MBO INTERVIEW with Igor Lukšić, PhD., Deputy Prime Minister and Minister of Finance of Montenegro

1. What are the consequences of global economic crisis to Montenegrin economy and how do you evaluate anti-crisis measures undertaken by Government of Montenegro? If you would have had a chance, would you change anything?

All economies worldwide, including Montenegro, have suffered from the economic and financial crises jeopardizing the liquidity of both financial and the real sector. The Government of Montenegro has reacted in a prompt and timely manner by adopting quite diversified anti – crisis package of measures. From this prospective, I think we did the right thigh; we carefully monitored the financial and the real sector needs that have enabled us in preserving liquidity of the two sectors. On the other hand, this package was supported by several other measures aimed at stabilizing public finance, inter - alia, the control and decrease in public spending, halt in new employment, discretionary spending saving resulting in decline in spending at around 9 of percentage points of GDP in the period 2008 - 2010. We did not only deal with the liquidity of the system (being still a challenge), but our approach was rather to tackle a whole set of structural reforms resulting in having a less vulnerable economic system to the crisis shocks in the long run.

2. What are your expectations from 2011/12? According to some announcements, Montenegrin economy is going out of crisis.

Technically speaking, Montenegrin economy has already emerged from the recession, and according to our projections forecasted growth will reach 0,5% by the end of 2010. The forthcoming year will be a year of recovery of our economy. In the light of the above, we budgeted the real economy growth of at 2,5% in the following year. In accordance with the practice that we have introduced in recent years, being supported by the European Commission, as a prudent Government we have develop alternative positive and negative scenarios of 3,5%, i.e., 0,5% of the real GDP growth. The economic growth in 2011 is relying on additional banking system consolidation, real sector increase in activity and high level of foreign direct investments, being planned at the level of around EUR 550 million in 2011.

In 2011, we will continue activities aimed at regulatory reform and business environment improvement. We will continue with the structural reforms in the area of public services, subsequently initiating a new cycle of state administration reforms. We will implement measures aimed at strengthening activities of small and medium - sized enterprises and maintaining production level of the large industrial systems. Our objective is the employment growth rate rebounding.

In the forthcoming period we envisage the further implementation of the traffic infrastructure and energy projects and projects aimed at adding value to tourist sites, as well as implementation of infrastructure projects of both local and regional importance, which will contribute to the opening of new possibilities and the increase in quality of living standard to our citizens.

3. What are your expectations in terms of future growth rates of Montenegrin economy and what will be the main drivers of that growth?

We envisage the recovery of our economy in the forthcoming years being based on economic growth rebound and insolvency problem reduction, as well as to increase the competitiveness of our economy. The initiation of the rebound process, to attract the interest of foreign investors, successful implementation of the Euro bonds project, increase in credit activity of banks, support to the real sector will be the main drivers of the growth. The main economic growth generators will be the sectors of tourism, energy and agriculture. In the light of the above, a stable political framework and improvements in the Euro – Atlantic integration will contribute a lot.

4. What are the main "threats" for the further development of the Montenegrin economy?

Montenegro is small and open economy. On one hand this is positive, because one small investment can add value to the further development of our economy. On the other hand, based on the results of the economic and the financial crisis, open economies are more exposable to external impacts. We are well aware of these threats, but in years of disrupted economic conditions we have proved to be at the top of the task. The positive news is that all countries in the region are emerging from the recession, which of course, is generating a positive external environment to our economy.

5. Montenegro has had excellent initiation with its Eurobonds. How well is Montenegro positioned in terms of economic stability in comparison with the states from the region?

The current year was marked by this most important economic “event”. This did not represent a mere borrowing, as it was sometimes presented, it more importantly opened a door to Montenegro to the European capital markets reaffirming that our public finance enjoy high confidence of investors. With regard to the successfulness of the project, the assessment of the top IMF officials is reaffirming that this was positive news for the whole region. In my opinion, the fact that we managed to provide cash on the capital markets speaks for itself. Unlike other countries in the region, we did not have to rush into the urgent stand - by arrangement with the IMF, we have independently implemented the policy aimed at decreasing the public spending and we have succeeded in stabilizing the public finance in the long run, which reflected to our good rating with investors.

