in tourism turnover,
traffic turnover, trade and construction works turnover. The first nine months of 2009 brought
on a GDP real retraction of approximately 4.0% compared to the same period last year. This
retraction is the consequence of the effects of the economic and financial crisis on the
general economic activity downturn, mostly in industry, construction, traffic and trade. Even
higher retraction of GDP was prevented by: tourism turnover that was at the level of the
previous year, increase in agricultural production and higher net inflow of FDI.
Industrial production: Global slowing down of the economic growth affected also the
dynamics of the industrial production in Montenegro. The production of base metals and the
generation of electrical energy had the crucial impact on its trend. In 2008, industrial
production was lower by 2.0% compared to the previous year. Two sectors, the sector of
generation of electrical energy, gas and water, and the sector of mining and quarrying,
generated the growth of 31.9% and 17.7% respectively, whereas the sector of downstream
industry recorded a drop of 11.3%.
Within the period from January to September 2009, the physical volume of industrial
production was lower by 30.9% compared to the comparative period of the last year. The
production in the sector of downstream industry was lower by 36.6%, in the sector of mining
and quarrying it was lower by 64.5%, and in the sector of generation of electrical energy, gas
and water, due to the repair of power plant Pljevlja, it was lower by 1.9%.
In Montenegrin industry, the production of base metals is dominant (in 2008, it was 41.3% of
the total industrial production, and 59.7% of the downstream industry), i.e. the production of
two large systems (Aluminium Plant -KAP and Steel Plant-Zeljezara). In 2008, the
production of base metals, strongly affected by the economic crisis, and the decrease in
demand and drop in sale prices of aluminium and steel below their production prices, was
lower by 11.3%, and within the first nine months of 2009 compared to the same period in
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Foreign debt on 30 September 2009 in relation to the estimated GDP for 2009
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2008 it was reduced by 50.0%. If the production of the base metals in 2009 had been at the
level of the previous year, the total industrial production in 2009 would have been lower by
10%, and the production in downstream industry would have been lower by 6.5% compared
to the previous year. It shows that KAP and Zeljezara, as the largest industrial producers,
almost fully dictate the level and index of the realized industrial production.
Tourism: Upward trend continued in 2008 in tourism sector, as well as the increase in the
number of arrivals and overnight stays of tourists and generated revenues. In 2008, 6.4%
more tourists more visited Montenegro and there were 10.3% of overnight stays more than
in the last year. Growth of the number of foreign tourists (3.6%) is important, as well as their
overnight stays (7.2%). A positive characteristic of the structure of foreign tourists is reflected
through an increasing share of tourists from the European Union countries (21%), together
with still significant share of tourists coming from Russia (12%) and Serbia (37%).
A dominant position in tourism is held by the coastal region that records 95.7% out of the
total number of overnight stays (Monstat, Monthly Statistical Review, 1/2009). In accordance
with the data of the World Travel and Tourism Council, it is estimated that in 2008,
approximately 26.4% of the Montenegrin GDP was generated by the sector of tourism3, and
that 37,000 of employees were engaged or 1.8% more than at the same period of the last
year. Total revenues were around 15% higher than in the previous year, amounting to 552
million euro (WTTC – Montenegro Travel and Tourism).
Tourism turnover within the period from January to September 2009 is approximately at the
level of the previous year. Proceeds from tourism amounted to around 480 million euro,
which is around 2.0% more than at the same period of 2008; there were 7,297,155 overnight
stays, which is by 2.0% less than last year; 1,145,027 arrivals were registered, which is by
2.4% more than at the same period last year. The number of domestic overnight stays is
higher by 3.8%, whereas the number of foreign overnight stays is less by 2.7%. The number
of domestic visitors is higher by 5.1%, whereas the number of foreign visitors is higher by
2.0%.
Construction: A favourable environment for the performance of the economic activity in
2008, with high aggregate demand, and within that framework, high scope of new
investments, generated a growth of construction activity. Value of executed construction
works in 2008 was 412.4 million euro, and it was higher by 44.5% than in 2007. The largest
part of the executed construction works (65.1%) relates to buildings, out of which 68.3%
relates to residential buildings. The value of executed construction works regarding traffic
infrastructure was 28.1% of the total works. Activity in construction, measured by executed
effective working hours, shows the increase of 20.7% in 2008.
In 2009, the impact of economic and financial crisis on making illiquidity problem more
severe, and the problems in maintaining credit activities of banks and difficulties in servicing
credit obligations by clients, strongly influenced the possibility to provide funds for
investments, primarily for completing already initiated works in the area of apartment
constructions. The total executed construction works within the period from January to
September 2009 were in the amount of 159.6 million euro and they were lower by 23.6%
compared to the comparative period. The value of executed construction works on buildings
(52.1% of the total executed construction works) in this period was lower by 22.7%. Effective
working hours in construction area were lower by 17.8%.
Foreign trade in goods – The global economic crisis, through the drop in world prices of
primary products and fall in world demand, has especially had negative impact on trends of
3
Multiplicative effect generated by the area of tourism.
11
foreign trade in goods. Total foreign trade in goods for nine months of 2009 was lower by
39.2% compared to the same period last year. Export for nine months was reduced by
39.3%, whereas import for nine months was reduced by 39.1%.
In accordance with the data from Monstat, and based on special trade regime, Montenegro
realized from January to September of 2009 the total foreign trade in goods in the amount of
1,413.31 million euro, out of which the export was 208.28 million euro, whereas the import
was 1,205.03 million euro.
Decline in export of approximately 135 million euro was mostly the consequence of the
decline of export of products of iron, steel and aluminium. This indicator has recently shown
a lower degree of correlation with the changes in GDP due to the change of revenue
structure.
Foreign trade in services – The total volume of foreign trade in services within the period
from January to September 2009 was 830.4 million euro, and it was lower than in the
comparative period by 10.8%. At the same time, the export of services was reduced by 8.3%
and it amounted to 609.9 million euro, and the import of services was reduced by 17.1%,
and it amounted to 220.5 million euro.
2.1.2. Inflation
Measured by the consumer price index, inflation in December 2008 compared to December
2007 was 6.9%, whereas the average rate for the period from January to December 2008
compared to the same period in 2007 was 7.4%. In 2009, inflation significantly reduced. As
shown in Table 2, in September 2009, inflation was 1.4% compared to December 2008. At
the annual level it was higher by 1.7%, whereas the average inflation rate for the period from
January to September 2009 compared to the same period of the previous year was 3.9%.
Under the conditions of the reduced aggregate demand and economic activity downturn, the
reduction of inflation has been in accordance with the expectations. Under the conditions of
the reduced external impact on prices, possible changes relate to the trends of the oil and oil
derivatives market and electrical energy market.
TABLE 2: Trends of consumer price indexes
Structure 09.2009 09.2009 01-09.2009
%
12. 2008 09.2008 01-09.2008
Consumer price index - total
100.0
101.4
101.7
103.9
Food and non-alcoholic beverages
42.5
100.1
101.6
104.2
Alcoholic beverages and tobacco
4. 8
107.6
107..8
107.1
Clothing and footwear
8. 2
99.2
99.7
101.0
Housing
12.8
100.0
107.8
117.5
Home
furnishings
and
home
5. 4
94.0
94.1
98.5
equipment
Health
2. 3
100.9
102.2
103.3
Transportation
10.0
110.9
96.0
92.8
Communications
6. 6
105.2
105.1
103.2
Culture and recreation
2. 9
99.6
99.1
100.9
Education
0. 2
100.0
100.0
100.0
Restaurants and hotels
0. 1
115.9
115.9
106.8
Other goods and services
4. 3
101.1
101.2
101.3
Source: Monstat
12
2.1.3. Labour market
The economic crisis has made the possibilities to keep the existing level of employment,
especially in larger systems, worse. In accordance with the data obtained from MONSTAT,
the average number of employees in the formal sector in the first ten months of 2009
increased by 5.4% compared to the same period of 2008 (from 165,641 to 174,523). August
of 2009 recorded the maximum number of employees (179,016 employees), after which the
employment reduced in September by 1.1% compared to August, and in October by 0.6%
compared to September. Constant increase of formal employment within the first eight
months, in spite of economic activities’ downturn, is a result of several factors, out of which
the most important measures of the Government are the measures for mitigating the
consequences of the global economic crisis, creating more favourable fiscal envelope and
reducing tax burden, which led to the transfer of labour force from informal to formal sector.
The reduction of employment recorded in September and October shows that, since the
period of strong economic growth was interrupted by the crisis, employment in the formal
sector will probably have a long-term upward trend in the second and third quarter thanks to
the summer season, whereas the first and the fourth quarter are characterized by somewhat
lower employment.
The impact of the economic crisis on the labour market is probably reflected through informal
market. In accordance with the labour force survey, the total number of employees in the first
three quarters of 2009 compared to 2008 was lower. Also, the survey records the reduction
of the number of unemployed persons that influenced the reduction of the activity of the
labour force by 0,7percentage points in the first quarter of 2009 compared to the fourth
quarter of 2008. The third quarter, thanks to the summer season, gave better results, since
there was reduction of unemployment, increase of employment, as well as of the labour
force activity by 0.6 percentage points.
The number of unemployed persons in the records of the Employment Office, until the end of
September 2009, reduced. At the end of September 2009, there were 27,269 unemployed
persons recorded, which is by 3.3% less compared to the same month of the last year, and
by 1.8% more compared to August 2009. In accordance with the aforementioned, the
unemployment rate reduced from 11.2% in September 2008 to 10.3% in September 2009,
which indicates that the measures taken by the Government of Montenegro for the purpose
of mitigating the consequences of the crisis have given the results. However, at the end of
October 2009, the number of unemployed persons was increased to 28,855, and the
unemployment rate to 10.7%. Bearing in mind that employment as economic activity
indicator by rule comes later than other economic activity indicators, and that within the last
few months it has shown a downward tendency, it is expected in the following year to have
an increase of unemployment, which would have a negative impact on aggregate demand
and increase of default credit repayments in the banking sector.
2.1.4. Banking sector
Trends in 2008: Assets of the banking sector in Montenegro in 2008 increased per average
monthly rate of 1% reaching the amount of 3.3 billion euro at the end of the year. The crisis
is the main reason for reduction of the total deposits in the banking sector by 4.8% in 2008,
and the fall of households deposits was even 16.0%. At the end of 2008, households
deposits were 856.5 million euro.
Measures taken by the Central Bank of Montenegro for the purpose of reducing credit
growth and reducing pressures on consumption and inflation have proved to be efficient, and
the total credits in 2008 increased by only 24.6%, which is significantly less than in 2007
when they were increased over 2.5 times – out of which, loans to the households sector
13
were increased by 30.7%, and to the corporate sector 21.4%. However, in the last quarter of
2008, the global financial crisis had a significant impact on interrupting the credit expansion.
The crisis has affected active interest rates in Montenegro. Over 2008, they got slightly
increased, and in December they were by 0.11 percentage points higher than a year before.
Table 3: Selected banking sector indicators, 2005 – 2008 (in 000 000 euro; %)
Description/Period
Assets of banks
Total credits
Corporate credits
Households credits
Total deposits
Corporate deposits
Households deposits
Allocated
mandatory
reserve requirements
3,309.7
2,797.5
1,657.0
1,037.6
1,990.6
589.5
856.5
Change
2008-2007
334.3
551.8
292.6
243.5
-100.5
-74.0
-162.9
2008
2007
11.2
24.6
21.4
30.7
-4.8
-11.2
-16.0
216.6
-42.4
-16.4
2005
2006
2007
2008
695.8
375.9
230.1
104.3
487.9
143.9
175.7
1,431.4
847.2
471.3
311.2
1,075.8
321.0
499.4
2,975.4
2,245.7
1,364.4
794.1
2,091.1
663.5
1,019.4
61.7
172.8
259
Due to the effects of the financial crisis, the banking system at the end of 2008 was
characterized by the decline in the basic liquidity indicators compared to the end of 2007.
Available funds for payments have been reduced, the credit/deposit ratio deteriorated, the
share of liquid assets in the total assets reduced, the share of non-performing credits in total
credits increased. Over the first nine months of 2008, the banks regularly fulfilled their
current obligations, whereas in the fourth quarter, influenced by the global financial crisis that
affected the Montenegrin economy, one bank had pronounced problems to maintain liquidity.
The total assets of the banks available for payments were from 333.4 to 532.9 million euro.
As it can be seen from Table 4, in 2008 these funds were on the average 438.6 million euro,
which was significantly below the average in the last year. Considered by months, the
highest level of average available funds for payment was recorded in April (485.9 million
euro), and the lowest in November (375.0 million euro). The payments made to the banks
were constantly lower than available funds for the payment and they were on the average 45
million euro. On the basis of the trends of available funds and made payments, a surplus
was created in the average amount of 392.9 million euro. Average payments made/average
available funds for payments coefficient in 2008 was 0.104 and it is similar to the one in the
previous year, which was 0.099.
Table 4: Average of available liquid funds and payments made by banks, 2005 – 2008
(in 000 euro)
Description/Period
2005
2006
2007
2008
Available liquid bank funds
137,166 267,724 472,216 438,619
Payments made
17,935
27,337
46,708
45,737
Surplus
119,231 240,387 425,508 392,882
At the end of 2008, liquid assets of the banks4 were 370.7 million euro and compared to the
end of 2007, they were reduced by 31%. The share of liquid assets in the total assets was
11.2%, and it was reduced compared to the end of 2007, when it was 18.06%. Credit/deposit
coefficient was 1.41 at the end of the year, which was a deterioration compared to the end of
2007 when it was 1.08. Within the first three quarters of 2008, mandatory reserve for liquidity
was not used, whereas in the last quarter two banks used mandatory reserve funds for
liquidity.
4Monetary
funds and deposits with depositary institutions.
14
Trends in 2009: The first eight months of 2009 clearly show the extent to which the financial
and economic crisis affected the Montenegrin banking sector. Table 5 shows that this period
is characterized by the reduction of bank assets and deposits, and by the reduction of credit
activities of banks.
At the end of August 2009, the assets of banks were 3,064.2 million euro; reduction of
banks’ assets compared to the end of 2008 was 7.4%, and the annual reduction was 12.5%.
The total deposits deposited with banks were 1,730.4 million euro at the end of August 2009
and they are reduced by 13.1% compared to the end of the previous year, and by 26.2%
compared to the same month of the previous year. During the first eight months, the total
deposits were reduced on the average on monthly basis by 1.7%, and a positive growth rate
was recorded only in May (2%).
Researches of the Central Bank show that an important reason for reduction of deposits is
that banks, in case clients failed to repay credits, were using deposits as cash collateral in
order to satisfy their claims. It should be noted that in the first eight months of 2009,
reduction of deposits slowed down compared to the fourth quarter of the last year, when
deposits fell on the average monthly basis by 5%. In addition to other things, the sale of
shares of EPCG and its recapitalization influenced the slowdown of reduction of deposits
within the observed period and growth of deposits in May.
Households deposits were 767.1 million euro at the end of August 2009 and compared to
the end of the previous year, they were reduced by 10.6%. During the first five months, they
dropped on the average monthly basis by 2.7%, whereas within the period from June to
August, they increased on the average monthly basis by 0.9%.
At the end of August 2009, the total credits were 2,572.9 million euro and they were by 8.0%
lower than at the end of the previous year, whereas the annual fall was 9%. During the first
eight months of 2009, credits of banks recorded the average monthly fall of 1.0%, whereas
during the first eight months of the previous year, the credits increased on the average
monthly basis by 2.9%. Observed by banks, at the end of August of this year and compared
to December 2008, six banks recorded the growth of credits, whereas the other five
recorded a fall.
Table 5: Selected banking sector indicators in 2009
VIII 2009
Description/Period
XII 2008
Bank assets
-7.4%
Total credits
-8.0%
Corporate credits
-9.5%
Households credits
-7.8%
Total deposits
-13.1%
Corporate deposits
-19.5%
Households deposits
-10.4%
Allocated mandatory reserve -26.9%
VIII 2009
VIII 2008
-12.5%
-9.0%
-10.9%
-7.3%
-26.2%
-33.4%
-31.7%
-47.0%
Decision on minimum standards for managing liquidity risk5, which is being applied from
January 2009, prescribes the obligations of banks to maintain minimum liquidity coefficients6
on a daily (0.9%) and decade basis (1.0%). As shown by Table 6, within the period from
January to August 2009, liquidity coefficient on a daily and decade basis was above the
5
Decision on minimum standards for managing liquidity risk in banks (Official Gazette of Montenegro,
No 60/08). Reporting based on this Decision is applicable from 1 January 2009.
6 Ratio of liquid assets of banks and due obligations for credits and loans.
15
prescribed minimum for the entire banking sector. However, observed by banks, during the
first eight months of this year, one bank constantly had lower daily and decade coefficients
than the prescribed ones. The structure of liquid funds of banks at the end of August 2009
shows that 57.3% of total liquid assets of banks relate to liquid funds in the country, whereas
42.7% relate to funds of banks abroad.
Table 6: Aggregate liquidity indicator of banks in 2009
Description/ Period
31 Jan 28 Feb 31 Mar 30 Apr 31 May 30 Jun
31 Jul 31 Aug
I. Liquid funds of
banks
270,596 255,177 284,767 277,993 315,916 326,402 380,567 382,210
II. Due obligations for
credits and loans
201,254 192,118 231,507 223,617 224,260 229,545 242,772 245,703
III. Liquidity indicators
( I : II )
1.34
1.33
1.23
1.24
1.41
1.42
1.57
1.56
Source: Daily reports of banks
Liquid assets of banks7, at the end of August of this year, were 370 million euro, and they
were increased compared to the end of the previous year by 4.7 million euro or 1.3%,
whereas compared to the same month of the previous year they were reduced by 20.6%. At
the end of August 2009, the share of liquid assets in the total assets was 12.06% and it was
increased compared to the end of 2008 (11.03%), and reduced compared to August of the
previous year (13.3%).
Economic policy measures directed to strengthening of the banking sector stability under the
conditions of the crisis: For the banking sector and the Central Bank of Montenegro, as the
regulator, the years of 2008 and 2009 were the years of big challenges. While until the fall
2008, under the conditions of extremely rapid economic growth characterized also by the
elements of overheating, the Central Bank tried to prevent too extensive credit activity of the
banks, in the period after the emergence of the crisis, i.e. just before the end of 2008, its
activity was concentrated on providing stability to the banking sector that was strongly
affected by the crisis.
Thus, in 2008, a set of regulations was adopted that regulates in greater details the banking
operations. The goal of the Law on Banks and a set of secondary regulations that are stricter
than the international accounting standards was to prepare the banking sector as good as
possible for the possible negative consequences of the global financial crisis. In addition to
the aforementioned, in 2008, the decision of the Central Bank was in force that limited credit
expansion, so that banks, especially in the second half of that year, were faced with
pronounced demand for credits and large restrictions to satisfy that demand.
Furthermore, in order to create protection against the consequences of the global financial
crisis and preserve its security and stability, at the proposal of the Government and the
Central Bank, the Parliament adopted the Law on Measures for the Banking System
Protection. In accordance with this Law, the Central Bank of Montenegro adopted the
Decision on Using the Bank Mandatory Reserve Requirement Held with the Central Bank for
a Period Longer than One Day and the Decision on Granting Short-Term Loans to Banks.
Intensive harmonization of the legal framework for operations of banks under the crisis was
continued in 2009. During the first quarter of that year, the regulations were amended
regarding the mandatory reserve instrument and using a part of allocated mandatory
7
Liquid assets, in accordance with the new Decision on managing liquidity risk, consist of monetary
assets and deposits with depositary institutions reduced by 50% of allocated mandatory reserve, and
the sources of data are monthly reports of banks.
16
reserve, in order to support the liquidity of banks. Also, the decision is adopted regarding the
establishment of banking ombudsman that provides for better protection of banks’ clients. In
June 2009, the Decision on Amendments to the Decision on Minimum Standards for Credit
Risk Management in Banks is adopted, as well as Decision on Amendments to the Decision
on Bank Capital Adequacy, Decision on Amendments to the Decision on Minimum
Standards for Risk Management in International Financial Institutions, Decision on
Amendments to the Decision on Bank Mandatory Reserve Requirement to be Held with the
Central Bank of Montenegro, and the Decision on Amendments to the Decision on Using
Bank Mandatory Reserve Requirement Held with the Central Bank of Montenegro for the
Period Longer than One Day. The goal of adopting these decisions is to stop, i.e. mitigate
the reduction of quality assets, to improve the credit activity and to stimulate banks to
undertake more intensive activities to attract new and recover previously withdrawn deposits.
In August 2009, the Central Bank Council adopted a set of temporary measures that enable
more favourable conditions for credit restructuring, asset classification and lower calculation
of provisions for credit losses. The goal of adopted measures is to improve the position of
banks and their debtors, as well as to preserve stability and security of the banking system.
At the end of December, the Central Bank amended the Decision on Temporary Measures
for Credit Risk Management that envisages certain reliefs for banks with the goal to initiate
the credit activity. The new measures reduced provisions for certain classification groups.
Also, it is envisaged that the banks when estimating creditworthiness of debtor may exclude
operating indicators for 2009. In addition to the aforementioned, banks are enabled to
classify credits approved for investments in development projects by analysis of project
profitability, and not by assessing creditworthiness of the debtor. A change is also that reliefs
for credit restructuring may be applied to credits whose repayment is late up to 180 days
(instead of 90 days that used to apply).
2.1.5. Balance of payments
Montenegro started to feel the impact of the global crisis, which has begun in the summer
2007, a year after in the area of foreign economic relations. Table 7 contains the main data
on the current balance of payments account of Montenegro within the period from 2006 to
September 2009. Further below trends of the current and capital part of the balance of
payments of the country will be presented in greater details, especially for 2008 and 2009.
Table 7: Current account of Montenegro from 2006 to September 2009, in thousand
euro
2006
2007
2008
Jan. –
Sep.
2009
Index
2007/2006
2008/2007
Jan –Sep
2009/Jan
–Sep
2008
A.
CURRENT
ACCOUNT(1+2+3+4)
-531,207
-642,786
-1,005,664
-332,144
121.00
156.45
46.24
1. GOODS
-849,325
-1,159,322
-1,489,603
-736,838
136.50
128.49
62.61
1.1. Revenues
1.2. Expenditures
2. SERVICES
2.1. Revenues
2.2. Expenditures
3. INCOME
3.1. Revenues
648,327
543,411
519,088
242,197
83.82
95.52
59.01
1,497,651
197,099
1,702,733
440,133
2,008,691
403,082
979,035
389,370
113.69
223.31
117.97
91.58
61.68
97.55
418,036
674,056
754,278
609,906
161.24
111.90
91.69
220,937
30,800
233,923
17,010
351,196
7,785
220,536
-44,405
105.88
55.23
150.13
45.77
82.90
65,334
89,420
128,356
87,029
136.87
143.54
92.43
17
3.2. Expenditures
4.
CURRENT
TRANSFERS
4.1.
Transfers
to
Montenegro
4.2.
Transfers
from
Montenegro
34,534
72,410
120,570
131,434
209.68
166.51
150.88
90,220
59,394
73,072
59,729
65.83
123.03
113.96
108,555
100,775
109,321
83,867
92.83
108.48
104.56
18,336
41,381
36,248
24,139
225.69
87.60
86.83
Source: CBCG
Balance of payment trends in 2008: Considered at the annual level, the year of 2008 is
characterized by the increase in deficit of the current account, record income of tourism,
further growth of expenditures based on services, record net FDI, as well as inflow of funds
in the form of other investments and reduction of reserves. Deficit of the current account of
balance of payments in that year was 1,005.7 million euro, which is by 56.5% more than in
2007. Deficit of the current account was significantly increased, as well as its share in GDP.
Whereas in 2007, it was 24.0%, in 2008 it increased to 32.6% of GDP. Considered by
quarters, it is obvious that as a result of slowing down of the economic activity, in the fourth
quarter of 2008, there was the reduction of current account deficit by 7.4% compared to the
same period of the previous year. This primarily happened due to the reduction of import, i.e.
reduction of the possibility to finance the import (the basic generator of the current account
deficit), and because of significant reduction of foreign indebtedness of companies and
reduction of reserves.
Results of foreign trade in goods of Montenegro are still worrying, since the trade structure is
still relatively unfavourable and the level of export diversification is low. Lack of
diversification of export and its orientation primarily to the European Union market, which is
affected by the crisis, as well as changes in aluminium prices on the world exchanges led to
the reduction of export of goods in 2008. The international trade in goods in 2008 recorded
the reduction of export and the growth of import of goods. Deficit on goods account was
1,489.6 million euro, which is by 28.5% more compared to 2007. The share of foreign trade
deficit in GDP was 48.3%.
As far as international trade in services is concerned, in 2008 Montenegro realized surplus in
the amount of 403.1 million euro, which is by 8.4% less compared to 2007, and it is the
consequence of faster growth of expenditures than of revenues. The total volume of trade in
services in 2008 was 1,105.5 million euro, which is by 21.8% more compared to 2007.
Export of services shows a tendency of continuing growth over the past few years.
Revenues from services in 2008 were 754.3 million euro, and they were higher by 11.9%
compared to the previous year. The highest revenues were realized on the basis of travelling
in the amount of 515.2 million euro, then transport in the amount of 92 million euro,
construction services in the amount of 54.3 million euro, and other business services in the
amount of 40 million euro. Expenditures from services were 351.2 million euro, which
represents the increase of 50% compared to 2007. The increase in expenditures from
services is the consequence of the increase in expenditures in the area of other business
services, transportation services, construction and personal services, cultural and
recreational service. In the structure of expenditures, expenditures realized on the basis of
other business services have the largest share in the amount of 92.8 million euro, which
represents an increase of 60.6%, and it is the consequence of the increase in expenditures
based on various business services.
Surplus was realized on the factor income account in the amount of 7.8 million euro, and
surplus on the current transfers account was 73.1 million euro.
On the capital financial account in 2008, a significant inflow of foreign capital was recorded,
and the record net inflow of FDI was realized in the amount of 18.4% of GDP. Exceptionally
high inflow of FDI is even more important bearing in mind the situation on the world markets
18
and increase of risk and investment costs. Net inflow of FDI (inflow minus outflow) was 567.6
million euro, which is by 8.1% more compared to 2007. The total inflow of FDI within the
given period was 832 million euro or 17.4% less compared to the previous year, out of which
824.9 million euro related to the investments of non-residents in Montenegro, and 7.2 million
euro to withdrawing of funds invested abroad. On the account of portfolio investments in
2008, the inflow of 182.9 million euro was recorded, whereas the outflow of funds was 198.4
million euro. On the account of other investments, net inflow in the amount of 337.4 million
euro was realized, which is by 10.2% less than in 2007.
Balance of payments trends in 2009: Reduction of domestic and external demand had an
impact on foreign economic relations of Montenegro in 2009. Balance of payments trends for
the first nine months of 2009 were characterized by the reduction of current account deficit,
reduction of foreign trade deficit, surplus on the account of services and transfers, record
high inflow of FDI and reduction of indebtedness of companies and banks abroad.
Based on preliminary data shown in Table 7, deficit of the current account of the balance of
payments from January to September 2009 was 332 million euro, which is by 53.8% less
compared to the same period of 2008. Considered in percentages of GDP, current account
deficit was 12.4%.
The total volume of trade in goods from January to September 2009 was 1221.2 million euro
and it was reduced by 38.9%, whereas the foreign trade deficit was 736.8 million euro and it
was by 37.4% less than in the same period of 2008. Offsetting the foreign trade deficit by
surplus realized on other accounts of the current account was 54.9%, which is by 16
percentage points greater than in the same period of 2008. Import was offset by the export
of goods in the amount of 24.7%.
As far as international trade of services of Montenegro is concerned, in the first three
quarters of 2009, Montenegro realized surplus in the amount of 389.4 million euro, which is
by 2.5% less than in the same period of 2008. The total volume of trade in services was
830.4 million euro and it is by 10.8% less compared to the same period of the last year.
Revenues from services were 609.9 million euro and they are lower by 8.3% compared to
the same period last year. The highest revenues were realized on the basis of travelling –
tourism in the amount of 459.3 million euro, then transport in the amount of 75.9 million euro,
construction services in the amount of 21.1 million euro, and other business services in the
amount of 21 million euro. Expenditures from the services were 220.5 million euro, which
represents the reduction by 17.1%. In the structure of expenditures, expenditures on the
basis of transport have the largest share in the amount of 52.6 million euro, other business
services in the amount of 50.5 million euro, where the most substantial expenditures are
expenditures based on various business services.
On the factor income account, deficit is realized in the amount of 44.4 million euro, whereas
surplus is recorded on the account of current transfers in the amount of 59.7 million euro.
The capital and financial account trends within the first nine months of 2009 were
characterized by record inflow of FDI and net outflow on the accounts of portfolio and other
investments. In accordance with the preliminary data, net inflow of FDI (inflow minus outflow)
within the first nine months of 2009 was 764.7 million euro, which is by 69.3% more
compared to the same period of 2008. The total inflow of FDI within the given period was
857.5 million euro. Considered by months, the highest FDI inflow was recorded in
September when the inflow was 314.9 million euro (see graph 1), and it is a result of the
partial privatization and recapitalization of EPCG. As a consequence of revenues generated
by partial privatization and recapitalization of EPCG, in 2009 the structure of FDI inflow was
significantly changed compared to the previous years, when investments in real estate were
dominant.
19
Graph 1: Inflow of foreign direct investments, 2007 – 2009 per months (in 000 euro)
350.000
2007
300.000
2008
2009
250.000
200.000
150.000
100.000
50.000
em
ba
r
st
se
pt
av
gu
ju
l
ju
n
aj
m
ap
ril
ar
t
m
fe
br
ua
r
ja
nu
ar
0
Source: Central Bank of Montenegro
On the account of portfolio investments within the first nine months of 2009, the record inflow
of 33.4 million euro was recorded, whereas at the same time the outflow of funds was 66.5
million euro. On the account of other investments (which include credits, commercial credits,
cash and deposits), the reduction of indebtedness of banks and companies and net outflow
from the cash and deposits account were recorded. Inflow on the basis of credits taken
abroad within the considered period was 167 million euro, which is significantly less than the
inflow realized within the same period of 2008 (635 million euro). Limited and more
expensive sources of financing in 2009 had the impact on reduction of indebtedness abroad.
2.2 Medium term Macroeconomic Scenario
Due to its high external exposure, as well as insufficient diversification and competitiveness
of export during 2009, Montenegro, as a small country, was significantly affected by the
world economic and financial crisis. Strength and dynamics of the impact of the crisis on the
Montenegrin economy have changed on a monthly basis, so that uncertainty regarding
projection of macroeconomic variables for the years to come is extremely high. Thus, for
example, EBRD reviewed twice the data regarding macroeconomic projections of
Montenegro for the following year; IMF reviewed them three times, while the development of
the World Bank projections is underway.
Due to the fact that because of the economic crisis Montenegrin economy will be exposed,
within the following midterm, to significant risks, this year Economic and Fiscal Programme
is also based on the development of two macroeconomic and fiscal scenarios for the period
from 2010 to 2012. The development of such scenarios, in the conceptual sense, is the
continuation of the work initiated in the former Economic and Fiscal Programme, which
proved to be very useful instrument for managing the economic policy at the time of the
crisis. This year scenarios take as a basis the risks that Montenegro was exposed to in 2009
(they were identified and articulated in the former Economic and Fiscal Programme). A
special focus is placed on the projection of macroeconomic indicators regarding the year of
2010, bearing in mind that the period from 2011 to 2012 is extremely uncertain.
The basic difference between the two scenarios is whether and to which extent
macroeconomic and financial risks from 2009 would be continued in 2010. The basis of
20
creation of the scenarios is not any more the elaboration of risks that the Montenegrin
economy is exposed to, but the analysis of its resistance or non-resistance in case of further
deepening of the crisis in 2010. Thus, the first scenario called “base scenario” that the State
budget for 2010 is based on envisages a slight recovery of the economy in 2010 – a real
GDP growth of 0.5%, with the reduction of illiquidity of the private sector and slight increase
of the credit activity.
The second scenario called “crisis scenario” is based on further deepening of the crisis in
2010, a real retraction of GDP of 2%, with further stagnation of external demand, stagnation
of export due to the loss of the market, lower inflow of FDI due to further fall in real estate
prices, failure to realize the privatization plan for 2010, as well as stagnation of new
investment projects, and continued illiquidity of the private sector that drastically reduces the
level of investments in gross fixed capital. This scenario is developed for the purpose of
determining “resistance point” of the Montenegrin economy in case of deepening of the
financial crisis in the following period. It is especially necessary to emphasize that the
realization of this “crisis scenario” would occur only under the conditions of the simultaneous
occurrence of all aforementioned negative trends, which is unlikely to happen. However, if
some of the negative trends do occur, real performances of the economy would be
somewhere between the “base scenario” and “crisis scenario”.
This Chapter below is devoted to the elaboration of both scenarios with a special emphasis
on explaining the differences between them. The text is divided into two sections. The first
section, Section 2.2.1, presents the so-called “risk map“. The last-year Economic and Fiscal
Programme of Montenegro 2008-2011 articulates a set of risks associated with financial
sector, real economy, fiscal sector, etc. The basic purpose of this section is twofold: i) to
analyze a degree of taking place or non-taking place of such risks during 2009, and ii)
evaluate extent to which it is possible to have such risks continued in 2010. The second
section, Section 2.2.2, gives a breakdown of quantitative indicators regarding “the base
scenario” and “the crisis scenario”, and it also gives a detailed review of trends of some
macroeconomic aggregates that the development of scenarios is based on.
2.2.1. Map of Risks Relevant for the Montenegrin Economy 2010-2012
Outturn of main risks in 2009: Global economic crisis has marked extensively the economic
development of Montenegro during 2009, especially having in mind that the Montenegrin
economy had extremely high growth rates until the third quarter of 2008, estimated at even
up to 10.7% in 2007 and 6.9% in 2008. However, the comparative advantage of
Montenegro, dealing with the fact that the country is a “small and open economy”, became
its comparative weakness in terms of generated high exposure to external shocks. In this
manner, the global economic crisis has highlighted the poor diversification of the
Montenegrin economy and exceptional comparative lack of competitiveness of some of its
sectors, in particular in the segment of the industrial production.
Namely, as a result of the global crisis impact on the neighbouring countries, and
consequently the reduction of the demand as well, primarily from the EU countries (as the
most important export market of Montenegro), numerous Montenegrin companies were
pushed out from the market. A consequence of that was a significant decline of export,
which went back to the level from 2003, which in turn represented an indicative signal that in
spite of efforts to affect the growth, the Montenegrin economy continues to have an
unfavourable structure in its economic sector, in particular in respect of the production
sector. On the other hand, in terms of the tourism sector, in spite of forecasts of the World
Tourism Organisation concerning decline in the tourism revenues inflows during 2009,
revenues of Montenegro generated in this year indicate that this sector is competitive as well
as that there is a high level of its flexibility, meaning that relatively satisfactory results of the
21
2009 tourism season are reached primarily as a result of the change in strategy, focus being
placed primarily on regional markets. The third segment of risk outturn, the impact of the
global crisis on the national economy deals with the construction sector, where there was a
significant activity fallback as a result of limited demand and pronounced indebtedness of
this sector, which has altogether affected the drop in real estate prices of around 20.4%
annually.
However, the impact of the global financial crisis on the Montenegrin economy affected the
banking sector first and somewhat later public finances as well. Negative impact of the crisis
on the Montenegrin banks became obvious from the 4th quarter of 2008, in order to escalate
in the subsequent months, including the end of the first quarter of 2009. Consequences of
the crisis were manifested through the significant reduction of the deposit potential of banks
(around 25% if compared to the end of September 2008), somewhat difficult access of banks
to external financing sources, reduction of inflows of funds from loan repayment caused by
worsening of the financial standing of borrowers which led to the worsening of all asset
quality parameters, as well as to the almost complete stoppage of the credit activity. As far
as the public finances are concerned, key consequence of the crisis is the reduction in tax
revenues because of sizeable slowdown of the economic activity, decline in import, lower
demand and sale of real estate, and decreased inflow of foreign capital, along with an
increase tax evasion as a result of reduced liquidity of the private sector.
Economic policy measures for the risk management in 2009: Similar to other countries,
decision-makers reacted to the stated risks caused by financial crisis with economic policy
measures, which could be generally divided into two groups. First group consists of the
measures directed towards the stabilisation of the banking sector and the financial system in
more general terms; and the second group of measures is focused on the fiscal adjustment
to newly created conditions.
It is generally recognised that Montenegro, using euro as the legal tender, has very limited
options in conducting the monetary policy. Those are primarily measures that contribute to
the growth of liquidity of the banking system, first through manipulation of the use of
mandatory reserves by banks, as well as by measures directed to the quicker consolidation
of banks’ balances and strengthening of the base to continue with the credit activity.
Specifically, during 2009 the CBM adopted set of measures: (i) single mandatory reserve
rate is reduced from 11 to 10%; (ii) it was made possible for banks to hold 25% of the
mandatory reserve in form of treasury bills issued by the state of Montenegro; (iii) period of
using up to 50% of the funds allocated to the mandatory reserves is extended from seven to
ten business days; (iv) annual interest rate for using the mandatory reserves was reduced
from 5% to 4%; (v) annual interest rate on mandatory reserve funds not repaid by the bank
in the same day was reduced from 9% to 7%; (vi) harmonization of the asset classification
with the Basel Standards was undertaken in terms of the days in arrears, whereby the
nonperforming assets represent assets in arrears for more than 90 days as compared to the
applicable one which reads the nonperforming assets as the one in arrears for more than 60
days. Additionally, the classification of assets – losses has changed from present arrears of
more than 180 days to an arrears period of more than 270 days; (vii) a new Decision on the
Provisional Measures for Credit Risk Management in Banks was adopted, which enables
banks to classify into a more favourable classification groups restructured loans starting from
1 January 2009, under the requirements defined by the Decision, provided that such assets
will not affect the bank liquidity over the short- and long-term, which provides for duly debt
servicing in future. Furthermore, this Decision has significantly relaxed the position of bank’s
borrowers – legal entities and natural persons in arrears affected by the global crisis.
In terms of the public finances, the response of the economic policy to the substantial
reduction of tax revenues was the revision of the 2009 Budget, having as a main feature the
reduction of all main items of the budget spending, i.e. expenditures of the current budget,
22
capital budget as well as budgets of the state funds, and there was also certain correction in
respect of the revenue side of the Budget. Significant cuts were made with some items of
the current budget, foremost the ones concerning gross wages of employees, costs of
materials, services and rents, as well as the current maintenance. Transfers for social
protection were increased at the same time as a result of increased number of users of such
rights, whereby expenses for payments of technological redundancies in companies that
were already privatised or are in the privatisation process were significantly increased. The
reduction in capital expenditures took place for such items which are going to have a less of
an impact on the future economic performance, such are the public administration buildings
and similar.
2.2.2. “Base Scenario” vs. “Crisis Scenario”
Qualitative articulation of the “Base Scenario” and “Crisis Scenario”: As it was already
mentioned, both scenarios are taking as a base risks that Montenegro was exposed to in
2009. The first column of the Table 8 lists the economic crisis risks for which, in the previous
EFP, was expected that Montenegro will face in 2009. The second column states the
assessment for each of those risks in terms whether such risk really took place in 2009 or
not, with a brief explanation. Third and fourth column of the Table are intended for the
exhibition of the “Base Scenario” and “Crisis Scenario” respectively, whereby in case of each
individual risk that did not take place or took place in 2009 a possibility of such risk to
continue or not in 2010 is assessed.
Table 8: Degree of risks taking/not taking place in 2009 and presentation of two scenarios for
2010
23
Risks
Risk taking or not taking place in 2009
Assessment of risk taking or not taking place in 2010
“Base Scenario”
“Crisis Scenario”
Stagnation or further drop in
turnover in the real estate
market
Further deepening of the crisis
in countries – trade partners of
Montenegro
Yes
Drop in real estate prices in 2009 was 20.4%
No
Real estate prices are stagnating or having a mild
growth of up to 5% annually
Yes
Real
estate
prices
are
dropping up to 5% annually
Yes
Based on preliminary data, the most important import and
export markets are having negative economic growth
results accompanied with the sizeable drop in aggregate
demand and private consumption
Yes
Further
decline
of
the
economic activity in EU and
CEFTA member countries
Further decline in industrial
production
Yes
Problems in operation of the largest producer in the
processing industry – KAP, caused a drop in processing
industry of 36.6%, while in the mining and quarrying
sector the drop was 64.5%. Reason for such decline is
mainly a consequence of the reduced production in the
sub-sector of other mining and quarrying by 79.4%,
whereby the ore mining reduction of 91.1% was the one
with the highest contribution in terms of the production
decline. Insignificant drop in electric power generation,
gas and water of 1.9% is due to the reconstruction of
production capacities.
No
Stagnation and mild recovery of the economic growth in
EU and CEFTA countries in accordance with the IMF
forecast (Regional Economic Outlook, October 2009)
and EBRD forecast (World Economic Outlook, October
2009).
No
A recovery of aluminium prices in the global markets
takes place, a problem with KAP is resolved and
production is growing.
Stagnation in revenues from
tourism
No
Even though the assumption was that 2009 would result
in a significant decline in revenues from tourism, by
focusing on local markets, price policy as well as
extending of the season, have led to a growth of 2.3%, at
least in terms of quantitative parameters, while the
estimated revenues are somewhat lower than in 2008.
No
In terms of its value, the Privatisation Plan in 2009 is
implemented primarily through the privatisation of EPCG,
thus the proceeds of so-called financing (privatisation
revenues, borrowings and loans, and grants) are of
177.19 million euro in 2009.
Yes
Drop in the payment operations took place as early as
mid 2008, much earlier than the economic activity
downturn and GDP retraction, but such trend continued
even during 2009 with gradual recovery during the last
quarter of the year.
Yes
Total approved loans from banks are being reduced at
the rate of 9.86%, if compared to the comparative one-
No
The tourism sector indicates high level of
competitiveness and resistance to global crisis, thus a
growth from tourism would be up to 6% if compared to
2009.
Yes
Stagnation is assumed and
mild drop in revenues from
tourism as a result of the
assumption on further impact
of the global crisis on the
neighbouring countries.
Yes
The stagnation of privatisationbased investment’s inflows is
assumed.
Privatisation
implemented
Plan
Further worsening of
liquidity of the economy
not
the
Further reduction of credit
supply
No
The assumption is that the privatisation process goes
as planned, with an inflow of average 55 million euro
annually during 2010-2012.
No
The assumption is that the growth of credit activity will
affect the growth of payment operations.
No
Stagnation of the credit activity continues with an
estimated marginal credit growth of 1.2% annually.
24
Yes
No growth of aluminium and
steel prices, and national
companies
being
large
exporters have a slow regain
of markets lost in 2009. Late
resolution of the excess
employees’ problem in KAP,
production starts only in the
second half of 2010.
Partially
Mild recovery of the payment
operations,
but
which
stagnates to the level from
2009 as a result of the
economic activity slowdown.
Yes
Reduction of credit activity,
assumed marginal decline of
Possibility of further drop of
deposit potential of banks
Further drawback of portfolio
investors
Unemployment growth
Stagnation and deferral of
investment projects
year period, or at the rate of 2.25% if compared to the
end of 2008. First negative rates in credit growth are
registered in October 2008, when there was a suspension
of credit activity of banks, as affected by the crisis, due to
the problems with liquidity and more difficult access to the
external sources of financing.
Yes
Total deposit potential of banks as of 30 September 2009
was 1,900 million euro. As impacted by the global
financial crisis, there was a significant outflow of deposits,
thus an annual drop of 18.3% was recorded. If compared
to the end of 2008 there is a growth in deposits of 7.19%.
2% annually.
No
The assumption is that there will be a mild recovery of
the deposit potential in the coming period, i.e. that the
deposit growth trend since May 2009 will continue. The
forecasted growth of deposits in 2010 is at the level of
2.5% of estimated GDP, which is an equivalent of 70-74
million euro of growth.
Yes
In terms of the portfolio investments in the first nine
months of 2009, there was an inflow of 33.4 million euro,
which is 72.5% lower than in 2008. Investments into
national securities were 16.6 million euro, which is 50.9%
less than in the previous year, while the withdrawal of
monetary assets invested into foreign securities was 14.2
million euro. At the same time outflow of funds at the
account of portfolio investments was 66.5 million euro.
The largest portion of the outflow of 47.9 million euro was
from investments of residents into foreign securities, while
18.6 million euro was withdrawal of funds invested into
national equity securities.
No
Even though the expectation was that as a result of
significant downturn of the economic activity there will be
an unemployment growth due to rather rigid labour
market, the number of employees in the first nine months
of 2009 was 174,418 and it was higher by 5.5% if
compared to the same period of the previous year, while
the number of employees in September was 4.6% higher
if compared to the end of the previous year. Broken
down by individual sector, the highest growth was in real
estate related activities – 26.9%, hotels and restaurants –
19.2%, construction – 17.7% and corporate and
households trade 11.7%.
No
The assumption used is that there will be a mild
recovery in inflows from investments into national
securities.
Partially
The feature of capital-financial account trends in the first
Partially
If the FDI inflow structure is observed, excluding the
Yes
In 2010 layoffs will be inventible, at least in the segment
dealing with the restructuring of export companies, thus
an increase in expenditure for technological redundancy
payments and increase of unemployment (which as an
economic indicator has a time lag in times of crises, etc)
are expected. The estimate is that these costs could
lead to an increase of expenditures in excess of 1% of
GDP. The estimated growth of unemployment is 1 p.p.
since the assumption is that the public works will affect
absorption of one segment of unemployed persons.
25
Yes
The assumption used is that
there will be a mild recovery of
deposit potential in the coming
period, i.e. that the deposit
growth trend since May 2009
will continue. This growth is
slower than the other scenario
and it is estimated at around
25-30 million euro in 2010.
No
Yes
In 2010 layoffs will be
inventible, at least in the
segment dealing with the
restructuring
of
export
companies, thus an increase in
expenditure for technological
redundancy payments and
increase of unemployment
(which as an economic
indicator has a time lag in
times of crises, etc) are
expected. The estimate is that
these costs would definitely
exceed 1% of GDP, while the
estimated
growth
of
unemployment will be 1.8 p.p.
Yes
There will a further drop in
Deferred implementation of
large-scale
infrastructural
projects
Drop in oil and oil derivatives
prices, as well as prices of
other energy sources
Stagnation
–
drop
of
aluminium prices
ten months of 2009 was a record inflow of FDI and net
outflow on portfolio accounts and other investment
accounts. According to preliminary data, net FDI inflow
(inflow less outflow) in the first ten months of 2009 was
764.7 million euro, which is 69.3% more if compared to
the same period of 2008. Total FDI outflow in the
observed period was 857.7 million euro. In view of
month-by-month data, the highest FDI inflow is recorded
in September when the inflow was 314.9 million euro and
was a result of the partial privatisation of EPCG.
Partially
Primarily as a result of reduced inflow of tax revenues,
the Budget revision reduced the level of funds allocated
to capital investments.
EPCG privatisation and recapitalisation, there is a drop
in investments in the core capital in addition to drop in
investments into real estate. The assumption is that
even in 2010 a certain number of projects will be
deferred because of the fact that price of capital is still
high and due to an increased risk.
investments in the real estate
market as well as in the core
capital of companies.
No
Signing of the Concession Contract for construction of
the first section of the highway, as well as signing of
concession contracts for capturing value of military
property by constructing tourism and residential
complexes in the Littoral, have created contractual
prerequisites for investments to start. Individually each
of the investments is important in its scope and exceeds
those currently implemented in Montenegro.
At the same time, if infrastructural investments
contracted through so-called “contract” loans are added
to the capital budget, assuming that the announced
arrangements with international financial institutions
turn into effect, and then the total capital investments
would be at higher level if compared to the previous
years.
Yes
No
Yes
Additional
financing
of
infrastructural
structures,
including
the
Bar-Boljare
Highway; In order to analyze
and have a good quality
management of fiscal risks
arising from this activity, the
Ministry
of
Finance
is
preparing various scenarios of
the fiscal envelope in order to
calculate fiscal impact of the
construction of the Bar-Boljare
Highway, as well as a cost of
direct borrowing of the sate if
the
entire
highway
is
constructed.
No
Yes
No
Yes
26
Quantification of the “Base Scenario” and “Crisis Scenario”: Based on the scenarios
articulated on qualitative bases (see Table 8), Tables 9 and 10 state basic quantitative
features of both the “Base Scenario” and of the “Crisis Scenario”:
Table 9: Main macroeconomic indicators of the “Base Scenario” for period 2010-2012
Key Macroeconomic Indicators of the “Base
Scenario”
2010
Forecast
2011
Forecast
2012
Forecast
Real GDP growth
0.5%
3.0%
4.0%
Nominal GDP growth
3.8%
6.6%
7.6%
Inflation
2.0%
3.0%
3.0%
Current account deficit (as % of GDP)
17.1%
15.9%
16.0%
Net Foreign Direct and Other Investments(as %
of GDP)
15.4%
16.9%
16.8%
Domestic Loans (as % of GDP)
77.1%
75.4%
74.0%
Bank Deposits (as % of GDP)
52.3%
53.7%
54.2%
Table 10: Main macroeconomic indicators of the “Crisis Scenario” for period 20102012
Key Macroeconomic Indicators of the “Crisis
Scenario”
2010
Forecast
2011
Forecast
2012
Forecast
-2.0%
3.0%
4.5%
Nominal GDP growth
1.9%
6.1%
7.6%
Inflation
2,0%
3.0%
3.0%
Current account deficit (as % of GDP)
Net Foreign Direct and Other Investments(as %
of GDP)
Domestic Loans (as % of GDP)
15.9%
15.9%
16.0%
15.9%
16.8%
16.9%
77.7%
76.1%
77.8%
Bank Deposits (as % of GDP)
52.6%
54.1%
54.1%
Real GDP growth
Arguments for the forecasted GDP growth rate according to the “Base Scenario” and “Crisis
Scenario” respectively
Concept of Calculating the Economic Growth Rate: Forecasts of the GDP trends in
Montenegro for the period 2010-2012 are based on so-called expenditure method which
consists of following elements: (i) personal consumption of households, (ii) public spending,
(iii) trade balance of goods and services, (iv) gross investments into fixed capital, and (v)
inventories. In preparation of the scenario, certain forecasts of prices and labour market
trends were also used.
Personal Consumption of Households: Personal consumption in 2009 had a significant
downturn, due to effects of the global economic crisis, and dropped for almost 9 p.p. (by
314.0 million euro) if compared to 2008. Significant decline of credit activity of the banking
system (drop in credits of almost 8% annually), connected with the stagnation of nominal
- 27 -
and reduction of real wages, especially in the public sector, decrease of FDI inflows into real
estate for almost 50%, have all affected the private consumption in 2009 to be estimated at
72.4% of GDP.
According to the “Base Scenario”, having in mind further expectations of low external
demand, high costs of capital at the international market, restrictive fiscal policy in the area
dealing with the compensation of employees, and only mild recovery of the credit activity, the
assumption for 2010 is that the private consumption of households will increase to the level
of 72.8% of GDP, or for additional 100 million euro if compared to 2009. It is important to
mention the fact that Montenegro does not have data on currency in circulation. This
complicates quite extensively the forecast of the private consumption level. The general
assessment is that only the second quarter of 2009 started to reflect the slowdown of the
consumption in terms of the households’ consumption, which indicates a relatively high
liquidity level of the private sector in the period preceding the first signs of the financialeconomic crisis. For the period 2011-2012, the “Base Scenario” relies on the assumption
that the private consumption will return to the new level of long-term balance of 73.5-74.7%
of GDP. Primary sources of growth of the private consumption share are based on the new
reduction of the unemployment rate, growth of economic activity, more pronounced credit
activity of the banking system and growth of nominal wages. On the other side, the new
private consumption equilibrium at this level should not cause higher inflationary pressures,
while on the other side it would reduce the level of the current account deficit of the balance
of payments, which was based on the import of consumables in 2007 and 2008, guided
primarily by the private sector demand.
According to the “Crisis Scenario”, as a result of the restrictive fiscal policy dealing with the
wage policy, stagnation of the FDI inflow into real estate, weak credit activity especially in
the area of consumer loans, the personal consumption in 2010 remains almost at the level of
2009 having a nominal growth of around 52 million euro if compared to the level from 2009.
After 2010, the economic recovery is expected, as well as return of the private consumption
level to 74% of GDP in 2012.
The difference of two scenarios regarding the private consumption in 2012 may be estimated
to around 90 million euro, which is an equivalent of 1.9% of GDP estimated under the “Base
Scenario”.
Public Spending: Decrease in import and export as early as the end of 2007 caused the
reduction of the balance of payments deficit, but a reduction of the Budget inflows as well.
The general assumption of both scenarios is that due to contracted growth of the
Montenegrin economy in the forward period one should take into account roughly the same
level of the Budget revenues in respect of estimated revenues for 2009. Furthermore,
Montenegrin public finances will be exposed to following factors: (i) orientation towards the
balancing of the Budget until 2012; (ii) decreased borrowing options in the international
market; (iii) the EU integration process requires allocation of significant funds for these
purposes (part of these costs will be covered by using pre-accession assistance funds); (iv)
continued construction of the Bar-Boljare Highway requires allocation of significant funds as
part of assumed obligations; (v) regular servicing of foreign and internal debt; and (vi) social
program for safeguarding the population most affected by the consequences of the global
economic crisis.
Following assumptions were used for the development of the medium term expenditure
framework: (i)

