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MONET

MONTENEGRO ECONOMIC TRENDS

December 2005

ABOUT ISSP ABOUT CEPS

The Institute for Strategic Studies and Prognoses (ISSP), established by Professor Vukotic in 1999, is the first independent economic institute in Montenegro. USAID assisted in this process and continues to support the work of the Institute. ISSP has a wide network of associates both in Montenegro (about 150) and abroad. ISSP is a member of the Balkan Network, the Global Development Network established by the World Bank and the European Integration Network. ISSP cooperates with ICER (Torino), WIIW (Vienna), CEPS (Brussels) and Chesapeake Associates (Washington).

The Institute’s mission is "to provide research that will contribute to Montenegro’s economic transformation and to change the current mindset, as well as to train today’s young people how to function successfully in the new environment."

Major projects: o Macroeconomic reform in Montenegro a) Privatization b) Monetary Reform c) Capital Markets Development d) Fiscal Reform e) Reform of the Pension System f) Introduction of the SNA system o Macroeconomic indicators in Montenegro o Economic education

President: Professor Veselin Vukotic, Ph.D. Executive Director: Petar Ivanovic, Ph.D. Advisory Board Chairman: Professor Miroljub Labus, Ph.D.

CONTACTS

ISSP Address: Naselje pod Ljubovic, Lamela C (1 i 2), 81000 Podgorica, Montenegro, Yugoslavia Tel/Fax: (381) 81 634 338; 634 329 Website: www.isspm.org / Email: [email protected]

CEPS Address: Place du Congres 1, 1000 Brussels, Belgium Tel: (32) 2 229 39 11, Fax: (32) 2 229 39 71 Website: www.ceps.be / Email: [email protected]

CEPS was established in 1983. It performs independent analyses and critiques on European economic policy and politics, as well as on European institutions and security. It disseminates its findings through a regular flow of publications, public events and electronic commentaries. CEPS is an independent membership-driven organization with more than 100 corporate members and a large number of central banks, diplomatic missions and international business organizations in its constituency.

ABOUT MONET

MONET (www.isspm.org) is the result of the joint work of ISSP in Podgorica and CEPS in Belgium. It is financed by the grant from the European Agency for Reconstruction.

MONET team

-ISSP- ISSP team leaders: Professor Veselin Vukotic Petar Ivanovic

Researchers: Jadranka Kaludjerovic, Maja Bacovic, Milorad Katnic, Nina Labovic, Ana Krsmanovic, Tijana Stanković, Milica Vukotic, Jelena Janjusevic, Ivana Vojinovic, Milica Dakovic.

Lay out and web site: Boris Buskovic

-CEPS- Program Director: Daniel Gros Team Leader: Vladimir Najman ([email protected]) Resident Economist: Przemyslaw Wozniak ([email protected], [email protected])

Project Associates Zeljko Brkovic, Milan Dabovic, Miloica Dakic, Mirjana Djuranovic, Danijela Vukajlovic Grba, Jovanka Knezevic, Darinka Micanovic, Draginja Milatovic, Dejan Miljkovic, Dragica Pekovic, Milan Perovic, Natasa Radunovic, Vesna Samardzic, Zdravka Savic, Ljubinka Sekulic, Marina Vukanovic, Bosa Vukicevic, Tamara Saveljic, Zoran Djikanovic, Dragana Radevic, Darko Konjevic, Jelena Jokanovic, Maja Drakic.

Montenegro Economic Trends

ISSP - CEPS 2

Table of contents Events

3

Executive Summary

6

Part 1

Chapter 1. Output Chapter 2. Employment Chapter 3. Wages Chapter 4. Prices Chapter 5. Budget Chapter 6. Money Chapter 7. Capital Market Chapter 8. External Sector Chapter 9. Regional Comparison

10 18 24 32 42 56 68 76 82

Part 2

Comment 1. Empowering workers: The privatization of social security system in Chile

Comment 2. Towards privatization of Montenegrin pension system

Comment 3. The challenge of Global aging Comment 4. Montenegro's Human Development Profile Comment 5. Maritime Sector of Montenegro Comment 6. Software legalization – importance

of implementation Comment 7. European Free Trade Agreement (EFTA)

and Opportunities for Montenegro

86

96

102 110 116

123

127

December 2005

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3

Events June 2005. 5. KAP produced nearly 50,000 tons of aluminium. According to a KAP announcement, the

company has produced, since the beginning of the year, 49,827 tons of aluminium, which is more than was planned. Total revenue was $ 97,302,908.

10. “Korali” sales contract terminated. The contract regarding the sale of 34% of the shares

of HTP “Korali” to the “Miraž Holografi Studio” company, which was signed more than two months ago, was terminated because the Slovenians didn’t pay the €3.2 million that was owed for shares.

14. New petrol price increase. Retail prices of diesel and eco diesel in Montenegro have

increased by five and six cents per litre, and they are now 0.88 € and 0.92€. 21. Treasury bills issue. Government of Montenegro issues 56-day-treasury bills in the amount

of € 1.5 million. 23. Treasury bills issue. Government of Montenegro issues 91-day-treasury bills in the amount

of € 1 million. 25. Budget surplus € 79 million. According to an announcement from the Ministry of Finance,

total Montenegrin budget revenues in the first five months of this year were € 268.57 million, almost € 79 million more than the Government has spent and sorted over for restitution in that period. That amount of surplus was accomplished through the revenues gained from the sale of state shares in Telecom of Montenegro, which amounted to € 111 million.

29. Treasury bills issue. Government of Montenegro issues 91-day-treasury bills in the amount

of € 1 million. 30. Treasury bills issue Government of Montenegro issues 56-day-treasury bills in the amount

of € 3 million. July 2005. 4. Mobile telephony in Montenegro is more and more utilized. According to the

Telecommunication agency’s data, at the end of May there were over 505,000 mobile phone users in Montenegro, which is 2.6 percent more than in April of 2004.

12. Treasury bills issue. Government of Montenegro issues 182-day-treasury bills in the

amount of € 1 million. 12. Hotel “Mediteran” sold. Hotel “Mediteran” in Ulcinj has been sold for € 940 thousand

with investments of € 6.15 million to the “Becirovic Management Group.” 13. New petrol price increase. Retail diesel price in Montenegro increases by five cents and

reaches 0.93 €.


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15. EBRD credit contract signed. The Ministry of Finance of Montenegro signed an € 11.5 million credit contract with the European Bank for Reconstruction and Development of regional roads in Montenegro.


amount of € 1 million.

27. Tender for “Galeb” hotel. Commercial Court of the Republic of Montenegro launched

international tender for sale of the “Galeb” hotel, which is owned by “Ulcinjska rivijera.”

August 2005. 02. Tourism revenue increase. According to an announcement from the Ministry of Tourism,

total tourism revenue for the first six months of this year was € 62 million, which is almost 80 percent more than in the same period of last year.

03. “Radvent” from Niksic sold. The Russian company “Midland Resources” signed a

purchase contract for 48.6 percent of Radvent’s shares. 09. New petrol price increase. Retail prices of super and unleaded fuel in Montenegro increase

by three and two percent, while diesel and eco diesel prices remain the same. New price for super is 1.05 € and for unleaded is 1.06 €.

24. Tax collection increase in Montenegro. According to the Tax Directorate announcement,

this institution charged over € 10 million of residual debt, 168% more than was planned. As Directorate, they announced personal income tax above planned by 34%, value added tax more than twice the plan, concessions are almost triple the plan, pension and health instrumentals are quadruple the plan, and excise charging was 18.000% better than planned.


amount of € 1.5 million. 25. Treasury bills issue. Government of Montenegro issues 56-day-treasury bills in the amount

of € 1 million. September 2005. 03. Labor Inspection charged € 431,000 on behalf of contributions. According to the

Ministry of Labor and Social Care announcement, after controls, which were conducted by the Labor Inspection of the Republic of Montenegro, an additional € 431,548 were paid on behalf of social insurance contributions, and from June 20th until September 1st, 9,506 employees were denounced for obligatory social insurance.

December 2005

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5

06. New petrol price increase. According to a “Jugopetrol” announcement, retail fuel prices in Montenegro increased by 2%. The price of super per litre is 1.13 €, unleaded 1.15 €, eco-diesel 1 €, and diesel’s price is 97 cents.


amount of € 2 million. 14. Milocer Economic Forum. The Milocer Forum of Economist’s was opened in Budva. The

forum’s topic was “Competition and European Way,” and more than 500 economists from Serbia and Montenegro took part in the Forum.

14. Treasury bills issue. Government of Montenegro issues 28-day-treasury bills in the amount

of € 5 million. 29. Tender for MMK Standard PLC-Niksic. The Agency for Restructuring and Foreign

Investments of Montenegro announced tender for sale of 49.81% of MMK Standard PLC shares, which are owned by: Republic of Montenegro (19.9080%), Republics’ Pension’s and Invalid’s Fund (18.5529%), Employment Agency of Montenegro (6.1843%), and Development Fund of Republic of Montenegro (5.1716%).


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Executive summary

First part Macroeconomic data for the first three quarters of 2005 showed generally positive trends in Montenegrin economy. Industrial production in the first three quarters of 2005 was 1.3% higher than in the corresponding period of 2004, while its annual growth rate in September 2005 was 9.3%. Average electricity production in the first three quarters of 2005 was 6% higher than in the same period of 2004. In the tourism sector, the registered number of tourists increased by 16.8% in the first nine months of 2005 compared to the same period of the previous year. According to Monstat data, a total of 146,744 persons were employed in Montenegro in August 2005. The average number of employed persons in first eight months of 2005 is insignificantly higher as compared to the same period last year. According to ISSP estimates, the unemployment rate in August was 19.0%, while the unemployment rate according to official data was 26.3% in the same period. The average wage after taxes and contributions in October 2005 amounted to €219.6, which is 8.1% higher compared to October 2004. The highest average wages and salaries after taxes and contributions were registered in the second quarter of 2005 amounting €224.44 and were achieved in the Central region. When analyzing the various activities, the highest average wages and salaries after taxes and contributions were achieved in the financial intermediation sector and amounted €444.84. During observed period, from June to September 2005, annual inflation has been declining slowly in the first three months and increased in September. Consumer prices inflation reached 5.2% in September 2005. Retail prices inflation was 3.7% in September 2005. The main source of inflation came from oil and oil product prices increase. The cost of the Food consumer basket amounted €261 in September 2004. Producer’s prices increased in September to 2.1% due to oil inflation. Inflation forecasts for period October 2005 to September 2006 is in the range of 1.4%-3.8%. Total budget revenues in the first three quarters in 2005 mounted to €314.04 million, which is 71.5% of total planned budget revenues for 2005. On the other side, total budget revenues was 13.05% higher than the observed period in 2004, which represents upgrading of budget revenue performances in 2005. According the fact that total executed expenditures were 3.56% lower than revenues, republic budget ran a surplus of €11.11 million euro. Monetary aggregates continue to register positive annual growth rates. Monetary aggregate M21 amounted to €781.4 million at the end of September 2005 and registered growth of 46,43% compared to September 2004. Total deposits continue to grow in the last four months and at the end of September 2005 they reached €406.0 million. Total household deposits registered an increasing trend from the beginning of 2005. During the last four months the average annual growth rate of household deposits was 103%. At the end of September, those deposits have reached €141.4 million. Also, total loans provided by

December 2005

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7

Montenegrin banks have been growing during the period May-September 2005 and reached €339.6 million in September 2005. Constant growing trend of the Stock exchange indices in Montenegro indicate that the capital market is growing up and developing. The companies’ values on the stock exchanges are increasing, as well as number of investors. Stock exchange turnover in the first five months of 2005 was three times higher than the entire 2004 year. Additionally, the stock exchanges realized two times more transactions than in the same period in 2004. Exports within the foreign trade sector 6 – “manufactured goods that are classified chiefly by materials” had the highest share in total goods exports and amounted to €183,7 million, or 58.5% of total goods exports in the first nine months of 2005. Imports of goods within the foreign trade sector 7 –“Machines and transport equipment” were the most dominant and accounted for 21.4% of total goods import in the first three quarters of 2005. The trade deficit (goods + services) within the first three quarters of 2005 amounted to € 182.2 million, a nominal increase of 48.9% compared to the same period of 2004. The current account deficit amounted to € 42.3 million in the first three quarters of 2005, a nominal increase of 162.6% compared to the corresponding period of 2004. Almost all SEE countries increased their industrial production in the first half as well as in the first three quarters of 2005 compared to the corresponding periods of 2004. Annual CPI inflation in September 2005 was the lowest in Macedonia and the highest in Romania and Serbia. The lowest unemployment rates have been registered in Romania, while the highest were estimated in Bosnia and Herzegovina at the end of the third quarter of 2005.

Second part The reform of the pension system is one of the most important issues for future development of Montenegrin economic system. That is why the pension reform is in the focus of analyses presented in this issue of MONET. We have pleasure to publish article “Empowering workers: The privatization of social security system in Chile”, written by Jose Pinera, known as father of the pension system reforms. We want to use this opportunity to thank Mr. Pinera for giving us authorization to publish his works. Besides this article, we present two additional analyses on pension reforms in Montenegro, done by ISSP researchers and analysts, titled “The Challenge of Global Ageing” and “Towards Privatization of Montenegrin Pension System”. ISSP together with UNDP prepared first Human Development Report for Montenegro, whereas we realized the importance of presenting the main findings of this report and picture of Montenegrin Human Development Profile. The real position of the Montenegrin maritime, as a vital segment of the country’s total economy, is quite unsatisfactory. Does this sector has growing capacities and can it catch up with the world’s trend in maritime sector and trade, are questions which we tended to answer in analysis of maritime sector in Montenegro.


ISSP - CEPS 8

Adoption and implementation of regulation in area of intellectual protection is the first step in struggle against software piracy. Why we believe the software legislation is important you may find in the article “Software legalization – importance of implementation”. If we start from the fact that the main objective for the Montenegro is the EU membership, than we can see the agreement with EFTA as one of the steps towards that goal. Since the Montenegro went directly to WTO, we tried to point out a few things that could be beneficial for Montenegro that only EFTA membership can provide. These findings are presented in analysis titled “European Free Trade Agreement (EFTA) and Opportunities for Montenegro”.

Montenegro Economic Trends December 2005

ISSP - CEPS

9

PART 1

Chapter 1. Output

ISSP - CEPS 10

Table 1.1 Major developments in the Real sector

GDP Industrial production Touism Transport

Processing industry **

Transport of passengers

Transport of goods

1991

=10

0

Ann

ual c

hang

e in

%

2000

=10

0

Ann

ual c

hang

e in

%

2000

=10

0

Ann

ual

chan

ge in

%

Alu

min

um

prod

uctio

n (t

on)

Ele

ctri

city

ge

nera

tion

(in

MW

h)

pers

ons

Ann

ual c

hang

e in

%

Shar

e of

for

eign

to

uris

ts in

tota

l in

%

1998

=10

0

Ann

ual

chan

ge in

%

1998

=10

0

Ann

ual

chan

ge in

%

2000 84.1 3.1 100.0 3.3 100.0 95,526 2,698,019 448,187 17.8 99.3 18.7 66.2 -18.2

2001 83.9 -0.2 98.0 -2.0 101.6 1.6 108,123 2,492,993 555,040 23.8 20.8 82.0 -17.4 69.1 4.5

2002 85.3 1.7 98.7 0.7 103.9 2.3 116,482 2,194,516 541,699 -2.4 25.1 65.2 -20.6 83.1 20.2

2003 86.6 1.5 100.9 2.2 104.6 0.6 120,212 2,586,420 598,539 10.5 23.6 67.3 3.3 81.2 -2.4

2004 89.8 3.7 114.6 13.8 120.8 15.6 120,796 3,246,608 703,484 17.5 27.2 64.4 -4.4 76.8 -5.4

2005* 93.8 4.5

2002-Q1 88.0 -15.1 26,619 507,743 33,292 -5.1 20.9 50.9 -14.7 84.5 80.3

2002-Q2 89.0 -5.8 29,513 265,271 118,958 21.7 25.5 61.4 -14.0 67.1 -18.1

2002-Q3 101.0 16.1 30,105 501,282 352,718 -8.9 26.9 88.4 -27.5 72.1 14.6

2002-Q4 116.7 9.4 30,245 920,220 36,731 4.3 25.6 59.9 -20.0 108.8 28.3

2003-Q1 108.5 23.3 104.4 29,744 1,010,097 26,913 -19.2 21.7 45.7 -10.2 63.8 -24.5

2003-Q2 87.9 -1.2 105.9 29,988 377,521 123,180 3.5 27.5 62.3 1.4 81.8 21.9

2003-Q3 98.1 -2.9 99.2 30,176 458,240 420,910 19.3 25.0 104.5 18.2 85.5 18.6

2003-Q4 106.8 -8.5 108.7 30,304 740,562 27,536 -25.0 29.5 56.8 -5.1 93.5 -14.0

2004-Q1 106.6 -1.7 111.3 6.6 30,168 840,947 26,265 -2.4 42.1 47.4 3.8 72.5 13.7

2004-Q2 117.5 33.6 121.0 14.3 29,783 981,060 121,790 -1.1 34.0 60.3 -3.3 70.7 -13.7

2004-Q3 104.7 6.7 113.8 14.7 30,335 518,626 512,740 21.8 26.0 98.3 -5.9 83.3 -2.6

2004-Q4 129.4 21.2 139.0 27.9 30,510 905,975 38,809 40.9 38.2 51.4 -9.6 80.7 -13.7

2005-Q1 110.94 4.0 115.5 3.8 29,951 1,388,921 29,154 11.0 34.4 41.0 -13.6 61.1 -15.7

2005-Q2 109.3 -7.0 119.3 -1.4 29,709 636,208 149,117 22.4 37.9 55.83 -7.4 77.56 9.8

2005-Q3 117.8 12.5 155.9 37.0 30346.0 451467 598181 16.8 33.7

Jan-04 99.67 -0.1 80.2 10,274 275,727 6,578 -30.9 23.7

Feb-04 109.04 -3.5 115.5 -1.8 9,588 340,680 14,318 50.4 47.6

Mar-04 111.55 -1.1 131.0 14.9 10,305 224,540 5,369 -31.8 55.0

Apr-04 119.35 44.6 113.3 22.4 9,846 327,487 14,198 2.9 33.5

May-05 116.73 46.0 123.4 15.2 10,091 382,956 43,697 16.7 36.1

Jun-04 116.38 16.5 124.3 5.30 9,846 270,617 63,895 -11.2 32.5

Jul-04 105.56 6.1 108.8 13.00 10,291 158,113 177,957 -2.7 22.7

Aug-05 99.01 0.2 112.2 16.50 10,174 209,536 241,916 42.3 21.4

Sep-04 109.51 14.6 128.6 14.6 9,870 150,977 92,867 36.3 33.9

Oct-04 111.04 7.3 129.8 9.0 10,321 188,282 21,242 54.8 40.7

Nov-04 122.25 19.4 143.0 49.1 9,934 296,330 8,074 8.6 39.1

Dec-04 154.77 28.3 139.7 25.7 10,256 421,363 9,493 48.9 34.7

Jan-05 112.98 13.3 95.4 19.0 10,296 350,921 7,999 21.6 30.3

Feb-05 103.16 -5.5 126.1 9.2 9,384 766,800 9,840 -31.3 30.4

Mar-05 116.67 4.5 125 -4.6 10,271 271,200 11,315 110.7 42.6

Apr-05 104.65 -12.4 99.5 -12.2 9,856 205,200 18,424 29.8 40.8

May-05 110.30 -5.7 129.8 5.2 10,009 222,500 40,678 -6.9 43.4

Jun-05 112.84 -3.3 128.7 3.5 9,844 208,508 90,015 40.9 36.2

Jul-05 117.47 10.1 194.8 17.9 10,178 126,793

Aug-05 115.70 16.5 129.4 15.3 10,186 136,047

Sep-05 120.10 9.3 143.6 11.7 9,982 188,627

Note (*): Real GDP growth for 2005 is ISSP’s projection


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1. REAL SECTOR o Industrial production in the first three quarters of 2005 was 1.3% higher than in the

corresponding period of 2004, while its annual growth rate in September 2005 was 9.3%.

o Average electricity production in the first three quarters of 2005 was 6% higher than in the same period of 2004;

o Average aluminum production in the first three quarters of 2005 declined by 0.3% compared to the corresponding period of 2004.

o Transport of goods decreased by 3.1%, while transport of passengers decreased by 10.1% in the first half of 2005 compared to the corresponding period of 2004;

o In the tourism sector, the registered number of tourists increased by 16.8% in the first three quarters of 2005 compared to the same period of the previous year.

o The sector of construction (measured by the value of the constructor’s activities) increased its production by 16% in the first six months of 2005 compared to the first half of 2004.

When compared to the first six months of 2004, the general trend in the real economy in the first half of 2005 was positive within the sectors of tourism, catering, retail trade, and construction,1 while it was negative within the sectors of industrial production, forestry, transportation, and construction2. Consequently, the situation in the real economy in the first half of 2005 was not much improved compared to the same period of 2004, due to the fact that the major sectors of the economy (industry, transport, forestry and construction2) decreased their production.

Graph 1.1. Situation in the real economy (seasonal adjusted-1998=100)3

0.00

50.00

100.00

150.00

200.00

250.00

300.00

350.00

1999

:01

1999

:02

1999

:03

1999

:04

2000

:01

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:02

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:03

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:04

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:01

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2004

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2004

:04

2005

:01

2005

:02

time

inde

x 19

98=

100

Source: Monstat; Index of activities in the real economy calculated by ISSP 1 Measured by the value of construction activities 2 Measured by effective working hours

3 Graph 1.1 presents seasonal adjusted data of activities in the real sector. Aggregated index, which presents activities in the real economy, consists of weighted indices of industrial production, transport of goods, transport of passengers, retail trade, forestry, tourism, catering and construction. This is due to the fact that these sectors within the real economy participate on average around 50-55% in GDP since 2000.

