Address of the Finance Minister Katnić, following the Cabinet’s adoption of the Proposal of the Law on Budget for 2012

The budget is always one of the most important documents, setting the direction of the state policy for public finance and general budgetary framework of the economic policy.

The budget is becoming more important in a situation of heightened financial instability risks, being generated primarily due to the debt crisis and the threat of the new recession. Especially for countries like Montenegro, lacking the monetary policy instruments.

In the absence of the monetary policy, Montenegro cannot affect the international context and an uncertain outlook and increased risks, imposing the obligation of pursuing credible policy with clear fiscal objectives, and this is what the Budget for 2012 stands for.

I believe that the Proposal of the Law on Budget for 2012 ensures the financial stability and a sound functioning of all government institutions. Furthermore, it provides the (pre)conditions for the economic recovery and integration process continuing, being the top priority of the state policy.

By improving the key fiscal policy parameters, Montenegro is one of the rare countries in Europe meeting the Maastricht Criteria. Therefore, we are sending a clear message to the international political and, more importantly, the financial community, that we are implementing a prudent fiscal policy.

In the period to come, which will be featured an extreme instability; the Budget designed in this manner represents a precondition for achieving sustainable economic growth. The Budget for 2012 is grounded on the real economic growth projection of 2%, while the nominal growth is at 4%. These projections are more conservative than the recent estimates of IMF and the World Bank, hence, we are demonstrating high seriousness and accountability.

The budget consumption decreased both in the nominal and the real terms. The total envisaged budget consumption for 2012, amounts at EUR 1.252 million, which is by EUR 1 million bellow the envisaged amount of the Budget for 2011, and by EUR 26 million below the public consumption estimate that will be executed in 2011.

In real terms, the government consumption decreased from 38,3% to 36,8% of GDP, or by 1,5% of GDP. The total consolidated public consumption, including estimated consumption of municipalities, will be below 40% of GDP in 2012. By reducing the government consumption below 40% of GDP, we are attaining an additional fiscal policy objective, imposing fewer burdens to the taxpayers, enabling us to retain the competitive tax policy. The decrease in the current consumption to the level below 35% of GDP is our objective in the mid run, providing a room for the increase in the capital investments.

The highest increase in the budget expenditures in 2012 relates to the following: pensions, social care, wages and interest, and its share in total expenditures is high, both in the real and the absolute terms. These so – called “mandatory”, and by rule rigid consumption, represent the challenge with which the overall expenditures are confronted with, since they exceed 70% of the total amount. The increase in these expenditures categories had to be leveraged by a significant decrease in all other non-mandatory expenditures. In the light of the above, so – called “discretionary consumption“ was reduced by of around 25%. The major budget cuts were made in: subsidies, contracted services, procurement of equipment, phone expenses, representation expenses, travel costs, etc..

Envisaged budget revenues amounts at EUR 1.210 million, exceeding the plan by above EUR 40 million for 2011. The increase in revenues will be triggered by the economic growth, the tax rate extension and the gray economy reduction. Investments are triggering the new employment, and the higher tax rate; thus the new investment cycle is pivotal both for the economic growth and the living standard, as well as the increase in budget revenues.

Envisaged budget deficit amounts at EUR 42 million or 1,25% of GDP, being by EUR 41 million bellow the planned one for 2011. This implies the generation of the primary surplus of 0,45% of GDP in 2012. In the light of the above, the Budget for 2012 represents a decisive step in reaching the budget without the deficit in 2013, and the budget surplus of over 1% of GDP in 2014, representing our objective set by the Medium – Term Budgetary Framework.

Envisaged capital budget amounts at EUR 70 million, or 2,1% of GDP, exceeding the capital budget execution in previous years. Simultaneously, in addition to the funds planned by the budget, there is an open option for the disbursement of the additional funds for the projects financed by the International Financial Institutions, for which the loan agreements have been entered, and these funds are at the disposal of the Government. In additional to the local government capital expenditures, the total capital budget in 2012 may reach of around 4% of GDP. This means that the Government adheres to the golden fiscal rule, being illustrated by the fact that the capital expenditures amount exceeds the deficit at minimum by EUR 28 million or of around 1% of GDP.

