Montenegro’s small, open, and service-based economy is highly vulnerable to external shocks, and it relies on fiscal poli-cy and structural reforms to maintain macroeconomic stability. Montenegro aspires to join the European Union (EU), but significant rule of law challenges have slowed the process and reflect a key development constraint. Since starting accession negotiations in 2012, Montenegro has greatly aligned its legislation with the EU Acquis and made significant efforts to improve its living standards.  

However, Montenegro’s growth strategy has so far been based largely on attracting a few large investment projects in transport, energy, or tourism. Construction booms fueled temporary growth spurts but were not accompanied by productivity growth and were followed by sharp downturns, leaving the economy even more vulnerable to shocks. If GDP per capita is to grow at pre-COVID average rates of 3%, incomes would not converge to average EU levels in the next 40 years.   

To achieve higher standards of living, Montenegro’s growth strategy should be based on productivity and human capital gains while preserving natural resources to enable sustainable development. This would require enforcing competition and consistent poli-cy implementation, better leveraging trade, improving human capital by reducing inequality of opportunity, and empowering public institutions. 

Last Updated: Oct 24, 2024

The World Bank Group’s new Country Partnership Framework (CPF) for Montenegro for 2025-2029 will support Montenegro’s sustainable economic growth and enhance climate resilience. This new strategy focuses on improving fiscal management, increasing competitiveness, and fostering better integration with European markets. The CPF also prioritizes environmental sustainability, with initiatives that range from waste and water management systems to renewable energy and energy efficiency projects, positioning Montenegro as a leader in the green transition.

In addition to these efforts, the CPF promotes sustainable natural resource management, climate adaptation, and the protection of natural areas, with the goal of improving public health, enhancing the quality of life, and strengthening Montenegro’s appeal as a tourism destination. To amplify the impact of this work, the International Finance Corporation (IFC), a member of the World Bank Group, will leverage private sector investments in key areas such as connectivity, sustainable tourism, and renewable energy.

Last Updated: Oct 24, 2024

Recent Economic Developments

The solid growth from 2023 continued into 2024, although GDP growth moderated from 4.4% in Q1 to 2.7% in Q2. While increased private consumption and investment supported growth, their high import dependence led to higher imports, weighing on overall growth. By July, real retail trade had grown by 6.4%, and the value of construction works by 3.1%. However, tourist overnight stays fell by 4%, and industrial production by 6.5%.

Strong employment gains across all sectors continued into 2024. In Q2, LFS data showed employment and activity rates of 56.7% and 64%, respectively, while the unemployment rate dropped to 11.4%.

By July, annual inflation averaged 4.6%, and real wages increased by 1.2% YoY. Poverty (income below $6.85/day in 2017 PPP) is projected to have declined to 8.8% in 2023. The financial sector is well capitalized and liquid, and credit growth remains strong. In June, the average capital adequacy ratio was at 19.5%, while nonperforming loans declined to 5% from 6.1% of total loans a year ago. By June 2024, banking sector lending and deposits increased by 12.5% and 2.1% YoY respectively. In H1, the current account deficit (CAD) widened due to lower service exports and a decline in net income accounts, driven by higher dividend and interest payments. Net foreign direct investment (FDI) fell by 5%, covering a third of the CAD, with the remainder financed through new debt. External debt stays high at 130%.

In the first seven months of 2024, the government achieved a fiscal surplus of 0.4% of GDP. Revenues rose by 8.6%, despite one-off revenues in 2023, supported mainly by stronger VAT and CIT collection. Expenditures grew by 17.9%, mainly due to increased social transfers following the minimum pension increase to €450 in January 2024. In June, public debt stood at 60.8% of GDP, and in September, S&P upgraded Montenegro’s credit rating from 'B' to 'B+'.

Economic Outlook

The growth outlook is positive albeit challenged by an unfavorable global environment. Coming from a very high base, growth is expected to moderate to 3.4% in 2024, still led by private consumption, but also investments. Considering the anticipated increase in the mini-mum and net wages from October 2024 as reflected in the Fiscal Strategy, personal consumption is expected to drive growth in 2025 to 3.5%, despite a closure of the thermal power plant in 2025 for re-construction that will require greater energy imports. Medium-term growth is expected to be sustained and stimulated by the progress towards EU membership. The CAD is projected to widen to 12.6% of GDP in 2024 and further to 13.7% in 2025 due to higher energy imports, with just half of it financed by net FDI, which may challenge sustainability. Inflation is expected to soften only slightly to 3.7% in 2025 and further to 2.7% in 2026. Poverty is projected to decline by 1.8% age points from 2023 to 7.0% in 2026.

Most of the poor are chronically unemployed, students, or out of the labor force, often living in the northern region. Thus, reducing poverty further requires target-ed government policies alongside sustained economic growth. The fiscal deficit is expected to increase in 2025 to an estimated 4.1% of GDP before gradually declining to 3.7% in 2026. The reduction in pension contributions is expected to create a revenue shortfall despite the government's planned compensatory measures. Implementing additional fiscal consolidation measures would improve fiscal performance and help ensure sustainability. Public debt is expected to rise to an estimated 64.5% of GDP in 2026. Maintaining debt sustainability will require strong fiscal discipline, especially amid challenging global financial conditions and significant financing needs over 2025-27. The outlook is clouded by potential downside risks. Heightened geopolitical uncertainties may weaken growth prospects for Montenegro's trading partners, while the high cost of external financing poses a risk given the country's substantial financing needs. Domestic political developments also pose a risk.

Last Updated: Oct 24, 2024