Chapter 1. Output

ISSP - CEPS 12

1.1. PRODUCTION Total production in Montenegro, which is comprised of industrial production, forestry, and construction, was 3% lower in the first half of 2005 as compared to the same period of 2004. 1.1.1. Industrial production The physical volume of industrial production in the first three quarters of 2005 was 1.3% higher than in the corresponding period of 2004. Annual growth rates of industrial production in July, August and September 2005 were 10.1%, 16.5%, and 9.3%, respectively. This production during the first nine months of 2005 increased due to the production increase within several sub-sectors of the processing industry and the mining and quarrying industry. Three major industrial sectors The processing industry sector represents 67.6%4 of total industrial production and the average level of its production was 5.9% higher in the first three quarters of 2005 compared to the corresponding period of the previous year. The annual growth rate of processing industry production was 9.2% in September 2005. The main contributors to the growth in processing industry production during this period were the sub-sectors of food products and beverages manufacturing, publishing and printing, manufacture of chemical products and fibers, wood processing, as well as machinery and devices-other. The sub-sector of “manufacture of food products and beverages” represents 6.3% of total industrial production and increased its production by 3.1% in the first three quarters of 2005. The sub-sector “Paper, publishing and printing,” which accounts for 0.8% of total industrial production increased its production by 28% in the first nine months of 2005 compared to the same period of 2004. Furthermore, the sub-sector “Manufacture of chemical products and fibers” (2.1% of total industrial production) increased its production by 380.8% in the first nine months of 2005. The industry “Wood and products of wood,” which accounts for 1.6% of total industrial production, increased its production by 2% in the first three quarters of 2005 compared to the same period of the previous year. The sub-sector “Machinery and devices-other,” which accounts for 0.6% of total industrial production, increased its production by 48.6% compared to the first nine months of 2004. One of the major sub-sectors of the processing industry, “basic metals and metal products manufacturing” (44.8% of total industrial production), decreased its production by 2.2% in the first nine months of 2005 compared to the corresponding period of the previous year and increased it by 1% in September 2005 compared to the same month in 2004. The average production of the sub-sector “Manufacturing of products of other non-metal minerals” (6.0% of total industrial production) declined in the period January - September 2005 by 0.5% compared to the same period of 2004, and by 25.7% in September 2005 compared to the same month of 2004. The second major industrial sector, electricity, gas and water, (26.4% of total industrial production) decreased its production by 12.6% in the first nine months of 2005 compared to

4 Data based on the share of sales in 2004, used in official statistics in 2005.


ISSP - CEPS

13

the corresponding period of 2004. The annual growth rate of this production was 23.6% in September 2005. The mining and quarrying industry, which accounts for about 6.0% of total industrial production, increased by 9% in the first nine months of 2005 compared to the same period of 2004. This production was 11.1% higher in September 2005 compared to the same month of 2004. Leading industrial producers One of the most important industrial producers- The Power Company of Montenegro (Elektroprivreda Crne Gore)-- increased its production by 6% in the period January - September 2005, compared to the same period of 2004. This production was 25% higher in September 2005 compared to the same month of 2004. Graph 1.2 presents the aggregate planned and actual electricity production of the three power plants existing in Montenegro: Perucica Hydro Plant, Piva Hydro Plant, and Pljevlja Thermal Plant.

Graph 1.2. Total electricity production

0

100,000

200,000

300,000

400,000

500,000

600,000

700,000

800,000

900,000

May

-05

Jul-

02

Sep-

02

Nov

-02

Jan-

03

Mar

03

May

-03

Jul-

03

Sep-

03

Nov

-03

Jan-

04

Mar

04

May

-04

Jul-

04

Sep-

04

Nov

-04

Jan-

05

Mar

-05

May

-05

Jul-

05

Sep-

05

MW

h

Planned production Actual production

Source: The Power Plant of Montenegro (EPCG) Total actual production of the three plants in the three quarters of 2005 was 24.6% above the planned level. The actual production in September 2005 was 24.9% higher than in the same month of 2004. In the first nine months of 2005, two of the hydro plants combined accounted for total actual production of 1,336,847 MWh, or 54% of the total planned electricity production, while the rest of production came from the thermal plant Pljevlja. Total actual production of the Perucica Hydro Plant was 18% above the planned level in the period January – September 2005. Actual production of the Piva Hydro Plant also exceeded

Chapter 1. Output

ISSP - CEPS 14

the planned level by 6% in the first nine months of 2005 and was 23% higher compared to the first nine months of 2004. Actual production of the Thermal Plant Pjevlja in the first three quarters of 2005 was 42.8% above the planned level and it was 73.8% higher than in the same period of the previous year. In September 2005, actual production within the Thermal Plant Pljevlja was 4.8% above the planned level, while it was 2.3% higher compared to actual production in September 2004.

Graph 1.3. Dynamics of electricity production

-100

-50

0

50

100

150

200

250

300

350

Jan-

00

Mar

00

May

-00

Jul-

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-05

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03

Mar

03

May

-03

Jul-

03

Sep-

03

Nov

-03

Jan-

04

Mar

04

May

-04

Jul-

04

Sep-

04

Nov

-04

Jan-

05

Mar

-05

May

-05

Jul-

05

Sep-

05

%

annual change average annual change after 12 months

Source: EPCG Note: 12-month averages of annual changes are moving averages of annual changes during the past 12 months Aluminum production in the first nine months of 2005 declined by 0.31% compared to the corresponding period of 2004. Furthermore, the exported quantity of this aluminum produced by Aluminum Combine Podgorica (KAP) decreased by 29.6% in the above-mentioned period of 2005 compared to the same period of the previous year. Total aluminum production in September 2005 was 1.14% higher compared to the corresponding period of 2004.


ISSP - CEPS

15

Graph 1.4: Aluminum production and exports prices

7000

8000

9000

10000

11000

Jan-

01

Mar

01

May

-05

Jul-

01

Sep-

01

Nov

-01

Jan-

02

Mar

02

May

-05

Jul-

05

Sep-

02

Nov

-02

Jan-

03

Mar

03

May

-05

Jul-

03

Sep-

03

Nov

-03

Jan-

04

Mar

04

May

-05

Jul-

04

Sep-

04

Nov

-04

Jan-

05

Mar

-05

May

-05

Jul-

05

Sep-

05

in t

ons

1300

1400

1500

1600

1700

1800

1900

2000

2100

$/to

n

Aluminum production Export price

As graph 1.4 illustrates, aluminum production declined by 0.72% in the first quarter of 2005 as compared to the same quarter of 2004, while the same figures for the second and third quarter are –0.25% and 3.7%, respectively. The average monthly aluminum price declined in June, July and August 2005 and began to increase in September 2005, when it reached 1,917.7 $/ton. 1.2 Forestry and Construction Forestry Production in the forestry sector increased by 64.6% in June 2005 compared to the same month of the previous year. However, due to very bad weather conditions in the beginning of the year, the first six months of 2005 found production to be 7% lower as compared to the corresponding period of 2004. Construction Average production in the sector of construction, measured by the value of the constructor’s activities, was 16% higher in the first half of 2005 compared to the same period of 2004. In June 2005, this production was 26.5% higher than in the same month of 2004. On the other hand, activities within the construction sector, measured by the effective working hours, decreased by 9% in the first half of 2005 compared to the corresponding period of the previous year. Here, it is important to note that data on construction activities in Montenegro is underestimated and there are other firms that are not included in the rather limited Monstat sample of firms.

Chapter 1. Output

ISSP - CEPS 16

1.2. TOURISM The total number of tourists increased by 16.8% in the first three quarters of 2005 compared to the same period of the previous year. The number of domestic tourists increased by 6.1%, while that of foreign guests increased by 47.3% compared to the first nine months of 2004. In the first three quarters of 2005, the share of foreign tourists was 32.8%, which is 6.1 percentage points more than in the corresponding period of 2004. Tourism revenues amounted to € 209.1 million and increased by 21.8% in the first nine months of 2005 compared to the corresponding period of the previous year; they increased mostly due to the increase of revenues from abroad (outside Montenegro and Serbia). 1.3. OTHER SECTORS OF SERVICES Transport Due to the fact that Monstat publishes only the disaggregated monthly index of transport, and it includes the following indices: road transport of goods, road transport of passengers, railway transport of goods, railway transport of passengers, sea transport of goods and air transport of passengers, the ISSP estimates the index of total transportation of goods and the index of total transportation of passengers. In order to create an index of goods transport, we used ton/km as a weight, and for calculation of the passengers’ transport index, the passengers/km were used as a weight. Estimated transport of goods in the first half of 2005 declined by 3.1% compared to the corresponding period of 2004. This decline is a consequence of the lower road and sea transportation of goods. Estimated transport of passengers in the first half of 2005 decreased by 10.1% compared to same period of the previous year (see graph 1.5). Transport of passengers declined mostly due to the decrease of railway transport of passengers. Railway transport of goods was the only mode of transportation whose activities rose in the first six months of 2005 compared to the same period of 2004, it increased by 41%.

Graph 1.5: Quarterly change of the transport of goods and passengers (1998=100)

0.00

20.00

40.00

60.00

80.00

100.00

120.00

1999

-Q4

2000

-Q1

2000

-Q2

2000

-Q3

2000

-Q4

2001

-Q1

2001

-Q2

2001

-Q3

2001

-Q4

2002

-Q1

2002

-Q2

2002

-Q3

2002

-Q4

2003

-Q1

2003

-Q2

2003

-Q3

2003

-Q4

2004

-Q1

2004

-Q2

2004

-Q3

2004

-Q4

2005

-Q1

2005

-Q2

year

inde

x

Transport of passengers p/km Transport of goods ton/km


ISSP - CEPS

17

Revenues from the export of transportation services, as evidenced in the Balance of Payments statistics, amounted to € 23.6 million and nominally increased by 15.4% in the first half of 2005 compared to the same period of the previous year. Retail trade The ISSP estimated retail trade turnover for 2004 and the first half of 2005 is based on monthly data obtained from Monstat’s limited sample from 2003. The average retail trade turnover nominally increased by 16% in the first half of 2005 compared to the corresponding period of 2004. In real5 terms, retail trade turnover increased by 13.6% in the first half of 2005 compared to the same period of 2004. In June 2005, real retail trade turnover increased by 14.7 % compared to June 2004. Catering The average real level of catering turnover in the first half of 2005 was 5.7% higher than in the same period of 2004, while in nominal terms, it was 8% higher. On an annual basis, the real growth of catering amounted to 4.7% in June 2005.

5 Deflated by CPI

Chapter 2. Employment

ISSP - CEPS 18

Table 2.1. Labor force and unemployment

Population mid-year1

Total number of employed persons 2

Number of registered unemployed Unemployment rate %

Unemployment rate %

(estimate)

Official data ISSP estimate based on

official data ISSP

1991 591,843 153,667 58,144 27.5 13.4 1992 594,137 145,653 64,632 30.7 17.1 1993 596,432 143,657 62,818 30.4 17.6 1994 598,727 140,684 58,210 29.3 18.6 1995 601,022 137,232 59,045 30.1 19.9 1996 603,317 137,743 60,225 30.4 19.2 1997 605,611 147,083 63,995 30.3 17.5 1998 607,906 147,233 68,373 31.7 16.7 1999 610,201 145,571 75,303 34.1 20.1 2000 612,496 140,762 83,583 37.4 20.1 2001 614,791 141,112 81,561 36.6 19.5 2002 617,085 140,778 80,865 36.5 21.6 2003 618,233 142,679 71,679 33.4 22.9 2004 620,706 143,479 65,185 31.2 22.3 2003-Q1 143,616 76,275 34.7 24.2 2003-Q2 143,088 72,744 33.7 23.4 2003-Q3 143,298 66,964 31.8 21.9 2003-Q4 140,714 70,732 33.4 23.2 2004-Q1 141,850 71,123 33.4 24.5 2004-Q2 143,847 68,589 32.3 23.6 2004-Q3 145,163 61,602 29.8 21.5 2004-Q4 143,056 59,422 29.3 21.2 2005-Q1 141,838 58,655 29.4 20.8 2005-Q2 143,020 56,508 27.5 20.0 2005-Q3 52,691 Jan-03 143,726 76,584 34.8 24.2 Feb-03 143,851 76,077 34.6 24.1 Mar-03 143,272 76,165 34.7 24.2 Apr-03 143,036 74,896 34.4 23.9 May-03 142,533 73,250 34.0 23.7 Jun-03 143,694 69,735 32.7 22.6 Jul-03 144,022 66,951 31.7 21.8 Aug-03 143,693 66,277 31.6 21.7 Sep-03 142,180 67,664 32.2 22.2 Oct-03 141,478 71,023 33.4 23.2 Nov-03 140,810 72,547 34.0 23.6 Dec-03 139,856 68,625 32.9 22.8 Jan-04 142,343 69,573 32.8 24.0 Feb-04 140,765 71,419 33.7 24.7 Mar-04 142,442 72,378 33.7 24.7 Apr-04 143,734 72,202 33.4 24.5 May-04 143,759 68,993 32.4 23.7 Jun-04 144,049 64,572 31.0 22.5 Jul-04 145,390 62,143 29.9 21.7 Aug-04 145,747 62,159 29.9 21.6 Sep-04 144,351 60,503 29.5 21.3 Oct-04 143,830 59,930 29.4 21.2 Nov-04 143,434 59,387 29.3 21.1 Dec-04 141,905 58,950 29.3 21.2 Jan-05 142,145 59,115 29.4 20.9 Feb-05 142,072 58,774 29.3 20.8 Mar-05 141,298 58,075 29.1 20.7 Apr-05 140,959 57,557 29.0 20.4 May-05 142,248 56,772 28.5 20.0 Jun-05 145,852 55,199 27.5 19.7 Jul-05 148,528 53,737 26.6 19.1 Aug-05 146,744 52,494 26.3 19.0 Sep-05 51,843

Source: Monstat, Employment Office of Montenegro and ISSP Methodological note:

Official unemployment rate was calculated from official data on number of employed and unemployed with the use of the formula:

100⋅+

=zn

nUR

where UR-unemployment rate, n-number of unemployed and z-number of employed persons. An ISSP estimate of the unemployment rate is revised estimate obtained by combining data from Monstat, Federal Labor Force Survey and ISSP Household Survey.

1 Data for the period 1991-2003 are Monstat data, 2004 data are ISSP estimates. 2 Annual data are Monstat numbers, while monthly and quarterly data for 2003 and 2004 are estimated by ISSP


ISSP - CEPS

19

CHAPTER 2. EMPLOYMENT o According to Monstat data, a total of 146,744 persons were employed in Montenegro in

August 2005 o The average number of employed persons in the first eight months of 2005 is

insignificantly higher as compared to the same period last year o According to ISSP estimates, the unemployment rate in August was 19.0%, while the

unemployment rate according to official data was 26.3% in the same period o Official data on the number of employed persons in the formal sector are significantly

improved 2.1 EMPLOYMENT AND UNEMPLOYMENT In July 2005, employment in the formal sector of the Montenegrin economy reached 148,528 persons, which is the highest level experienced in the last eight years. However, in August employment declined by 1.2% and reached 146.744 persons. After a decrease in the period from February-April of 2005, employment in the formal sector of the economy has significantly increased. The number of employed persons increased in May by 0.9% as compared to the previous month, while the increase in June and July (relative to the previous months) was 2.5% and 1.8%, respectively. On an annual level, employment recorded positive growth rates in February, June, July and August, amounting to 0.9%, 1.3%, 2.2%, and 0.7%, respectively, while negative rates were achieved in January, March, April and May (-0.1%, -0.8%, -1.9% and –1.1%, respectively). On average, employment in the first eight months of 2005 was higher by 0.1% as compared to the corresponding period last year.

Graph 2.1: Number of employed persons (2001-2004)

139000

140000

141000

142000

143000

144000

145000

146000

147000

148000

149000

J an Fe b Ma r Apr May J un J ul Aug Sep Oct No v Dec

2002 2003 2004 2005

Source: Monstat


ISSP - CEPS 20

The large increase in the number of employed persons in June and July can be attributed to the tourism season in large measure, which was assessed as successful, as well as to other factors, such as the decreased shadow economy due to a reduction in taxes and contribution rates. The important influence that the tourist season has on employment will be obvious later. However, if we assume that employment in the remaining months of 2005 will have a similar trend as those of 2004, it can be expected that employment in 2005 will be approximately 1% higher as compared to 2004. A decrease in employment levels after the summer season is a typical phenomenon; in 2003 and 2004 employment in December 2.5% lower, on average, as compared to July and August, when employment reaches its maximum level. At the same time, registered unemployment is constantly decreased by an average rate of –1.4% monthly. Thus, unemployment in the first nine months of 2005 is 16.6% lower as compared to the same period last year, implying that unemployment is lower in each month of 2005 as compared to the corresponding months of 2004. If we observe quarterly changes, as compared to previous quarters, employment in the first quarter of 2005 is 1.3% lower, 3.7% lower in the second, and 6.8% in the third. Table 2.2: Changes in the number of employed and unemployed persons

Annual changes in

the number of employed persons

Monthly changes in the number of

employed persons

Annual changes in thenumber of

unemployed persons

Monthly changes in the number of

unemployed persons %

Jan-05 -0.1% 0.2% -15.0% 0.3% Feb-05 0.9% -0.1% -17.7% -0.6% Mar-05 -0.8% -0.5% -19.8% -1.2% Apr-05 -1.9% -0.2% -20.3% -0.9% May-05 -1.1% 0.9% -17.7% -1.4% Jun-05 1.3% 2.5% -14.5% -2.8% Jul-05 2.2% 1.8% -13.5% -2.6% Aug-05 0.7% -1.2% -15.5% -2.3% Sep-05 -14.3% -1.2%

Source: Monstat, Employment Office, ISSP calculations Registered unemployment will probably continue to decrease. According to the Employment Office data for the period of January-September 2005, a total of 30,143 persons have been deleted from the register of unemployed persons because they failed to meet requirements for maintaining their status as unemployed persons; this number is 6% higher than the previous year. On the other hand, the number of newly registered persons in the same period was 22,059 persons, which is 16% lower than in 2004. Also, in the same period, according to the Employment Office, a total of 6,091 persons were employed, but it is not clear whether these persons are unemployed from their register or if there is a share of persons who are not registered.


ISSP - CEPS

21

Graph 2.2: Number of unemployed persons (2000-2005)

50000

55000

60000

65000

70000

75000

80000

85000

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

2002 2003 2004 2005

Source: Employment Office of Montenegro In any case, based on this data one can conclude that the main reason for the decrease in registered unemployment is the removal of unemployed persons from the register because they haven’t satisfied conditions that the Employment Office has determined. Also, this significant decline in registered unemployment reflects the disinterest of unemployed persons in finding a job, given that they do not respect the rules that the Employment Office has determined. The average number of pensioners in the first nine months of 2005 was 0.32% higher as compared to the same period last year.

Graph 2.3: The official number of employed, unemployed persons and pensioners (1994Q1-2005Q1)

50000

70000

90000

110000

130000

150000

1994

-Q1

1994

-Q2

1994

-Q3

1994

-Q4

1995

-Q1

1995

-Q2

1995

-Q3

1995

-Q4

1996

-Q1

1996

-Q2

1996

-Q3

1996

-Q4

1997

-Q1

1997

-Q2

1997

-Q3

1997

-Q4

1998

-Q1

1998

-Q2

1998

-Q3

1998

-Q4

1999

-Q1

1999

-Q2

1999

-Q3

1999

-Q4

2000

-Q1

2000

-Q2

2000

-Q3

2000

-Q4

2001

-Q1

2001

-Q2

2001

-Q3

2001

-Q4

2002

-Q1

2002

-Q2

2002

-Q3

2002

-Q4

2003

-Q1

2003

-Q2

2003

-Q3

2003

-Q4

2004

-Q1

2004

-Q2

2004

-Q3

2004

-Q4

2005

-Q1

2005

-Q1

2005

-Q2

2005

-Q3

Employed persons Unemployed persons Pensioners

Source: Monstat, Employment Office of Montenegro and ISSP Note: data are quarterly averages


ISSP - CEPS 22

In the third quarter the number of pensioners was higher by 0.5% as compared to the second quarter, while the number of pensioners in the second quarter was higher by 0.7% as compared to the first quarter of 2005. The average number of pensioners in the first quarter of 2005 was 0.3% lower as compared to the previous quarter and 0.2% lower as compared to same quarter of 2004. The number of pensioners in the second and third quarters, as compared to the corresponding periods of 2004, is higher by 0.2% and 1%, respectively. 2.2. LABOR PRODUCTIVITY IN INDUSTRY Labor productivity is a measure of the physical volume of production by worker. Productivity is measured as a ratio of index of physical volume of production and index of employment in industry. Labor productivity within industry in Montenegro in 2004 and 2005 on a monthly level discloses continuous fluctuations. Different levels of productivity are found in individual months, and it is mainly influenced by the variations in the level of production, while changes in the number of employed within industry are insignificant.

Graph 2.4 :Indices of industrial production and employment (2004=100)

0

20

40

60

80

100

120

140

160

J-04

F-0

4

M-0

4

A-0

4

M-0

4

J-04

J-04

A-0

4

S-04

O-0

4

N-0

4

D-0

4

J-05

F-0

5

M-0

5

A-0

5

M-0

5

J-05

Index of industrial production Index of employment

In the period from January to June of 2005 labor productivity within industry was 2.7% higher as compared to the same period last year. If we observe monthly changes, labor productivity within industry in January 2005, as compared to December of 2004, is approximately 26% lower, which is in large measure a seasonal effect. However, productivity within industry in January 2005 is roughly 22% higher as compared to January 2004. In February and April productivity was reduced as compared to their previous months, by 9.2% and 11.1%, respectively, and in March, May and June, productivity increased by 14.0%, 5.9%, and 2.2%, respectively, as compared to their previous months.


ISSP - CEPS

23

Graph 2.5 :Productivity in industry

0

50

100

150

200

250

300

J-04

F-0

4

M-0

4

A-0

4

M-0

4

J-04

J-04

A-0

4

S-04

O-0

4

N-0

4

D-0

4

J-05

F-0

5

M-0

5

A-0

5

M-0

5

J-05

Total Manufacturing Utilities Mining

Source: Monstat, ISSP calculations Productivity in the manufacturing sector has the highest influence on total labor productivity within industry; this sector is the largest component of industrial production.

When observing the first half of 2005 by components of industrial production, labor productivity in manufacturing increased by 2.9%, in mining by 33.1%, and in the utilities sector by 8.3% as compared to same period of the previous year.

Chapter 3. Wages

ISSP - CEPS 24

Table 3.1:Wages and salaries

Minimum wage

Average gross wage

(official)

Total contributi

ons on gross wage

Average disposable

wage

Average pension (paid)

Ratio min.wage/ average

disposable wage (%)

Average disposable

wage*

Total labor cost**

Average tax rate (% gross wage)

Official data ISSP estimates IN DINARS IN DINARS

1994 65.0 292.7 154.1 139.0 47.0 406.0 33.0 1995 128.0 637.8 330.8 307.0 280.0 42.0 873.0 32.0 1996 243.0 1349.0 689.7 659.0 600.0 37.0 1826.0 31.0 1997 332.0 1801.4 922.5 879.0 738.0 38.0 2445.0 31.0 1998 453.0 2503.8 1276.1 1228.0 1073.0 37.0 3391.0 31.0 1999 663.0 3159.3 1227.3 1932.0 1581.0 34.0 4356.0 19.0

IN EUROS IN EUROS 2000 37.0 150.9 55.5 96.4 83.5 38.0 218.0 19.0 2001 42.0 176.2 68.5 108.0 97.0 39.0 174.0 249.0 19.0 1-6/2002 42.0 185.8 72.9 112.9 106.0 41.0 262.5 19.0 2002-Q1 46.0 178.5 69.7 108.9 103.0 42.0 254.2 19.0 2002-Q2 46.0 193.1 76.2 116.9 108.0 39.0 270.9 19.0 Jan-02 46.0 166.5 65.0 101.7 101.0 45.0 239.7 19.0 Feb-02 46.0 181.3 70.7 110.6 104.0 42.0 257.5 19.0 Mar-02 46.0 187.8 73.3 114.5 104.0 40.0 186.0 266.2 19.0 Apr-02 46.0 194.0 78.3 115.7 104.0 40.0 270.1 19.0 May-02 46.0 191.0 74.5 116.4 110.0 40.0 274.4 19.0 Jun-02 46.0 194.5 75.8 118.7 110.0 39.0 273.4 19.0

New personal income tax system

Minimum

wage

Average wages and salaries of employee

Total contributions and taxes

Average wages and salaries without

taxes and contrib.