Envisaged borrowing amounts at EUR 230 million (including a favorable World Bank loan, for which we have already entered the agreement). Although the borrowing is not considered to be the earmarked revenues, based on the breakdown of receipts and expenditures, it is clear that the financing will be directed to the following: repayment of the loan principal (EUR 125 million), deficit financing (43 million), as well as the fiscal reserves (provisions) establishment (at around EUR 60 million).

The amount of the total loans repayment and the liability of EUR 182 million (principal at EUR 125 million and the interest at 57 million), makes above 5% of GDP, underlying the need to continue with an aggressive fiscal consolidation, surplus generation and the decrease in the public debt.

At the end of 2012, the state debt will amount at 46.8% of GDP, and a major part of the debt increase relates to the fiscal reserves accumulation. An accountable government needs the fiscal reserves, and this need is especially pronounced in an uncertain external environment. In a long run, the fiscal reserves should become a formal public finance instrument, which in accordance with the best international practice, will be managed pursuant to the clearly determined rules, and its ultimate use will be restrictive and allowed only in a rare extreme events.

Envisaged guarantees amount at EUR 10 million, to the greatest extent, committed to the infrastructure – related projects (rail infrastructure, etc.), based on which we are reducing the relative fiscal exposure and the risk, with the timely servicing of the current liabilities for which the state issued guarantees. Decrease in the public consumption, deficit, public debt stock and guarantees, along with the establishment of the fiscal reserves fund; represent the precondition for improving the sovereign credit rating, which could positively trigger the overall economy.

To summarize, the budget policy for 2012 is featured by the following elements:

- It is grounded on the real economy growth of 2%, creating the conditions for economic growth boost to 3,5%, i.e., 4% respectively in 2013 and 2014.

- The decrease in the public consumption, in both the nominal and the real terms. The consolidated public consumption is for the fist time decreased below 40% of GDP. Medium – Term Budgetary Framework sets forth the decrease in the current public consumption at below 35% of GDP, creating a room for the capital investments amounting to of around 5% of GDP.

- Envisaged increase in budget revenues by above EUR 40 million against 2011, with the focus on the extension of the tax base and the gray economy reduction.

- Budget deficit reduced to 1.25% of GDP, while the public debt will amount at 46,8% of GDP at the end of the year, thus Montenegro will be one of the rare countries in Europe meeting the Maastricht Criteria. In 2013, we are planning to have a balanced budget, and to generate the surplus of above 1% of GDP in 2014, creating conditions for the decrease in the public debt to of around 41% of GDP.

- We are implementing the principle of golden fiscal rule adherence, implying that the (future) net borrowing will not exceed the capital investments amount. Simultaneously, we are accumulating the fiscal reserves fund, being extremely important for the fiscal policy and credibility strengthening.

Briefly, Montenegro is building up a consistent fiscal policy. Consistency means the fiscal consolidation continuation, deficit reduction, conditions for the public debt decrease, with the provision of the fiscal reserves. Consistency is enabling us to retain the basic tax rates (VAT, corporate profit tax and personal income tax), for which Montenegro is recognized as the competitive country for investments, at the same level. Simultaneously, the tax rate extension and the gray economy reduction, as well as based on the increased collection of the real estate taxes and concessions fees, we will increase the total budget revenues.

We are enhancing our stability by strengthening the fiscal policy credibility, and closely cooperating with the financial institutions. Along with the structural reforms continuation and the improvement of both the business environment and administration efficiency, we are laying out the grounds for a more dynamic growth. This should be and this is the top priority of the economic policy to be implemented by the Government in the forthcoming period.

The Proposal of the Budget for 2012 is the best answer to address the economic challenges with which Europe, and therefore Montenegro is facing with. It should be observed and criticized in an extended context, having in mind the mid – term prospectus. Short term objectives are considered important, yet the direction is even more important, toward more competitive and more dynamic economy, being bounded by the fiscally accountable and consistent policy. This is the only material that can pave the path for the long – term prosperity.

Milorad Katnić, PhD., Finance Minister