Continued reduction of tax pressure by reducing and equalising the personal income tax
rate from 12% in 2009 to 9% in 2010: This measure has a significant impact on creation
of a more incentivising framework for the development of the private entrepreneurship
- 28 -
and an increase of competitiveness as a result of a more significant reduction in effective
tax rates, as well as reduction of employment in the “grey economy” segment and
bringing it into legal economy. At the same time there will be an increase of
contributions at the expense of employees from 17.5% to 24% and reduction of
contribution rates at the expense of employers from 14.5% in 2009 to 10% in 2010 (9.8%
contribution for compulsory social insurances and 0.2% contribution for the Labour
Fund). In this manner the overall costs for employers is reduced which has significantly
impacted relieving employers of obligations, reducing business barriers and increasing
competitiveness. Moreover, in 2010 the obligation of advance payment of corporate
profits tax was also abolished, which has significantly relaxed the private sector in terms
of both liquidity and administrative procedures.

Limiting the level of the current public spending: Reduction of its share in GDP from
around 40% of GDP in 2009 to some 34.2% in 2012 is envisaged, whereby the nominal
amount of the current Budget spending will remain almost unchanged.

Continued implementation of the capital budget of Montenegro of 3.5% of GDP annually
is planned along with the reduction of the current public and budget spending levels.

Continued payment of liabilities arising from the old foreign currency savings and
restitution, whereby the repayment of liabilities arising from the restitution is limited to
0.5% of GDP annually. At the same time, regular servicing of national and foreign debt
will continue.

Use of the EU pre-accession funds – IPA funds, whereby the country will have at
disposal up to 33 million euro annually in the period 2011-2013, depending on the
implementation schedule of proposed projects.
Balance of trade in goods and services: Drastic downturn of the foreign-trade balance during
2009 as a result of the global financial crisis is a consequence of action of both external
factors (low external demand, primarily of the EU market, as well as the drop in prices of
core export products, aluminium first of all) and internal weaknesses of the Montenegrin
export structure (principally the low competitiveness of production sectors). Namely, due to
significant drop in aluminium prices in world markets, the Aluminium Plant was very quickly
pushed-out from the market as a result of high production costs. Thus in 2009, primarily due
to decrease of export of aluminium and steel, the forecasted drop in export of goods is
46.1% which sets back the country to the 2001 export level. It is sufficient to mention that for
the first six months of 2009 the export of goods in Montenegro without aluminium and steel
was only little above an equivalent of 8% of GDP. On the other hand, reduced inflow of
funds from abroad, slowdown of economic activity, decreased liquidity of the economy and
reduced aggregate demand in 2009 led to drastic reduction of import which is estimated to
be almost 40%. The biggest drop was in the segment of general consumption commodities,
electricity import (due to reduced production of the Aluminium Plant) and of vehicles as well.
Under the assumption of the “Base Scenario” i.e. the assumption of mild growth of GDP,
growth of aluminium prices in the world markets, consolidation of the Aluminium Plant and
commencement of works of the Bar-Boljare Highway, the forecast for 2010 is simultaneous
growth of export and import, whereby the import will have somewhat higher growth
absorbing the effects of the highway construction. Based on such assumptions, this
scenario envisages for the current account deficit in 2010 to be at the level of 17.1% of GDP.
For the next two years the assumption of the “Base Scenario” is that the current account
deficit stated as the GDP share will be stable at the level of around 16% of GDP, first of all
as a result of growth of export of goods which should grow at the rate of 10-15%, then as a
result of regaining of markets of base metals which were lost during 2009, as well as growth
- 29 -
of export of services the growth of which would be balanced at the level of 5-8% annually.
Forecast on trade in goods and services trends in 2010 relies on the four basic assumptions:
(i) EU economy is recovering with a rate forecasted in documents of IMF, ECB, EBRD and
WB; (ii) highway construction as well as other capital investments planned for 2010 are
implemented according to the planned schedule; (iii) tourism season in the coming period
continues the growth which was the characteristic for the period 2006-2008; and (iv) the
Aluminium Plant commences regular export at the level which is not less than 70% of the
production from 2008.
According to the “Crisis Scenario”, in 2010 the export of goods will stagnate as a result of
postponing the finding of the solution for the Aluminium Plant, thus the growth of export of
goods in 2010 is only 6% if compared to 27% what is planned under the “Base Scenario”.
On the other had due to low public spending and private consumption of households, the
import also stagnates having the growth of only 1.6% if compared to 2009, which is
considerable lower that the growth of 8.15% planned in the “Base Scenario”. On the
medium-run, precisely in 2012 and 2013, the “Crisis Scenario” envisages the stabilisation of
the export trends based on the assumption that in 2011 the large Montenegrin export
companies will manage to regain lost markets, especially those of the EU. Therefore, the
forecast for export of goods in 2011 is 28% and 14% in 2012. These trends would reduce
the current account deficit of the balance of payments in 2012 to the level of 16% of GDP,
which is almost half less than in 2008.
Gross investments in the fixed capital: During 2009, it seemed initially that the FDI inflow
was one of the macroeconomic aggregates not being significantly affected by the global
financial crisis, even though the neighbouring countries were facing significant decline of FDI
inflows. In case of Montenegro, the net FDI was one of the elements that have assisted in
the prevention of a more pronounced economic activity downturn. The structure of the FDI
inflows is significantly changed if compared to previous years, when investments into real
estate were dominant. Investments into national companies and banks became dominant,
where the significant part is effectuated in the form of inter-company debt, while the
investments into real estate were significantly lower source of FDIs.
In terms of the level of investments into the gross fixed capital, it is noticeable that in 2009
there was a significant drop in the level of this category in the GDP structure of only 14.7%
of GDP if compared to the previous year, when the estimated investments into gross fixed
assets were around 27.8% of GDP. Reasons for an important downturn of this category in
2009 come from the fact that only few companies had new investments in fixed or working
assets in this year, as well as that they were investing in growth of inventories. Namely, as a
result of reduced credit activity of the banking system during this year, of pronounced
reduction of private sector liquidity, as well as due to the fall in external demand and real
estate prices, the investments into fixed capital were considerably reduced. The companies
were primarily focused to utilize existing capacities in a quality manner, to adjust costs and
level of production, as well as to utilize inventories in respect of reduced demand, thus the
need for additional investments into fixed capital was limited.
According to the “Base Scenario”, projections are that there will be a mild growth of
investments into fixed capital in 2010, and its share in GDP for that year is forecasted to be
at the level of 15.6% of estimated GDP, as a result of somewhat more active but not
excessively active credit policy of the banking system, somewhat better liquidity of the
system as well as due to the recovery of the world economy. The assumption is that
companies will focus on recovering lost markets in 2010, as well as to reach production level
from previous period. Amidst, as a result of restrictive fiscal policy, it is to be expected to
have a limited growth of gross investments into fixed capital as a result of decelerated
implementation of capital public works, as well as due to further stagnation of new works in
the construction sector. Distinct large investments into gross fixed capital are not expected
- 30 -
in the subsequent years either, but the focus will be on the more efficient use of existing
capacities. Investments into gross fixed capital are thus projected to be at the level of 16.4%
of GDP in 2011 and 16.7% of GDP in 2012.
According to the “Crisis Scenario”, due to further economic activity downturn, a further
decline of investments into gross fixed capital is to be expected; thereby investments in this
category could be up to 1% less in 2010 if compared to 2009, since companies would
primarily focus on maintaining their solvency and to a lesser extent to new investments.
Inventories: Items from financial reports for period 2007-2008 were used to assess the level
of inventories. The level of inventories in 2009 reflected the expected market behaviour of
companies in global crisis circumstances. Namely, decline of demand, both the internal and
external one in almost all sectors, caused stockpiling of inventories, which were estimated to
be 71 million euro in 2009. Reduction of the level of inventories is expected during the next
year in both the “Base” and “Crisis” scenario, due to adjustment of production to existing
demand, which were in an obvious mismatch (demand too low, plus production impulse
based on the 2008 demand). According to the “Base Scenario”, there will be an abrupt
reduction in inventories in 2010 as a result of expansion of the economic activity and private
consumption. In the next two-year period, inventories should stabilise at the level of 0.10.4% of GDP. According to the “Crisis Scenario”, consumption of inventories in 2010 is
forecasted to take place with slower pace than the one in the “Base Scenario” due to slim
aggregate demand. Thus, the net difference of “unused” inventories in the “Crisis Scenario”
and in the “Base Scenario” for that year is 39.8 million euro. In the case of the “Crisis
Scenario”, a decline in inventories is forecasted for 2011 and 2012 due to economic activity
expansion.
Prices: The prices trend in the coming period should not represent the source of instability of
the Montenegrin economy. Videlicet, low demand and by that low consumption level, drop
of real wages (in September 2009, if compared to the previous quarter, the average wage as
well as the average wage without taxes and contributions have recorded a drop of 2%),
unemployment growth which is expected in the next year, alongside restrictive fiscal policy
and limited credit growth, do not leave sufficient room for inflationary pressure. The present
level of base inflation supports this argument, which indicates a downward trend of
inflationary expectations. In October 2009, the base inflation was 1.73%, while the annual
base inflation for the same month was 1.43% and it was 3.7 p.p. lower if compared to the
annual base from March 2009. Having in mind that the base inflation is a relative indictor of
the long-term inflation, the assumption is that there will be no internal inflationary pressures
in the next period.
Possible source of instability could be expected if there would be significant changes in
prices in the world market of energy sources, fuels, as well as of agricultural products, which
are the external sources of price instability. Possible impulse (even though rather unlikely)
of inflationary expectations could be also caused by an extensive increase of prices of
products the prices of which are regulated by administration (through the increase of excise
taxes). Consequently, in both scenarios the level of projected inflation measured by the
consumer prices index remains at the level of 2%.
In terms of the trends of deflators, the characteristic of the previous period is that the level of
deflators in Montenegro exceeds the inflation level, which is an indication of noncompetitiveness of prices of domestic products and services. Therefore, the deflator was
significantly higher than the inflation during 2007 in spite of extremely high import oil prices
which led to rise of inflation above the deflator level in other countries. Adjustment of prices
of domestic products and services is expected in the coming period, in order to adjust them
to decreased internal demand, thus the assumption of both scenarios is that an equalisation
- 31 -
of the GDP deflator level and CPI will take place in the period 2011-2012 and will be around
3% annually.
Labour Market: The labour market in Montenegro, as compared to majority of neighbouring
countries, almost has not even felt consequences of the economic crisis until the end of third
quarter of 2009. According to data of the Employment Office, the unemployment rate was
10.35% in September 2009 and it is lower for 0.36 p.p. if compared to the rate from the
same month of previous year. Low unemployment rates were recorded in summer months
(lowest one in August – 10.17%), which could be attributed to seasonal employment.
Additionally, it should be mentioned that the additional reason for such low unemployment
rates was the change in legislation in 2009 whereby rights and obligations of non-residents
were made equal to the one of the residential labour force.
In 2009, the Government of Montenegro signed the Agreement with the Union of Employers,
whereby the employers undertook, among other things, that the layoffs during the crisis
would be only done as a last instance measure. It is extremely important to highlight that the
unemployment, as an economic activity indicator, has a time lag, as a rule, if compared to
other indicators, as well as that it has a downward trend over the last several months.
Growth of unemployment rate of 0.18 p.p. in September 2009, if compared to the previous
month could be a reflection of beginning of recording the labour market problems from
previous period, precisely difficulties in operation of some economic undertakings and
administrative recording of “surplus” of employees with a certain time lag. Having in mind
the announced resolution of problems in several companies having a long-standing surplus
of labour force, including also the Aluminium Plant as the largest export company, it is
realistic to expect that the unemployment rate will grow. Moreover, the enterprises will not
be able to rely on the reduction of wages in the next period, as a preventive measure of
reduction of production costs, which was an often-used option since September 2009, but
they will have to adjust their production by reducing marginal operating costs through the
reduction of the number of employees. The assumption in the “Base Scenario” is that in
2010, the unemployment rate could reach the level of 11.9%, setting it back to the 2007
level, while the “Crisis Scenario” envisages even higher rate – precisely 13.0%.
In respect of the labour productivity in Montenegro, there was a significant reduction in 2009.
In fact, in spite of the real economic activity downturn for an estimated 5.3% in 2009 there
was an employment growth of estimated 5%, meaning that the estimated labour productivity
decline in that year is 1.8%. The “Base Scenario” for 2010 envisages the productivity growth
of 3.5% due to unemployment growth and marginal growth of real GDP. The labour
productivity could grow at rate of around 4%, within the “Crisis Scenario”, due to significant
layoffs of labour force to increase the production efficiency. It is obvious that the financial
crisis pointed to the existence of the labour market rigidity in Montenegro, non-resilient in
terms of the large economic shocks, whereby the new adjustment of labour force level is
very slow, which altogether has direct impact on labour productivity changes.
The wages in Montenegro, unlike the employment growth, stagnated and even recorded a
decline. This stresses out that structural changes in the labour market caused by the global
financial and economic crisis in Montenegro were manifested through drop in wages. The
assumption used is that after the nominal wage growth of 17.5% in 2008, there will be a
nominal drop of wages of 1.7% in 2009. Due to mild recovery of the economic activity in
2010, envisaged in the “Base Scenario”, an upward correction of nominal wages in the real
sector could be expected in line with the forecasted inflation rate, while there will be an
downward correction in the public sector in accordance with legislative changes. In forward
years, having in mind fiscal policy measures directed at reduction of the public spending in
all levels, a significant growth of nominal wages cannot be expected, thus the wage growth
will be adjusted with the labour productivity level and inflation, which corresponds to the
growth of nominal wages in 2011 and 2012 of 5% and 6.2% respectively in both scenarios.
- 32 -
3. PUBLIC FINANCES
The high growth rates were the characteristic of the Montenegrin economy in the period
2006-2008. Macroeconomic and political stability has provided for a synergy effect in terms
of the more pronounced interest of foreign investors, which has resulted in impressive inflow
of foreign direct investments. The foreign direct investments, alongside the large growth of
banking loans, have influenced the increase of import growth rates and growth of personal
consumption and public spending, which started the cycle of the dynamic economic growth
and the growth in quality of life of Montenegrin citizens. Moreover, this period was featured
by sizeable dynamics in the capital and real estate markets, as well as important increase in
revenues of the Central Budget of Montenegro, as well as in budget of local selfgovernments. High economic growth was also followed by reinforcement of some of the
trends, such as the “overheating” of the economy, increase of the current budget
expenditures, inflation growth and high balance of payments deficit.
In the long run, the stated positive economic trends were hardly sustainable, thus the
medium-term macroeconomic and fiscal forecasts developed at the time were already
projecting gradual decrease of the economic growth rate and foreign-economic disbalance
and a gradual decline of public spending in the fiscal area with simultaneous reduction of the
fiscal burden. However, the occurrence of the global economic crisis and its repercussions
have accelerated the need for faster structural and fiscal adjustments, as well as budgetary
adjustments.
Consequences of the global financial and economic crisis, felt in Montenegro in the last
quarter of 2008 and continued during the entire 2009, have substantially worsened the fiscal
performance of the country. In 2009, there was a drastic reduction of the scope of source
public revenues if compared to the previous year. Even though the Government responded
with a series of saving measures to the reduction of the public revenues, the public finances
deficit was increased from only 0.4% of GDP in 2008 to almost 4.0% of GDP in 2009.
However, in 2009, the relative stability of the banking system and prudential fiscal responses
of the state to the downturn have for the time being restrained the significant negative impact
of the crises on the public finances.
The estimate of public spending in Montenegro in 2009 and over the medium-term
framework of 2010-2012 is based on the estimated data on GDP trends (the estimate is that
the GDP retraction in 2009 will be around 5.3%), data on public spending trends in the
period from 2006 to 2008, outturn of the public spending for the first eleven months of 2009
and estimated negative impact of the global economic crisis on Montenegro. Furthermore,
the fiscal effect of main structural reforms was taken into consideration, as well as the fiscal
impact of changed legislation dealing with tax rates.
Strong impact of the global economic crisis on Montenegro, in particular on its public
finances, has determined the main assumptions for the development of the medium-term
fiscal scenario of the country for the period from 2010 to 2012, which are presented in Table
11 in terms of some core elements. The context of the global uncertainty and growing
probability for the impact of the global economic crisis to continue on the Montenegrin
economy definitely featured the forecasts in both of the scenarios.
- 33 -
Table 11: Basic Macroeconomic Indicators and Fiscal Parameters for 2008 and Forecasts for
the Period 2009-2012.
Macroeconomic
and fiscal
envelope
( in % of GDP)
Nominal
GDP
growth (in %)
Real GDP growth
(in %)
2008
2009
Outturn
Forecast
16.27
-0.10
2010
2011
2012
“Base
Scenario”
“Crisis
Scenario”
“Base
Scenario”
“Crisis
Scenario”
“Base
Scenario”
“Crisis
Scenario”
3.80
1.90
6.60
6.10
7.60
7.60
4.00
-5.30
0.50
-2.00
3.00
3.00
4.00
4.50
Public Revenues
Consolidated
Public Spending
49.58
43.10
41.89
40.17
42.06
40.33
41.10
39.41
49.96
47.09
46.23
45.99
43.54
43.54
41.06
41.06
Deficit/Surplus
-0.38
-3.99
-4.34
-5.83
-1.48
-3.22
0.04
-1.65
Interest
Primary
deficit/surplus
0.76
0.86
1.04
1.04
1.04
1.04
1.03
1.03
0.38
-3.13
-3.30
-4.78
-0.44
-2.17
1.07
-0.62
-2.79
-1.87
-2.76
-4.28
-0.36
-2.10
0.07
-1.62
Increase/reduction
of deposits
The first scenario called the “Base Scenario” is consistent with the adopted Budget of
Montenegro for 2010 and is based on the assumption of approximately equal level of the
budget revenues in 2010 if compared to the estimated revenues for 2009. The strategic
objective of this scenario is to eliminate the public finances deficit by 2012, primarily by
reducing the public spending, which is significantly reduced by the Revision of the 2009
Budget and the Law on Budget for 2010.
Apart from the “Base Scenario” of public finances, which is based on moderate recovery of
economy in 2010 (forecasted real growth of 0.5%), the “Crisis Scenario” is also developed
which is based on the assumption that the economy of Montenegro will have negative
economic growth in 2010 as well (at the level of -2.0%). As presented in the Table 11, the
core difference of such fiscal scenario if compared to the “Base Scenario” is that due to
additional reduction of public revenues the pace of the public finances deficit reduction in the
“Crisis Scenario” will be slower than the one envisaged in the “Base Scenario”.
In spite of the need to increase expenditures required for the efficient implementation of the
EU accession process of Montenegro8, the expenditures for financing of social programs for
safeguards of the population mostly affected by the consequences of the economic crisis, as
well as expenditures for financing of the continuation of the construction of the Bar-Boljare
Highway9 and other strategically important infrastructural projects, both of the scenarios
have significant fiscal consolidation guided by the reduction of current expenditures as their
feature.
8
The full utilization of the pre-accession assistance IPA is the one being counted on in this case.
The capital budget for 2010 has allocated 25 million euro as participation of the Government of Montenegro at
the account of contribution to the construction of the first section of the Smokovac-Mateševo Highway, in line with
the Concession Contract signed with the Croatian Consortium led by the Konstruktor company.
9
- 34 -
3.1 Public Finances Sector – Fiscal Framework and Debt
Management
3.1.1 Public Finances Trends in the Period 2008 - 2009
In 2007, the consolidated public finances of Montenegro consisting of the central
government budget, budgets of 5 state funds and local-self government budgets (19
municipalities, Capital, and Historical Royal Capital) were marked by a significant increase of
public revenues and surplus of public finances of around 6.5% of GDP.
As early as in the last quarter of 2008, the contraction of the economy led to the worsening
in the public finances sector. Even though the high economic growth almost until the end of
the year maintained revenues from taxes at high level, the total public revenues (their
relative share in GDP) were reduced as a consequence of economic activity slowdown,
especially in the real estate sector; decreased export and import; and also due to reduction
of rates for mandatory social contributions and reduction of non-tax revenues. Since there
was a significant increase at the side of the consolidated public spending primarily due to
the 30% increase of wages in the public sector and an increase of social transfers and of the
capital budget, already in 208 the budget entered the zone of public finances deficit of 0.4%
of GDP after three years being in the zone of high surplus.
Under the influence of the global financial and economic crisis, the negative trends in
performance of the public finances of Montenegro continued during 2009. The reasons for
worsening of the public finances performances of the country are both on the side of the
drop in public revenues and further growth of budget expenditures.
As stated in the Table 12, due to dramatic reduction of the economic growth and imports, the
source public revenues were reduced by almost 14%; from 1,544 million euro in 2008 to
1,329 million euro in 2009. The biggest drop was in the indirect taxation revenues (VAT and
customs), which were having a strong import element, thereby the recued imports, trade and
production activities led to their reduction. Additional reduction in VAT revenues was also
due to abrupt drop in personal consumption. The corporate profit tax revenues were also
affected due to a declining corporate profitability. As a result of increased tax burden in
terms of the excise taxes (this was the only source revenue that recorded growth) there was
an increase in revenues from this source. The excises on mineral oils and tobacco and
tobacco products were increased, all in line with alignment and harmonisation of
Montenegrin tax legislation with the EU Directives. Finally, revenues from the personal
income tax remained at the level from 2008, due to unchanged employment in the economy.
On the other side, the expenditures were increased in the same period by 9.1% or by around
150 million euro, before the revision of the Budget was adopted in July 2009.
Table 12: Overview of Public Finances in 2008 (outturn) and 2009 (forecast)
Outturn 2008
DESCRIPTION
CURRENT PUBLIC REVENUES
mil €
Forecast 2009
% of GDP
mil €
% of GDP
1544.44
49.58
1328.91
43.10
Taxes
926.40
29.74
794.14
25.76
Contributions
339.91
10.91
286.97
9.31
36.09
1.16
31.55
1.02
165.76
5.32
112.01
3.63
Fees
Charges
- 35 -
Other revenues
Inflows from loan repayment
67.28
2.16
55.83
1.81
9.00
0.29
48.41
1.57
CONSOLIDATED PUBLIC SPENDING
1556.55
49.97
1451.92
47.09
CURRENT PUBLIC SPENDING
1245.67
39.99
1239.40
40.20
Current expenditures
574.95
18.46
545.68
17.70
Transfers for social care
350.42
11.25
408.36
13.25
Transfers to institutions, individuals, NGOs and public sector
237.55
7.63
233.63
7.58
Total capital expenditures
310.89
9.98
212.52
6.89
Borrowings and loans
63.51
2.04
29.72
0.96
Reserves
19.19
0.62
22.00
0.71
-12.12
-0.39
-123.01
-3.99
12.12
0.39
123.01
3.99
-110.79
-3.56
-125.25
-4.06
-2.65
-0.09
80.96
2.63
4.22
0.14
5.40
0.18
38.56
1.24
109.74
3.56
-87.00
-2.79
-57.56
-1.87
DEFICIT/SURPLUS
FINANCING
Domestic financing
Foreign Financing
Grants
Revenues from privatisation or deposits
INCREASE/REDUCTION OF DEPOSITS
It is important to highlight that the structure of source revenues changed in 2009 if compared
to previous years. In fact, the growth of share of direct taxes (income taxes and social
contribution) in total taxes is notable, while at the same time there is a reduction in share of
indirect taxes (40%:60% for direct taxes). Namely, the simultaneous effect of lower tax rates
of personal income tax and corporate profit tax, and continuity in removing business barriers
in the Montenegrin economy in 2009 have led to the increase of revenues from this source,
pointing out in that way the growth of employment and wages, as well as the reduction of the
grey economy. At the same time, there was a significant reduction in revenues from the
value added tax on imported goods and tax on international trade and transactions. During
previous years due to a high share of VAT on imported goods, the structure of totally
collected VAT was 75:25 – VAT on imported goods : VAT on internal trade, while in this year
as a result of reduced revenues from VAT on imported goods this ratio changed to 63:37
and this trend can be expected in 2010 and beyond.
On the public spending side, there was a reduction in 2009, even though much lower if
compared to the revenue side. The consolidated public spending in that year was 1,452
million euro, which is by 7% less than in 2008. The reduction of the total spending was
accompanied by significant changes in its structure. Thus, on one side there is an increase
in transfers for social care as part of counter-crisis measures, while on the other side there
are significant reductions as part of the savings program which have reduced all
discretionary outflows up to the level which enables undisturbed functioning of spending
units. Of all the saving measures in the area of current outflows, the most important were
the reduction of other wage compensations in the public sector and restrictions in the field of
expenditures for materials.
Sizeably lower generation of public revenues of Montenegro, which resulted in the first half
of 2009, required the correction in both revenue and expenditure side of public finances,
which resulted in the revision of the 2009 Budget, adopted in July. The basic assumptions
used for the revision are as follows:
 Estimated drop in revenues of the Budget of Montenegro and state funds of 212.4
million euro or 6% of GDP, compared to the previously planned level of revenues;
 Reduction in scope of consolidated public spending in such manner to keep the cash
deficit at the level of 3% of GDP, precisely within the established Maastricht criteria;
- 36 -