Average pension (paid )

Ratio min. wage/ average w&s without

taxes and contributions

(%)

Average disposable

wage *

Total labor cost**

Average tax rate

(%wages and salaries)

7-12/2002 50.0 272.6 101.2 171.4 112.0 29.0 365.6 15.4 2003 50.0 271.2 97.2 174.0 113.0 29.0 364.2 14.1 2004 50.0 304.1 107.8 195.4 122.0 25.6 405.2 14.0 2003-Q1 50.0 233.5 83.9 149.6 112.0 33.9 316.8 13.0 2003-Q2 50.0 274.3 99.4 174.8 112.0 28.6 366.9 14.3 2003-Q3 50.0 281.9 100.7 181.3 112.0 27.6 378.1 14.5 2003-Q4 50.0 295.0 104.7 190.3 112.0 26.4 395.1 14.8 2004-Q1 50.0 283.9 101.7 182.1 120.0 27.5 378.6 14.0 2004-Q2 50.0 301.1 108.9 192.1 122.00 26.0 399.2 14.4 2004-Q3 50.0 310.1 108.6 201.5 122.0 24.8 414.0 13.7 2004-Q4 50.0 321.5 111.9 209.6 122.0 23.9 429.1 14.0 2005-Q1 50.0 297.3 102.5 194.9 125.9 25.7 390.1 13.3 2005-Q1 50.0 317.7 111.5 206.2 128.7 24.3 413.3 13.5 2005-Q1 50.0 335.0 116.7 218.3 129.0 22.9 436.0 13.5 Jan-04 50.0 267.0 97.4 169.6 120.0 29.6 355.9 13.6 Feb-04 50.0 292.1 104.6 187.5 120.0 26.7 389.0 14.2 Mar-04 50.0 292.4 103.2 189.3 120.0 26.4 391.1 14.2 Apr-04 50.0 301.4 108.9 192.5 122.0 26.0 256.3 399.7 14.4 May-04 50.0 297.1 107.6 189.6 122.0 26.4 394.2 14.3 Jun-04 50.0 304.7 110.4 194.4 122.0 25.7 403.6 14.5 Jul-04 50.0 307.1 106.5 200.6 122.0 24.9 408.5 13.6 Aug-04 50.0 312.8 109.6 203.1 122.0 24.6 414.4 13.7 Sep-04 50.0 310.3 109.7 200.6 123.6 24.9 410.4 13.7 Okt-04 50.0 312.8 109.7 203.1 123.6 24.6 414.4 13.7 Nov-04 50.0 306.8 107.5 199.3 124.6 25.1 407.0 13.6 Dec-04 50.0 345.0 112.9 226.4 124.6 23.9 426.1 13.9

Jan-05 50.0 283.4 98.2 185.1 124.6 27.0 377.2 12.5 Feb-05 50.0 299.2 102.8 196.4 124.6 25.5 392.8 13.5 Mar-05 50.0 309.4 106.4 203.0 128.7 24.6 405.4 13.5 Apr-05 50.0 325.6 113.4 212.2 128.6 23.6 424.0 13.5 May-05 50.0 297.8 106.2 191.6 128.7 26.1 387.1 13.5 Jun-05 50.0 329.6 114.9 214.7 128.7 23.3 428.8 13.5 Jul-05 50.0 329.8 114.7 215.8 128.7 23.2 429.3 13.4 Aug-05 50.0 338.8 118.3 220.5 128.7 22.7 440.0 13.4 Sep-05 50.0 336.5 117.1 219.4 129.1 22.8 438.6 13.5 Oct-05 50.0 336.9 117.3 219.6 129.1 22.8 440.7 13.5

Minimum wage is the lowest wage that an employer is obligated to pay. Average gross wage includes the portion that employee receives as well as employee’s portion of social contribution and taxes. Average disposable wage is the amount that employee receives. Average earning of employee includes basic wage of employee (earlier disposable wage), its share of contributions and taxes and all other benefits that employee receives (meal allowance, summer allowance, per diems, honoraria, etc). *Average wage is calculated from ISSP Household survey. First survey was conducted in June 2001, up to this point, there have been 8 surveys. **Total labor cost includes average gross wage/average earnings, employer part of contribution and taxes and other benefits.


ISSP - CEPS

25

CHAPTER 3.WAGES AND SALARIES o The average wage after taxes and contributions in October 2005 amounted to €219.6,

which is 8.1% higher as compared to October 2004. o The highest average wages and salaries after taxes and contributions were registered in

the second quarter of 2005 amounting to €224.44 and were achieved in the Central region.

o When analyzing the various activities, the highest average wages and salaries after taxes and contributions were achieved in the financial intermediation sector and amounted to €444.84.

3.1. WAGES AND SALARIES In October 2005 average wages and salaries amounted to €336.9, while wages & salaries after taxes and contributions amounted to €219.6. As compared to the previous month, wages & salaries in October were 0.1% higher and compared to the same month of the previous year, they were 7.7% higher. On average, wages & salaries in the ten months of 2005 are 5.4% higher relative to the same period last year, while wages & salaries after taxes and contributions are higher by 6.5%. Despite negative growth rates achieved on a monthly level in January, May, and September, on an annual level, wages & salaries over the period record positive growth rates. In June wages & salaries after taxes and contributions were 12.1% higher as compared to June 2004, in July they were 7.2% higher, in August 8.6% higher, in September 9.4% higher, and in October 8.1%as compared to the corresponding months of 2004. Table 3.2: Changes in average wages and salaries

Annual changes in

w&s after taxes and contributions

Monthly changes in w&s after taxes and

contributions

Annual changes in w&s

Monthly changes in w&s

%

Jan-05 9.2 -11.5 6.1 -12.0

Feb-05 4.8 6.1 2.4 5.6

Mar-05 7.2 3.3 5.8 3.4

Apr-05 10.2 4.5 8.0 5.2

May-05 1.1 -9.7 0.2 -8.6

Jun-05 10.5 12.1 8.1 10.7

Jul-05 7.2 0.2 7.4 0.1

Aug-05 8.6 2.5 8.3 2.7

Sep-05 9.4 -0.5 8.4 -0.7

Oct-05 8.1 0.1 7.7 0.1

Source: Monstat and ISSP calculations

Chapter 3. Wages

ISSP - CEPS 26

In the third quarter of 2005 the average wage without taxes and contributions increased by 8.1% as compared to the same quarter last year, while as compared to the previous quarter (Q2-2005), it has increased by 5.5%. The average wage in the second quarter of 2005 is 7.3% higher as compared to the corresponding period last year, while relative to the first quarter of 2005, it has increased by 6.8%. In comparison to the previous period, the average wage in the first quarter of 2005 is 5.3% lower; however, relative to the same quarter of 2004, it is 4.7% higher. If average wages & salaries experience a similar trend as in 2004 during the remaining three months, the annual growth of average wages & salaries will be 7.7%. Minimum wage remained level at €50 during the first ten months of 2005. Social partners (Government, union, and the employer’s representatives) have adopted a methodology for setting the minimum wage, which should be adopted by the Government soon. After the methodology was adopted, negotiations to increase the minimum wage began. According to statements from the Ministry of Finance, the minimum wage will most probably be increased by 10% or from €50 to €55.

Graph 3.1: Wages and salaries, wages and salaries after taxes and contributions and minimum wage (July 2002-October 2005)

0.0

50.0

100.0

150.0

200.0

250.0

300.0

350.0

400.0

J-02

A-0

2S-

02O

-02

N-0

2D

-02

J-03

F-0

3M

-03

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3M

-03

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3S-

03O

-03

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3D

-03

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-04

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4M

-04

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4S-

04O

-04

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4D

-04

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F-0

5M

-05

A-0

5M

-05

J-05

J-05

A-0

5S-

05O

-05

Eur

o

Wages and salaries Wages and salaries after taxes and contributions Minimum wage

Source: Monstat and ISSP calculations The average effective PIT rate in the first ten months of 2005 amounted to 13.4%, which is 0.6 percentage points lower than in the same period of 2004.


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27

Graph 3.2. Annual growth of nominal and real disposable wages

-10.0%

0.0%

10.0%

20.0%

30.0%

40.0%

50.0%

60.0%

Jul-

03

Au g

-03

S ep-

0 3

Oct

-03

No v

-03

Dec

-03

Jan -

04

Feb

-04

Mar

-04

Ap r

-04

May

-04

Jun-

04

Jul-

0 4

Au g

-04

S ep-

0 4

Oct

-04

No v

-04

Dec

-04

Jan -

05

Feb

-05

Mar

-05

Ap r

-05

May

-05

Jun-

05

Jul-

0 5

Au g

-05

S ep-

0 5

Oct

-05

Annual growth of real disposable wages Annual growth of nominal disposable wages

Sources: Monstat and ISSP calculations Due to minimal price increases, the annual real growth of disposable wages is close to nominal, and real wages have been positive over the first ten months of 2005. The only exception is May, when average disposable wages decreased by 9.7% as compared to the previous month, i.e. nominal growth rate was 1.2% so the real disposable wage growth was negative (-0.8%). The average pension from January to September amounted to €127.9. In July 2005 pensions increased by 0.3% according to the Law on Pension and Disability Insurance. In the last couple of months, the PIO Fund has reduced arrears in pension payments, and instead of 1.5 pension payments they owe just 0.5 pension payments to current pensioners. The fund plans to fully eliminate this arrear by the end of the year. 3.2. AVERAGE WAGES BY ACTIVITY The highest average wages & salaries without taxes and contributions in the first ten months of 2005 was achieved in the industry sector amounting to €225.80, while the lowest wages were earned in the agricultural sector amounting to €125.50. Average wages & salaries after taxes and contributions in the services sector amounted to €224.40 in the first ten months of 2005. As compared to the same period of the previous year, average wages have increased in all three sectors, 29.3% in agriculture, 23.7% in industry, and 5.8% in the services sector.

Chapter 3. Wages

ISSP - CEPS 28

Table 3.3. Average wages &salaries after taxes and contributions by activity

Average

Jan-Oct 2005 (in € monthly)

Change relative to Jan-Oct 2004

(in %)

Agriculture, forestry and water 172.43 15.0

Fishery 76.61 43.7

Mining 302.06 35.4

Manufacturing 190.92 15.7

Utilities 285.59 7.9

Constructing 124.54 35.8

Wholesale and retail 137.05 3.6

Hotels and restaurants 135.97 16.9

Transport, traffic and communications 257.56 -0.3

Financial intermediation 444.84 22.0

Mortgages, renting and business act. 205.30 7.6

Public administration and social insurance 239.38 4.1

Education 234.53 3.4

Health and social work 217.71 5.0

Other communal, social and service activities 147.61 -10.1

Sources: Monstat and ISSP calculations Observed by individual activities, the average wage in the period from January to September is still highest in the financial intermediation activity (€444.84), while the lowest wages are in the fisheries activity (€76.61). As compared to the same period last year, in the first ten months of 2005 average wages have increased in all activities with the exception of Traffic, transport and communications and Other services activities, which have decreased by 0.2% and 10.1%, respectively. The highest wage growth rates have been achieved in Mining (35.4%) and Fisheries (43.7%). 3.3. AVERAGE WAGES & SALARIES BY MUNICIPALITY In the first half of 2005 the highest average wages & salaries without taxes and contributions amounting to €240.20 was achieved in Podgorica, while the lowest was achieved in Rozaje, amounting to €108.2. Also, the highest average wage regionally was achieved in the Central region and amounted to €224.441, while the lowest wage was in the Northern region (€158.01). The average wage without taxes and contributions in the Southern region amounted to €184.65.

1 Weighted by the number of employees in the Central region


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29

Table 3.4: Average wages & salaries without taxes and contributions and effective PIT rates by region in the first half of 2005

Weighted average w&s after taxes

and contributions (in € monthly)

Weighted average tax rate (% monthly)

South 184.65 13.7

Center 224.44 14.9

North 158.01 13.7

Sources: Monstat and ISSP calculations Note: Both average w&s after taxes and contributions and the tax rate are weighted by the number of employees by municipality. Average wages & salaries without taxes and contributions in the second quarter of 2005 were higher than the previous quarter. Wages & salaries without taxes and contributions in the Central region are 3.4% higher in the second quarter as compared to the first, while wages & salaries in the northern region have increased by 4.5% and in the southern region by 1.6%. Observed by individual municipalities, one can notice that in some municipalities, wages & salaries after taxes and contributions have increased significantly, for example in Andrijevica by 33.5%, in Pluzine by 45.3%, in Cetinje by 35.3%, and in Mojkovac by 28.1%. Average wages & salaries without taxes and contributions have decreased in two municipalities - in Plav by 11% and in Kotor by 3.8%.

Table 3.5: Average wages & salaries after taxes and contributions by municipality (Q1-Q2/2005)

First quarter (Q1)

in € monthly Second quarter

(Q2) in € monthly Change in %

(Q1/Q2)

S Andrijevica 141.3 188.6 33.5% J Bar 161.8 165.7 2.4% S Berane 154.6 169.5 9.6% S Bijelo Polje 121.1 129.1 6.6% J Budva 185.0 218.5 18.1% C Danilovgrad 179.2 196.9 9.9% S Žabljak 103.9 128.7 23.9% S Kolasin 143.9 161.8 12.4% J Kotor 228.2 219.4 -3.8% S Mojkovac 119.5 153.0 28.1% C Niksic 205.7 228.6 11.2% S Plav 136.7 121.7 -11.0% S Pluzine 143.7 208.8 45.3% S Pljevlja 210.3 219.7 4.5% C Podgorica 236.4 243.9 3.2% S Rozaje 105.7 110.8 4.8% J Tivat 211.3 215.4 1.9% J Ulcinj 120.4 128.6 6.8% J Herceg Novi 190.7 192.2 0.8% C Cetinje 120.0 162.4 35.3% S Šavnik 167.6 180.0 7.4%

Sources: Monstat and ISSP calculations Note: S-Northern region, J-Southern region, C-Central region

Chapter 3. Wages

ISSP - CEPS 30

Important growth rates in the second quarter as compared to the first quarter of 2005 of over 10% were achieved in Nikšić, Kolašin, Budva, and Žaljak. In the first quarter, the lowest average wage was achieved in Žabljak.

Graph 3.3: Wages&salaries in the Central region (average Jan-June 2005)

0.0

50.0

100.0

150.0

200.0

250.0

300.0

350.0

400.0

Cetinje Danilovgrad Niksic Podgorica

W&S W&S after taxes and contributions

Sources: Monstat and ISSP calculations Six municipalities reported average wages and salaries that were higher than the national average in the first six months of 2005 (200.5€); three of those municipalities are from the Southern region (Budva, Kotor,Tivat), two from the Central region (Nikšić, Podgorica), and one from the northern region (Pljevlja). These municipalities employ over 60% of the total number employed in Montenegro.

Graph 3.4: W&S in the Northern region (average Jan-Jun 2005)

0.0

50.0

100.0

150.0

200.0

250.0

300.0

350.0

Roz

aje

Zab

ljak

Bije

lo P

olje

Plav

Moj

kova

c

Kol

asin

Ber

ane

And

rije

vica

Savn

ik

Pluz

ine

Plje

vlja


Sources: Monstat and ISSP calculations


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31

In the Northern region, the highest average wages & salary after taxes and contributions in the first half of 2005 was achieved in Pljevlja, while the lowest was in Rozaje.

Graph 3.5: Wages and salaries in the Southern region (average Jan-June 2005)

0.0

50.0

100.0

150.0

200.0

250.0

300.0

350.0

400.0

Ulcinj Bar Herceg Novi Budva Tivat Kotor


Sources: Monstat and ISSP calculations In the Southern region, the highest average wages & salaries after taxes and contributions in the first half of 2005 was achieved in Kotor, while the lowest was in Ulcinj.

Chapter 4. Prices

ISSP - CEPS 32

Table 4.1. Prices

Consumer Price Index (Cost of Living) )1

CPI Total RPI Total Producer Price

Index

2000=

100

Monthly change in %

Annual change in %

Foo

d, to

bacc

o an

d be

vera

ges

annu

al c

hang

es

Goo

ds le

ss f

ood,

to

bacc

o an

d be

vera

ges

annu

al

chan

ges

Serv

ices

ann

ual

chan

ges

2000= 100

monthly change in %

annual change in %

2000= 100

annual change in %

PRICES IN DINARS

1995 9.8 6.2 83.7 206 6.5 100.1

1996 18.2 3.4 89.7 379 3.3 89.1

1997 22.9 1.4 26.5 456 1.1 20.8

1998 29.8 3.1 29.8 582 2.9 27.5

1999 47.1 6.2 56.6 931 7.1 58.0 85.9

DM (until December 2001) and EURO (from January 2002)

2000 100.0 3.4 36.1 10.9 23.2 12.2 100.0 25.0 100.0 16.5

2001 120.2 1.8 21.8 18.9 22.8 42.0 123.0 8.6 23.1 114.4 14.5

2002 142.0 0.7 16.8 15.7 18.7 19.5 147.6 3.1 17.4 121.6 4.6

2003 151.6 0.50 6.8 3.9 9.3 7.3 159.4 0.5 7.7 127.8 2.9

2004 155.2 0.26 2.35 0.6 3.8 9.3 164.4 0.3 3.3 138.0 5.8

2004-Q1 155.0 0.1 5.5 3.9 8.1 7.7 161.9 0.1 7.1 130.9 7.6

2004-Q2 154 0.2 6.3 4.2 7.3 9.0 161.7 0.2 7.5 129.9 7.2

2004-Q3 155 0.1 5.5 3.9 8.1 7.7 161.9 0.1 7.1 130.9 7.6

2004-Q4 156.1 1.2 1.3 -1.2 2.3 20.2 166.7 0.8 3.1 138.5 4.3

2005-Q1 160.0 0.1 3.2 98.3 101.6 142.2 172.40 0.1 5.9 139.47 3.1

2005-Q2 161.9 0.5 4.1 0.0 1.3 41.1 173.77 0.28 5.2 140.34 0.9 2005-Q3 161.3 -0.1 4.8 0.8 1.8 45.3 174.04 0.05 3.6 141.45 1.6 May-04 156.0 0.4 2.8 -0.3 0.5 3.6 164.3 0.6 2.7 139.6 6.7

Jun-04 155.1 -0.6 0.9 -1.0 3.3 8.1 164.3 0.0 2.4 139.0 5.5

Jul-04 153.9 -0.7 0.9 -0.1 2.7 3.6 164.3 0.0 2.1 139.3 5.7

Aug-04 153.9 0.0 0.8 -0.3 2.8 3.6 164.4 0.1 2.1 139.7 6.0

Sep-04 153.8 0.0 0.3 -0.8 2.2 2.7 164.8 0.2 2.0 138.8 4.9

Oct-04 154.3 0.3 0.3 -0.9 2.4 3.5 165.6 0.5 2.4 138.7 4.6

Nov-04 154.5 0.1 0.3 -1.2 2.9 3.4 165.7 0.1 2.5 138.7 4.6

Dec-04 159.6 3.3 3.2 -1.6 1.6 53.7 172.1 3.8 6.2 138.1 3.6

Jan-05 159.8 0.1 3.2 -1.8 1.4 53.8 172.1 0.1 6.2 130.7 3.6

Feb-05 160.0 0.1 3.1 -1.8 1.7 54.8 172.4 1.1 5.8 131.0 3.3

Mar-05 160.3 0.2 3.2 -1.6 1.7 55.8 172.7 2.1 5.9 133.8 2.5

Apr-05 161.1 0.5 3.7 -0.2 1.1 56.8 173.4 3.1 6.2 131.9 0.4

May-05 162.0 0.6 3.8 -1.0 1.8 57.8 173.8 4.1 5.8 140.2 0.5

Jun-05 162.5 0.3 4.8 1.3 0.9 38.7 174.2 5.1 3.8 141.3 1.7

Jul-05 160.9 -1.0 4.6 0.6 1.6 44.7 173.8 6.1 3.5 141.3 1.5

Aug-05 161.2 0.2 4.7 0.6 1.6 44.8 173.9 7.1 3.5 141.4 1.3

Sep-05 161.8 0.4 5.2 1.2 2.1 46.3 174.4 8.1 3.7 141.6 2.1

Sources: Price indices published by Statistical Office of Montenegro except December 2004 monthly rates of change are calculated by ISSP. Table presents end-of-period values for monthly data and average period values for quarterly and annual data. Currencies: DIN until 1999, DM from 2000 till 2002 and € from 2002.

• One-base index is calculated as chain index according to Monstat indices based on respective previous years

• Monthly and annual changes are based on data taken from Monstat publications except December 2004 monthly rates of change are calculated by ISSP

1 Cost of Living is the official name of the Consumer price index (CPI) in Montenegro


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33

4. PRICES o During the observed period, June to September 2005, annual inflation has declined

slowly in the first three months and increased in September. o Consumer price inflation reached 5.2% in September 2005. o Retail price inflation was 3.7% in September 2005. o The main source of inflation came from the increase of oil and oil product prices. o Alcohol prices increased. o Food continued to push the total index down. o The cost of the Food consumer basket amounted to €261 in September 2005. o Producers’ prices increased in September to 2.1%, due to oil inflation. o Inflation forecasts for the period from October 2005 to September 2006 range from 1.4%

to 3.8%. 4.1. CONSUMER PRICE INDEX (CPI) Annual inflation of CPI reached 5.2% in September 2005, which is much higher compared to the same indicator of 0.3% in September of last year. The high annual level originates from the high inflation of Services that incorporates a 200% increase of “local call charges.” On the other side, oil price inflation shocks are the source of the annual increase of total CPI as well. The average change during the observed period, from June to September 2005, amounted to 4.8%, which was the average annual inflation as well. The average price change in the last 12 months (Oct 04 to Sep 05) compared to the previous period was 3.2%. End-of-period inflation in the second quarter was 4.8%, while in the third it reached 5.2%. Various measures of CPI inflation in the first three quarters of 2005 are presented below:

CPI Inflation in 2005

Annual change2 “Average change”3 Average annual change4 Average monthly change 5

Q1 3.2 3.2 3.2 0.1

Q2 4.8 4.1 4.1 0.5

Q3 5.2 4.8 4.8 -0.5

Source: Monstat Calculations: ISSP Monthly CPI changes in the observed months of 2005 were: 0.3% in June, -1.0% in July, 0.2% in August, and 0.4% in September.

2 “Annual change” represents a ratio of index in an observed month and the respective month of the previous year. This way of measuring inflation is also called “end-of-period-inflation”. ISSP uses annual change of CPI as the main indicator of inflation. CPI “dec-on-dec” presents inflation in a certain year. 3 “Average change” or “Average on average” represents ratios of an average of indices in the observed period to an average of indices in the same period of the previous year. 4 “Average annual inflation” represents arithmetic average of indices of annual change in an observed period. 5 “Average monthly inflation” is calculated by applying geometric averages for monthly inflation in an observed period (3 months in a quarter or 12 months in a year).

