Montenegro is preparing a new fiscal framework that would introduce tighter controls on public spending and borrowing as the country approaches a significant sovereign refinancing cycle. The proposed Law on Budget and Fiscal Responsibility, which would replace legislation adopted in 2014, is planned to take effect on 1 January 2027, subject to parliamentary approval. It would introduce binding medium-term expenditure limits, stronger controls over capital projects, expanded oversight by the Fiscal Council and a requirement for public debt above 60% of GDP to follow a defined downward path.
Public debt approaches 60% of GDP
Montenegro’s gross public debt reached €5.13bn at the end of March 2026, equal to 59.9% of projected GDP. Central government debt stood at €5.11bn, or 59.6% of GDP. After government deposits are deducted, net central government debt was approximately €4.46bn, equivalent to 52% of GDP.
The state held around €650.5mn in deposits, representing 7.6% of GDP, including monetary gold valued at approximately €154.4mn. The government expects gross public debt to temporarily increase to around 68% of GDP during 2026, largely because the Ministry of Finance plans to pre-finance obligations due in 2027. The largest single liability is a €750mn Eurobond maturing in December 2027. Total debt repayments scheduled for 2027 amount to approximately €1.17bn, followed by another €338.3mn in 2028.
Pre-financing raises gross debt immediately because borrowed funds are added to the sovereign balance sheet, even when the proceeds remain as government cash. The strategy is intended to ensure liquidity before major maturities rather than relying entirely on market conditions when bonds fall due.
Sovereign financing remains exposed to market conditions
Montenegro’s sovereign ratings remain below investment grade. S&P rates Montenegro B+ with a positive outlook, while Moody’s assigns Ba3 with a positive outlook. Montenegro’s 4.875% Eurobond maturing in April 2032 was trading in July at a yield of approximately 4.6–4.7%. The 2.875% December 2027 bond carried a spread of approximately 160 basis points according to late-July market indications. The refinancing strategy reduces exposure to potential changes in European yields, geopolitical risks and investor appetite for lower-rated sovereign debt.
New law introduces medium-term expenditure controls
The proposed legislation retains the Maastricht fiscal benchmarks requiring the general government deficit to remain below 3% of GDP and public debt below 60% of GDP. Where debt exceeds 60%, future fiscal strategies would have to establish a downward debt trajectory, annual fiscal targets, policy measures, expenditure paths and a timetable for returning to the required range.
Temporary deviations would remain possible in circumstances including major economic shocks, natural disasters, epidemics, national-security emergencies, financial-sector interventions and other exceptional events with significant fiscal effects. Higher defence expenditure could also qualify for a temporary deviation. Such exceptions would have to be formally limited in time and assessed against medium-term fiscal sustainability.
Revenue collection improves in 2026
The World Bank estimated that Montenegro’s general government deficit increased from 3.3% of GDP in 2024 to 4.3% in 2025, while public debt remained around 64% of GDP under its methodology. Economic growth slowed to approximately 2.7%. Fiscal execution improved during the first half of 2026. Budget revenue reached €1.437bn, an 8.6% year-on-year increase and approximately €26.5mn above plan. Expenditure amounted to €1.552bn, producing a first-half deficit of €114.2mn, equivalent to approximately 1.3% of projected annual GDP.
The deficit was €141.9mn below the planned level, while current expenditure recorded a small surplus. At the same time, government expenditure increased 8.3% year on year during the first six months, driven largely by mandatory commitments including wages, pensions, social transfers and healthcare spending.
Spending ceilings to cover four fiscal years
The proposed medium-term budget framework would cover the current year and the following three fiscal years. It would include expenditure projections, programme-level spending, limits for individual budget users, a net-expenditure path, fiscal-risk assessments and programme-performance indicators.
A separate four-year Fiscal Strategy would establish medium-term projections for revenue, expenditure, debt and deficits, alongside major reforms and investment plans. Government institutions would receive formal spending ceilings and would have to keep annual financial requests within those limits while also providing projections for the following two years. If no Fiscal Strategy or net-expenditure trajectory had been approved, expenditure ceilings generally could not increase faster than projected nominal GDP growth.