Specifically, the revision envisaged that the deficit would be 93.74 million or 2.65% of
GDP;
Securing financing of deficit and debt amortisation with new inflows from financing
(mainly borrowings in the form of loans); Signing contracts and issuing Treasury Bills
in the amount not exceeding 240 million euro are envisaged for financing of deficit
and debt repayment;
Issuing of state guarantees of 167 million euro for loans in support of production and
export (KAP, Railways, newspaper Pobjeda, Montenegro Airlines, etc).
As stated in the Table 2, the latest projections for 2009 indicate that the deficit will be higher
than planned in the revision of the 2009 Budget due to unfavourable trends on the revenue
side of public finances, and that the public finances deficit in 2009 will reach the level of 123
million euro or 4.0% of GDP as a result of deferred recession effects on tax revenues and
social transfers. The deficit is mainly financed by commercial arrangements with foreign
banks and privatization proceeds, avoiding in such manner the crowding out effect.
The analysis of trends of certain spending categories of the central budget of Montenegro in
the period 2006-2009, i.e. in the three pre-crisis years when the state recorded exceptionally
high economic growth rates and in 2009 as the year of the financial crisis, is presented in the
remaining part of this section. This analysis is important in order to get a proper overview of
what were the most important sources of the budget spending growth in the previous period
in order to explain corrections in 2010 and beyond.
The growth of the budget spending in Montenegro in previous years was caused to a great
degree by growth of wages and pensions. In the period 2006-2009, due the increase of
minimum labour cost and multipliers of salary grades, the gross wages of employees
increased by about 63%, thus the total wage bill of the public sector (without local selfgovernments) in 2006 was around 210 million euro while in 2009 it was planned, based on
the Budget revision, at around 340 million euro. By identifying the part of wages being paid
through transfers from the budget (healthcare institutions, University of Montenegro,
Montenegrin Academy of Science and Arts, etc) we obtain the amount of gross wages of
around 371 million euro as planned in the Budget revision. According to the data of the
Ministry of Finance, the number of employees in the public administration, healthcare and
education sectors in 2009 was 42.5 thousand, including trainees and employees based on a
service contract. As far as pensions are concerned, the current number of users of rights
from pension and disability insurance is around 110 thousand, which has caused an
increase of expenditures for pensions, at the account of regular and extraordinary
adjustments, from 199 million euro in 2006 to 321 million euro in 2009 or 61%.
Wages and pensions are the key element of fixed or mandatory expenses of the Budget of
Montenegro, the share of which was around 75-80% in consolidated budget expenditures of
the country in the period 2006-2009. As stated in the Table 13, according to the revision of
the 2009 Budget, 76% of consolidated expenditures are defined in advance by way of
legislation i.e. relevant laws and other applicable legal instruments in this area (general and
sector-based collective bargaining agreements, laws and contracted obligations) – wages
and other personal revenues, pensions, transfers for social protection, transfers to the
University of Montenegro, transfers to political parties, interests, subsidies, etc. This
indicates that those responsible for economic policy have very little room for discretionary
spending.
- 37 -
Table 13: Fixed and Discretionary Spending of the Budget of Montenegro, 2006 – 2009
Outturn 2006
DESCRIPTION
mil €
% share
Outturn 2007
mil €
Outturn 2008
% share
mil €
Revision 2009
% share
mil €
% share
CONSOLIDATED EXPENDITURES
788.74
100.00
951.34
100.00
1272.03
100.00
1347.36
100.00
FIXED SPENDING
615.35
78.02
757.70
79.65
957.77
75.29
1025.69
76.13
DISCRETIONARY SPENDING
173.39
21.98
193.64
20.35
314.26
24.71
321.67
23.87
The Table 14 states expenditure of the Budget of Montenegro and of the state funds in the
period 2007-2009. Expenditures for materials and services and capital expenditures are
reduced by a portion of the expenditures being financed from international grants, and
borrowings and loans, in order to have a clear picture of the budget spending level being
financed from general and earmarked revenues.
Table 14: Current and Capital Budget of Montenegro, 2007 – 2009
Outturn 2007
DESCRIPTION
mil €
% of
GDP
Outturn 2008
Outturn 2009
mil €
% of
GDP
mil €
% of
GDP
TOTAL (1+2)
947.16
35.34
1264.85
40.99
1354.67
43.94
1. Current budget and budget of state funds
864.96
32.27
1191.48
38.61
1241.91
40.28
Gross wages and other personal earnings
283.61
10.58
376.45
12.20
391.29
12.69
Expenditures for materials and services
135.26
5.05
158.32
5.13
167.44
5.43
Current maintenance
22.63
0.84
22.15
0.72
5.53
0.18
Interests
27.10
1.01
22.53
0.73
25.17
0.82
4.92
0.18
8.36
0.27
9.66
0.31
13.07
0.49
18.59
0.60
51.07
1.66
Rent
Subsidies
Other expenditures
Transfers for social protection
Social care rights
Redundancy funds
5.75
0.21
5.74
0.19
6.82
0.22
298.51
11.14
346.54
11.23
419.75
13.62
39.19
1.46
42.10
1.36
48.95
1.59
11.42
0.43
30.21
0.98
22.39
0.73
228.37
8.52
250.94
8.13
321.02
10.41
Other healthcare rights
19.54
0.73
23.29
0.75
15.60
0.51
Transfers to institutions, individuals, NGOs and public sector
55.41
2.07
74.76
2.42
74.49
2.42
0.00
0.00
83.06
2.69
47.86
1.55
Pension and disability insurance rights
Capital expenditures of the current budget and funds
Borrowings and loans
7.85
0.29
62.54
2.03
28.75
0.93
Reserves
10.84
0.40
12.44
0.40
14.07
0.46
2. Capital Budget
82.20
3.07
73.37
2.38
112.76
3.66
The Table clearly shows that the current spending in 2008 was higher by 8% than in 2007,
whereby the increase is almost equally distributed into following three categories: (i) wages
and other personal earnings, (ii) transfers, and (iii) capital expenditures of the current
budget; even though there were significant downward corrections in the revision of the 2009
Budget in respect of initially planned budget exactly of those line items.
- 38 -
3.1.2. Fiscal risks in 2010
The following factors that might represent a greater or lesser risk for public finances of
Montenegro in 2010 should be taken into account when macro-economic and fiscal
indicators are projected for the subsequent period:

Banking sector condition; Although the banking sector balance is under consolidation,
and liquidity growth trends are notable, as well as gradual decrease of the percentage of
uncollected receivables and increase of the deposit level, this sector is still characterized
by numerous problems. The most significant one is high exposure to the crisis affected
economic entities and their employees, such as KAP (Aluminium Company), Željezara
(Steels Company) and building companies, which represents a potential jeopardy for
banks and it is the basic reason why their net-lending is currently negative. At the same
time, the consolidation and still uncertain future lending policy of the largest bank in the
system – Crnogorska Komercijalna Bank OTP, with limited lending to which Prva Banka
Crne Gore is subject, as one of the largest banks in the system and the only bank with
majority domestic equity, significantly contribute to uncertainty of the net lending
estimates for 2010. Net positive lending of the banking sector in 2010 will be a definite
signal that Montenegro is leaving recession.

Continuation of exposure of Montenegrin economy to external shocks; As a small open
economy, Montenegro is very dependent on economic trends in its surroundings,
primarily in the EU countries, therefore a slow recovery of economic growth in such
countries will reflect on macro-economic and fiscal trends in Montenegro in the following
year. To-date the overflow of the crisis through trade flows has mostly impacted the
reduction of aluminium export, due to decreased external demand, decreased production
of aluminium in Montenegro, as well as drastic reduction of its price in the international
market. In addition to trade channels, the crisis overflows to Montenegrin economy by
banking channels too. In 2009 there was a significant contraction of lending activity of
banks (as a result of decreased access of domestic banks to capital and significant
growth of its price), and this trend could continue in 2010 as well. The recovery or nonrecovery of the lending activity of banks will substantially determine the trends in the real
sector.

Dependence of the country on the trends in the tourism market; The international market
of tourism services, and therefore Montenegro as a tourism destination is very exposed
to external impacts. Summer tourism season in 2009 was approximately at the level of
the previous year, with approximately the same number of tourists and financial effects.
The trends in the coming years will be dominantly determined by the growth of global
economy and international tourism market. Also, in order to attract a significant number
of upscale tourists it required to improve the accommodation capacities and
complementary tourist offer, which requires the support from the banking sector. This
risk is boosted by visa liberalization for the countries from the region – the tourists from
Serbia, Macedonia, as well as the citizens of Montenegro will be able to travel abroad
with less barriers and expenses.

Uncertainty of the recovery of companies in the heavy industry sector; The current prices
of aluminium and steel in the world market do not allow profitable business of these
companies, which even in the short-term undermines their functioning. The restructuring
of these companies is in process in order to reduce costs to the level that could facilitate
profitable business operations.
- 39 -

The decrease of public expenditures in 2010 for the purpose of ensuring sustainability of
public finance system, will have negative effect in the form of additional contraction of
aggregate demand; The fact is that public expenditures make a significant part of the
overall demand in Montenegro. Since its share is nearly 30% of the country’s GDP, its
contraction made for the purpose of stabilizing public finances will result in the reduction
of the overall demand, and therefore unfavourable impact on rehabilitation of economic
growth.

Significant increase of wages in the public sector in the previous years; The growth of
public expenditures in the previous years was primarily caused by the growth of wages
and pensions. In order to provide the sustainability of the public finance system, it is
necessary to re-examine the policy of salaries and employment in the public sector. In
other words, in order to ensure the growth of salaries in the subsequent years in
accordance with the growth of work productivity, it is necessary to lead a robust wage
policy in the public sector.

Issued guarantees and other implied obligations of the country; One of the measures for
support to the real sector hit by the crisis was the issue of guarantees for approved
loans. Crowded debts of economic entities will, if the negative trends continue in the real
sector, increase the possibility for issued guarantees to be called, which would
additionally burden the settlement of planned budget expenditures, due o the increase of
the debt repayment.

Increase of the unemployment rate and lowering of wages may increase the pressure on
social transfers from the budget; Similarly to all other countries hit by the crisis it is
realistic to expect that the continuation of the crisis will be followed by the increase of the
number of the unemployed, which will in its own right increase the pressure on the social
transfers from the budget. This risk could become extremely significant in the context of
potential termination of production in some of the largest industrial plants.

Incomplete certainty that the planned privatizations will be carried out within the
envisaged deadlines; In accordance with the adopted plan the privatisation of some of
economic entities that are still under the ownership of the state is envisaged in 2010.
Still, the continuation of the current economic and financial crisis might lead to certain
problems in implementing such plans, i.e. deadlines within which they would be
implemented.

Potential problems related to access to the international financial market for the purpose
of financing the deficit of public finances; Many countries around the world, particularly
the most developed ones, significantly increased the deficit of their public finances in
2009, and the high level of the deficit will continue in 2010 too. All this leads to the
conclusion that in 2010 there will be great demand for liquid funds in the international
financial markets with potential crowding out of small borrowers from such markets.
3.1.3. Goals and basic directions of the fiscal policy in the following medium term
framework
Taking into account the above mentioned fiscal risks and fact that the high level of public
expenditures would lead to a longer and slower recovery of the Montenegrin economy, the
fiscal policy defined the following basic goals and directions for the coming midterm period:

Establishing of a sustainable public finance system through defining of fiscal “anchors“
and rules. The main fiscal anchors in the period until 2012 that are included in the “base
- 40 -
scenario“ are: reduction of the current expenditures and state debt below 35%; balanced
budget in 2012; restraining of the growth of the wage and subsidy fund through
concurrent reduction of the share of mandatory costs; constant capital budget at the level
of around 3.5% GDP and possibility of capital project financing through public private
partnership models; structural revenues should cover the current spending and at least
50% of the capital budget, while after the stabilization of the economic situation the
budget balance should have surplus at the level of about 2% GDP. In this way, the
current public spending would move to the level of about 30% GDP after 2012, while the
debt would move below this level.

Completion of reforms on the revenue side of public finances commenced in 2007; The
reforms related to lowering of the personal income tax rates that commenced in 2007 will
be completed in 2010, and thus Montenegro will become the most competitive in the
region according to this parameter. After lowering the personal income tax rate to 12 %
in 2009, it will be lowered to the final 9% in 2010. This measure significantly impacts the
creation of an incentive-giving framework for the development of entrepreneurship and
improvement of competitiveness, as well as the reduction of employment in “grey
economy“, i.e. its inclusion in the legal flows. At the same time, the rates for contributions
paid by employers will be lowered from 14.5% in 2009 to 10% in 2010. The lowering of
the mentioned rate significantly impacts the reducing of the burden of employers,
reduction of business barriers and improvement of competitiveness.

Continuation of public expenditure reforms directed to creation of a stimulating economic
environment; In the period 2010 – 2012 fiscal and structural reforms of the public
spending system directed to creation of a stimulating economic environment will
continue. This will be achieved through: the implementation of public private partnership
policies, particularly in the areas of education and health; further reform of the social
system, with special accent on further parameter reform of the pension system with
concurrent elimination of business barriers, which will provide for the competitiveness of
economy and additional attraction of foreign direct investments.

Establishing of sustainable health and pension system; With the integration of the
Pension Fund and the Health Insurance Fund in the Treasury in 2010, their inflows and
outflows will be recorded and processed through the state Treasury. In this way the
transparency of the budget and control of budgetary funds spending will be improved,
and concurrently the liquidity too. At the same time, the transformation of the
Development Fund is ongoing, and it will function as a state investment fund from 2010
and will not be a spending unit.
The following measures, i.e. economic and particularly fiscal policy instruments will be used
for achieving these goals and directions: (i) creation of the conditions for a more flexible
position of the Government in designing the budget spending, primarily through lowering of
mandatory reserves in relation to the discretionary spending, (ii) leading of a robust
employment policy in the form of rationalisation of the number of employees and use of
internal transfers (legal possibility for transfer of an employee from one spending unit to the
other), (iii) presenting of transfers according to economic classification that will improve the
control and upgrade the transparency of spending of public resources, (iv) establishing of
methodologies and procedures for defining the basic macroeconomic and fiscal indicators,
such as for example the level of the current and capital spending, deficit and public debt, (iv)
using of non-recurring budgetary revenues, primarily, for early repayment of debt incurred in
2009 and 2010, and in specific cases for lump sum payments of redundancy costs or work
force retraining costs, (v) using of the EU pre-accession funds – IPA funds, where
Montenegro as a potential candidate in the period 2011-2012 has funds available in the
amount of about €33 mil on annual level, (vi) increase of the current spending only for
development projects, with concurrent abandoning of non-rational public spending programs.
- 41 -
3.1.4. Medium term fiscal framework for 2010 – 2012
As already explained in the sub-section 2.2. and sub-section 3.1.2, this year’s EFP is based
on the development of two macroeconomic and fiscal scenarios for the period 2010-2012.
The basic difference between these two scenarios is related to the extent in which the
macroeconomic and financial risks from 2009 will continue in 2010 as well. Thus, the first
scenario called the “base scenario” on which the state budget for 2010 is based projects a
mild recovery of economy in 2010, while the other, alternative scenario, i.e. “crisis
scenario” is based on further deepening of the crisis in 2010. Both scenarios significantly
differ on the revenue side (primarily as the result of different rates of the forecasted
economic growth in 2010) and consequently in the forecasted scope of the deficit of public
finances. Each of the two scenarios is in details presented in the following text of this
section.
“Basic scenario” for 2010 - 2012
Fiscal projections in the “base scenario“ (Table 5) are based on macroeconomic projections
of the mild growth of economic activity – GDP growth of 0.5% – since, due to weak
diversification of economy, there is no economic base to provide for stronger recovery of
economic growth, and thus the recovery of budgetary revenues. Whether the mild recovery
of economy forecasted by the “base scenario“ will take place greatly depends on the
fulfilment of the following assumptions: (i) banking system stabilisation – consolidation of the
banking sector balance, decrease of the percentage of non-collected receivables, increase
of the level of deposits and restoration of lending to economy and households, (ii)
continuation of the positive trend of the inflow of foreign direct investments, and (iii) recovery
of some significant indicators of Montenegrin economy, such as payment operations,
turnover in retail and banking sector indicators.
Table 15: Basic macroeconomic and fiscal indicators of the “base scenario” for the period
2010-2012 (0.5 % growth in relation to 2009)
Fiscal indicators
Macroeconomic
indicators
2010 Plan
Nominal growth of GDP
Real growth of GDP
Inflation
Current account deficit
Net foreign direct and other investments
Domestic loans
Bank deposits
Public revenues
Consolidated public spending
Deficit/Surplus
Interest
Primary Deficit/Surplus
Public debt level
Increase/decrease of deposits
3.80%
0.50%
2.00%
17.10%
15.40%
77.10%
52.30%
41.89%
46.23%
-4.34%
1.04%
-3.30%
39.50%
-2.76%
2011
Projection
6.60%
3.00%
3.00%
15.90%
16.90%
75.40%
53.70%
42.06%
43.54%
-1.48%
1.04%
-0.44%
38.70%
-0.36%
2012
Projection
7.60%
4.00%
3.00%
16.00%
16.80%
74.00%
54.20%
41.10%
41.06%
0.04%
1.03%
1.07%
34.20%
0.07%
A fiscal “base scenario” has been produced based on macroeconomic indicators, and its
basic indicators are presented in the lower part of Table 15. These indicators are included in
the Montenegro Budget Law for 2010.
“Base scenario” of public finances of Montenegro is presented in Table 16, which is based
on the real growth rate of GDP amounting to 0.5% in 2010, 3.0% in 2011, and 4.0% in 2012.
- 42 -
Table 16: “Base scenario” of public finances for the period 2010 – 2012
OPIS
OWN SOURCE PUBLIC REVENUES
Plan 2010
mil €
% GDP
Projection 2011
mil €
% GDP
Projection 2012
mil €
% GDP
1341.02
41.89
1435.22
42.06
1509.21
41.10
Taxes
820.47
25.63
877.24
25.71
917.88
25.00
Contributions
323.93
10.12
346.39
10.15
364.62
9.93
30.11
0.94
32.10
0.94
34.54
0.94
110.02
3.44
117.28
3.44
126.19
3.44
49.65
1.55
54.92
1.61
58.14
1.58
6.84
0.21
7.30
0.21
7.85
0.21
CONSOLIDATED PUBLIC SPENDING
1479.92
46.23
1485.81
43.54
1507.66
41.06
CURRENT PUBLIC SPENDING
1246.46
38.94
1249.04
36.60
1254.65
34.17
Current expenditures
625.21
19.53
626.84
18.37
611.75
16.66
Social security transfers
407.19
12.72
407.77
11.95
427.42
11.64
Transfers to institutions, individuals, NGO and
public sector
197.55
6.17
197.26
5.78
198.14
5.40
CAPITAL EXPENDITURES
233.46
7.29
236.77
6.94
253.01
6.89
Duties
Fees
Other revenues
Loan repayment receipts
Borrowings and loans
Reserves
SURPLUS / DEFICIT
FINANCING
Domestic financing
4.48
0.14
4.52
0.13
4.55
0.12
12.02
0.38
12.66
0.37
12.80
0.35
-138.91
-4.34
-50.59
-1.48
1.55
0.04
138.91
4.34
50.59
1.48
-1.55
-0.04
-101.23
-3.16
-77.32
-2.27
-57.34
-1.56
Foreign financing
56.66
1.77
38.20
1.12
-12.00
-0.33
Donations
21.77
0.68
21.70
0.64
24.90
0.68
Revenues from privatization or deposits
73.22
2.29
55.59
1.63
45.59
1.24
-88.50
-2.76
-12.42
-0.36
2.70
0.07
INCREASE/DECREASE OF DEPOSITS
The main direction of this scenario is to eliminate the deficit of public finances by 2012.
Since, due to relatively low economic growth rate a very slow increase of source public
revenues is forecasted, the main burden of fiscal stabilization will be borne by public
spending. The “base scenario” forecasts that consolidated public spending in the period
2010-2012 will stagnate at the nominal annual level of about EUR1,500 million, which will
with the mild growth of GDP imply the decrease of its share in GDP by 5 percentage points,
from 46.2% in 2010 to 41. 1% in 2012. In this context it should be pointed out that in the precrisis year of 2008 the consolidated public spending amounted even to 1,555 million euro, or
50.0% GDP, and in 2009 affected by the crisis it drastically decreased to the level of 1,452
million euro, or 47.1% GDP (see Table 12).
Almost entire burden of adjustment of public finances on the spending side will be in future
borne by the current spending, which in 2010 is planned at the lower level than the outturn
from 2008. In this way a sustainable functioning of the system of public finances will be
ensured through adjustment of the public spending, i.e. reduction of expenditures.
Restraining wage policy is envisaged for the coming period which commenced in 2009.
Already in 2009 new employment in the public sector stalled, and such policy will continue in
the subsequent period. In addition, in 2010 the public sector payroll system will be
centralized, which will contribute to the improvement of transparency and control of spending
of funds for these purposes. The amendment of tax rates in 2010 will lead to the reduction of
salaries in the public sector within the range 3%-7%.
The new Law on Wages of Lower and Senior-Grade Civil Servants will additionally reduce
the wage bill, regulate the employment of new staff, introduce the possibility of more flexible
work hours and clearly regulate rights in this area. The Law envisages the possibility of part
- 43 -
time employment with wages decreased by 30%. Also, prior to the permanent proclamation
of redundancy, the possibility is envisaged for employees to receive 50% wage, without
coming to work. Any employees proclaimed as redundant and disbursed severance pays will
not be able to be employed in budgetary funded bodies or institutions in the next 5 years.
The legal solution clearly defines that it is exclusively the Minister of Finance who signs the
decisions on fixed and variable parts of wages. Announcing a public advertisement for a
vacancy in a budgetary funded body or institution is preconditioned by the previous approval
by the Minister of Finance. The Law abolished additional fees for specific administrative
tasks (with the Ministry of Defence, Ministry of Interior Affairs and Public Administration and
the like), in the amount of 10% and 30%, which used to be paid in accordance with the
previous legal solutions.
According to the budget revision for 2009 and the budget for 2010 the current spending is
reduced by around 4% GDP, therefore almost overall amount of the deficit in 2010 is related
to the capital expenditures, where current maintenance of road and railway infrastructure
was transferred from the capital budget (where it belonged in this year) to the current budget
for 2010. In other words, the deficit in the next year will be incurred primarily as the effect of
development financing (a range of projects from capital budget). Only 0.28% GDP will be
related to current spending financing, while 1% GDP will go for interest financing. This
structure of the deficit is a clear evidence of following the “golden rule” in public finances that
shortage in the budget should be incurred as a consequence of capital spending financing,
and current expenditures should be financed by current revenues.
The side of capital expenditures will also be subject to specific adjustments but in that area
the reduction of expenditures will be significantly less robust than the reduction of the current
public spending. The share of capital spending in total expenditures will increase, which has
already been done in the budget 2010, where the share of capital budget increased by
around 5% in relation to the current budget. The capital expenditures as a GDP share will
decrease in the period 2010-2012 by only 0.4 percentage points, while in nominal amounts
they will grow from EUR233 million in 2010 to EUR253 million in 2012. For capital budget
financing in 2010 it is planned to disburse loans mostly from international financial
institutions in the amount of around EUR27 million, as well as donations in the amount of
around EUR8.3 million. In addition, through the institute of public-private partnership and
concession construction in 2010 the amount of around EUR53 million will be provided for
capital investments in the area of road infrastructure, as well as around EUR100 million for
the construction of the Bar-Boljare highway.
Significant downward adjustments of capital expenditures are anticipated in local selfgovernment capital budgets due to the limited possibility of borrowings and expected fall of
all types of communal fees caused by the slowdown in the construction sector. However, it
should be pointed out that the Government recognised this restriction of the possibility for
the local authorities to borrow and included a range of very important local projects in the
central budget, such as waste waters, water supply, roads etc., and even provided the funds
from international financial institutions (EIB, EBRD, WB).
The funds from loans, donations and IPA-funds will be used to finance precisely defined
expenditures in the budget for 2010 in the total amount of EUR 63 mil or 1.97 % BDP, and in
the case these funds are not disbursed, the planned projects will be delayed, i.e. the deficit
that is to be financed from the source budgetary revenues will be only somewhat above 2%
BDP.
- 44 -
“Crisis scenario” for the period 2010 – 2012
Unlike the base scenario, the crisis scenario is based on micro-economic projections
according to which in 2010 the downward trend of GDP will continue, i.e. the economic
growth rate will continue to be negative at the level of -2% (see the upper part of Table 17).
The crisis scenario forecasts more rapid recovery of economy for 2011 and beyond. It is
necessary to emphasise once again that the crisis scenario could really take place only if all
negative trends that are discussed in the sub-section 2.1. take place at the same time. If
some of such negative trends took place, then the actual economy performances would be
somewhere between the base scenario and the crisis scenario.
A fiscal crisis scenario has also been developed based on macroeconomic indicators, and its
basic indicators are presented in the lower part of Table 17.
Fiscal indicators
Macroeconomic
indicators
Table 17: Basic macroeconomic and fiscal indicators of the “crisis scenario” for the period
2010-2012 ( -2 % growth in relation to 2009)
Nominal growth of GDP
Real growth of GDP
Inflation
Current account deficit
Net foreign direct and other investments
Domestic loans
Bank deposits
Public revenues
Consolidated public spending
Deficit/Surplus
Interest
Primary Deficit/Surplus
Public debt level
2010
Projection
1.9%
-2.0%
2,0%
15.9%
15.9%
77.7%
52.6%
40.2
46.0
-5.8
1.04
-4.8
39.50
2011
Projection
6.1%
3.0%
3.0%
15.9%
16.8%
76.1%
54.1%
40.3
43.5
-3.2
1.04
-2.2
38.70
2012
Projection
7.6%
4.5%
3.0%
16.0%
16.9%
77.8%
54.1%
39.4
41.1
-1.7
1.03
-0.6
34.20
-4.28
-2.1
-1.62
Increase/decrease of deposits
Table 18 presents the crisis scenario of Montenegro public finances for the period 20102012. The scenario is based on the real GDP growth rate of -2.0% in 2010, 3.0% in 2011
and 4.5% in 2012.
Table 18: “Crisis scenario” of public finances for the period 2010 – 2012
OPIS
OWN SOURCE PUBLIC REVENUES
Projection 2010
Projection 2011
Projection 2012
mil €
mil €
mil €
% GDP
% GDP
% GDP
1285.74
40.41
1376.11
42.07
1446.99
41.93
Taxes
781.39
24.56
835.45
25.54
873.89
25.32
Contributions
307.73
9.67
329.07
10.06
346.39
10.04
30.11
0.95
32.10
0.98
34.54
1.00
110.02
3.46
117.28
3.59
126.19
3.66
49.65
1.56
54.92
1.68
58.14
1.68
6.84
0.22
7.30
0.22
7.85
0.23
CONSOLIDATED PUBLIC SPENDING
1472.29
46.27
1485.83
45.42
1507.68
43.69
CURRENT PUBLIC SPENDING
1246.31
39.17
1249.05
38.19
1254.67
36.36
Current expenditures
624.66
19.63
626.84
19.16
611.76
17.73
Social security transfers
407.21
12.80
407.77
12.47
427.42
12.39
Transfers to institutions, individuals, NGO
197.44
6.20
197.26
6.03
198.14
5.74
Duties
Fees
Other revenues
Loan repayment receipts
- 45 -
and public sector
CAPITAL EXPENDITURES
Borrowings and loans
Reserves
SURPLUS / DEFICIT
FINANCING
Domestic financing
225.98
7.10
236.78
7.24
253.01
7.33
4.48
0.14
4.52
0.14
4.55
0.13
12.52
0.39
12.66
0.39
12.80
0.37
-186.55
-5.84
-109.72
-3.25
-60.69
-1.75
186.55
5.84
109.72
3.25
60.69
1.75
-101.23
-3.18
-77.32
-2.36
-57.34
-1.66
Foreign financing
56.66
1.78
38.20
1.17
-12.00
-0.35
Donations
20.77
0.65
21.70
0.66
24.90
0.72
Revenues from privatization or deposits
73.22
2.30
55.59
1.70
45.59
1.32
-137.14
-4.31
-71.56
-2.19
-59.55
-1.73
INCREASE/DECREASE OF DEPOSITS
“The crisis scenario” assumes the consolidated public spending at the approximately same
nominal level in the period 2010-2012 (due to the lower growth rate in 2010, the nominal
amount for 2010 is lower than the one in the base scenario, while for the two subsequent
years the nominal amounts are equal). Furthermore, this scenario assumes that in 2010
there will not be any additional reductions of the consolidated public spending despite the
economic crisis continuation. While in 2009 it amounted to EUR 1,452 million, “the crisis
scenario” forecasts a marginal increase at the level of EUR 1,472 million for 2010.
Since, due to the continuation of GDP retraction in 2010 public revenues in all the years of
the period 2010-2012 are lower than those projected in the base scenario (in 2010 by cca
EUR 60 to 70 million), this scenario also forecasts a higher level of public finances deficit.
From the 4% GDP, as projected for the public finances deficit for 2009, it would according to
the “crisis scenario” increase to 5.8% GDP in 2010, and then in the following two years it
would begin to decrease to 3.2% GDP in 2011 and 1.7% GDP in 2012. The deficit would be
funded from the borrowings from foreign sources and by using the state deposits which
would cause the increase of the public debt. In general, after 2010 the fiscal deficit would
have to be consolidated in order to bring the public finances back to the sustainable
mainstream, taking into account the significance of this system for Euroisedor the year 2010
is assessed as unsustainable, it is realistic to expect that in the case of this scenario it would
be necessary to implement additional measures for adjustment of the public finance system
in order to insure sustainable functioning of the public finance system. Some of them are as
follows:

Implementation of additional saving measures in relation to the current spending
(pursuant to Article 5 of the Montenegro Budget Law for 2010); according to the savings
generated in 2009 the amount to EUR 20 million is projected for potential savings.

Further reduction of the wage bill, through rationalisation of public administration or
reduction of gross wages. There is significant space for reduction, but it is limited by the
General Collective Agreement, which was the subject of negotiations with all participants
in the social dialogue in Montenegro.

Reduction of discretionary spending – through the reduction of the capital budget of
Montenegro. According to the outturns of the previous years it is possible to expect the
reduction of the capital budget by EUR 30 million.

