In the exposé of the mandate, it is clearly stated that the optimization of the public administration will be carried out, which means that a large part of people from the public administration will end up at the labor office. In translation, we were promised that part of the employed will become unemployed; existing estimates say that at least 5 to 10 thousand people from the public administration should be "optimized" through the Employment Office of Montenegro.
As the Europe now 2 program promised full employment within a year of taking office, one logical question arises: how to reach full employment if we bear in mind that, in addition to the very high current unemployment rate, at least 5.000 "optimized" people should be added from the public administration that will be on the records of the Employment Office?
On top of all that, in the budget for 2024, which contains projections for 2025 and 2026, the amount predicted for the payment of gross wages in the public sector does not decrease but increases, which clearly means that the optimization of the public sector is not in the plan.
The necessity of continuing the reform of the PIO Fund
There is no dilemma - Montenegro, like many developing countries, must continue the long-initiated complex pension and labor market reforms. That road is full of economic, social and political landmines that, if not dealt with adequately, can explode and blow the cohesion of social peace to pieces.
A fairer, more comprehensive and multifaceted approach, which combines careful fiscal planning with social issues and the implementation of structural reforms, can offer a smooth path to ensuring the long-term sustainability of pensions as well as increasing wages and employment in Montenegro.
However, the road to implementation is fraught with difficulties, given the need to establish a delicate balance to ensure the short-term feasibility of the reform on the one hand and the long-term sustainability of public finances on the other. Montenegro, like many middle-income countries, is grappling with systemic inefficiencies, a strong and resilient informal economy, and a sensitive political climate, all of which can threaten effective change in economic policies.
At its core, the never-before-seen and announced reform on salary increases implies the abolition of contributions to the PIO Fund: "We will implement ES2 as we implemented ES1". However, any meaningful reform needs to balance financial sustainability, social balance and economic stability.
The pension system in Montenegro, when everything is taken into account, goes beyond its basic economic character and function similar to a water heater. It actually represents a form of social contract, which is expressed through solidarity between generations and trust in people.
Analyzes of international financial institutions on pension systems
The German Bundesbank's 2020 publication, "Taxation of consumption to finance pension payments", offers a detailed analysis of pension financing strategies through various tax approaches, including the reduction/abolition of pension contributions.
On page 17 of this material it says: “A 10% reduction in the labor contribution rate must be financed by an increase in the consumption tax rate (author's note: VAT and similar taxes) by an additional 6% soon after the policy is implemented. In the long term, about 4%”.
When we map this to Montenegro, the situation is as follows: VAT now amounts to 21%, while contributions for pension disability insurance amount to 20,5%. If the contributions were reduced by 10%, the VAT should be 25%. Additionally, if they were to be abolished, as announced through the Europe Now 2 program, VAT should amount to a dizzying 29%, in order to balance the fiscal position.
Additionally, in the context of the reform of the pension system of Montenegro, the World Bank in its document "REPORT ON SYNTHESIS OF PUBLIC FINANCES: Restoring sustainability and strengthening the efficiency of public finances", states the following: "The Montenegrin pension system is expensive, but socially unsustainable: in the long term, the adequacy of pensions will probably erode over time. Given the aging population and low labor force participation, the pension system will face further pressures”.
At the end of this segment, we should also mention the technical instruction of the IMF "Engagement of the IMF on pension issues", which states: "Pension policy reforms can have significant short-term and long-term fiscal implications, whether they are related to the adjustment of key parameters of the pension system in mature pension systems or by expanding the coverage of the retired population. Even relatively small and gradual changes can materially affect public finances in the long term."
It will be very interesting to present to the IMF the idea of abolishing contributions for PIO while increasing the average pension by about 50%, wages by 25%, within a year, which amounts to about 15% of our GDP annually.
According to the IMF's definition, "the public pension system is sustainable if, according to current policy, demographic projections and a conservative macroeconomic scenario, it enables the financing of pension spending in the coming decades without stressing public finances or, therefore, worsening macroeconomic stability."
The never-presented Europe Now 2 program is anything but a small and gradual reform; on the contrary, it is financially huge (gross amount of around 900 million euros or 15% of GDP) and radically fast (guaranteed implementation 12 months from the day the 44th Government of Montenegro takes office).
Unfavorable macroeconomic and demographic trends
The macroeconomic situation is not in favor of radical solutions to systemic laws, such as the Law on Pension Disability Insurance:
- In the next 4 years, we have to pay off about 4 billion in old debt, new debt (budget deficit) and interest;
- Interest rates are expected to remain high for the next few years due to inflation;
- Evident overcrowding of the public sector and state enterprises;
- The huge impact of an external emergency event (the war in Ukraine) that had the greatest impact on higher budget revenues, which will be under pressure when the war ends;
- Coverage of imports by exports amounts to only 18%; any further increase in consumption will lead to an increase in dependence on imports.
Furthermore, according to United Nations projections, the demographic picture in Montenegro until 2070 is extremely unfavorable:
- The number of inhabitants in Montenegro will decrease;
- The number of residents over 65 will increase, while the number of residents under 65 will decrease;
- The degree of dependency of those over 65 will increase and almost double;
- The population pyramid will worsen;
- The demographic pyramid shows intensive changes in all population structures, with an emphasis on the increase in the number of older citizens;
- In addition, dramatic changes await us by 2070, when we are expecting a large increase in the elderly population and a decrease in the working-age population.
Such demographic changes, which include intensive changes in all population structures, with a focus on increasing the number of older citizens, will have significant consequences on the economy, additional pressure on the health and pension systems, social protection and other aspects of society. Additionally, these changes will require a serious and detailed review and adjustment of all current policies and strategies in order to adequately respond to the challenges of these demographic changes.
Implementation of economic policies based on evidence
In order to successfully implement economic reforms, it is crucial to adopt an approach that is both precisely focused and flexible.
The first step in this process is an in-depth analysis of the current economic situation, which reveals all the weaknesses and potentials of the economy. After that, it is necessary to precisely identify the problems, be it unemployment, low productivity or unsustainable fiscal policies.
Thorough data collection is essential, as any decision must be based on solid and reliable data, avoiding guesswork and speculation. Setting clear, realistic and measurable goals serves as a roadmap for the success of reforms. These reforms require a detailed strategy with precise steps, deadlines and responsibilities, crucial for translating plans into action.
Inclusivity in consultations with different social actors ensures that reforms have broad support and are adapted to the real needs of society. Decisive implementation, followed by continuous monitoring, is key to keeping reforms on track.
Finally, constant evaluation and flexibility in adapting reforms are necessary to navigate complex economic challenges and achieve long-term prosperity for our society.
Conclusion
In essence, the "Big Time Buy" trilogy, in addition to criticizing the non-transparent and secretive ES2 program about which the public knows nothing, is a call for a paradigm shift in the way important economic issues are approached, insisting that instead of superficial "puff-puff " and marketing-oriented methods, use fundamental research of databases, factual information and understanding of economic laws.
Trilogy strives for a carefully designed approach, the ultimate goal of which is to ensure efficient, fair economic reforms, focused on the long-term improvement of the quality of life of all citizens of Montenegro.
(The end)
The author is the CEO of Fidelity consulting
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