TRANSITION REPORT 2014 Innovation in Transition


  • Economic growth returned in 2013. The rise in GDP of 3.3 per cent in 2013 represents a strong rebound after the 2012 recession. However, public debt levels have risen sharply and need to be monitored carefully.
  • Progress on privatisation has been weak over the past year. Several attempts to sell large companies and assets have failed due to a lack of investor interest.
  • Power sector capabilities have been improving. Plans to build a submarine electricity cable connection with Italy are advancing, contributing to Montenegro’s growing status as a regional energy hub.

Key priorities for 2015

  • Management of public finances should be improved. The level of public debt has risen sharply in recent years and needs to be addressed carefully. Plans to improve public finance governance and impose limits on public deficits and public debt are therefore welcome, provided they are adhered to.
  • A comprehensive approach is needed to tackle the NPL problem. Many non-performing loans (NPLs) in Montenegro are related to real estate, which makes them harder to resolve. A coordinated approach by the government, central bank and local banks is needed, with a strong emphasis on supervision and enforcement rules.
  • Further improvements are needed in the energy sector. The main challenges include unbundling the country’s vertically integrated electricity holding company, developing renewable sources of energy (mini-hydro and wind), and strengthening the independence and competence of the energy regulator.




2014 sector transition indicators
Corporate Energy Infrastructure FI

Source: EBRD. 
Note: FI – Financial institution; ICT – Information and communication technology; Water – Water and wastewater; IAOFS – Insurance and other financial services; PE – Private equity.

Main macroeconomic indicators %

  2010 2011 2012 2013 2014
GDP growth 2.5 3.2 -2.5 3.5 3.0
Inflation (average) 0.7 3.1 3.6 2.2 0.4
Government balance/GDP -4.6 -5.2 -5.9 -3.2 -1.5
Current account balance/GDP -22.9 -17.7 -18.7 -14.6 -17.8
Net FDI/GDP 17.8 12.0 14.7 9.7 10.5
External debt/GDP 96.0 96.1 115.1 118.9 n.a.
Gross reserves/GDP n.a. n.a. n.a. n.a. n.a.
Credit to private sector/GDP 69.5 57.9 57.4 57.6 n.a.

Note:  Montenegro uses the euro as legal tender.

Macroeconomic performance

Growth returned to positive territory in 2013, with real GDP rising by 3.5 per cent, following the 2012 recession (when GDP fell by 2.5 per cent). While an increase in external demand was the main growth driver over the last year – largely due to higher exports in electricity and a strong tourism season – domestic demand remained subdued. As a result, Montenegro’s economic recovery in 2013 had a limited impact on the labour market and the unemployment rate remained high at 19.5 per cent. Subdued domestic demand ultimately led to a period of deflation, as the average price level showed a year-on-year decline from the beginning of 2014.

The current account deficit continued to decline due to a narrowing trade deficit and a rise in revenue from tourism and remittances. Despite this, the current account remains one of the highest in the region at close to 15 per cent of GDP. However, as the country enters a new investment cycle, with several major projects in tourism, energy and infrastructure in the pipeline, the declining current account trend is likely to reverse.

Public finances have been under pressure. The activation of state loan guarantees for the aluminium producer, KAP, has weakened the government’s fiscal position and elevated the government deficit to an unplanned 3.2 per cent of GDP. Under the 2014 budget law, Montenegro plans to cut its deficit to below 2 per cent of GDP. This will be achieved by a combination of higher budget revenue from continued GDP growth, a one-year extension on the so-called crisis tax (15 per cent tax introduced in early 2013 on above-average salaries) and a freeze on wages and pensions until the end of 2014. However, risks remain from the activation of further state loan guarantees, equivalent to 9.4 per cent of GDP. The deteriorating fiscal situation contributed to public debt rising to just below 60 per cent of GDP, a 10 percentage point increase relative to 2011. In line with the latest negative developments, parliament has endorsed a new law on fiscal responsibility, which regulates budget execution and the issuance of state guarantees, and sets a 3 per cent GDP limit for the budget deficit and a 60 per cent GDP limit for public debt. This is an important step towards improving the standards of public finance management in Montenegro, but sticking to these rules will be a serious challenge, especially in light of the launch of a major highway construction project.

