Interview of the Minister of Finance, Milorad Katnić, for Balkans.com

Balkans.com: Minister, it is our honor to be able to interview you. You must be very pleased with the current position of Montenegro. It has successfully sold two Eurobond issues, won many tourism awards, the "who's who" are at your doorsteps, very significant investors have already started major project, the EU has praised you for your reforms, WTTC has predicted that Montenegro will experience the world's fastest growth for contribution to tourism and you have just received an outstanding opinion from the European commission's economic report. How do you feel about all this success?

Minister Katnić: When all our achievements are found at one place, as you enumerated them now, a very nice feeling of proudness and satisfaction over the things that have been done is experienced. This overview of the past period and praises obtained by Montenegro from the international institutions represent a confirmation of its political and economic maturity.

After regaining the independence in 2006, Montenegro has achieved enormous political and economic progress. Market economy foundations have been laid out, democratic institutions have been enhanced. The IMF and the World Bank membership additionally boosted positive positioning of Montenegro into the international financial markets. Finally, in December 2008, Montenegro applied for the candidate status for joining the EU.

Today Montenegro is a small and open economy with GDP of around EUR 4.800 per capita (estimates for 2010), representing the growth of around 39% against 2006. In the same period, wages and pensions increased, inflation rate and unemployment rate declined, and the unemployment rate reduced. As far as FDI amount per capita is concerned, Montenegro is the leader in the region, indicating the attractiveness and of the incentives system boosting new entrepreneurial activity and, generally, the credibility of the current and development policy.

A serious and huge work has been completed and I believe that we are on the right path. However, recent results represent an additional stimulus responsibility for the future. Numerous challenges and obligations are ahead of us. It is necessary to create conditions for the economy to be stable and boosting, inspiring for new ideas, new innovations, new technologies and new investments in the long run, so that all of the aforementioned created opportunities for the prosperity of the majority of citizens.

Balkans.com: What are your biggest challenges?

Minister Katnić: In the second half of 2010, we emerged from the recession and preconditions were created to initiate a new development cycle. We are implementing fiscal consolidation aimed at decreasing the public consumption, budgetary deficit and the public debt. We must persevere in implementing this policy if our objectives are the long - term public finance stability and the economic competitiveness. The financial sector has been strengthened by adopting new regulations and its implementation. However, there is a high percentage of non - performing loans, while the credit activity boosting and high quality infrastructure – related and business projects financing are considered essential for the economy. We are faced with the need to complete the restructuring of large industrial systems, simultaneously dictating to improve infrastructure, and more importantly to create conditions for the establishment of new companies generating new employment.

In past years, we intensified our activities on the Project “Montenegro – the most competitive entrepreneurial zone“. In the light of the above, in the forthcoming period we will continue creating the environment providing incentives, the foundations of which we laid down by creating a competitive fiscal system, and we will focus on strengthening physical infrastructure, rule of law, business barriers abolishment and reduction.

International competitiveness indicators, being the integral part of the Government’s Economic Agenda, represent a clear benchmark of our success in developing the competitive economy. Our objective is to be on the top 50 countries of the world in the international competitiveness lists in the next three years. Having in mind that Europe counts around 50 states with which we compete, this is a quite ambitious task.

Balkans.com: Being such a small country, investors must have a big advantage in being able to communicate easily with the Government, how has this helped in terms of growth?

Minister Katnić: Good investment environment and investments realization represent the leading precondition for the economic growth, especially having in mind the features of Montenegro. The development of the investment environment in which the investors will be interested in investing its capital, envisages a clear and nondiscriminatory laws, cost effective transaction costs for companies, as well as an efficient administration. Montenegro is providing for the opportunity to investors to make qualitative contacts and communication with the representatives of the Government and the decision makers. Decisions are efficiently made, and it is important to create conditions for its implementation both at the central and the local level. This is our focus of work. It is necessary to change the mentality and attitude of the public administration towards the business, and that is something what is most difficult to do.