Chapter 4. Prices

ISSP - CEPS 34

Graph 4.1. CPI inflation

-4

-2

0

2

4

6

8

10

12

14

16

18

20

Sep-

02

Nov

-02

Jan-

03

Mar

-03

May

-03

Jul-

03

Sep-

03

Nov

-03

Jan-

04

Mar

-04

May

-04

Jul-

04

Sep-

04

Nov

-04

Jan-

05

Mar

-05

May

-05

Jul-

05

Sep-

05

%

Monthly Annual

Source: Monstat Calculations: ISSP Retail prices experienced a lower annual change of 3.7% in September 2005 compared to cost of living (CPI). This significant difference originates from the higher weight that is given to Liquidate fuel and lubricant in the consumer basket of CPI (1.8%) as compared to the weight of these items in the structure of products and services of RPI (1.4%). However, the change in RPI is still higher compared to the RPI annual change in the same month of the previous year, when it amounted to 2%. Compared to the June-September 2004 average, RPI increased by 3.6% in 2005 and average annual inflation was also 3.6%. The average monthly inflation was -0.7% for the observed period. End of period inflation was 3.7% in Q2 and 3.5% in Q3. The table below presents some price change indicators in the first three quarters of 2005.

RPI in 2005

Annual change “Average change” Average annual change Average monthly change

Q1 3.5 5.9 5.9 0.1

Q2 3.5 6.0 5.2 0.3

Q3 3.7 5.8 3.6 0.1

Source: Monstat Calculations: ISSP


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35

Graph 4.2. RPI Inflation

-2

0

2

4

6

8

10

12

14

16

18

20

22

24

26

28

Aug

-02

Oct

-02

Dec

-02

Feb

-03

Apr

-03

Jun-

03

Aug

-03

Oct

-03

Dec

-03

Feb

-04

Apr

-04

Jun-

04

Aug

-04

Oct

-04

Dec

-04

Feb

-05

Apr

-05

Jun-

05

Aug

-05

%

Monthly Annual


Monthly changes of retail prices in the observed months were: 0.2% in June, -0.2% in July, 0.1% in August, and 0.3% in September. 4.1.2. Disaggregated price changes Table 4.2 Annual inflation of disaggregated CPI components

Product or service group

Total index Food Tobacco and

beverages Clothing and

footwear Accommodati

on

Hygiene and personal

care

Education and culture

Traffic vehiclesand transport

and communication

services Consumption Weights in 2004

100 57.56 7.34 8.23 11.16 5.25 4.8 5.66

2004

Jan 5.20 3.90 -0.06 6.75 15.27 4.21 9.48 4.52 Feb 5.40 4.26 -0.03 6.70 15.06 3.06 11.57 3.93 Mar 5.76 4.83 -0.02 6.85 15.44 3.04 11.92 1.22 Apr 2.55 2.14 1.57 6.09 3.11 1.86 5.90 0.09 May 2.77 -0.43 0.75 5.79 0.47 2.25 4.56 2.41 Jun 0.89 -1.15 0.75 5.54 2.66 2.25 5.95 6.67 Jul 0.93 -0.22 0.88 5.47 0.49 2.22 5.48 1.97 Aug 0.81 -0.43 0.75 5.79 0.47 2.25 4.56 2.41 Sep 0.26 -1.00 0.56 5.74 0.41 1.46 1.51 2.13 Oct 0.32 -1.12 0.68 5.49 0.72 1.50 1.60 3.93 Nov 0.27 -1.38 0.76 5.94 0.74 1.54 1.38 5.04 Dec 3.17 -1.79 0.71 4.52 2.38 1.43 1.41 68.53

2005

Jan 3.17 -2.08 1.04 3.98 0.74 1.28 1.39 68.62 Feb 3.11 -2.13 1.19 3.60 0.71 1.36 0.26 71.05 Mar 3.22 -1.91 1.34 3.17 0.69 1.52 0.34 71.50 Apr 3.67 -1.54 4.34 2.29 0.67 1.59 0.35 72.76 May 3.85 -0.81 5.29 2.64 0.62 0.82 0.31 67.02 Jun 4.80 0.78 6.03 1.88 0.64 0.47 0.33 66.86 Jul 4.56 -0.05 6.45 1.78 0.64 0.47 0.43 69.50 Aug 4.72 0.01 6.48 1.48 0.74 0.44 0.44 68.05 Sep 5.15 0.63 6.52 1.55 0.56 0.40 0.74 67.38


Chapter 4. Prices

ISSP - CEPS 36

Food, tobacco, and beverages products exhibited average annual inflation of 0.03% in Q2 and 0.8% in Q3. A decreasing annual rate was registered for Goods less food, tobacco, and beverages products with average annual inflation of: 1.3% in Q2 and 1.8% in Q3. The price of services continues to push total CPI up, reaching the highest average annual inflation of 41.1% in Q2 and 45.3% in Q3. As you can see, the third quarter was characterized by higher annual rates of change.

Annual inflation for most of the seven main product/service groups slightly increased in September 2005. With the exception of food, tobacco, and beverages, the remaining product/service groups registered a decline in inflation during the first two quarters of 2005. The most significant change came from tobacco and beverages prices that sharply increased from an annual rate of 1.3% in Q1 to 6.0% in Q2 and 6.5% in Q3.

Food product prices (57.6%6) experienced seasonal variations characteristic of the period from June to September 2005. The high monthly change in June (0.4%) created annual inflation of 0.75% while July brought a seasonal drop of prices by 2% compared to the previous month. The annual rates for the food categories in September 2005 are: Corn products (8.9%) registered annual inflation rate of 0.9%, Fresh and processed vegetables (6.2%) with an annual rate of 2.5% caused total food inflation to decrease, while Fresh and processed fruits (5%) registered average annual deflation of 0.1%. The price of fresh and processed meat (17.5%) increased by 1.3%, while Fish (1.1%) prices decreased by 6%. Milk and milk product (8.9%) prices were 0.6% higher on an annual level and egg prices (1.8%) were 3.2% higher. The price of Lard (3.2%) and the rest of the food product prices (coffee, sugar, candies, spices, etc.) (5%) decreased annually, by 4% and 0.2%, respectively.

Tobacco and beverage (7.3%) product prices registered high annual inflation during the observed period, reaching 6.5% in September 2005. Tobacco (4.5%) product prices remained unchanged, while the average annual inflation of the price of beverages (2.8) was 16.5%. Thus, the overall increase in this product group was a result of the alcoholic drink prices that were 20% higher compared to the same month of the previous year. Specifically, the source of this group’s inflation is “Rakija” that registered monthly inflation of 5.9% in June and 2.7% in July; additionally, beer registered inflation of 2.8% in June. Since there were no changes in taxes, we assume that “good summer season expectations” increased the demand for this product that is often consumed during the summer months when the number of consumers increases.

Clothes and Footwear prices (8.2%) begin their deflationary impact on total inflation reaching 1.6% in September 2005. Footwear (3.8%) registered almost unchanged monthly inflation reaching 1.6% at an annual level in September 2005, while Clothes prices (4.4%) registered annual inflation of 1.5% in the same month.

Annual inflation of Accommodation prices (11.2%) was 0.6% for September 2005. The highest rate was for the annual change of Apartment prices with an average annual change for the observed period of 3.1%, while heating and lighting, as well as apartment equipment, were all under 0.2%. The media even announced that the price of electricity did not change.

Hygiene and personal care (5.3%) prices registered the lowest annual inflation of 0.4% in September 2005: Hygienic means (3.6%) prices registered an annual change of 0.3% in September; prices of health care services (0.8%) registered 0.7%; medicines (0.6%) registered 0.6%. These prices remained unchanged on a monthly level. 6 The weight for each group in the total consumer basket is given in brackets next to the name of the CPI products services group or subgroup.


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37

Education and culture (4.8%) prices experienced 0.7% annual change in September 2005. Education equipment (3.4%) was almost unchanged, while Education services (1.5%) registered 1.6% annual inflation in September 2005.

Traffic vehicles and transport and communication services were still at a high 67.4% annual inflation in September 2005. Except for Traffic vehicles (0.2%) prices, which had a deflationary effect on the total index with 1.1%, Fuel and lubricants (1.8%), prices of outlay for keeping cars (0.5%), and Communication services (2.3%) pushed the total index up with 12.6%, 9.7%, and 67.9% annual rates in September, respectively. Fuel and lubricants inflation is the main reason why the total index increased during the observed period. Its impact is direct, through this category, and indirect, as a cost of production or wholesale. All three months of quarter three in 2005 brought monthly inflation to this category: in June 4.3%, in July 3.3%, and in September 6.4%. The outlay for keeping a car registered high with 7% as a monthly level in September 2005, while communication services remained unchanged.

Summing up, besides the increase of inflation in September 2005, most of the main product groups had a deflationary effect on total inflation. But, since the Vehicles, Transport and Telecom Services continue to have high annual inflation (67.4%), the total index is strongly pushed up. Tobacco and Beverages were also inflationary, with 6.5% due to the inflation associated with alcoholic drinks. On the other side, we have the force of the large weight that is applied to Food prices that continue to have a significant deflationary effect (0.6%). Other groups that have a lower rate as compared to total inflation are: Hygiene and personal care (0.4%), Accommodation (0.6%), and Education and culture (0.7%). Vehicles transport and telecom services had a strong inflationary effect, with 53.7% annual inflation, as well as Clothes and footwear (4%). 4.1.3. COST OF THE FOOD CONSUMER BASKET (FCB)7 Table 4.2 Cost of the food basket in Montenegro (in €)

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

2004 257.73 257.08 257.11 255.51 260.36 264.52 253.43 255.45 253.82 254.85 245.61 244.07

2005 240.22 241.54 241.09 241.99 246.21 267.34 259.32 259.96 261.10

Source: Monstat

After almost a year of negative annual rate of change, the cost of the Food consumer basket registered annual growth since June 2005. Thus, the average four member family spent 461 € for 65 food products in September 2005, or almost 3% more than in the same month last year. This confirms the same trend of the Food category in the consumer basket of CPI, which registered lower but positive annual rates of change. The main impact on the increasing food prices came from fresh vegetables and fruits, but

7 The food consumer basket consists of a group of basic food products in the quantities adequate for a four-member family. The concept of the basket was developed following the guidelines of the EU to approximate the cost of basic food needs for a four-member family. Thus, it allows for easy comparisons between countries.

Graph 4.3. Food consumer basket (annual change)

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other food product prices also increased at lower rates of change. Here are some of the most significant positive average annual rates of change of prices: spinach (8% in Q2 and 20% in Q3), cabbage (36% in Q2 and 23% in Q3), cauliflower (27% in Q2 and 21% in Q3), nuts (20% in Q2 and 29% in Q3), pear (35% in Q2 and 29% in Q3) and peaches (65% in Q2). Significant deflationary rates came from: onion (33% in Q2 and 21% in Q3), red beet (35% in Q2 and 15% in Q3), cucumber (34% in Q2 and 11% in Q3), peas (27% in Q2 and 64% in Q3), beans (35% in Q2 and 22% in Q3), tomato (71% in Q2 and 13% in Q3), paprika (75% in Q2 and 12% in Q3), lemon (15% in Q2 and 13% in Q3), and orange (10% in Q2 and Q3). Meat prices registered annual inflation from 1% to 6% in Q2 and Q3. Three important food products salt, sugar, and oil registered lower prices in Q2 and Q3 compared to the same quarters last year.

Graph 4.4. Cost of FCB in Montenegro (in euro)

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Source: Monstat 4.2. PRODUCER PRICE 4.2.1. PPI Inflation Producer and Wholesale prices registered end-of-period inflation of 1.7% in Q2 and 2.1% in Q3. While this is lower compared to 4.9% in September 2004, it does show an increasing trend since May 2005. The increasing trend of annual PPI inflation is a result of the increase of oil and oil products, which are one of the main inputs in production. Inflation in production is also one of the main reasons why total CPI increased in the third quarter of 2005. Annual inflation in the months from May to September was: 0.5% in May, 1.7% in June, 1.5% in July, 1.3% in August, and 2.1% in September 2005. The average annual inflation was 0.8% in Q2 and 1.6% in Q3 compared to the respective quarters of the previous year.


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Graph 4.5 PPI inflation

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Source: Monstat 4.2.2 PPI disaggregated changes The deflationary effect of PPI came from the production price of food, tobacco, and beverage, while most of the other costs were unchanged at a monthly level in the period from January to April. Mining and stone extraction prices were almost unchanged at a monthly level from May to August 2005 with average annual inflation at 1.4%. The increase of oil prices at the world market pushed this inflation to 4.8% at a monthly level and 5.4% at an annual level in September 2005. Processing industries prices registered an increase at an annual level to 2.1% in September 2005. The cost of production of non-metal products, furniture, and construction materials has continued to push total PPI up, on an annual level. o From May to August 2005 monthly inflation of food, tobacco and beverage production

was unchanged and the annual level was at -3.2%. In August it increased 0.6% compared to July 2005, raising annual inflation and reaching 0.6% in September.

o Chemical products production prices kept the same unchanged monthly level at -2.6% during all months from May to September 2005.

o Textile production remained unchanged on a monthly and annual level from May to September 2005.

The average annual increase of Construction materials prices in the period from January to April 2005 was 3.8%. Electricity, gas and water prices did not change on an annual or monthly basis. As you can see, the deflationary effect was interrupted mostly with prices of mining and stone extraction and construction materials, which use oil and oil products the most. The slowing inflation effect came again from prices of food, tobacco, and beverage production and chemical products, while mining and stone extraction costs and construction material influenced an increase of the total index.

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4.3 INFLATION MEASURED BY DIFFERENT INDICATORS: PPI, RPI AND CPI Graph 4.10 shows the annual rates of change of consumer, retailer and producer price indices. Since June 2005, those three inflation indicators experienced theoretically ideal composition of trends. It was a month when CPI became higher than RPI and PPI was lower than both8. The increase of CPI and RPI is probably a result of PPI inflation during 2004 due to significant increases of oil prices, when products from production came into the retail market. High annual inflation of services made CPI and RPI increase (travel, transport and telecommunication costs). Cost of Production of Food, beverages, and tobacco followed the trend of retail food prices, as well as tobacco and beverages. Production prices of textile are still at the same, unchanged, monthly and annual level. The annual change of retail prices of textile and leather experienced a significant drop to 1.6% in September, which could come from 0% inflation of the same category in PPI.

Graph 4.6. PPI, RPI and CPI - annual changes

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Source: Monstat 4.4. FORECASTS Actual annual inflation in September 2005 was 5.2%. Our projection of inflation in the same month was an interval from 4.3%-6.2%. Thus, the experienced inflation rate was within this interval. The main impact for our optimistic and pessimistic inflation forecasts for the next twelve months is oil and oil product prices as an external influence that comes from the world oil market. Changes in the price of oil have a direct and indirect impact on total CPI. Indirectly, PPI is impacted in that it counts the oil price increase that actually happened; this impact is usually postponed for a few months (our forecast period) until the product comes

8 PPI does not include service prices as CPI and RPI. Services represent the most sensible source of price changes.


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to the retail market. Directly, the impact comes from changes in the price of oil that we expect to occur; these expected changes are represented as a part of retailer costs, such as are transport costs. The projected energy price increase did not happen until September, thus we do not expect to feel the impact until the end of the current year. However, since the energy price is still not liberalized and is lower than the market price, the pessimistic scenario forecasts its increase in the spring of 2006. The optimistic scenario for inflation developments in the next 12 months (January – December 2005) assumes:

Continuation of the CPI dynamics as in the previous twelve months Projected monthly increase of fuel price by 0.15%.

The pessimistic scenario of inflation developments in the next 12 months (January – December 2005) assumes:

The consumer prices increase a bit faster in the next 12 months as compared to the previous 12 months.

Increase of Electricity price by 15% in March 2006. Projected monthly increase of fuel price by 0.20%.

The resulting projected inflation in the next 12 months ranges from 1.4% to 3.8%, as shown in Graph 4.11. A sharp decrease in December 2005 resulted from the increase in CPI in the same month of the previous year. According to the optimistic scenario, the inflation rate in the following four quarters of 2005 and 2006 is projected to be: 1.8% in Q4 2005, 1.7% in Q1 2006, 1.7% in Q2 2006, and 1.4% in Q3 2006. According to the pessimistic scenario, the inflation rate in the following four quarters of 2005 and 2006 is projected to be: 2.0% in Q4 2005, 3.3% in Q1 2006, 3.4% in Q2 2006, and 3.8% in Q3 2006.

Graph 4.7 Twelve months inflation forecast

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5. BUDGET

o Total budget revenues in the first three quarters of 2005 amounted to €314.04 million, which is 71.5% of total planned budget revenues for 2005. The execution of total budget revenues was 13.05% higher than the observed period in 2004, which represents upgrading of budget revenue performances in 2005.

o During the first nine months of 2005, total budget expenditures and net lendings amounted to €302.86 million, which is 7.07% higher than expenditures in the same period in 2004. At the end of September, 65.74% of total planned budget expenditures for 2005 were executed.

o According to the fact that total executed expenditures were 3.56% lower than revenues, the republic budget ran a surplus of €11.11 million euro.

5.1 BUDGET EXECUTION IN THE PERIOD JANUARY-SEPTEMBER 2005

5.1.1 Budget revenues and grants

Total budget revenues in the first three quarters of 2005 were 314.04 million euro, which is 71.5% of the total planned for 2005. Executions of total budget revenues were 13.05% higher than the same period in 2004, representing an upgrading of budget revenue performances in 2005.

Graph 5.1. Monthly budget revenues (million euro)

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Source: Ministry of finance, ISSP calculations Total budget revenues have continually grown from the beginning of 2005 (with the exception of July, when they fell by 9.16% in comparison with the previous month) and culminated (as it was expected) in August at 44.74 million euro. After the end of the summer season, in September, they fell 14.97% in comparison with the previous month.

Total revenues were 291.49 million euro, which is 92.82% of the total budget revenues and 18.56% higher than the same category in 2004. Non-tax revenues, which represent 6.18% of budget revenues, were 19.42 million euro. At the end of September, the annual plan of capital revenues, in the amount of €3.06 million, was completely executed.


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Table 5.1. Central Budget Revenues and Expenditures, 2001-2005 (million €)

2001 2002 2003 2004 2005 Jan-Dec Jan-Dec Jan-Dec Jan-Dec Jan-Dec Jan 05 Feb 05 Mar 05 Apr 05 May 05 Jun 05 Jul 05 Aug 05 Sept 05 Jan-Sept 05 Execute Execute Execute Execute Plan Execute Execute Execute Execute Execute Execute Execute Execute Execute Execute

% of plan 05

Deposits from previous year Total revenue and grants (1+2) 233.140 256.804 350.103 379.730 439.138 18.474 22.339 33.653 36.690 35.979 40.707 39.176 44.743 42.280 314.041 71.513 Total revenue (1.1+1.2) 221.220 229.847 337.519 372.783 435.447 18.474 22.339 33.653 36.69 35.979 40.707 39.176 44.743 42.215 313.976 72.104 Current revenue (1.1.1+1.1.2) 221.220 229.847 337.519 369.696 432.385 18.474 22.339 33.599 36.69 32.971 40.707 39.176 44.743 42.215 310.914 71.907 Tax revenue (1.1.1.1+1.1.1.2+1.1.1.3+1.1.1.4+1.1.1.5) 187.999 208.931 312.918 337.513 384.733 17.58 20.696 31.552 34.365 30.494 37.702 37.071 42.295 39.736 291.491 75.764 Personal income tax 56.654 57.889 63.961 61.235 65.585 2.003 4.150 5.509 5.875 5.084 5.960 5.658 7.100 5.441 46.780 71.327 Turnover (sales) tax 58.488 56.528 137.222 158.096 188.894 8.791 9.488 14.982 14.959 15.507 19.097 19.168 22.214 19.784 143.990 76.228 Excises 35.664 50.786 58.197 61.527 61.257 4.658 3.003 4.591 6.636 3.779 5.763 6.569 6.03 8.253 49.282 80.451 Taxes on international trade and transactions 27.274 26.376 36.845 36.653 38.989 1.477 2.221 3.424 3.179 3.774 4.096 4.162 4.481 3.663 30.477 78.168 Custom tariffs 13.894 12.605 35.078 33.803 37.542 1.358 2.096 3.157 3.016 3.618 3.973 4.123 4.453 3.603 29.397 78.304 Custom transit fees 13.380 13.771 1.766 2.850 1.447 0.119 0.125 0.267 0.163 0.156 0.123 0.039 0.028 0.06 1.08 74.637 Other taxes 9.920 17.342 16.694 20.002 30.008 0.651 1.834 3.046 3.716 2.350 2.786 1.514 2.47 2.595 20.962 69.855 Non tax revenues 33.221 20.916 24.601 32.183 47.652 0.894 1.643 2.047 2.325 2.477 3.005 2.105 2.448 2.479 19.423 40.760 Capital revenue 3.087 3.062 0 0 0.054 0.000 3.008 0.000 0.000 0.000 0.000 3.062 100.000 Grants 11.920 26.958 12.584 6.947 3.691 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.065 0.065 1.761 Total expenditure and net lending (1+2) 259.309 266.771 381.090 405.487 460.707 11.078 27.112 32.789 38.664 29.211 39.887 39.514 38.682 45.926 302.863 65.739 Total expenditure (1.1+1.2) 252.585 247.517 358.924 390.211 448.887 10.555 26.550 31.422 38.364 29.036 36.759 39.237 36.856 45.053 293.832 65.458 Current expenditure (1.1.1+1.1.2) 233.287 236.697 345.235 377.561 412.665 10.535 26.203 30.645 37.265 26.417 33.768 37.167 35.045 42.299 279.344 67.693 Interest 0.622 12.880 14.136 24.025 15.275 0.561 0.254 2.923 0.355 0.493 5.610 0.480 0.391 3.026 14.093 92.259 Non-interest expenditure (1.1.2.1+1.1.2.2+1.1.2.3+1.1.2.4+1.1.2.5+1.1.2.6) 232.665 223.818 331.099 353.536 397.390 9.974 25.949 27.722 36.910 25.924 28.158 36.687 34.654 39.273 265.251 66.748 Wages, salaries, allowances 108.464 110.178 134.262 164.389 172.352 1.220 11.141 11.176 22.254 11.205 14.962 17.245 10.906 20.619 120.728 70.047 Goods and services 55.351 41.817 37.858 46.913 62.263 0.892 3.355 4.266 5.364 4.405 4.012 4.679 4.596 4.586 36.155 58.068 Social Insurance and Social Security Transfers 45.327 35.825 132.795 103.782 141.673 7.257 8.737 10.323 7.886 8.674 8.016 12.331 13.389 11.729 88.342 62.356 Subsidies to enterprises 12.249 18.169 14.631 8.481 6.282 0.048 0.389 0.158 0.275 0.883 0.600 0.839 0.910 0.705 4.808 76.529 Reserves 6.461 14.819 8.388 16.689 10.996 0.479 2.118 1.533 0.836 0.508 0.257 1.296 4.463 1.312 12.802 116.423 Other non - interest expenditure 4.813 3.010 3.165 13.282 3.824 0.078 0.209 0.266 0.295 0.249 0.311 0.297 0.390 0.322 2.417 63.206 Capital expenditure 19.298 10.820 13.688 12.650 36.222 0.020 0.347 0.777 1.099 2.619 2.991 2.070 1.811 2.754 14.488 39.998 Net lending 6.723 19.254 22.167 15.276 11.820 0.523 0.562 1.367 0.300 0.175 3.128 0.277 1.826 0.873 9.031 76.404 Lending 13.974 19.490 22.590 17.803 11.820 0.523 0.562 1.367 0.540 0.192 3.178 0.954 1.826 1.074 10.216 86.430 Repayment 7.250 0.236 0.423 2.527 0.000 0.000 0.000 0.000 0.240 0.017 0.050 0.677 0.000 0.201 1.185 Overall budget balance excluding grants (cash) (A-B-2) -38.089 -36.925 -43.571 -32.704 -25.600 7.396 -4.773 0.864 -1.974 6.768 0.820 -0.338 6.061 -3.711 11.113 Overall budget balance (cash) (A-B) -26.169 -9.967 -30.987 -25.757 -21.909 7.396 -4.773 0.864 -1.974 6.768 0.820 -0.338 6.061 -3.646 11.178 Financing (1+2) 26.129 38.254 18.395 23.427 21.909 -3.339 2.109 1.940 90.999 -12.023 -24.868 -11.676 -4.556 -8.266 30.320 Domestic and foreign financing (net) 17.007 0.568 6.234 19.886 15.909 -3.339 2.109 1.940 -20.071 -12.023 -24.881 -11.676 -4.556 -8.266 -80.763 Borrowings 76.436 40.445 48.246 51.110 53.609 0.034 3.055 3.611 1.944 0.000 0.064 0.142 0.021 0.359 9.230 Repayment 59.430 39.877 42.012 31.224 37.700 3.373 0.946 1.671 22.015 12.023 24.945 11.818 4.577 8.625 89.993 Privatization revenue 9.122 37.686 12.161 3.541 6.000 0.000 0.000 0.000 111.070 0 0.013 0.000 0.000 0.000 111.083

Source: Ministry of Finance of Montenegro, ISSP calculations

Chapter 5. Budget

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Structure and execution of individual revenues

Personal income tax amounted to 46.78 million euro in the first three quarters of 2005 (71.33% of the annual plan) and it was 5.89% higher than the same period of 2004. At the same time, participation of personal income taxes in total budget and tax revenues was 14.90% and 16.05%, respectively.

