“Private consumption, further supported by a better-than-expected tourist season, is expected to lead growth in 2022, estimated to reach 6.9%,” said senior economist Mark Tobias Schiffbauer.
Economic growth in Montenegro last year and this year was higher than expected, but unfavorable global economic prospects and high uncertainty affect the prospects for further recovery of the country.
This was assessed by the World Bank, which today presented at a press conference the regular economic report for the countries of the Western Balkans entitled “After the crisis”.
Senior economist Mark Tobias Schiffbauer estimated that private consumption and investments led economic growth in the first half of the year.
“Private consumption, further supported by a better-than-expected tourist season, is expected to lead growth in 2022, estimated to reach 6.9%”, he said.
He particularly highlighted the successful tourist season despite the lack of traditional tourists from Russia and Ukraine.
He also assessed the labor market as positive, which shows continuous progress, i.e. an increase in the activity rate, and a decrease in the number of unemployed.
As he said, the less good news is that global inflationary pressures and higher wages have led to rising prices.
“The shock of food and energy prices is particularly visible, which could push a large part of the vulnerable into poverty”.
He added that the increase in wages through tax reforms has largely mitigated the higher cost of living.
Economist of the World Bank in Montenegro, Milan Lakićević, said that the WB estimates that lower revenues as a percentage of GDP due to the tax reform and higher social spending will increase the fiscal deficit for this year to 4.9 percent of GDP.
Asked why that estimate differs to a large extent from the one provided for in the budget rebalancing, where the deficit is projected at over seven percent, Lakićević said that this is an estimate for the level of the general government, which also includes municipalities. He said that the SB expects higher revenues than those presented in the budget and that spending will be delayed due to problems with the public procurement system.
He stated that public debt remained at a fairly high level, but that it fell in relation to GDP to 73 percent, but that this was the result of GDP growth and inflation.
“The level of public debt is among the highest in the region”, said Lakićević. He praised the high collection of value-added tax as well as collection from excise taxes despite the fact that the state waived part of the collection of excise taxes on fuel. He stated that revenues from personal income tax and mandatory insurance have decreased due to the new tax policy.
Political instability is a risk for economic growth
In addition to GDP growth of 6.9 percent for this year, the WB projects that it will amount to 3.4 percent next year, and 3.1 percent in 2024.
The SB cites political instability as the main domestic risk, which causes the postponement of necessary reforms. In addition, the risks include pressures on consumption due to the election, as well as more permanent inflation due to the spiral of wages and prices.
The main external risks are the war in Ukraine, which further disrupts trade and investment and fuels further geopolitical tensions.
Lakićević stated that Montenegro must accelerate structural reforms in order to defy increasing external challenges.
“On the short-term plan, the costs and benefits of any new spending obligations should be carefully weighed, while prioritizing targeted and time-limited support for the vulnerable and strengthening collection and improving tax discipline.”
In the medium-term plan, as pointed out by the WB, it is necessary to remove the barriers that hinder the markets from rewarding productive companies, and better utilization of trade for sustainable productivity growth, local media reports.