Decisions to raise the minimum wage to 700 euros and potentially reduce the pension contribution rate would represent a great risk and have serious consequences for the fiscal sustainability of Montenegro, requiring a significant increase in indirect taxes in order to compensate for the costs, it was stated in the evaluations of the European Commission on the Program of Economic Reforms (PER) of Montenegro for the period 2024 to 2026.
The Government published the European Commission's evaluations of PER in the document Information on the preparation of the Program of Economic Reforms for Montenegro for the period 2025-2027. year, whom she adopted two days ago.
Prime Minister's Government Milojko Spajić adopted the Program of Economic Reforms until 2026, which announces the "Europe Now 2" program, in January of this year and sent it to the European Commission for evaluation.
The European Commission prepared a document with evaluations on PER in April of this year, citing risks for the implementation of the program, "over-optimistic projections of the Government", uncertainties in implementation and dangers to public finances.
In July, the government published a draft of the Fiscal Strategy, which envisages the introduction of minimum wages of 600 and 800 euros, the reduction of the contribution rate from 20,5 to 10 percent of gross wages, which increases the deficit of the PIO Fund to 386 million euros in the next year, as well as proposing an increase in VAT -a, excise duty and other duties and measures in order to cover that deficit.
The laws enabling this were adopted during September, but the Assembly still did not adopt the Fiscal Strategy itself.
The most significant indirect taxes are VAT and excise duties.
The risks deserve deeper consideration
In its assessments, the European Commission also states that possible risks with the implementation of the government's plan deserve deeper consideration.
“While the PER shows a broad balance of risks relative to the baseline scenario, some risks merit deeper consideration. Political risks refer to geopolitical tensions and the internal environment, which may lead to new pressures on consumption, undermining the sustainability of public finances and credit conditions for future borrowing. The lack of a comprehensive fiscal strategy creates the risk of further ad-hoc measures, as shown by the ongoing discussion on raising the minimum wage to 700 euros and increasing net wages, potentially by reducing the rate of pension contributions. Such decisions would represent a great risk and have severe consequences for the fiscal sustainability of Montenegro, requiring a significant increase in indirect taxes in order to compensate for the costs," the European Commission said in its assessment.
They called for the rationalization of consumption
The EC also warns of the possibility of public debt growth, as well as the need to rationalize spending on salaries in the public sector, better management of infrastructure projects, establishment of an independent fiscal institution and improvement of management of state-owned enterprises.
"High mandatory spending and a weak revenue base, together with looming large debt repayment needs, cause concern and call for a comprehensive medium-term fiscal plan with concrete consolidation measures and a commitment to bring the debt ratio below 60% of GDP as prescribed by the fiscal rule. The expansion of the tax base and the rationalization of tax exemptions would contribute to the rebuilding of fiscal reserves. Further fiscal space could be gained by reviewing and rationalizing spending on wages in the public sector and social transfers. Large infrastructure projects need better management and prioritization given the limited fiscal space available. Although there are fiscal rules, they are weak and lack a strong enforcement mechanism. The establishment of an independent fiscal institution would contribute to strengthening the costs of new initiatives and improving fiscal discipline. Improving the supervision and risk management of state-owned enterprises would ease their burden on the budget over time," the European Commission stated.
The government's program predicts that Montenegro will experience a slowdown in real GDP growth to an annual average of 3,2 percent in the period 2024-2026, driven by the growth of private and public consumption and the recovery of investments.
"Net exports are expected to make only a marginal contribution to GDP growth, as tourism services, which exceeded the level of 2019, are expected to slow down from double-digit growth in 2023. Negative outcomes are more likely, as inflation could fall less than projected, eroding disposable income, while higher financing costs could negatively impact investment. Imports could increase even more than expected if the investment plans are realized, especially the construction of the Bar-Boljare highway", the European Commission states.
Instead of a reduction, the deficit grew
The fiscal scenario of PER predicts a significant deterioration of the budget balance in 2024 and a gradual reduction of the deficit in the next two years, which, as the EC believes, should lead to a modest pace of debt reduction.
"The deficit in 2024 is mainly driven by a strong increase in social transfers and capital spending. It is expected that the budget will be adjusted in the period 2025-2026. rely on a sharp slowdown in public spending, which is forecast to lead to a 2,3 percentage point (pps) decline in the consumption share and a small primary surplus in 2026. However, the predicted restraint in consumption seems too optimistic and is not supported by concrete measures", the EC states.
