Economic Achievements and Challenges

Minister of FinanceIgor Luksic, PhD

The youngest independent state in the world

Montenegro is accepted as 192th member of United Nations on June 29, 2006 by which it became the youngest independent state in the world

Basic Economic Facts

  2004 2005 2006/6

GDP real growth 2.7% 3.7% 6.5%Budgetary deficit/surplus - 2.1% - 1.6% 0.5%

Inflation rate 4.3% 1.8% 1.6%

External public debt 32.7% 31.3% 27.1%

Total public debt 44.8% 42.6% 36.9%

Current account deficit 9.2% 8.6% 7%

Unemployement rate 22.6% 18.6% 14.7%/9

Public Finance Consolidation

Decreasing of:

• Public expenditures• Public debt• Tax burdens• Budget deficit

Increasing of:• Tax incomes

43.544

44.545

45.546

46.5

2003 2004 2005 2006

public expendiures in %

88.39

49.69 48.4942.79

36.9

010

2030

4050

6070

8090

100

2002 2003 2004 2005 2006/6

public debt in % corporate tax rates

0.05.0

10.015.020.025.030.035.0

B&

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Est

Slo

Che

ch Cro

Alb

Slo

vaki

a

Hun

Rum

Bul

g

Lith

u

Irle

and

Ser

b

Mon

tene

gro

budget deficit/surplus

-3.5

-3

-2.5

-2

-1.5-1

-0.5

0

0.5

1

2003 2004 2005 2006p

Public Expenditures Reduction

Public expenditures are reduced from 46.22% in 2003 on 45.51% in 2004, 45.18% in 2005 and estimated 44,64% GDP in 2006 (included municipalities expenditures). Estimation for 2007 is 41%GDP (II consolidation level)

43.5

44

44.5

45

45.5

46

46.5

2003 2004 2005 2006

public expendiures in %GDP

Public Debt Reduction

Public debt of Montenegro as of 30 September 2006 amounted to 644.9 mln €, domestic debt was 167.6 mln € while foreign debt was 477.3 mln €

88.39

49.69 48.4942.79

36.930

40

50

60

70

80

90

100

2002 2003 2004 2005 2006/6

public debt in %GDP

Tax Burdens Reducing

• VAT – 17% (in 2005 is introduced new rate of 7% for basic food, books, tourism services)

• PIT (now 15, 19 ad 22%) and social contributions cut by 10%. Further plans are: proportional rate 15% ( 2007, 2008), 12% in 2009 and finally 9%.

• Corporate Income Tax - 9%• Health contribution rate is intended to be reduced from 13.5% to 9%

gradually by 2010

VAT rates

0

5

1015

20

25

30corporate tax rates

05

101520253035

From budget deficit to surplus

• In 2002 consolidated budget deficit was amounted on 4% GDP. According to actual budget execution it is estimated to reach surplus of 0,6% GDP by the end of 2006

• If we consider longer period of time, starting with 2000, budget deficit fell down over 8% GDP.

budget deficit/surplus in %GDP-3.5

-3

-2.5

-2

-1.5-1

-0.5

0

0.5

1

2003 2004 2005 2006p

“Standard&Poor’s” Credit Rating

In November 2005 Montenegro got the grade of S& P BB positive for long term credit ability.

Economic Freedom Index

• Annual Report on Economic Freedoms of the Fraser Institute for 2006 in cooperation with CEED analyzed economic freedoms in Montenegro and gives it the score 6,4.

• This score puts Montenegro into the first 65 countries in the world (nine places above the Republic of Croatia).

Banking Sector Development

New Law on banks which will prescribe new possibilities for foreign investment in banking sector.

Over 95% privatized Greenfield investments Constant growth of total

assets of banks, loans, deposits (specially households deposits)

Decreasing of interest rates

0

100

200

300

400

500

600

700

2002 2003 2004 2005 2006/6

credits deposits

10

10.5

11

11.5

12

12.5

2005Sep 2005Oct 2005Nov 2005Dec

AWIR nominal AWIR effective

Basic Legal Framework for Capital Market

• Law on Securities,• Law on Privatization,• Law on Foreign Investments,• Business Organization Law,• Law on Investments Funds,• Law on Voluntary Pension Funds• Law on Takeover of Joint Stock Companies

Stock Exchange Indexes

• Index NEX20:

- March 2003 – 1000,

- July 2006 – 15.575

• Index NEXPIF:

- March 2003 – 1000,

- July 2006 – 13.827

• Index MOSTE:

- March 2003 – 100,

- July 2006 – 810

0100200300400500600700800900

Moste

0

2000

4000

6000

8000

10000

12000

14000

16000

18000

Nex 20

Nex PIF

Capital and Current Transaction Law

• Legal tender - Euro• No restriction regarding capital and current transaction with abroad• Free flow of capital (repatriation of the profit, possesion of the current account

abroad)• 382 ml € FDI in 2005, 615 € per capita, plan for next four years is 300 per capita

87 38 50

375

0

200

400

600

2002 2003 2004 2005

FDI in mil

Property

• Set of property laws• Law on restitution adopted on 9. April 2004• Restitution Fund is established• 20 municipality commissions started to work• Commissions submitted to Fund 167 legal decisions

amounted to 28.5 ml • Until now owners got 6.17 ml, ¼ in cash and 13.4 ml in

bonds

Tourism

• The number of tourists in the first seven months of 2006 was 17.7% higher than in the same period last year, number of foreign tourists rose by 39.5%, and the number of domestic tourists and tourists from Serbia by 6.8%.

• The registered number of overnight stays in this period amounted to 2.8 million, which is 17.6% more than in the comparative period in 2005, with an increase in the number of foreign tourist overnight stays of 48.8%.

0

2

4

6

8

2003 2004 2005

overnight stays

Challenges

Preconditions for faster economic growth:

• Further fiscal consolidation:- Public debt decreasing and restructuring to be below 30%GDP by

2011- Compliance with “golden rule”- Balanced budget- Public expenditures reducing to 35%GDP/alternatively cuts in current

expenditure 1pp yearly• Business barriers reduction• Pension system reform – introducing of mandatory individual capital saving• Labor market deregulation• Health system reforms – voluntary health insurance• Education system reforms• Infrastructure investments – highways, wastewater and reconstruction of

water supply system

Ministry of Finance of the Republic of Montenegro2 Stanka Dragojevica Street

Podgorica 81000Montenegro

tel: +381 81 242 835, fax: +381 81 224 450e-mail: mf@mn.yu

www.ministarstvo-finansija.vlada.cg.yu

THANK YOU!