The framework is designed to capture the longer-term fiscal effect of measures such as public-sector wage increases, new social benefits and permanent tax exemptions, whose recurring costs can increase substantially after the first year.
Capital investment faces stronger scrutiny
Montenegro’s 2026 budget amounts to approximately €3.79bn, with originally planned revenues of around €3.08bn. The capital budget was set at €305mn, covering almost 400 projects with an estimated combined multi-year value of approximately €9.7bn. The planned annual deficit was approximately 3.2% of GDP.
The significant difference between annual capital expenditure and the value of identified projects increases the importance of project selection and implementation. The proposed law would introduce a more formal public-investment management framework, including defined prioritisation criteria and an electronic Public Investment Register. A Public Investment Management Council would coordinate major investment decisions.
Government retains substantial borrowing capacity
The 2026 borrowing framework allows potential credit arrangements of up to €2bn across a broad range of development projects, although the authorised amount does not mean the entire sum will necessarily be drawn. Potential investments include transport infrastructure, healthcare, digital systems, defence equipment and the Velje Brdo housing development. Separately, the government planned up to €710mn of financing for debt repayment and capital expenditure in 2026.
It also retained the ability to borrow an additional €1bn to establish a reserve for refinancing requirements in 2027 and 2028. The proposed fiscal framework distinguishes between borrowing used to refinance existing debt and borrowing directed towards productive infrastructure. Debt raised to refinance an existing bond changes the maturity structure without creating a new public asset, while borrowing for roads, railways or electricity infrastructure can finance assets with potential economic returns.
Debt trajectory expected to improve after 2026
Government projections envisage total state expenditure declining relative to GDP, from approximately €3.16bn, or 36.8% of GDP, in 2026, to around €3.42bn, or 34.8% of GDP, by 2029. Gross public debt is projected to peak temporarily at around 68% of GDP in 2026 before declining towards 59.9% by 2029, based on the government’s assumptions for nominal growth, fiscal consolidation and the use of pre-financed reserves.
Montenegro’s medium-term real GDP growth is expected to remain close to 3% annually. The country is also euroised and therefore cannot use currency devaluation or monetary issuance as conventional tools for managing sovereign financing pressures. Maintaining sufficient cash reserves is consequently important when large euro-denominated bonds mature.
Fiscal Council receives stronger oversight role
The proposed legislation would strengthen the role of the Fiscal Council, including through assessments of the medium-term budget framework and other major fiscal documents. A new “comply or explain” mechanism would require the government or another public institution that does not follow a Fiscal Council opinion or recommendation to provide Parliament and the public with a written explanation within 30 working days.
The Fiscal Council would not have veto powers over government decisions, but its recommendations would become part of a more formal public process for explaining fiscal deviations. The legislation would also formalise regular spending reviews, placing greater emphasis on the results achieved through public expenditure.
EU framework influences fiscal reform
The proposed law incorporates elements of the European Union’s updated economic-governance framework and is intended to align Montenegro’s budgeting, fiscal surveillance and public-investment management more closely with EU standards. EU accession is also relevant to Montenegro’s sovereign credit profile. Both S&P and Moody’s moved their outlooks to positive in 2026, while the country remained in speculative-grade territory.
A sustained improvement in the sovereign rating could reduce Montenegro’s risk premium and refinancing costs. For every 100 basis points difference in the interest rate on €1bn of refinancing, annual interest expense changes by approximately €10mn. Montenegro therefore enters the new fiscal framework with stronger-than-expected first-half revenue collection, substantial government liquidity and positive rating outlooks, while facing a major concentration of debt maturities and continued infrastructure investment requirements. The proposed rules would place greater emphasis on medium-term expenditure control, capital-project selection, debt management and the future trajectory of public debt, as the government prepares for the €1.17bn refinancing requirement scheduled for 2027.
