Abstract
The economic expansion in Montenegro is proceeding at full strength. The economy is overheating. Rapid credit growth is overstretching banks, and has contributed to ballooning asset prices. Eroding competitiveness is a concern. Management of the boom falls on fiscal policy. Tax cuts have been procyclical and potentially destabilizing. Fiscal risks need to be contained. The main focus of credit policy should be to strengthen banking sector supervision. Completing the transition to a market economy should be kept at the top of the policy agenda.
January 16, 2008
1. This statement provides an update on recent economic developments based on information received after the preparation of the staff report. The new information reinforces the message of the staff appraisal for an urgent need to rein in expansionary fiscal plans for 2008.
2. Inflationary pressures continue to build. Twelve-month retail price inflation is estimated to have risen to 6 percent in November, compared with the staff report projection of 5 percent for 2007.
3. The stock market correction has continued. The stock index dropped 35 percent by end-year compared to the May 2007 peak.
4. The recently adopted 2008 budget would result in some additional fiscal stimulus in 2008. The approved budget would lower the consolidated fiscal balance by 1 ½ percent of GDP compared with the staff report. This partly reflects higher capital spending of about 2 percent of GDP. Past experience suggests that spending may be limited by capacity constraints. Preliminary data suggest a stronger budgetary outturn in 2007 by about 1 percent of GDP, due to strong revenues.
Montenegro Stock Exchange Index, 2005–07
Citation: IMF Staff Country Reports 2008, 048; 10.5089/9781451826708.002.A002
Source: Montenegro Stock Exchange5. The central bank has recently introduced a policy package to contain the credit expansion. The package (i) extends the 19 percent reserve requirement to all public sectors deposits and all deposits with 90–180 days maturity; (ii) broadens the reserve requirement base (albeit at a reduced rate of 2 percent) to deposits with maturity between 180 days and two years; (iii) raises the minimum capital adequacy ratio from 8 to 10 percent for banks with credit growth faster than 60 percent, and to 12 percent for those with credit growth in excess of 100 percent; and (iv) caps annual credit growth to 30, 40 and 60 percent respectively for banks with outstanding loans above 200 million, between 100 and 200 million, and below 100 million euros. While the credit ceilings should help rein in credit growth temporarily, they may distort lending. They are also unlikely to be effective in the medium term as with the open capital account borrowing activity is likely to shift offshore.
Montenegro: Consolidated fiscal operations 1/
(In percent of GDP)
Including local governments.
Staff estimate based on central government outcome.
Montenegro: Consolidated fiscal operations 1/
(In percent of GDP)
| 2006 | 2007 | 2008 | |||
|---|---|---|---|---|---|
| Prel. | Staff report |
Est. 2/ | Staff report |
Budget | |
| Revenues | 44.9 | 50.7 | 51.6 | 48.9 | 50.7 |
| Expenditures | 42.7 | 45.2 | 45.1 | 46.6 | 50.0 |
| Balance | 2.3 | 5.4 | 6.5 | 2.3 | 0.7 |
| Primary balance | 3.5 | 6.6 | 7.6 | 3.3 | 1.5 |
Including local governments.
Staff estimate based on central government outcome.
Montenegro: Consolidated fiscal operations 1/
(In percent of GDP)
| 2006 | 2007 | 2008 | |||
|---|---|---|---|---|---|
| Prel. | Staff report |
Est. 2/ | Staff report |
Budget | |
| Revenues | 44.9 | 50.7 | 51.6 | 48.9 | 50.7 |
| Expenditures | 42.7 | 45.2 | 45.1 | 46.6 | 50.0 |
| Balance | 2.3 | 5.4 | 6.5 | 2.3 | 0.7 |
| Primary balance | 3.5 | 6.6 | 7.6 | 3.3 | 1.5 |
Including local governments.
Staff estimate based on central government outcome.
