Interview of the Minister of Finance, Milorad Katnic, for Vijesti

Finance Minister Milorad Katnić, PhD., said to an interview to "Vijesti" that there isn’t a magic wand for solving the economic illiquidity problem, being the burning issue, however there is a room for the State to assist whereas the efficiency of court proceedings is of supreme importance.

- Efficiency of court proceedings and actions taken by courts are of the supreme importance in the entire process. If debtors, who are not paying their contractual obligations and who continuously make frauds, are not punished by the State, legal uncertainty is going to prevail, and all other measures will be the struggle against the consequences and not against the causes, said Katnić.

What would be the actions taken by the Government aimed at improving the illiquidity problem, to some extent, considering the fact that the mutual debts are constantly increasing, and the crisis is looming? In fact, what could be the solution to the problem?

- There is neither a magic wand nor a special instrument to resolve the illiquidity problem of Montenegro and almost every country worldwide. The basic objective of the State is to timely service its liabilities and to create a legal security and institutional infrastructure for the efficient claims servicing. At the same time, the State must punish business organizations and individuals operating in bad faith and committing abuses. Additionally, it is important that the State creates conditions to implement high quality investment – related projects, which will increase the level of funds liquidity in the economy.

We are fully committed in achieving the aforementioned objective. We are harmonizing our regulatory framework that will result in the ease in doing business. Within the Investment Development Fund, we have launched a factoring service, aimed at unburdening the balance of a number of business organizations. It can be expected that new regulations on enforcement procedure and the introduction of public enforcement officers will accelerate the resolution of debtor-creditor relationship.

- Efficiency of court proceedings and actions taken by courts are of the supreme importance in the entire process. If debtors, who are not paying their contractual obligations and who continuously make frauds, are not punished by the State, legal uncertainty is going to prevail, and all other measures will be the struggle against the consequences and not against the causes. At the same time, creditors must do their part of job and be more engaged in the protection of their rights and interests. First of all, they must have clearly defined contractual obligations and appropriate security, as provided by laws, and if needed, they must initiate adequate administrative and court procedures, including the initiation of procedures to determine criminal liability. The State cannot do this part of the job instead of entrepreneurs.

■ How do you see the perspective of Montenegrin economy, because the crisis is severe, yet serious investments are pending?

- I believe in Montenegrin economy. In my opinion it is the most prosperous one both in the region and the Europe. In addition to other advantages, our economy has the two most competitive products on the market, and these are the tourism, increasing globally in last 40 years, at the average of 6% annually and the energy, whereas renewable energy sources are dominant in Montenegro, which represent the need and the future of the sustainable European economy. Despite serious external shocks, Montenegrin economy had shown that it is vital, and it is relatively quickly recovering from the crisis. We expect our economy to grow, and I’m certain that in the years to come, along with the aforementioned potential, to converge to the European average.

■ What about the investments?

- Investments are the key to the development and we should all contribute to creating conditions for its realization. Our estimates are indicating that an investment worth EUR 100 million, being relatively small pursuant to the international standards, is positively triggering Montenegrin economy boosting GDP increase of 0,7% and the collection of minimum EUR 20 million of additional budget revenues. If significant investments were realized in tourism, energy, agriculture and transportation sectors in the forthcoming years, the economic growth would be accelerated and many social and economic problems would be mitigated. I’m not exclusively addressing the foreign investments. National small and medium – sized enterprises had shown the vitality and ability to survive the toughest crisis. Some of these companies are developing quite successfully, being internationally competitive. In addition to the large systems undergoing restructuring process, entrepreneurship, family companies, national small and medium – sized enterprises must become the pillar and the anchor of Montenegrin economy

• In the last six moths, Montenegro borrowed EUR 380 million, and this amount is far above if we take into consideration the interest that we will have service. Furthermore, EUR 60 million will be disbursed from the World Bank up to the end of the year. The stock of the public debt additionally increased. Is this overburdening the State?

- The fall in the economic activity and imports have triggered significant decrease in the budget revenues, and the increase in unemployment and inflation meant the increase in social contributions and budgetary expenditures. This doubled influence has generated the deficit that had to be financed through the borrowing. The aforementioned is the nowadays feature of almost every EU member state. Finally, the borrowing is the result of the Budget Law adoption and it doesn’t represent an autonomous fiscal instrument. The borrowing represents the process and a technique enabling the fulfillment of the obligation prescribed by the law. Assessments and amounts communicated to the public, in reference to the state borrowing in Montenegro, are often nonobjective. In last seven months, i.e., in 2011, the total borrowings amounted to EUR 192 million, which is EUR 180 million through Eurobonds issue and EUR 8 million through T – Bills issue and EUR 4 million disbursed from EIB. In the same period, EUR 130 million of debt was services, thus the net borrowing amounts to EUR 62 million. During 2010, the two – thirds of borrowed amount was committed to the debt servicing. Current generations of taxpayers are overburdened by paying off old injustices and debts. The highest amount of Montenegrin state debt relates to the assumed allocated and non-allocated FRY debt, old FX currency savings, restitution liabilities and overdue liabilities based on pension rights. We assumed all the aforementioned liabilities, being timely services without exceptions, thus this fact should be considered when addressing the stock of the state debt and the borrowing need for the debt servicing.

