Montenegro’s estimated shadow economy among registered private businesses and entrepreneurs has declined from 20.6% to 12.4% of GDP, while informal employment and partially undeclared wages have also decreased, according to research by the Finance Ministry. However, the ministry says it cannot reliably quantify the additional tax revenue generated by the reduction in informality.
The estimated share of informal employment fell from 15.7% to 9.8%, while the proportion of employees receiving wages that were only partly declared dropped from 10.8% to 5.3%. The improvements indicate that a larger share of economic activity is being recorded within the formal system, reflecting changes in tax enforcement, employment practices and reporting.
Construction and Hospitality Record Lower Informality
The largest reductions were recorded in sectors traditionally associated with higher levels of undeclared economic activity. In construction, the estimated shadow economy declined from 25.9% to 14.4%, while the corresponding figure for hospitality fell from 18.7% to 9.4%.
Lower informality can improve competitive conditions by reducing the advantage enjoyed by businesses that avoid taxes and employment obligations. It can also strengthen companies’ financial transparency by bringing more revenue and payroll transactions into documented channels. For banks, better-documented business activity can improve the quality of financial statements and support more reliable credit assessments.
Finance Ministry Cannot Isolate Additional Tax Revenue
Despite the reduction in informal activity, the Finance Ministry said it could not reliably determine the resulting increase in public revenue. Tax collections are affected by several variables, including economic growth, inflation, employment, wages, consumption and tax-policy changes.
The government has reported strong growth in tax and customs collections, but without a reliable method for distinguishing revenue generated by formalisation from that driven by inflation, wage increases and higher consumption, the fiscal contribution of reduced informality remains uncertain. This limits the extent to which the government can treat improved tax compliance as a predictable source of financing for permanent expenditure increases. The decline in the estimated shadow economy from 20.6% to 12.4% of GDP nevertheless represents a significant change, provided the methodology accurately captures the underlying trend.
Wage Reforms and Business Costs
The fiscal implications are relevant to Montenegro’s discussions on wage reforms, pensions and labour-market policy, as the sustainability of higher public expenditure commitments partly depends on the government’s ability to maintain and expand its revenue base. If higher wages and lower labour taxes encourage businesses to operate formally, the tax base could be preserved or expanded. However, a rapid increase in business costs could encourage some companies to return to informal employment arrangements.
The Chamber of Economy has warned that substantial minimum-wage increases could create this risk for financially weaker businesses.
Construction, hospitality, retail and small service companies are particularly exposed because labour represents a significant share of their operating costs. The government’s challenge is to establish a clearer fiscal model showing how much additional revenue can realistically be generated through lower informality. This will be increasingly important when assessing the affordability of permanent spending commitments and the financial sustainability of planned wage, pension and labour-market reforms.
