Annual Regional Conference of the Ministers of Finance and Governors of the Central Banks of South East European Countries and 6th Meeting of the Supervisory Board of the Center for Excellence in Finance - Statement of the Minister of

Ladies and Gentlemen,

On behalf of Montenegrin government I would like to welcome you all and express our gratitude for the possibility to meet you in Montenegro. Such occasions are always great opportunity to improve cooperation and relations among our countries.

This conference comes only two weeks after democratically organized referendum on independence which becomes a milestone in our history. New independent Montenegro following the will of its people marks the modern history of our region as well, contributing to its stability and economic prosperity.

At the very beginning I would like to stress that formal independence and international recognition of our country logically follows already established functional economic sovereignty as well as economic self sustainability of Montenegro. The issue of the legal status of the country is resolved and our expectation is that it will significantly influence further development of the Montenegrin economy. Being one of the European centers rather than a part of a Union, will enable our country to participate in and encourage economic integration processes on equal footing. As a result, it will be more effective to promote numerous resources which serve for economic development.

An overriding impression about Montenegrin economy being out of recession was definitely confirmed. Favorable macroeconomic indicators achieved over the last couple of years, convincingly prove the macroeconomic stability required for further growth and development. For three years in a row, the macro-economic situation has been stable with growing GDP, expected this year to reach real growth of 5%. The unemployment rate has been decreasing and, after a long period of time, closes 17%. Thanks to having euro, our inflation has been low in single digits falling to 1.8% in 2005. This years estimate is about 3%. Quite encouragingly, budget revenues were also stabile, out of which tax revenues of 2005 are higher by about 17% compared to those in 2004. The tax collection in 2006 has been even better and over plan.

Deficit has also been decreasing along with implementation of a strong fiscal consolidation, through reduction of all forms of public debt or general government debt. This is particularly reflected in reduction of internal debt through reduction of the budgetary arrears, bank credit and treasury bills liabilities, which resulted in about 1% interest rate on the treasury bills at last auctions in 2005. In a larger sense, interest rates are gradually decreasing, which indicates a reduction of general risk rate in Montenegro. Such policy and achievements resulted in new assessment of the Montenegrin credit rating done by Standard & Poor's. In the very first year, the credit rating mark "BB stabile" was promoted to "BB positive" based on a significant progress in the economic and policy reforms and in strengthening of the macroeconomic stability. Expectations of excellent tourist season, positive effects from restructuring and privatization of the banking sector, strong inflow of Foreign Direct Investments etc., speak in favor of viability and progress of Montenegrin economic system.

I particularly rejoice over successful completion of the 3-year arrangement with the IMF which, in addition to having positive effect on image of Montenegro, led to further write-off of liabilities to the Paris Club. I am looking forward to future cooperation of independent Montenegro with the IMF, WB, EBRD, Council of Europe Bank for Development and so on. Immediately after the independence is proclaimed we will work to establish our own relations with all mentioned institutions, and seek to continue the EU and WTO integration processes. Following regulation of Montenegro membership to the international financial institutions, creation of a new program of co-operation with the IMF is ahead of us, particularly in the area of further structural reforms. In addition to standard program elements, more attention should be paid on finances of local self-governments and public finances in general, including public companies. Strengthening mid term budgetary framework along with the introduction of the II pension pillar and continuation of reforms in the health system will be key reforms in the forthcoming period.
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In the meantime reform challenges carry on. Particularly important activities for this year relate to the set of property laws, which are now in the final phase aiming to strengthen Montenegro's attractiveness as an investment location. Continuation of the tax reform process aimed at creating a favorable business environment is also noteworthy. In 2006, tax framework will be further analyzed, both at state and local level, which should result in further tax cut in compliance with a budget framework and projections, primarily, with respect to income tax by phasing out progressive taxation and introducing one rate. All previous tax reforms were successfully implemented. Tax burden on labour was cut by 10%, while as of 2006 profit tax rate of 9% will be applicable. Introduction of a flat income tax and setting non-taxable income threshold will make Montenegro a leading country among countries with favorable tax treatment.

Ladies and Gentlemen

High competition within Europe, particularly competition imposed by new EU member states, sets our task that Montenegro should become a champion in liberalization of its market. This chance should be used because our region is becoming one of the most important markets not only in Europe, but globally as well. Efforts made at establishing free trade zone in the region clearly define this chance. Our message to all countries in the region is that openness, private initiative, low level of business regulation, international cooperation and protection of the property rights are the challenges for the forthcoming period.

I hope that already established tradition of our annual meetings, which is based on effort and enthusiasm of our friends from CEF, will be continued in the future. I wish you successful meeting and pleasant stay in Montenegro.