OREANDA-NEWS. On January 23, 2015 the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with Montenegro.

Economic momentum slowed in 2014, but growth is expected to accelerate in 2015, aided by expenditures on the highway project. Nonetheless, Montenegro is vulnerable to a downturn in external demand, and substantial financing needs expose the country to shifts in risk aversion and disruptions to global financial markets.

The authorities have undertaken bold fiscal adjustment over the past years, reflecting a combination of tax hikes, pension freezes, and efforts to increase tax compliance. Measures in the draft 2015 budget that partly offset the extra spending on the highway are welcome, but a sustained period of fiscal discipline will be needed nonetheless. Laying out clear and credible long-term plans for managing the public finances, including savings on pensions and the public sector wage bill, would boost credibility and reduce risks to market access. In addition, the authorities should define contingency measures to address unforeseen fiscal shocks, with the first recourse being a delay or cut in highway spending.

Addressing non performing loans and improving credit conditions are priorities. The “Podgorica Approach” has the potential to facilitate debt workouts; this effort should be complemented by reforms to address problems with contract enforcement and securing collateral. Although provisioning coverage for the banking system as a whole appears sizable on a regulatory basis, the wide variation across banks may warrant enhanced supervisory scrutiny. There is scope to improve transparency, including by publishing quarterly banking reports with information on the level of regulatory provisions and all stress test results.

Structural reforms are essential to raise potential growth and improve flexibility and competitiveness. Bolstering the economy’s ability to respond to macroeconomic shocks is especially important in a country lacking its own currency and with decreasing fiscal buffers. Measures to ensure that wages adjust in line with productivity developments and to reduce disincentives for employment would improve labor market outcomes. Sustaining recent policy momentum to strengthen the business environment and spur investment is also critical to broaden the economic base.