That the fears of the European Commission were justified is shown by the data from the Fiscal Strategy and Budget Rebalancing, documents prepared six months after the PER, which increases the budget deficit in the following year from this year's 3,3 to 3,5 percent of GDP, that is, that it will not even reach that "small primary surplus in 2026" that they informed the EC about in January of this year.
"The share of public debt, which has declined very significantly in recent years, should continue to decline, but slowly, to 61% of GDP in 2026. Debt refinancing needs are still high, reaching a peak of 11% of GDP in 2025", the EC announced on the basis of the PER that was sent to them earlier.
However, with the new Fiscal Strategy, made after the PER, it is predicted that the net public debt will increase in the coming years, and not decrease, as previously informed by the EC. According to the new document, the net public debt is estimated at 2026 percent in 61,25, and will rise to 2027 percent of GDP in 63,25.
"High mandatory spending and a limited revenue base, together with the upcoming needs for large debt repayments, require a stronger fiscal consolidation than envisaged by the PER", the EC recommended.
Debt repayment obligations increase vulnerability
However, the new fiscal strategy does not strengthen fiscal consolidation because it increases the deficit and public debt. The EC proposed the consolidation of public finances and the reduction of the deficit because Montenegro needs to return 2,2 billion euros in the next three years, which, as they stated, "increases vulnerability, together with strict financing conditions."
"Taking into account the monetary framework of Montenegro, fiscal policy is the main tool for managing aggregate demand and supporting further disinflation. This requires a comprehensive medium-term fiscal plan with concrete consolidation measures and a commitment to reduce the debt ratio below 60% of GDP as prescribed by the fiscal rule. The expansion of the tax base, the rationalization of tax benefits and the inclusion of new initiatives for budget revenues would contribute to the rebuilding of fiscal reserves and the reduction of public debt. Further fiscal space could be provided by revision and reform of mandatory expenditures on account of wages in the public sector, contributions for social and health insurance", it was stated in the evaluations of the EC.
Therefore, the European Commission proposes consolidation, retention of existing duties and an increase in the base, even a reduction of public sector salary expenditures, and warns of the preservation of contributions.
Fiscal rules weak
The EC states that improving the long-term sustainability of public finances requires strengthening fiscal management and public investment management.
"Although there are fiscal rules, they are weak and lack a strong enforcement mechanism. The most important new spending initiatives were not adequately evaluated, resulting in high mandatory expenditures. Large infrastructure projects require better management and prioritization given the limited fiscal space available. The establishment of an independent fiscal institution would help strengthen the costing of new initiatives and improve fiscal discipline. "Improving the supervision and risk management of state-owned enterprises would ease their burden on the budget over time," recommends the European Commission.
They looked for a strategy for consolidation, and got an increase in the deficit and public debt
In a document from April, the European Commission calls on Montenegro to adopt a sustainable fiscal strategy in 2024 in order to comply with the budget goal and support further disinflation, and use surplus income to reduce the deficit and accumulate state deposits.
"To adopt a medium-term fiscal strategy, including specific consolidation measures that support the achievement of a negative primary balance and a share of public debt that does not exceed 60% of GDP by 2026," the EC stated.
However, three months later, due to the fulfillment of the pre-election promise of an average net income of 1.000 euros, the Government adopted the Fiscal Strategy, which is not in line with the budget goals and these EC recommendations, on keeping the deficit below three percent of GDP and the public debt below 60 percent of GDP, because the deficit is increasing and will be above three percent in the next three years, as well as the public debt above 60 percent.
"Members of the Fiscal Council should be elected and appointed, and an adequate calculation of the costs of new fiscal initiatives should be ensured and publicly announced. Based on the analysis of the economic and fiscal impact of all tax expenditures to be submitted to the Commission, to prepare concrete budget recommendations for reducing tax expenditures. To improve the supervision of state-owned enterprises through the preparation and publication of an appropriate assessment of fiscal risks. To implement the Public Investment Management Assessment (PIMA) recommendations, prioritizing key public infrastructure works within the available fiscal space, while avoiding exceptions in terms of project selection. Continue to thoroughly assess price developments and be prepared to use the limited tools available within the chosen monetary framework to ensure price stability," the recommendations said.
The members of the Fiscal Council, a new institution that has been announced for years, have not yet been elected, although they should start working on January 1 of the new year.
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