Statement of the Ministry of Finance on the occasion of IMF’s Mission preliminary conclusions

After reviewing the IMF’s mission report and preliminary assessment, the Ministry of Finance announces the following: the report is in a negative context addressing the fiscal policy of the Government of Montenegro, not listing a number of positive actions and measures taken by the Government in the area of fiscal adjustments during 2009, whereas some facts and comments presented in the report do not match the real situation. Moreover, in the fiscal policy area the report did not praise the efforts of the Government of Montenegro invested in reducing the current consumption (cost - saving measures, budget rebalance, Budget for 2010), as well as the fact that Montenegro is among few countries which during the crises is covering the current consumption by structural revenues, and new landing is used exclusively for servicing liabilities based on existing debt, and not for new consumption. The IMF’s Report did not include the fact that the projected deficit is only 2% of GDP without loans and grants, and that the amount of the capital budget in 2010, is exceeding the level of deficit even in this year if the crises. The report states that salaries in state administration are high and it doesn’t take into consideration the fact that in order to reduce and stabilize public spending in the year of crisis, among other measures, net earnings were reduced by about 7% in state administration and by 3.5% in public institutions. According to preliminary estimates of the Ministry of Finance, economy contraction in 2009 amounted to of about 5.3%, and not 7% as stated in the IMF’s Report. It should be borne in mind that the analysis of the Ministry of Finance was made on the basis of the GDP official estimates, provided by MONSTAT with the IMF expert assistance. Revenues in 2009 amounted to EUR 140 million, being lower than in 2008, and the statement that the fall in economy of 7% led to the fall in revenues of 10% or less than 5% GDP is without grounds. Moreover, total employment according to the data available to the Ministry of Finance has not fallen by 15% but by 5%, while the public debt is 37.5%, and not 39%, as stated in the Report. At the same time, the public debt in recent years has not increased but decreased, as identified in previous IMF’s reports, and Montenegro is still one of the least indebted countries. From 2009 and onwards, the Ministry of Finance is implementing the policy of reducing tax rates (which was not the case with countries in the region), early repayment of debt to commercial banks (these measures began in late 2008, with the first major negative effects of the crisis in the banking system) and increased capital budget, which in conditions of the crisis represents a contra-cyclic fiscal policy. The years of the “boom” are featured by the fiscal surplus, which in the case of Montenegro was used primarily for early repayment of debt to the World Bank (amounting to about 3% of GDP) and the early repayment of domestic debt (bonds restitution) with the accumulation of deposits (provisions), which in the year of the crisis served as a kind of a buffer. These policies in the past period were contra-cyclic as well. The public debt to GDP ratio in the period of economic boom in the period from 2006 to 2008 was reduced from 38.3% to 26.8%, while the credit growth was 330%. Contra – cycling policy of the Ministry of Finance, reduction of public debt and the cumulated deposits provided for partial buffering of the external shock. Provisions were used to "inject" fresh cash into the banking system, and reduced public debt enabled commercial borrowing in the course of 2009. These positive effects were not presented in the IMF’s report. Regarding the comment that the increase in cost – saving measures is imperative, given the fat that the consumption participates in generating GDP with over 75%, cost – saving measure leads to more contraction of the economy especially when there is no alternative in the financing expenditures, and on the other hand banks significantly improved their liquidity compared to the previous year. At the proposal of the Ministry of Finance, the Parliament adopted the Law on Banking Sector Safeguards. At the same time, the Ministry of Finance has made the early repayment of the banking sector's debts, providing additional liquidity through the issuance of treasury bills (depositing a part of the funds in commercial banks) and issued guarantees amounting to over 90 million Euros for long-term credit lines to commercial banks from the EIB and the KfW. Moreover, the Ministry of Finance neither withdrew deposits nor borrowed with the domestic banks, but it made the commercial borrowing in abroad avoiding the situation of narrowing credit potential of banks towards the private sector. This is a concrete support of the Ministry of Finance to the banking sector, which also wasn’t recognized by the Report. Because of the scope of activity of the Investment Development Fund, the proposal that the Fund should be placed under the supervision of the Central Bank would mean complicated supervision of this institution than any other individual regulator. We are emphasizing that the Law prescribed the reporting to the Central Bank and compliance with Banking operations standards in the area of credit and guarantee operations of this institution, which anyway is the international practice in regulating similar institutions. Regarding comments relating to public finance, we are reminding that the public finances already during 2009, significantly reduced, and in relation to the budget execution for 2008, the current expenditure reduction in the budget for 2010 is 65 million Euros, while in relation to the budget for 2010, this reduction is over 130 million Euros or 4.3% of GDP. Public consumption is about 47.5% of GDP (GDP in 2010 is 3,117 million Euros) and at the level of the region and the EU is 27, and not the highest one in the region, as stated in the Report. The Structural deficit is not 6%, but 0 or even in mild surplus. In fact, generated revenues in the amount of 1,160 million Euros are by 20 million Euros higher than generated ones in 2009, while only the application of new tax laws and increase in excise tax in 2010, will lead to the increase in revenues of 30 million Euros, not including possibly higher revenues from income tax and private sector contribution. One of the theses of the IMF’s Report is that the structural deficit of 6% would mean that the structural revenues of about 1 billion Euros, i.e., are 100 million Euros less than in 2007, which is extremely unrealistic considering, among other things that inflation in the last two years was about 10% cumulatively. In 2009, year indirect taxes were reduced by 9.3% or 2% of GDP which were temporary, and where the tax rate remained the same (increase in excise tax), while the reduction of direct taxes led to a reduction of collected revenues by only 2 million Euros, but at the same time salaries and employment grew in private sector, i.e., subsequently reducing non-observed economy. All support and each guarantee to the economy is transparently being indicated in the budget. Moreover, the recommendation does not stand that for the sake of transparency purpose, we should opt for direct budgetary loan instead of issuing guaranteed to KAP and Steelworks. That is bad practice and deviating from the concept model of public finance that we have build. The amount of guarantees issued to these companies is 5% of GDP, and there is a default risk, but more importantly the possibility of reducing expenditures due to the abolition of subsidies to these companies. The procedure of issuing guarantees was fully transparent through the adoption of the Budget Law for 2010. Through non-covered pension obligations, it should be emphasized that in the mid – term, the Budget recognized these trends and projected fiscal adjustment. It is not clear why this issue was highlighted as a particular problem of Montenegro, when almost all European countries face the same situation. Moreover, the Report did not state that the Government of Montenegro is endeavoring in improving the business environment, which was finally recognized in the World Bank's Doing Business Report 2010, improving position by 6 places, and above all, by the Economic Freedom Index of the Heritage Foundation, which recently improved our position by 26 places. Moreover, the Freedom House has ranked for the first time Montenegro in a list of free countries, and the Transparency International has improved our position by 19 places. In addition, the comment that the budget data are unavailable is without grounds. All data on the Budget of Montenegro were published, being available to the public on the website of the Ministry of Finance. All of aforementioned is referring to the fact that the report could have recognized at least a part of the aforementioned facts and positive developments and efforts of our administration in recent months, as at the end, all this data can be easily verified being available to the public. The Ministry of Finance has prepared comments to the IMF’s Report and asked detail rationale and justification for each comment.