6. Can we expect further improvement of business environment in Montenegro and in which areas?

At the proposal of the Council, chaired by me, the Government of Montenegro adopted the Action Plan for Regulatory Reforms and Business Environment Improvement. This document consolidates the three pillars of the reform: Regulatory Reform "Guillotine" of Regulations, Reform of the Ease of Doing Business and Regulatory Impact Assessment (RIA), which implementation is envisaged in the forthcoming period led by the Government of Montenegro in cooperation with the World Bank and the International Finance Corporation (IFC). Our objective is to create the image of Montenegro as an attractive business destination with low tax rates. In the light of the above, the Council has carried out activities that additionally improved the business environment and the tax rates on personal income for all income categories including entrepreneurs, were levered and reduced at 9%. At the same time, the obligation of monthly prepayment of corporate profit tax was abolished, contributions charged to employer were reduced and therefore employers are relieved of the financial cost generated based on workforce engagement. We are currently implementing activities aimed at amending regulations on local self governments financing. The Law on Business Environment Improvement was recently adopted, being developed by the Ministry of Finance, amending provisions of ten other laws, with the overall objective of reducing both the deadlines and the number of procedures, decrease in fees and other barriers to business, paving the road to the process of improving the “business” regulations. The World Bank Doing Business Report has recognized our efforts and the Report stresses that Montenegro has implemented three reforms, thus ranking our country on the list of 21 countries that carried out this number of reforms, whereas only eight countries have succeeded in implementing higher number of reforms. Simultaneously, we are the only country in the region that has implemented three reforms, illustrating that we have implemented the highest amount of reforms in the region. The Council determined the areas of priority in the forthcoming period related to the establishment of one stop – shop for registering of companies, finalization of reforms of issuing licenses to companies, adoption of the Law on Enforcement Procedure, further simplification of procedures for the employment of foreigners, establishment of unified procedure for collection of taxes and contributions, reduction in administrative taxes, extension of the scope of bank’s credit registry, as well as the improvements in registering of property. Thus, we will focus on indicators that do not have satisfactory ranking. Activities within the Regulatory Reforms Project are ongoing, being implemented in cooperation with the International Finance Corporation (IFC), including the guillotine of regulations and introduction of regulatory impact assessment in Montenegrin system. The RIA comprises the system analysis of the impact of regulatory impact assessment to the overall system, enhancing the dialogue between private and public sector in developing regulations, increasing the awareness level of decision makers in reference to the regulatory implications. Aforementioned and other activities that we are undertaking should provide for the grounds for increasing the competitiveness and the dynamic level of Montenegro and its economy. Finally, these joint efforts should result in opening of new companies, improving the operation of existing ones, new employment and increase in living standard.

7. When considering Montenegro as potential investment destination, what would you suggest to international investors?

Any prudent Government is using its best endeavors in increasing the number of investors. The further sequence of events will become the focus of attention especially in the period after the crisis. In my opinion we have recently proved to be the country which is protecting its investors, being reflected and confirmed by the World Bank Doing Business Report, ranking Montenegro 28th out of 183 observed countries with the reference to protecting investors, being simultaneously the country which is committed to further business environment improvement. However, other reports such as the UN Human Development Report and the World Economic Forum Global Competitiveness Report are implying the investment attractiveness of our country. Lowest tax rates and one digit taxes, favorable business environment, free capital and goods circulation are the major advantages of our country, thus, all preconditions important for an investor are being met. In my opinion this is the best recommendation to investors. FDI will still be the key driver of the economic growth.

8. In your opinion, on its way towards of the European Union, what are the greatest challenges for Montenegro?

Montenegro is committed to the European integration which is reflected by obtaining the positive opinion on the candidate status. The huge workload is behind us, but bigger challenges are yet to come. Obtaining of the negotiations date on membership status is pending as well as the engagement of our administration in reference to the opening and closing of negotiating chapters. Our administration is not challenged by a simple task, but I believe that that the integration level is reflecting that it is prepared to fulfill such a huge task.

9. Have you been satisfied with cooperation with international financial institutions (IMF, EIB, EBRD, etc.) and do you expect further improvements of these relationships?

Shortly upon gaining independence, Montenegro has established a highly successful cooperation with almost all relevant international financial institutions. In the light of the above, we have established extremely remarkable cooperation with the development banks (WB, EBRD, EIB and KfW), which up to date have invested a significant amount of funds in development projects, mainly in the energy, transport, water supply and wastewater disposal projects, banking sector, development of small and medium – sized enterprises, etc. We envisage that the cooperation with development banks, having solid grounds of mutual trust and positive past experience, will continue in the future. We have budgeted funds for the implementation of several projects in the Budget for 2011. With regard to the cooperation with the IMF, it should be emphasized that Montenegro is maintaining regular communication with this institution, reflected in the current exchange of data and projections. Even Montenegro at the time of the crisis was the innovator regarding certain projects, such as the support to the banking sector and small and medium – sized enterprises obtained through the EIB.

10. How do you see Montenegro in 2015?

As a country on its road to the EU and NATO, being recognized as an attractive business destination, and a resort to a vast number of companies placing investments in construction of highway, Luštica, Porto Montenegro, hydropower - plants, undersea cable with Italy, etc., with high employment possibilities, better wages and living standard of our citizens, and certainly better budget revenues which contribute to increasing funds aimed at improving infrastructure and other important services to our citizens.