Authorial text of the Minister of Finance, Milorad Katnić, "Cautious Optimism", published in Bulletin 23

Montenegrin economy is showing the signs of vitality. The recovery has begun in the second half of the last year. The growth in 2010 was 1.1% of Gross Domestic Product (GDP). The economic growth continued and accelerated in the first half of 2011. Most economic indicators are positive. Downstream industry shows significant growth. The growth is also recorded in the areas of tourism, construction, agriculture, forestry, fishing and transport. Starting from the beginning of the year, retail turnover has recorded a dynamic growth, indicating the increase in demand and anticipating good tourist season. Export of goods, within the first five months, was over 50% higher compared to the last year, which had a positive impact on reducing foreign trade deficit. In spite of the drop in electrical energy generation, all of the aforementioned has caused the growth of the overall economic activity in accordance with the planned dynamics, i.e. between 2% and 3% annually.

As a result of positive trends in the economy, the budgetary revenues are at the satisfactory level. Within the first six months, the budget outturn was 2.7% lower than anticipated, as a consequence of still prominent illiquidity and increase in budget deficit. Intensified efforts and measures, we are taking to expand the tax base, collect budgetary receivables, and stop gray economy, will result in increase in revenues. After the first half of the year, it can be said that the planned budget revenues for 2011 are realistic and achievable.

At the same time, although lower than the last year, foreign direct investments are at relatively high level. If the announced investment projects commence during the year, it is possible to reach the projected amount on that basis. It would further affect positive trends on the labor market. The unemployment rate has been reduced over the last year from 12.4% recorded in May last year to 11.7% recorded in May of this year. Number of the employed and new jobs is also growing. In addition to the economic activity, the unemployment rate and the possibilities to create new jobs are the most concrete indicators of the economic vitality. It is encouraging that all three parameters have reestablished positive trends.

On the other hand, economic indicators that call for caution relate to the monetary and financial sectors, instabilities in the euro zone, as well as expenditure-side of the budget. The increase in oil and food prices on the international market has caused the increase in inflation above the planned level. The banking sector is facing high percentage of defaulting on credits. However, the trust in the banking system is strengthened, the levels of liquidity and capital are above the coefficients prescribed by law, and it is expected that the restructuring of credits in the banks would lead to improving credit portfolio at the level of the entire system.

Debt crisis in Greece, Ireland and Portugal is threatening to be spread to other countries, which would destabilize the euro as the joint legal tender and the financial market as the whole. It is important that small countries dependent on international financing are cautious and prepared for potential external shocks. The arrangement with the World Bank and the money that will be available to Montenegro imply additional security, but also the responsibility to improve the fiscal and the financial systems.

Salaries, pensions and social assistance are continuing the absolute upward trend. The costs for these three expenditure-side categories will exceed the plan for approximately 30 million euro. It will necessarily lead to the reduction of other state spending in order to restrain deficit. Together with (potential) cost of issued guarantees, these are the main fiscal risks we are faced with.

Growing social pressure, in the form of frequent strikes and strike threats, is worrying. After 20 years of transition, people in Montenegro still believe that the State is the institution that should resolve all problems and pay all invoices. Old requests for having contributions for all years of service paid have been renewed, and new ones have been initiated, as well as requests for severance payments and pre-retirement. There is a decreasing number of requests to create new jobs and create working conditions, and increasing number to provide for severance payments and pensions. The paradox is that in Montenegro around 10,000 nonresidents get temporary or permanent jobs, while at the same time there is a greater pressure for social assistance. Instead of populist attitude towards the employees, it is necessary to decisively and responsibly build the system based on merits. All state institutions, but also the trade union and the civil sector, must be partners in building of new values. Therefore, it is especially important that new regulations in the area of labor and social policy encourage people to search for a job, work, and live on their salary, and not to live on other’s people money and budget reallocations. This is the key for higher productivity and competitiveness of our economy. That is how we will open the door to long lasting progress.

Milorad Katnic PhD
Minister of Finance