Montenegro’s economy has finally reached pre-crisis levels of activity but the growth pace will slow in 2014. Tight credit and limitations on tourist capacity hold back the recovery. A huge current account deficit poses great risks for the economy. There has been some progress in reducing persistent fiscal imbalances but highway improvements will add substantially to budget deficits and public debt in coming years. Unemployment exceeds 20%. Montenegro's economy grew steadily between 2003 and 2008 and inflation slowed after the country adopted the euro. Demand was supported by large increases in credit. Employment and wages rose and unemployment fell sharply in 2005-2008. The country experienced somewhat of a property boom with wealthy Russians and Europeans buying property along the coast. However, the economy slipped into recession in 2009 when property prices fell by more than 50% and real GDP contracted.
Growth resumed – but at a modest pace – in 2010 and 2011. The recovery was slowed by a debt overhang in the private sector. The economy stalled in 2012 as a result of severe weather conditions and a sharp slowdown in aluminium production. The economy continued to struggle in 2013, plagued by problems in the metals sector and the high level of private sector debt. Shortages of domestic liquidity were another constraint.
Modest growth is expected in 2014 with real GDP rising by 2.8%, down from 3.4% in 2013. Tight credit and limitations on tourist capacity slow the recovery.
Inflation was 2.8% in 2013 and prices are expected to rise by 0.2% in 2014.
Montenegro's huge current account deficit poses great risks for the economy. In 2013, the deficit was 15.0% of GDP. Improvements in competitiveness will be essential to keep the imbalance from worsening as the economy gains strength.
Household demand and investment remain weak and bank credit continues to decline. The real value of private final consumption rose by 1.5% in 2013 and gains of 0.4% are expected in 2014.
Unemployment was 20.4% in 2013 and it will dip to 20.2% in 2014. Participation in the labour force is at a very low level while the share of long-term unemployed continues to grow.
The economy has been subject to vulnerability from persistent fiscal imbalances and a rapid increase in public debt. Some progress was made in 2013, as revenue collection was improved and expenditures were contained. However, the construction of the SmokovacMatesovo highway will add substantially to budget deficits and public debt in the coming years.
Evaluation of market potential
The economy still faces a large degree of re-
structuring. There is a small, market-oriented sector which generates the most growth; a large, unreformed socialist system; and the hidden “black economy”, estimated to generate 40% of GDP. Real growth of 2.6-2.9% per year is expected in medium term.
Agribusinesses have considerable potential. The elimination of waiting times at borders would make it possible for producers to shift from low-profit frozen exports to fresh exports. In addition, the growing season is unique and fits comfortably with the EU's needs.
Economic prospects should be reasonably bright once Western Europe's recovery gathers steam. So far, however, the benefits of recent progress have not reached the masses. Average salaries are just €250 per month. The large current account deficit limits efforts at export diversification.
Montenegro has an ambitious programme of privatisation and plans to modernise labour legislation with the goal of improving labour flexibility. The country's large aluminium complex and most of its financial sector have recently been privatised.
The banking sector, telecommunications, and oil import and distribution in Montenegro are 100% privately owned. Some privatisations, however, have been dubious. The elite are believed to have profited excessively from privatisation. Nepotism is another problem which handicaps the judiciary. The country's business environment is lumbered by a maze of excessive regulations. Greater flexibility in wage setting and employee protection is needed. The ability to protect property rights is also limited.
The government has passed new legislation which will improve the environment for business development, investment and economic growth. The labour market remains rigid, limiting the ability of firms to restructure. The technical and administrative skills of the agencies providing business services are also extremely limited.