Foreign investors believe that banking is the only sector in which in 2023 doing business in Montenegro was easier than before, that the situation worsened in tourism, trade, transport, energy and remained unchanged in the field of telecommunications.
That is why the ease of doing business index last year was 6,4, i.e. 0,3 lower than in 2022.
This is also the first time since the Council of Foreign Investors published the White Book that negative trends have been recorded in it for two years in a row, so it is clear that businessmen and investors are not satisfied with the reforms implemented in 2023.
This, among other things, is written in the 13th edition of the White Book, in which foreign investors give grades from 1 to 10 (MFIC index) for the ease of doing business.
In addition, they look at the business environment and indicate the main challenges they face.
"What characterized the business environment was the non-transparency of the process of making important decisions, frequent changes in legislation, which were not accompanied by an economic calculation of the impact on the economy, slowness of administration, political instability, and insufficiently developed and prepared infrastructure, etc. Also, as the main shortcomings of the business environment in Montenegro, our members single out the still high representation of the informal economy, the insufficiently transparent process of public procurement, the insufficient availability of digital and online services from the domain of public administration, as well as the great lack of labor force", it is written in this book. .
Banks seem to be leading the way
The banking sector is the only one that recorded growth last year, by 0,4, which is why it received a rating of 6,7. The book also says that, despite progress, the rating is still not at a satisfactory level, as it is the lowest since 2015.
Commercial banks, 11 of them, in 2023, according to the data of the Central Bank, made a profit of 146 million euros, which is 75,26 percent more than in 2022. This was mainly due to the growth of interest on loans for citizens and the economy, the growth of the international reference interest rate for the European currency Euribor, the increase in bank fees and commissions for citizens and the economy on payment transactions, services...
It is emphasized that the better rating of banking came after a record drop of 0,9, which was recorded in 2022 compared to 2021. Although the members of the Council give positive evaluations, the members who deal with this work do not think so, so they give it a negative evaluation for ease. Thus, their assessment of this sector is 5,8, i.e. 0,4 less than in 2022.
"As other reasons for the negative index, members recognize the lack of transparency in the Government's decision-making process. The mentioned practice has a negative impact on this sector and often leads to the creation of additional costs and difficulties in the sector's operations. Tax regulations are perceived very negatively, which, especially in the last period, had a very bad effect on business. It was especially pointed out that by-laws in other areas are not aligned with the needs of the sector, and therefore have a negative impact on the entire sector. In addition to the lack of regulation and the existence of digital solutions, payments with a virtual wallet, online account opening, the use of electronic signatures and the like further complicate the further development of banking in Montenegro," the White Book says.
On the other hand, foreign investors believe that the telecommunications sector has stagnated, so it received the same rating as in 2022 - 7,2. Telecommunications and ICT continue to have the highest ratings compared to other categories and most of them show progress from year to year. The council points out that the assessment for 2023 shows stability, but that this sector still has a lot of room for improvement. Although foreign companies working in telecommunications point out that work is now easier, infrastructure received the lowest rating - 6, while openness to foreign investors was rated 7.
"Among the other factors that influenced the ease of doing business, the investors included: insufficiently developed legislation in the area of digitization, especially in the area of interaction with customers, lack of standardization of payment QR codes. The prices of fees for ICT providers are problematic, on the other hand, companies from other sectors cite the prices of roaming services as a problem in development," the book says.
Airplanes and trucks also slow down
Work in all other sectors is more difficult than before, so tourism received a rating of 6,7. Although attitudes were positive two years after the coronavirus pandemic, the rating for 2023 is 0,4 lower than the year before, and at the same time the lowest rating since 2016, if the pandemic is ignored. It is also worrying that foreign employers who work in tourism gave the same rating for the ease of doing business that Montenegro received in the age of the coronavirus, which obviously means that they are not satisfied with the situation.
"Everyone stated that poor air connectivity (fewer airlines) had a negative impact on the ease of doing business. The members recognized the insufficient capacity and disorganization of the airport during the season as a big problem, which creates a very negative image of tourism, and discourages not only tourists but also potential investors from investing their capital. A long-standing problem is the informal economy, which causes great damage and reduces attractiveness, and the members recognize the lack of strategic and coordinated management of the problem and the entire tourist offer. As negative factors, businessmen recognized large parafiscal levies in the form of residence and other taxes and deficiencies in communal infrastructure," the document says, and it is emphasized that all employers share the view that the biggest problem is the availability of labor, i.e. its import from abroad, which can be an additional problem, due to regulations.
The biggest drop, of 0,7, is in production and energy, which was rated 5,5. This sector generally records low marks, and businessmen, as he writes, give them because of roads, traffic connections, administration, regulatory framework, insufficiently developed market, underdeveloped competition...
The major weakness of the energy sector for these employers is the lack of credit lines and grant schemes, tax and other benefits, insufficient recognition of the sector, but also the observation that the attitude towards investors in any phase of investment is not at an enviable level.
Generally developed in Montenegro, trade also received a rating of 6,6, which is 0,4 less than in 2022. This sector has recorded growth in the last two years, but now it has received the same rating as in the pandemic 2022.
"Investors particularly emphasized weak consumer confidence and insufficiently developed digital solutions. Recognized shortcomings have a negative impact on the development of the sector, and the public's attitude towards this sector is particularly noteworthy in terms of perception regarding the existence of monopolies and the process of price formation. A significant problem in the better positioning of the sector is excessive imports and a lack of domestic supply, which could lead to a reduction in prices. As in most sectors, the informal economy represents a serious obstacle to development," the book says.
