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IMF: Economy is projected to expand 3% in 2019

Sa sastanka

According to the IMF Mission for Montenegro, Montenegrin economy is going to grow by 3% on average. They warn that public debt needs to be reduced even more.

Representatives of IMF point out that economic growth was strong and fiscal adjustment resulted in the improvement of budget balance.

“But high public debt is restricting room of the state to face possible downturn of the economic activity in the future. With global trends for growth increasingly uncertain, public debt should be further reduced”, said the representatives of IMF.

Their advice: costs and benefits of the construction of next phases of Bar-Boljare highway should be carefully analyzed.

“Burden of the costs would probably make the economy more vulnerable to shocks”, said the representatives of IMF.

Continuation of strong economic growth requires careful definition of priorities and public consumption sequencing.

“Projections indicate that the economy will expand 3% in 2019. Without further reforms, the growth would be expected to fall under 3% in the next five years”.

They say that tourism sector has enormous untapped potential.

IMF representatives point out that authorities are focused on the electricity production from renewable energy resources with good reason, given the country’s natural endowments.

“Accelerated progress in this area could lead to increase in our projections”.

However, there are many risks of growth slowing down, especially in the context of the decline in global trade, financial conditions or geo-political tensions.

Public spending must be focused on  providing the highest possible economic and social return.

“Greater investments in education and healthcare, along with the market labor reforms would enhance employment and create more productive workforce. Spending  in public infrastructure should be focused more on the areas that are most useful for the consumers.With time, such public investments will generate dividends that can be channeled to more ambitious projects whose benefits are more uncertain. “, advise the representatives of IMF.

Fiscal harmonization has made some progress but that process must be sustained

“Public debt-GDP ratio needs to be reduced as soon as possible. Activities related to balancing conflicting objectives is of crucial importance”.

The authorities have made progress in the last two years in this regardExcluding highway spending, the primary fiscal balance (the budget balance excluding interest payments) has swung from a deficit of 1 percent of GDP in 2016 to a surplus of 2 percent in 2018. This was not an easy achievement, and the authorities are to be commended for it. However, general government debt including guarantees stood at 79 percent of GDP in 2018 (71 percent of GDP excluding guarantees), a level that is still too high. The maintenance of currently projected primary surpluses over the medium term of 2 percent of GDP is critical to reduce the level of public debt. Under current policies, general government debt with guarantees is projected to decline to 61 percent of GDP by 2024 (53 percent of GDP without guarantees).

Authorities  should be careful with the plans for Bar-Boljare highway.

“Construction of the first phase has been very expensive. Construction of the remaining phases could be expensive too. At this stage, economic benefits of the project are entirely uncertain and fiscal resources could be used for other purposes.”, said the representatives of IMF. Moreover, studies conducted several years ago raised questions about the economic viability of the project. The authorities recently commissioned further studies to re-evaluate the project based on updated information. If the new studies do not adequately dispel earlier doubts, we understand that the authorities will revise their investment plans, moving forward once public finances are sufficiently strengthened.

Over the next few years, strong progress in three specific areas will further build fiscal space.One very important reform would be on pensions – aligning them with increasing lifespans and making future benefits fairer to today’s youth. Overhauling public employment to enhance the efficiency of the public sector is another high priority reform. Progress in these two areas has stalled and needs to be reinvigorated. A third area where the authorities do envisage near-term progress is eliminating wasteful tax exemptions. If efforts are redoubled in these areas, there will be strong long-term rewards, and the fiscal situation would provide a much more robust foundation for ambitious projects.

One of the most important reforms is the reform  of pension system. Detailed review of employment in the public sector would be another very important reform.

“Progress in these two areas is in stagnation and should be revived”, said the IMF representatives.

Additional improvements in tax administration will generate additional revenues through suppression of grey economy.

“Reduction in unsettled tax liabilities shows significant improvements in basic processes. In the future, activities of inspection supervision should be focused on main tax risks”.

“More robust investment management frameworks are of paramount importance. It is very important establish strong legal and institutional framework in order to identify feasible projects and avoid the risks of fiscal burden”.

Banking supervision and anti-money laundering supervision need further enhancement

No spillovers have been observed to the broader banking sector from recent interventions in two non-systemic banks. Despite a freeze on deposit withdrawals in these two banks, system-wide deposits have been stable. The system-wide capital adequacy ratio is comfortably above the regulatory minimum, liquidity remains high, and overall system is profitable. Following the closure of these two banks, non-performing loans (NPLs) declined to 4.7 percent in April 2019. Private sector credit growth has strengthened.

Tax wedge

Fiscal tax wedge (40%) is the second highest in the WB, warn the IMF representatives.

“High level of tax wedge reduces the incentives for employment in formal sector, especially for the persons whose wages are low”.

Authorities’ intention of reducing social security contributions by 2 percentage points is appropriate.

 Law on Labor

“More than 30% of employees have fixed-duration employment relationship. They have less chance than their colleagues who have open-ended positions”.

Draft Law on Labor appropriately aims to narrow the gap between these two types of contracts.

“Future decisions on minimum wage should be harmonized with the competitive questions. Minimum wage is going to be 15% higher starting from July and that’s the first rise since 2013”, said te IMF representatives.

In future, authorities are advised to take into consideration a wide range of indicators, including poverty line and average wage and productivity growth trends.

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