The Government of Montenegro must limit current spending from the budget (salaries, pensions, social benefits, etc.), establish a fiscal council, review existing fiscal rules, analyze the impact of all tax exemptions, increase public revenues, analyze the operations of state-owned enterprises with the aim of operating economically, select priority investments that will be financed with debt in order to limit the growth of public debt... Montenegro must also elect the vice governors of the Central Bank according to the principle of independence of that institution, as well as harmonize the Law on the Development Bank with EU legal norms.
This was stated, among other things, in the opinion of the European Commission on the Economic Reform Program (ERP) of Montenegro until 2027, which was published in the June EC Institutional Document.
"Montenegro should limit current spending, while any remaining budget funds and savings resulting from the failure to execute capital spending should be used to reduce the deficit and accumulate government deposits. It should establish and put into operation the Fiscal Council in time to be able to review the budget proposal for 2026. It should review the functioning of the existing fiscal rules and prepare and submit to the Commission a document with possible options for their strengthening," the EC conclusions stated.
At the end of May, the parliamentary majority refused to elect two vice governors proposed by the Governor of the Central Bank of Montenegro. Irena Radović.
Analyze risks in state-owned enterprises
Brussels is also demanding that, based on an analysis of the economic and fiscal impact of all tax exemptions, budgetary measures be implemented with the aim of increasing public revenues.
“Montenegro should prepare and submit to the Commission a comprehensive report on fiscal risks and further strengthen the analysis of fiscal risks related to state-owned enterprises. Implement the recommendations of the Public Investment Management Assessment, prioritizing key infrastructure projects within the available fiscal space and ensuring a cost-benefit analysis of investment projects, including public-private partnerships. Continue to closely monitor price developments and possible secondary effects, and stand ready to use the limited instruments available within the chosen monetary framework to ensure price stability. In line with the principles of the independence of the Central Bank, it should ensure a transparent selection of members of the Council, including deputy governors, based on the competences of the candidates and through a procedure that is aligned with the Law on the Central Bank. Ensure that the Development Bank follows best practices in terms of governance, as well as appropriate supervision and regulation applicable to other deposit-taking institutions, in order to ensure transparency, sound lending practices, adequate deposit protection and a level playing field in the banking sector,” the EC stated in its main recommendations to Montenegro.
The government sent the Economic Reform Program for 2025-2027 to the European Commission in January. The document contains all planned measures that the state will implement in the field of public finances and the economy, plans for borrowing and repayment of old debts, planned capital investments... as well as forecasts for the development of state revenues, public debt and gross domestic product growth.
Fewer foreigners, delayed investments, falling GDP
The government expects the economy to grow by 4,8 percent this year, based on private consumption growth, increased tourism revenues, and new capital investments in the continuation of highway construction, railway reconstruction, energy, etc. The state's partner in the construction of the new highway section, the EBRD, has not yet selected a bidder, and although this will happen in the second half of the year, the main works, and the effects on GDP, could only begin next year. The expected preparations for the railway reconstruction project worth 224 million have also not been completed.
The World Bank and EBRD have already revised Montenegro's growth rates downwards, to 3 and 2,6 percent, respectively. If this growth rate were not achieved, the percentage of public debt in GDP would increase, and lower economic activity would also result in lower government revenue than planned.
The European Commission warns of possible risks to the estimated growth of 4,8 percent, namely that the decline in tourism from 2024 could continue in 2025, as well as the failure to generate significant income from the consumption of a large number of foreigners - migrants.
“Demand stimulus and GDP growth are expected to weaken in 2026-2027. While tourism services are expected to expand, PER forecasts net exports to contribute negatively to GDP growth over that period. Overall, risks to the economic outlook are largely negative. The recent influx of migrants, which followed Russia’s aggression in Ukraine and boosted consumption in previous years, could reverse. "Weaker tourism growth could continue beyond 2024, in light of the challenging and highly uncertain global situation. The temporary closure of a large thermal power plant could further reduce GDP growth, more than currently projected by the PER," the EC said.