Value added tax was, as expected, the most dominant category in total budget revenues, contributing 49.40% to total tax and 45.85% to budget revenues. The total executed amount was 143.99 million euro, which was 25% higher than the same period in 2004. The highest level of executions occurred during the summer season and culminated in August, with 22.21 million euro of execution.

Graph 5.2. Value added tax (million euro)

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Excise tax – The total amount of executed excise taxes was 49.28 million euro, which is 80.45% of the total planned. Total execution was 9.26% higher than the same period in 2004, and this considers excises in production (9.53 million euro) and excises in import (39.75 million euro).

Taxes on international trade and transactions – Total revenue, according to this category, in the first three quarters of 2005, was 30.48 million euro, which is 11% higher than the same period in 2004. In comparison with the plan for 2005, 78.17% of taxes on international trade and transactions were executed. Custom tariffs were 29.40 million euro, which was 15.62% higher than the same period of 2004. Custom transit fees were 1.08 million euro and they represented 50.65% of the total planned amount for 2005 (it is the only category in which executions are lower than executions in the first three quarters of 2004).


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Graph 5.3. Customs and transit in period January-September 2005 (million euro)

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Non-tax revenues– During the first nine months of 2005 non-tax revenues were 19.42 million euro. From that number, taxes accounted for 4.93 million euro and 14.49 million euro was from other budget revenues. Total non-tax revenues were 22% lower in 2005 than the same category in the first three quarters of 2004.

Grants During the first three quarters of 2005, grants amounted to only 0.07 million euro of the total planned amount of 3.70 million euro. 5.1.2 Budget expenditures and net lending In the first nine months of 2005, total spending of the republic budget (including net lending) amounted to €302.86 million, which represents 65.74% of the annual plan. At the same time, total spending is 7.07% higher as compared to the same period of last year. Total expenditures amounting to €293.83 were 8.48% higher, while net lending (9.03 million) was lower by about 25% in comparison with the first three quarters of last year. Current expenditures amounted to €279.34 million and were by 6.90% higher than the corresponding period of the previous year. Out of that amount, €265.25 million, or 94.96%, represents non-interest expenditures1, while the rest is related to interest payments. The following graph shows monthly expenditures from January to September 2005 in comparison to the same period of 2004. 1 This type of spending is comprised of general spending, social insurance, development incentives and current and permanent budget reserve.

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Graph 5.4 Monthly expenditures from January to September 2004 and 2005 (million euro)

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Source: Ministry of finance, ISSP calculations The biggest budget spending in the amount of € 45.93 million is found in the month of September. This is a direct consequence of both the higher net salaries and contributions payments for employees in the state institutions. Gross salaries, wages and other compensations for employees in the state institutions represented 45% of expenditures in this month. Execution of expenditures categories

The Republic budget transfers salaries, wages and other compensations for employees in 68 Montenegrin institutions. With that purpose, in the period January-September of 2005, €120.73 million, or 70.05% of the planned amount, was paid. This amount is nearly 8% higher than last year. Net wages and salaries amounted to €68.08 million, which is 19% higher than the same period of last year. Contributions in the amount of €31.30 million were 3.61% higher than last year’s amount, while the amount of personal income tax (€12.57), which is paid from the budget, is 8% lower as compared to last year. To that effect, and knowing that according to the budget corrections, personal income tax payment is planned to be €19.15 million, or 1.6% higher than execution of this category in 2004, it is expected that through the end of the year, GoM will improve the discipline of taxation payment for its employees. The same statement can also be related to the contributions payments given the fact that their payment for this year is planned to be 7.9% higher than last year’s execution. At the end of September, other compensations for employees in state institutions amounted to €6.96 million, out of which €4.57 million represents food compensations and the remaining €2.38 million is related to the living compensations, regress, temporary jobs, compensations for representatives in the Parliament, and other. In comparison to 2004, the amount of other compensations for state employees was 22% lower.


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Expenditures for goods and services represent almost 12% of the total €36.16 million

budget expenditures. In the period from January to September of 2005, only 58.1% of planned spending in this category was executed (the largest amount of spending is related to contract services and the current maintenance of the construction building of the Republic, in the amount of €12.429 million and €10.997 million, respectively2).

In the period from January to September of 2005, social insurance and social security

transfers amounted to €88.34 million, which represents 29.17% of total budget expenditures. Almost 52% of the mentioned amount, or €45.71 million, are transfers to the social funds and the Ministry of defense of the Union S&M. Even though the mentioned transfers have the greatest share in this overall category, in the mentioned period, only 56.57% of the annual plan had been executed. Expenditures related to the social protection of the socially vulnerable amounted to €25.28 million, or 72% of annual3.

Box 1: In July of 2005, budget corrections were made due to the strong performances of certain tax revenues, as well as savings made on some budgetary categories. By this, total revenues increased by 1.6% (VAT revenues, other taxes, and non-tax revenues increased by 6.7%, 25%, and 20%, respectively, while revenues based on personal income tax, excises, tax on international trade and transactions, and capital revenues decreased by 9.8%, 8%, 11%, and 43%, respectively) as compared to the original plan. Total expenditures increased by 1.5% (gross salaries and other payments to state employees, expenditures for goods and services, subsides to enterprises, other non-interest expenditures, capital expenditures and net lending increased by 0.8%, 6.8%, 11%, 1.3%, 29.7%, and 10.5%, respectively, while interest, social insurance, and social security transfers and reserves decreased by 22%, 2%, and 13%, respectively). One of the main objectives regarding budget corrections was the construction of the road Podgorica-Kolašin, causing the biggest increase of capital revenues, by nearly 30%, within the new budget plan. Budget corrections comprise only horizontal changes, which means that the projected deficit of € 25.6 million remained the same.

Subsidies to enterprises amounted to €4.81 million, which represents 76.5% of the annual plan and 78.8% of the amount of subsidies paid from the budget in the same period last year. The trend of having a low share of subsidies in the Montenegrin budget continued in the analyzed period, for their share was capped at 1.6%.

2 Spending on these two categories (contract services and current maintenance of construction building of the Republic) represents 49.11% and 74.86% of the plan, respectively. 3 It comprises the whole range of cash allowances to their beneficiaries from the Ministry of Labor and Social Affairs (FMS, child allowances, veteran benefits, other persons care, food for children in kindergarten, recreation of children from the poorest families, one-time social assistance, and assistance to invalid persons in transport).

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Graph 5.5: Where the taxpayers’ money is spent in the period January-September of 2005

wages and salaries and other compensations to

the public sector employeess

39%

goods and services12%

social insurance and social security

transfers29%

interests5%

net lending3%

other expenditures1%

subsidies2%

reserves 4%

capital expenditures5%

Source: Ministry of finance, ISSP calculations

At the end of September, total reserves amounted to €12.80 million, which is 16.4% higher than the defined plan and 14.7% higher than last year’s execution in the same period. Out of that amount, €0.85 million represents permanent budgetary reserve, and €11.96 million relates to the current budgetary reserve.

In the first nine months of 2005, other expenditures (rent and other non-interest

expenditures) amounted to €2.42 million, which represents 63.2% of the annual plan.

Interest paid from the republic budget represents 4.65% of total budget expenditures. In the first three quarters of 2005, they amounted to €14.09 million, or 92.3% of the annual plan. At the same time, this amount is nearly 20.25% lower in comparison with the same period of last year. In the analyzed period, interest paid to residents amounted to €2.53 million, while interest paid to non residents was €11.57 million.

In the first three quarters of 2005, capital expenditures amounted to €14.49 million,

which represents only 40% of the annual plan; however, on the other hand, they increased by 52% in comparison with the same period of last year. Out of that amount, €13.39 million is related to the purchase of fixed assets, while the remaining €1.10 are expenditures for investment maintenance of the infrastructure.

Net lending

In the first three quarters of 2005, net lending amounted to €9.03 million and was about 25% lower than in the same period of last year. At the same time, at the end of September, 76.4% of the planned annual amount of net lending had been executed. Gross lending amounted to €10.22 million, out of which €5.52 million is related to the repayment of loans based on given guarantees (annual plan is exceeded by 38%) and €4.70 million is related to the given borrowings and loans to public and other enterprises (planned repayment of loans


ISSP - CEPS

49

to public enterprises is completely exceeded, while to other enterprises, 69% of the planned amount is paid). Repayments of loans amounted to €1.19 million. Net lending in the amount of €3.13 million was the largest in June, and gross repayments in that month were also the largest, amounting to €3.18 million. However, repayments were at a significantly low level of €0.05 million. 5.1.2 Budget balance and financing Overall budget balance In the months of February, April, July, and September, the budget balance was negative and amounted to €4.77, €1.97, €0.34, and €3.71 million, respectively. On the other hand, positive financial results characterized January (€7.40 million), March (€0.86 million), May (€6.77 million), June (€0.82 million), and August (€6.06 million). Consequently, at the end of September, the overall budget surplus for the first nine months of 2005 amounted to €11.11 million. Financing In the first nine months of 2005, revenues from privatization amounted to €111.08 million. Total borrowings amounted to €9.23 million, while in the same period almost €90 million of debt was repaid. To that effect, at the end of September, net liabilities of the republic budget amounted to €80.76 million. Due to the significant inflow of privatization revenues, the overall amount of funds available for financing a potentially negative financial result amounted to €30.32 million. 5.1.4 Treasury bills In the period from January to September 2005, a total of 33 auctions of 28-day, 56-day, 91-day, and 182-day treasury bills were held. Total offered value in the observed period was 105.9 million euro, while the total amount of sold treasury bills was 103.9 million euro. The average weighted interest rate was 7.08%. 28-day T-bills in the first three quarters of 2005

During the first nine months of 2005, five auctions of 28-day treasury bills were held.

These auctions were held in the first two quarters of 2005, two of them in the first quarter and three of them in the second one.

The total amount of issued 28-day treasury bills in the observed period was 32.2 million

euro.

When analyzed by quarter, the total amount issued of 28-day treasury bills in the first quarter was 17.2 million euro and 15 million euro in the second quarter of 2005.

The total amount of sold 28-day treasury bills in the first three quarters of 2005 was 31.7

million euro.

Chapter 5. Budget

ISSP - CEPS 50

The maximum weighted average interest rate was 9.2% in March, while the minimum weighted interest rate was 4.5% in May 2005.

The average weighted interest rate on 28-day treasury bills was 7.9%.

Table 1. Overview of 28-day T-bill auctions, held from January-September 2005

No. Date of auction Date of maturity Amount of issue Amount of sold T-bills Weighted average

interest rate

1 01/20/04 02/17/05 8.7 8.3 8.89%

2 02/17/05 03/1705 8.5 8.5 9.00%

3 03/17/05 04/14/05 9.0 9.0 9.22%

4 04/14/05 05/12/05 5.0 5.0 8.33%

5 05/12/05 06/09/05 1.0 1.0 4.50%

Source: Ministry of Finance Note 1: Interest rates are expressed in annual terms Note 2: Amount of issued and sold T-bills in million euro 56-day T-bills in the first three quarters of 2005

During the first nine months of 2005, ten auctions of 56-day treasury bills were held.

The auctions were held over three quarters of 2005, four of them occurred in the first quarter, three in the second, and three in the third quarter of 2005.

The total amount of issued 56-day treasury bills was 37.6 million euro.

Observing the quarters, the total amount of issued 56-day treasury bills in the first

quarter was 21.6 million euro, while the second quarter had 10.5 million euro, and the third quarter had a total amount of issued 56-day treasury bills of 5.5 million euro.


million euro.

The maximum weighted average interest rate was 9.3% in March, while the minimum interest rate was 2.8% in September 2005.

The average weighted interest rate on 56-day treasury bills during the first three quarters

of 2005 was 6.7%.


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Table 2 Overview of 56-day T-bill auctions, held from January to September 2005


interest rate 1 01/12/05 03/09/05 5.6 5.6 8.78% 2 02/03/05 03/31/05 5.0 4.7 8.95% 3 03/09/05 05/04/05 6.0 6.0 9.35% 4 03/31//05 05/26/05 5.0 5.0 9.38% 5 05/05/05 06/30/05 4.0 4.0 8.30% 6 05/26/05 07/21/05 5.0 5.0 7.63% 7 06/30/05 08/25/05 1.5 1.5 5.45% 8 07/21/05 09/15/05 3.0 3.0 3.57% 9 08/25/05 10/20/05 1.0 1.0 2.96% 10 09/15/05 11/10/05 1.5 1.5 2.88%

Source: Ministry of Finance Note 1: Interest rates are expressed in annual terms Note 2: Amount of issued and sold T-bills in million euro 91-day T-bills in the first three quarters of 2005

During the first nine months of 2005, eleven auctions of 91-day treasury bills were held.

Auctions of 91-day treasury bills were held in all three quarters -- four auctions in each of the first and second quarters and three auctions in the third quarter.

The total amount of issued treasury bills was 21.5 million euro.

Analyzing the quarters, the total amount of issued 91-day treasury bills in the first

quarter was 12.5 million euro, while the second quarter issued a total of 6 million euro, and the third quarter had a total amount of issued 91-day treasury bills of 3 million euro.


million euro.

The maximum weighted average interest rate was 10.2% in March, while the minimum interest rate was 1.06% in September 2005.

The average interest rate on 91-day treasury bills in the first nine months of 2005 was

6.2%. Table 3. Overview of 91-day T-bill auctions, held from January to September 2005


interest rate 1 01/20/04 04/21/05 2.0 2.0 8.65% 2 03/24/05 06/23/05 2.5 2.0 9.03% 3 03/30/05 06/29/05 2.5 2.5 10.20% 4 03/31/05 06/30/05 5.5 4.8 9.68% 5 04/21/05 07/21/05 2.0 2.0 8.61% 6 06/23/05 09/22/05 1.0 1.0 6.88% 7 06/29/05 09/28/05 1.0 1.0 5.59% 8 06/30/05 09/29/05 2.0 2.0 5.82% 9 07/21/05 10/20/05 1.0 1.0 4.82% 10 08/22/05 12/22/05 1.0 1.0 2.24% 11 08/29/05 12/29/05 1.0 1.0 1.06%

Source: Ministry of Finance Note 1: Interest rates are expressed in annual terms Note 2: Amount of issued and sold T-bills in million euro

Chapter 5. Budget

ISSP - CEPS 52

182-day T-bills in the first three quarters of 2005

During the period from January to September 2005 seven auctions of 182-day treasury bills were held.

Auctions of 182-day treasury bills were held in all three quarters -- three auctions were

held in the first quarter and two in each of the second and third quarters of 2005.

The total amount of 182-day treasury bills in the observed period was 14.6 million euro.

The total amount of issued T-bills in the first quarter was 7.6 million euro, while the second quarter issued a total of 4 million euro, and the third had 3 million euro.

The total amount of sold 182-day treasury bills in the first three quarters of 2005 was

14.5 million euro.

The maximum weighted average interest rate was 9.8% in January while the minimum interest rate was 3.8% in July 2005.

The average interest rate on 182-day treasury bills in the first nine months of 2005 was

7.2%. Table 4. Overview of 182-day T-bill auctions, held from January to September 2005


interest rate 1 01/13/05 07/13/05 3.6 3.5 9.88% 2 02/24/05 08/25/05 3.0 3.0 8.95% 3 03/11/05 09/09/05 1.0 1.0 8.95% 4 04/07/05 10/06/05 2.0 2.0 9.48% 5 05/25/05 11/23/05 2.0 2.0 8.69% 6 07/12/05 01/10/06 1.50 1.5 3.82% 7 08/25/05 02/23/06 1.5 1.5 4.30%

Source: Ministry of Finance Note 1: Interest rates are expressed in annual terms Note 2: Amount of issued and sold T-bills in million euro 5.2 SOCIAL FUNDS

In the remainder of this chapter we will present a brief analysis of the revenues and expenditures in the social funds (Pension Fund, Health Insurance Fund, and Employment Fund) during the analyzed period. Table 5.2: Social funds revenues and expenditures, January-September (€ millions)

Social funds I-IX revenues in 2004

I-IX revenues in 2005

I-IX expenditures in 2004

I-IX expenditures in 2005

Pension Fund 122.426 127.695 118.890 126.682

Health insurance Fund 65.876 69.498 66.178 68.506

Employment Fund 8.826 13.057 8.294 11.573

Source: Social Funds, Ministry of finance, ISSP calculations


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53

Pension Fund At the end of the third quarter of 2005, the Pension Fund ran a surplus of €1.013 million. Total revenues amounted to €127.695 million and were 4.3% higher than in the same period of the previous year. Total expenditures were at €126.682 million, which represents an increase of expenditures of 6.6% as compared to the first nine months of 2004.

In the analyzed period, the total amount of contributions payments4 (the most important revenue source) amounted to €82.774 million, or 64.8% of total revenues. Contributions were 1.1% higher than in the same period of last year5. The rate of covering pensions with contributions amounted to 0.80%, which indicates its increase of about 0.06% as compared to the previous year (0.85%); this also indicates that in this period an insufficient amount of contributions were paid in to cover the necessary pension payments from the Pension Fund. In addition to the payment of contributions for state employees in the amount of €18.330 million, the republic budget transferred €33.491 million on the basis of its legal liability concerning covering the Pension Fund deficit. This dynamic of payments indicates that the Republic budget met only 50.7% of its legal liability with regards to the payment of funds in the Pension Fund. Revenue recorded on the basis of borrowing (loans) amounted to €5.500 million and revenue from the selling of stock capital was at €5.333 million6. Other revenues (pensions return, interest, etc.) amounted to €0.597 million.

In the first nine months of 2005, the total pension amounted to €103.258 million, or 74.6% of the planned annual payment. That stock of pensions was 7.4% higher than the same period of last year. In addition to the paid pensions, other persons’ care, compensations for bodily damage, and pensioners health care contributions amounted to €2.525 million (97% of the plan), €3.281 million (36.7% higher than planned) and €13.070 million (48% of the plan)7, respectively, which means that cumulative gross pension expenditures amounted to €122.134 million. Expenditures for goods and services amounted to €1.569 million, which is 3.1% higher than the previous year8. Expenditures related to the payment of pensions amounted to €1.152 million and were 17.6% lower than last year’s level. This was caused by the decision of the Pension Fund to pay pensions once per month (instead of twice per month), all with the view of gaining internal savings within the Pension Fund. Thus, this resulted in the decrease of expenditures related to this category. Administrative expenditures amounted to €1.191 million, or 44.1% of the planned amount. The rest of expenditures, which amounted to €0.638 million, include capital investments and current maintenance and loans repayment.

4 In the Pension Fund, contributions (from economic, non economic and independent activity) are paid in at the rate of 21.6%. 5 The increase of contribution revenues, in comparison to last year, indicates that the cut of the contribution rate in 2004 did not have a negative effect on the level of contribution revenues. 6 The biggest revenue, in the amount of €3.379 million, from the selling of stock capital was gained in the month of May. 7 Although pensioners health care contributions paid in the Health insurance Fund were approximately 9% higher compared to those paid in the same period of 2004, the dynamic of their payment, bearing in mind the fact that realization of the annual plan requires payment of 52% of the determined funds in the last quarter of 2005 (which is unrealistic), is pretty unsatisfactory. 8 This category is comprised of: donations (material support, Pensioners alliance, decisions of Board of directors) amounting to €0.380 million, interest payments (€0.365 million) and material expenses (€0.824 million).

Chapter 5. Budget

ISSP - CEPS 54

Health Insurance Fund At the end of the first three quarters of 2005, the Health Insurance Fund had a positive financial result in the amount of €0.992 million. Total revenues, in the amount of €69.498 million, were 5.5% higher as compared to last year’s level. Total expenditures were also higher, by 3.5%, as compared to last year, amounting to €68.506 million.

In the period from January to September of 2005, revenue from contributions amounted to €64.454 million. The greatest share of contributions revenues (46.7%) and total revenues (43.3%) was held by contributions paid from the real sector, totaling €30.102 million. Contributions from non-economic activity amounted to €19.275 million and were 11.6% lower in comparison to the same period of last year. Contributions paid from the Pension Fund that were aimed for the health care of pensioners amounted to €13.00 million, which is an increase of 17.6% in comparison to last year. Contributions paid from independent activity totaled €1.220 million. The republic budget transferred €4.256 million (health care of unemployed persons, refugees and displaced persons and transfers for capital expenditures). Contributions paid by agricultural workers and from the Employment Fund amounted to €0.171 and €0.134 million, respectively.

Ambulant and clinic services (€24.526 million) had a share of 38.5% in total expenditures, which is 8.1% higher as compared to the first nine months of 2004. The second biggest expenditures category is medicines, which amounted to €20,346, which is 8.6% higher than last year’s execution. In the analyzed period, €18.083 million was spent for treatments in hospitals, which is 2% lower in comparison to the same period of last year. Funds for activities of the Health insurance Fund and other expenditures represent 2.8% of total expenditures and amount to €1.943 million. In this period, travel costs amounted to €1.655 million (8.5% higher compared to last year). Other expenditures, totaling €1.954 million, are related to: other health care, orthopedics devices, and compensation for sick leave.

