The announced increase in wages will further stimulate the strengthening of inflation, which will make salary growth meaningless, and make the economy expensive and poorly productive, assessed the adviser to the President of Montenegro for the economy and economic diplomacy, Mladen Grgić.
"If the announced increases really happen, a lot could be said about the consequences for financial stability, but let's stay on topic - it will further stimulate the growth of inflation, which will eventually make salary increases meaningless, but will make us an expensive and poorly productive economy." , said Grgić in an interview with Mina-business agency.
He added that announcements of substantial wage increases further stimulate price growth.
"When you look at our economic indicators, inflation is certainly one of the red lights that should worry us. In the first four months, we are at the very top of Europe - first, second position in terms of inflation. In April, the EU average was 2,6 percent, the Eurozone 2,4 percent, while in Montenegro it was 5,8 percent, which is the highest rate after Romania," Grgić said.
He assessed that inflation in the last two years practically canceled the growth of wages.
"Thus, real earnings today are lower than those in January 2022. When you compare the nominal earnings, you will see that from February 2022, it increased from 706 euros to 828 euros in April this year, however, the real earnings in April amount to some 686 euros. It is not superfluous to remind that real earnings actually show how many goods and services you can afford for the same salary," Grgić explained.
As he said, unfortunately, although they directly affect the reduction of the standard of living, and therefore the quality of life of citizens, governments - including ours, are not always motivated to influence the reduction of inflation.
"One of the reasons is that it is a politically often painful undertaking and requires unpopular fiscal measures, which usually slow down economic growth. In addition, in the short term, inflation benefits the government, as rising prices and wages increase nominal tax revenues, such as income and sales taxes, which fill the government's coffers. The purchasing power of money is reduced, which effectively reduces the real value of debts and increases the nominal income of the state," said Grgić.
According to him, while inflation reduces the real value of debts and increases tax revenues, it acts as an indirect form of taxation that allows the government to temporarily finance its activities more easily.
"Inflation is a monetary problem, and it is important to say that in a small Euroized economy like ours, where the Central Bank does not have the opportunities that countries with their own currency have, the Government does not have a large range of measures to influence inflation. But if it does not already have the possibility to directly affect the reduction of inflation, what it should do is to refrain from policies that can affect its growth", said Grgić.
He added that it seems that so far there have been no effective measures to reduce inflation.
"The Limited Price campaign did not show visible results. Apart from that, I don't see any significant steps being taken in the direction of limiting price growth," Grgić said.
When asked to comment on the trade deficit, Grgić replied that, according to the latest Monstat data, foreign trade in the first four months was 3,6 percent higher compared to the same period last year. Also, exports are lower by 26,2 percent, and imports are higher by 10,9 percent.
"What needs to be explained is that last year the export of electricity had a significant impact on the growth of exports. That export in the first three months of last year was 155,3 million, while in the same period this year it was 44 million. Therefore, the better balance than last year depended least on our production capacity, and more on natural resources and the state of the market", said Grgić.
When asked how exports to the foreign market can be more promoted, Grgić answered that it would first be necessary to define the areas in which we have comparative advantages with a strategy, and then create generous incentive lines, in accordance with what the law allows, and increase the budget for that area.
"Our budget is primarily social, with one solid component related to infrastructure. In addition, it is not a budget that is strongly focused on development, especially on two important branches - tourism and agriculture. Of course, investment in infrastructure will contribute to the faster development of the economy, but if the approach is not meaningful, and if strategic branches are not defined in parallel and where we can really have a comparative advantage, then infrastructure will remain for the transport of people and tourists. That is not enough," said Grgić.
According to him, the infrastructure we are building is too expensive to use only for transporting people.
"And when I already mention the infrastructure, especially the transport one, we are still waiting for the epilogue about the airport, which is one of the brakes on our tourism, but also on the economy in general", stated Grgić.
He added that, after those steps, new markets can be opened through economic diplomacy.
