The European Commission recently published a document „EU Candidate Countries’ and Potential Candidates’ Economic Quarterly“ which, among other things, analyzes the economic position of each country and presents key macroeconomic indicators of all seven candidate countries (Montenegro, Albania, Serbia, Bosnia and Herzegovina, Kosovo, North Macedonia, Turkey).
You guessed it, Montenegro is not doing well compared to other countries. Six indicators - public debt, current account deficit, budget deficit, unemployment, inflation and GDP growth - are enough to clearly see how the EC views us. Unfortunately, compared to the candidate countries for EU membership, Montenegro is the country with the highest public debt (56,9% of GDP), the deepest current account deficit (-17,5% of GDP), the second worst budget deficit (-0,8%), the third highest unemployment (11,4%) and inflation that is only somewhere in the middle (3,2%).
In addition, it is important to note that GDP growth remains quite weak, at only 2,5% in the first quarter of this year. Although Montenegro is the only country to have implemented fiscal expansion through a radical reduction in pension contributions - a measure that other candidate countries have not implemented and which increases consumption, a key component of GDP - its GDP growth rate is below some countries that have not done so.
In other words - if there had been no reduction in PIO contributions, our economy would be in recession.
Indicator analysis steps
- Public debt (56,9% of GDP): The level itself may not sound alarming compared to the eurozone countries, but in the context of our small, open economy with limited capacity to borrow in the long term and on favorable terms, this is a serious problem, given that public debt will grow faster than economic growth. Brussels looks at such figures through the prism of sustainability and resilience to shocks: what happens if the tourist season fails (which we are witnessing these days) or interest rates on public debt increase further (evidently from the refinancing of old debts at significantly higher interest rates)?
- Current account deficit (-17,5% of GDP): This is the number that rings the alarm bells the loudest. A huge external deficit means that we spend and import significantly more than we produce and export. In practice, this means a chronic dependence on inflows from abroad - primarily tourism, diaspora remittances, foreign direct investment and borrowing at expensive interest rates. This is a point that the EU is particularly concerned about, because a macroeconomic imbalance of this type can easily turn into a balance of payments crisis, which happened in 2020 (the year of corona), when Montenegro had to sign an arrangement with the IMF and limit itself in the development of infrastructure financed from the budget.
- Budget deficit (-0,8% of GDP): The second worst in the group may not sound dramatic, but the problem with the budget deficit is its trend and structure. When the deficit is the result of permanent measures, such as the abolition of PIO contributions, then it becomes a systemic long-term risk; the question remains how the deficit will be financed and when it will be reduced to reasonable limits? Judging by the medium-term budget projections until 2028, the PIO Fund deficit will grow further, which will put pressure on the budget.
- Unemployment (11,4%): the third highest rate points to structural weaknesses in the labor market - from skills mismatches to low productivity and seasonality. In addition, data for Montenegro shows that, although increasing record number of employees, contribution revenues are stagnant or declining.
- Inflation (3,2%): A moderate level, “somewhere in the middle,” gives the appearance of stability. However, moderate inflation without productivity growth and with rising borrowing costs can easily turn into stagnation. Additionally, during the summer tourist season, the inflation rate exceeds 4%, while citizens perceive inflation to be much, much higher than the official rate.
- GDP growth (weak despite fiscal expansion): This is perhaps the most devastating indicator. If GDP growth does not respond significantly to a measure such as the abolition of PIO contributions, which, with the expansion of credit activity, “pumped” over half a billion euros into the system, which is about 8% of GDP, this means that the state’s financial multiplier has been spent: this money has been “eaten up” by imports because it ended up in private consumption with little effect on domestic investment and productivity. In other words, fiscal policy has been extremely expensive, but micro- and macroeconomically inefficient.
How these numbers are "read" in Brussels
Brussels is monitoring the ability and credibility of economic policy to improve the situation in the country.
The combination of a weak revenue base (heavy reliance on VAT and excise duties), high mandatory spending and a large need for debt refinancing on the one hand, and high debt, external financial imbalances and structural unemployment with modest growth on the other, sends a message about an economy that is too reliant on a single sector (tourism), poorly diversified logistically and industrially, and fiscally vulnerable.
In its assessment of the current Economic Reform Programme, the EU notes that Montenegro has largely limited or partially adhered to the economic policies agreed through the economic and financial dialogue with the EU. Of course, the EU recognises Montenegro's commitment to reforms, but warns that fiscal risks, structural bottlenecks and implementation gaps could hinder our country's progress.
Scenario analysis indicator
In order to properly consider the 6 indicators described above for all seven EU candidate countries, I have prepared three scenarios for weighting the indicators, in order to show Montenegro's position in relation to other countries.
Scenarios (sum of weights = 1):
- Scenario 1 - fiscal sustainability: debt/GDP weight 30%, budget deficit weight 25%, current account deficit weight 20%, GDP growth rate weight 10%, unemployment rate weight 10% and inflation weight 5%.
- Scenario 2 - growth and employment: GDP growth rate weight 25%, unemployment rate weight 25%, current account deficit weight 15%, budget deficit weight 15%, debt/GDP weight 15% and inflation rate weight 5%.
- Scenario 3 - balanced: each indicator has a weight of 16,7%.
The results are as follows:
As you can see, in all three scenarios, when looking at the six indicators for all countries with completely different weights, Montenegro ranks last.
Therefore, Montenegro's problem is not that reducing PIO contributions has relieved labor taxes; the problem lies in the fact that this was done without respecting fiscal rules (the Law on Budget and Fiscal Responsibility is being brutally violated), without covering productivity growth, and without addressing structural economic problems that are obstacles to growth.
In other words, through the reduction of PIO contributions, fiscal symmetry occurred: labor taxes were reduced, but the structure of the economy that requires that labor was not changed, which ultimately led to increased inflation and redistribution of money from the poorest to the richest segments of the population.
If the goal of economic policymakers was to fake statistics, then the operation failed because the patient is still bleeding. The halved contributions to the PIO were presented as "freeing up work", but in fact they are a fiscal game of roulette: the revenue side of the budget has been permanently and irreversibly collapsed, budget expenditures are growing much faster than budget revenues, and the biggest structural wounds - debt, current account deficit and unemployment - have been left without adequate treatment, which will result in a permanent reliance on external borrowing (infusion).
Conclusion
Montenegro faces a classic macroeconomic risk triangle: high public debt - large external deficit - weak economic growthIn the middle of that triangle are high inflation i structural unemployment which limits growth potential and makes the social picture vulnerable.
Our country today lives on the fiscal credit of the pension system, not on real economic growth. If fiscal rules do not replace political improvisations, if productivity does not replace cosmetic reforms, the bill will arrive much faster, this time with default interest, the consequences of which we will feel for a long time in public, as well as in the finances of citizens and the economy.
The author is the CEO of Fidelity consulting
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