Employment Fund

In the first three quarters of 2005, the Employment Fund had a positive financial result in the amount of €1.573 million, which is almost twice as high as compared to the same period of 2004. Total revenues and expenditures amounted to €13.057 and €11.483 million, respectively, which are 48% and 38.5% higher, respectively, as compared to the same period of the previous year.

In the analyzed period, the largest revenue category was the payment of employment contributions, which totaled €3.525 million, representing 27% of total revenues. Revenues based on contributions payments were 22.2% higher compared to the same period of the previous year. The second largest expenditures category, totaling €2.587 million was revenue earned from the selling of stock capital (this type of revenue is brand new in comparison to previous years, when this Employment Fund activity was insignificant). A fairly high share of total revenue (17.3%) has come from the repayment of self-employment credits, amounting to €2.257 million by the end of September. Cumulative budget transfers amounted to €1.829 million, which is 12.7% lower in comparison to the same period of last year and out of which, €1.203 million are cash compensations for unemployed persons and the remaining €0.626 million are aimed for the support of new employees, according to the GoM program. Fees for the employment of non-residents paid to the Employment Fund budget were 12% higher as


ISSP - CEPS

55

compared to last year and reached €1.074 million. Revenue based on loans from commercial banks amounted to €1.0 million. The remaining revenue in the amount of €0.785 million is comprised of: deposits from the previous year, donations for the observatory, donations for the preparation and public works, selling of the fixed assets, and other revenues.

The greatest spending of the Employment Fund, in the analyzed period, is related to self-employment loans, which were 89.1% higher than the same period of the previous year and amounted to €2.478 million. The second largest expenditures category is salaries and compensations for employees in the Employment Fund, which totals €2.349 million (23.4% higher compared to the same period of 2004). Gross cash compensations for unemployed persons amounted to €1.885 million and were 85% higher than in 2004. The cumulative amount of expenditures aimed for the preparation and employment was €1.809 million, out of which €1.222 million is related to the preparation of workers, €0.270 to public works – “It should be clean,” €0.276 to public works - geronto housewives, and €0.040 million is related to, the payment of new employees. Expenditures for goods and services were 6% higher than last year and amounted to €1.462 million. Funds for highly educated new employees, according to the GoM program, amounted to €0.983 million and were 8.1% higher than the same period of last year. The remaining expenditures in the amount of €0.516 million are expenditures for the work of the observatory and the purchase of non-financial assets.

Chapter 6. Money

ISSP - CEPS 56

6.1. MONETARY AGGREGATES o Monetary aggregates continue to register positive annual growth rates; o Monetary aggregate M21 amounted to € 781.4 million at the end of September 2005 and

registered growth of 46.43% compared to September 2004; o Total deposits continue to grow in the last five months and at the end of September 2005

they reached € 406 million; o Total household deposits registered an increasing trend since the beginning of 2005.

During the last five months, the average annual growth rate of household deposits was 103.75%. At the end of September, those deposits have reached € 141.4 million;

o Also, total loans provided by Montenegrin banks have been growing during the last five months of 2005 and reached € 339.6 million in September 2005.

From the beginning of May to the end of September of the current year, monetary aggregates continued to register positive annual growth rates, compared to the end of last year, as well as to the same period in the previous year. During the third quarter of 2005, the monetary aggregate M0 consistently registered positive annual growth rates that amounted to 7.18% in July, 8.37% in August, and 11.46% in September when compared to the same periods in the previous year. Also, monetary basis registered positive growth rates in this period in comparison to the end of 2004. The average growth rate over the third quarter of 2005 was 9.9%. Precisely, the highest growth rate when compared to the end of 2004 was registered in September, at 11.97%. The high growth rates were influenced by the increase of bank deposits within the Central Bank of Montenegro. Annual growth rates of these deposits were: 53.37% in July, 50.84% in August 2005 and 79.21 in September. At the end of September 2005, monetary basis M0 amounted to € 325.768 million. Monetary aggregate M1 (deposits of the Central Bank and Government are excluded) amounted to € 537.926 million at the end of September 2005, which is 28.95% higher as compared to the same month in 2004, or 24.91% higher as compared to the end of the previous year. This increase of M1 was influenced primarily by the growth of demand deposits in euros, which comprised the majority of bank deposits. Those deposits (without Government deposits) registered an annual growth rate of 86.68% in September 2005. On the other hand, the second component of the M1 monetary aggregate - demand deposits in other currencies (without Government deposits), registered a negative annual growth rate of 27.36%.


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57

Table 6.1 Monetary aggregates, end of month, in 000 euro 2003 2004 2005

XII XII I II III IV V VI VII VIII IX

M0 284,909 290,935 287,562 291,512 290,848 296,909 305,784 307,376 309,627 324,364 325,768 Banks' deposits with CBM-Payment Operations

34,909 40,935 37,562 41,512 40,848 46,909 55,784 57,376 59,627 74,364 75,768

Estimate of cash in circulation 250,000 250,000 250,000 250,000 250,000 250,000 250,000 250,000 250,000 250,000 250,000

M1 386,121 430,659 416,111 428,064 451,793 444,089 472,717 490,980 497,616 527,268 537,926 M0 284,909 290,935 287,562 291,512 290,848 296,909 305,784 307,376 309,627 324,364 325,768

Demand deposits in EUR 83,148 130,220 118,566 124,830 148,976 135,610 155,975 168,142 171,764 191,498 201,738 Demand deposits within banks in EUR

82,688 129,813 118,413 124,793 148,963 135,570 155,931 168,107 171,742 191,481 201,602

Demand deposits within CBM-Payment Operations in EUR

460 407 153 37 13 40 44 35 22 17 136

Demand deposits in other currencies 18,064 9,504 9,983 11,722 11,969 11,570 10,958 15,462 16,225 11,406 10,420

M11 402,586 436,876 430,423 439,820 476,246 463,571 504,940 512,757 514,833 552,806 568,659

M0 284,909 290,935 287,562 291,512 290,848 296,909 305,784 307,376 309,627 324,364 325,768

Demand deposits in EUR 98,776 136,064 132,491 136,408 173,286 154,936 187,565 188,970 188,265 216,911 232,375 Demand deposits within banks in EUR

97,894 135,623 126,023 132,762 155,678 149,746 173,566 178,828 180,364 204,208 225,263

Demand deposits within CBM-Payment Operations in EUR

882 441 6,468 3,646 17,608 5,190 13,999 10,142 7,901 12,703 7,112

Demand deposits in other currencies 18,901 9,877 10,370 11,900 12,112 11,726 11,591 16,411 16,941 11,531 10,516

M2 460,837 535,550 522,016 537,908 565,852 561,341 597,896 622,851 641,495 676,574 692,596 M1 386,121 430,659 416,111 428,064 451,793 444,089 472,717 490,980 497,616 527,268 537,926

Term deposits in EUR 71,229 98,128 97,304 102,132 104,334 106,541 117,492 125,682 140,112 139,684 146,904

Term deposits in other currencies 3,487 6,763 8,601 7,712 9,725 1,071 7,687 6,189 3,767 9,622 7,766

M21 494,290 546,287 540,856 555,080 707,024 677,325 722,119 726,277 730,148 767,794 781,479 M11 402,586 436,876 430,423 439,820 476,246 463,571 504,940 512,757 514,833 552,806 568,659

Term deposits in EUR 88,203 102,648 101,832 107,548 221,053 203,043 209,492 207,331 211,548 205,366 205,054

Term deposits in other currencies 3,501 6,763 8,601 7,712 9,725 10,711 7,687 6,189 3,767 9,622 7,766

* without excluded required which banks have in treasure bills ** without Government *** with Government

Chapter 6. Money

ISSP - CEPS 58

Monetary aggregate M11 amounted to € 568.659 million at the end of September, which is 33.80% higher as compared to the same period in the previous year, or 30.16% higher compared to the end of 2004. This increase was mainly influenced by the increase of demand deposits in euros within the Central Bank of Montenegro, which registered an annual increase of 270.13% in August and 52.55% in September. These deposits registered growth of 2,780.50% in August 2005 and 1513.70% in September as compared to the end of 2004. Demand deposits in euros in banks (including Government deposits) also registered positive trends throughout the previous four months. Their annual growth rates were the following: 63.44% in July, 56.89% in August, and 99.68% in September. Also, in September 2005, these deposits compared to the end of the previous year registered an increase of 66.09%. On the other side, demand deposits in other currencies (with Governance deposits) registered negative annual growth rates in May, August and September (-30.64%, -23.01%, and -31.00%, respectively), while in June and July, annual growth rates of these deposits were 41.69% and 30.19%. In September 2005, the monetary aggregate M2 registered an annual growth rate of 33.86%. Additionally influencing the increased value of M2 were term deposits in euro (without Government deposits), which, compared to September 2004, increased 50.80%. Term deposits in other currencies (without Government deposits), after several months of negative growth rates, registered a positive annual growth rate of 172.97% in September. The widest monetary aggregate, M21, amounted to € 781.479 million at the end of September 2005 and registered growth of 46.43% compared to the same month in 2004. Compared to the end of 2004, this monetary aggregate registered an increase of 43.05%. Annual growth rate of term deposits of the Government in euro in September 2005 amounted to 93.73%. 6.2. DEPOSITS Total deposits Total deposits continued to grow during the last five months, and at the end of September 2005 they reached € 406.043 million and were 58.96% higher as compared to the same month in 2004. When compared to the end of the previous year, total deposits were 48.3240.26% higher in September 2005. Observed by deposit categories, financial institutions’ deposits realized annual growth of 31.38% in September 2005, i.e. 37.19% as compared to the end of 2004. However, bank deposits were compared to the end of the previous year found to be 31.32% lower, indicating that the increase of the total financial institutions’ deposits was influenced by the increase of other financial institutions’ deposits, which amounted to 139.30%. The share of non-financial institutions’ deposits in September 2005 amounted to 34.78%. Those deposits, in the last fivemonths, have registered positive growth rates as compared to the end of 2004 in contrast to the first four months of the current year, when growth rates of those deposits were negative. At the end of September 2005 the growth rate of non-financial institutions’ deposits amounted to 48.89% as compared to September 2004. Within the non-financial institutions category, deposits of domestic private companies have registered an increase of 76.46% in September 2005 as compared to September 2004, and have amounted to € 103.296 million; additionally, they also represent 73.1% of overall non-financial institutions’ deposits or 25.44% of total deposits. Also, the entrepreneurs’ deposits recorded an annual


ISSP - CEPS

59

growth rate of 61.0%, and compared to the end of the previous year, the growth rate was 94.9%. Deposits of the government increased 33.21% from September 2004 to September 2005.

Graph 6.1: Total deposits in euro 000

0

50000

100000

150000

200000

250000

300000

350000

400000

450000

Dec

-02

Dec

-03

Jan-

04

Feb

-04

Mar

-04

Apr

-04

May

-05

Jun-

04

Jul-

04

Aug

-04

Sep-

04

Oct

-05

Nov

-04

Dec

-04

Jan-

05

Feb

-05

Mar

-05

Apr

-05

May

-05

Jun-

05

Jul-

05

Aug

-05

Sep-

05

Deposits from physical entities’ recorded an annual growth rate of 122.51%; additionally, non-profit organizations’ deposits experienced growth of 54.36% in the same period (from September 2004 to September 2005). The deposit categories that registered the highest growth rates in September 2005 are deposits of other foreign financial institutions (206.24%), deposits of foreign firms (234.19%) and deposits of foreigners (276.95%). Negative growth rates were registered for foreign banks’ deposits of –53.72% as well as for publicly owned organizations (-66.26%). From the total amount of deposits, 59.2% are related to demand deposits and 40.8% to term deposits. The demand deposits at the end of September 2005 amounted to € 240.194 million and were 82.85% higher than the year before. On the other side, term deposits in September 2005 amounted to € 165.849 million, registering an increase of 33.67% as compared to the same period last year.

Chapter 6. Money

ISSP - CEPS 60

Table 6.2.a: Total deposits, in 000 EUR

2002 2003 2004 2005 XII XII XII I II III

Description/ Period D

eman

d de

posi

ts

Ter

m d

epos

its

Tot

al

Dem

and

depo

sits

Ter

m d

epos

its

Tot

al

Dem

and

depo

sits

Ter

m d

epos

its

Tot

al

Dem

and

depo

sits

Ter

m d

epos

its

Tot

al

Dem

and

depo

sits

Ter

m d

epos

its

Tot

al

Dem

and

depo

sits

Ter

m d

epos

its

Tot

al

1 Financial institutions

4.938 1.662 6.600 2.454 1.284 3.738 10,708 19,876 30,584 8,402 21,107 29,509 9,347 18,304 27,651 30,486 23,632 54,118

Banks 3.658 1.653 5.311 1.081 764 1.845 6,000 12,297 18,297 4,406 13,888 18,294 3,375 10,873 14,248 1,765 14,244 16,009 Domestic 485 992 1.477 489 364 853 4,840 368 5,208 3,156 395 3,551 2,385 380 2,765 1,256 773 2,029 Foreign 3.173 661 3.834 592 400 992 1,160 11,929 13,089 1,250 13,493 14,743 990 10,493 11,483 509 13,471 13,980

Other financial institutions

1.280 9 1.289 1.373 520 1.893 4,708 7,579 12,287 3,996 7,219 11,215 5,972 7,431 13,403 28,721 9,388 38,109

Domestic 1.262 9 1.271 1.359 520 1.879 4,577 6,679 11,256 3,865 6,319 10,184 5,941 6,531 12,472 28,680 8,488 37,168 Foreign 18 0 18 14 0 14 131 900 1,031 131 900 1,031 31 900 931 41 900 941

2 Non financial institutions

69.331 30.999 100.330 69.942 40.042 109.984 69,630 33,958 103,588 59,519 31,970 91,489 59,002 31,161 90,163 57,282 30,981 88,263

Public non fin. corporations

22.779 7.347 30.126 12.037 9.986 22.023 11,477 13,352 24,829 6,613 13,076 19,689 6,640 11,843 18,483 8,559 11,319 19,878

State companies 3.746 3.667 7.413 4.670 4.791 9.461 4,360 9,356 13,716 4,902 9,200 14,102 4,769 8,978 13,747 6,173 9,592 15,765

Publicly owned organizations

19.033 3.680 22.713 7.367 5.195 12.562 7,117 3,996 11,113 1,711 3,876 5,587 1,871 2,865 4,736 2,386 1,727 4,113

Other non financial corp.

46.552 23.652 70.204 57.905 30.056 87.961 58,153 20,606 78,759 52,906 18,894 71,800 52,362 19,318 71,680 48,723 19,662 68,385

Domestic private companies

41.972 23.370 65.342 52.640 28.916 81.556 53,893 16,798 70,691 48,539 16,576 65,115 48,084 16,022 64,106 43,274 15,630 58,904

Entrepreneurs 0 0 1,063 2 1,065 1,227 12 1,239 1,188 12 1,200 1,321 12 1,333 Foreign companies 4.580 282 4.862 5.265 1.140 6.405 3,197 3,806 7,003 3,140 2,306 5,446 3,090 3,284 6,374 4,128 4,020 8,148 3 Government 58.238 11.078 69.316 19.402 25.685 45.087 18,122 28,111 46,233 24,457 29,053 53,510 21,352 29,062 50,414 20,753 28,813 49,566 Central government 40.221 7.077 47.298 5.738 8.223 13.961 6,184 4,507 10,691 7,996 4,516 12,512 8,147 4,416 12,563 4,948 5,651 10,599

Agencies and institutions of central gov.

13.907 1.246 15.153 9.468 258 9.726 6,356 6,339 12,695 9,757 7,339 17,096 6,072 7,351 13,423 9,377 5,744 15,121

Local government-municipalities

339 44 383 1.324 10 1.334 1,843 186 2,029 1,958 436 2,394 1,888 396 2,284 1,498 219 1,717

State funds 3.771 2.711 6.482 2.872 17.194 20.066 3,739 17,079 20,818 4,746 16,762 21,508 5,245 16,899 22,144 4,930 17,199 22,129 4 Physical entities 11.469 10.743 22.212 22.206 22.864 45.070 40,064 39,211 79,275 35,620 41,465 77,085 45,877 45,104 90,981 43,572 49,661 93,233 Domestic 11.469 10.743 22.212 22.206 22.864 45.070 36,862 37,288 74,150 31,459 39,601 71,060 34,782 43,100 77,882 37,530 42,963 80,493 Foreign 0 0 3,202 1,923 5,125 4,161 1,864 6,025 11,095 2,004 13,099 6,042 6,698 12,740

5 Non profit organizations

1.315 1.229 2.544 2.452 1.285 3.737 5,089 171 5,260 5,368 194 5,562 5,086 243 5,329 5,177 243 5,420

Domestic 298 234 532 1.601 235 1.836 3,928 110 4,038 4,816 110 4,926 3,940 159 4,099 3,335 159 3,494 Foreign 1.017 995 2.012 851 1.050 1.901 1,161 61 1,222 552 84 636 1,146 84 1,230 1,842 84 1,926 6 Other 2.954 1.574 4.528 1.376 2.016 3.392 7,886 371 8,257 7,433 522 7,955 7,370 1,260 8,630 8,006 464 8,470 Total 148.245 57.285 205.530 117.832 93.176 211.008 151,499 121,698 273,197 140,799 124,311 265,110 148,034 125,134 273,168 165,276 133,794 299,070

Source: Central Bank of Montenegro


ISSP - CEPS

61

Table 6.2.b: Total deposits, in 000 EUR

2005 IV V VI VII VIII IX

Description/ Period D

eman

d de

posi

ts

Ter

m d

epos

its

Tot

al

Dem

and

depo

sits

Ter

m d

epos

its

Tot

al

Dem

and

depo

sits

Ter

m d

epos

its

Tot

al

Dem

and

depo

sits

Ter

m d

epos

its

Tot

al

Dem

and

depo

sits

Ter

m d

epos

its

Tot

al

Dem

and

depo

sits

Ter

m d

epos

its

Tot

al

1 Financial institutions

14,168 30,670 44,838 11,282 28,694 39,976 15,054 30,301 45,355 15,223 23,136 41,359 16,540 27,745 44,285 17,578 24,377 41,955

Banks 3,511 11,922 15,433 4,119 9,436 13,555 3,113 11,709 14,822 4,292 8,066 12,358 4,140 10,642 14,783 4,411 8,160 12,571 Domestic 2,350 919 3,269 3,528 802 4,060 2,342 830 3,172 3,047 827 3,874 3,554 821 4,375 3,726 829 4,555 Foreign 1,161 11,003 12,164 861 8,634 9,495 771 10,879 11,650 1,245 7,240 8,485 587 9,821 10,408 685 7,331 8,016

Other financial institutions

10,657 18,748 29,405 7,163 19,258 26,421 11,941 18,592 30,533 10,931 18,069 29,000 12,400 17,103 29,503 13,167 16,217 29,384

Domestic 10,512 17,848 28,360 6,883 18,358 25,241 11,539 17,692 29,231 10,289 17,169 27,458 11,163 16,203 27,365 11,072 15,317 26,389 Foreign 145 900 1,045 280 900 1,180 402 900 1,302 642 900 1,542 1,237 900 2,137 2,095 900 2,995

2 Non financial institutions

56,655 27,979 84,634 80,217 31,206 111,423 88,501 36,114 124,615 84,372 42,441 126,813 94,202 47,769 141,971 91,506 49,724 141,230

Public non fin. corporations

9,096 8,129 17,225 7,798 5,390 13,188 11,948 6,757 18,705 10,695 8,504 19,199 13,627 9,538 23,165 12,363 10,701 23,064

State companies 5,987 5,666 11,653 5,548 4,113 9,661 10,144 5,528 15,672 8,570 7,175 15,745 11,348 8,067 19,415 9,851 8,900 18,751

Publicly owned organizations

3,109 2,463 5,572 2,250 1,277 3,527 1,804 1,229 3,033 2,125 1,329 3,454 2,279 1,472 3,750 2,512 1,801 4,313

Other non financial corp.

47,559 19,850 67,409 72,419 25,816 98,235 76,553 29,357 105,910 73,677 33,936 107,614 80,576 38,230 118,806 79,143 39,023 118,166

Domestic private companies

40,544 15,828 56,372 66,312 20,794 87,106 69,462 22,599 92,061 65,984 26,348 92,332 73,624 31,321 104,945 71,862 31,434 103,296

Entrepreneurs 1,424 2 1,426 1,413 2 1,415 1,554 13 1,567 2,026 13 2,039 2,081 13 2,094 2,050 14 2,064 Foreign companies 5,591 4,020 9,611 4,694 5,020 9,714 5,537 6,745 12,282 5,667 7,575 13,242 4,871 6,896 11,767 5,231 7,575 12,806 3 Government 28,267 25,995 54,262 34,536 32,943 67,479 25,346 27,979 53,325 25.432 26,075 51,507 30,059 25,784 55,843 43,899 25,194 69,093 Central government 14,333 5,650 19,983 18,268 12,623 30,891 9,215 9,241 18,456 9,297 6,512 15,809 12,852 4,151 17,003 23,758 3,019 26,777

Agencies and institutions of central gov.

9,553 3,686 13,239 8,399 4,412 12,811 9,585 2,690 12,275 9,184 3,317 12,501 1,054 4,461 14,515 12,235 4,762 16,997

Local government-municipalities

1,333 316 1,649 2,826 97 2,923 2,631 107 2,738 2,943 46 2,989 3,272 17 3,289 3,929 7 3,936

State funds 3,048 16,343 19,391 5,043 15,811 20,854 3,915 15,941 19,856 4,008 16,199 20,207 3,880 17,156 21,036 3,977 17,406 21,383 4 Physical entities 51,794 49,680 101,474 49,891 53,687 103,578 56,420 59,355 115,775 64,253 63,062 127,315 67,162 62,022 129,184 75,527 65,890 141,417

Domestic 41,698 45,493 87,191 42,254 48,959 91,213 47,480 55,725 103,205 54,348 59,612 113,960 57,647 57,727

115,374

65,467 61,671 127,138

Foreign 10,096 4,187 14,283 7,637 4,728 12,365 8,940 3,630 12,570 9,905 3,450 13,355 9,515 4,295 13,810 10,060 4,219 14,279

5 Non profit organizations

4,227 243 4,470 6,401 303 6,704 6,808 358 7,166 7,532 370 7,903 8,506 407 8,913 8,222 352 8,574

Domestic 3,943 159 4,102 5,415 241 5,656 5,705 296 6,001 6,292 273 6,565 7,113 345 7,458 7,112 254 7,366 Foreign 284 84 368 986 62 1,048 1,103 62 1,165 1,240 97 1,337 1,392 62 1,455 1,110 98 1,208 6 Other 9,869 255 10,124 6,948 350 7,298 4,882 321 5,203 4,782 374 5,157 3,407 372 3,780 3,462 312 3,774 Total 164,980 134,822 299,802 189,275 147,183 336,458 197,011 154,428 351,439 201,595 158,458 360,053 219,877 164,099 383,976 240,194 165,849 406,043


Chapter 6. Money

ISSP - CEPS 62

Graph 6.2. Trend of different categories of total deposits

0

20,000

40,000

60,000

80,000

100,000

120,000

140,000

160,000

Dec

-02

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-03

Jan-

04

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-04

Apr

-04

May

-04

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04

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04

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05

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Mar

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il-05

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-05

Jun-

05

Jul-

05

Aug

-05

Sep-

05

in 0

00 E

ura

Financial institutions Nonfinancial institutions GovernmentPhysical entities Nonprofit organisations Other

Term structure of deposits varies when observed by depositor. Participation of demand deposits is lowest at financial institutions (41.9%) and significantly higher at non-financial institutions and physical entities (64.79% and 53.41%, respectively). In September 2005, demand deposits held the highest participation in total deposits (demand deposits share – 59.15%), and the participation of demand deposits within the entrepreneurs` deposits was 99.32%. The lowest participation of demand deposits was registered at foreign banks (demand deposits share – 8.55%). The structure of total deposits by depositors in September 2005 shows that the biggest depositors are non-financial institutions (34.78%) and physical entities (34.83%). Participation of domestic private company deposits in total deposits amounted to 25.44%. A significant depositor is the Government, and participation of these deposits in the total amounted to 17.02%. The following graph presents the structure of total deposits.