Balkans.com: As a former member of Council of Europe Development Bank, currently serving as governor for the World Bank and an author of a numerous working and scientific papers published nationally and internationally in the area of economic growth, how have you used your knowledge to improve the climate for investors?

Minister Katnić: I strongly believe in the power of free will and the strength of free market and private ownership, therefore my knowledge about economy is mostly referred to more liberal part of economic science. My colleagues and I are well aware of the fact that lowering expenditure of public sector will reduce taxes, which will make more space for entrepreneurship to develop, but at the same time the government has to maintain its level of service at the highest possible level; walking down that thin line makes the state successful.

Building a prosperous society implies the implementation of best solutions that may be applied taking into account the level of development, cultural, customary and other society axes. It is important that we learn from our own experience and experience of others. Therefore, in our daily work and in formulating development policies, we are not exclusively relying on theoretical concepts, but also on the best practice of developed countries. Therefore, in building a more favorable environment for investors, we are relying on relevant international researches such as the World Bank Doing Business Report. Of course, openness and sticking to agreed are the principles on which we build investors’ trust.

Balkans.com: What tax advantages does Montenegro offer to investors and any new tax initiatives underway?

Minister Katnić: In last years, we are successfully implementing tax reforms, aimed at creating a competitive tax system being based on low and flat tax rates, with the lowest possible number of tax exemptions and deductions, simple and clear regulations and procedures, automated processes, efficient and professional administration, partnership relation with the taxpayer, and good tax payers culture.

Montenegro has the most competitive tax policy in Europe. Direct taxes are flat and one – digit taxes. Corporate profit tax and the income tax amount to 9%, and VAT is the lowest in the region, the standard rate is 17%, and reduced 7%.

Balkans.com: You had a tremendous success with both your 2010 and 2011 Eurobond, what do you attribute this to?

Minister Katnić: Two quite successful Eurobond issue, certainly represent very important economic “events” in 2010 and 2011. These events did not imply a mere borrowing, more importantly, they have opened the doors to Montenegro to enter into the European capital markets, confirming that our public finance enjoys investors’ confidence.

This success becomes more important if we consider the global markets trends and the fact that Montenegro does not have the investment credit rating, thus a successful issue is a proof that investors are positively assessing our overall fiscal and monetary policy, as well as the outlook and our economy development prospects in the forthcoming period.

Balkans.com: The IMF in their recent report stressed the importance of restoring the soundness of the banking system to bolster the resilience of the economy and promote private sector-led growth, what steps have you taken to address this?

Minister Katnić: During the crisis, the banking sector of Montenegro was exposed to a significant early deposits withdrawal, and, subsequent economic sector illiquidity. Both the Government and the regulators reacted by applying appropriate measures aimed at preserving the stability of this sector, primarily through the regulatory measures. A new regulatory framework was established last year, being based on the European acquis and the best international practice. Banks will have to further align their operations with the international standards. This resulted in generating additional set of instruments contributing to the system stability.

Government guarantees issued for the credit lines of EIB and KfW represent an example of good cooperation between the commercial banks and the Ministry of Finance, as well as the assistance provided to both the banking and the private sector, enabling the provision of significant funds under favorable conditions for the banks and the companies. We are reminding that Montenegro is a sole example in the region that supported in this manner the banks and companies during the crisis.

As far as the private sector development and growth is concerned, the primary role of the state is to create favorable legal environment and simplified business procedures. Pursuant to this commitment one – stop – shop for registration of companies was recently established, companies licensing procedures reforms reached its final stage, the Foreclosure Law was adopted, procedures for the employment of foreigners were further simplified, uniform procedure for the collection of taxes and contributions was established, administrative fees were reduced, credit registry scope was extended and the property registration procedure was enhanced. To this end, this joint work should result in opening new businesses, improving operation of existing ones and increasing the living standard.

Balkans.com: Montenegro has two airports but with a rise in tourism that is predicted, what is the government doing about increasing the number of flights into Montenegro?

