Montenegro's economy faces serious problems

14/09/2011

Ballooning debt and a lack of foreign investment have put Montenegro at risk of economic crisis.

By Nedjeljko Rudovic for Southeast European Times in Podgorica -- 14/09/11

Montenegro Central Bank Governor Radoje Zugic. [Reuters]

Montenegro's economy grew at a rate of 2% in the first half of the year, but experts warn the country must immediately curb borrowing to avoid the crushing weight of a debt crisis.

"We are concerned about the pace of increasing public debt … More powerful economies in the EU have experienced major problems because of it," Central Bank Governor Radoje Zugic said.

At 1.25 billion euros, or 45% of GDP, Montenegro's projected total debt is second only to Albania in the region. Public debt rapidly increased after the government issued 380m euros in bonds around the start of the year in order to pay salaries and pensions. With interest, the bond obligation will total 524m euros when it comes due in 2016.

Meanwhile, the government took an additional World Bank loan in the amount of 59m euros earlier this month.

Central Bank data shows that the operations of one in four enterprises are blocked due to their inability to pay debts. As of June, 14,754 companies -- out of 55,602 -- with a combined debt of 302m euros were unable to function.

Similarly alarming is the data on private debt. Of 2 billion euros in total bank loans -- a quarter, or 523m euros -- will likely not be repaid.

Parliamentary Committee for Economy President Aleksandar Damjanovic warns that continually increasing the public debt has not improved the economy's performance or standard of living.

"The fact that the national debt, which in 2006 was about 700m euro, rose more than twice in five years, indicates there is a policy [at work] which can push Montenegro into debt slavery. There is a legitimate concern that we are coming into the danger zone of state bankruptcy," Damjanovic told to SETimes.

Experts agree that to avoid a worsening debt situation, foreign investment -- rather than borrowing -- should be the engine of growth.

"In Montenegro, there is stagnation when it comes to foreign direct investment. In the first seven months, compared to the same period last year, foreign direct investment decreased 38%," Zugic said.

"We believe that tourism pushed up the other sectors," he concluded. Experts say Montenegro needs 300m euros in annual foreign investment to reach a sustainable budget.

One of the ruling Social Democratic Party (SDP) members insists that Montenegro take urgent measures, including a new law to encourage foreign investors.

"They include tax, financial and customs incentives, infrastructure and free use of land," SDP's Damir Shehovic told SETimes.

According to analyst Vasilije Kostic, Montenegro's high dependence on imports, pension fund deficit and social benefits expenditures, coupled with a large state administration, will put constant pressure on the sustainability of public finances.

"The reality is public debt will still increase due to the slowdown of the world's economic recovery, especially in the developed European economies, which affects the development of small economies like ours," Kostic told SETimes.

"It is clear that the problem of debt growth is complex and troubling. We should not forget that the credibility of a state depends largely on the ability to service its debt, especially now," Kostic said.

This content was commissioned for SETimes.com.