Graph 6.3.: Structure od total deposits by clients (September 2005)

10.33%

34.78%

17.02%

34.83%

2.11%

0.93%

Financial instiutions Nonfinancial instiutions Government

Physical entities Nonprofit organisations Other


ISSP - CEPS

63

If we compare the structure of total deposits in September 2005 with the structure in September 2004, we can conclude that participation of deposits of financial institutions in total deposits showed a negligible decrease (from 12.5% to 10.33%). The participation of non-financial institutions’ deposits decreased from 37.13% to 34.78%, as well as the participation of Government deposits that have decreased from 20.31% to 17.02%. On the other hand, participation of physical entities’ deposits has increased 10.0% (from 274.8% to 34.8%) as compared to September 2004. Analysis of domestic private companies’ deposits shows that their participation increased from 22.9% (September 2004) to 25.44% (September 2005). The share of deposits of domestic physical entities increased from 23.4% (September 2004) to 31.3% (September 2005). Deposits of households


1.Demand deposits

2. Term savings up to 1 year

3. Term savings over 1 year

Total (1+2+3)

Dec-00 2,034.94 428.46 2.05 2,465.45 Oct-05 1,750.66 655.48 56.75 2,462.89 Nov-01 2,092.21 809.38 466.30 3,367.88 Dec-01 3,516.67 1,557.40 549.64 5,623.70 Jan-02 2,843.81 2,089.65 617.13 5,550.58 Feb-02 2,791.00 2,336.00 702.00 5,829.00 Mar-02 4,139.00 3,418.00 741.00 8,298.00 Apr-02 4,874.00 4,443.00 773.00 10,090.00 May-05 4,329.00 4,732.00 525.00 9,586.00 Jun-02 4,629.00 5,609.00 615.00 10,853.00 Jul-02 5,036.00 6,089.00 702.00 11,827.00 Aug-05 4,269.00 7,217.00 928.00 12,414.00 Sep-02 3,984.00 7,669.00 1,663.00 13,316.00 Oct-05 5,686.00 8,012.00 1,038.00 14,736.00 Nov-02 5,205.00 9,515.00 1,099.00 15,819.00 Dec-02 11,370.00 9,650.00 1,127.00 22,147.00 Jan-03 11,122.00 10,326.00 1,188.00 22,636.00 Feb-03 11,339.00 10,926.00 1,194.00 23,459.00 Mar-03 9,887.00 14,446.00 1,166.00 25,499.00 Apr-03 13,409.00 13,466.00 1,179.00 28,054.00 May-05 11,379.00 13,368.00 1,199.00 25,946.00 Jun-03 12,133.00 13,848.00 1,340.00 27,321.00 Jul-03 14,433.00 13,386.00 1,463.00 29,282.00 Aug-05 16,917.00 14,576.00 1,522.00 33,015.00 Sep-03 16,967.00 16,512.00 1,554.00 35,033.00 Oct-05 19,863.00 18,983.00 1,633.00 40,479.00 Nov-03 19,502.00 19,851.00 1,658.00 41,011.00 Dec-03 22,559.00 20,258.00 2,341.00 45,158.00 Jan-04 18,560.00 20,639.00 3,331.00 42,530.00 Feb-04 18,359.00 23,115.00 2,987.00 44,461.00 Mar-04 20,865.00 24,108.00 2,525.00 47,498.00 Apr-04 22,730.00 25,102.00 2,647.00 50,479.00 May-04 22,314.00 26,104.00 2,914.00 51,332.00 Jun-04 22,986.00 26,393.00 3,254.00 52,633.00 Jul-04 26,320.00 26,592.00 3,770.00 56,682.00 Aug-04 28,716.00 28,277.00 3,327.00 60,320.00 Sep-04 29,980.00 30,168.00 3,407.00 63,555.00 Oct-04 35,105.00 28,203.00 6,786.00 70,094.00 Nov-04 33,571.00 33,388.00 3,743.00 70,702.00 Dec-04 40,143.00 36,097.00 4,433.00 80,673.00 Jan-05 35,621.00 36,794.00 4,722.00 77,137.00 Feb-05 45,877.00 40,828.00 4,267.00 90,972.00 Mar-05 43,573.00 34,753.00 14,902.00 93,228.00 Apr-05 51,794.00 35,366.00 14,306.00 101,466.00 May-05 49,892.00 39,112.00 14,551.00 103,555.00 Jun-05 56,420.00 42,583.00 16,771.00 115,774.00 Jul-05 64,253.00 47,323.00 15,739.00 127,315.00 Aug-05 67,162.00 47,053.00 14,969.00 129,184.00 Sep-05 75,527.00 53,238.00 12,652.00 141,417.00

Chapter 6. Money

ISSP - CEPS 64

Total household deposits registered an increasing trend since the beginning of 2005. During the last five months, the average annual growth rate of household deposits was 103.75%. The highest annual growth rate was registered in September and amounted to 122.51%, while in August it amounted to only 60.12%. Those deposits reached the level of € 144.417 million in September. During that period, participation of household deposits in total deposits was 34.83%. Such high growth rates of household deposits were influenced by many factors; among them, the most important were the development of the capital market, and more frequent trade on it, as well as the wage increase and the increase of international transfers. Of course, the fact that there is more and more confidence in the banking sector also contributes to the increase of total, as well as household, deposits.

Graph 6.4. Deposits of households

0.00

20.00

40.00

60.00

80.00

100.00

120.00

140.00

160.00

Jan-

02

Mar

-02

May

-05

Jul-

02

Sep-

02

Nov

-02

Jan-

03

Mar

-03

May

-05

Jul-

03

Sep-

03

Nov

-03

Jan-

04

Mar

-04

May

-04

Jul-

04

Sep-

04

Nov

-04

Jan-

05

Mar

-05

May

-05

Jul-

05

Sep-

05

in m

il. E

uro

Demand deposits Term deposits up to 1 year Term deposits over 1 year

At the end of September 2005, over half of total household deposits (53.41%) were demand deposits, while the rest (46.59%) were term deposits. Demand deposits registered significant annual growth rates – 123.59% in May, 145.45% in June, 144.12% in July, 133.88% in August and 151.92% in September 2005. At the end of September 2005, total demand deposits amounted to € 75.527 million. Also during the last five months, term savings up to 1 year registered positive growth rates as compared to the same period last year. The highest annual growth rate in the last five months was registered in July and amounted to 77.96%, while the lowest was registered in May and amounted to 49.83%. Annual growth rates in August and September, regarding term savings up to 1 year, amounted to 66.40% and 74.47%, respectively. As a result, household term deposits reached € 53.238 million at the end of September 2005. Term savings over 1 year registered the following annual growth rates in the last five months: 399.35% in May, 415.40% in June, 317.48% in July, 349.92% in August and 271,35% in Septmber 2005. At the end of September 2005, their value amounted to € 12.652 million.


ISSP - CEPS

65

Graph 6.5. Annual change of deposits

-100.00%

0.00%

100.00%

200.00%

300.00%

400.00%

500.00%

600.00%

Dec

-02

Feb

-03

Apr

-03

Jun-

03

Avg

-03

Okt

-03

Dec

-03

Feb

-04

Apr

-04

Jun-

04

Aug

-04

Oct

-04

Dec

-04

Feb

-05

Apr

-05

Jun-

05

Avg

-05

Demand deposits Term deposits up to 1 year Term deposits over 1 year

As the previous graph presented, the highest participation was held by demand deposits (53.41% in September 2005). Within total deposits, the share of term deposits up to 1 year decreased compared to the previous four months (May, June, July and August). Namely, the share of these deposits in total households’ deposits in the period from May to September 2005 amounted to 37.76% in May, 36.78% in June, 37.17% in July, 36.42% in August and 37.65% in September. After experiencing a significant increase in March 2005, the share of term deposits over 1 year has begun to fall, going from 15.98% in March, 14.10% in April, 14.05% in May, 14.49% in June, 12.36% in July, 11.59% in August and 8.95% in September. 6.3. LOANS Total loans provided by Montenegrin banks have been increasing during the last five months of 2005, reaching € 339.608 million in September, which is 41.55% higher compared to the same month of 2004 and 19.55% higher compared to the end of 2004. After a negative annual growth rate of -33.66% in May 2005, loans approved to financial institutions registered high annual growth rates. Namely, the annual growth rate of loans approved to financial institutions in June amounted to 206.73%, followed by a larger increase in July at 292.01%, and a considerably higher growth rate in August, 1509.09%. In September, the registered annual growth rate was 1337.5%. Of special note are loans to other (non-banking) financial institutions, which registered high annual growth rates after a negative trend in May 2005 (-28.48%) -- the growth rates in June, July, August and September were 791.87%, 1055.83%, 1485.12% and 1661.17% respectively. Loans to non-financial institutions registered annual growth rates of 34.56% in May, 36.65% in June, 37.16% in July, 37.96% in August 2005 and 33.5% in September. A portion of these loans, loans to domestic private companies registered annual growth rates of 36.45% in May, 38.68% in June, 41.48% in July, 39.67% in August and 34.33% in September 2005. At the end of September 2005, the level of loans approved for domestic private companies amounted to € 191.772 million. Loans to foreign companies continue to

Chapter 6. Money

ISSP - CEPS 66

register the highest annual growth of all loan categories: 48,650.0% in May, 46,575.0% in June, 85.66% in July, 85.80% in August and 85.86% in September 2005. At the end of September 2005, loans to foreign companies reached € 1.866 million. Loans to physical entities were 40.53% higher in September 2005 compared to the same month in 2004 and 23.99% higher compared to the end of 2004. In September 2005, these loans reached € 92.154 million. Loans to the Government amounted to € 26.770 million at the end of September 2005, which is 147.14% higher compared to the same month in 2004 and 42.48% higher compared to the end of 2004.

Graph 6.6. Loans provided by banks in Montenegro

0

50

100

150

200

250

Dec

-02

Dec

-03

Jan-

04

Feb

-04

Mar

-04

Apr

-04

May

-04

Jun-

05

Jul-

04

Aug

-04

Sep-

04

Oct

-04

Nov

-04

Dec

-04

Jan-

05

Feb

-05

Mar

-05

Apr

-05

May

-05

Jun-

05

Jul-

05

Aug

-05

Sep-

05

in m

il. €

Financial instiutions Nonfinancial instiutions GovernmentPhysical entities Nonprofit organisations

Graph 6.7. Structure of loans provided (September 2005)

0.54%

64.17%7.88%

27.14%

0.27%

Financial instiutions Nonfinancial instiutions Government

Physical entities Nonprofit organisations

The structure of approved loans in September 2005 shows that the majority of loans (64.17%) were approved to non-financial institutions. More precisely, the majority of total loans were approved to domestic private companies (56.47%). Loans approved to physical entities accounted for 27.14% of total loans.


ISSP - CEPS

67

Table 6.3. Approved loans in 000 euros

2002 2003 2004 2005

XII XII XII I II III IV V VI VII VIII IX

1 Financial institutions 788 1,695 3,854 3,110 3,210 2,077 292 435 1,868 1,913 1,947 1,840

Banks 35 1,525 1,000 300 500 505 50 204 4 29 29 26

Domestic 35 1,525 1,000 300 500 505 50 204 4 29 29 26

Foreign 0 0 0 0 0 0 0 0 0 0 0 0

Other financial institutions 753 170 2,854 2,810 2,710 1,572 242 231 1,864 1,884 1,918 1,814 Domestic 753 170 2,819 2,810 2,705 267 238 231 1,864 1,884 1,918 1,814

Foreign 0 0 35 0 5 1,305 4 0 0 0 0 0

2 Non financial institutions 80,984 128,338 184,298 187,470 192,828 202,348 207,570 210,899 218,408 215,764 220,676 217,931

Public non financial institutions 10,641 14,186 18,248 17,325 18,595 21,725 24,377 21,962 22,562 21,847 22,743 20,129

State companies 8,448 12,413 10,545 9,687 10,644 12,932 15,834 14,869 14,905 14,148 15,360 14,075

Publicly owned organizations 2,193 1,773 7,703 7,638 7,951 8,793 8,543 7,093 7,656 7,699 7,383 6,054

Other non financial corporations 70,343 114,152 166,050 170,145 174,233 180,623 183,193 188,937 195,846 193,917 197,933 197,802

Domestic private companies 70,305 114,148 159,278 162,529 166,511 174,740 177,121 182,578 189,532 187,686 191,892 191,772

Entrepreneurs 5,768 5,814 5,928 4,075 4,263 4,409 4,448 4,367 4,183 4,164

Foreign companies 38 4 1,004 1,802 1,794 1,808 1,809 1,950 1,867 1,864 1,858 1,866

3 Government 20,531 20,570 18,758 18,438 20,281 22,990 27,638 24,241 27,498 23,924 28,019 26,770

Central government 16,373 16,495 9,162 6,758 6,726 6,814 5,097 5,080 3,382 3,167 3,172 3,082

Agencies and institutions of central

government 916 141 405 255 364 405 387 387 1,208 1,303 1,303 1,251

Local government - municipalities 842 910 1,735 2,116 2,199 2,018 2,743 3,163 3,027 3,797 5,017 4,993

State funds 2,400 3,024 7,456 9,309 10,992 13,753 19,411 15,611 19,881 15,657 18,530 17,444

4 Physical entities 22,290 49,959 74,393 73,154 74,377 76,268 79,014 83,688 88,013 90,043 90,377 92,154

Domestic 22,290 49,959 74,304 73,066 74,287 76,180 78,927 83,561 87,896 89,932 90,271 92,049

Foreign 89 88 90 88 87 127 117 111 106 105

5 Non profit organizations 70 63 180 114 124 178 1,301 784 845 850 822 882

Domestic 70 63 180 114 68 178 227 784 845 848 822 882

Foreign 0 0 0 0 56 0 1,074 0 0 2 0 0

6 Other 0 0 0 0 0 0 0 0 0 0 31

Total 124,663 200,625 281,483 282,288 290,820 303,861 315,815 320,047 336,631 332,494 341,840 339,608


Chapter 7. Capital Market

ISSP - CEPS 68

7. CAPITAL MARKET o High growth rates of indices o Stock exchange turnover in the first five months of 2005 was three times higher than the

entire 2004 year o The stock exchanges realized twice as many transactions than in the same period in 2004 7.1. INDICES The constant growing trend of the Stock exchange indices in Montenegro indicates that the capital market is continuing to grow and develop. The companies’ values on the stock exchanges are increasing, as well as the number of investors. The following graph presents the trend of the indices values from their introduction through the end of September 2005. In this chapter of MONET, the focus will be on the first three quarters of 2005.

Graph 7.1 Stock exchange indices NEX 20 and NEX PIF

900.00

1300.00

1700.00

2100.00

2500.00

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"NEX 20" "NEX PIF"

Source: NEX Montenegro and Montenegroberza As presented in the graph, growth rates in 2005 of the two NEX Montenegro Stock exchange indices, NEX 20 and NEX PIF, are appreciably higher as compared to the previous years. This is especially emphasized in the third quarter of 2005. We will analyze the values trend of both indices, individually. Index NEX 20, which represents shares of the twenty largest companies with the largest market capitalization and liquidity on the NEX Montenegro stock exchange, has the highest growth rates. The highest value for the index was registered at the end of September 2005 in the amount of 7,516 points. Compared to the previous year, the index value increased 280%. On the other side, compared to its initial value, the growth is 7 times higher. The


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lowest value for the index occurred at the beginning of January (2,523 points), after which it exhibited continuous growth. The increasing index value was most influenced by the price increases of shares from “Telekom”, the “Electric Power Company of Montenegro AD Niksic” (increase was 45% in 2005), and the “Port of Bar”, as well as an increase of trade with these shares. The NEX Montenegro index, NEX PIF, which represents the price trend of the investment units of PIFs, also had a growing value trend during 2005. The highest value for this index, 3,895 points, was recorded at the end of September. Compared to the same period in 2004, the index value increased more than 150%, while compared to its initial value, the index value nearly quadrupled. The increasing index value was most influenced through the growth in share price of all six Privatization Investment Funds, par excellence TREND, ATLAS MONT and MIG. The Montenegroberza index, MOSTE, also registered a value increase in 2005. This is especially expressed in the third quarter of 2005. The highest value for the index was reached at the end of September, amounting to 340 index points. A comparison of this value with the same period in 2004 indicates a 240% increase. Compared to its initial value, the index value more than tripled. Increasing trade was marked mostly due to the increase of “Coal Mine Pljevlja”, “Plantaze”, «Lutrija» and “KAP”. Additionally, the increased price of investment units of PIFs, per excellence TREND, ATLAS MONT and MIG, contributed to the increased index value.

Graph 7.2 Stock exchange index MOSTE

50.00

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Source: NEX Montenegro and Montenegroberza


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Table 7.1. Stock exchange trade in Montenegro

MONTH MONTENEGROBERZA NEX MONTENEGRO TOTAL

TURNOVER (in €) TURNOVER (in €) TURNOVER (in €)

Primary Secondary Total Num

ber

of

tran

sact

ions

Primary Secondary Total

Primary Secondary Total Num

ber

of

tran

sact

ions

Total 03 8,799,736 17,636,926 26,436,662 5,993 1,990,881 15,126,802 17,117,683 15,331 10,790,617 32,763,728 43,554,345 21,324

Jan-04 230,000 464,477,4 694,477,4 389 0 314,863 314,863 1,555 230,000 779,340 1,009,340 1,944

Feb-04 0 530,885,3 530,885,3 639 0 1,822,403 1,822,403 2,347 0 2,353,288 2,353,288 2,986

Mar-04 780 1,008,168 1,008,948 1,853 0 474,788 474,788 2,589 780 1,482,956 1,483,736 4,442

Apr-04 0 429,683 429,683 2,082 0 960,508 960,508 2,424 0 1,390,191 1,390,191 4,506

May-04 0 547,176 547,176 1,470 0 1,701,167 1,701,167 1,812 0 2,248,343 2,248,343 3,282

Jun-04 0 1,001,662 1,001,662 1,698 1,584 767,002 768,586 1,563 1,584 1,768,664 1,770,248 3,261

Jul-04 0 2,628,140 2,628,140 1,292 1,000 1,009,365 1,010,365 1,617 1,000 3,637,505 3,638,505 2,909

Aug-04 0 961,001 961,001 2,377 0 2,072,318 2,072,318 1,962 0 3,033,319 3,033,319 4,339

Sep-04 0 985,597 985,597 3,070 0 989,159 989,159 3,048 0 1,974,756 1,974,756 6,118

Oct-04 0 723381 723,381 2,951 0 3,660,613 3,660,613 3,631 0 4,383,994 4,383,994 6,582

Nov-04 592,829 4,156,832 4,749,661 4,493 0 1,481,573 1,481,573 3,900 592,829 5,638,405 6,231,234 8,393

Dec-04 822,679 3,802,987 4,625,666 3,389 0 8,741,632 8,741,632 5,206 822,679 12,544,619 13,367,298 8,595

Total-04 1,646,288 17,239,990 18,886,278 25,703 2,584 2,399,5391 23,997,975 31,654 1,648,872 41,235,381 42,884,253 57,357

Jan-05 0 605,009 605,009 1,992 0 1,886,401 1,886,401 3,007 0 2,491,410 2,491,410 4,999

Feb-05 0 1,161,632 1,161,632 2,615 0 9,708,671 9,708,671 4,719 0 10,870,303 10,870,303 7,334

Mar-05 11,964 3,430,230 3,442,194 3,919 0 39,747,684 39,747,684 6,794 11,964 43,177,914 43,189,878 10,713

Apr-05 137,219 2,794,549 2,93,768 2,971 0 17,486,055 17,486,055 6,202 137,219 20,280,604 20,417,823 9,173

May-05 0 5,783,934 5,783,934 4,241 0 7,453,604 7,453,604 4,214 0 13,237,538 13,237,538 8,455

Jun-05 0 5,531,852 5,531,852 4,225 0 1,620,456 1,620,456 3,888 0 7,152,308 7,152,308 8,113

Jul-05 0 4,797,211 4,797,211 4,453 0 1,719,889 1,719,889 4,017 0 6,517,100 6,517,100 8,470

Aug-05 1,552,912 4,447,391 6,000,303 4,655 0 4,592,919 4,592,919 4,858 1,552,912 9,040,310 10,593,222 9,513

Sep-05 115,023 4,705,463 4,820,486 5,471 0 5,737,850 5,737,850 5,271 115,023 10,443,313 10,558,336 10,742

Total 05 1,817,118 33,257,271 35,074,389 34,542 0 89,953,529 89,953,529 42,970 1,817,118 123,210,800 125,027,918 77,512

Source: Montenegroberza and NEX Montenegro 7.2 TURNOVER ON STOCK EXCHANGES Trade on the Montenegrin stock exchanges was intensified in the third quarter of 2005. Total trade realized in the first nine months of 2005 amounted to €125 million. Within this trade, a total of 77,512 transactions were realized. Total turnover realized on the stock exchanges during the first three quarters of 2005 is three times higher than that realized in all of 2004. However, the number of transactions is just 35% higher when compared to the 2004 year, and just twice as high when compared to the same period in 2004. The following graph presents total turnover and the number of transactions in 2004 and 2005.


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Graph 7.3 Total turnover and number of transactions

0

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Source: NEX Montenegro and Montenegroberza The increased turnover that was recorded in 2004 continued and was reinforced during the first months in 2005. The realized number of transactions also followed the turnover trend. The highest turnover was realized in March in the amount of € 43 million, of which 92% was realized on the NEX Montenegro stock exchange. The majority of turnover on the NEX Montenegro stock exchange was related to trade with Telekom shares (40%). The greatest number of transactions was also registered during March (10,713). The lowest turnover, as well as the fewest transactions, was realized in January (€ 2.4 million turnover and 4,999 transactions). Total number and turnover on the primary market in the first nine months of 2005, similar to 2004, was negligible - 1.4%. Nearly all 2005 turnover, thus far, has been realized on the secondary market – 98.6%.