• In which way the budget will be financed in 2011, and in future, will it require additional borrowings, and is Montenegro and its taxpayers able to cope with this?

- Despite previously mentioned assessment, which I made as a counter-critique of borrowing, we are not satisfied with development dynamic of the public debt in the Ministry of Finance. I believe that we should use our best endeavors to both reduce the new borrowing and the burden imposed to the future generations of taxpayers. For a small and open economy, subject to external shocks, the low level of public debt is a precondition for the stability. It is of crucial importance to continue with the fiscal consolidation. The level of public consumption is excessively burdening our economy which is an impediment if our leading objective is to accelerate the economic growth and to improve the living standard. The public consumption must be adapted to the tax capacity of the economy and population, aimed at avoiding further borrowing. In the light of the above, a significant steps had been made over the past several years. Government spending was reduced, from above 51% of GDP in 2009, to 47.4% of GDP in 2010. The planned public consumption for 2011 amounts to 44.4% of GDP, which for two years represents the fiscal consolidation of above 6.5%. Simultaneously, the public sector balance has improved. The deficit amounting to 5.7 % of GDP in 2009 and in 2010, was decreased to 3.9% GDP, while in 2011 it is envisaged to be at around 3% of GDP. Budget financing to the end of 2011, will depend on the collection of tax revenues and possibilities of imposing additional austerity measures to certain spending units. Funds that we currently have at our disposal will cover the financing in this year, yet one of the rules of the debt and liquidity management is to maintain the liquid funds in the budget in the amount of around EUR 60 million in order to have an additional back - up. If the additional financing is unavoidable, we have already accounted its possible sources, and the agreement with the World Bank is one of the choices.

• Furthermore, the state has issued a number of guarantees to companies, amounting above EUR 300 million, which may represent an additional burden?

- Prior to the escalation of the world financial crisis, the state was primarily issuing guarantees for credit arrangements aimed at implementing infrastructure – related projects. The total support to the economy, especially the private sector, through the state guarantees was made in 2009 and 2010. During these years, when the economic crisis was threatening to paralyze both the financial and the real sector of Montenegro, the Government was opting for the unconventional supporting measures, being in line with the recommendations of the international financial institutions and the EU. These measures contributed to the banking and the real sector preservation, thus, thanks to these measures, the end of 2010 and the first half of 2011, were featured by the economic recovery and economic growth stabilization. I’m not the advocate of the state interventionism, yet the question could be posed what could have been the causes if the state had failed to support the banking and the real sector.

■ We know that we had to pay around EUR 25 million for guarantees for the credit of the Steal Mill? What if something similar occurs?

- The guarantee of the Steal Mill was activated and we, as a responsible borrower, fulfilled the commitment we assumed. This represented a huge attack to the budget and liquidity, but by fulfilling this obligation, we have shown that we are a credible borrower and that we are successfully managing the budget liquidity. Guarantees issued to KAP are the most riskiest ones in our portfolio. The working team of the Government is following up the operation of this company and it is in charge of undertaking measures to reduce the risk of guarantees activation. Other guarantees in the portfolio are exposed to significantly lower activation risk, and I’m not concerned that it could pose significant extraordinary expense.

• What is the situation with the state debt today against few years earlier, and could it be deteriorated?

- Current state debt stock, along with the parameters referred to the debt servicing and the share of interest rates in GDP, are positioning Montenegro in a group of moderately indebted country. Maturity and foreign exchange currency structure is favorable. The state debt level is within the limits of the Maastricht criteria prescribed by the EU and it is significantly lower than in the euro zone countries.

The lowest share of the state debt in GDP of Montenegro, was in range of around 27% of GDP in the course of 2007 and in the first half of 2008. These were the years when the budget was in surplus, and a part of the provisions was used for the early debt repayment to the World Bank. The state debt was significantly increased in years of the financial and the fiscal crisis, reaching 38% of GDP already in 2009. As of 30th June 2011, the state debt amounted at 44,9% of GDP. According to the estimates of the Ministry of Finance, the state debt in the forthcoming period will not go above 46 % of GDP, which is approximate the share recorded in 2004. one of the basic fiscal objectives is the decrease in public debt to the value of around 35% of GDP by the end of 2015.

■ What is the public finance prospectus?