Minister Katnić: Pursuant to the World Travel and Tourism Council estimates, our country, in the next decade, is envisaged to generate the fastest growth of the direct share of travel and tourism industry by 12.4% of GDP annually. Regarding the contribution of tourist visits, Montenegro, with the real growth of 9.4% annually, in the next decade, will be second ranked.

These positive estimates are additionally motivating us to focus on improving the accessibility of Montenegro as a tourist destination in all types of transportation.

In addition to the airports in Podgorica and Tivtat, covering the central or the south part of our country, we undertook activities aimed at using the capacities of the airport in Berane, in the north, for public air transport, through the type of the Public Private Partnerships. Furthermore, the working team established within the Government is entrusted with negotiating with a few well-known so-called low cost airlines, which expressed the interest in operating in Montenegro. In order to increase flights to/from Montenegro, bilateral activities were intensified aimed at establishing a legal framework in reference to providing regular air transport between Montenegro and other countries. Agreements were entered with Croatia and Macedonia, and the text of the Agreement was aligned with the United Arab Emirates and Switzerland, and quite soon the Agreements will be entered with Serbia, Bosnia and Herzegovina, Russian Federation and Ukraine.

Balkans.com: It is said Montenegro is called the "land of opportunity," which areas would you point out to investors as the best opportunities in Montenegro for investments?

Minister Katnić: Investors recognized the sectors of tourism, energy and agriculture to have the highest potential for the implementation of projects. If Montenegro develops these sectors, it will boost economic growth simultaneously decreasing the regional differences.

Balkans.com: Is there any large tenders or privatizations scheduled?

Minister Katnić: Companies restructuring and privatization process reached its final stage. There are certain large systems and enterprises pending privatization in which the state has a controlling stake subjected to complex ownership rights issues and/or facing business problems. Privatization of these enterprises is a sensitive issue, requiring proper preparation of the state. Simultaneously, it is necessary to have a concrete interest of credible investors. We often lacked this interest, thus some privatizations were delayed or have failed. Additional endeavors were used aimed at restructuring and preparing the enterprises in majority ownership of the state for privatization, thus I believe that some of the tenders will be successfully completed.

In 2011, we hope to finalize the initiated privatization processes, find a strategic partner in the area of tourism for Valdanos, Kumbor, Mamula Island, and Bigova Peninsula, select contractor for the first section of Bar-Biljare Road, realize investments such as underwater cable with Italy, construction of a golf course in Tivat, hydro-power plants, etc.

Balkans.com: With so many days of sun, it is not only good for tourism but for energy, what is the tariff rate situation in regards to renewable energy?

Minister Katnić: Currently Montenegrin legislation does not provide for a special tax exemptions for investments in facilities and equipment used for electricity generation from renewable sources. This Government’s decision is in accordance with the policy of establishing and maintaining single tax rates, without exceptions for certain activities.

However, being aware of the enormous potential of the solar energy of Montenegro (number of sunny hours in the most parts of Montenegro amounts to above 2000 hrs/year, while at the coast it amounts up to 2500 hrs/year), we are currently working on finding appropriate ways for defining the fund for the provision of incentives to the system for the production of energy from renewable sources, since it is much cheaper to stimulate the electricity generation from renewable sources than the direct one.

Balkans.com: Montenegro has been operating on Euros for many years and you were part of the negotiating team for Montenegro's accession to European Union, how will this transition to European Union benefit Montenegro?

