The deficit must be reduced, even through belt tightening.

Montenegro will only partially meet the main conditions for joining the European Monetary Union - the Eurozone in the next three years, or rather, it will meet two of the four criteria. In 2029, public debt will be just below the 60 percent limit of gross domestic product at 59,9 percent, while current revenues will be two percent above current expenditures. Even then, the conditions for the state finance deficit to be below three percent will not be met, as it will amount to 3,2 percent, and there will be no cash surplus (cash revenues greater than cash expenditures), but a deficit of minus 0,6 percent of GDP.

This is stated in the Proposal for Macroeconomic and Fiscal Policy Guidelines for the period 2026-2029, prepared by the Cabinet of the Minister of Finance. News of Vuković, and which was adopted by the Government.

The proposal for the new Law on Budget and Fiscal Responsibility stipulates that the Ministry of Finance adopt special measures to keep the deficit and public debt within these criteria, through savings, revenue increases or other means.

According to official state policies, Montenegro plans to apply for membership in the eurozone - a community of countries that use the euro and pursue a common monetary policy - after joining the European Union by the end of 2028.

According to the new Eurozone ERM II rules, a country can become a member of the Eurozone at least two years after joining the European Union, which would at best mean in 2031. Montenegro has been formally approved to use the euro as its currency even though it is not a member of the Eurozone.

These criteria, even without that obligation, are part of fiscal responsibility and an official goal in fiscal policy.

"The criterion that stipulates that the general government budget deficit will not exceed 3% of GDP has not been met in the projection years, however, with stable convergence towards the defined frameworks ensured, ranging from 3,7% in 2026 to 3,2% of GDP in 2029. When it comes to the expected movement of public debt, in the medium term, it is stable, if we look at the percentage of public debt in GDP, with a slight downward trend. The level of public debt is projected to range from 68% in 2026 to 59,9% in 2029, so this criterion is met and reaches a level below 60% of GDP in 2029," it is stated in the Proposal for Macroeconomic and Fiscal Responsibility Guidelines.

It is also estimated that the primary cash surplus will not be achieved in the observed medium-term period, but it is stated that the primary deficit is decreasing, reaching a level of minus 0,6% in 2029 and is now 1,7 percent of GDP.

Public debt currently at 68 percent

These criteria are found in the existing Law on Budget and Fiscal Responsibility, but also in the new one, which the Parliament will discuss at an extraordinary session on August 24th.

The previous law also stipulated that the Ministry of Finance would react with special measures and guidelines each year if the deficit exceeded three percent and the public debt exceeded 60 percent, in order to meet these criteria in that year or at the latest in the next three years.

The proposal for the new Law on Budget and Fiscal Responsibility also sets fiscal rules that the public debt will not exceed 60 percent of GDP and the budget deficit will not exceed three percent of GDP.

Currently, according to data from the Ministry of Finance, public debt is at 5,8 billion euros or 68 percent of the estimated gross domestic product, while the deficit (shortage) of state finances for this year is 318 million euros or 3,7 percent of GDP.

The plan must include a reduction in expenses.

The new law proposal, which, if adopted by the Parliament, will come into effect on January 1st of next year, stipulates that measures to bring public debt and deficit below these criteria will be determined by fiscal strategies for that year and the medium-term budget framework for the next three years.

"In order to eliminate the risk of instability of public finances, if public debt exceeds 60% of GDP, the Fiscal Strategy must include a fiscal convergence plan (approaching the set goals) to ensure a downward trajectory of public debt in the medium term. The fiscal convergence plan contains annual fiscal targets, fiscal policy measures, the expected impact of the measures on the budget surplus or deficit, public debt and the trajectory of net expenditures, as well as a timeframe for achieving compliance with the fiscal responsibility criteria," the bill before the parliament states.

Similar measures are envisaged in the event of violations of the parameters for the public finance deficit.

"If during the fiscal year there are structural disturbances that may have negative effects on the established level of surplus, i.e. general government deficit, borrowing in terms of net expenditures, the Government is obliged to: conduct an analysis of the negative effects on the established level of general government deficit and public debt and to prepare an amendment to the Fiscal Strategy defining fiscal policy measures for the recovery of the general government deficit," the bill states.

It is also envisaged that the recently established Fiscal Council should give its consent to the fiscal strategies prepared by the Ministry of Finance.

Exceeding the benchmark only in the event of war, pandemic...

The draft law provides for possible exceptions in which the public debt and deficit would be above the established criteria, namely major extraordinary events beyond the control of the Government "including a serious economic disruption, a natural disaster or major environmental disaster, an epidemic or public health emergency, a state of war or emergency, a serious threat to national security, a financial sector support measure necessary to preserve financial stability, a mass migration or humanitarian wave, or another extraordinary event with a significant fiscal impact that could not have been reasonably foreseen".

However, even in the event of such major extraordinary events, deviation from these criteria must not jeopardize fiscal sustainability in the medium term, i.e. even in the event of war, pandemic or a wave of migration, the deficit and public debt must return below the criteria within three years.

The draft law also leaves the possibility for temporary deviation from these criteria only in the event of a need to increase defense expenditures in accordance with international obligations and collective security standards. In these cases, the fiscal strategy must also demonstrate the reasons for the increase in these expenditures, i.e. the level of annual deviation compared to the previous proposal, and their duration. Also, in this case, the public debt and deficit must be returned to acceptable limits within a maximum of three years.

The explanatory memorandum to the new law states that it represents a continuation of the reform of the public finance management system in Montenegro.

"The current law from 2014 laid the foundations for fiscal discipline and transparency, but in the meantime there has been a significant development of international standards and obligations in the EU accession process. Without the adoption of the new law, Montenegro would not be able to fulfill the obligations under negotiation chapters 32 and 33 or respond to modern requirements for fiscal discipline and transparency."

First measures to prevent public debt growth next year

The Ministry of Finance, in its Proposal for Macroeconomic and Fiscal Policy Guidelines until 2029, also predicts that public debt in 2027 will amount to 5,73 billion euros or 63,8 percent of GDP.

That is, in the first year of application of the new law, one of the most important criteria will be above the prescribed limit, which is why the law provides for an exception for the first year.

"If the level of public debt at the time of entry into force of this law is above 60% of GDP, the Government is obliged to prepare a fiscal convergence plan referred to in Article 26, paragraph 1 of this law as an integral part of the first subsequent Fiscal Strategy. Until the adoption of the first Fiscal Strategy referred to in paragraph 1 of this article, the Government is obliged to take measures to prevent a further increase in public debt above the level recorded in the year of entry into force of this law," the proposal states.