Re-examination of tax policy in terms of increase of tax rates in order to increase source
revenues of budgets of Montenegro and the local self-government. The increase of the
value added tax rate by 1 percentage point would cause additional increase of revenues
- 46 -
in the amount of EUR 20 million. Further increase of the fuel excise by 0.05 €/ litre,
would lead to the increase of the excise by around EUR 15 million.
3.1.5 Public Debt Management Strategy
The state debt of Montenegro as of 30 September 2009 amounts to EUR 1.071,2 million or
34.7% (according to the new calculation of the GDP) gross domestic product (GDP). Internal
debt amounts to EUR 426.0 million or 13.8% GDP, while external debt amounts to EUR
645.2 million or 20.9% GDP. Guarantees of Montenegro amount to around EUR 83.5 million
or 2.7% GDP, i.e. 7.8% of the state debt. The state debt makes around 70.7% of the total
generated revenues in 2008 (not including privatisation receipts, loans or donations).
The currency structure of the state debt of Montenegro is favourable: internal debt is in
euros, while the part of the total debt which is related to the Paris Club is serviced in other
currencies (around 26% of the debt in USD and around 3% in other currencies), as well as
the obligations in respect of IDA loans (in SDR). The interest structure is also favourable
since around 77% of debt bears fixed interest rates.
The interest rate for external debt ranges from 2% to 5.8%, with the exception of the loans
signed in 2008 for the needs of the budget deficit financing that bore interest rates of 8.4%
and 9%, while within the internal debt the interest rate of 2% is applied for obligations in
respect of restitution and foreign currency savings, and it has already been included in the
calculation of the nominal amount of the debt.
Table 19: Montenegro state debt balance as of 30 September 2009, in million Euros
Foreign debt balance
Debt
balance
Creditor
GDP
est
Foreig
n debt/
GDP
%
foreign
debt
%
public
debt
4
5
6
(2/3)
1
International Bank for Reconstruction and
Development (IBRD)
2
184.1
3,083.8
6.0%
28.5%
17.2%
International Financial Organisation (IFC)
6.9
3,083.8
0.2%
1.1%
0.6%
Paris Club Member Countries *
124.4
3,083.8
4.0%
19.3%
11.6%
International Development Agency (IDA)**
52.7
3,083.8
1.7%
8.2%
4.9%
European Investment Bank (EIB)****
European Bank for Reconstruction and
Development (EBRD)
39.8
3,083.8
1.3%
6.2%
3.7%
18.0
3,083.8
0.6%
2.8%
1.7%
Council of Europe Development Bank
1.2
3,083.8
0.0%
0.2%
0.1%
5.5
3,083.8
0.2%
0.9%
0.5%
10.8
3,083.8
0.4%
1.7%
1.0%
Austrian Loan
4.1
3,083.8
0.1%
0.6%
0.4%
Hungarian Loan
12.2
3,083.8
0.4%
1.9%
1.1%
Polish Loan
11.8
3,083.8
0.4%
1.8%
1.1%
Societe Generale – Education IT
1.6
3,083.8
0.1%
0.2%
0.1%
8.5
3,083.8
0.3%
1.3%
0.8%
22.8
3,083.8
0.7%
3.5%
2.1%
45.0
3,083.8
1.5%
7.0%
4.2%
European Community
Credit Bank for Reconstruction
Germany (KFW)
French Loan***
EUROFIMA – debt of the
Company *****
Czech EXIM - debt of the
Company
3
–
Railway
Railway
- 47 -
Steiermarkische Bank und Sparkassen
AG******
5.5
3,083.8
0.2%
0.9%
0.5%
Erste Bank
30.0
3,083.8
1.0%
4.6%
2.8%
Credit Suisse Bank
60.3
3,083.8
2.0%
9.3%
5.6%
TOTAL
645.2
3,083.8 20.9%
100.0% 60.2%
* The amount of original debt in euros makes 71%, American dollars 26% and
other currencies 3%.
**The original amount is in special drawing rights (SDR). The exchange rate XDR/EUR
= 1.0724 was used
***Commodity loan – EPCG
****EIB loans in the total amount of EUR 47.0 million that are serviced by public enterprises
(Monteput, Aerodromi CG (Airports of MNE) and EPCG (Energy Company)) are not included in
the amount of external debt, but are treated as guarantees.
*****The debt to EUROFIMA is CHF 34.5 million, and the exchange rate of 0.6612 was used
******The loan for financing the purchase of fire vehicles for the Ministry of Interior Affairs
Domestic debt balance
Creditor
1
Old foreign currency savings
Local self-government debt
Obligations
in
respect
of
compensations
Loans with commercial banks
Loans
with
non-financial
institutions
Pensions in arrears
Treasury bills
TOTAL
TOTAL STATE DEBT
2
108.5
61.7
3
3,083.8
3,083.8
Domestic
debt/
GDP
(2/3)
4
3.5%
2.0%
101.9
40.9
3,083.8
3,083.8
3.3%
1.3%
23.9%
9.6%
9.5%
3.8%
7.0
64.4
41.6
426.0
3,083.8
3,083.8
3,083.8
3,083.8
0.2%
2.1%
1.3%
13.8%
1.6%
15.1%
9.8%
100.0%
0.7%
6.0%
3.9%
39.8%
1,071.2
3,083.8
34.7%
Debt
balance
GDP
est
%
domestic
debt
% public
debt
5
25.5%
14.5%
6
10.1%
5.8%
Notes:
1) The loans from the German KfW bank for the water supply needs are used by municipalities but
they are presented in the summary table of foreign debt.
2) Bonds acquired based on the Law on compensation of beneficiaries from pension and disability
insurance were issued on 15 September 2008 in the amount of EUR 105 million.
In relation to the end of the third quarter of 2008, the state debt increased by EUR 143.2
million. Internal debt decreased by EUR 27.9 million, while the external debt increased by
EUR 171.1 million. Internal debt was reduced by regular payments of debt in respect of old
foreign currency savings and restitution, as well as regular payments of debt in respect of
extraordinary pensions. In addition, internal debt in relation to the end of the third quarter of
last year was reduced by early repayment of old foreign currency saving bonds in the total
value of around EUR 0.7 million, as well as early repayment of restitution bonds FO01 and
FO02 by the State in the stock exchange, in the total value of around EUR 15 million. The
Ministry of Finance plans to continue the redemption of restitution and foreign currency
saving bonds in the following year in order to decrease the internal debt.
Growth of external debt is caused by assuming the debt of “Željeznička infrastruktura Crne
Gore A.D.” (Railway Company) to the Czech export bank in the amount of EUR 48.1 million,
- 48 -
to the European Investment Bank (EIB) in the amount of EUR 7 million (funds have not been
disbursed yet), European Bank for Reconstruction and Development (EBRD) in the amount
of EUR 11 million (until now 7.8 million have been disbursed), and by assuming the debt of
“Željeznički prevoz Crne Gore A.D.” to EUROFIMI in the amount of CHF 34.5 million. In
addition, the external debt balance was also increased by the borrowing from Erste Banke in
the amount of EUR 30.0 million and Credit Suisse Bank in the amount of EUR 90.0 million
(of which around EUR 30.0 million was disbursed by 30 September 2009) for the purpose of
budget spending financing.
The mentioned information on the foreign debt balance implies the amounts of engaged
(disbursed) loan funds by individual loans. Out of the total available loan funds the following
amounts remain undisbursed: around SDR 9.8 million in respect of IDA loan, EUR 28.3
million in respect of KfW loan (water supply phases II and III), around EUR 0.6 million in
respect of the EBRD loan for the road rehabilitation project, around EUR 0.3 million in
respect of the Polish loan, around EUR 2.8 million in respect of the Hungarian loan, as well
as the loans assumed from Željeznica (Railway Company) approved by EIB in the amount of
EUR 7.0 million and EBRD in the amount of EUR 3.2 million. Also, in the coming period it is
expected that the funds of the commodity loan by the Spanish government for the recycling
centre in Podgorica amounting to EUR 6.0 million will be disbursed, as well as the funds of
the commodity loan by Erste Bank from Austria in the amount of EUR 6.0 million, the funds
of the loan of the International Bank for Reconstruction and Development (IBRD) for the
“Cadastre“ project in the amount of EUR 10.6 million, “Energy efficiency“ in the amount of
EUR 6.1 million and for the project “Agriculture” in the amount of EUR 11.0 million, the funds
of EUR 5.0 million for the waste water project from the European Investment Bank (EIB)
loan, the funds of the loan for funding the “Project for procurement of special vehicles for fire
extinguishing and rescue” from the Austrian bank Steiermarkisiche Bank und Sparkassen
AG in the amount of EUR 16.5 million, the funds of the loan intended for financing the
budget spending from Credit Suisse Bank in the amount of EUR 30.0 million. Accordingly,
the total amount of available but undisbursed funds is around EUR 142.9 million.
In the first three quarters of the year 2009 the Loan Agreement for financing the “Project for
procurement of special vehicles for fire extinguishing and rescue” was signed with the
Austrian bank Steiermarkisiche Bank und Sparkassen AG in the amount of EUR 22.0 million,
as well as the Loan Agreement with IBRD for financing the Project for institutional
development and agriculture strengthening in the amount of EUR 11.0 million, the Loan
Agreement for financing of budgetary spending in the amount of EUR 90.0 million with Credit
Suisse, the Loan Agreement for financing of budgetary spending in the amount of EUR 30.0
million with Erste Bank, Austria, and the Guarantee Agreement with EBRD for the loan to
finance the implementation of the project for the Railway Company, phase III in the amount
of EUR 4.0 million.
The Budget Law for 2009 also envisages the signing of the loan with IBRD for the ‘’Project of
ecological sensitive tourist areas of Montenegro’’ amounting to EUR 3.75 mil and “Health”
amounting to EUR 5.125 mil, with the German Bank for Reconstruction (KfW) for the
realization of the Phase IV of the Project for water supply improvement and waste disposal
in Montenegrin Coast in the amount of EUR 25.0 mil, with EIB for the projects for wastewater
management (EUR 10.0 mil) and waste management (EUR 30.0 mil), with the Council of
Europe Bank (CEB) for the project “Solidarity Apartments” amounting to EUR 5.0 mil, with
the Government of Austria for the project “Procurement of equipment for oncology clinic”
amounting to EUR9.2 mil, and with Hungarian Exim Bank for the project “School
Construction in Bar” in the amount of EUR4.0 mil. In addition, it is envisaged that the State
should issue guarantees for the following loans: from EBRD for the project Construction of
Regional Water Supply in Montenegrin Coast, amounting to EUR3.0 mil and the Railway
Project amounting to EUR 7.0 mil, as well as the guarantees for EIB loans for support to the
banking sector, in the total amount of EUR 91.0 mil, from KfW for the projects of EPCG
- 49 -
“Thermal Power Plant Pljevlja I and Sub-station Ribarevina” in the amount of EUR 15.0 mil
and “Hydro power plant Piva” amounting to EUR 9.5 mil. Also, the State will sign a
guarantee for the regional water supply project with Abu Dhabi Development Fund in the
amount of EUR 15.0 mil and guarantees for economy support in the total amount of
EUR167.5 mil.
Ministry of Finance deposits as of 30 September 2009 amount to EUR 69.1 mil, including
38,477 ounces of gold, which is by around EUR14.4 mil more than at the end of 2008, while
the deposits of state funds, which are not fully integrated in the Treasury system – Pension
Fund, Health Insurance Fund and Development Fund of Montenegro, according to the data
of the Central Bank of Montenegro amount to EUR48.3 mil, therefore the net amount of the
state debt is around 29.4 % GDP. According to the projections of the Ministry of Finance, the
state deposits at the end of 2009 will amount to around EUR131 mil (significant increase will
follow the recording of revenues from privatisation of EPCG), and when deposits in gold are
included, the total amount of state deposits at the end of 2009 will amount around EUR157
mil. The mentioned amount does not include the deposits of the mentioned funds amounting
to around EUR 45 mil, since the obligations of funds are approximately the same as the
amount of deposits they have available.
The state debt of Montenegro including public enterprises amounts to EUR 1,195.3 mil. or
38.8% GDP. The amount of obligations of state-owned enterprises has been calculated
based on the Government guarantees, Central Bank data and data submitted by enterprises.
With regard to repayment of loans, the budget for 2010 plans the repayment of debt in the
amount of EUR 61.2 mil and the repayment of liabilities from previous years in the amount of
EUR 66.7 mil.
- 50 -
Table 20: Amount and structure of state debt of Montenegro in the period 2007-2013 (projections for 2009-2013)
2009.
2010
2011
2012
2013
09.2007
09.2008
09.2009.
projection
projection
projection projection projection
Internal debt (in
mil €)
Internal debt (%
GDP)
External debt
(in mil €)
External debt
(% GDP)
Total debt (in
mil €)
Total debt (%
GDP)
272,4
453,9
426,0
437.2
408.30
354.80
284.70
243.20
10,2
14,6
13,8
14,2
12.8%
10.4%
7.8%
6.1%
500,6
474,1
645,2
699,5
856.20
964.20
970.00
968.00
18,7
15,2
20,9
22,7
26.7%
28.3%
26.4%
24.4%
773,0
928,0
1.071,2
1136,7
1264.50
1319.00
1254.70
1211.20
28,9
29,8
34,7
36,9%
39.5%
38.7%
34.2%
30.5%
Note: Estimated GDP in 2007 – €2,679 mil, in 2008 - €3,115 mil, in 2009 – €3,083.8 mil, in 2010 - €3,201.04 mil, in 2011 - €3,412.3
mil, and in 2012 - €3,671.6 mil, in 2013 – 3,965.4 - Source: Ministry of Finance
51
Table 20 presents the projected amount of state debt, based on assumed legal and
contractual obligations of the State, for the purpose of estimating the debt sustainability. The
projection of internal debt trends in the period 2009 to 2012 as stated in Table 19 is based
on the assumptions that the debt in respect of restitution will reach the level of EUR 350.0
mil by 2012, while the repayment in this respect will amount to around 0.5% GDP on annual
basis. The amount of repayment of liabilities in respect of pensions in arrears will be EUR
34.0 mil annually and will be fully repaid by the end 2011. New borrowings are envisaged in
2009 intended to finance the projects of the Transport Directorate, to resolve transport
bottlenecks, in the total amount of around EUR 32 mil. The assumption is that the amount of
local self-government debt will remain on the current level. The repayment of liabilities in
respect of foreign currency savings will amount around EUR 14.0 mil annually. The
redemption of foreign currency savings bonds OB16 and OB17 and DO16 and DO7 has not
been taken into account, or the redemption of restitution bonds. In addition, it is assumed
that there will be no assuming of debts of enterprises.
When projecting foreign debt, new borrowings and on-lending have been projected in
accordance with the agreed framework of cooperation with international and bilateral
creditors, and the funds will be used for projects from the area of waste waters, regional
water supply, road and railway infrastructure and energy. The trends of foreign debt have
been projected with the assumption of average four-year disbursements of loan funds in the
amount of EUR 50 million (in 2010), and EUR60 million (in 2011 and 2012). In 2009, the
borrowing amounting to EUR 200.0 mil. has been added for financing of budget deficit and
repayment of loans, in 2010 additional EUR 200.0 mil and in 2011 additional EUR100.0 mil.
With regard to the borrowings for the needs of budget financing, alternatives, i.e. concurrent
borrowings with the following institutions are considered: International Monetary Fund, World
Bank (Development Policy Loan – to US$ 85 million), European Commission, bilateral
creditors, i.e. through Eurobond issue. The borrowing conditions will be considered during
the negotiations with the representatives of the mentioned institutions, and based on the
most favourable conditions, credit arrangements will be concluded with one of the mentioned
institutions.
In 2010 it is planned that the State borrows: from IBRD in the amount of EUR 3.5 mil. for
financing of the ‘’Project for ecological sensitive tourist areas of Montenegro”, from the CEB
for financing of the project ”Solidarity apartments and resolving of housing needs of citizens
and mitigation of economic crisis effects on the construction sector“ in the amount of
EUR10.0 mil, from EBRD in the amount of EUR30.0 mil (stand-by loan funds) for the needs
of the Deposit Insurance Fund, from EIB in the amount of EUR 25.0 mil for financing of the
wastewater management project and EUR 5.0 mil for the project ”Resolving of transport
bottlenecks“.
Also, it is planned to sign bilateral and multilateral loans intended for the need to protect
monuments of culture in the amount of EUR 5.0 mil. In addition to the mentioned, the budget
2010 plans the borrowings for providing funds for budget financing, repayment of debt and
support to the banking system in the amount to EUR 200.0 mil. With regard to State
guarantees, it is planned to issue guarantees in the total amount of EUR 202.0 mil, out of
which EUR 140.0 mil relates to guarantees for agriculture support loans, EUR15.0 mil for the
loan for the Railway from EBRD, EUR7.0 mil for the loan for the Railway from EIB, as well as
EUR 40.0 mil for the loan for purchase of new ships from the Chinese Export Bank, the
beneficiary of which is ‘Crnogorska plovidba AD Kotor’.
In 2010, it is planned to commence the development of a new Debt Management Strategy.
The mentioned strategy will define new borrowings projections as well as the amount, and
debt repayment schedule, which will be required to be done in particular after the change of
the situation in the economic area caused by the world economic crisis.
State debt under “crisis scenario” conditions
The starting assumptions for projection of the state debt under crisis scenario conditions are
as follows:
 Budget source revenues will be additionally reduced according to the crisis scenario
projection of public finances for the period 2010 – 2012, presented in Table 18 of the
section 3.1.4. Mid-term fiscal framework for the period 2010 – 2012
 Privatisation receipts and receipts in respect of property sale in the period 2010 – 2012
will not be achieved, which will imply additional foreign borrowings for the needs of
budget financing, which will increase the overall public debt.
 Based on non-generated privatisation receipts, the need for borrowings for budget
financing will increase, in the following amounts:
o in 2010 – 59 million euro,
o in 2011 – 45 million euro,
o in 2012 – 33 million euro
 In the period 2010 – 2012, liabilities will not incur in respect of issued guarantees.
Companies that have been issued guarantees for borrowings, whose repayments have
already commenced or are commencing in the observed period, have been regularly
settling their obligations so far. Guarantees have been issued to the following
enterprises: EPCG (Energy Company of Montenegro), Aerodromi Crne Gore (Airports of
Montenegro), JP Regionalni Vodovod (Regional Water Supply), as well as Montenegrin
commercial banks for loan support to small and medium size enterprises. Based on the
analysis of the position of specific economic branches and balances of the very
companies, the assumption is that these companies will continue to settle their
obligations on regular bases.
The following tables present fiscal indicators and state debt indicators depending on fiscal
scenarios.
Table 21: Basic fiscal indicators and state debt indicators - Base scenario
Indicators
2010
2011
Public revenues
41.89%
42.06%
Consolidated public spending
46.0%
43.5%
Deficit/Surplus
-4.1%
-1.5%
Interest
1.0%
1.0%
Primary Deficit/Surplus
-3.1%
-0.4%
State debt level
39.5%
38.7%
Increase/decrease of deposits
-2.6%
-0.4%
Table 22: Basic fiscal indicators and state debt indicators - Crisis scenario
Indicators
2010
2011
Public revenues
40.17%
40.33%
2012
41.1%
41.1%
0.0%
1.0%
1.1%
34.2%
0.1%
2012
39.41%
Consolidated public spending
46.0%
43.5%
41.1%
Deficit/Surplus
-5.8%
-3.2%
-1.7%
Interest
1.04%
1.04%
1.03%
Primary Deficit/Surplus
-4.8%
-2.2%
-0.6%
Public debt level
42.9%
44.9%
42.5%
-4.28%
-2.1%
-1.62%
Increase/decrease of deposits
- 53 -
Table 23: Amount of state debt in 2008 and 2009 and projections for the period 2010 – 2012,
based on base and crisis scenarios
2008
Total
debt
2009 Projection
2010 Projection
2011 Projection
2012 Projection
Mil.Eur
GDP%
Mil.Eur
GDP%
Mil.Eur
GDP%
Mil.Eur
GDP%
Mil.Eur
GDP%
894.7
29.0
1,136.7
36.9
1,264.5
39.5
1,319.0
38.7
1,254.7
34.2
1,372.4
42.9
1,530.8
44.9
1,561.7
42.5
856.2
26.7
964.2
28.3
970.0
26.4
963.8
30.1
1,176.0
34.5
1,277.0
34.8
408.6
12.8
354.8
10.4
284.7
7.8
408.6
12.8
354.8
10.4
284.7
7.8
state
Base scenario
Crisis scenario
Foreign state
debt
Base scenario
481.7
15.6
699.5
22.7
Crisis scenario
Domestic
state debt
Base scenario
Crisis scenario
413.0
13.4
440.6
14.3
As it can be seen from the Table, in the situation of crisis scenario, the total state debt
reaches the maximum share in GDP of 44.9% in 2011, which is by 6.2 percentage points
less than its amount in the base scenario. This difference in the amount of state debt is even
greater in 2012 (8.3 percentage points) due to significantly lesser reduction of the state debt
in the situation of the crisis scenario.
3.1.6 Budget implications of main structural reforms
Privatisation process continuation. Receipts of the budget of Montenegro and budgets of
state funds and the sale of property in 2009 are planned in the amount of EUR 35 million.
When planning this revenue for 2009, additional capitalization and partial privatisation of
EPCG were not taken into consideration. In this respect, the privatisation receipts amount
over EUR90 million. According to the Montenegro Budget Plan for 2010, the receipts from
the sale of property are planned in the amount of EUR59.00 million and will be used for
financing of capital budget and budget deficit. The planned amount of receipts in respect of
the sale of military property amounts to EUR2 million, and the remainder is related to the
revenue from the planned sale of shares that the State owns in the following enterprises:
Institut Simo Milošević – Igalo – EUR20 million, Luka Bar -Port of Bar (AD Kontejnerski
terminali i generalni tereti – Container Terminals and General Cargo) – EUR26 million and
AD Montecargo – EUR 11 million.
Reduction of tax burden on wages. Despite the negative global crisis effects, and weaker
outturn of the revenues of the Montenegro budget and local self-government budgets, the
policy of low tax rates continues in 2010 for the purpose of eliminating business barriers and
attracting investments. The practise evidenced positive effects of such fiscal policy. In 2010
there will be further reduction of the burden for employers since the contribution rates paid
by employers from gross salaries will be reduced from the current 14% to 10% in 2010. The
estimated effect on the Montenegro budget in 2010, i.e. on the state as an employer, is
around EUR 14 million less contributions paid by employers and as much lower gross
wages.
- 54 -
Improvement of road infrastructure and road transport. Montenegro Budget Law for 2010
envisages significant funds for the Montenegro Capital Budget in the total amount of EUR
121 million, which makes almost 4% GDP. The significance of capital expenditures in the
Montenegro budget, for 2010 and in years to follow, lies in the awareness of the fact that
elimination of infrastructure bottlenecks, primarily in the physical infrastructure, facilitates for
growth of economy, standard of living of citizens, and strengthens the capacities of the
country for implementation of EU standards. This highlights the need for further
intensification of the function for identification of credible budget-funded capital projects and
demonstration of permanent commitment and ability for servicing obligations in respect of
debt so Montenegro would be awarded the investment credit rating and become an
attractive investment destination in the international market. As it can be seen from the Table
24, out of the total amount, the funds amounting to EUR 57.95 million are planned for the
Transport Directorate, and they are related to improvement of road infrastructure. The
following table presents projects to be implemented in 2010 through the Transport
Directorate:
Table 24: Capital budget of the Directorate for Transport for 2010
Description
Total
Road Risan – Grahovo – Nikšić- Žabljak
Producing of the project for Adriatic-Ionic highway
Resolving of bottlenecks in the transport network of Montenegro
Third lanes of highways
Reconstruction of regional roads and highways in Montenegro
Rehabilitation of tunnels on highways and regional roads
Investment coating of highways and regional roads
Expropriation of land for construction of the highway Bar-Boljari, section
from Smokovac to Verušae
Construction of the overpass in Bar
Program for reconstruction of intersections
Rehabilitation of slides
Rehabilitation of the road base of the highway Ribarevine – Berane
Ring road Rožaje
Construction of the Bar – Boljari highway
Amount
57.950.000,00
2.500.000,00
1.000.000,00
7.850.000,00
1.000.000,00
8.500.000,00
1.000.000,00
1.000.000,00
4.000.000,00
600.000,00
2.500.000,00
1.000.000,00
1.000.000,00
1.000.000,00
25.000.000,00
Employment policy and amendments to the regulations related to labour market. Since
January 2009 the Law on Employment and Labour of Foreigners has been in force, and
three secondary legislation acts were adopted based on them, which clearly prescribe
procedures and systematically adjusted employment of foreigners in Montenegro. Net
positive effect on the budget of Montenegro in respect of new regulations in 2009 has been
estimated to EUR 18 million based on the estimate that 40,000 work permits for residents
will be issued. However, due to the impact of economic crisis, the number of non-residents
employed in Montenegro and budgetary revenues are significantly lower. By the end of
October 2009, around 16.600 work permits were issued to non-residents. For the next year it
is difficult to envisage the number of non-residents that are to work in Montenegro, for two
basic reasons. The first one is that a significant number of non-residents was employed in
the construction sector, which is heavily hit by the crisis, and the recovery in 2010 is
uncertain. On the other hand, the planned dynamics of the construction of the Bar-Boljare
highway and the commencement of works in Luštica, might significantly increase the number
of non-resident workforce in the following year.
- 55 -
3.2 Public finances quality
In 2009, amendments to legal framework were adopted as well as initiated that in 2010 are
to lead to changes on the side of current budgetary revenues. Excise on mineral oils and
excise on tobacco and tobacco goods were increased. The lowering of the personal income
tax and the Amendments to the Law on Compulsory Social Insurance are the measures that
will lead to further reduction of burden of employers for the purpose of creating the most
favourable environment for development of business. Tax rates defined by the Law on tax on
use of passenger motor vehicles, watercrafts and aircrafts have also been amended.
Tax rates have been significantly amended according to the Amendments of the Law on
Personal Income Tax and Amendments to the Law on Contributions for Compulsory Social
Insurance. The following table presents the current and amended tax rates:
Table 25: Amended tax rates and rates of contributions on wages
DESCRIPTION
Personal income tax
Non-taxable part of the wage (monthly)
Total contributions paid by employers
Total contributions paid by employees
Total contributions for compulsory pension insurance
Total contributions for compulsory health insurance
Total contributions for insurance against unemployment
Total contributions for compulsory social insurance
2009
12%
70 €
14.5%
17.5%
20.5%
10.5%
1.0%
32.0%
2010
9%
0€
9.80%
24.0%
20.5%
12.3%
1.0%
33.8%
As previously mentioned, in 2009 the structure of source revenues changed in relation to
previous years. The growth of revenues from direct taxes (income tax and social
contributions) in the total revenues from taxes is notable, while the share of revenues from
indirect taxes concurrently decreased (40%:60% in favour of direct taxes). In 2009, the
growth of wages and increase of employment continued which led to the increase of
revenues from direct taxes, while the revenues from value added tax on imported goods and
tax on foreign trade and transactions decreased. In the previous years, due to a high share
of VAT on imported goods, the structure of total collected VAT was 75:25 – VAT on imported
goods : VAT in internal trade, while in this year, primarily due to the decrease of VAT on
imported goods, this ratio changed to 63:37 and such trend may be expected in 2010 and
the following years.
Monitoring of basic indicators of economic activities was introduced in the course of planning
of the revenue side, where 20 indicators from four areas are monitored, based on which the
projections of GDP trends are produced. Also, detailed analyses were produced in the
attempt to distinguish cyclical from structural revenues of Montenegrin economy, and the
projection of revenues for 2010 was produced based on structural revenues.
Since 2008, five extra-budgetary funds have become state funds and planned as an integral
part of the budget of Montenegro. In the period 2008-2009, the Employment Fund and
Compensation Fund were integrated in the system of State Treasury and their receipts and
expenditures are recorded through the Consolidated Treasury Account. Other funds
functioned independently in practice. In 2010, the Fund for Health Insurance and Fund for
Pension and Disability Insurance will be included in the system of State Treasury which will
provide for better transparency, as well as control in execution of expenditures.
The adoption of the Law on Wages of Lower and Senior-Grade Civil Servants and robust
control of new employment initiated the restraining of the wage bill growth and the
- 56 -
centralization of the payment of wages of all budgetary beneficiaries is in process. Another
important change that will impact the quality and transparency of public finances is related to
the change in presentation of expenditures by economic classification with a part of
budgetary beneficiaries. Namely, gross wages, capital expenditures, expenditures for
material and services and other expenditures have not been presented within transfers. In
the Budget of Montenegro for 2010, all transfers except for the Health Insurance Fund are
presented by economic classification, while in the next year it will be worked on the
centralization of all revenues of budgetary beneficiaries, primarily public institutions, which
will contribute to realistic viewing of budgetary needs of these spending units.
In 2009, based on the provisions of Organic Budget Law, the Ministry of Finance issues
opinions on the budgets of local self-governments, which in practice will improve the control
of public expenditure growth and assist to balancing of overall public spending.
According to the provisions of the Law on Budget Revision for 2009 all spending units are
obliged to obtain approval from the Ministry of Finance prior to public contracting, which
additionally established the control over spending of budgetary funds and reduced the
possibility of carrying forward liabilities to following years.
Given that 2010 will be significantly different from previous years for which Economic and
Fiscal Program was produced, our view is that it is important to mention once again all the
factors that will impact the improvement of the quality of public finances in 2010 and midterm framework:








Defining of “fiscal anchors“ for mid-term framework
Including of all state funds in the State Treasury system
Re-examining of employment and wage policy
Central calculation and recording of wages (centralised payroll system)
Recording of transfers by economic classification
Completion of tax reforms
Continuation of privatisation process
Elimination of business barriers
3.3 Public finances institutional framework
The commitments of Montenegro to international organizations, primarily undertaken in the
process of integration in the European Union require the establishment of new institutions
that will have the status of spending units within the budget of Montenegro. Under the
conditions of economic crisis and necessary rationalisation of budgetary expenditures, it will
be taken into account to the maximum extent that the establishment of new institutions
should not contribute to the increase of current spending. In this context, the premises for
accommodation of new institutions will be provided within the premises already in use by
public institutions, and the administration of newly founded institutions will be provided by
taking over employees from line ministries and other state institutions. The Montenegro Law
on Budget for 2010 envisages the establishment of the following institutions:
Under the Ministry of Economy:
o Administration for Hydrocarbons
o Mining Administration
Under the Ministry of Maritime Affairs and Transport:
o Directorate for Railways
- 57 -
o
Port Administration
Under the Ministry of Labour and Social Care:
o Labour Fund
o Agency for amicable resolution of labour disputes
Under the Ministry for Protection of Minorities and Human Rights:
o Centre for development and preservation of minorities in Montenegro
Development Fund, that had the status of an extra-budgetary fund by 2008, and in the
period 2008-2009 the status of a state fund, from 2010 will not be planned as an integral part
of the budget of Montenegro, but will be transformed in the Investment Development Fund of
Montenegro and will be a joint stock company under the ownership of the state of
Montenegro. Taking into account the significant changes in Montenegrin economy (in the
part related to banking sector, capital market, priorities and needs of economic development,
overall economic environment, legal regulation) a need emerged to transform the Fund and
adjust its objectives to further economic development and economic policy of the
Government of Montenegro. Also, significant reasons for transformation arise from the
current position of the Development Fund which is characterised by non-harmonisation of
the regulatory framework (SAI recommendations, need for adjustment to the Law on
Business Organizations in terms of the business organization form, disability to apply
corresponding regulations treating financial reporting, inadequate organisational structure
and the like). Newly established entity will have the following goals which will represent the
base for further development of economy:
1. Support to implementation of infrastructure and environmental projects
2. Balancing of regional development
3. Support to the sector of micro, small and medium size enterprises
4. Carrying out of privatisation of the remainder capital in the portfolio of the Fund
5. Generating receipts from to-date placements.
- 58 -
4. STRUCTURAL REFORMS OBJECTIVES
4.1. Enterprise Sector
4.1.1. Privatisation
Intensive and successful implementation of activities in the privatisation area had a positive
impact on generating new economic structures, new ways of thinking, growth and the overall
development of Montenegrin economy in the long run. The negative aspects of privatisation
are largely a consequence of uncleared property relations and delays in adoption and
implementation of the laws that regulate those relations.10
In 2009 the Agency for Economic Restructuring was shut down, and Privatisation Council
except the conceptual role in the privatisation process, took over the conduct of technical
and administrative activities. Year 2009 was marked by success of the biggest privatisation
process in Montenegro – „Elektroptivreda Crne Gore“ (the Electric Power Industry of
Montenegro) – on one side, and in terms of crisis, a series of unsuccessfully completed
tenders on the other side. Recapitalisation of Electric Power Industry of Montenegro is the
largest privatisation project in Montenegro, both in financial and in terms of multiplicative
effects on the economy.
In addition to the sale of the minority package of shares of the insurance company „Lovćen
osiguranje” to the current majority owner „Triglav osiguranje“ from Slovenia, other
privatisation processes which have started in 2008, were not realised due to lack of interest
of investors. Therefore, tenders were unsuccessfully completed for the privatisation of the
Institute „Dr Simo Milošević“ Igalo, „Jadransko brodogradilište“ AD11 Bijela, dairy „Zora“
Berane, public press publishing and printing company „Pobjeda“ AD Podgorica, HTP
„Ulcinjska rivijera“ AD Ulcinj and „Duvanski kombinat“ AD Podgorica. Some of the initiated
privatisation processes of companies such as electric industry „Obod“ AD Cetinje and
„Duvankomerc“ DOO12 Podgorica during 2009 were completed by bankruptcy. Some of the
projects of tourist valorisation of attractive tourist sites have been successfully completed
(Luštica I and II), while „Mediteranski centar“ Žabljak, „Velika plaža“ and „Ada“ were finished
with a lack of interest of investors for investment.
The main privatisation objectives in 2010 are continued increase of competitiveness and
efficiency of companies in Montenegro, encouragement of foreign investments and
entrepreneurship in all areas, increase of employment and improvement of the standard of
living. Privatisation in 201013 will be marked by capitalisation of the national airlines company
Montenegro Airlines and valorisation of tourist sites which will define the concept of
development of tourist infrastructure in the coastal area of Montenegro. Mild recovery of
world economy also carries the expectations that the failed privatisation projects during 2009
will end successfully in 2010. Specific projects for 2010 are as follows:
-
Restructuring of the company „Željeznice Crne Gore“ (Montenegro Railways) AD
Podgorica led to the formation of two companies: Rail infrastructure and Rail transport
10
More in the Analysis of the privatisation effects in Montenegro, Podgorica, Faculty of Economics
(December 2008).
11 Joint stock company
12
Limited liability company
13
Privatisation plan for 2010 (Council for Privatisation) defines a list of companies that will be
privatised by the various methods during 2010.
- 59 -
„Montecargo“. Tender for the sale of 85.4% of the shares of Railway transport has been
announced until February 2010.
-
The company „Luka Bar“ AD Bar is restructured into two companies: Holding „Luka Bar“
AD Bar with 100% ownership of limited liability companies „Obezbjeđenje i protivpožarna
zaštita Bar“ (Security and Fire Protection Bar) and „Informatika i komunikacije Bar“
(Information and Communications Bar) and „Kontejnerski terminal i generalni tereti Bar“
AD (Container Terminal and General Charges Bar – joint stock company). Tender for the
privatisation of 54% of the company „Kontejnerski terminal i generalni tereti Bar“ AD has
been announced as well as for awarding concession period of 30 years with the
obligation of investing, which will be also open to offers until February 2010.
-
In 2010 through an international public tender, procedure of choosing investors for
valorisation of tourist sites will be implemented: Ada Bojana, Velika plaža, Njivice, Utjeha,
Buljarica i Jaz and continue the evaluation of the activities of the military-tourist complex
„Mediteran“, Žabljak , "Bigovo – Trašte", Kotor barrack ’’Orjenski bataljon’’ Kumbor, island
of Mamula – Herceg Novi, barrack ’’Radoje Dakić’’ Žabljak and „Valdanos“ – Ulcinj.
-
Tenders have been announced for the privatisation of the company „MontepranzoBokaprodukt“ AD Tivat and „Marina“ AD Bar which are expected to be finalised in the first
half of the 2010.
On the basis of a decision passed by the Privatisation Council, the preparation of tenders for
the following companies will continue:
- In the field of transport: „Željeznička infrastruktura Crne Gore“ AD Podgorica, „Barska
plovidba“ Bar;
- In manufacturing sector: Jadransko brodogradilište“ (Adriatic Shipyard) AD Bijela, "Zora"
AD Berane, „Duvanski kombinat“ AD Podgorica, „Institut crne metalurgije“ (Institute of
ferrous metallurgy) AD Niksic;
- In the field of tourism: the Institute „Dr. Simo Milošević“ AD Igalo, HTP „Budvanska rivijera“
AD Budva, HTP „Ulcinjska rivijera“ AD Ulcinj;
- In energy sector: "Montenegro bonus" DOO Cetinje, „Elektroprivreda Crne Gore“ AD
Niksic - small hydroelectric power stations and
- In the field of newspaper printing and publishing activities: „Pobjeda“ AD Podgorica.
The privatisation process for „Pošta Crne Gore“ (Mail Montenegro) DOO Podgorica will also
be initiated.
Projected recovery of the world economy in 2010 also means the revival of investment
activities. The attractiveness of potentials of countries in transition, including Montenegro,