"Some significant ones are already available to us, but we are definitely not competitive enough to succeed in them. There are no quick measures, everything takes time. Unfortunately, political instability favors policies that are quick, not based on serious analysis and that give short-term results. That is why our economy is growing, but its structure remains the same", explained Grgić.
He, commenting on tourism and foreign direct investments, said that there was an evident decline in tourism in the first four months, and it is the biggest decline in individual accommodation, where it is minus 20 percent, while collective accommodation is at an approximate level.
"Certainly, the drop in income is less than 20 percent. If we take out inflation, the decline is even greater. We can partly blame the warm winter and the failure of the ski season there. However, it is necessary to go deeper into the problem and state that apart from the constant repetition of all the challenges in tourism - fewer hotels, poor infrastructure, poor connectivity, overemphasized seasonality, not much has been done in recent years to at least pave the way for solving these problems", said Grgić.
As he stated, the tourist economy and market structure itself is changing, and it would be said that we do not follow the trends.
"When it comes to winter tourism, you have analyzes by serious institutions, such as the Bank of Italy, which in one analysis predicts a serious negative impact of climate change on the sale of ski passes and overnight stays in winter tourist centers, especially at lower altitudes - right where we are we as a state invested a lot of money, which was accompanied by substantial private investments," said Grgić.
He said that their experts find that measures such as artificial snow have a weak effect on winter tourist flows, which indicates the need for a more comprehensive approach to adaptation strategies.
"As far as foreign direct investments are concerned, they are in a slight decline, by one percentage point. More important than the quantity is the structure of investments. In the first four months, compared to last year, there was a decrease in investments in real estate and an increase in investments in companies and banks. And when we analyze the origin of the investments, we will see that Serbia, Russia and Turkey are leading the way," said Grgić.
Speaking about the economic environment for attracting foreign direct investments, he said that Montenegro is an attractive investment destination.
"We have rich natural resources and a favorable tax policy, but we have entered a vicious circle of long-term transition, from which we cannot get out. Essential reforms are expected from us in order to really valorize all potentials, while we still do not offer too much besides a positive narrative and a relatively favorable tax policy", Grgić assessed.
He stated that the planning documents in Montenegro are still not in order, the courts are slow, ineffective and do not allow investors to realize their contractual rights, and the administration is slow and cumbersome.
"Apart from intensive economic diplomacy and positive political messages, there were no policies that would influence the increase of foreign direct investments. If you allow me to use a colloquial expression, the "battle" for investments is taking place in the country, and the precondition for attracting credible investments is reforms and improvement of the investment environment", said Grgić.
He added that this does not mean that we should not promote ourselves, because he is convinced that we are a very attractive investment destination, we just need patience.
Speaking about the coming period, Grgić said that Montenegro is a small and open economy whose performance depends on the events in the EU, which has entered a period of slower growth, largely as a result of the fight against inflation and adaptation to new geopolitical circumstances.
"With that, I expect it to reflect on our economy. "With the reduction of foreign direct investments, which are of great importance to us for the balance of payments and the worsening of the trade deficit, we will again wait for the main summer season to make up for all those shortcomings or, in jargon, to get out," said Grgić.
According to him, we may have a significant growth compared to most European countries, but insufficient to catch up with more developed countries.
"If we do not start with serious reforms soon, I am afraid that we will lose our leadership position among the countries of the Western Balkans, at least when it comes to the level of wages. I will give you an example, because we often hear that we will soon be at the level of the most developed economies. To avoid exotic comparisons and to take Slovenia as a model, which had strong, but at the same time more sustainable growth than the rest of the region, and is culturally and historically closer to us than some other countries. Let's take the year 2022 as a reference, and the gross domestic product (GDP) at purchasing power parity, with the forecast growth of the International Monetary Fund (IMF) for Slovenia, to catch up we will need to grow 9,5 percent for the next ten years or 19 percent next five years", concluded Grgić.
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