Government's austerity plan too optimistic
They also point out that the government's PER for this year itself predicts an increase in the budget deficit from 3,2 to 3,5 percent of GDP, compared to the small surplus that occurred in 2023. The EC states that the deficit will be above three percent and public debt above 60 percent of GDP, i.e. above the Maastricht criteria and the limits prescribed by Montenegrin fiscal rules. They also point out that this is a consequence of the "Europe Now 2" program.
“The 2025 budget foresees a deficit of 3,5%, due to the full annual implementation of the Europe Now 2 programme, including a significant reduction in pension contributions, an acceleration of capital investments and a partial compensation through an increase in indirect taxes. The budgetary adjustment plans for the period 2026-2027 rely on a gradual reduction in the primary deficit, mainly through a slowdown in current expenditure growth, which should lead to a reduction in the expenditure ratio by 2,5 percentage points. However, the envisaged budgetary savings appear overly optimistic and are not supported by concrete measures. The public debt ratio, which has declined significantly in previous years, partly thanks to strong nominal GDP growth, is projected to fall to 60,2% of GDP in 2025, before rising to 64,6% in 2027,” the EC said.
Don't repay debts only from new borrowings
They point out that Montenegro needs to repay 2025 billion euros of old loans in the period 2026-2,1, or about 14 percent of GDP in 2025 and 2027. The EC also believes that part of these obligations should be repaid from budget revenues, not from new borrowing, which is why they call for savings and consolidation of public finances.
"High mandatory expenditures and a limited tax base, combined with large debt servicing needs, require a more cautious fiscal policy. Recent measures, including efforts to significantly reduce the tax burden on labor ('Europe Now 2') and permanently increase social transfers, have further widened the structural gap between revenue and expenditure. Debt servicing needs are expected to increase significantly, first in 2025 and then in 2027. Given Montenegro's monetary framework, fiscal policy is the main instrument for preserving macroeconomic stability. Therefore, more ambitious fiscal consolidation measures are needed, ideally aimed at achieving a primary surplus and reducing the public debt ratio below 60% of GDP, as required by the fiscal rule," the EC believes.
Brussels is calling for this goal to be achieved by expanding the tax base by suppressing the shadow economy and increasing the number of taxpayers, rationalizing tax exemptions, introducing measures to increase revenues, and reviewing and reforming public sector wage obligations and social transfers in terms of savings.
"The government adopted the 'Europe Now 2' reform agenda, leading to continued non-compliance with fiscal rules and an increase in the public debt ratio, as projected in the new medium-term fiscal strategy. Little progress has been made in reviewing tax exemptions and preparing concrete budgetary recommendations," the EC said.
Development Bank Law Contrary to EU Norms
Following the adoption of the Law on the Development Bank in October, the Investment and Development Fund of Montenegro was officially transformed into the Development Bank of Montenegro in December. The EC warns that this law is in conflict with EU norms.
"The law violates several EU legal acts in the field of banking and regulation of credit institutions, as well as in the field of payment transactions, which raises serious concerns regarding compliance with EU competition and state aid rules. The Development Bank's governance and risk management frameworks, as well as supervisory and control mechanisms, are not aligned with the comprehensive EU rules and Montenegro's EU-aligned legislation, which may negatively affect the integrity of the country's financial system. Capital adequacy requirements are lower than the standards prescribed by EU banking legislation. The Development Bank is exempted from the laws regulating credit institutions, although it accepts deposits and grants business loans. This creates an unequal position in relation to other commercial banks," the EC stated.
Last year, when the Europe Now Movement parliamentary group proposed the controversial law on the Development Bank, the Central Bank announced that it supported the establishment of a Development Bank of Montenegro, but that the draft law was contrary to EU directives, which is why it was necessary to obtain the opinion of the European Commission. The parliamentary majority then nevertheless adopted the controversial law.
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