could represent a good basis for investment expectations, and therefore the success of
privatisation of remaining projects.
Privatisation in 2010 will be focused on projects in tourism and transportation sector. These
projects in the country, in which is situated one of the most important ports for the region and
whose priority is the development of tourism industry, can further increase the interest of
investors. On the other hand, the consequences of the crisis have left traces on all actors in
the economy, which has been taken into account with regards to the projection of revenues
from privatisation.
- 60 -
4.1.2. Competition, state aid and public procurement
4.1.2.1 Competition
Implementation of competition policy is the responsibility of the Administration for
Competition Protection as an independent operating body for the protection of competition.
Objectives, priorities and implementation strategies are defined by the Strategy on
competition policy from 2008. The ultimate goal is achievement of complete harmonisation
of competition and national legislation with the acquis and effective implementation of these
policies through functionality of independent competent bodies. Economic and Fiscal
Programme for Montenegro 2008-2011 announced the adoption of the new Law on
Protection of Competition in the second quarter of 2009. Law provides the establishment of
the Agency for Competition Protection, its status, authority and funding. Due to commitments
to introduce specific changes with regards to the conduct of the proceedings before the
future Agency for Competition Protection, which must be fully compliant with EU regulations,
the adoption of the new Law has been postponed for the first quarter of 2010. With the
establishment of the Agency for Competition Protection, Administration for Competition
Protection will cease operations.
Three years of experience in functioning of the Administration for Competition Protection
proved the following limiting factors of its development: (i) an insufficient number of qualified
personnel, which could guarantee the smooth functioning of the Administration, greatly
hindered by the impossibility of planning to increase the number of employees and dispersal
of existing staff, (ii) in addition to improvement of legislation, it is necessary to strengthen
human resources in specific areas with regards to law application, such as
telecommunications, media, financial services and others., (iii) lack of financial resources
intended for the operations of the Administration for Competition Protection. However,
confirmation that the implementation of the Law on Competition Protection has begun, is the
number of submitted requests for issuance of approval for conduction of concentration (46),
out of which in 90% of cases the claimant was a foreign investor. This leads us to conclusion
that the situation in Montenegro is favourable for foreign investors, and they have the same
treatment as domestic investors in our market.
It is anticipated that after the adoption of the new Law on Competition Protection in the first
quarter of 2010, within next half a year the appropriate bylaws will be adopted, which will
complete the legal framework in this field. The Agency will in the future, in addition to control
of concentration and non-operative actions in order to achieve a higher degree of
competition culture, organisation of seminars, training and round tables (Competition
Advocacy), pay particular attention to: (i) evaluation of work, analysis of resolved cases
(temporal and quantitative analysis) with the necessary recommendations for improvement,
in order to achieve greater efficiency, (ii) training of judges and employees in sectoral
regulators, (iii) providing conditions for the detection of violations of competition rules,
particularly with regards to tacit agreements and abuse of dominant position, where those
conditions will be ensured by introduction of „Leniency Programme“ (determining violations
of competition rights - jurisdiction of the EC).
Fiscal effects of competition policy. Planned direct budgetary expenditures associated with
the Agency for Competition Protection and implementation of the new Law amount €
159,344.65 in 2009, € 304,367 in 2010, € 319,585.35 in 2011 and € 329,172.91 in 2012.
- 61 -
4.1.2.2 State Aid
Challenges regarding the introduction and implementation of state aid system in Montenegro
are resulting from the complexity of regulation of state aid in general, as well as from the fact
that this is a new area which in the future should continue to build. In this regard, in 2009
was prepared a new set of regulations in collaboration with experts from the EU, namely: (i)
Law on State Aid Control (Official Gazette of Montenegro, No. 74/09) (ii) Regulation on
acceptable costs, the maximum intensity of state aid and other criteria that are applicable for
the allocation of state aid for certain state aid goals; (iii) Regulation on methodology and
notification submission form and control of state aid, and (iv) Regulation on the annual report
content with regards to the allocation of state aid, which is mostly compliant with the acquis
and the Treaty establishing the EC.
Solutions contained in a Draft Law on State Aid Control will contribute to the further
development of a transparent state aid system. This is particularly true with regards to the
obligation of the Commission for the control of state support and assistance to prepare a
unified list of regulations on the basis on which were made allocations or on which state aid
is allocated. Commission is obliged to submit unified list with proposed measures to the
Government in order to comply with the solutions from the Law ( Article 26 of Draft Law on
State Aid Control). The specified solution will allow efficient previous (ex ante) and
subsequent (ex post) control of all new state aid measures, as well as harmonisation of
existing measures with rules that will be established, which will have positive effects in the
creation of economic policy, rational budget planning and management of appropriate policy
of regional development.
State aid measures disturb competition and cause real discrimination between market
participants (companies that receive and those which do not receive state aid), and therefore
adoption of regulations governing this area has established a system accepting that the
allocation of state aid, although incompatible with the common market, may be justified in
exceptional circumstances. This has created conditions for respecting the rights of the single
market and the preservation of competition between economic entities.
According to the annual report on the assigned state aid, in Montenegro in 2008 was
allocated state aid amounting to 45.896 million euros, which is 1.37% of GDP, and is
significantly higher than the 24.847 million euros in 2007. Percentage of state aid of GDP
without transportation and agriculture sectors in 2008 amounted to 1.2%. Comparing the
structure of state aid allocated in 2007 and 2008 shows a negative trend that is reflected,
above all in reduction of the share of horizontal state aid in total allocated state aid, given
that, precisely, this category of aid, at a minimum causes disorders of competition in the
market. In total allocated state aid in 2008, noticable is significant increase of public sector
aid (112.46%). Noted increase is conditioned by the allocation of the state aid to the banking
system in order to reduce the consequences of the global financial crisis. The increase of
this aid category is also evident in the steel and agriculture sectors.
TABLE 26: Structure of the allocated state aid
Aid type
Year
horizontal
sectoral
regional
2007
59.48%
40.52%
0.0%
2008
4.93%
46.60%
48.47%
- 62 -
In the future period, priorities of state aid policy should go towards development of regional
aid map based on NUTS II system, reducing the participation of sectoral aid in the total
amount of allocated state aid and diversion of state aid funds from social goals towards wellprepared projects, or towards horizontal objectives such as investments in small and
medium size enterprises, research and development, employment, training of employees
and environmental protection.
4.1.2.3 Public Procurement
In Montenegro in 2008, 5504 public procurement contracts were concluded (without
immediate agreement - the value of procurement up to 2000 euros), in the total amount of
537,996,900.38 euros, or 16.11% of total GDP. This is significantly higher than in 2007,
when the value of public procurement amounted to 411,992,511.45 euros or 18.92% of
GDP. In 2008, in open public procurement procedures contracted procurements amounted
to 387,278,406.21 euros, or 71.99%, while in other cases 150,718,494.10 euros, or 28.01%.
According to the World Bank standards, transparency principle in public procurement in
Montenegro is at the highest level (over 71% of procedures was conducted by applying an
open public procurement procedure). In public tender procedures there was a total of 4655
submitted offers or 3.03 offers per one procedure, which ensures the principle of
competitiveness. Principles of economy and efficiency savings were achieved through
savings of public funds of 31,575,259.04 euros, as the difference between the estimated and
the contracted value.
The Commission for the control of public procurement in 2008 and 2009 implemented a
series of activities to improve public procurement system and its promotion. First, in the
period from 01/01/2009 until 01/11/2009, the Commission passed decisions on 227
complaints, of which 71 was adopted. In cooperation with the World Bank, the Commission
issued a publication „Protection of bidders rights in public procurement in Montenegro“. The
Commission has also started a comprehensive PR campaign, in which has organised a
series of press conferences. In cooperation with the European Commission Delegation in
Montenegro, the Commission has developed web portal www.kontrola-nabavki.me, which
has helped improve the public procurement system. The site continuously after each
session, publishes all decisions based on submitted appeals. Starting from the fact that,
establishing the portal-www.kontrola nabavki.me significantly increased the number of
submitted complaints, proves a greater degree of knowledge of the system with regards to
protection of rights in public procurement procedures by the bidders and a higher quality of
complaints content and reference to previous decisions made by State Commission, we
conclude that the protection rights system in public procurement procedures has a positive
impact on the business environment, as domestic and foreign companies are familiar with
procedures and the way that those rights can be protected and exercised.
The Commission had intensive regional and international cooperation. With the support of
UNDP it organised workshop for employees as well as members of the Commission.
Activities on the implementation of the National Integration Programme and innovative
Action Plan on implementation of programs to fight corruption and organised crime, as well
as implementation of obligations under Enhanced Permanent Dialogue with representatives
of the European Commission are continuously monitored.
Preparation of technical basis to change the legislation in public procurement area was
completed in December 2009, after which started preparations with regards to the drafting of
legislative solutions in this area, in order to have further harmonisation with the relevant
directives and requirements of the European Court of Justice. In this sense, the legal text will
be put in the procedure of passing in the fourth quarter of 2010. This activity will be
conducted in collaboration of Public Procurement Directorate with the Ministry of Finance
and the Commission for the control of public procurement.
- 63 -
In the next 18 months public procurement policy will be supported by the project IPA 2007,
which began with the implementation on the 27th May 2009. Implementation participants
involve the Directorate of Public Procurement, as the beneficiary, and partners in the project,
Ministry of Finance and the Commission for the control of public procurement.
Implementation of this project will focus on improvement of regulations in public procurement
(Law and Bylaws), the national training system in this area, strengthening the capacity of the
Directorate for public procurement, modernisation of the system of publication of notices on
public procurement, spread of national awareness about the importance of a healthy and
robust system of public procurement, the adoption of strategic studies for the introduction of
e-procurement in Montenegro, establishment of a platform for electronic public procurement,
the adoption of the Strategy for development of public procurement 2010-2014.
In accordance with the assessment of the European Commission, presented in the Progress
Report for Montenegro for 2009, that it was necessary to strengthen the capacity building of
the Directorate of Public Procurement and the Commission for the control of public
procurement, a request for approval of budget funds was submitted in the amount of
298,507.50 euros + 50,000 euros (for the IPA project) for the Directorate of Public
Procurement and 379,619.50 euros for the Commission for the control of public
procurement.
Commission for the control of public procurement is in the negotiations process with UNDP
in preparing a project proposal which has the value of 50,000.00 euros, and is in the process
of adopting a new Regulation on the systematisation of professional services of the
Commission for the control of public procurement, by which new working places will be
systematised, and will comply with explicit requirements for strengthening the administrative
capacities of this institution.
4.1.3. Business environment including tax aspect
Support to SME sector
Creation of the conditions for entrepreneurship and SME development remains one of the
priorities of Government of Montenegro economic policy. Small and Medium Enterprises
Development Strategy 2007 – 2010 defines strategic framework of the objectives and tasks
for the creation of a stable and simulative environment for growth and development of SME
sector and intensifying entrepreneurship.
Abovementioned Strategy, inter alia, prescribes that by the end of 2010 comparing to 2006
following objectives should be achieved:
-
-
Increase of the number of new SME and entrepreneurs for 30%. By the end of 2008
number of SME amounted to 15.35714 which represents the increase of 33,28% in
comparison 2006 (11 522);
Increase of the employment in the SME sector for 20%. Number of the employees in
SME sector has increased from 85.065 in 2006 to 104.544 in 2008, which represent
the increase of 22,89%. This led to increase of the ratio of number of employees in
SME sector and total number of employees from 56,41% in 2006 to 62,90% in 2008;
14
Source: Tax Administration 31. 12. 2008. of which micro firms amounted to 11.852, entrepreneurs
1.609, small 1.472 and medium enterprises 424
- 64 -
-
-
Increase of the participation of SME in total export on 30%15 (competitiveness,
internationalization). Participation of SME in total export at the end of 2005 amounted
to 22.23%16;
Increase of the share of SME in GDP to 60%17.
Abovementioned data indicate to the increase of the number of employees in SME sector as
well as the real expectation that by the end of 2010 share of SME in the total export will
achieve estimations defines by the Small and Medium Enterprises Development Strategy
2007 – 2010.
Implemented active policy measures for enhancing SME development
SME sector is funded by the credit lines of the Directorate for Development of SME, the
Development Fund and the Employment Agency. In the first nine months of 2009 these
three institutions approved 695 projects in the total value of 17,111,701.00 € by which 1.448
new working places have been created. In the same period of time the Directorate for
Development of SME approved 16 application in the value of 54,431.18 € for Grant schemes
with purpose to support market participation, cover marketing activity costs and improve
companies possibilities for more successful business performance (introduction of new
technologies, market research etc). Projects IPA Cross Border Cooperation and Adriatic
Programme of Cooperation in the area of SME development have been nominated, under
the programs which are funded by EU funds.
Under the institutional support to SME, activities have been undertaken regarding the
reorganization and improving capacities of the regional/local business centres. In 2009 two
more business incubators were established in Plav and Kolasin. Business incubator in Bar
has firms as tenants which perform different businesses while incubator in Podgorica has got
IT business “tenants”. Preparation activities for the establishing of the business incubator for
service – manufacturing businesses in Berane are in progress. Project for the establishing
technological park has been nominated within IPA Cross Border Adriatic Cooperation
Programme.
The strengthening the economy competitiveness and stimulating the export orientation are
implementing through the measures of the Export Promotion Strategy and the Strategic
Operational Plan. Activities regarding the providing relevant information to SME are
implementing continuously. In November 2009 market informative service was established
which will enable to SME direct approach to data bases on the international markets and by
these activities will strengthen the export oriented companies. European Centre for
Information and Innovations which provides a practical information and assistance to SME in
order to improve the competitiveness and internationalization became operational.
Promotion of entrepreneurship and SME is still organized through the promotional activities,
the fair exhibitions and the business meetings. The exhibition of the Montenegrin companies
has been organized on the fair manifestation in the region, Europe, Russia, India, UAE, etc.
15
There are no official statistics on SME share in total export in 2006, 2007, 2008
16
Data are taken from the Annual Report of Chief Economist of the Central Bank of Montenegro 2002
– 2005. For more details, see document SME Development Strategy 2007 – 2010 – Analyses of the
SME share in export 2002 – 2005.
Monstat Estimation on SME share in GDP in 2003 – 58,79%. There is no official statistic on SME
share in GDP after 2003.
17
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In the area of business knowledge enhancing, the project Business Innovation Programs
(BIP) is in the implementation process in the Montenegrin six secondary schools (Tivat,
Kotor, Mojkovac, Bijelo Polje, Berane, Plav). Also, project “Chance for young managers” was
implemented in Podgorica, Bijelo Polje, Niksic and Cetinje. Its aim is to provide the
conceptual, administrative and experts knowledge and skills which are necessary to young
managers for the effective business performance. Result of this Project is that 90% of
attendants have found a new job. Further plan is to organize the same project in Danilovgrad
and Kotor.
Further policies and measures for development of SME are refers to the:
1. Strengthening the institutional support for SME development. Capacities of the
existing regional/local business centres and the existing business incubators will be
improved. New business incubators will be established. Activities on the establishing
of the Technological Park will be initiated. Support to the cluster and cooperation
development will continue.
2. Strengthening the economy competitiveness and stimulation of the business
orientation. Continuation of the implementation of the Export Promotion Strategy. In
2010 promotion of Market Informative Service is planned for the companies form
Montenegro, as well as for institutions/organizations which deals with development of
SME and entrepreneurship. Register of exporters will be created – data base of
Montenegrin exporters and export products.
3. Improvement of business knowledge through the implementation of the educational
programs – trainings in the area of business skills, management, marketing, business
communication, internationalization and export (organization of seminars, workshops,
trainings in order to establish new and improvement of existing SME performance),
implementation of Action plan of Strategy for Entrepreneurial Learning.
4. Promotion of the entrepreneurship and SME through the improvement of the
marketing activities, improvement of public relations, promotion of new companies
establishing - start up, increasing the level of cooperation with international
institutions, promotion of women’s activities in business.
Bearing in mind significant changes in Montenegrin economy (in the area of banking sector,
capital market, economic development priorities and demands, overall economic
environment, regulation) there was requirement for transformation of the Development Fund
and adjustment of its mission and objectives to the further economic development and
Government of Montenegro economic policy.
Legal status of the Development Fund would be determined through its transformation to the
public owned joint stock company. Basic intention of the Development Fund transformation
is to organize the Fund as the individual legal entity in order to enable the appropriate
preconditions for future institution (Fund) to justify efficiency of its business performance.
There are several arguments in the favour of Fund transformation into Joint Stock Company:
-
-
As the independent economic subject Fund would operate on the principle of self
sustainability;
As the joint stock company Fund would dispose with more instruments (shares,
bonds, portions, credit lines, guaranties etc.) for the accomplishing of defined
objectives;
Fund would be open institution for the international and domestic cooperation;
Enabling the efficient operation with an optimal number of executives who are able to
implement Fund’s business policy;
Defining of the legal position of the institution and applying of the appropriate
regulation.
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The objectives of the newly established subject, as basis for further Fund’s development, will
be as follow:
-
Support to the realization of the infrastructural and ecological projects;
Regional development balancing;
Support to micro, small and medium size enterprises, inter alia;
Privatization of the rest of the state capital in the Fund’s portfolio;
Existing placements realization.
The most significant activities of the Fund will be credit and guarantee operations. Law on
establishing if the new Fund prescribes that the Government of Montenegro will guarantee
for Fund’s obligations which means that Fund’s guarantees will be covered by the first class
collateral, in accordance with international principles. Government of Montenegro adopted
Law Proposal on Investment Development Fund on its session of December, 3 2009 as well
as Parliament of Montenegro on the end of 2009.
Financial funds for the implementation of this Law will be provided from the Fund’s existing
funds and the Directorate for Development of Small and Medium Enterprises funds assigned
for SME sector support which are on the commercial banks accounts currently.
Business environment
Creation of the economic system and institutional framework which will provide simulative
business environment is the one of the strategic priorities of Montenegro. In the previous
period, the different reforms have been implemented in the all areas of the economic
system. These reforms were oriented to build as much as possible favorable business
environment. Under abovementioned reform activities Government of Montenegro has
established the Council for Elimination of the Business Barriers.
Main task of the Council is to organize and coordinate the activities of the Government
bodies and other relevant institutions in the area of the business barriers elimination. Council
has the mandate to propose to the Government the adoption of the new regulation as well as
amendments of existing regulation which will contribute to the elimination of business
barriers. On the basis of the proposals and recommendations given by government bodies,
economic subjects and business associations, Council prepares and proposes the Plan for
elimination business barriers to the Government. Council cooperates with the international
organizations and institutions in order to improve business regulation in Montenegro, as well
as bilateral cooperation with institutions of other countries which are successful examples in
the area of business regulation and elimination of the business barriers. Council is chaired
by Deputy Prime Minister for international economic relations, structural reforms and
business environment improvement.
On the Council’s initiative the Act on Government of Montenegro Internal Rules has been
amended in the part which regulates the procedure of the proposing of the laws and other
acts to the Government. According to these amendments under the new procedure,
proponents of the laws and other acts are obliged to provide positive opinion, issued by the
Ministry of Finance, which proves that there are not business barriers in the provisions of
proposed act. In accordance with abovementioned, in the Ministry of Finance, special
Department for improvement of business environment has been established which is in
charge for issuing of the opinions on the proposed laws and acts from the point of their
impact on business environment. Other activities of the Departments are related to the
administrative support to the Council for Elimination of Business Barriers, cooperation with
international organizations in the area of business regulation improvement as well as
cooperation with private sector. Since July 2009 Department has issued about 140 opinions
on the different laws and acts.
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Considering the business environment in Montenegro, it is obvious that there are a lot of
possibilities for improvements in this area, especially in the area of duration, costs and
procedures for licensing, in other words, the proceedings of the state administration in
different procedures. World Bank Doing Business Report 2010 findings confirms in the favor
of the abovementioned fact. Montenegro improved its position for the six places up on the
Doing Business 2010 global list. On the basis of the recorded reforms in Montenegro, DB
team assessed that Montenegro has improved in the four of the ten analyzed indicators.
Only 11 countries reformed better than Montenegro according to score by indicators.
Reforms were made in the area of starting business, dealing with construction permits,
paying taxes and employing workers. In the rest of the DB analyzed indictors (areas)
Montenegro has not come forward, due to the fact that it has not reformed while other
countries reformed better and outstripped Montenegro on the global list.
In order to intensify activities on the elimination of the most important business barriers,
Government of Montenegro – Ministry of Finance has launched cooperation with the World
Bank in the area of drafting of the recommandations for the further reforms. In the
cooperation with World Bank, Government of Montenegro has adopted Doing Business
Reform Action plan which consists the measures for improving of the business regulation.
Action plan activities which will be implemented in the next short and long term period are
related to the changing or abolishing the laws and other regulation, shortening of procedures
as well as reducing their costs. In that sence, during the next period of time main activities
will be related to the implementation of the Law on spatial development and construction
building, amending the Law on Business Organization, Law on general Administrative
Procedure, adoption of the Law on executive procedure, Law on insolvency and Law on
courts fees.
At the same time, preparation activities for the Regulatory Reform Project are in progress.
This Project will be implemented in the cooperation of the Ministry of Finance and the
International Finance Corporation during the next 15 months. Project consists of three
components: regulatory Guillotine, Doing Business indicators and implementation of
Regulatory Impact Assessment.
This Project is aimed to strengthen the business environment through implementation of the
integral methodology for the systematic revision of the business regulation in order to
eliminate unnecessary, dysfunctional and obsolete regulation, shorten administrative
procedures and reduce the administrative costs. Revision of this regulation would be a kind
of the guillotine by which long-lasting and expensive administrative procedures will be
excluded from the economic and legal system and will assure that Montenegrin
accomplishment of competitive market economy standards.
Second component, related to the Doing Business indicators will be implemented through
the selection of the areas where the reforms are mostly needed. That would be Doing
Business Indicators: starting business, paying taxes, cross border cooperation, dealing with
construction permits, registering property.
Third component refers to the implementation of the Regulatory Impact Assessment.
Activities of the issuing opinions on the proposal of regulation which are organized within the
department for business environment improvement could be considered as precursor for RIA
implementation.
It is expected that implementation of the Doing Business Reform Action plan and Project of
the regulatory reform in the next two years significantly contribute to the business
environment improvement as well as elimination of the business barriers which should lead
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to strengthening SME sector and economic activity and consequently to higher economic
growth and recovery of the economy affected by the global financial crises.
Project will be financed mutually by the Government of Montenegro (50%) and International
Finance Corporation (50%) by the funds amounted to 350.000 euro (500.000 $).
Experiences of the countries which have implemented similar projects show that effects on
the budget savings are usually ten folded. In that sense, it is expected that implementation of
Action plan measures and activities will contribute to savings for state budget and economy
valued about 4 millions euro.
Tax aspect of the business environment
Tax policy in 2009 was driven towards further improvements of the Montenegrin tax system
in order to enhance business environment and strengthen the investments, bearing in mind
EU legislation and practice. It was continued with the trend of decreasing and equalization of
tax rates, abolishing of tax deductions and elimination of exemptions. In the further period of
time, special attention will be given to the improving of the service to the tax payers.
In the area of the direct taxation, corporate income tax rate was kept on the level of 9% in
2009 and it is the lowest in the region. Planed decreasing of the fiscal burdens on the wages
has been implemented. Related to that, personal income tax rate as of January 1 2009 has
been decreased from 15% to 12% and as of January 1 2010 it will be 9%. At the same time
mandatory social insurance cumulative contributions rate has been decreased from 34% to
32% as of January 1 2009. Simplified procedure of unified registration of the PIT and social
security contributions taxpayers, organized by one tax return has been successfully applied
while the model of unified calculation and collection of abovementioned obligations is in the
testing phase which is being implemented by Tax Administration in cooperation with tax
payers.
Further implementation of the tax reform with basic commitment of the simplification of tax
procedures, low tax rates with as much as possible broad tax base and insignificant number
of tax exemptions is in progress. Related to that Parliament of Montenegro adopted the set
of tax laws on its session held on December 17 2009 as follow:
- Amendments on the Personal Income Tax Law, by which: is abolished tax relief on the
“personal deduction” amounted to 840€ annually (70€ monthly); are balanced tax rates on all
sources of personal income tax and decreased the standards expenditures (from 40% to
30%) in the process of calculation of taxed income on occasional business activities which
contributed to decreasing of the effective tax rate and created better business environment;
is introduced the taxation on some benefits based on working contract (benefits for meals,
transport etc) in order to broaden the tax coverage and equalize tax treatment; is introduced
obligation of the taxation of incomes on capital gains based on real estate selling, shares in
companies and securities (this provisions will be applied as of 1 January, 2011);
- Amendments on Social Security Contributions Law by which is increased the cumulative
contributions rate. Provisions of the Social security contributions Law (Official Gazette no
13/07, 79/08) prescribed the decreasing of the contribution rate from 32% to 30% as of
2010. Namely, in the context of decreasing the personal income tax rate from 12% to 9% as
of 2010 and overall liquidity problem caused by global financial turmoil, the fiscal structure of
the wages has been changed including the social security contributions structure.
Cumulative contributions rate has been increased by 1,8% (from 32% to 33,8%) through
decreasing of the fiscal burden based on contributions paid by employer from 14,5% to 9,8%
(which will cause decreasing of the employers costs) while tax burdens on wages based on
contribution paid by employees has been increased from 17,5% to 24%;
- Amendments on the Corporate Income Tax Law by which is decreased the number of tax
exemptions as well as abolished monthly advance paying of corporate income tax. These
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measures will contribute that companies will have more disposable funds for financing of the
current operations;
- Amendments on the Tax Law on Using the Passenger motor vehicles, motorcycles and
Vessels (with cabin).
Above-mentioned amendments will be in implementation as of January 1, 2010 and overall
positive effect on Budget would be around 30 millions of euro.
In March of 2009, in the area of indirect taxation, the Decree on the postponed payment of
customs obligations (Official Gazette 25/09, 48/09) was adopted for the temporary period of
time and is valid up to December 31, 2009. This Decree is adopted as response on global
financial crises and as measure in order to diminish its negative effects. It prescribes
possibility for postponing of the payment of customs obligation (customs and tax) based on
imports of goods, on the period of 30 days from the day of customs declaration acceptance.
This provision creates more favourable condition for the continuation of the imports of goods
necessary for realization of many investment projects. Also, in order to provide additional
budget revenues, in June 2009, the Law on amendments on the Law on excises (Official
Gazette 50/09) was adopted by which excises on mineral oil (lead acid petrol, unleaded
petrol and gas oils used as motor oils)are increased by 0,10 € per liter. For the other mineral
oils18 excises are increased by 30%. This law, also, prescribes that the provisions from the
previous law amendments regarding increasing of specific excise rate on cigarettes from 3€
to 5€ (for 1000 pieces) as well as proportional excise rate from 30% to 35% of retail price of
cigarettes will be implemented as of October 2, 2009, instead of January 1, 2010 as it was
prescribed by the previous amendments19. Implementation of this law will contribute to
increase of excises revenues by approximately 20 millions of euro comparing to 2009.
In the area of customs, in July 2009, it was adopted Decree on conditions for performing
pleading operations in the customs authority (Official Gazette no 50/09) which prescribes
more flexible conditions for obtaining the license of the customs authority. On its session of
the December 3 2009, Government is adopted the Decree on the harmonization of
nomenclature of the customs tariff with combined nomenclature of EU for 2010 in order to
create more favourable conditions for the foreign trading of our economic subjects.
Implementation of this Decree in the area of decreasing of customs rate for certain group of
goods, according to Interim Agreement with EU and Free Trade Agreement with Turkey will
affect on decreasing of customs revenues in the budget by approximately 2,5 millions of
euro. Preparation of Decree which will prescribe conditions for obtaining status of favorable
subject20 is in progress. This Decree will prescribe possibilities for the subject with favourable
status to use facilities during customs procedures.
In the next time, Ministry of Finance intends to carry out analyses of the effects of the
implementation of existing regulation of key taxes in Montenegro. On the basis of this
analyses findings, Ministry of Finance will prepare tax strategy for 2010 – 2014 which will be
based on the current principles of self taxation, simple procedures, as much as possible
smaller number of the tax exemptions as well as competitive tax rates. Strategy will be the
framework for the further regulation improvement in this area bearing in mind actual
legislation and practice of European Union as well as future changes in this area.
18
Other mineral oils: kerosene which is used as motor oil and kerosene for hitting, gas oil for industrial
and commercial uses and gas oils for hitting, stoke oil, liquid oil gas which is used as motor oil or
industrial and commercial uses and heating
19
Amendments on the excises law (Official Gazette, no. 76/08)
20
Decree will be in force as of January, 1 2010.
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One of the important principles of future tax policy will be more efficient administration for the
purpose of further simplification of the procedures and elimination of business barriers which
will be accomplished trough project of unified registration and collection of taxes and
contributions as well as electronic submission of tax returns and payments and better
services to tax payers.
Financial reporting in Montenegro – business environment aspect
Reliable financial reporting system represents the basis for satisfactory functioning of the
market economy and dynamic financial system as well as very important aspect of the
business environment in the sense of availability of timely and credible information to
business, investors and regulators. Ministry of Finance was adopted the Strategy and Action
plan for the improvement of the system of financial reporting in Montenegro in October 2008
and thereby has started the activities on overall reform of the system of financial reporting.
During 2009, in accordance with Strategy and Action Plan, Ministry of Finance has
implemented following activities:
- Amendments on Accounting and Auditing law are adopted as well as complementary
regulation by which regulatory framework in this area is completely established;
- Accounting and Auditing Council is established. Council has consultative and advisory role
in the process of development and enhancing of the accounting and auditing practice in
Montenegro;
- Administrative capacity for the inspection control is established in the Ministry of Finance.
In the first phase of the inspection control, in the cooperation with Securities Commission
and Violation Jury, officers of the Ministry of Finance had been controlling the delivering of
the quarterly financial reports by the joint stock companies, banks, insurance companies and
had launched 203 violation processes against legal persons due to not delivering the
financial reports in the period of time prescribed by law;
-In the cooperation with the World Bank implementation of the activities on prioritization of
the action plan and designing of the long term reform plan is in progress. Also, through
regional World Bank REPARIS program, cooperation and exchanging the experiences with
countries in the regions has been effectuating constantly.
In order to improve business environment and increase the level of transparency, following
activities on improvement of the financial reporting will be implemented by 2012:




Implementing the capacities for receiving and publishing of the financial reports for all
legal persons on the web site of Central Registry of the Commercial Court;
Implementing the capacities for controlling of the quality of the financial reports
Implementing the capacities for public supervision of the auditors and quality control;
Further regulatory framework straightening through adoption of the new law on
Accounting and Auditing in 2012 and implementation of the all acquis communittaire.
4.1.4. Network Industries
4.1.4.1. Energy
The total energy balance of Montenegro consists of hydro energy, oil derivatives, coal, wood
and wood by-products, and imported electrical energy. Montenegro imports all needed
quantities of oil derivatives, more than one third of needed electrical energy and rather small
quantities of lignite. Import of electrical energy has been growing over previous years. In the
period 2000-2008, this import was growing with an annual rate of 0.6%. The elements in the
structure of import of oil derivatives are mazut, diesel fuel and gasoline. Over the course of
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previous several years, the share of heating oil was around 30%, diesel fuel around 25%,
while the share of gasoline was somewhat lower (around 18%). Montenegro exports much
lower quantities of energy if compared to imported quantities of energy. The electrical
energy and coal make the structure of exports.
Features of the energy sector in terms of level of services and prices
The Law on Energy, in application since 2003, has regulated the issue of level of services in
the energy sector partially and in rather general terms. The new Law on Energy, expected
to be adopted at the begging of 2010, will govern in details the issue of the level of services
in all energy segments.
Electrical Energy: The level and quality of services in electrical energy supply are different in
different parts of Montenegro. Problems in respect of safe and reliable supply of electrical
energy to consumers are pronounced in the northeast part of Montenegro and on the
territory of the Municipality of Kotor. In order to secure higher quality and reliability in supply
of electrical energy to consumers, a series of projects are under implementation for
construction of new and reconstruction of existing structures of the transmission and
distribution system of electrical energy. The rulebook on electrical energy tariffs governs the
manner of establishing of charges of electrical energy undertakings for carrying out electrical
energy activities and manner of setting tariffs for sale and purchase of electrical energy
supplied, as well as for services provided regarding such supply to consumers/customers by
electrical energy undertakings.
During 2008, some intensive activities were evidenced in terms of creating conditions for
opening the electrical energy market, which resulted in adoption of the Decision on Opening
of the Electrical Energy Market by the Energy Regulatory Agency on 30 December 2008. In
accordance with that Decision, the market is open for all consumers, except for households,
starting from 1 January 2009. The Decision has established that the organisation and
operation of market will be carried out in accordance with the Market Rules, which were
prepared at the end of December 2009 by EPCG and approved by the Energy Regulatory
Agency. The objective of the Market Rules is to create prerequisites for the functioning and
development of the electrical energy market. The electrical energy market consists of the
wholesale market, where participants are producers, traders, and suppliers of electrical
energy, as well as qualified buyers/self-suppliers, and retail market where participants are
suppliers and qualified buyers i.e. customers that acquired right to select directly a supplier
of electrical energy. The development and liberalisation of the market will take place
gradually, in accordance with the development of competition and overall relations in the
market. In the initial period, following the opening of the market i.e. until the entry of
competition in supply, all end-users have right to be supplied from public supplies according
to the regulated tariffs, except for buyers supplied under special contracts.
Pursuant to the Decision on Approving Prices Tables for Electrical Energy, adopted by the
Energy Regulatory Agency on 29 November 2008, the electrical energy prices were
increased for all consumers except for distribution consumers connected to 0.4kV voltage
network, which do not classify in the category of households. There were not increases in
prices of electrical energy in 2009. Considering that the existing prices apply until 31
December 2009, the Energy Regulatory Agency has adopted the new decision on electrical
energy prices at the end of December 2009.
On 4 December 2008, the Government of Montenegro adopted the Program of Subsidising
Electrical Energy Consumers for period from 1 December 2008 to 31 December 2009, in
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order to protect consumers and find-out options to establish more regular payment of
invoices for electrical energy. This subsidising program covers all distribution consumers
connected to 0.4kV voltage network (small and medium-size enterprises engaged in
services and craftsmanship activities, as well as small-size industrial consumers), in
addition to users of social protection rights and other classes of households meeting certain
conditions, as well as all distribution consumers connected to 10kV and 35kV voltage
networks and the Railways of Montenegro. Having in mind present economic crisis and
relatively high prices of electrical energy for distribution consumers, in particular consumers
connected to 0.4kV voltage network (other consumption – 1st and 2nd degree), on 26 March
2009 the Government adopted the Model of additional subsidising of consumers of
electrical energy for categories of distribution consumers connected to 35kV, 10kV, and
0.4kV voltage networks which was applied from 1 April to 30 September 2009.
Until April 2009, the Elektroprivreda Crne Gore AD Nikšić (EPCG), whereat the state had
70.59% ownership, was the only electric power company in Montenegro engaged in
generation, transmission, distribution, and supply of the electrical energy. EPCG was
organised into four functional segments: Generation, Transmission, Distribution, and
Supply; and two organisational segments: Headquarters and Elektrogradnja. At the end of
March 2009, a spinout of the Transmission from the EPCG was made, and the company
called the Transmission JSC (Prenos AD) established. This joint stock company has
started its functioning as an independent legal entity in April 2009. The Transmission JSC
Podgorica undertakes activities of transmission of electrical energy, as well as role of the
transmission system operator and (temporarily) electrical energy market operator. In mid
2009, the Transmission JSC became member of ENTSO-E association (European Network
of Transmission System Operators for Electricity).
The third party access principles are applied in Montenegro in a non-discriminatory and
regulated basis, in accordance with the Rules on Third Party Access in transmission and
distribution network. These Rules govern the third party access in transmission and/or
distribution network, which include the rights of third parties – market participants that can
under equal just conditions which are known in advance enter into contracts with
transmission network operator or distribution network operator for network access in order
to carry out their licensed activities.
Oil: The functioning of companies operating in the field of oil and oil derivatives is organised
as a market-based activity. Numerous oil companies are engaged in supply of oil
derivatives of consumers in Montenegro, thus it could be said that the competition principles
are achieved. The only element which does not allow for the full competition to take place
in the field of oil products and gas is the fact that the largest company engaged in this
activity, Jugopetrol from Kotor, is the owner of majority of storage capacities in Montenegro.
Companies are procuring certain quantities of oil derivatives by direct purchase on
international tender (Steel Mill Nikšić, Aluminium Plant Podgorica, Directorate of Public
Works, and other).
Prices of oil derivatives are established every 15 days in accordance with the Decree on the
Manner of Determining Maximum Retail Prices of Oil Derivatives. The core elements of this
calculation are the price of oil derivatives on the world market and currency ration
EUR/USD.
Draft Rulebook on Quality of Oil Derivates was prepared but it was referred from the
ministry which prepared it to the ministry in charge for environmental protection. Decree on
Quality of Oil Derivatives is planned to be prepared in the second quarter of 2010, defining
the manner and deadline for elimination of fuels containing lead, the manner of control of
fuels in locations where the trade in oil and oil derivatives takes place, as well as the
competent authority for implementation thereof.
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Gas: Network energy system for gas is still not developed in Montenegro. The level of
services and prices in the gas sector is guided to a great extent by the fact that Montenegro
does not have a developed gas network. Montenegro uses liquefied petroleum gas (LPG)
which is imported. LPG in the Montenegrin market is present in form of small steel
containers, small tanks used by the services sector and households, and in large tanks of
various capacities for industrial and hotel consumers, and as autogas. Several economic
undertakings are engaged in distribution and sale of LPG (Jugopetrol - Kotor, Energogas Podgorica, INA Crna Gora – Tivat) and their number is constantly growing. The price of
liquefied petroleum gas is established on market-based principles.
Status and efficiency of the regulatory authority
The Energy Regulatory Agency carries out activities of an energy regulator in Montenegro,
and is established as an independent, functionally autonomous and non-profit organisation.
During the second half of 2008 and first half of 2009, the Agency adopted several enabling
regulations which were necessary for opening and functioning of the electrical energy
market.
Tendency and existing measures of the Economic Policy
The Economic Policy of Montenegro for the energy sector will be conducted within the
Energy Development Strategy of Montenegro until 2025 in the forthcoming period. The
action plan for implementation of the Energy Development Strategy of Montenegro for
period 2008-2012, adopted by the Government in October 2008, envisages the realization
of large number of programs and projects. The activities to create conditions for energy
investments are planned, in particular for construction of new energy generation capacities
and energy interconnections with neighbouring countries, revitalisation and modernisation
of existing energy structures, increasing of energy efficiency in energy generation and
consumption sectors, reduction of the adverse effect of energy structures on the
environment, and incentives for the higher use of renewable energy sources and
cogeneration.
In order to harmonise the national legislation in the field of energy with the legislation of the
European Union, the new Law on Energy and Law on Energy Efficiency are under
preparation. Their adoption is expected at the beginning of 2010. The Proposal of the Law
on Energy, which was adopted by the Government in December 2009, contains provisions
of the previously prepared Draft Law on Gas dealing with the internal gas market and of the
Draft Law on Renewable Energy Sources. Furthermore, the Proposal of the Law on Energy
also contains provisions dealing with the safety of supply of electrical energy and gas,
cogeneration, as well as provisions dealing with the minimum requirements of 90-days oil
derivatives reserves. The Law on Energy Efficiency will establish core legal bases for the
development of the energy efficiency system, rational use of energy and energy savings in
the final consumption sectors. The Law on Energy will govern the energy efficiency in plants
for generation and transformation, transmission and distribution of energy.
In order to create conditions for the construction of new, and revitalisation and optimisation
of existing electrical energy structure, a Project of Partial Privatisation and Recapitalisation
of the Elektroprivreda Crne Gore AD Nikšić was carried out in 2009. The transaction was
closed after the Italian company A2A S.p.A met all conditions from the Contract on Sale of
Part of Shares and Recapitalisation of the Elektroprivreda Crne Gore, signed with the
Government of Montenegro on 3 September 2009. In addition to state shares and newly
issued shares, this company purchased shares from privatisation funds and majority of
shares from remaining minority shareholders, thus it was registered as owner of 43.7% of
shares of Elektroprivreda Crne Gore. The financial effect of this transaction is around 430
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million euro (44.4% for state shares and newly issued shares of EPCG, 23.3% for shares of
minority shareholders, and 32.3% for shares of funds). According to the Contract, the
company A2A S.p.A. should increase the efficiency of the operation and carry out
investments plan through the management of Elektroprivreda. In line with that, the plan is
that significant increase of capacity and annual generation of the existing generation
facilities is achieved through implementation of various projects, as well as reduction of the
adverse effects of the TPP Pljevlja on the environment, reduction of the number and overall
duration of interruption of electricity supply to consumers, decrease in distribution network
losses and increase of the collection rate of consumed electricity.
Several projects are currently being implemented, and so precisely:
- The project “Year of Energy Efficiency” is being implemented, which is based on intensive
promotion of priority activities in the field of energy efficiency, through implementation of 17
specific programs supported by a continuous promotional campaign. The implementation
of the Project started in November 2008, and officially ended in December 2009, but
activities which were initiated will also continue in the coming period.
- According to the Concession Contracts, entered into in September 2008, the
concessionaires are implementing activities in terms of exploration and construction of
small hydro power plants in 8 watercourses.
- The tender procedure for awarding concession for the construction of small hydro power
plants in ten watercourses with distinct hydrological features in Montenegro, in line with the
tender published on 15 September 2009, is underway.
- The preparation for publishing of the tender for construction of wind power plants in
locations where explorations and measurements on wind potential are completed, is
underway.
- The preparation of the tender for selection of the concessionaire for construction of 4 HPP
on the Morača River, is underway and it should be published in January 2010. Total
designed capacity of these hydro power plants is 238MW, and estimated annual
generation is around 694GWh.
- Preparatory activities for the project on construction of the HPP Komarnica, capacity of
168MW and annual generation of 232GWh are being implemented.
- The tender for awarding the concession for exploitation of coal in the Maoče Basin
(territory of Pljevlja), conditioned by the construction of a thermal power plant with the
estimated capacity of 500MW, is published on 9 November 2009.
- In order to raise the energy efficiency on the generation side, the revitalisation and
modernisation of existing electrical energy generation facilities is taking place (HPP
Perućica, HPP Piva, and TPP Pljevlja), which should provide for their optimisation and
increase of the overall annual generation for around 4000GWh.
- Activities for implementation of the Project for construction of the 400kV transmission line
Podgorica-Tirana, the Project for the construction of submarine high-voltage direct current
cable between the power systems of Italy and Montenegro, as well as series of other
projects dealing with reconstruction and expansion of transmission and distribution
electricity network are underway.
As far as gas is concerned, under the Action Plan for the Implementation of the Energy
Development Strategy of Montenegro for period 2008-2012, the project of gasification of the
city of Podgorica with the distribution gas network and the Project of construction of the
Ionian-Adriatic gas pipeline are planned. Numerous activities under these projects, which
are determined by the Action Plan, were not implemented, mainly due to the economic crisis.
A memorandum of understanding is signed for implementation of the Project of construction
of the Ionian-Adriatic gas pipeline between companies PLINACRO and EGL, a joint working
group PLINACRO-EGL was established, creation of the inter-state body of Albania,
Montenegro, Croatia, and Bosnia and Herzegovina was initiated, and analyses and studies
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of various options for routes and configuration of the gas pipeline system were developed
(spatial and technological and economic considerations).
It is expected that the realisation of the said projects will contribute to the mitigation of the
consequences of the economic crisis and to the economic development of Montenegro.
Fiscal effects of the Action Plan for Implementation of the Energy Development Strategy of
Montenegro for the period 2008-2012
The Action Plan envisages the implementation of programs and projects having total value
of 1,391,081.000 euro, where the state should participate with 22,678,000 euro. Activities
that will be co-financed with budget resources are as follows: (i) raising energy efficiency and
use of renewable energy sources by consumers (€2,615,000); (ii) increasing the efficiency of
existing energy generation facilities and energy supply facilities (€700,000), (iii) preparation
of the plan for mitigation of the consequences of the climate changes (€200,000), (iv)
development of the institutional framework and participation of public in development of
competitive and market oriented energy sector (€7,960,000), (v) construction of and
exploitation of renewable energy sources (€6,450,000), (vi) increase in generation of clean
energy from fossil fuels (€1,560,000), (vii) development of a base for a long-term energy
development of Montenegro (€1,343,000), (viii) development of mechanisms for efficient
monitoring and control of the implementation of the Action Plan (€1,850,000).
4.1.4.2. Transportation
The share of transportation in GDP of Montenegro for 2008 was 11.3%, which is somewhat
less than 13.3% in 2007. The Transportation Development Strategy of Montenegro, adopted
on 3 July 2008, defines the development of transportation. The basic goals of the strategic
development of the transportation system of Montenegro are: improvement of security and
safety, in order to save human lives, material values and preserve state funds; integration
into the European Union, through the connection to TEN-T and improvement of the
competitiveness of the domestic transportation industry; improvement of the quality of
transportation services; stimulation of economic growth through more efficient and costeffective transportation; minimization of negative impact of transportation development and
transportation infrastructure on the environment and the society in general.
Road infrastructure and road transportation
Existing condition. Road infrastructure in Montenegro is characterized by the problems such
as the age of the road network, unfavourable geographic terrain, its exploitation in the
manner that it was not designed for, bad maintenance of roads over the last decade,
pronounced seasonal cycle-nature in the frequency of transportation. In accordance with the
recommendations and the practice of developed countries, parameters for providing funds
for maintaining roads are approximately 2% of the total value of the road infrastructure or
around 8,000 euro/km of road, which would be from 15 to 40 million euro per year for the
road network in Montenegro. In Montenegro, within the period from 2005 to 2009, the
amount of 9 million euro was invested in regular maintenance of the roads.
The Transportation Development Strategy of Montenegro, the Spatial Plan of Montenegro
until 2020 and the Law on Roads determine the initial grounds for realization of the rational
policy for managing the state roads. The tasks defined by the Transportation Development
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Strategy of Montenegro in the area of road infrastructure and road transportation are
elaborated in the Strategy for Development and Maintenance of State Roads (adopted in
July 2008), Middle Term Programme for Regular and Investment Maintenance,
Reconstruction and Construction of the State Roads for the Period 2008-2011 (adopted in
July 2008), the Annual Plan of Regular and Investment Maintenance, Reconstruction and
Construction of the State Roads, Programme for Eliminating Bottle Necks on the Core
Transportation Network in Montenegro 2007-2009 (adopted at a session of the Government
on 27 September 2007). The Programme relates to the elimination of 16 bottle necks on the
main transportation network, and the programme is being implemented mostly in accordance
with the dynamic plan of realization that is adopted together with the aforementioned
programme. The implementation of these programmes should contribute to the realization of
one of the main strategic goals defined in the Transportation Development Strategy of
Montenegro, which is quality integration in the regional and beyond that into European
Transport Network.
As far as legislation is concerned, the following activities important for the road infrastructure
and road transportation in 2009 were performed:
- The Law on Contracts for Carriage by Road (Official Gazette, No. 53/09) was developed
and it provides for the protection of passengers and users of services of freight carriage.
The Law is fully harmonized with the Convention on the Contract for the International
Carriage of Passengers and Luggage by Road (CVR) and the Convention on the
Contract for the International Carriage of Goods by Road (CMR), and with this law a full
harmonization of the national legislation in the area of road transportation with the
European Union legislation is achieved.
- Draft Law on Working Hours, Obligatory Breaks of Mobile Workers and Surveying
Devices in Road Traffic is being prepared;
- The Law on Amendments to the Law on Roads (Official Gazette of the Republic of
Montenegro, No. 54/09) is adopted. The application of the Law on Roads from 2004 has
imposed in the practice the need to specify the provisions regarding the inspection
jurisdiction at the state and municipal level. In addition to the aforementioned, due to
different interpretations of the Law with respect to determining the fees for using the road
land, the proposed amendments envisage that the amount of fee for using the municipal
roads is determined by a competent body of a local self-government unit, provided that it
cannot be higher than a fee for the highway. In such a way it is impossible to set barriers
for operations of business organisations that are, due to the nature of their business
activity, forced to use the road land.
- Development of the Rulebook on Conditions and Manner for Performing Extraordinary
Transport on the basis of Article 55 of the Law on Roads (Official Gazette of the Republic
of Montenegro, No. 42/04) is underway.
The consortium, consisting of Konstruktor Company from Split, Tehnika Company from
Zagreb, and the Civil Engineering Institute of Croatia, won the tender for the construction of
the Bar-Boljari Highway. Bar-Boljari Highway will link the Coast with the North of the country,
up to the border with Serbia and the connection with the Central Europe. Further
development of the Port of Bar (Luka Bar) and Montenegrin railways is creating the
environment that will contribute to the development of the highway as a part of the modern
inter-modal corridor that will serve as integration factor of the Northern part of Montenegro
with the Central and the South Region. The Detailed Spatial Plan is adopted, as well as
detailed designs and the Feasibility Study for Bar-Boljare Highway. Firstly, a section from
Podgorica to Matesevo will be built. The Government made a decision to participate in the
construction of the highway with 100 million euro, which will be invested over the period of
four years of construction, and thereafter the Government will make the so-called availability
payments during the concession exploitation of the road. Preliminary works on the
construction of the highway have started in IV quarter of 2009.
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The funds obtained from international financial institutions for the period from 2007 to
October 2009 for the projects in the area of road infrastructure are as follows:
- EAR donation for 3 projects and the administrative building of the Transportation
Directorate in the amount of 4.5 million euro;
- EIB credit – tranche in the amount of 4 million euro was obtained under the project called
“Rehabilitation of Roads and Bridges”,
- EBRD credit in the amount of 11 million euro - the funds are intended for the realization of
the project called “Construction of the Third Lane on Obzovica” and “Rehabilitation of the
Mioska – Kolašin Arterial Road’.
Future activities. The Strategy for Development and Maintenance of State Roads represents
a strategic document, which determines the goals and main tasks for developing and
maintaining state roads for the period of 10 years, their dynamics and scope of realization,
approximate amount of necessary funds and sources of financing. The Middle Term
Programme for Regular and Investment Maintenance, Reconstruction and Construction of
State Roads is developed for the period from 2008 to 2011. The main goal of the Middle
Term Programme is the realization of works defined by the Strategy for Development and
Maintenance of State Roads. Concrete tasks of this Programme are: defining the priority
tasks for the development and maintenance of state roads, defining the sources of funds for
realization of works and determining dynamics for execution of the envisaged works.
Within the development plans of Montenegro, it is determined that the Adriatic –Ionian
Highway is of a strategic importance, both from economic and social aspect, and from the
aspect of high standard road connection of Montenegro with the neighbouring countries. The
route of the Adriatic-Ionian Highway from Trst to Kalamata having 1500 km in length goes
through Italy, Slovenia, Croatia, Bosnia and Herzegovina, Montenegro, Albania and Greece,
linking 7 countries of the Adriatic-Ionian initiative interested in realization of this project.
Furthermore, it is important to note that in 2008 Montenegro, parallel with its initial activities
for preparing the formation of the Adriatic-Ionian Highway Secretariat, as a joint regional
body of Adriatic-Ionian member states, developed, within the Feasibility Study for two
highways in Montenegro prepared by a consultant Louis Berger, a technical documentation
in the form of the General Project for a part of the Adriatic-Ionian Highway that goes through
Montenegro, sections Nudo (border with Bosnia and Herzegovina) – Zelenika and Zelenika –
border with Albania. On the basis of the developed General Project, the estimated price of
the construction of the Adriatic-Ionian Highway through Montenegro having the length of
95.19 km is around 920 million euro. The activities of the Ministry of Spatial Development
and Environmental Protection on the development of the Detailed Spatial Plan are
underway, after which the urban and technical conditions will be issued and the conceptual
design for the Adriatic-Ionian Highway developed.
Other future activities in the area of road infrastructure relate to the following:
- Reconstruction programme for crossroads of the state roads of Montenegro, which is
adopted at a session of the Government of Montenegro, held on 16 July 2009;
- The five-year Contract of Regular Maintenance will expire in April 2010;
- The construction of Risan-Grahovo-Žabljak road, which has an important role in
connecting the coastal and continental tourist area and integration of the north, middle
and south region of Montenegro, will be completed by July 2010.
Air Transportation
Existing condition. Due to the effects of the world economic crisis, Public Company Airports
of Montenegro (JP Aerodromi Crne Gore) recorded a fall in turnover of airplanes in the
amount of 9% and of passengers in the amount of 12% in the airports in Podgorica and
Tivat, compared to the previous year. At the Podgorica Airport, the works on adaptation,
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reconstruction and modernization of the building of the former passenger terminal were
completed in August of 2009. The aforementioned building is significantly contributing to the
overall airport offering and it is equipped to service numerous needs of the State of
Montenegro.
In October 2008, the Law on Air Transportation was adopted, and its application has started
in February 2009. The new Law regulates air transportation; conditions for its safe
performance; services; researches regarding jeopardizing of the safety, accidents and
serious incidents of aircrafts; searching and rescuing of aircrafts; safety, protection against
aircraft noise; inspection of security; and offences. In July of 2009, the Decision on
Establishing the Civil Aviation Agency was adopted (Official Gazette of Montenegro, No
45/09) and the Agency Council has been formed. The Agency is a body in charge of air
transportation having the status of a legal entity, its own financial funds and gyro accounts.
Within the implementation of the first phase of ECAA Agreement, in October of 2009, the
Proposal of the Law on Ratification of the Convention for the Unification of Certain Rules for
International Carriage in Air Transport (The Montreal Convention) was adopted. This
Convention describes important characteristics of new aviation law, regarding
responsibilities of carrier, which has become the integral part of the European Union law.
The Government of Montenegro owns 99.88% of shares of Montenegro Airlines. In
September 2009, the Government of Montenegro adopted the following privatization model
of the company: recapitalization in the amount of 30% of the estimated value of Montenegro
Airlines, and investor who wins the tender has the right to use a call option after two years
and buy additional shares of the state in the amount of at least 21%, provided that the
investor meets within that period the conditions defined by a tender commission. In the
meantime, the Tender Commission has been formed, which is obliged to develop a plan and
dynamics of the privatization process of Montenegro Airlines, in order for the entire process
to be efficient and in accordance with the aforementioned model.
Future activities. Development of the Proposal of the Law on Obligations and Ownership
Rights in Air Transportation that will be based on solutions provided by the Law on Air
Transportation (Official Gazette of Montenegro, No. 66/08) and relevant international
conventions is underway.
Future activity of the Civil Aviation Agency will be mostly based on developing secondary
regulations, which will complete the implementation process of the first transition phase and
initiate the implementation process of the second transition phase of the multilateral ECAA
Agreement ratified by Montenegro in October 2007, as well as on strengthening of
administrative and technical capacities of the Agency. The Civil Aviation Agency has
engaged EUROCONTROL experts to make Tivat Airport equipped for instrument flying, i.e.
flying at night or in reduced visibility. EUROCONTROL expert team has prepared a
preliminary Feasibility Study for this project, and in the following period the emphasis will be
placed on the development of the procedures in compliance with international standards,
which would make Tivat Airport equipped for instrument flying.
Railway transportation
Existing condition. The process of restructuring of the railway is done in accordance with the
Strategy for Restructuring Railways of Montenegro that was adopted in 2007. Disintegration
restructuring model has been applied, by which management of infrastructure is fully
separated from transport of passengers and freight. The restructuring process is currently at
the end of the second phase, i.e. further segmentation of the newly formed joint stock
companies. After the phase of separating the infrastructure from operating activity, two joint
stock companies have continued the restructuring process in accordance with separate
programmes, which envisage the following: (i) that Railway Infrastructure of Montenegro,
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Joint Stock Company (Željeznička Infrastruktura Crne Gore AD – Podgorica) (Infrastructure
Manager), with 72.35 % of the state ownership, is organized as holding company with three
subsidiaries - limited liability companies, as follows: Infrastructure Management and
Transportation Regulation Company (Upravljanje infrastrukturom i regulisanje saobracaja);
Infrastructure Maintenance and Railway Stations and Land Company (Odrzavanje
infrastructure i Zeljeznicke stanice i zemljiste); (ii) Railway Transportation of Montenegro
Company (Željeznički prevoz Crne Gore AD – Podgorica (Passenger Transportation
Operator), with 85.45 % of the state ownership, has continued the restructuring process in
the following manner: (iii) at the beginning of June 2009, a new joint stock company has
been formed called MONTECARGO – Podgorica (freight transportation operator), with 85.45
% of the state ownership, which deals exclusively with freight transportation, whereas parts
of the company dealing with passenger transportation and maintenance of rolling stock
remained within the same company.
By forming a Tender Commission for the railways privatization by the Privatization Council of
Montenegro in March of 2009, the third restructuring phase has officially commenced, i.e.
privatization. At the end of October 2009, after having prepared the tender documentation by
the Tender Commission, the Privatization Council published a public invitation for the sale of
the state package of shares of MONTECARGO Company. It is envisaged that the company
starts the privatization process after financial stabilization and defining of the level of
compensation regarding the obligations of public transportation by the state, which is
expected to happen by the end of 2009 or in the first half of 2010.
For the purpose of resolving a problem associated with high indebtedness of the railway
system, the Government of Montenegro assumed the debts and credit obligations of the
railway companies incurred by 31 December 2008, in the total amount of around 138.2
million euro (out of which 107.5 million euro of the Railway Infrastructure and 30.7 million
euro of the Railway Transportation). The debts regarding the payment of instalments with
related interests based on credits intended for financing of infrastructure reconstruction and
investment maintenance of rolling stock were assumed, as well as other unfulfilled
obligations. In such a manner, financial consolidation of the system was achieved. On the
basis of the assumed debts of the railway companies, recapitalization was done, i.e. debt for
equity swap, which increased the state share up to the above-mentioned percentages.
Completing the legal framework governing the area of railway transportation shall be done
by the Law on Contractual Relations in Railway Transportation, which is expected to be
adopted in the first quarter of 2010, as well as by the adoption of the relevant secondary
regulations based on the Law on Railway, Law on Safety in Railway Transportation, and the
Law on Contractual Relations in Railway Transportation, which are being developed by the
competent Ministry. Completion of the institutional framework will be achieved by
strengthening of the administrative capacities in the competent Ministry and Transportation
Directorate – Railway Transportation Sector, i.e. future Railway Directorate which will take
over the role of the regulatory body.
In 2009, the following activities were carried out in the area of railway transportation
development:
- The Government of Montenegro and the Government of the Republic of Serbia signed in
March 2009 the Agreement on the Border Control in Railway Transportation, which will
facilitate the cross border transportation and accelerate the train border crossing between
the two countries;
- In June 2009, Ministers of Italy, Serbia and Montenegro signed the Memorandum of
Understanding that envisages the development of the Study of technical and economic
feasibility of works regarding the reconstruction of Belgrade-Bar railway line, which is
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delegated to Italian company called ITAL FERR. The total value of the project is 1.4
million euro;
- The realization of the activities have started envisaged by the Memorandum of Joint
Activities on the development of design documentation for connecting Montenegro and
Bosnia and Herzegovina by a Niksic-Capljina railroad, which was signed in March 2008.
The development of the Feasibility Study for the construction of the aforementioned
railroad by a selected consulting firm is underway, which is financed by the European
Commission through CARD Programme. It is expected that the study will be completed
by the beginning of 2011, and the construction might start in 2012 and it would last four or
five years.
Existing investments. In accordance with the Law on Railway and Protocol 4 regarding the
Land Transport of the Association and Stabilization Agreement, Montenegro is making
investments in reconstruction and modernization of the railway infrastructure through the
programme annual budgets and relevant credit arrangements. The current budget
allocations, on the basis of which the current and investment maintenance of infrastructure
and regulation of transportation are done, are around 10 million euro per year. In addition,
investments in the railway infrastructure, financed by credits granted by international
financial institutions whose repayment is guaranteed by the Government, are underway. The
second phase of rehabilitation of the railway infrastructure, i.e. the Railway of Montenegro II
Project, is being implemented, which is planned for the period from 2007 to 2012. The
following projects are underway:
1. For urgent renovation of the railway infrastructure, the European Bank for Reconstruction
and Development (EBRD) approved 15 million euro. The first and second tranches of this
credit in the amount of 11 million euro that serve for the works on the renovation of three
landslides, four tunnels and six slopes. EBRD funds in the total amount of 3 million euro
are also used for resolving redundant employees’ problem of railway companies. The
third tranche of this credit in the amount of 4 million euro will be used for rehabilitation of
the Ostrovica Tunnel 182. The European Investment Bank approved 34 million euro and
the preliminary works are underway for the realization of the first tranche of this credit in
the amount of 7 million euro, which is intended for the main overhaul that includes the
repair works on the Krusevo – Mijatovo Kolo railroad covering 16.5km of open railroad,
with the repair of tracks at Krusevo and Mijatovo Kolo railway junction.
2. The current maintenance of the lower and upper track is done in accordance with the
planned dynamics so that the transportation is carried out with no disturbances and with
the speeds envisaged by the schedule for 2009. During the first three months of 2009,
sensors were installed for the control of inter-station dependence in six stations, and the
delivery of exit signals at Bijelo Polje-Bar railroad and Podgorica-Albanian border
crossing railroad is agreed on. Within the activity “Let It Be Clean”, the project of
developing and maintaining railway infrastructure is being implemented.
3. Within the observed period, in accordance with the Programme for Maintaining Railway
Infrastructure and using the aforementioned funds provided by international financial
institutions, renovation of two tunnels was completed at the Vrbnica-Bar railroad (No. 175
and No. 185), two landslides (Ratac/Mrčale and Brca), as well as the Project for
renovation of track bars on five steel bridges (Kosorski žljijeb, Tanki rt, Tara I, Ljiboviđa
and Mala Rijeka).
4. Repair and electrification of the Nikšić-Podgorica railroad are carried out slower than
expected. The value of the works performed so far was approximately 52 million euro. In
order to fully complete all works on this railroad, it is necessary to invest approximately 15
million euro. Additional funds would be intended for the development of road crossings,
tunnels and station facilities, landslides, and similar. The Government gave the approval
for commencing negotiations with potential creditors about additional borrowing of the
Railway from commercial banks for the aforementioned amount. It is expected that the full
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completion of works, including also the envisaged additional works, would be prolonged
until November 2010 due to the existing problems in the realization,.
5. In order to improve the condition of its rolling stock, Railway Transportation of
Montenegro Company (Željeznički prevoz Crne Gore) repaired and modernized, in the
previous period, 10 passenger coaches that have been included in transportation during
July and August of 2009. The value of executed works is 3.5 million euro.
6. MONTECARGO company completed investment repairs, within the period from July to
October, on 16 freight cars and diesel-electric locomotive 661-326. Furthermore, tender
for investment repairs on 3 electro-locomotives 461 was implemented, and the contract
with repair company called RELOC Krajova – Romania has been concluded.
Future activities. The process of railway restructuring will be completed by the realization of
the last phase, i.e. by privatization of the holding company called Railway Transportation of
Montenegro, Joint Stock Company Podgorica (Željeznički prevoz Crne Gore AD –
Podgorica). For both companies of Railway Transportation, privatization is planned through
joint venture with a strategic partner or sale of the state package of shares. Management of
the infrastructure and regulation of transportation will be delegated to a company with
majority state ownership, whose share will be increased by recapitalization. As far as
infrastructure maintenance is concerned, the intention is to have a joint venture with a
strategic partner, and thereafter the state shares will be sold, whereas concessions will be
awarded for railway stations and land.
In the following period , it is necessary to adopt a new Law on Railway that will be
harmonized with the most recent EU Directives governing the area of railway transportation
(the second, third and expected fourth package), as well as relevant secondary regulations
on the basis of this law and other laws regarding the area of railway transportation.
From the beginning of 2010, it is expected that the Railway Directorate would become
operational, in accordance with the Decree on Amendments to the Decree on Organization
and Manner of Work of State Administration adopted at the end of 2008. At the same time,
the Law on Safety in Railway Transportation envisages the establishment of the following
bodies in 2010: (i) investigation body in charge of investigation of railway accidents and
incidents that will be within the Ministry of Transportation, Maritime Affairs and
Telecommunications; (ii) body in charge of safety and notified body, which will be formed
within the Railway Directorate.
For the purpose of liberalization of the transportation service market, it is envisaged that
during 2010 the process of mutual recognition of licenses and certificates begins, primarily
with the Railway of Serbia, and then with other interested users of the railway infrastructure
of Montenegro.
In the following period, the realization of the following investment projects is planned in the
area of railway transportation:
1. Future investments. From the funds of IPA 2009 and IPA 2010 allocated for Montenegro,
the projects for rehabilitation of two sections of railroad Vrbnica – Bar, i.e. Trebaljevo Kolašin and Mijatovo Kolo – Mojkovac are submitted, and the project documentation is
being developed for both sections by a selected company called IPSA Sarajevo. The
aforementioned projects will be implemented during 2010 and 2011.
2. For the period 2010 – 2012, it is expected that the second, third, fourth and fifth tranches
of the credit of the European Investment Bank will be drawn in the total amount of 27
million euro (out of the total approved 34 million euro). The second tranche in the amount
of 7 million euro will be used for the reconstruction of 8 steel bridges on the Bar – Vrbnica
railroad, whereas the intended use of the other tranches will be additionally determined.
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3. There are plans that the company Railway Transportation of Montenegro, Joint Stock
Company applies for the credit from international financial institutions (EUROFIMA,
EBRD...) in the amount of 15 million euro in order to buy 5 new electrical-engine sets.
The realization of these plans is expected in the following year or two.
4. Based on the results of the aforementioned Study of Technical and Economic Feasibility
of works regarding the reconstruction of the railroad line Beograd – Bar in the following
few years, the reconstruction in phases of the Bar-Beograd railroad will be carried out,
which will contribute to significant improvement of performances of the existing railroad
that represents the most efficient connection between Italian ports and the South-East
European market.
5. Upon the completion of the Justifiability Study for the construction of the Nikšić –Trebinje
–Čapljina railroad and development of project documentation, it is expected that the
works on the aforementioned section would start at the end of 2012.
Maritime
Luka Bar (Port of Bar) performs 95% of all port-related activities of Montenegro. The State is
a majority owner of the Port having 54.0527% of shares. In March 2008, the Restructuring
Programme for “Luka Bar AD” was adopted, which includes four phases: (i) the first phase
envisages the formation of new companies and the sale of all parts of the business system
that are not related to port activities. At the same time, through the formation of five
subsidiaries, having limited liability, and owned by the Port, all other functions will be
organized through which the core port activities on terminals will be serviced. Those
companies are: “Održavanje” (Maintenance), “Pomorski transport” (Maritime Transport),
“Obezbjeđenjee i protivpožarna zaštita” (Security and Fire Protection), “Informatika i
komunikacije” (IT and Communications”, and “Lučko transportni radnici-Štivadori” (Port
Transportation Workers); (ii) The second phase starts with the adoption and the application
of the Law on Ports, on the basis of which port administration is formed, and a landlordmodel of port is to be established; (iii) In the third phase, Luka Bar AD will get a priority
concession for the location it has used so far, and in that phase »Luka Bar AD” and all
unbundled companies will establish contractual relationship; (iv) The fourth phase envisages
the privatization of unbundled companies and the sale of the majority package of the state
shares of “Luka Bar AD”. The restructuring programme of the Port of Bar specifies that a
joint stock company should be formed by a spinout called “Container Terminal and General
Freight” (Kontejnerski terminal i generalni tereti). Public invitations for the participation in the
tender for the sale of 54.0527% of the total capital of “Kontejnerski terminal i generalni tereti”
are underway, as well as for 100% of interests in the limited liability company »Obezbjeđenje
i protivpožarna zaštita« and 100% of interests in limited liability company “Pomorski poslovi”
(Maritime Affairs).
On the coast of Montenegro, there are numerous infrastructure facilities intended for the
development of nautical tourism, and one of the most important ones is Marina Bar. The
State owns 19.47% of shares of the company Marina Bar. Development plans for the
company Marina Bar include finding a quality strategic partner who will participate in a public
tender for the sale of 54.34% of the total capital, i.e. 825.727 shares of the company.
The activities regarding the conclusion of the Agreement on Purchase and Construction of
two ships for the company called “Crnogorska plovidba”, which also includes a credit
arrangement with the National Republic of China are in the final phase in order to revitalize
the Montenegrin shipping industry. In May 2007, the Government of Montenegro adopted
the Study on Economic Justifiability of Investments in Procurement of Ships for Crnogorska
plovidba AD from Kotor, with the intention to realize investment project on the basis of which
the revitalization of the Montenegrin shipping industry would commence. In August 2008, the
Government of National Republic of China suggested to the Government of Montenegro a
commodities credit that is offered to amicable countries and which includes the involvement
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of Chinese companies. In accordance with this initiative and with the intermediation of the
Ministry of Transportation, Maritime Affairs and Telecommunications, Crnogorska plovidba
concluded with a company called Poly Technologies Inc from Peking, in Podgorica on 21
August 2009, a Preliminary Contract of Purchasing and Construction of Two Handy Ships for
Carrying Bulk Cargo, having the capacity of 35.000 tons each at the price of around 18.56
million euro per ship. The Preliminary Contract has envisaged that Poly Technologies
provides a commodities credit, under favourable terms, of the Chinese EXIM Bank, and to
guarantee the construction of ships in accordance with the adequate quality standards and
technical characteristics in a reputable shipyard Shanghai Shipyard INC. This shipyard has
enough experience for the construction of the target type of ship, and its clients are, in more
than 80% of cases, ship owners from the countries of the European Union, such as
Germany, Denmark, Italy and Greece.
The aforementioned decisions regarding the sending of the credit application and conclusion
of the Preliminary Contract were adopted on the basis of the Business Plan of Crnogorska