The processes for obtaining permits, the ease of working with the administration and the efficiency of controls, infrastructure, and the entire sector were also given low ratings in transport. This is also the worst rating for this category since 6, but it is stated that transport and logistics have a huge potential for growth.
"Almost all businessmen in this sector have evaluated and recognized tax procedures as complicated, long and expensive, especially when we talk about import/export procedures, which further complicates their business both financially and administratively. In addition to this, underdeveloped infrastructure and ineffective border control, which is very slow, are factors that limit the development and progress of the sector," the book states.
Small voice of the economy
The percentage of business involvement in the drafting of laws was also analyzed, and it was determined that out of 93 observed laws, businessmen participated in the drafting of more than 37 percent of them. This process received a score of 6, so a change is recommended to make decision-making more transparent and inclusive.
Of the other monitored categories important for the business environment, the labor market and employment stand out. This sector was rated 5,7, as it was the year before.
"Economists rated sick leave, with 5,2, and severance pay, with 5,5, the lowest. A slightly higher rating was given to open-ended contracts, namely 5,9. When it comes to other factors that influence the assessment, businessmen stated: permits for foreigners, remote work, development of skills improvement programs, the work of the judiciary, especially in the area of greater protection of employees compared to employers, market migration, the minimum wage and work institution," the document says.
In addition, Montenegro did not show itself in real estate development either, so since 2019 this sector has recorded a decline, from 6,4 in that year to the current 5,6. Foreign investors, as stated, gave a low rating because of the bad performance of the cadastre in the last year, as well as the efficiency of issuing building permits. Among the sector's problems, the lack of publicly available data, administration, high prices, corruption, detailed state plans, lengthy procedures, digitization...
The taxation sector received the same rating, due to the work of the tax inspectorate, different taxes, the level of tax rates, levies at the state and local level, lack of tax incentives for business growth, non-transparent adoption of laws and their inconsistency, double taxation, new illegal taxes. ..
The lowest rating for the duration of commercial disputes
The rule of law was also rated poorly, so due to the issuance of permits and licenses, residence and work permits, incoherence of judicial practice, corruption, discrimination, non-transparency, it received a rating of 5. This is also the lowest rating in the report for 2023, namely 3,2 , which is given for the length of commercial disputes and court cases.
"Lack of qualified workforce with specific skills, especially for large companies, insufficiently developed education system, outdated programs that do not follow the dynamics of the market, lack of system analysis that would offer solutions, insufficient investment in the education system, lack of educational infrastructure, which additionally causes brain drain , which is one of the main problems, especially with the talents that are in demand on the IT market, increased competition from the public administration, labor migration", is highlighted among the factors in the book, which businessmen believe are holding back the human capital sector.
Foreign investors also gave an index below 5 for the informal economy and the work of inspections, which received a rating of 4,2. It is emphasized that tax institutions, especially inspections, are not sufficiently ready and strong to control the operations of companies, which is why there is selective application of the law and ineffective control.
In the book, it is also written that Montenegro has no real measures to combat the informal economy and unfair competition, although there is a lot of talk about this problem, and that excessive taxes and other costs turn businessmen away from these forms of business.
3,2 is the lowest score in the report, and Montenegro received for the duration of commercial disputes and court cases
A similar index was given to the underdeveloped public procurement sector, which is now rated 0,6 worse than in 2022.
Businessmen point out that the procedures are very complicated, which slows down public procurement, repels investors, and price is the main criterion, so the cheapest product or service is obtained regardless of quality, but also that they are non-transparent.
Green economy helmet
The White Paper also states that new areas to be monitored will be introduced, including human capital, the rule of law and equal opportunities, the tax system, economic and infrastructure development, and the transition to a green economy. These sectors are a priority of the Council's strategy.
All these priority categories have a score below the average - 5, which, as stated, shows that additional progress is needed because the current situation is far from a good investment climate.
"Although all categories were rated below average, three segments scored above 4, namely: talent and human capital (4,7), tax system (4,6) and economic development and infrastructure (4,3). The lowest rating was given to the transition to a green economy (3,6) and the rule of law and equal opportunities (3,9)," the document reads.
Numerous recommendations to the Government
The Council has also prepared a large number of recommendations for the Government related to priority areas, and especially for human capital in Montenegro, as it is one of the key obstacles to the development of the business and investment environment.
"It is advised to make a comprehensive analysis of the curriculum and the market, and create a program based on recommendations to meet the needs of the market and its rapid changes. It is necessary to follow world trends and invest in educational infrastructure that will give young people the chance to develop their ideas", are some of the recommendations, and it is stated that it is also necessary to stimulate the reduction of salary costs.
In the recommendations for taxes, the Council told the Ministry of Finance that the Law on Tax on Sales of Used Motor Vehicles prescribes unreasonably high tax rates. This department stated in its response that they believe that this rate of 5 percent should not be changed.
"Create comprehensive policies and strategies for the development of the economy, especially less developed areas, and implement a reform of both the process and the work of the administration, in the part of issuing building and other permits," it says in the recommendations for economic development.
For the progress of the green economy, they advise to introduce a system of subsidies for those who participate in that transition, and they also recommend strengthening awareness of its importance, strengthening investment in renewable energy sources and technology.
Starting this year, the "White Book" will be published in November, so that the Government can timely consider and include the recommendations and analyzes of foreign investors in its work program.
As the President of the Council, Tamaš Kamaraši, said earlier, this is an important step that additionally ensures that the real needs of foreign investors and the entire business community are taken into account when creating policies and regulatory frameworks.
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