- Public finance will depend on the economic trends and our commitment and readiness to continue with the fiscal consolidation. We have defined priorities in the following mid term. The top priority is to decrease the public consumption and public dent to the level of around 35% of GDP in 2015. This is the precondition of the fiscal stability and maintenance of the competitive tax system. State consumption is rigid and this is quite an ambitious task. Therefore, the Ministry of Finance will face difficult and unpopular task aimed at decreasing expenditures and the number of state administration employees. However, this is deemed appropriate if we strive towards a long – term achievement. The Government had shown that it is ready to bring tough and often unpopular decisions aimed at reaching stability and prosperity. The experience has shown that there isn’t a recipe providing success and increase in the living standard over nigh. Decisions bring consequences, some of which are seen after he expiration of few years. All countries that jeopardized their stability by increasing wages and pensions above the productivity levels, with the protectionist labor legislation and irrational public administration, had to introduce extremely difficult and unpopular measures. Thus, in future we must be wise and brave and vigilant in order not to create long term damage for the sake of a short term prosperity.

■ What is the current situation in the Budget of MNE, what is the liquidity status concerning the crisis, considering that the pension, social and health expenditures are up by about EUR 30 million?

– Even in 2011, the budget is facing with the significant challenges. Expenditures for pensions, wages, social benefits and health care are up by about EUR 30 million against the plan. The activation of the loan guarantee issued by the Government for Steel Mill mend additional extraordinary expense. On the other hand, budget revenues for the first seven months of 2011, were collected in the amount of EUR 612 million, which is by about 2% below the plan. Despite these challenges, we maintain liquidity, to the greatest extent, thanks to the right timing to enter into the international capital market. April’s Eurobonds issue took place at the right time, before the current and quite serious crisis in the international financial markets. As of today, we have at our disposal the total of EUR 109 million of liquid assets, enabling regular servicing of budget commitments. There isn’t a payment request that is older than 2 days in the State Treasury, although the legally prescribed deadline is 30 days. Furthermore, we have established procedures that the VAT refund is made within 2 days, although the legally prescribed deadline is 60 days.

■ Seven months passed after the new Government was elected. What were the achievements of the Ministry of finance in this period?

Over the past seven moths, we were committed in fulfilling the three leading priorities. The first one referred to the budgetary stability. We have provided the conditions and funds for the sound functioning of the spending units and we strengthened the budget liquidity. Simultaneously with the successful Eurobonds issue, the credit rating agency Moody's praised the efforts made and improvements in budget items, and after two years, the Agency altered the sovereign rating outlook from the negative to the stable one. The second priority was the business environment improvement. We have prepared a set of laws that will contribute to shortening mandatory procedures, deadlines and costs for citizens and business organizations, and these laws have an excessive anti – corruption feature abolishing discretionary decision making, simultaneously increasing transparency in the state administration proceedings. Concretely, in cooperation with other authorities we initiated and implemented the consolidation of the procedure for companies registration in one stop shop, we simplified the procedures for the payment of taxes and contributions, and we decreased administrative taxes and established the procedures for the employment of foreigners. Activities aimed at decreasing the non observed economy rate, represent an important segment of our efforts aimed at improving the business environment and introducing an ordinance in the economic system. Our third priority is the establishment of the institutional and human resources capacities for the use of the EU funds. We have defined coordinating structures, we have appointed persons responsible as well as the Road Maps, or the Action Plans. The EC has recognized the progress made in this area. We fully met all planned priorities and commitments deriving from the Work Programme of the Government. Over the past seven months, the Ministry of Finance has developed and submitted for adoption 18 laws and above 100 decrees, decisions, strategies and analysis. A huge work is behind us, which enumerated in this way, may mark the entire term of office, and not just the seven months of work. All the aforementioned was feasible thanks to high quality institutional assumptions and corresponding human resources capacities being established at the time of the Minister Lukšić’s term of office, and my colleagues and associates in the Ministry of Finance succeeded in fulfilling every obligation in a professional and qualitative manner. In the absence of a sound foundations and commitment of each employee, a successful implementation of numerous obligations would be doomed to failure.

In addition to the huge workload carried out in the previous period, we are more focused on future. It is necessary to create conditions enabling the long – term economic stability and development, being inspirational for the new ideas, innovations, new technologies and new investments, which is the precondition for the better living standard of the majority of citizens. This is the essential task of both the Ministry of Finance and the Government. I’m not in favor of the pressures to the banks to provide more crediting.

■ What is your opinion about the situation in the banking sector?

Credits are being offered, sometimes at high rates which is additionally burdening the functioning of the economy. Furthermore, banks are facing problems with non – performing loans, which might be an additional reason for aggravating crediting conditions?

Montenegrin banking sector is of special importance, because by rule, in addition to the banking sector, small and medium – sized enterprises do not have an alternative sources of funding. The parameters indicating to the increase in the banking sector liquidity and solvency are encouraging. All large banks are recapitalized and have initiated the restructuring process. The latest data are showing that the banks have increased the issuing of loans, which is of a special importance having in mind the decrease in the credit activity after several months. Regardless of the essential importance of the new crediting for the economy and the budget, I’m not advocating the criticism of banks targeted at creating pressure to increase the crediting activity. Banks are institutions that have their own interest that must mirror the interest of their clients with the objective of their joint survival on the market. The banking crisis is the worst possible one in the economy and the banks should not be “pushed” into the investments not envisaging an adequate risk assessment.