plovidba, which includes Feasibility Study and profitability estimate. Upon the acceptance of
the Business Plan also by the Chinese EXIM Bank, on 12 October 2009, the Contract of
Purchasing Two Ships and two Contracts of Ship Construction were signed by Crnogorska
plovidba and Poly Technologies INC, by intermediation of the Ministry of Transportation,
Maritime Affairs and Telecommunications, in Peking and Shanghai.
Contracts of purchasing and construction of ships will be valid and their implementation will
start upon providing the credit arrangement under favourable terms by the seller - Poly
Technologies INC from Peking. The delivery of the first ship will be for 21 and the second
ship for 24 months, upon the conclusion of the relevant contract of credit under favourable
terms. The specified amount of credit is 47,396 million American dollars, and it has to be
fully used for the payment of ships, i.e. for 85% of the total contractual price of ships, which
is for both ships 55.76 million American dollars. So, it is envisaged that 15% of the total sum
(8.364 million American dollars) as down-payment is provided by Crnogorska plovidba. This
amount will be paid after Poly Technologies provides an irrevocable guarantee by the first
class bank for the reimbursement of the down-payment in case of cancellation of the
contract of credit under favourable terms. The credit will last 15 years with the annual
interest rate of 3%. Grace period is five years, and thereafter the credit will be repaid in 20
consecutive instalments, and it is specified that Crnogorska plovidba as a borrower may
repay the whole amount or any portion of the credit before its due date.
It is estimated that Crnogorska plovidba, in addition to the aforementioned amount for the
down-payment for the credit, will have the costs in the amount of approximately 5 million
American dollars until the moment the ships are built, become operational and start to
generate revenues. Out of which, the credit costs will be around 2.7 million, and the costs for
obtaining appropriate class, insurance, supervision during construction, as well as ship
equipment, together with operational costs until the moment of generation of first revenues
will be 2.3 million American dollars.
As far as regulations governing maritime transportation are concerned, and on the basis of
the adopted Law on Ports, the Port Administration has been formed, which performs the
administration activities regarding the ports of national importance. On 10 February 2009,
the Ministry of Transportation, Maritime Affairs and Telecommunications adopted the
Rulebook on Titles and Authorizations of Seafarers’ Training that prescribes the titles and
authorizations regarding training of crew members of maritime ships. In the period to come,
the adoption of another three laws is envisaged: Law on Sea Protection from Pollution, Law
on Navigation Safety and Security, and Law on Obligations in Maritime Area.
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4.1.4.3. Telecommunications
During 2008, there was an increase in all telecommunication segments. Total revenues from
telecommunications in 2008 were 295,736,504 million euro, which compared to 2007
represents an increase of 6.96%. The share in GDP of Montenegro of total revenues from
telecommunications is 9.77%. Revenues from telecommunications per capita in Montenegro
for 2007 were 472 euro. Adoption of the Law on Electronic Communications (Official Gazette
of Montenegro No 50/08 of 19 August 2008) provided a new framework for the regulation of
this area, which is harmonised with the EU recommendations. This new Law has separated
regulatory and supervisory function, thus the Agency for Electronic Communications and
Postal Services is newly established from the Agency for Telecommunications and Postal
Services and technical department of the Broadcasting Agency, which is assigned with the
regulatory-supervisory role, while the Ministry of Transport, Maritime Affairs and
Telecommunications is assigned with the administrative-inspection role. A number of
enabling regulations was also adopted. At the sessions held on 19 November 2009, the
Government of Montenegro adopted the Rulebook on Internal Organisation and
Systematisation of the Ministry of Transport, Maritime Affairs and Telecommunications.
Fixed telephony: At the end of 2008, the number of fixed subscriber lines was 174,013, out
of which 87.25% are natural persons and 12.75% are legal entities. If compared to 2007, a
decline of 1.29% in number of fixed subscriber lines is recorded. Out of this number of the
fixed telephony connections, T-Com had 179,214 and M:Tel 3,799, or in percentages, TCom had 97.82% and M:Tel 2.18%. The degree of digitalisation of fixed telephony
connections in Montenegro is 100% for the second year in a row, which places our country,
in respect of this criterion, in the group of developed European countries. Total revenues in
2008, in the fixed telephony segment, were 75,881,435 euro, which is 17.68% less than if
compared to 2007.
Mobile services: At the end of 2008, the number of mobile telephony users in Montenegro
was 1,150,459, which represents a penetration of 185.51%. If compared to the end of 2007,
number of users is higher by 9.99%. Out of 1,150,459 users of the mobile telephony, there
were 871,661 prepaid users and 278,848 post-paid subscribers. The increase in number of
users in 2008 contributed to the increase of traffic in terms of outgoing conversation minutes,
which is an increase of 30.7% if compared to the previous year. During 2007, the number of
outgoing SMS messages registered was 1,158,140,248, which is an increase of 40.79% if
compared to 2007. Total revenue in the mobile telephony segment was 215,545,974 euro,
which is an increase of 19.64% if compared to 2007.
Internet and Broadband Access Market: All modern technologies for Internet access are
used in Montenegro. During 2008, 59,727 users have accessed Internet via dial-up
connections. Total traffic of dial-up users in 2008 was 264,912,428 minutes. All three mobile
telephony operators offer service of Internet access via 3G modems. In 2008, 30% of mobile
telephony users used mobile telephones to access the Internet. The number of Internet
users in 2008 was 132,651, which is an increase of 22.4% if compared to the previous 2007.
Taking into account the number of broadband connections, as well as that large number of
users access the Internet from office and in educational institutions, the estimate is that there
are 238,722 users in Montenegro, which is an estimated penetration of 38.5%, representing
an increase of 7% if compared to the previous year. There is an increase in the fixed
wireless access as well (ADSL users, WiMAX, cable modems, and dedicated lines) to 5.5%
representing an increase of 2.9% if compared to 2007. If we observe the penetration in
comparison to the number of households, than the penetration increases to 18.9%. The
penetration of mobile broadband access is 1.4%. Total revenues in the Internet operation
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segment were 4,309,095 euro, representing an increase of 3.73% if compared to the
previous year.
Radio Broadcasting: In accordance with issued permits of the Broadcasting Agency of
Montenegro, the right to distribute radio and television programmes intended for numbers of
users within the designated service zone is granted to nine operators, and so precisely: six
cable and one operator for each of the following: MMDS, IPTV, and DTH. At the end of the
fourth quarter of 2008, number connection for distribution of radio and television
programmes using various platforms (CDS/MMDS/DTH/IPTV) was 88,002. Namely, the
increase in number of users was 14,929 or a growth of 20% if compared to 2007. In absolute
numbers, if compared to the first quarter of 2008, all operators have had a significant
increase of connection numbers. Based on the Decision on the Establishment of the Limited
Liability Company “Radio Broadcasting Centre” – Podgorica (Official Gazette of Montenegro
No 21/09 of 29 March 2009), a company for provision of services of access to electronic
communication networks and provision of electronic communication services was
established. The Board of Directors was appointed and Statute adopted, upon prior
approval of the Government of Montenegro.
Postal Services: In the postal services segment, the Agency issued a special license to the
Posts of Montenegro to carry out universal postal services and five licenses to operators to
carry out individual postal services in the domain of the universal postal service and
commercial postal services. The number of postal operator increased in the segment of
postal services. The funds of 1,200,000.00 euro were provided for the universal service in
2009.
Future Activities
After the adoption of the Law on Electronic Communications, the Agency for Electronic
Communications and Postal Services and the Ministry will adopt the remaining enabling
regulations as envisaged by the Law within their competence, and those will be harmonised
with the EU directives. The deadline envisaged for the adoption of enabling regulations has
expired. The reason for failure to adopt the remaining enabling regulations is the lack of
capacities of the Ministry and inability to provide experts that would assist in their
development.
The procedure that will define the provision of the universal service is underway. The
document that will monitor the problems of the universal services is being developed with the
participation of experts from the European Bank for Reconstruction and Development in
addition to the administrative capacities of the Ministry and the Agency for Electronic
Communications and Postal Services. The planned document will be adopted rather soon.
In order to carry out the obligations that Montenegro took under the Stabilisation and
Association Agreement between the European Communities and their Member States and
the Republic of Montenegro, Final documents of the Regional Radio-communication
Conference (RRC-06) part of the International Telecommunication Union, and to ensure
efficient transition from analogue to digital terrestrial transmission system, the plan was to
adopt during 2009 an appropriate law on transition from analogue to digital broadcasting of
television programmes, which would together with the Law on Electronic Media and the Law
on Electronic Communications represent an adequate regulatory framework for the
implementation of transition from analogue to digital terrestrial transmission of television and
radio programmes. Consequently, the Work Programme of the Government of Montenegro
for 2009 included, among other things, the development of the Proposal of the Law on
Audio-Visual Services and Proposal of the Law on Digitalisation which will govern the
transition from analogue to digital transmission, and which will be submitted to the
Parliament of Montenegro for consideration and adoption, following the public discussion, in
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the first quarter 2010. The reasons for delays in respect of this Law are that financial
resources were not provided. According to the IPA programme, the state should finance
1,050,000.00 euro and IPA 1,600,000.00 euro. The obligation of the Radio-Broadcasting
Centre is 45,000.00 euro as part of the service contract, i.e. training and study tours for RDC
staff.
In 2010, the attention will be dedicated to the development of the Broadband Access
Strategy and the Action Plan for the Implementation of the Strategy, aimed at development
of the information society and progress of the overall society in Montenegro. The plan for
2009 was to pay attention to the development of the Strategy. However, due to the shortage
of funds and crisis that affected Montenegro as well, implementation of the activity is
postponed for 2010.
The program of restructuring of the Posts of Montenegro, approved by the Government of
Montenegro, was prepared. The Program was adopted in the 4th quarter of 2009, whereby
the Program and the Action Plan set the further schedule for the restructuring program.
The overall Budget of the Agency for Electronic Commutations for 2009 was 5,182,100 euro,
having breakdown as follows:
- Registration fees – 15,000 euro;
- Fees for carrying out regulation and supervision of the market – 2,722,600 euro;
- Fees for authorisations for using radio frequencies – 1,883,000 euro;
- Fees for authorisations for using numbering – 400,000 euro;
- Statutory fees under laws governing the competences of the Agency – 161,500 euro.
4.2. Financial sector
4.2.1. Banking sector
Banking system and global financial crisis
The impact of the global financial crisis on the Montenegrin banking system became evident
in October 2008, and escalated in the following months, including the end of the first quarter
of 2009. The crisis effects were reflected in significant reduction of deposit potential of
banks, hindered access of banks to external sources of funding, reduction of inflow of funds
in respect of repayment of loans caused by aggravation of the financial position of borrowers
which led to aggravation of all parameters of the quality of assets and profitability, and
almost total discontinuance of lending activities.
Owing to timely and coordinated actions of the Government of Montenegro and the Central
Bank of Montenegro, stability and safety of the banking sector have been preserved, since
already at the end of the second quarter 2009 negative trends of the balance sum, deposits
and loans stabilized. Namely, the Government and the Central Bank undertook preventive
actions by adopting the Law on the Banking System Safeguards which was adopted in the
Parliament of Montenegro in October 2008 according to the emergency procedure, to
prevent the escalation of the crisis, maintain the stability, liquidity and solvency of the
banking sector in Montenegro.
Based on the Law the State guaranteed for deposits of physical persons and legal entities
placed with banks registered in Montenegro in their full amounts; early repayment of debts to
all banks was made at their request, and also borrowings for liquidity support was approved.
The Law also envisaged the possibility to issue guarantees to illiquid banks for international
borrowings or borrowings from financial institutions, as well as additional capitalisation of
insolvent banks. Only one bank in the system used the credit support from the State for its
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liquidity in the amount of 44 million euro. In respect of early repayment of debt of budgetary
beneficiaries to commercial banks, the Government “injected“ around 42 million euro of
liquid funds into the banking system.
In accordance with the Law on the Banking System Safeguards, and with the aim to improve
liquidity, the Central Bank was in the position to approve banks to use the funds of allocated
mandatory reserve on daily basis for the period of one to seven working days, and approve
short-term borrowings to 30 days, up to 50% of the amount of its capital, as regulated by the
Decision on use of mandatory reserve of banks held with the CBM for the period exceeding
one day and the Decision on approving of short-term borrowings to banks.
The Central Bank adopted a range of measures in 2009 that significantly contributed to
liquidity of banks:
- lowered the single rate of mandatory reserve from 11 to 10%,
- banks were allowed to hold to 25% mandatory reserve in the form of Treasury
bills issued by the State of Montenegro,
- the period for use to 50% allocated funds of mandatory reserve was extended
from seven to ten working days,
- interest rate was lowered from 5% to 4% on annual level on the used amount of
mandatory reserve,
- interest rate was lowered from 9% to 7% on annual level, on the amount of funds
of mandatory reserve that a bank fails to repay on the same day,
- assets classification was harmonized with the Basel standards in respect of days
of delay, according to which nonperforming assets represent the assets overdue
by more than 90 days unlike the current which implies the non-performing assets
as the assets overdue by more than 60 days. Also, the assets category – loss is
moved from the current over 180 days overdue to over 270 overdue days.
The new Decision on Provisional Measures for Credit Risk Management in Banks was
adopted in August to enable banks to classify the restructured loans into more favourable
classification group from 1 January 2009, under specified conditions, if such activity should
not influence liquidity of banks in the short-term and long-term period, but will ensure regular
debt servicing in the future. Also, this decision will significantly facilitate the position of bank’s
borrowers – legal entities and physical persons which are in delay due to the global crisis
effects.
The effects of the mentioned measures of the Central Bank on the banking system were
multiple:
- three banks in the system used the mandatory reserve funds for the period
exceeding one day and thus overcame the problem of short-term illiquidity,
- the amount of allocated mandatory reserve was significantly reduced due to the
changed mandatory reserve policy (in relation to the end of the previous year the
reduction in this respect amounted to 48.3 million euro or 22.3%),
- in September of the current year, after three Treasury Bill auctions organized by the
Central Bank, banks placed the total amount of 38.1 million euro into Treasury Bills,
that the State directed into the banking flows,
- the Central Bank abolished the obligations for banks to allocate general mandatory
reserves from 1 January 2009, where the banks were released by around 16 million
euro (as they amounted as of 31 December 2008),
- Amendments to the Decision on Minimum Standards for Credit Risk Management in
relation to classification of assets by days of delay (the interval of 60 – 180 days was
changed for non-performing loans to 90 – 270 days) resulted in the primary effect of
releasing credit loss provisions with six banks in the system in the total amount of
10.2 million euro,
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-
the application of the new Decision on Provisional Measures for Credit Management
Risks in Banks resulted in the primary effect of releasing credit loss provisions in the
amount of around 2 million euro reserves with the tendency of further growth, and the
secondary effect was the relaxation of the position of bank clients in delay due to the
aggravation of the financial position under the crisis impact.
In addition to the mentioned measures, the preservation of the banking system stability was
contributed by strengthening of supervision activity of the Central Bank under the crisis
conditions, for the purpose of ensuring safety and stability of the banking system. These
activities, in particular, increased from the fourth quarter 2008 which corresponds to the
beginning of the global crisis effects in Montenegro. In the period 2009 - March 2010 the
Central Bank will conduct so called on-site diagnostic examination of all banks in the system,
and the same will represent the combination of the on-site examination and stress testing
conducted by the bank and the Central Bank based on the single projection of key
macroeconomic variables within two scenarios: realistic scenario and “worst case” scenario.
The goal of the examination is to assess the banking system sustainability and define the
requirements for capital and liquid funds at the level of each bank and for the system as a
whole.
Foreign mother banks provided significant support to their subsidiaries in Montenegro in the
period of the crisis for the purpose of amortizing the strong outflow of deposit potential and
the pressure of clients in relation to payment of cash.
In the context of anti-crisis measures that the Government of Montenegro has undertaken for
the purpose of preventing negative effects of the global economic crisis, one of the
measures that was, on one side, aimed at improving banking system liquidity that at the time
was at a low level, and from the other side, providing cheap funds to small and medium size
enterprises, was the issue of state guarantees to international financial institutions.
Already in November 2008, when the Memorandum of Understanding was signed between
Montenegro and the European Investment Bank worth 200 million euro, the Ministry of
Finance of Montenegro started an initiative with EIB to approve loan funds to Montenegrin
banks to finance the projects of small and medium size enterprises, which was the first
initiative of such nature directed to EIB in comparison to all the countries that approached it
to request such kind of loans. Also, with regard to the state guarantee agreed with the
European Investment Bank in the amount of 91 million euro, it is the highest amount
approved for such purpose by EIB to any of the countries from the region in relation to the
GDP value.
By and including December 2009, Loan Contracts were concluded between the European
Investment Bank and the following Montenegrin commercial banks – Komercijalna Banka
Budva, Hipotekarna Banka, Atlasmont Banka, Investbanka Montenegro, First Financial
Bank, Hypo Alpe Adria Bank, Erste Banka and recently NLB Montenegrobanka. With regard
to the operational aspect of loan funds by the European Investment Bank, after formal
conditions had been met by Montenegrin commercial banks, the first disbursement
applications were issued and first funds were disbursed in the middle of November of the
current year. By the end 2009 banks withdrew 10.6 million euro, while at the beginning of
2010, another 8 million euro will be disbursed.
The Ministry of Finance is ready to approve additional funds to those banks that have
implemented the arrangement, i.e. placed funds with small and medium size enterprises.
In addition to the EIB arrangement, the Government of Montenegro provided for guarantees
to Montenegrin commercial banks with the German Development Bank (KfW). KfW
approved credit lines for three banks – Crnogorska Komercijalna Banka (20 million euro),
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NLB Montenegrobanka (15 million euro) and Erste Banka (15 million euro). Out of the
mentioned amount, 2 million euro is intended for providing loans to projects aimed at the
energy efficiency improvement, while the remainder is intended for financing projects of
small and medium size enterprises.
Banking sector performances as of 30 September 2009
At the end of the third quarter 2009 the balance sum, deposits and capital of banks
generated moderate growth rates, and the concentration decreasing trend continued as a
result of reduced lending activity of banks since the fourth quarter 2008.
Balance sum. The total balance sum of banks as of 30 September 2009 amounted to 3,224
million euro, implying that it decreased by 8.15% in relation to one-year, and increased by
2.57% in the current year. Six banks in the system generated growth of the balance sum in
one-year period.
Capital. The total capital of banks as of 30 September 2009 amounted to 294 million euro
and they generated growth at the rate of 3.91% in relation to one-year period, and the
growth at the rate of 5.27% in the current year. Four banks were subject to additional
capitalization in the amount of 44.7 million euro, and two banks provided 18 million euro in
respect of subordinated debt. In the period IV quarter 2008 – III quarter 2009 the total
capital of banks increased in the amount of 93 million euro, of which 69 million euro in
respect of the issue of shares and 24 million euro in respect of subordinated debt. However,
negative financial result of banks and allocation of additional provisions for potential credit
losses that have been identified in the process of regular supervision activities, had negative
impact on the total amount of capital and led to its objective reduction.
Solvency ratio on aggregate level amounted to 12.86% and it is above the statutory
minimum of 10%. Foreign capital has a dominant share in the structure of total capital
amounting to 80.53%, and then follow the domestic private capital with 16.87% and the state
(indirectly through state owned enterprises) with 2.6%. At the end of the third quarter 2009,
two banks were under majority domestic private ownership, while the remaining nine banks
were in majority of (five banks) or 100% foreign capital (four banks). Banks with majority
foreign capital have control over 83% banking market in Montenegro.
Loans. Total approved loans of banks in the observed period amounted to 2,571 million euro
and they decreased at the rate of 9.86% in relation to one-year period, and at the rate of
2.25 % in relation to the end of 2008. First negative growth rates of loans were registered in
October 2008 when due to the crisis effects the lending activities of banks almost
discontinued because of the problems with liquidity and hindered access to external
financing sources. In the loan portfolio structure long-term loans make 73.1% total approved
loans in the system. The most significant loan beneficiaries are business organizations
under private ownership (58.05%) and physical persons (35.34%). The greatest
concentration of loans is distinctive in the retail sector (36.96%), trade (22.60%), services,
tourism and hospitality (9.08%) and construction (7.08%).
Deposit potential. The total deposit potential of banks as of 30 September 2009 amounted to
1,900 million euro. Due to the global financial crisis impact there was a significant outflow of
deposits and they decreased at the rate of 18.3% on annual level. In relation to the end of
2008 deposits increased by 7.19%. The positive trend in the deposit potential of banks and
the mitigation of the expressive problem of illiquidity with one bank in the system were
contributed by the sale of shares and additional capitalisation of Elektroprivreda (Energy
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Company). The most significant depositors of banks are physical persons with the share of
40.52% and business organizations under majority private ownership of 29.54%. Out the
total deposits in the system, 48.3% is related to demand deposits. The greatest
concentration of deposits is distinctive with the retail sector, trade, finances and transport
(72.94% total deposits).
Interest rates. Average weighted interest rates on the total loans in the system amounted to
8.73% nominal and 9.40% effective. Average weighted interest rates on loans approved to
legal entities amounted to 8.06% nominal and 8.65% effective, i.e. on loans approved to
physical persons 9.83% nominal and 10.64% effective. Average weighted interest rates
payable on deposits of banks amounted to 3.4%, i.e. 2.74% on deposits of legal entities and
4.37% on deposits of physical persons.
Operations of banks. The negative trend in operations of banks that began in 2008
continued in September 2009 too, when six of eleven banks in the system presented loss in
the amount of 21 million euro. The profitability of banks was influenced by both subjective
and objective factors. Subjective weaknesses of individual banks are related primarily to bad
credit risk management which resulted in the high level of provisions additionally identified
by the supervision in accordance with the regulatory framework, as well as the high level of
overhead expenses. Objective factors are related to the restriction of credit growth in 2008
and due to the crisis impact the withdrawal of deposit potential from the fourth quarter 2008
and hindered access of banks to externally- funded sources.
Operations of IFI. Micro-crediting represents a significant segment in financing of physical
persons. There are five micro-credit financial institutions (MFI) operating in Montenegro,
which total balance sum amounted to 75.5 million euro as of 30 September 2009. The
growth of the balance sum of these institutions on annual basis amounted to 7.97%, and in
the current year it decreased by 4.52%. The total approved loans amounted to 68.6 million
euro and they increased at the rate of 0.48%, i.e. decreased at the rate of 9.45% in the
current year. The largest amount of loans was approved for financing of agriculture activity
(63.35%). The total capital of MFI amounted to 19.3 million euro, i.e. it increased at the rate
of 2.65% in one-year period, and decreased at the rate of 1.56% in the current year. At the
end of the third quarter 2009 MFI presented negative financial result in the amount of 160
thousand euro. The total number of employees in the five MFI as of 30 September 2009
amounted to 189.
Regulatory framework development
In 2009, the continuity of the regulatory base development advanced and passing and
adopting of secondary legislation related to the Law on Banks were almost completed. To
that end the Central Bank of Montenegro adopted the following regulatory acts: (i) Decision
on Minimum Standards for Operational Risk Management in Banks; (ii) Decision on
Minimum Standards for Investments in Real Estates and Fixed Assets; (iii) Decision on
Methodology for Drawing-up Consolidated Financial Statements of a Banking Group; (iv)
Decision on Banking Ombudsman and (v) Decision on Minimum Standards for Risk
Management in Micro-Credit Financial Institutions.
Also, in 2009 some amendments of the regulatory framework were adopted, as follows: (i)
Decision on Amendments to the Decision on Minimum Standards for Credit Risk
Management in Banks; (ii) Decision on Amendments to the Decision on Capital Adequacy of
Banks; (iii) Decision on Amendments to the Decision on Reports Submitted to the Central
Bank in accordance with the Law on Banks and (iv) Decision on Amendments to the
Decision on Minimum Standards for Risk Management in Micro-credit Financial Institutions.
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The Council of the Central Bank also adopted the Decision on Provisional Measures for
Credit Risk Management in Banks, which is primarily aimed at creation of a more flexible
space for banks to manage credit risk under the global financial crisis conditions. Therefore,
banks were allowed to restructure loans of such beneficiaries whose financial position
aggravated due to the crisis effects, which directly contributed to relaxation of loan
beneficiaries.
The decisions of the Central Bank, in the drafting phases and after being adopted, were
subject to attention and assessment by relevant international financial institutions, primarily
the International Monetary Fund and the World Bank. Positions of these institutions were
fully positive, and therefore it may be concluded that the regulatory framework for bank
operations in Montenegro is highly adjusted with the regulatory framework of the EU and
internationally recognized standards for bank operations.
Planned activities in the coming period
The activities of the Central Bank in the coming period will be directed to strengthening of
the capacities of the Central Bank and improving and strengthening of the supervision
function for the purpose of implementation of the new regulatory framework.
The key activities of the Central Bank will be aimed at drawing-up and proposing of a set of
legal regulations that will further improve the capacities of the Central Bank and advance the
continuity of harmonising the regulatory framework with new improvements and
amendments of the EU regulations. To that end, the text of the new Law on the Central Bank
of Montenegro has been prepared, as well as significant amendments to the Law on Banks,
Law on Deposit Insurance and the Law on Bankruptcy and Liquidation of Banks.
After the adoption of this regulatory set, in accordance with established obligations the
Central Bank will continue to improve the secondary regulations originating from the
amendments to these laws. The objective is to fully define the constitutional and systematic
status of the Central Bank and additionally improve its capacities in 2010. Also, to that end,
the regulatory framework will be further improved to the level of full compliance with the EU
regulatory framework and internationally recognized banking standards.
TABLE 27: Action Plan of initiatives for strengthening of the CBM capacities and
supervision function in the period 2009 – 2011.
Planned activities
2009 2010 2011 2012
STRENGTHENING OF CBM CAPACITIES
1. Adoption of a new Law on CBM
X
X
2. Amicable providing of the lead supervisor of the financial X
X
X
X
sector for examination on consolidated basis
3. Strengthening of liaison with the ECB
X
X
X
X
4. Review of mandatory reserve policy
X
X
X
X
5. Financial analysis of the real sector and centralization of X
X
X
X
the data-base within the CBM
6. Strengthening of the capacities of macro-economic X
X
X
X
modelling and statistical analyses
REGULATION AND SUPERVISION OF BANKS BASED ON THE PRINCIPLES OF
BASEL II AND EU DIRECTIVES FOR THE PURPOSE OF MAINTAINING FINANCIAL
STABILITY
1.
Amendments to the Law on Banks based on the proposal X
X
X
X
by the CBM
2.
New secondary legislation acts on capital adequacy X
X
X
X
incorporating approaches from Basel II and CRD
- 92 -
3.
4.
5.
6.
7.
8.
9.
10.
11.
Development of supervisory modelling and centralisation
of the data base for managing various risks
Recognition of rating agencies
Adoption of amendments to the Law on Bankruptcy and
Liquidation of Banks
Establishing of the banking ombudsman institute
Leading of prudential policy of licensing of banks and
issuing approvals for changes in equity shares
Establishing of clearing cooperation in the region
Development of cooperation with other regulatory and
supervisory institutions in order to exchange data in
respect of the principle of home supervision and
exchange of experiences
Coordination and institutional linking of activities in the
process of the EU accession
Develop stress testing of all financial system segments
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
4.2.2. Non-banking sector
4.2.2.1. Insurance
Development of insurance market and influence of economic crisis
The main characteristic of the insurance market in Montenegro is that, despite the impact of
economic crisis, market is still developing, although at the moment the insurance sector in
Montenegro according to various indicators is significantly lagging behind the average of the
developed EU member states. The gross premiums at the end of 2008 amounted €60.58
million, which is an 18.74% growth as compared to 2007. Projections for 2009 indicate that
total gross premiums will slightly increase as compared to previous year. Share of gross
premiums in the GDP at the end of 2008 amounted 1.82%, while for 2009 increase in this
indicator it is expected. In the same time it is expected that gross premium per capita at the
end of 2009 will exceed €100, which will represent a slight increase as compared to 2008.
Montenegrin insurance market is not directly influenced by the economic crisis, the influence
on the sector is rather indirect. Having in mind, that insurance companies still have
conservative approach in conducting business, as well as the fact that degree of integration
of insurance sector in the contemporary financial surroundings is not at the high level; costs
caused by the crisis on domestic insurance market will be proportionally lower as compared
to the banking sector and the capital market. However, data for the first eight months of 2009
indicate that economic crisis, in line with projections in the EFP for 2008, had impact on
insurance market in terms of achieved gross premiums and their structure, as well as in
terms of decreased profitability. Because of listed reasons the Agency for Insurance
Supervision, within regular control of insurance companies’ operations, gave special
attention to the influence of the capital market risks, the credit risks and the liquidity risks on
the balances of Montenegrin insurance companies.
Montenegro’s insurance market is still characterized with the low share of life insurance and
the dominant share of non-life insurances, among which the compulsory insurances have
the largest share. Projections for the end of 2009 indicate that, similarly to the end of 2008,
the share of non-life insurance will amount around 88%, while the share of life insurance will
amount approximately 12%. Observing Montenegrin insurance market, dominant share of
- 93 -
non-life insurance is noticeable; however the increasing trend of the life insurance share and
decrease of the share of non-life insurance in the total gross insurance premium is present.
During 2009, same as in 2008, on the Montenegrin insurance market operated eleven
insurance companies. Five insurance companies are engaged solely in the non-life
insurance, five companies are involved only in the life insurance while only one company is
engaged in the both life and non-life insurance, with the end of 2010 as deadline to separate
these two activities. Speaking about market concentration of the insurance companies, after
8 months of 2009, three companies with the largest gross premiums have market share of
81.53%, which is a decrease as compared to the end of 2008, when they market share
amounted 89.14%. Based on available data from the insurance market, it is evident that the
higher competition among the insurance companies has caused decrease of the market
concentration.
Trend of increasing share of foreign capital, started in earlier years, continued in 2008 and
2009. After sale of 41.14% of state shares in the largest insurance company, “Lovćen
osiguranje” a.d. Podgorica, at the end of 2009, all insurance companies in Montenegro are in
the private ownership.
Legislation and strengthening of the institutional capacities
In line with strategic goal of Montenegro in terms of its integration within European Union, as
well as activities anticipated in 2008 EFP, Agency for Insurance Supervision has undertaken
activities on aligning insurance sector regulations with the EU directives and principles of the
International Association of Insurance Supervisors (IAIS). In that sense, activities on
improving regulatory framework for the area of insurance are implemented, and during 2008
and 2009 eleven bylaws has been passed, as follows: (i) Rulebook on the Content of
Reports, Notifications and Other Data Which Insurance Company Submits to the Agency of
Insurance Supervision and on the Manner and Deadlines for Submission ("Official Gazette
of MNE” number 70/08); (ii) Rulebook on the Content of Opinion from the Authorized Actuary
("Official Gazette of MNE” number. 70/08); (iii) Rulebook on the Content and the Manner of
Running Register on the Insurance Companies and Other Actors Which Are Subject of the
Control by the Agency for Insurance Supervision ("Official Gazette of MNE” number. 70/08);
(iv) Rulebook on the Manner for Determining and Monitoring the Liquidity of Insurance
Companies ("Official Gazette of MNE” number. 70/08); (v) Rulebook on Detailed Criteria and
the Manner for Calculating the Mathematical Reserves and the Reserves for Share in Profits
("Official Gazette of MNE” number 70/08); (vi) Rulebook on Detailed Criteria and the Manner
for Calculating Reserves for Counterbalancing Risks ("Official Gazette of MNE” number
70/08); (vii) Rulebook on Detailed Criteria and the Manner for Calculating the Transferable
Premiums ("Official Gazette of MNE” number 70/08); (viii) Rulebook on Detailed Criteria and
the Manner for Calculating the Technical Reserves for the Reserved Claims ("Official
Gazette of MNE” number 70/08); (ix) Rulebook on the Manner for Determining Business
Results, Distribution of Profits, Coverage of Losses and Measures for Covering Losses
("Official Gazette of MNE” number 70/08); (x) Rulebook on Limitations in Depositing and
Investing of the Technical Reserves Funds and the Funds of Guarantees for Insurance
Companies ("Official Gazette of MNE” number 38/09); (xi) Rulebook on the Content and
Manner for Passing Expert Exam for Intermediation i.e. Insurance Agents ("Official Gazette
of MNE” number 47/09). Short-term priority in this area is passing Rulebook on the Chart of
Accounts and Rulebook on the Valuation of the Balance Positions, activities on drafting
these two rulebooks should be completed in the beginning of 2010.
- 94 -
Long-term priority is a full alignment of insurance laws21 with the European Union legislation
in this area. Up to 2012 insurance sector development will reach level which enables
harmonisation of the Law on Insurance with the EU directives, according to which there is
full territorial openness for the insurance companies, i.e. provides opportunity for
establishment of the branch offices of foreign companies without having status of legal
person. In the same time, the minimum insurance sums for compulsory insurances will be
aligned with the levels of insurance sums prescribed by the EU legislations.
Activities of the Agency for Insurance Supervision are and will be in the future aimed at
improvement in general market performance, improvement of institutional framework and
strengthening supervision capacities of the Agency itself. In realisation of this plans Agency
is continuously engaged in strengthening cooperation with the Government of Montenegro,
Ministry of Finance, Association of Insurers of Montenegro- National Bureau, Administration
for Prevention of Money Laundering, Securities Commission of Montenegro, Statistical
Office of Montenegro, Ministry for European Integration, local insurance companies,
universities and other bodies and institutions, as well as supervisory organisations in the
insurance area.
During 2009 many activities, aimed at establishment and intensifying communication with
international institutions, expert bodies and associations, have been undertaken. In October
2009 Agency has joined the International Association of Insurance Supervisors International
- IAIS. This fact has enabled Agency to establish closer cooperation and exchange of
information with the insurance supervisors in the world. Agency undertakes all necessary
steps towards strengthening the institutional cooperation and exchange of best international
practice with the other regulators from the region, establishment of bilateral cooperation with
the supervisory bodies. During 2009 Agency has intensively cooperated with the National
Bank of Serbia, Agency for Insurance of Bosnia and Herzegovina, Agency for Insurance
Supervision of Slovenia, Croatian Agency for Supervision of Financial Services and
regulatory body of Austrian financial market FMA.
In development of its experts and administrative capacities, Agency is using technical
assistance within two projects:
1. Within project “Strengthening regulatory and supervisory capacities of financial
regulators", under 2008 IPA, twinning contract has been sighed between the
Delegation of European Union to Montenegro and beneficiaries of mentioned project,
among which is the Agency for Insurance Supervision. The main project goal is
assistance to financial sector regulators in Montenegro in building institutional
capacities through technical assistance and expert education of employees,
establishment of the most advanced operational procedures, strengthening
cooperation among financial regulators and securing more stability of the overall
financial system. Project activities related to Agency will start in December 2009 and
will last until the beginning of 2011. The objective of anticipated activities is
transposing European legislation in the area of insurance into Montenegrin
legislation, as well as adjustment in supervision function of the Agency in line with the
best international practice in this area.
2. Project “Strengthening capacities of Ministry of Finance to efficiently plan analyze
and manage the public finances in support to country’s aspirations for sustainable
development and EU integration”, which is implemented through cooperation of
Ministry of Finance and Capacity Development Program (CDP), Agency will since the
21
Law on Insurance, Law on Compulsory Insurance in the Traffic and Law on Insolvency and
Liquidation of Insurance Companies
- 95 -
end of 2009 benefit from experts and technical assistance aimed at strengthening
regulatory capacities in the next two years period.
Agency is conducting continuous education of its employees, which is realised through
participation in seminars and conferences in the country and abroad, using technical
assistance of the international organisations, as well as foreign and domestic literature and
magazines.
Fiscal impact of the Agency’s foreseen activities
All planed activities, which are aimed towards enhancing regulatory, supervisory,
educational, record keeping, analytical, and other duties as prescribed in the Law, are
included in financial plan of the Agency. Sources for Agency’s financing are prescribed in the
article 175 of the Law on Insurance, which are as follows: (i) funds from insurance
companies which pay 0.99% of gross premium from previous year, as a supervision fee; and
(ii) taxes for issuing of licences, approvals, endorsements and authorizations determined in
the Law on Insurance, as well as special fee which insurance companies pay in the case of
pronounced surveillance measures. Sources of financing for Agency do not include any kind
of foreign assistance, donations or budget loans, except for the activities on projects
mentioned previously, which would be financed from the budget anticipated in the projects.
4.2.2.2. Capital market
The capital market in Montenegro is developing since 2001, as a continuation of
comprehensive privatization process, especially mass voucher privatization which had
influenced the character of transition and the development of market economy. The capital
market has impacted social situation in Montenegro, since through mass voucher privatization
to employees and citizens was distributed around 45% of state capital. On this way roughly
400.000 citizens became shareholders. This represented respect for the principles of
ownership democracy and namely this system of ownership democracy was one out of the
key resources for our development.
The most important development effect of the capital market is influence on education of each
citizen and change in their attitude towards the business and the profits. There is no such
institution, which with this speed, intensity and scope has influenced population’s knowledge on
the market economy. Today people independently make decisions about the market and bear
consequences of their decisions. This decision making has influenced the change of
management in certain banks, funds, companies.
In the first nine months of 2009 market capitalisation has reached value over €3 billion,
which is a 60% increase as compared to value of capitalisation on the January 1st 2009.
Total turnover realised on Montenegrin stock-exchanges in observed period amounted over
€342 million which is by 150% higher as compared to first nine months of 2008. It is
important to stress that in first nine months of 2009 new capital, from emissions of shares
and permanent investments in Montenegrin companies, amounted over €283 million.
In the structure of instruments, which were traded in the first nine months of 2009, trade with
shares of companies made 91.65% out of total turnover, trade with shares of mutual
investment funds made 2.86% of total turnover, while bonds turnover amounted to 5.5% out
of total turnover.
Comparing the percentage changes of the value of stock-exchange indices achieved in the
region with the changes in the values of indices on the Montenegrin stock-exchanges, it is
obvious that Montenegrin stock exchanges record the highest growth of the indices value.
- 96 -
Table 28: Change in the values of stock exchange indices in the region, 2009
Value of
Value of
Percentage
Index name
index,
index,
change
31.12.2008. 31.08.2009.
Belgrade
Sarajevo
Zagreb
Skopje
Podgorica
BELEX15
BELEX LINE
SASX10
BIFX
CROBEX
CROBIS
MBI10
NEX20
NEXPIF
MOSTE
565.18
1,198.34
1,233.65
2,137.15
1,722.25
90.62
2,096.16
10,002.93
5,844.64
469.53
710.80
1,354.84
1,042.47
1,954.46
2,009.02
86.78
2,607.58
17,083.52
8,962.06
890.88
25.77%
13.06%
-15.5%
-8.55%
16.65%
-4.24%
24.40%
70.79%
53.34%
89.74%
On Montenegrin capital market currently operate 24 authorized participants as brokers, out
of which 14 have a licence for dealers’ jobs. There are also 7 investment funds, which
overall value of net assets at the end of the ninth months of 2009 has amounted €330
million. During first nine months of 2009, 24 share holders’ companies’ takeovers have been
completed.
During May and at the end of September, the purchasing transactions with the EPCG shares
from the portfolio of Mutual Investments Funds and privatisation process are completed.
Significant inflow of fresh capital from these transactions has influenced the market growth,
and the effects on demand increase and positive expectations are clearly visible.
Strengthening institutional capacities
Regulatory framework and practice of Montenegrin capital market is highly assessed from
the prospective of use of the best international practice and international standards. IMF
mission in Montenegro, which took place during March 2008 in its report concluded
following:
“Montenegro implemented a modern system of the capital market regulation. Securities
Commission has important powers and has established the framework for regulation. The
Commission has also passed detailed regulation concerning operations of the investment
funds, the issuers, and the intermediaries on the market and stock exchanges. …”
Along with this assessment, our regulatory system was a subject to analysis and the
research by the IOSCO – The International Organisation of Securities Commissions.
International team of the IOSCO has researched and confirmed that the regulatory system
implemented on our capital market fulfils criteria for ranking at the A list, among the group of
50 countries, whose regulatory systems completely satisfy the demands related to the
information exchange.
Commission, in development of its expert and administrative capacities, uses technical
assistance within the project “Strengthening Regulatory and Supervisory Capacities of the
Financial Regulators", under IPA 2008 fund. The twinning contract is signed between the
Delegation of the European Union to Montenegro and beneficiaries of the mentioned project,
among which the Securities Commission. The project goal is to assist the financial regulators
in Montenegro in building institutional capacities through technical assistance and education
of employees, establishment of the most advanced operational procedures, strengthening
cooperation among financial regulators and securing higher degree of stability within the
overall financial system. Project activities related to the Commission will start in 2011. The
- 97 -
main goal of anticipated activities will be to transpose European legislation in the area of
capital market into Montenegrin legislation, as well as adjustment of the supervisory position
of the Commission in accordance with the best international practice in this area.
Future activities
Based on the expected development direction future activities have been planned, as
follows:

Improvements in regulatory framework, especially:

Drafting and implementation of the Changes and Amendments to the Law on
the Investment Funds, and drafting and implementation of the Changes and
Amendments to the Law on the Share Holders Companies Takeover,

Development of the practice for regular dissemination of data and reports on
the companies’ operations,

Alignment of the capital market regulations with the other laws and
regulations,

Harmonisation of the practice in dealing with the securities.

Broadening of the market and informational linking of stock exchanges and market
participants from the region and strengthening the market infrastructure, especially the
reliability and the efficiency of custody banks in order to make market more visible to foreign
investors,

Oversight and control of the authorized participants and the issuers,

Social responsibility of the Commission in the terms of education of investors,
representatives of institutions and broader public,

Continuation of cooperation with domestic and foreign institutions and participation in
development projects (IOSCO - MMOU, Toronto Centre, IPA, EAR, IMF, World Bank, ...),

Internal organization, transparency in the work and development of informational
system of the Securities Commission.
4.2.2.3. Leasing
In 2009, as well as several previous years there were not changes of the regulatory
framework of the leasing market in Montenegro. Also, there were not the changes of the
market participants. Still, there are six market participants, of which four leasing houses and
two banks which provides leasing services within their basic operations. The Hypo Alpe
Adria leasing, S- leasing, NLB leasing, and Porsche leasing provide services of both
financial and operating leasing, while other leasing providers are involved in financial
leasing. It should be mentioned that three leasing firms are also engaged in real estate
leasing - Hypo Alpe Adria Leasing, NLB leasing, and Erste bank22, while other leasing firms
are providing leasing services for movable property. Five leasing providers in Montenegro is
majority owned by foreign capital while one provider is predominantly in domestic ownership.
For nine months of 2009 on the Montenegrin leasing market, 950 leasing contract have been
concluded which is less by 64,72% comparing with same period of the previous year. At the
same time, value of the concluded contract was amounted to 25, 494 millions of euro which
represents decrease of 81.59% comparing with same period of previous year. As it was the
case in the previous years, for the first three quarters of 2009 financial leasing operations
had significant share in the total number of contract as well as total value of the contracts.
The graph to follow gives the number and value of concluded contracts by type of leasing.
22
Opportunity bank is taken over by Erste bank
- 98 -
Graph 2: Number and value of concluded contracts by type of leasing
1200
60.00
1000
50.00
800
40.00
Contracts value
600
30.00
400
20.00
200
10.00
0
Milioni
Number of contracts
Lesing type
0.00
IQ
II Q III Q IV Q I Q II Q III Q IV Q I Q
II Q III Q IV Q I Q
II Q III Q
2006 2006 2006 2006 2007 2007 2007 2007 2008 2008 2008 2008 2009 2009 2009
Operational leasing
Financial leasing
Contracts value
Analyses of the structure of the total number of the concluded contracts based on subject of
leasing shows that item passenger vehicles has dominant share of 79.8% in the total
number of leasing placements. Share of commercial vehicles in the total number of
concluded contracts is 8.2%, while share of construction machines and equipment is 5.4%
and real estate 6.2%. In the comparison with the same period of the previous year, on the
leasing market it was recorded the decrease of the share of number of contracts of the
commercial vehicles, construction machines and equipment as well as ships. Commercial
vehicles shows the highest share in the total value of concluded contracts of around 50%
while real estate is represented with around 26% and commercial vehicles with around 10%
and leasing of construction machines and equipment around 11%.
Table No 29: Comparative overview of the number of the concluding contracts by the leasing
subject
Leasing subject
Passenger vehicles
Commercial vehicles
Construction machines and equipment
Boats
Real estate
Other
Total
30. 09. 2008
(1)
Number of contacts as of
30. 09. 2009
%
(2)
%
Growth rate
(2)/(1)
1.873
69,6
758,00
79,79
-59,53
471
17,5
78,00
8,21
-83,44
257
28
60
4
2.693
9,5
1,0
2,2
0,2
100
51,00
4,00
59,00
5,37
0,42
6,21
-80,16
-85,71
-1,67
950,00 100,00
-64,72
Table no 30: Comparative overview of the value of the concluded contacts by leasing subject
Contacts value in € as of
30. 09. 2009
%
(2)
%
Leasing subject
31. 09. 2008
(1)
Growth rate
(2)/(1)
Passenger vehicles
36.888.375,17
26,6 12.502.431,20
50,5
-66,11
Commercial vehicles
22.196.314,12
16,0
2.003.195,26
10,3
-90,98
Construction machines and equipment
Boats
23.121.566,08
3.033.406,16
16,7
2,2
2.874.783,26
447.719,00
11,4
1,5
-87,57
-85,24
- 99 -
Real estate
Other
Total
53.067.798,99
202.528,50
138.509.989,02
38,3 7.665.924,19
0,2
100,0 25.494.052,91
26,3
-85,55
100,0
-81,59
Analyzed data shows that as of the fourth quarter of 2008 when impact of global financial
turmoil have already been presented, trend of slow developments or decreasing of business
activities on the market (per number and per value of the contracts) has started. Decrease
was recorded in all analyzed categories and it could be concluded that volume of activities
has been halved comparing to the same periods of the previous year. In the structure of the
leasing users it is noticeably the decrease of share of the legal persons in the total number
of the concluded contracts. Generally, overall period which was characterized by slow
developments on the leasing market marks higher share of the physical persons contracts
as opposed to the previous period when legal persons contracts were dominant. These
developments are in the line with the strategies which were announced by leasing services
providers in the circumstances of the overall economic slowdown and significant private
sector liquidity problems. Substance of the leasing providers’ strategies was in the efforts to
diversify the risk through redirecting the placements from legal to physical persons. Also,
significant change in comparison with pre-crises period (when real estates contracts were
dominant in the total contact value) is significant decrease of the share of commercial
vehicles, construction machines and equipment in the total number and total value of the
contracts. That is one more indicator of crises impact on the structure of the leasing
operations. Despite the decreasing of the number and value of the commercial vehicles
contracts its share in the total number and value of the contract has been increased
significantly.
It could be concluded that the trends on the leasing markets in the last year were
consequence of negative effect of the global financial turmoil and overall economy
slowdown. In that sense, reduced individual spending (household sector) and liquidity
problems of economy sector led to decreased number of leasing contracts. Leasing market
participants adjust their business strategies to the new circumstances. Bearing in mind
performances of leasing industry in pre-crises period, this sector recovery could be expected
along with recovery of the rest segments of the financial system and overall economy.
4.3. Labour market
Situation and trends
Employment. Despite the fact that the influence of economic crisis has became evident in
some sectors already in the last quarter of 2008, during first ten months of 2009 continued,
several years preset tendency of increase in the number of registered employed persons,
caused by the high economic growth and improved business environment. The average
number of employees in the first ten months was by 7,884 persons or by 5.4% higher as
compared to the same period in 2008 (174,523 and 165,641, respectively). The average
number of employed in the fist ten months of 2009 as compared to corresponding period in
2008, observed by the sectors of activity has decreased only in the industry sector by 9.3%,
while sector of agriculture records 2.1% growth, constructing sector 16% growth and
services sector 8.8% growth. Within the services sector, which makes around 75% of overall
employment, employment in the private services sector (45% of overall employment) has
increased by 10.6%, while in the public services sector (30% of total employment) has
increased by 2%. Monthly data on the number of registered employees, show that after
constant increase in the first eight months it is stabilising on somewhat lower level (
employment in September is lower by 1.1% as compared to August, and in October by 0.6%
as compared to September).
- 100 -
On the other hand, Labour Force Survey data show that the number of employed persons
has decreased in the first nine months as compared to same period last year, which indicate
that economic crisis probably had impacted the informal labour market, i.e. informal
employment. Also, LFS records a decrease in the number of unemployed which has caused
decrease of the activity rate by 0.7 percentage points in the first quarter of 2009 as
compared to fourth quarter of 2008. Third quarter, under the seasonal influence shows better
results, since unemployment decreases, employment increases while activity rate is higher
by 0.6 percentage points as compared to the first quarter of 2009.
Influence of economic crisis, jet did not have significant negative impact on employment in
the formal sector. One should consider this fact as relative, having in mind crisis in the
aluminium industry and difficulties in KAP23 operations and connected legal persons.
Following factors have caused described situation:
- Government measures aimed at alleviation and elimination of negative crisis impacts.
This primarily relates to the increase of the capital budget as compared to previous year,
support to the citizens and the economy through securing additional liquidity, provision of
the long-term credit lines to the banking sector from international financial institutions with
the aim to support the small and medium sized companies through guarantees, further
implementation of the project “Job for you” aimed at employment increase, measures on
reducing government spending, etc.
- Decrease of fiscal burden imposed on labour (taxes and contributions) in the last several
years. Fiscal burden as compared to 2004 has decreased by 40% and has supported
employment, longer job spells, and legalisation of the informal labour.
- In period from 19 June 2008 until 19 June 2009, number of employers-contributors to
health insurance has increased to 23,149, i.e. by 11% (data from Health Insurance Fund),
which indicates that the number of legal persons has increased by 2,294 legal persons
which generated new employment.
- Employment of non-resident labour in 2009 is managed under new conditions and
procedures prescribed in the Law on the Employment and Work of Foreigners, based on
international standards, which to some extent has decreased attractiveness of the foreign
labour for employers and had some impact on higher engagement of domestic labour
force. In the first ten months of 2009 15,771work permits has been issued (9,976 for
seasonal employment and 7,795 permits for employment) which is by three time less as
compared to same period last year.
Although, with the presence of economic crisis, it is very difficult to give reliable projections
of further development, based on observations made in recent periods, it is real to expect
that the number of registered employed persons by the end of 2009 will stabilize at the lower
level as compared to August when the number of employed persons amounted to 179,016.
Likewise, after strong economic growth, which has caused constant increase of registered
employment, with the slowdown in the growth it can be expected that the level of registered
employment will change under the influence of season, i.e. employment increases in the
second and the third quarter, where usually the highest level is achieved in August, and than
stabilizes at some lower level. This like expected scenario of the employment dynamics
could oscillate depending on the situation in the aluminium industry.
Unemployment. Favourable trends in the area of registered employment have caused that
during 2009, similarly to previous years, unemployment continually decreases. At the end of
October in the Employment Agency register there were 27,680 unemployed persons, which
is by 66 or by 0.2% less as compared to same period last year. Registered unemployment
rate in the same period has decreased from 11.1% in December 2008 to 10.7%. Similarly,
23
Aluminum company
- 101 -
as in the case of registered employment, registered unemployment increases since
September, so unemployment in September increased by 1.8% as compared to August and
by 4.2% in October as compared to September. Changes in the number of registered
unemployed persons hide unfavourable trends. In the structure of registered unemployment
share of females was 45.8%, same as last year, while the incidence of long term
unemployment has increased from 57.0% to 58.4%, share of youth unemployed (less than
25 years of age) increased from 15.3% to 16.5% and persons aged over 50 from 35.3% to
36.8%. Also, in observed period demand for semi-qualified labour force exceeded demand
for highly qualified labour force.
Decrease in the registered unemployment in the period until August, in great measure was
caused by the improvements in the business environment in Montenegro, especially in the
tax policy area and the labour market regulations, which had influence on the establishment
of new businesses and legalisation of the certain number of informal jobs. Also, the active
labour market measures have contributed to decrease in unemployment. The most important
are: (i) the programs of education (for occupation and specialist knowledge) for labour
market, through which the quality of labour supply increases; (ii) the programs of vocational
training for known employer through which direct employment is secured; (iii) the program of
self-employment through which the development of start-up, micro and small businesses is
supported; (iv) the program of seasonal employment through which employment of domestic
labour force during the season is stimulated, especially from the northern part of
Montenegro. Important contribution had also Program of state aid and support »Stimulating
employment in Montenegro – with emphasis on the northern region and vulnerable groups«,
which only with Employment Agency intermediation has included 4,087 persons.
Goals and the future regulatory measures of economic policy on the labour market
Concept of economic policy aimed at the labour market is based on the determination that
the further strengthening of the market economy, improvement in the regulatory framework
and active support to the entrepreneurship and the programs for new jobs creation and
realisation of investment ideas, especially in the SME sector, is the most fruitful response to
the challenges of global economic crisis. In the area of labour market and human resources
the policies will be based on the National Strategy for Employment and Development of the
Human Resources 2007-2011 and National Action Plan for Employment 2010-2011.
Priorities within labour market and employment defined in the National Employment Strategy
2007- 2011 will not change significantly, but in the context of the global economic crises the
focus will be on the measures which in greater measure could contribute to alleviation of the
negative consequences. Measures and activities on the labour market will be aimed at
decrease in structural misbalances, removal of regional differences and possible influences
of global crisis through:
- the programs of preparation for employment (training, vocational education,
specialisation) i.e. improvement in the quality of the labour supply taking into account the
need to decrease regional imbalance on the labour market;
- the programs aimed at new jobs opening, through provision of financial support to selfemployment and small scale entrepreneurship, which will influence on the employment
increase, and in that context through project “Job for you”, which will have regional
development dimension;
- incentives for employment of certain categories of the unemployed (persons with
disabilities, persons with unemployment spell over five years, unemployed aged over 50
years of age, redundancies, farmers, persons engaged in the public works, and those
engaged during season).
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Taking into account labour market dynamics in 2009, forecasts of macro-economic trends in
future and estimated effects of mentioned measures, registered unemployment rate could
have increasing trend in 2010, especially in the first half of the years and reach level
between 11.5% and 12.0%, while the decrease could be expected in 2011 (10.5-11,0%) and
2012 (below 10%).
Labour market administration
Strategic and regulatory framework for the labour market represent the National Strategy for
Employment and Development of Human Resources 2007-2011, the Labour Law, the Law
on the Employment and Work of Foreigners, the Law on the Professional Rehabilitation and
Employment of Persons with Disabilities, the Law on the Social Council, the Law on
Peaceful Solution of the Labour Disputes and the Law on National Qualifications. In the first
quarter of 2010 the new Law on Employment will be adopted, according to which National
Action Plan for Employment becomes central instrument for planning of active labour market
measures, increases scope of work for private employment agencies, increases amount and
decreases duration of unemployment benefits. The government has submitted to the
Parliament the proposal of the Law on Union Representation, and the proposal of the Law
on the Labour Fund, which anticipates protection of employees in the case of employer’s
bankruptcy and settlement of employees’ claims.
Social Council of Montenegro has initiated drafting and signing “Memorandum on Social
Partnership in the Circumstances of Global Economic Crisis “. Through this document the
social partners have committed to preservation of macroeconomic stability and good
relations through: (i) Government’s implementation of the anticipated set of fiscal and socioeconomic measures aimed at prevention and elimination of the global financial crisis
consequences; (ii) efforts of employers that during crisis do not fire workers in order to
increase profits; (iii) efforts of unions that, in the case that employers fulfils its commitments,
do not organize strikes, and by that give contribution to overcoming the consequences of
crisis.
In 2009 National Strategy for Development of Volunteerism in Montenegro is adopted, while
Law on Volunteerism Work, which will support development of volunteerism spirit in
Montenegro, increase in employability, and thus higher employment, and inclusion of
vulnerable groups, will be adopted in the first quarter of 2010.
Implementation of IPA 2008 Project “Reform of Labour Market and Workforce Development
II” will start in the beginning of 2010. This project will contribute to: (i) strengthening
administrative capacities of the labour market institutions, (ii) establishment and
strengthening partnerships for employment on the local level and (iii) strengthening system
of carrier information and counselling in Montenegro. Project anticipates also work on
strategic documents in the area of employment and human resource development, creation
of the unique database and the web-site, improvements in the needs analysis among
employers, training and assistance to staff in the labour market institutions, within the
process of aligning Montenegrin legislation to the EU legislation.
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Reform of social insurance system
Health protection
Reform activities during 2008 in the area of the primary health protection have achieved
following: the new model of payment for services has put in place, e-invoices are introduced
and complete process of services provision on this level of health protection is supported by
IT. Through IT support new inputs for broadening reform on the secondary and the tertiary
level of health protection are provided, and available information pointed out the need to
define the norms and standards on the different and more modern way as compared to what
is defined in the existing Master Plan for Health Protection Development.
Reform activities on the reform and development of health protection in 2008 focused on
primary health protection projects and IT system, drafting of legislation and programs of
health policy measures. These activities are completed in all 18 health centres. In the area of
legislation following laws have been passed: the Law on Amendments to the Law on
Medicinal Appliances, which is aligned with the EU directives, the Law on Conditions and
Procedures for the Termination of Pregnancy, the Law on Databases in the Area of Health,
the Law on Health Inspection, The Law on Assisted Reproductive Technologies, the Law on
Obtaining and Transplantation of Body Parts, Law on Emergency Assistance, the Law on the
Control of Production and Sale of Substances Which Can be Used in the Production of
Drugs and Psychotropic Substances, and within visa liberalisation process Rulebook on
Content of Pharmacological and Toxic Examination of Medicines. The Action Plan for
Fighting Corruption in the Area of Health 2009-2012 is adopted as well as National Program
of Fight Against Diabetes, with framework Action plan for activities anticipated in the
Program for period 2009-2015. The Program of Blood Donations, aimed at achieving the
self-sufficiency in the provision of blood and components of blood and fulfilling higher
standards in the security of the collected blood units, is adopted.
The new contract (BCA) on cooperation of Montenegro with World Health Organisation has
been signed for 2010-2011, which defines framework for cooperation in the two years
period. This contract defines four priorities for strengthening the health system: noninfectious diseases, promoting healthy way of life, food security, strengthening capacities for
better monitoring and control of the infectious diseases and health and protection of
environment. The total amount of funds allocated from the Contract for Support of
Montenegrin Health Protection System Amounts to US$ 560,000.
Projects within health protection, which are underway, are final works on adaptation and
reconstruction of the Institute for Public Health building, Health Centre Podgorica objects
(Stara and Nova Varoš). It is expected that works on Clinic for Oncology and Radiotherapy
within Clinical Centre of Montenegro will be completed soon, as well as supplying the public
health institutions with the most advanced diagnostic equipment. Works are completed and
the new ward of neonatology is opened in the KCCG24. From the World Bank funds will be
financed implementation of measures for securing energy efficiency in general hospital
Berane and general hospital Pljevlja, the tender is already announced for Berane while for
Pljevlja documentation is prepared. The value of works per building is roughly €400,000.
New circumstances, caused by the financial crisis, made inevitable adjustments in the plan
in terms of giving priorities to activities which are pre-conditions for successful completion of
the health protection reform, and this is at the moment reform of secondary and tertiary level.
The Government of Montenegro, in order to secure continuation of reforms on the secondary
and tertiary level, has provided loan from the World Bank worth €5.1 million. Reform of
24
Clinical center of Montenegro
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secondary and tertiary level of health protection assumes defining and implementation set of
activities of normative, organisational and technical nature, among which are the most
important following:
- defining norms and standards for secondary and tertiary level, basic services packages
for these two levels, clinical protocols and guidelines for certain diseases, new
organization of KC, network of health institutions;
- introduction of the system for monitoring and evaluation in the area of dentist protection,
introduction of IBIS (integral hospital informational system), as advanced instrument for
improvement and management of the system; indicators for quality control of health
protection on all levels of health protection, criteria’s for accreditation of health
institutions.
Reform of the secondary level of health protection will start with realisation of following
activities:
- Pilot project in Pljevlja’s General hospital - implementation of the modern hospital
information system, which will be part of Integral health system of Montenegro.
- changes in the Law on Health Insurance, through which supplementary voluntary health
insurance will be introduced, also the law will more precisely define procedures for
exercising rights from the health insurance, primarily through defining the financing of
health services outside Montenegro (transplantation, child cardio-surgery).
- definition of conditions for public-private partnerships and granting concessions.
- solving issues of medicinal waste is initiated by the Strategy, and having in mind need for
prompt actions and influence of the economic crisis, public-private partnership appears to
be the most favourable solution.
During period from 2010 until 2012, following investments are anticipated:
- Building, reconstruction, and adaptation of the Clinic for Dermatology and Venereal
Diseases within Clinical Centre, the Centre for Blood Transfusion, Emergency Centre,
Health Centre Bijelo Polje, Policlinic Centre Berane, Internal Ward of General hospital in
Niksic, Clinic for Neurology, Clinic for Psychiatry, Clinic for Infectious Diseases, Centre for
Occupational Medicine, as well a establishment of the PET SCAN centre within KCCG
under public-private partnership.
- Within World Bank loan, for continuation of the health protection reform, funds are
planned for construction of the Health Centre in Bijelo Polje in cooperation with
municipality of Bijelo Polje and Fund for Health Insurance. Estimated value of building is
€2.6 million. From the World Bank loan €1 million is secured, while remaining funds, €0.8
million each, are provided by the .municipality of Bijelo Polje and the Fund for Health
Insurance.
- Project Energy Efficiency in the following years will include General Hospital Risan,
Special Hospital Brezovik, General Hospital Cetinje, General Hospital Bijelo Polje, as well
as Clinical Centre of Montenegro. The value of these works is around €2.2 million.
- Construction of apartments for employees in the health institutions in Podgorica, Kotor
and Tivat. Apartment construction will be financed from employees’ funds.
Revised Master Plan for Health Sector Development will be approved during 2010.
Reform of pension system
Pension reform initiated by the reform of the current financing system, i.e. first pillar of the
pension system, is continued towards implementation of three pillars system. With
consultations with the World Bank, the Government has decided that introduction of third
pillar, i.e. voluntary pension insurance, precedes the introduction of compulsory individual
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capitalized savings i.e. second pillar. Existing and anticipated activities on the pension
reform are as follows:
1. Decrease in the contribution rate for compulsory social insurance should contribute to the
price competitiveness of domestic workforce, new jobs opening and decrease in the
informal economy on the labour market. Contribution for pension and disability insurance
will in 2010 amount 20.5%, out of which 15% is paid by the employee and 5.5% by the
employer, according to the Law on Contributions for Compulsory Social Insurance.
2. The Law on Voluntary Pension Funds is in force since October 2007. Up to date, three
companies for management of voluntary pension funds were granted a licence - DZU25
„Atlas Penzija“, DZU „Market Invest“ and DZU „NLB Penzija“. Company for management
of pension fund „Atlas Penzija“ has established voluntary pension fund „Penzija Plus“,
Company for management of pension fund „Market Invest“ established voluntary pension
fund „Market Penzija“. On September 21st 2009, voluntary pension fund "Penzija Plus"
had 375 members, and voluntary pension fund "Market Penzija" 46 members. Securities
Commission issued to five banks licences for performing custody services for pension
funds, these banks are: Invest Banka Montenegro a.d. Podgorica, Hipotekarna banka a.d.
Podgorica, Prva banka Crne Gore - osnovana 1901. godine a.d. Podgorica, Hypo Alpe
Adria Bank a.d. Podgorica and Crnogorska komercijalna banka a.d. Podgorica.
3. Prior to final draft of the law, i.e. selection of the appropriate model which will be base for
the decision on implementation of the second pillar of pension system, corresponding
analysis will be done until the end of 2010. Likewise, comparative legal experiences of
countries that have introduced this like systems will be examined and adjusted to
conditions and specificities of Montenegro. Based on these analyses, time framework and
dynamics of potential introduction of second pillar will be determined. One should have in
mind that by introduction of the second pillar, rate of contributions in the existing public
pension fund will significantly decrease and on this way create additional deficit, for which
adequate source of financing must be find.
Social welfare
In the social welfare area the activities on implementation of adopted strategies continued:
Strategy for Alleviation of Poverty and Social Exclusion 2007-2011, Strategy for
Development of Social and Child Protection 2008-2012, Strategy for Integration of Persons
with Disabilities 2008-2012 and Strategy for Social Protection of Elderly 2008-2012. Based
on the data from the area of social and child protection negative impact of economic crisis is
not apparent. Payment from the central budget of the social and child protection benefits are
on time and beneficiaries of this kind of state aid will have priority in the following period.
4.4. Administrative reforms
Public administration
On 23 July 2009, The Government of Montenegro adopted the Decree on Organisation and
manner of work of state administration (Official Gazette of Montenegro 43/09), which
establishes 17 ministries, with the following changes in structure: competences of the
Ministry of Health, Labour and Social Welfare were conferred to the Ministry of Health and
the Ministry of Labour and Social Welfare. Ministry for Spatial Planning and Environmental
Protection was formed by conferring the competences of the Ministry for Economic
Development and the Ministry of Tourism and Environmental protection. Consequently, the
tourism policy is now delegated to the Ministry of Tourism and the policy of economic
25
DZU- Management company
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development to the Ministry to the Ministry of Economy. Ministry for European Integration
was also formed. The Ministry governs the association and accession process of
Montenegro to the EU, coordination of the negotiation process with the EU, coordination of
the harmonisation of Montenegrin legislation with the EU legislation, coordination of
translation and management of data basis for the process of support to the translation
process and coordination and evaluation of the programmes of technical and financial EU
support. Thus the Ministry for European Integration undertook the competences of the
Secretariat for European Integration, which has been raised to higher institutional level.
Changes in organisation, that is distribution of competences between certain sectors and
forming the new ones, were necessary, inter alias, for more efficient and effective
performance of work within state administration in relevant administrative areas having in
mind the scope of competences of previous ministries which regulated the areas of
economic development, urbanism, environmental protection and labour and social welfare
as well as significance of these administrative areas for further development of economic
and commercial system of Montenegro.
Apart from 17 ministries, state administration system is also comprised of 16 administrations,
10 offices, 6 directorates, 2 agencies and 1 secretariat. Apart from this, according to the Law
on State Property (Official Gazette of Montenegro 21/09), the Real Estate Administration
was established at the proposal of the line ministry, for performing the work in the area of
property issues.
On its session as of 13 October 2009 the Parliament adopted the Law on Ratification of the
Agreement on Establishment of Regional School for Public Administration (RESPA). In the
reporting period, the activities on implementation of state administration reform were
continued.
The preparation of the work basis of the Action Plan – Agenda of further development of the
state administration reform in Montenegro for the period 2010-12 is underway.
Human Resource Management Administration
The Human Resources Administration have organised 176 trainings on 60 different topics in
line with the Programme of Specialisation of Civil Servants and Employees for 2008/2009.
Six of them have been organised in the newly opened Centre for Training in Bijelo Polje,
which enabled an easier realisation of training for employees coming from the north of
Montenegro. Apart from this, 66 (group and individual) foreign languages courses (English,
French and Italian) and 18 computer courses have been organised. A Manual for State
Examination for Graduate Students with six thematic areas has been prepared in the
framework of the Module for specialisation of trainees and newly employed for work in public
administration.
An Agreement for the Implementation of the Campaign for Awareness Raising on the
Importance of Free Access to Information was signed with the OSCE and 15 seminars for
local self-government employees of all Montenegrin municipalities shall be organised.
Assessment of needs for professional training of Civil Servants and Employees for 2010 is
underway. On the basis of this assessment, the Programme for professional training of Civil
Servants and Employees will be prepared for 2010. The adoption of the Action plan for
Implementation for Civil Servants and Employees Training Strategy for the period 2009-12 is
underway.
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Coordination of EU integration process
After the parliamentary elections, the new Government was appointed on 10 June 2009,
which defined, in its work priorities for forming mandate, the commitment of Montenegro to
continue with its work on reforming and aligning its legal and economic system with the EU
standards. Therefore, the new organisation of state administration was introduced, under
which the Ministry for European Integration was established, as a legal successor of the
Secretariat for European Integration. Rulebook on Internal Organisation and Job Description
was adopted on 9 July 2009 and the following organisational units were defined: Sector for
Coordination of Accession encompassing the Department for Coordination, Analyses and
Reporting and Department for Harmonisation of Legislation, Sector for Translation, IT
Support and Communications under which Translation Coordination Unit and Department for
IT Support and Communications operate Sector for Programming, Monitoring and
Evaluation of Technical and Financial EU Support, Sector for Regional Cooperation
Programmes and Service for General Affairs.
At its session held on 25 June 2009, the Government adopted the Information on the need of
establishing new coordination structures for the following phases of the EU integration and
on the session held on 9 July 2009, the Government adopted the Decision on establishment
of the Commission for European Integration and the Decision on establishment of groups for
European Integration and subgroups for negotiating chapters
When it comes to the coordination of translation- EU legislation to Montenegrin and
Montenegrin legislation and strategic documents to English language, significant progress
has been achieved during the reporting period. Since the Translation Coordination Unit was
established in Ministry for European Integration, within the Sector for Translation, IT Support
and Communications, a solid basis was set up for the translation challenges lying ahead. In
May 2009, in the framework of preparations for EU Questionnaire, a public invitation was
launched for expression of interest of local translators to cooperate with the Government of
Montenegro, and 230 interpreters applied26.
Ministry for European Integration prepared the Manual for Translation of Legal and other
acts in the process of European Integration, which is now available on
http://www.mei.gov.me. In the framework of these activities, the Government of
Montenegro adopted the Information on introducing the revised Statement of Conformity of
Montenegrin legislation with the relevant EU legislation, with the Table of Conformity, which
was prepared by the Ministry for European Integration.
Free movement of goods
Since 1 October 2008, a considerable progress has been made in the area of free
movement of goods. Laws and secondary legislation adopted and implemented in the
reporting period include Law on Metrology (Official Gazette of Montenegro 79/08), Law on
Accreditation (Official Gazette of Montenegro 54/09), Decree on the Method and Procedures
for Assessment of Products Conformity with the Prescribed Requirements (Official Gazette
of Montenegro 71/08), Decree on Conditions for Implementation of Technical Regulations of
Other States and on Records of Foreign Documents on Conformity (Official Gazette of
Montenegro 74/08) and Decree on Legal Measurement Units (Official Gazette of
26
162 translators who fullfiled the conditions the testing was organised, with the support of experts from the Twinning
programme. Translators also completed the form, which, among other, contain the specification of their field of expertise.Thus,
and also having in mind the previous cooperation, the solid base of external translators was created for translation of questions
and answer tio the Questionnaire, translation of Montenegrin and the EU legislation. In cooperation with the Ministry for
Information Society, 25 laptops, 4 servers and the network infrastructure were procured for the needs of the translation centre,
formed within the Ministry for European Integration in July 2009 during the preparations for EC Questionnaire.
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Montenegro 22/09). These legal acts considerably replaced the legislation in this area from
the period before the renewal of Montenegrin independence.
Standardisation
The Institute for Standardisation of Montenegro (ISME) is the final phase of drafting the
Internal Rules of Standardisation (ISME IRS), which will be harmonised with the Internal
Rules of European and international organisations for standardisation.
Work Plan and Programme of the Institute for 2009, inter alia, envisaged the adoption of
1,500 Montenegrin standards and related documents. As of December 2009, the Institute
has adopted cca 1600 Montenegrin standards and related documents (decisions on adopted
Montenegrin standards are published in Official Gazette No 16/09, 56/09 i 82/09) which
exceeded the previously planned number. The total number of Montenegrin standards and
related documents which are in force is cca 2500 documents.
Work Plan and Programme of the Institute for 2010 envisaged the adoption of cca 3000
Montenegrin standards and related documents, which would represent a 100% increase
comparing to the number of adopted Montenegrin standards in 2009. Bearing in mind that
requested funds for the implementation of the abovementioned plan and programme could
not have been provided by the Founder (the Government of Montenegro), but were
significantly reduced, a revision of the work plan and programme is expected by the
Managing Board of the Institute and a possible reduction in number of standards originally
envisaged for adoption in 2010.
Accreditation
The new Law on Accreditation (Official Gazette of Montenegro 54/09) entered into force at
the beginning of August 2009. Through this Law, requirements of the Regulation (EC)
765/2008 of the European Parliament and of the Council have been transposed into
national legislation. Seven bodies (five laboratories, one laboratory for calibration and one
inspection body) have been accredited for conformity assessment and first regular
supervisory visits to those institutions have been performed. A great number of other
organisations expressed interest for accreditation and some of them already applied.
There are ongoing preparations of the Accreditation Body of Montenegro for the full
membership in the European Cooperation for Accreditation (EA). The Accreditation Body of
Montenegro will host the General Assembly of the EA in November 2010. On 8 April 2009,
the Accreditation Body of Montenegro (ABMNE) became an associate member of the
International Cooperation for Accreditation of Laboratories – ILAC. Full membership in the
International Accreditation Forum (IAF) is also one of the goals of the Accreditation Body of
Montenegro.
Conformity assessment
Conformity assessment in Montenegro is conducted in the manner which is aligned with the
EU principles transposed through national horizontal technical legislation. All the principles
of "global approach" have been transposed through the Law on Technical Requirements for
Products and Assessment of Products Conformity with the Prescribed Requirements(Official
Gazette of Montenegro 14/08), and through its secondary legislation The Decree on the
Method and Procedures for Assessment of Products Conformity with the Prescribed
Requirements (Official Gazette of Montenegro 71/08) , The Decree on the Procedure of
Notification in the Area of Technical Regulations, Standards and Conformity Assessment
Procedures (Official Gazette of Montenegro 55/08), The Decree on Conditions for
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Implementation of Technical Regulations of Other States and on Records of Foreign
Documents on Conformity (Official Gazette of Montenegro 74/08).
Metrology.
The Metrology Office of Montenegro makes the basis of the metrological system in
Montenegro. The Metrology Office is an associate member of the WELMEC - the European
Cooperation in Legal Metrology.
In the area of metrology, the new Law on Metrology is applied in Montenegro (Official
Gazette of Montenegro 79/08), adopted in December 2008. The transitory and final
provisions stipulate that regulations for implementation of the Law on Metrology should be
adopted within two years as of the effective date of the Law. Secondary legislation adopted
on the basis of the previously mentioned law is: Decree on the Legal Measurement Units
(Official Gazette of Montenegro 22/09), The Rulebook on technical and metrological
conditions and procedure for authorizing persons preparing water meters for verification
(Official Gazette of Montenegro 44/09), Rulebook on technical and metrological
requirements and procedure of authorizing persons for preparation of weight verification
devices (Official Gazette of Montenegro 65/09), Rulebook on technical and metrological
conditions and procedure for authorising persons preparing taximeters for verification
(Official Gazette of Montenegro 74/09)
Main difficulties in The Metrology Office actually metrological system development are
related to the adequate working space, metrological equipment and professional staff.
Despite the financial crisis actually despite the limited funds Metrology Office intends to
establish national laboratories for the basic physical dimensions: weight, length, volume,
electrical dimensions, time and frequency and pressure. To this end acquisition of
metrological equipment from the IPA 2007 fund will be significant. Parallel to the developing
of the national laboratories activities on improvement of metrological infrastructure and
legislative framework will be conducted.
Market Surveillance
On May 14, 2009 the Government adopted the Proposal Law on Amendments to the Law on
Inspection Surveillance. Within the institutional framework for market surveillance in
Montenegro, changes occurred in the area of phytosanitary and ecological surveillance.
Namely, the Phytosanitary Administration has been formed, within which the Phytosanitary
Inspection functions, and also, the Agency for Environment Protection has been formed,
within which the Ecological Inspection operates.
Bylaws necessary for implementation of the Law on General Product Safety have been
drafted. In the area of market surveillance carried out by Health and Sanitary Inspection, the
following two laws have been adopted: Law on Health Inspection and Law on Medical
Devices (Official Gazette of Montenegro 53/09). Market Surveillance Strategy of
Montenegro, drafted by the inter-ministerial working party which was provided with the
experts support under the TRIM MNE project, was adopted on Government session held on
5 November 2009.
Market surveillance and the need for the adoption of Strategy are the subject to the National
Consumer protection Programe 2008 – 2010. National Consumer protection Programe
envisages intentions for providing integrated surveillance primarily of technical and non-food
market products in line with european standards which will be implemented through this
Strategy.
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Free movement of workers
The Law on Employment and Work of Foreigners (Official Gazette of Montenegro 22/08)
came into force on 1 January 2009. It creates legal framework for movement of labour force
and increased mobility and flexibility of foreign citizens’ access to labour market in
Montenegro, for the purpose of balancing supply and demand in this market. According to
this Law, the employed foreigner, with work permit in Montenegro, has equal rights as
domicile employee.
Intellectual property
On 13 February 2009, the Government of Montenegro and the European Patent
Organisation (EPO) signed an agreement on the extension of European Patents to
Montenegro (so-called Extension Agreement) and the Law on Ratification of the Agreement
on the extension of European Patents to Montenegro (so-called Extension Agreement) was
published in Official Gazette of Montenegro 05/09 – section International Agreements.
Stamp Law, Law on Legal Protection Of Industrial Design and Law on Integrated Circuits
Topography are in the Government procedure. Their adoption by the Parliament is expected
in early 2010. Implementation of these laws does not require for the additional resources in
the Budget of Montenegro and, due to fees, will affect the budget positively.
Information Society and Media
Electronic communication. Field of electronic communications is regulated under the
provisions of the new Electronic Communications Law (Official Gazette of Montenegro
70/09). Under the provisions of the previously mentioned law Agency for Electronic
Communications and Postal Services has been established. Agency for Electronic
Communications and Postal Services disposes presently with a sufficient number of
professional personnel with adequate qualifications for the performance of duties and
competences laid down by the Law.
The Agency has initiated in 2009 significant activities concerning harmonization of the
existing licenses with the new regulatory framework (brought into compliance with the
European legislation in this field) as well as the procedure of market assessment and
analysis and designation of operators having significant market power (SMP) pursuant to the
Decision of the Agency’s Council, for 7 markets in line with the recommendation of the
European Commission from 2007.
In the forthcoming period the Agency will initiate activities on additional market analysis
which implies that the operators recognized as operators with significant market position
even after such analysis will be subjected to the measures envisaged in the Law in the
procedure envisaged by the Law.
Information society Subject to the Decree on Amendments to the Decree on Organization
and the Manner of Work of the State Administration (Official Gazette of Montenegro 81/08)
that came into force on 3 January 2009, the Ministry of Information Society has been
established replacing the former Secretariat of Development. In February 2009, the
Information Society Development Strategy of Montenegro has been adopted for the period of
2009-2013. The strategy sets guidelines for the development of a contemporary knowledgebased society and is designed to contribute to the effective implementation of electronic
services to be used by both citizens and business undertakings.
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Due to the limited budgetary funds the Ministry of Information Society will apply through the
Community Program ICT-PSP for the funds needed for realization of the following projects:
e-Montenegro centre, drafting of the national interoperability framework, safety and the
implementation of the ISO 27001. The Ministry will continue with the activities on drafting the
project „5-year National Strategy for Electronic Communications Development and
Broadband Diffusion in Montenegro” with the meditation of the INA Academy - South-eastern
Europe Telecommunications Academy and support of the Ministry of Foreign Affairs of
Greece. Ministry for information society assumed the commitment amounting to 5% for co
financing of this Project.
Media. The Parliament of Montenegro, at its session held on 17 December 2008, adopted
the Law on Public Broadcasting Services of Montenegro (Official Gazette of Montenegro
79/08) that came into force on 1 January 2009. The Law defines precisely the obligations of
the Radio and Television of Montenegro (RTCG) concerning the production and
broadcasting of program contents as well as the obligations to adopt and adhere by
professional standards and program rules. The broadcasting subscription and license fee for
the use of radio sets in motor vehicles have been abolished. Subject to the new scheme of
sources of funding, the RTCG shall be financed from the general revenues of the
Montenegrin Budget. The funds needed for the accomplishment of the RTCG primary
activity shall be allocated on the annual basis in the amount of 1.20% of the current
Montenegrin Budget determined by the Budget Law for a specific year. Should the funds
realized on the basis of excise taxes not be sufficient for the provision of the above
mentioned amount, the lacking funds shall be provided from the revenues realized on the
basis of value added taxes. The payment of funds shall be effectuated in the amount of 1/12
of the total designated funds, in the period of the 15th to 20th day of each month for the
current month, pursuant to the decision of the Minister of Finance. The total amount of funds
for financing the primary activity of the RTCG in 2009 is € 8,244,496.00.
Agriculture and Rural Development
The Law on Agriculture and Rural Development is the umbrella law, regulating the objectives
and measures of agricultural policy, incentives, setting up of the payment agency,
harmonization with the principles of the Common Agricultural policy, etc.
Activities significant for the institutional and administrative framework of agriculture and rural
development are the following:

National Council for the Food Safety Assessment was formed thus completing the
institutional structure in the field of food safety,
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Under the provisions of the Decree on Amendments to the Decree on Organisation
and the Methods of Work for the Public Administration (OGM 43/08), the Phytosanitary Administration was established. The Phyto-sanitary Administration
commenced its activities in the fiscal 2009. Through the Twinning Project (IPA 2010)
for which implementation 700 000 euros is provided by the European Commission
and 70 000 euros by the national budget it is planned for Phyto-sanitary
Administration to improve its administrative capacities in 2010 and 2011. Plant health
protection activities are now combined under a single authority, which is in
compliance with the Directive (Celex No. 32000L0029), which clearly defines setting
up of a responsible official body in charge of phyto-sanitary issues.
In compliance with the new Law on Plant Protection Products (Official Gazette of
Montenegro 51/08), the Department for Plant Protection Products and Residues was
established and its role is to follow the residue monitoring programme for pesticides
in the food of plant origin for 2009 (Official Gazette of Montenegro, 57/09) which is
currently being implemented.
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In April 2009, the twinning partner was selected – the Austrian-French-Slovak
consortium – for implementation of IPA 2008 project Support to Establishing of
IPARD Programming and Implementation System. In April 2009, the World Bank
approved an 11 million Euros credit and a grant of 4 million USD from GEF funds for
implementation of the project Institutional Development and Strengthening of
Montenegro’s Agriculture, which will be used over the period of five years.
National Program for Integration of Montenegro into the EU envisages gradual employment
of up to 20 persons in the Payment Agency (primarily IPARD Agency) for the instruments of
financial aid that Montenegro is to use under IPARD funds. Bearing in mind the limitations
imposed by the financial crisis and the restrictive Government policy in the area of additional
employment, execution of previously mentioned obligations may be postponed. This relates
to the realization of the Twinning project and its aim of establishing the IPARD structure,
which implies new employees within the Ministry. In the course of 2010 and 2011, it is
necessary to provide the adequate premises, facilities and IT equipment for initiation of the
Agency’s work.
Statistics
In 2009 based on proposal of MONSTAT, Goverment of Montenegro has adopted Strategy
on development of Statistics 2009 – 2012 and Statistical Survey Programme 2009-2013.
Previously mentioned documents together with completed draft of the Proposal of the Law
on Amendments to the Law on Statistics and Statistical System of Montenegro which is
expected to be adopted in 2010 will create legislative framework of the official statistics
aligned with international standards. Implementation of the adopted legal acts and
methodological improvement of the official statistics will be supported through realization of
the national project IPA 2007 in the period 2009 – 2011.
In 2009, Law on Agricultural Census was adopted, trial agriculture census was conducted
and the methodology adopted, while the realisation of the census is planned for April 2010.
During 2009 trial population census was conducted while the main population census is
planned to be conducted in 2011. Law on Population Census is planned to be adopted in
2010.
Judiciary system
Monitoring of the implementation of goals defined by the Strategy for the Reform of the
Judiciary (2007-2010) and the measures for the realisation of the strategic goals envisaged
by the Action Plan is done in line with planned dynamics and supervised by a Commission
for the Monitoring of the Implementation of the Action Plan and an Expert Team.
Human rights and protection of minorities
In course of 2008, the Minority Fund started to work. The Fund has a Steering Board and a
Director. Total amount of funds for 2008 was € 422,150 while € 1,018,000 is planned for
2009. 2008 budgetary funds were provided for the work of constituted minority councils.
Budget 2009 foresees € 360,000 for the work of the Council in 2009.
The implementation of the Strategy for the Improvement of the Position of the RAE
Population in Montenegro, which was adopted in November 2007 for the period 2008-2012,
has been continued. The 2009 Budget allocation is € 600,000 and certain education projects
have already been started.
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The Employment Office, in cooperation with the UNDP trained 12 RAE persons and
awarded three € 6,000 grants which financed the employment of six persons. The UNDP
funded the development of five education programmes.
The Refugee Care and Support Office is still implementing the Assistance to RAE Newborns
project through which every RAE newborn is awarded € 100. Total worth of this project is €
15,000. Currently, the preparations for the start of realisation of the project entitled
Procurement of Three-Wheel Vehicles to RAE Population Eligible for Work are under way.
Total worth of this project is € 16,000. Both projects have been funded by the Budget of
Montenegro.
Justice, freedom and security
Visas The Government of Montenegro adopted on 26 February 2009 the Decree on the Visa
Regime (Official Gazette of Montenegro 18/09), which came into force on 19 March 2009.
This Decree harmonized visas regime of Montenegro with European standards
On the plenary session held on 12 November 2009, the European Parliament confirmed
positive opinion on Draft Report of the Committee on Foreign Affairs by adopting
Consultative Resolution. Council of Ministers of Justice and Home Affairs on its session held
on 30 November 2009 adopted a positive Decision on visa abolishment for the citizens of
Montenegro, Macedonia and Serbia. Visa abolishment decision came into force on 19
December 2009.
Asylum. Centre for Asylum Seekers, which is under the competence of the Refugee Care
and Support Office, is still in the construction phase and it applies alternative solutions
concerning the accommodation of the refugees. The Government approved € 450,000 for
the completion of one of its parts through the capital Budget. The project for IPA 2009
support is approved. These funds will be allocated for the completion of construction and
equipping of the Centre for Asylum Seekers.
Personal data protection. The Parliament adopted the Law on Amendments to the Law on
Personal Data Protection which refers to defining five year mandate for the head and
members of the Council of the Agency for the Personal Data. Article 59a stipulates the
manner of establishing revenues of the head and members of the Council of the Agency.
Education and research
The Government adopted the Rulebook on the internal organization and job classification in
the Ministry of Education and Science on 30 October 2008. New structure includes 4
Sectors, 5 Sections and 3 Services.
On 14 May 2009 the Government of Montenegro adopted the Decision on establishing the
Council for the Adult Education (Official Gazette of Montenegro, 36/09), the Decision on
establishing the Council for the General Education (Official Gazette of Montenegro, 36/09)
and the Decision on establishing the Council for Professional Education (Official Gazette of
Montenegro, 36/09).
In the Sector for science, research, and technological development, which was established
in the Ministry after the adoption of the Rulebook on Internal organization and Job
description of the Ministry of Education and Science, 7 employees were foreseen, and
together with the Council for Scientific-Research Activities, this Sector deals with the issues
of improving the scientific-research activities, analyzing the status and the achievements in
the scientific-research activities, giving professional proposals to the Government, as well as
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with monitoring the implementation of the Strategy for Scientific-Research Activities in
Montenegro (2008-2016).
As a part of the further support to the scientific and research activities in Montenegro, the
amount of € 141,485.00 was allocated as a part of the call for co-financing of scientific and
research activities which was published in 2009.
Environment protection and spatial planning
In accordance with the new Rulebook on internal organization and systematization of the
Ministry for spatial planning and environmental protection number of employees dealing with
environmental protection is 46 and the number of employed persons in Environmental
protection Agency according to the systematization act is 50 but currently working number of
employees is 38. Work of the Environmental protection Agency is financed by budgetary
funds and donations. Budget for 2009 (Official Gazette of Montenegro 31/09) foreseen
942,743.06 € for the work of the Agency.
In the framework of the Multibeneficary IPA, main goal of the Instrument for support to the
infrastructure projects (Infrastructure Project Facility- IPP) is providing technical support for
preparation of project documentation i.e. feasibility studies, elaborate on impact assessment
etc, needed for realization of infrastructural projects as well as providing support for
realization of concrete activities trough Municipal Window Programme which is recognized
as a significant instrument of support to the national subjects in the field of environment. In
2008 approved funds for preparation of feasibility study and studies on environmental impact
assessment for wastewater treatment facility in Podgorica amounted to 135,000 €. For 2009
approved funds for preparation of technical cooperation for wastewater treatment facility
construction in Berane amounted to 150.000 € and trough the Municipal Window
Programme non-refundable funds in total amount of 5 mil € were approved for Wastewater
Treatment Facility Construction in Pljevlja, Bijelo Polje, Plav and Cetinje.
In March 2009 an Agreement on Loan between Montenegro (Ministry of Finance) and
Instituto de Credito Oficial (ICO) of the Kingdom of Spain was signed. It envisages a Spanish
loan to Montenegro of approximately € 5 million for funding a project entitled Regional
Recycle Centre Construction in Livade – Podgorica
.
An important segment of the new system of spatial planning, established under the
provisions of the Law on spatial planning and construction which defines organizational set
up and assumptions for implementation of the state spatial planning, is preparation of the
report on the spatial planning status as well as spatial planning programme.
Spatial planning programme is prepared on the basis of the report on the spatial planning
status and it comprises assessment of needs for preparation of new or amending existing
planning documents as well as significant measures for preparation and adoption of those
documents. Spatial planning programme determins spatial planning dynamics, sources of
financing, planning deadlines, operational measures for implementation of the planning
document, especially measures for utility equipment of construction sites, etc.
As appropriate, Programme contains also the measures in accordance with assumed
international committments in relation to the objects built contrary to the law. Spatial planning
programme for 2010 contains significant number of planning documents which are
underway, and defines drafting and adoption of new planning documents - this approach is
based on the need for aligning the new concept of spatial development with the new manner
of spatial planning pertinent with strategic development goals of the State.
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Detailed spatial plan for Adriatic-ionic highway;
Detailed spatial plan Adriatic MAGISTRALA for fast motor transport;
Detailed spatial plan for small hydropower plants
Detailed spatial plan for route of the new trunk and underwater cable Montenegro Italy
Detailed spatial plan for the space of multifunctional acumulations on the river
Komarnica
Spatial plan of special purpose for the Skadar lake region
Spatial plan of special purpose for National Park Prokletije;
Spatial plan for area of special purpose National Park ’’Lovćen’’ (amendments) or
other adequate planning document
Spatial plan for area of special purpose Costal Managment (amendments), because
of the ratification of the Protocol on integral managment of costal area,
State study of the location for Tivat airport
Studies of locations for sites in the framework of Spatial plan for the area of special
purpose for Costal Managment will be determined aftherwards depending on
expressed needs and priorities.
Studies of locations for sites in the framework of spatial plans for area of special
purpose for national parks will be determined aftherwards depending on expressed
needs and priorities.
Consumer and health protection
In 2009 Commission for monitoring of the implementation of the National Programme for
Consumer Protection was formed with its main goal of monitoring the implementation of the
National Programme for consumer Protection. Establishment of this working body is legally
based on the decision of the Ministry for Economic development as of 2 July 2009 according
to the Government conclusion as of 23 April 2009, and it is consisted of 15 members. All the
institutions whose representatives are members of the Commission are obliged to pay
compensation for their work. The new Law on Consumer Protection, which is planned to be
adopted in 2010, will promote the Consumer Protection Council as a consultative body.
Urgent Medical Office was established in July 2009 under the provisions of the Law on
Urgent Medical Aid (Official Gazette of Montenegro 49/08) and on the basis of the Law on
Blood Supply (Official Gazette of Montenegro 11/07), Blood Transfusion Institute was
established in October 2009.
Foreign affairs, security and defense
On 27 November 2008 the Government of Montenegro has adopted the Rulebook on
Internal Organization and Job Description of the Directorate for Protection of Classified Data,
which establishes three organizational units within the Directorate: Department for Protection
of Classified Data, INFOSEC and General Affairs and Finances Service, with total of 14
employees. Currently there are 5 employees in the Directorate.
Pre-accession funds – establishing of decentralized implementation system
The adoption of the Information on Phase II of Establishing DIS in Montenegro on 15
January 2009 followed after the adoption of the Information on Establishing of Decentralized
Implementation System (DIS) in Montenegro, which represented the official commencement
(2008) of the overall process of establishing structures required for functioning of the system.
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The adopted Information that represents the continuation of fulfilling of requirements for
obtaining accreditation, defines the relation between the National IPA Coordinator (NIPAC)
and National Authorizing Officer (NAO) as the main bearers of the DIS establishment
process, and confirms the appointment of key actors in using the EU assistance. The
Committee for Coordination of IPA programs has been established.
NAO as the head of the National Fund (NF) is responsible for the overall financial
management of the EU assistance. According to the Rulebook on Internal Organisation and
Systematisation of the Ministry of Finance adopted in March 2009 the National Fund is
defined as a section within the State Treasury Department with 5 staff. Also, the
reorganisation of the current Central Financing and Contracting Unit (CFCU) managed by
the Program Authorising Officer (PAO) is mentioned as one of important items. Under the
new Rulebook, the unit gains the status of a department titled as Department for Financing
and Contracting EU Assistance Funds, with 9 staff.
The Action Plan for conferral of management powers for IPA funds including corresponding
activities to be implemented in 2009 was adopted at the meeting of the Government of
Montenegro held on 15 January 2009. With regard to programming and implementing of
projects from IPA component I, Senior Programming Officers – SPO have been appointed in
line ministries, while the establishing of the Project Implementation Unit (PIU) is in process.
In order to be able to implement the above mentioned activities the key DIS bodies are
provided with expert assistance through the project “First Steps for a Decentralised
Implementation System (DIS) in Montenegro” (no. 06MON01/11/001) funded from the
national CARDS program 2006 and implemented by the consulting agency EWC (East West
Consulting). The main beneficiaries of the project budgeted in the amount of 499000 euro
that commenced in September 2008 and completed at the end of December 2009 were the
Ministry of Finance and the Ministry for European Integration. The drafting of the Manual of
Procedures is in process for decentralized implementation system (DIS) structures of the
Instrument for pre-accession assistance (IPA), as a document of horizontal character, since
it will relate to all management levels and will be used for both IPA components accessible
to Montenegro.
In December 2009, the Government adopted the first Information and an indicative Action
Plan for use of IPA components III and IV (regional development and human resources
development), which defines operational structures and the work plan on preparation of the
key documents in this area.
The progress in this process in relation to the plans defined in the previous EFP may be
viewed at based on the assessment by the representatives of the European Commission
(EC) of the Enlargement Directorate during the fact-finding mission in respect of identifying
results achieved in the process of establishing DIS in Montenegro, in May 2009. Namely,
according to the Roadmap for decentralised IPA funds management (an EC document),
every country must be subject to 5 phases on the road to accreditation for DIS. EC auditors
are of the opinion that Montenegro has made significant progress in achieving the
establishment of DIS, and have concluded that it is still in the zero phase - Establishment of
the Management and Control System and it is necessary to have a formal Gap assessment
phase carried out by an independent audit firm. The gap assessment phase that represents
the base for implementation of the following phase commenced in November 2009, while the
final Report that is to include the relevant assessments and recommendations, for both
components individually, is expected in February 2010. In addition, auditors demanded the
current Action Plan (adopted by the Government in January 2009) to be reviewed and
adjusted to the EC Roadmap phases. This demand has been met through a new Information
adopted by the Government on 15 October 2009, with updated Action Plan for Conferring
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Management Powers for IPA components I and II, which includes all the phases of the EC
Roadmap and simultaneously represents the National Roadmap.
Depending on the audit assessment, the following phase of compliance, i.e. preparation for
decentralized management (gap plugging) will commence, with the aim to eliminate the
flaws identified in the previous phase. It is envisaged that the mentioned phase will last until
1 August 2010 which will enable the plugging of the gap between the actual and required
status based on the identified flaws and recommendations given in the Gap Assessment
Report.
The following third phase, i.e. Compliance Assessment is related to the engagement of an
independent audit firm by national authorities in order to verify the readiness of established
DIS structures to be awarded the national accreditation. The process itself is planned in the
way that the Competent Accrediting Officer-CAO should sign a contract with a selected
independent audit firm that is to carry out this process. The audit firm with which the contract
has been signed will produce the Report, which will include their opinion with regard to
awarding of the national accreditation. Based on a positive opinion of the independent audit
firm, incorporated in the Compliance Assessment Report, CAO will accredit the National
Fund, i.e. NAO, and the NAO will accredit the operational structure, i.e. PAO, which makes
the fourth phase, i.e. National Accreditation and Submission of Application for Conferral of
Management. Afterwards, NAO will, along with the application for conferral of management
of EU funds, submit to the European Commission the Accreditation Package that is to
include the documentation on accreditation of the Operational Structure, as well as any
required additional information that the European Commission might require. It is envisaged
that the phase of obtaining the national accreditation should last until 1 February 2011.
Unlike previous phases that represent an obligation of the countries that are beneficiaries of
funds, the last, fifth phase - Preparation for Commission Decision is exclusively an obligation
of the EC and usually takes to 6 months.
In the subsequent period it is necessary to undertake a range of activities as to confer
powers for management of programs and projects, from the EC to the EU assistance
beneficiary country, i.e. Montenegro. This implies the following:
-Establishing of an Audit Authority, that will be responsible for verification of effective and
stable functioning of the management and control system. To that end the Memorandum
of Understanding has been produced between the Government of Montenegro and the
State Audit Institution (SAI), which should be signed by the Competent Accrediting
Officer-CAO, on behalf of the Government of Montenegro, and the president of the
Senate of SAI. After the establishment of this body, the appointment of the Audit
Authority managers and recruitment of staff will commence.
-Within IPA component II, as planned by the current Action Plan, it is necessary to establish
mechanisms that will enable the segregation of duties among the actors making the
Operational Structure for IPA component II in the form of an operational agreement that
is to be executed by the representatives of the Ministry for European Integration
(Department for Cross-Border Cooperation Programs) and PAO.
For elimination of the flaws identified in the gap assessment phase and fulfilment of other
accreditation requirements, DIS bodies will be provided with expert assistance through the
project ’’Strengthening the management and control systems for EU financial assistance in
Montenegro’’, funded from IPA 2009. The project will be related to components 1 and 2, as
well as the components 3 and 4.
Since the European Union is providing support to Montenegro on its way to membership,
every year it will allocate significant financial support, defined in the strategic European and
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national documents, within which a country applies for certain projects, the amount of which
will be allocated depending on the quality of proposed projects. In addition to foreign
support, it is necessary to provide some funds from the national budget to support the
activities of the employees in established structures. The review of financial requirements for
establishing of DIS is given in the following Table. Namely, with regard to financial
requirements related to CFCU, as a part of the operational structure for components I and II,
the estimated funds amount to 85,915 euro in 2009, while for the period from 2010 to 2012
the amount increases, in accordance with the increase of the number of staff and scope of
activities, since it is envisaged that in this period the CFCU will be a part of the operational
structure for components III and IV. With regard to the National Fund, which was established
within the Treasury Department in the Ministry of Finance in 2009, financial resources are
estimated in the amount of 24,524 euro, while for the period from 2010 to 2012 the amount
of funds will increase since the NF will be responsible for all five IPA components. Senior
programming officers (SPO) in all line ministries are responsible only for IPA component I,
and estimated funds in 2009 amount to 588,480 euro, while in the period from 2010 to 2012
the amount is expected to be higher due to the increase of the number of staff.
Table 31: Financial requirements for establishing of DIS
Budget
2009.
2010.
2011.
2012.
CFCU – Operational structure
for components I and II
85.915
183.815
232.826
232.826
MF – National Fund (Treasury
Department) for components I,
II, III, IV and V
24.524
61.310
61.310
61.310
SPO – Senior Programming
Officers of all ministries for
component I
588.480
784.640
784.640
784.640
500.00027
2.300
00028
Foreign assistance
Source: Ministry of Finance, Budget Department
The level of use of these funds will depend on the manner and readiness of the assistance
beneficiary country to spend the allocated funds. This rule is valid irrespective whether the
system for management of pre-accession funds is centralized (as is the current condition) or
decentralized (that is to be established after the accreditation criteria prescribed by the EU
have been met). Here it needs to be pointed out that once adequate institutions have been
established, which are ready to absorb the resources from pre-accession funds, the
beneficiary country will be concurrently prepared for use of significantly higher amount of
resources from Structural and Cohesion funds on the day it becomes a member of the
European Union.
The amount was provided from the CARDS Project 2006 “First Steps for a Decentralised
Implementation System (DIS) in Montenegro”.
27
The amount was provided from the IPA Project 2009 “Strengthening the management and control
systems for EU financial assistance in Montenegro”, which duration is 24 months.
28
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