History shows us that, instead of one big event, every financial and economic crisis is preceded by several complementary and interrelated economic and social events. Excessive and unsustainable global debts, changes in the structure of global debt, trade wars, difficulties in refinancing debts for customers who have bad credit ratings will drag us into the next world economic-financial crisis and deep recession. The covid-19 corona virus, as an unexpected additional trigger that no one could have predicted, only drastically accelerated the imminent debt crisis, which will hit us with all its force this year and the next, and its true consequences will only be seen in the medium term.
One of the main factors leading to the crisis is excessive public debt, especially in the developed and especially in the open developing economies to which Montenegro belongs. Statistically speaking, public debt is always linked to gross social product (GDP). When the ratio of public debt to GDP is too high, it most often leads to questionability of the sustainability of public finances; debt becomes too large and expensive to be sustainable in the long term.
What is the situation in Montenegro when we compare data on public debt and GDP at the end of 2008 and 2019? The data are, to put it mildly, worrying. At the end of 2008, Montenegro owed 27% of GDP, while at the end of 2019, the debt rose to 77,2% of GDP, which is even three times higher than 12 years ago. For example, the public debt of Central and Eastern European countries amounted to about 45% of GDP.
In the context of the strong economic crisis that is happening right now, the above means that Montenegro has exhausted the main mechanism for mitigating the consequences that the corona crisis will bring. Since the Central Bank of Montenegro does not have an emission function or additional tools of monetary policy, the impact of the crisis in Montenegro will be much stronger than the impact of 2008; consequently, recovery from the crisis will take much longer.
A dangerous dance with a rainbow
All segments of Montenegrin society (citizens, economy and state) have (un)justifiably danced a rather dangerous dance with credit debts for years. Low wages, weak paying power, the inability to significantly accumulate economic capital for independent investments and excessive public administration have led to the opium dependence of all segments of society on external financing, which, completely commercially justified, was made possible by financial institutions but also numerous private investors who financed particularly intensively public debt of the state of Montenegro.
Not all segments of society borrowed for the same needs. Citizens, characteristically with low salaries and weak payment power, borrowed to the greatest extent in order to supplement their modest household budgets. The domestic economy as a whole had insufficient investment activities because most of the loans were used to finance working capital and operating costs, while the state used abundant foreign loans to finance the huge administration as well as numerous inefficient, expensive but also failed investments.
Due to the drastic slowdown in the flow of cash in the system caused by the corona virus, without the support of the state through guarantee schemes, additional external lending will be mostly unavailable to citizens and the economy; insolvency, which represents the inability to pay obligations in the long term, has come dangerously close to insolvency, due to which the private sector will be affected by a serious wave of bankruptcies and the directly consequent uncontrolled increase in unemployment.
Remittances from the Montenegrin diaspora, which amount to 400 million euros per year, will also decrease. Let me remind you that remittances are mostly used to help families whose members have gone to countries where they can earn more money than in Montenegro. Foreign direct investment and exports will at best be halved, while money is rapidly flowing out of the country.
The state will have to take on additional debt, not to create new value, but to mitigate the obvious social explosion, the true outlines of which we are yet to expect in two waves: the first, after the end of the deferral of credit obligations in June, and the second, in September, which will radically weaker summer tourist season, will be seriously shaken because it will not generate even one billion euros of income, which is of systemic importance for the entire Montenegrin economy.
The new debt of the "heavy" state of at least 500 million euros, announced in an unusually frivolous manner in the morning on the public service, will increase the public debt of Montenegro in 2020 to close to 90% of GDP. However, there is every chance that GDP will fall even more than the announced 9%, so the ratio of public debt to GDP will almost equalize, which according to the official views of international institutions is considered unsustainable public debt for countries like Montenegro.
The next year, 2021, is a story for itself; with insufficiently fast recovery of the economy and new needs for borrowing, the ratio of public debt to GDP will exceed 100%.
Entry of the IMF into the public debt structure
According to Prime Minister Marković in an interview with RTCG at the beginning of 2018, at the beginning of the mandate, in December 2016, the current Government of Montenegro was under pressure from the IMF to conclude an arrangement worth 300 million dollars, which in its essence would mean a recognition that the economic the situation in our country was already alarming then.
In the newly created circumstances, when our economy is collapsing exponentially, indebtedness to the IMF is inevitable: without new loans, the state of Montenegro will not be able to settle its obligations by the end of the year. In a situation where private creditors withdraw from the market and/or demand huge interest for their funds, money must be provided by an institutional investor such as the IMF.
In the last two months, more than 100 countries have requested IMF support to mitigate the consequences of Covid-19, which has never happened in the history of the IMF. Therefore, the citizens of Montenegro must know that the IMF is not a humanitarian organization. The debt to the IMF must be returned; the credit arrangement will contain difficult measures that our society as a whole will have to meet. Unfortunately, once again, the poorest classes and the middle class will bear the greatest burden of debt repayment, while an additional tax would have to be introduced for the richest classes of society.
In a large number of countries to which the IMF provided credit arrangements, social unrest occurred regularly, which were caused by the conditions of the IMF, which demands firm and unconditionally binding implementation of austerity measures through the publicly marketed euphemism "fiscal consolidation". Precisely for these reasons, remarks are often heard that the IMF imposes requirements that undermine sovereignty and reduce the quality of the state's public services provided by the credit line.
However, the IMF should not be blamed for the situation in Montenegro; we must face the truth.
We pay the price of simulating reforms
The current sudden negative economic situation in the country, which the corona virus actually exposed to its ultimate essence, points to structural economic problems that decision-makers have been "sweeping under the carpet" for years.
Any criticism of the economic development so far has been sharply met with the inevitable spin that those who do not agree with such a model of development do not really like Montenegro. Covid-19 also proved empirically that all of us, who pointed out economic anomalies in time, love Montenegro much more sincerely and strongly than those who, as the only measure of insincere love, strongly imbued with completely personal interests and insatiable greed, regularly showed her megalomaniacal invoices, with pervasive items of corruption, nepotism, clientelism and serious ignorance that were marketed as axioms.
Unfortunately, all citizens of Montenegro will pay the price of simulating reforms, which was warned about in a large number of addresses years ago. While other countries worked diligently and diligently on structural reforms that led to the well-being of their societies, Montenegro at that time actively simulated reforms that international factors diplomatically subtly described in their numerous reports.
The smarter ones made a lot of concessions
Bearing in mind the above, it is high time for: - a painful confrontation with the numerous systemic weaknesses of the Montenegrin economy, which has been intensively induced by mediocre personnel (honor to the exceptions that there are); - essential recognition of the previous decision-makers about the failed economic model of economic development; - a reformed, efficient and, above all, transparent public administration with a special emphasis on opening budget expenditures for inspection by all citizens, in order to show the scale of spending money; - decisive and precise removal of personnel who, with their economic ideologies, brought the state of Montenegro to the brink of collapse. It would really be a catastrophic mistake to allow work on new programs for the development of the Montenegrin economy to the people who actually brought us to this situation; - filigree precise analyzes of all future investments and expenditures, which would replace the current method of estimating investments.
In the end, this should also be mentioned: the smarter people in this country have given in too much to those worse than themselves for too long; finally it's time to ask something - ask. The author is the CEO of Fidelity consulting
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