Minister Katnić: Since the restoration of the independence five years ago, Montenegro achieved substantial progress on its way to the EU membership, which has been recognized by our European partners and reflected in the current status of the candidate country. It is important to stress that Montenegro in the previous years has advanced in the integration process faster than other countries from the Region which is the best indicator that our policy and reforms are on the right track and new status confirmed that Montenegro reached political maturity necessary for the opening of the negotiations. Surely, we are aware that there is long way ahead and I would like to stress that for us quality of the process is more important than speed. In other words, further reforms are surely needed in order to become EU Member State in the moment when we will be ready to fully use all the benefits of the membership which are considerable. Having said that, I am not speaking only about structural funds, but more on political and security stability and big internal market which we consider as an opportunity for the small and open and serviced based Montenegrin economy. Montenegro in the previous period already benefited from the process, having in mind capacity building of the public administration, process of the visa liberalization as well as beginning of the transformation of the whole society in accordance with the patterns that exist in the EU countries. Therefore, we are really looking forward for the further deepening of the relations with the EU.

Balkans.com: What steps were taken by the government to fight against the crisis?

Minister Katnić: Montenegrin economy in the period 2006 - 2008 grew at average of 9%. Economic and financial crisis in 2009, has severely hit the economic activity, thus the economy in 2009 experienced the negative GDP rate of 5,7%, being significantly better result against the countries in the region and majority of more developed economies. This successful “buffering“ of the economic and financial crisis that hit the entire world economy, was a result of a fast response of our Government to the crisis, i.e., defining the package of monetary, fiscal and socio – economic measures in the amount of around 10% GDP, being estimated as one of the best ones in Europe. In order to prepare this support, we used the surplus generated in previous years, providing us the possibility to halt the first wave of the crisis and to mitigate its negative effects.

Furthermore, in order to protect banks, economy and citizens we adopted the Law on Banking Sector Safeguards, envisaging the set of measures aimed at supporting the banking sector liquidity and protection of citizens’ deposits to full amounts.

For sure, the economic crisis required certain correction of the state budget in a light of adjusting to global economic trends.

The Ministry of Finance, having in mind the consequences of the economic and financial crisis, in February 2009, applied the cost – saving measures aimed at decreasing the public consumption. These measures included, in addition to other, the halt of new employment in public sector, decline in the use of government’s vehicles, rationalization of expenditures for representation and business trips, changes to the execution dynamic in respect of expenditures for material and services, etc.

The ultimate goal of these measures was to gain a full control over the budgetary expenditures, and support package, which is a part of the plan for the stabilization of our public finance is subjected to continuous enhancement. Hence, at a recent meeting of the Senior Budget Officials held in Budva, the IMF and the World Bank had confirmed that our fiscal policy is on the right path.

Balkans.com: What lessons can all European countries learn from this financial crisis?

Minister Katnić: Even this experience has taught us that the state is not the driver of the economic process, it’s role is to encourage and create a sound institutional framework, having the same role even in the event of the economic crisis. State interventionism, and its active and immediate role in the economic field is commonly generating greater long-term negative consequences exceeding initial problems. In a situation of the economic crisis, the state must be prepared for applying alternative scenarios and to correct solution from month to month, following the events on the world stage, and tough decisions should not be delayed because it only increases costs of dealing with the problem. Fiscal consolidation and banking system strengthening are the priorities that must not be delayed. Structural reforms in the labor market, social policy, health care and education, as well as improving the business environment, with a safe public finances and financial system, are considered to be the only response to internal and global crisis.

Balkans.com: Our readers are investors and companies doing business or considering doing business in the Balkans, what advise do you have for them?

Minister Katnić: Western Balkans is still unexplored by foreign investors with unexploited potential. One of the Balkan’s advantages is that it represents a conglomerate of similar systems, with its specificity. Furthermore, having in mind its economic and geographical linkages, reforms in one country, from the investors’ stance, are resulting in creating a favorable investments environment in the other one. These are the advantages of the area such as the Balkans.

Moreover, this relatively small area in a geographical sense, consisting of a number of small economies, being open in almost all countries, is fostering the business process, while governments and investors have the opportunity to create direct partnership relationships.

Regardless of all transitioning problems faced by the region, its advantages from the investors’ stance are huge, because this is a new market with the cheap manpower, being tremendously well positioned and that will become the EU member.



Journalist: Jelena Mišić

Original interview on: http://www.balkans.com/interview-view_new.php?id=106781