Opening Speech of the Minister Igor Lukšić for the Seminar Strategic Planning and Medium-Term Budget Framework in Montenegro

Welcome: It is my honour to welcome you all to this important Seminar on Strategic Planning and Medium-Term Budget Framework in Montenegro. As you know, Montenegro initiated a strategic approach to fiscal policy two years ago, but it takes time to fully implement such an approach and the time has now come to take another step. I hope that the initiatives to be presented todayinitiatives that are intended to reinforce a top-down approach to budget policywill help the Government to sharpen its strategic policy priorities, will help spending units to better target their expenditure toward those ends, and will help the Ministry of Finance to provide adequately for these fiscal needs while maintaining a sound financial platform and a sound and vibrant economy. I look forward to a productive day of deliberation on this vital topic for the future of Montenegro.

Montenegro has experienced a boom in economic activity over the past two years. This boom has been driven by unprecedented levels of foreign investment in combination with high export growth. Foreign capital has responded to the extensive economic reforms that were undertaken over the past six yearsreforms that secured macroeconomic stability in a largely privatised economy that has a solid legal underpinning for economic activity. But foreign capital is a difficult guest and must be treated to continued stability and afforded an open door. Structural reformsincluding continued privatisation and liberalisation of the labour marketmust be deepened in an effort to improve competitiveness and increase employment. Moreover, the boom that occurs when foreign capital first arrives is temporary in nature and this period must be used to put the economy, and the governments finances, on a solid medium-term footing. High wage increases could undermine the medium-term competitiveness of the economy and the temporary surplus in the budget must not lead to high and unsustainable levels of government expenditure.

The medium-term strategy of the Government, as set out in its Economic and Fiscal Programme, is now in its second year of implementation. As will be discussed later, it includes plans for the further modernisation of the economy and the targeting of achievable macroeconomic policy goals. Economic performance has been far better than originally envisaged under the Programme but this should not lead to a false sense of securitythe boom should be used to reinforce the Programme rather than deviate from it. Fiscal policies must still be based on the tight control of public spending in order to permit a reduction in tax rates (aimed at a further reduction in the grey economy and increased employment) and a gradual reduction in public debt (aimed at further improving the credit rating of Montenegro and, ultimately, of its citizens). The limited resources available to government will need to be expended on the development of infrastructure and on carefully selected priorities in social spending that will secure a high rate of economic growth over the long term in the context of a caring society.

A Medium-Term Budget Framework for Government is the instrument that will be used to implement this policy and that is why this seminar is so important. We need to deepen our commitment to this approach to Public Expenditure Management. The presentations that you will hear today will explain why such a Framework is important and how it will be implemented. They will explain its basic elements and explain how we are changing the way the government does business in Montenegro. This will also affect the way that youthe representatives of most of the agents of government spending in Montenegrowill conduct your affairs. In short, the level of fiscal resources that are available will be established over a medium-term horizon; those resources will be allocated on the basis of a strict set of priorities; and those priorities will be constantly reassessed on the basis of adequate performance and results. You will be responsible for those results.

This year, in preparing the Budget for 2009, the Ministry of Finance will present a set of proposals on strategic spending priorities to the Government for its consideration. These proposalsas adopted or amendedwill be translated into budget ceilings for all spending units before the process of budget negotiation begins and spending units will be expected to outline, in a new form, how their spending will be assigned within these ceilings. The ceilings will be established at sectoral level and line ministries will be required to sub-allocate these sectoral ceilings to agencies in their own functional areas. The budget ceilings will not be binding for 2009 but they will become binding in 2010. This year, the process will be used to highlight the benefits of strategic planning and to prepare change.

Government spending is the most visible service to our citizens. Citizens will judge the government on its ability to create an environment conducive to personal welfare and a good quality of life. The Government of the Republic of Montenegro has to be able to first, align spending with our identified policy priorities, and second, evaluate whether those budget allocations have, in fact, advanced our strategic goals. The resulta more predictable, transparent and efficient allocation of resourceswill be our most important service to the citizens of Montenegro, and they should hold us accountable for this. We need to invest in such fields as education, infrastructure and the business environment in order to transform Montenegro into a dynamic knowledge-based economy, and we still need to do this in the context of fiscal discipline.

Closing words: I look forward to the presentations by some of the strategic planners within our Government and from the experts who have been working with the Ministry of Finance in the context of an EU-funded project on the Implementation of Budgeting and Salary Systems Reform. Let me close by thanking the European Agency for Reconstruction for its lengthy support of the reform agenda of the Ministry of Finance. I look forward to a continuation of this support from our new Delegation of the European Commission as we continue to advance in our strategic goal of EU accession. Thank you.