Further growth is expected this year. However, as a small and open economy, Montenegro is highly vulnerable to external shocks, such as the crisis in Ukraine. Diversification of the economy remains a challenge for building sustainable growth in the medium term, but visible progress in the EU approximation process should help to attract further foreign direct investment and, together with major investment projects currently in the pipeline, ultimately boost the country’s growth prospects. Future growth should mainly be underpinned by tourism, energy and infrastructure investments.

Major structural reform developments

Montenegro is making good progress in EU accession negotiations. The negotiations began in June 2012 and, as of August 2014, Montenegro has opened 12 negotiating chapters (out of 35), and has provisionally closed two: science and research; and education and culture. The most recently opened chapters include those relating to free movement of capital, intellectual property, foreign security and defence policy, and financial control. Under the new enlargement rules, Montenegro has started negotiations on the two most challenging chapters relating to judiciary and fundamental rights (chapter 23), and justice, freedom and security (chapter 24).

Large-scale privatisation is advancing, albeit with some setbacks. The privatisation council’s plan for 2014 includes preparing tenders for privatisation of the following assets: rail cargo operator, Montecargo; the national airline, Montenegro Airlines; tobacco company, Novi Duvanski Kombinat Podgorica; the Igalo Health Institute; and hotel and tourism operators, Budvanska Rivijera and Ulcinjska Rivijera, among other targets. The council also stated that it would seek to sign public-private partnership contracts for 32 companies – including the postal operator, Posta Crne Gore – as well as a number of tourism companies and locations, such as Ada Bojana and Velika Plaza. However, offers of sale of many of these companies have failed over the years. An example of a recent failed privatisation is the Bijela shipyard. A tender for a majority stake attracted just one bid by the deadline of 15 April 2014 and this bid was rejected on legal grounds, resulting in the fourth failed attempt at privatising this asset. In addition, in March 2014 the government reclaimed its stake in Marina Bar from the Latvian owner, and cancelled its 30-year concession deal for port operations, on the grounds that the company acted against the terms of the privatisation contract. However, the government managed to sell the Container Terminal and General Cargo company in the Montenegrin port of Bar to a Turkish company, Global Ports.

Aluminium company KAP’s future remains uncertain as sale is disputed. Following the initiation of bankruptcy procedures in July 2013, the sale of KAP’s assets was launched in December 2013. In March 2014 the bankruptcy administrator decided to sell the company’s assets to the sole bidder, local company Uniprom, for €28 million. CEAC, the company’s former owner and one of its largest creditors, has challenged the decision in both national and international courts.

Business environment reforms have advanced. Over the past year, the government has introduced a number of business environment improvements, including a one-stop shop for permits, strict time limits for the issuance of approvals and a decrease in the number of procedures required for obtaining a permit. This has had a particularly beneficial impact on the real estate sector and has led to an upgrade on the EBRD’s market institutions score for this sector. These reforms are helping to maintain Montenegro’s relatively good standing on the World Bank Doing Business 2015 report, which places the country at 36th out of 189 countries for overall ease of doing business, six places up from a year ago. However, a planned €250 million hotel investment by a major foreign investor was delayed earlier this year, reportedly due to bureaucratic impediments.

Power sector capabilities are being enhanced with private sector involvement. In 2013 a tender was opened for the construction of a second 220-300 MW unit of Montenegro’s only thermal power plant, TE Pljevlja. Preliminary discussions are ongoing with three bidders: two from China and one from the Czech Republic. In addition, mini-hydropower capabilities are being developed further. In June 2014 the government awarded 10 concession contracts to five private investors for the construction of 10 mini-hydropower plants in the northern part of the country.

Earnings remain strong in the financial sector, but credit growth has turned negative again, while non-performing loans remain high. Prior to the crisis, between 2006 and early 2008, Montenegro reported annual credit growth rates of over 100 per cent. Since the crisis, however, there has been a persistent year-on-year credit contraction, which finally reversed in 2013. The financial sector showed strong earnings in the first half of 2014, but credit contraction returned in the same period, reflecting conservative lending policies and a lack of attractive projects. At the same time, the banking sector continues to be characterised by a high level of NPLs, at approximately 17 per cent of total gross loans as of mid-2014. Bank deposit growth has strengthened following the 2009 slump, which implies that banks are increasingly relying on domestic sources of financing. At the end of 2013 a total of 11 banks were active in the country and another one was opened in mid-2014. Currently, foreign-owned banks control 90 per cent of the banking assets.