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

Serbia is one of the leading foreign trade partners of Montenegro – one forth of the overall foreign trade exchanges is realized with Serbia. On the other hand, Serbia is realizing at around EUR 450 million of foreign exchange inflow. In addition, Serbian tourists are the most numerous ones on Montenegrin coast and pursuant to the data available, above 6.000 of Serbian citizens are either temporary or permanently employed in Montenegro.

Entering of the Treaty on the Avoidance of Double Taxation and cooperation strengthening in customs related matters, we are laying out the ground for investments increase and economic cooperation enhancement between our businessmen. Simultaneously, we are creating the institutional preconditions for enhanced cooperation, data exchange and control over the taxpayers. The elimination of the double taxation means the provision of incentives aimed at encouraging investments from Serbia. It is a natural phenomena, to have more significant proportion of investors from Serbia, in addition ones from Italy, Austria, Germany, Russia, Slovenia and other EU members – said the Finance Minister of the Government of Montenegro, Milorad Katnić, answering a questions of daily “Danas”, whether the recently signed Treaty between the governments of Montenegro and Serbia will result in the increase in foreign trade exchange.

Could you comment the status of the Budget of MNE and whether the commitments of all budgetary users are timely serviced?

- Budget of MNE is in the consolidation stage. We are facing with the predominant influence generated by the increase in pensions, wages and social contributions, however we succeeded in decreasing the overall budget consumption and deficit. Revenues are at the satisfactory level, being by less than 2% below the planned ones, yet revenues have an additional fiscal capacity based on ownership in capital, tax debt collection and reduction in non – observed economy. In spite these challenges, we maintain liquidity, to the greatest extent, thanks to the right timing of entering into the international capital market. April’s Eurobonds issue took place at the right time, before the current and quite serious crisis hit the international financial markets. We are proud that we succeeded in providing funds at more favorable conditions compared to last year, enabling timely servicing of all liabilities, at the time of extremely unstable market. We have significant amount of liquid funds, 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.

High public consumption is the problem to which Montenegro wasn’t immune. What was done to decrease it?

- Public consumption level is excessively overburdening our economy, if we know that the focus is placed on accelerating economic development and better living standard. This means that we must align the public consumption with the tax capacity of both the economy and the citizens, and in light with this, significant steps have been made. Public consumption was decreased, from above 51 % of GDP in 2009, to 47,4% of GDP in 2010. Planned public consumption in 2011, amounts to 44,4% of GDP, which represents the fiscal consolidation of over 6,5% of GDP, for the two year period. Simultaneously, the public sector balance improved. The deficit amounting to 5,7% of GDP in 2009, was decreased to 3,9% of GDP in 2010, while in 2011 the plan is to reach the amount of around 3% of GDP. The basic fiscal objective is to retain the income tax rate at the level of 9% and to decrease the current budget consumption and the public debt to 35% of GDP.

In spite high indebtedness, the State keeps borrowing. What is the amount of the public debt of Montenegro and are we subjected to the debt bondage?

- 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, being significantly lower than in the euro zone countries. As of end of June, 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 be retained at 46 % of GDP, which is approximately the share recorded in 2004. One of the basic fiscal objectives is the public debt reduction to the value of around 35% of GDP by the end of 2015. In spite the fact that the current state debt level is sustainable, the Ministry of Finance is unsatisfied with its development. For a small and open economy, subjected to the external shocks, the low public debt level is a precondition for stability.

According to some studies, Montenegro is a high risk country for investments. What are the risk factors and the level of interest of foreign investors to invest their capital in Montenegro?

- I’m not sure which studies are you addressing to. Documents and data that we have at our disposal are quite opposite. In SEE, including Bulgaria and Romania and according to the Global Competitiveness Index for 2009 and 2010, published by the World Economic Forum, Montenegro is positioned in the top. Pursuant to the Doing Business Report for 2010, published by the World Bank, Montenegro is in top leading countries in the region in reference to the progress made. The same applies to the assessment provided by the Cross-border Investments Report for 2010, published by the World Bank. Montenegro enjoys the confidence of more than 60 investors from 21 countries of the world, who purchased euro bonds. The successful euro bonds issue on the international market is the best proof of confidence. Investors are the ones who are at risk, indicating the actual relationship versus the investment environment. According to the data on the number and amount of investments and their origin, Montenegro is not only the safe and stable, but a competitive country.

The gray economy is also a problem that burdens the normal course of business. In your opinion, in addition to the campaign against the gray economy that is underway, should authorities be more determined to tackle this “scourge”?

- We are neither closing our eyes to the problems, nor postponing its resolution. The gray economy represent a problem faced by all countries, including more sophisticated legal and economic systems than ours. Even in Scandinavian countries, representing a school examples of the tax discipline, the gray economy is estimated at around 7 % of GDP. In some EU states, the gray economy is above 30%. The most effective way to reduce the gray economy is to create a system that will result in more expensive operations in the informal sector, triggering cheaper regular operations. Therefore, our policy is focused on maintaining a competitive tax system, reducing barriers to business, encompassing the establishment of an efficient repression mechanism on those failing to adhere to the rules. We have intensified the control of the taxpayer and we imposed stricter penalties, including the prohibition of performing an activity. We have initiated and strengthened controls at the border crossings to prevent illegal imports and exports. We plan to introduce tax terminal (GPRS), a special electronic system of fiscal memory to be introduced in the sales of petroleum products, which includes the introduction of control of the level of fuel in the tank and at the same time providing the control over the turnover/sales. With the objective of promoting positive business, we have initiated the development of so-called black and white list of companies. Together with the Tax Administration, we launched a campaign “VAT is Your Money”, which main focus is placed on improving the tax culture and raising the awareness of our citizens.

We are not abandoning euro. In the context of the current crisis in euro zone, is the issue of abandoning the euro being considered, as well as switching to the national currency?

- Euro represents the cornerstone of our reforms, both the monetary and the fiscal ones. It enabled us to see problems more clearly and to properly handle them. This currency provides for the lower transaction costs. This is especially important for small and open economy, service oriented such as Montenegro. Safe currency, regardless of its title, providing low taxes and the rule of law is a precondition of the progress. In addition, euro is the common currency of the Community of states which we aspire. Therefore, neither a relevant political party nor a serious economist may advocate the abandoning of euro and the introduction of our own currency.

One of the burning issues burdening the economic cooperation is the pending establishment of a direct payment operation system between Serbia and Montenegro. What has been done so far, or who is hampering the establishment of the direct payment operations system?

- The legal and institutional framework has been established, and the cooperation between the Central and commercial banks in Montenegro and Serbia is at a very high level. The Central Bank has indicated its willingness to carry out clearing operations without compensation. It seems that the only reason why the direct payment operation system has not been introduced is that the commercial banks are unwilling to give up the commission. Some banks have announced the establishment of a direct payment systems. I believe that other banks, being pressured by their clients, will recognize the interest and that the competition will reduce transaction costs, because indirect payment operations are more expensive, decelerating the economic cooperation between Montenegro and Serbia.

Journalist: Branka Pejovic