Graph 7.4 Primary and secondary market

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primary secondary

Source: NEX Montenegro and Montenegroberza


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7.2.1. Trade in the secondary market Total turnover on the secondary market, in the first nine months of 2005, reached over € 123 million. Compared to the first nine months of 2004, turnover is nearly 7 times higher this year. Furthermore, turnover on the secondary market during the first nine months of 2005 has tripled compared to its turnover during the entire 2004 year. The structure of turnover is similar to the structure in the previous period. Namely, the majority of turnover on the secondary market is realized with shares (around € 104 million or 89%), followed by old foreign exchange currency saving bonds (€ 11 million or 9%), and the minority of turnover is related to the investment units of PIFs (€ 7.7 million or 6%). The structure of trade on the secondary market is presented in the following graph.

Graph 7.5 Trade on the secondary market

Investment units of PIFs -6% Old foreign exchange

bonds - 9%

Shares85%

Source: NEX Montenegro and Montenegroberza In the following text we will analyze every security individually. Trade with shares Shares of more than 50 companies were traded on the NEX Montenegro stock exchange. A similar situation was found on the Montenegroberza, where shares of more than 70 companies were traded. As in previous years, the majority of turnover and the majority of transactions on the secondary market were realized with shares of several companies. The following tables present shares with the highest turnover and those with the highest number of transactions in the first nine months of 2005. Total turnover realized from shares of the following ten companies amounted to €75,230,530, making 62% of the total turnover realized on the secondary market. It is important to note that trade with Telekom shares recorded € 46.8 million, or more than 40% of all secondary trade.


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Table 7.2 Ten shares with the highest turnover in the first 9 months of 2005.

Issuer Turnover in €

TELEKOM CRNE GORE A.D. PODGORICA 46,818,272 €

"ELEKTROPRIVREDA CRNE GORE" A.D. NIKŠIĆ 4,977,855 €

"LOVĆEN OSIGURANJE" PODGORICA 4,736,857 €

HTP "PRIMORJE" 3,898,110 €

AD PLANTAŽE 3,460,944€

RUDNIK UGLJA A.D. 2,906,251 €

HTP "BOKA" AD - HERCEG NOVI 2,501,842 €

AD LUKA BAR 2,402,431 €

SOLANA "BAJO SEKULIĆ"-ULCINJ 1,991,670 €

HIPOTEKARNA BANKA A.D. 1,536,289 €

Source: Security Exchange Commission of Montenegro The total number of transactions realized with shares of the following ten companies amounted to 25,984, making 35% of the total number of transactions realized on the secondary market during the analyzed period. The majority of transactions are related to trade with Telekom shares (30%). Table 7.3 Ten shares with the highest number of transactions in the first 9 months of 2005

Issuer Number of transactions

TELEKOM CRNE GORE A.D. PODGORICA 7,448

"ELEKTROPRIVREDA CRNE GORE" A.D. NIKŠIĆ 3,276

AD PLANTAŽE 2,957

AD LUKA BAR - BAR 2,396

HTP BUDVANSKA RIVIJERA 2,374

RUDNIK UGLJA A.D. 2,097

HTP "BOKA" AD - HERCEG NOVI 1,794

HK ŽELJEZARA NIKŠIĆ AD NIKŠIĆ 1,398

JUGOPETROL AD 1,235

AD INDUST. KOŽE " POLIMKA " BERANE 1,009

Source: Security Exchange Commission of Montenegro


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Trade with investment units of Privatization Investment Fund Investment units of all 6 PIF’s participated in the stock exchange trade during the first nine months of 2005. In this period, a total of € 7,740,059 in turnover was realized (32% on NEX Montenegro and 68% on Montenegroberza). On the other side, a total of 35,175 transactions were realized (44.5% on Montenegroberza and 55.5% on NEX Montenegro). Turnover and number of transactions with these securities is presented in the next graph.

Graph 7.6 Investment units of PIFs

0

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turnover number of transactions

Source: NEX Montenegro and Montenegroberza As table 7.4 presents, the highest turnover was realized with investment units of HLT (24%) and MIG (19%), while the lowest turnover was realized by Moneta (1.4%). The highest price increase was had by investment units of Eurofund 328%, Atlas Mont 290%, and Trend 210%. Table 7.4 Prices and turnover with PIF investment units in the first 9 months of 2005

Fund min price max price turnover

"ATLAS MONT" 0.0128 € 0.0500 € 392,381.10 €

"EURO-FOND" 0.0070 € 0.0300 € 168,795.00 €

"MIG" 0.0151 € 0.4000 € 1,468,703.75 €

"MONETA" 0.0118 € 0.0300 € 111,095.45 €

"TREND" 0.0161 € 0.0500 € 480,213.20 €

"HLT-FOND" 0.0150 € 0.0380 € 1,888,203.90€

Source: Security Exchange Commission of Montenegro


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Trade with shares of old foreign currency saving bonds Trade with old foreign currency saving bonds was reinforced during the first nine months in 2005. The total volume of trade with bonds on both Montenegrin stock exchanges in the first eight months of 2005 was €10,891,799, while transactions totaled 4,080. The majority of trade was realized on the NEX Montenegro stock exchange - € 7.3 million (67%), and the rest on the Montenegroberza stock exchange - € 3.6 million (33%). On Montenegroberza, 1 euro of old foreign currency savings was worth between € 0.41 and €0.95, while in the NEX Montenegro, 1 euro of old foreign currency savings was sold for between €0.47 and €0.95, depending on the maturity. Old foreign currency saving bonds provide the security that is very attractive to investors. This is confirmed by the continuous increase of trade with these securities. Data for 2005 shows that investors are especially interested in bonds with longer maturity dates. Namely, trade with bonds that mature in 2015, 2016 and 2017 represent 40% of the total trade with this security.

Chapter 8. External Sector

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8. EXTERNAL SECTOR o Exports within the foreign trade sector 6 – “manufactured goods that are classified

chiefly by materials” was € 183.7 million or 58.5% of total goods exports in the first three quarters of 2005;

o Imports of goods within the foreign trade sector 7 –“Machines and transport equipment” were the most dominant in the first three quarters of 2005, accounted for 21.4% of total goods imported;

o Considering the goods export structure by country in the first three quarters of 2005, the most dominant were Serbia and Kosovo (37%), Italy (27.6%), Greece (9.4%), Slovenia (7.6%), and Bosnia and Herzegovina with a share of 4.8% in total goods export.

o With respect to goods imported by origin, the most dominant foreign trade countries were Serbia and Kosovo (36.1%), Italy (8.5%), Slovenia (7.2%), Croatia (6.8 %), Germany (4.9%) and Greece (4.7%) in the first three quarters of 2005;

o The trade deficit (goods + services) within the first three quarters of 2005 amounted to € 182.2 million, a nominal increase of 48.9% compared to the same period of 2004;

o The current account deficit amounted to € 42.3 million in the first three quarters of 2005, a nominal increase of 162.6% compared to the corresponding period of 2004.

8.1. FOREIGN TRADE 8.1.1 Foreign Trade Structure by Goods Data, in compliance with SITC1, was obtained from the Central Bank of Montenegro and covers the divisional structure of imported and exported goods for the first three quarters of 2004 and 2005 On the export side, the most dominant sector in the first three quarters of 2005 was sector 62 that accounted for 58.5% of total exported goods. The second important sector was sector 7 that accounted for 9.3% of total exported goods. The third dominant sectors on the export side were sector 0 that accounted for 8.6% of total goods exported in the first three quarters of 2005. The fourth most dominant export sector was sector 2 that accounted for 7.3% of total goods exported. Sector 1 accounted for 7.2% of total goods exported in the first three quarters of 2005. Generally, exports within these above mentioned sectors accounted for 90.9% of total goods exported. With respect to imports by sectors in the first three quarters of 2005, sector 7 was the most dominant sector that accounted for 21.4% of total goods imported. The second most dominant sector on the imports side was sector number 8 that 17.2% of total imports of goods. Sector 0 ranked third with the share of 16.1% in total goods imported the first three quarters of 2005. The most dominant sub-sectors within this sector were 01 (“meat and meat 1 Standard International Trade Classification 2 Nine sectors according to SITC are the following: Sector 0: Food and live animals; Sector 1: Beverages and tobacco; Sector 2: Crude materials, inedible, except fuels; Sector 3: Mineral fuels, lubricants and related materials; Sector 4: Animal and vegetable oils and fats; Sector 5: Chemicals; Sector 6: Manufactured goods classified chiefly by materials; Sector 7: Machinery and transport equipment; Sector 8: Miscellaneous manufactured articles; Sector 9: Commodities and transactions, n.e.s.


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products”), 07 (“coffee, tea, cocoa and spices”), and 05 (“vegetables and fruits”). The fourth most dominant sector on the imports side was the sector 3 that accounted for 14.6% of total goods imported in the first three quarters of 2005. The fifth most dominant imports sector was sector 6, with the sub-sectors 66 (“construction materials”), 64 (“Paper, cardboard and cellulose products”), and 67 (“iron and steel”). This sector accounted for 14.3% of total goods imported in the first three quarters of 2005. All together, the above-mentioned import sectors accounted for 83.6% of total goods imported in the first three quarters of 2005. 8.1.2 Foreign Trade Structure by Country of Destination and Origin Foreign trade structure in the first three quarters of 2005 and the corresponding period of 2004, by countries, is presented in table 8.1. Table 8.1 Foreign Trade Structure by Countries

Imports Exports

Country

2004

(ja

n-se

pt)

in 0

00 €

2004

(ja

n-se

pt)

% o

f to

tal

impo

rts

2005

(ja

n-se

pt)

in 0

00 €

2005

(ja

n-se

pt)

% o

f to

tal

impo

rts

2004

(ja

n-se

pt)

in 0

00 €

2004

(ja

n-se

pt)

% o

f to

tal

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rts

2005

(ja

n-se

pt)

u 00

0 €

2005

(ja

n-se

pt

% o

f to

tal

expo

rts

Bosnia and Herzegovina

18,483 3.06 26,431 3.95 12,429 3.67 14,957 4.77

Croatia 43,284 7.16 45,401 6.80 6,043 1.78 4,581 1.45

Slovenia 49,712 8.23 48,460 7.24 1,738 0.53 23,856 7.60 Serbia and Kosovo

209,742 34.70 241,529 36.10 136,795 40.33 116,211 37.03

Italy 52,721 8.72 56,835 8.50 83,861 24.73 86,729 27.63

Greece 25,693 4.25 31,302 4.70 34,712 10.24 29,413 9.47

Germany 28,581 4.73 32,724 4.90 1,959 0.60 805 0.26

Cyprus 6,043.0 1.00 5,822.4 0.87 3,636 1.07 1,826 0.60

Hungary 10,797 1.79 13,215 1.97 4,204 1.24 5,136 0.64

Albania 1,905 0.30 3,920 1.16 3,036 0.97

Austria 24,982 5.80 29,058 4.34 355 0.10 868 0.30

Great Britain 24,975 5.80 7,368 1.10 1,965 0.60 5,297 1.69

Switzerland 13,002 2.15 27,852 4.20 24,891 7.34 2,552 0.81

Other 96,357 12.6 101,350 15.14 22,640 6.70 18,585 6.80

Total 604,372 100.00 669,252 100.00 339,148 100.00 313,852 100.00

Source: Central Bank of Montenegro. In the first three quarters of 2005, Serbia and Kosovo, Italy, Greece, and Slovenia were the most dominant destinations of exported goods with respective shares of 37%, 27.6%, 9.47%, and 7.60% of total goods exported. The share of goods exported to Italy and Slovenia increased compared to the same period of 2004 when Italy’s share was 24.7%, and Slovenia had 0.5% of exports. On the other hand, the share of exports to Serbia and Kosovo decreased from 40.3% in the first three quarters of 2004 to 37% in the same period of 2005 and Greece from 10.2% of total exports in the first three quarters of 2004 to 9.5% in the first three quarters of 2005. The share of exports to Switzerland also declined from € 24.9 million, or 7.4% of total goods exported, in the first three quarters of 2004 to € 2.6 million, or 0.8%, in the first three quarters of 2005. The reason for this structural change is the export of aluminium, which is now recorded to be exported to Italy, Greece and Slovenia, which have aluminium plants and use primary aluminium for their production. In


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previous years, it was recorded that aluminium was exported only to Switzerland, where its main purchasing company (Glencor) was set up. Exports to Bosnia and Herzegovina (BiH) accounted for 4.8% of total exports in the first three quarters of 2005, compared to 3.7% in the same period of the previous year. Exports to Croatia declined from 1.78% in the first three quarters of 2004 to 1.45% of total goods exported in the first three quarters of 2005. In this period of 2005, Great Britain had a significant share of total exports (1.7%) compared to 0.6% in the first three quarters of 2004. The share of Albania decreased in total goods exported in 2005 and accounted for 1.0%, while in same period of the previous year their respective shares were 1.16%. With respect to imports, according to the country of origin, in the first three quarters of 2005, the most dominant trade partners were Serbia and Kosovo, Italy, Slovenia, Croatia, Germany and Greece, which accounted for 36.1%, 8.5%, 7.2%, 6.8%, 4.9%, and 4.7% of total goods imported, respectively. Compared to the first three quarters of 2004, Serbia and Kosovo, Germany and Greece increased their share of total goods imported. 8.1.3 TERMS OF TRADE Terms of trade are defined as a ratio of the price level of the most important exports and the price level of the most important imports. In the last several years in Montenegro, the highest import share was held by oil and oil derivatives (8.0% in 2004 and 10% in the first half of 2005), while with respect to exports, the most dominant is aluminium (49.7% of total exports in 2004 and 67.2% in the first half of 2005). Thus, the ratio of aluminium prices and the ratio of oil prices are used to measure Montenegrin terms of trade, despite the fact that they do not precisely represent the profitability of those terms of trade.

Graph: 8.1 Prices of crude oil and aluminium prices

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Crude oil (left axis) Aluminum (right axis)

Source: KAP (export prices), International financial statistics (IFS) - average crude oil prices, SPOT oil) Within the analysis, export prices of aluminium are given in USD per ton as provided by the Aluminium Plant Podgorica (KAP), along with world prices of crude oil (USD per barrel), as published by the IMF’s International Finance Statistics.


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Graph 8.2: “Terms of trade” in Montenegro (approximation)

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2003

M11

200

3M

1220

03M

1 20

04M

2 20

04M

3 20

04M

4 20

04M

5 20

04M

6 20

04M

7 20

04M

8 20

04M

9 20

04M

1020

04M

11 2

004

M12

2004

M1

2005

M2

2005

M3

2005

M4

2005

M

5 20

05M

6 20

05M

7 20

05M

8 20

05M

9 20

05

Terms of Trade (approximation), 2000:1=100

Source: ISSP calculations based on the data obtained from KAP and International Financial Statistics

Terms of trade estimation in Montenegro are shown in graph 8.2. The graph shows that Montenegrin terms of trade were improved in 2001 and then deteriorated in 2002. After that, they again improved in 2003 and then again deteriorated in 2004, due to the increased price of oil. In December 2004, terms of trade were at 70.1 (compared to 100 in 2000:1). At the beginning of 2005, terms of trade deteriorated when the index was 69.8, and this deteriorating trend continued in 2005. In September 2005, this index decreased to 49.2. The reason for the general deterioration of the Montenegrin terms of trade was that the price of crude oil increased much faster than the price of aluminum exports, despite the fact that export prices of aluminum in 2005 increased compared to 2004, when aluminum’s price per ton reached $ 1,917 in September 2005. 8.2. BALANCE OF PAYMENTS

The following text presents the latest data on the Balance of Payments of Montenegro in the first three quarters of 2005 and the corresponding period of 2004. The data are provided in € and were obtained from the Central Bank of Montenegro. The data are preliminary, due to the fact that there are some statistical weaknesses within the statistical system of Montenegro, which means that possible deviations from the final data are expected.

Generally, the Balance of Payments of Montenegro in the first three quarters of 2005 was characterized by the increasing current account deficit. The financial account of the Balance of payments was rather improved in the first three quarters of 2005 compared to the same period of 2004. 8.2.1 Current account The current account deficit in Montenegro in the first nine months of 2005 was € 42.3 million, a nominal increase of 162.6 % compared to the same period of the previous year. Total revenues were € 766.9 million, an increase of 9% compared to the first nine months of the previous year. On the other hand, total expenditures of the current account in the first nine months of 2005 were € 809.2 million, a nominal increase of 12.4% compared to the same period of 2004. The reason for the increasing expenditures and deficit of the current account is the large decrease of exported goods and increase of imported goods, compared to first nine months of 2004.


ISSP - CEPS 80

Good trade The goods trade deficit in the first nine months of 2005 was € 355.4 million or 34% more than the same period of 2004. Total trade of goods (imports plus exports) was € 983.1 million in the first nine months of 2005, an increase of 4.2% compared to the same period of the previous year. Exports of goods amounted to € 313.9 million, a decrease of 7.5% compared to the first nine months of 2004. Imports of goods was € 669.4 million an increase 10.7% compared to same period of 2004. Overall, the ratio of exports to imports in the first nine months of 2005 was 46.9%, a decrease of 9.2 percentage points as compared to the corresponding period of 2004.

Generally, the goods trade deficit in the first nine months of 2005 increased due to the decrease in exported goods and increase of imported goods.

Balance of service The balance of service surplus in the first nine months of 2005 was € 173.2 million, an increase of 13.1% compared to the same period of the previous year. The reason for the increasing surplus was a 18.3% increase in revenues from tourism, a 30.9% increase in revenues from transport, and a 26.3% increase in revenues from financial services.

Income The surplus of income amounted to € 87.6 million, a nominal increase of 49.8% in the first nine months of 2005 compared to the same period of 2004. This increase is mainly due to the increased compensation of employees from abroad, compared to the same period of the previous year.

Transfers The net balance of transfers in the first nine months of 2005 was in surplus, amounting to € 52.3 million, an increase of 9.5% compared to the corresponding period of 2004.

8.2.2 Capital and financial account 3

Financial account In the financial account of Montenegro, “foreign direct investments” still hold the most significant position, amounting to € 248.4 million in the first three quarters of 2005, an increase of 582.6% compared to the corresponding period of 2004. The main reason for the increase of foreign direct investments is the privatisation process of Telecom of Montenegro. Net portfolio investments in the first nine months of 2005 amounted to € 5.9 million, an increase of 198% compared to the corresponding period of 2004. The position of “change in net foreign asset of commercial banks” was negative and amounted to € -79.3 million in the first three quarters of 2005. The change in CBM foreign reserve assets was also negative (€-93.7 million) in the first nine months of 2005, while it was € -17.8 million in the same period of 2004.

Net errors and omissions The total balances of the current, as well as capital and financial accounts, was positive and amounted to € 101.9 million in the first three quarters of 2005 and was significantly improved compared to the same period of 2004, when it was negative. This surplus of the current, capital and financial account is set explicitly equal to the position “net errors and omissions”, in order to achieve the balance of payments equilibrium.

3 Data on capital and financial transactions are, until now, rather limited due to the ongoing process of adopting international standards, which would allow for proper registration of these transactions. Consequently, capital account transactions have not been registered in Montenegro at all since 2001.


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Table 8.3: Balance of Payments of Montenegro (in 000 €)

2001 2002 2003 2004 Jan-Sept

2004 Jan-Sept

2005

Change in Jan- Sept

2005 (in %) as comparedto the same period of

2004. CURRENT ACCOUNT BALANCE -195 -163409 -101,986 -142,968 16,124 -42,338 162.6 Total current account revenues 631,606 692,315 642,531 830,398 703,531 766,900 9.0 Total current account expenditures 827,017 855,724 744,517 973,366 719,655 809,238 12.4 GOODS AND SERVICES BALANCE -390,675 -323,883 -247,597 -291,021 -122,362 -173,172 41.5 GOODS BALANCE -487,527 -424,705 -359,330 -430,900 -265,224 -355,401 34.0 Total export goods 235,365 322,624 270,574 381,607 339,148 313,852 -7.5 Exports of goods excl. trade with Serbia and Kosovo 209,925 220,738 177,575 259,553 202,353 197,641 - 2.3 Exports to Serbia and Kosovo 25,440 101,895 92,999 122,054 136,795 116,211 -15.0 Total import of goods 722,892 747,329 629,904 812,507 604,372 669,353 10.7 Imports of goods (excl. trade with Serbia and Kosovo) 608,398 567,928 413,091 566,716 394,630 427,824 8.4 Import form Serbia and Kosovo 114,495 179,401 216,813 245,791 209,742 241,529 15.2 SERVICE BALANCE 96,852 100,822 111,733 139,879 142,862 173,172 21.2 Total revenues from services 150,228 175,969 191,395 241,123 21,860 261,469 20.6 Total expenditures from services 53,376 75,147 79,662 101,244 73,998 88,297 19.3 Total transport revenues 28,384 32,041 35,009 45,341 34,372 44,979 30.9 Total transport expenditures 20,059 22,029 25,904 29,378 22,489 26,119 16.9 Balance of transport services 8,326 10,012 9,105 15,963 11,883 18,860 58.7 Total revenues of tourism 105,970 124,236 136,046 163,495 161,197 190,740 18.3 Total expenditures of tourism 5,020 8,009 10,096 6,951 4,951 7,573 53.0 Balance of tourism 100,950 116,227 125,950 156,544 156,246 183,167 17.2 Revenue of Financial Services 4,094 2,686 2,848 4,035 2,379 3,005 26.3 Expenditures of Financial Services 3,191 3,332 6,761 6,462 4,711 5,927 25.8 Balance of financial services 903 655 -3,913 -2427,00 2,379 3,005 26.3 Revenues of other services 11,779 12,755 17,492 28,252 18,912 22,745 20.3 Expenditures of other services 25,106 39,133 36,901 58,453 41,847 48,678 16.3 Balance of other services -13,327 -26,378 -19,409 -30,201 -22,935 -25,933 13.1 INCOME BALANCE 46,482 74,201 99,510 103,834 58,486 87,587 49.8 Total revenues 86,777 99,569 125,337 152,722 91,687 126,811 38.3 Compensation of employees 40,841 46,342 85,496 129,822 91,348 126,139 38.1 Revenues from Serbia for physical persons 44,329 53,226 39,261 22,314 Received dividends 170 3 45 15 0 0 Interest revenues 1,438 158 577 541 324 672 107.4 Investment in abroad 980 Total expenditures 40,295 25,368 25,827 48,888 33,201 39,227 18.2 Compensation of employees 33,544 3,155 3,362 6,289 5,284 10,475 98.2 Expenditures from Serbia for physical persons 115 313 1,083 2,782 Interest expenditures 2,287 13,807 12,568 24,524 17,438 19,116 9.6 Paid dividends 4,349 8,405 8,814 15,293 10,479 9,636 -8.0 CURRENT TRANFERS BALANCE 148,781 87,056 46,101 44,219 Current transfer to Montenegro 159,235 97,267 55,225 54,946 55.836 64.768 16.0 Transfers from abroad to Montenegro 170,596 102,755 58,413 63,514 20,481 26,497 29.4 Foreign assistance 69,518 42,074 21,807 20,078 15,630 5,766 63.1 Foreign assistance financial and material (NGO, humanitarian organizations)

78,357 50 30,230 26,300 19,725 32,505 64.8

Expenditures of transfer from Montenegro 10,454 10,211 9,124 10,727 8,084 12,461 54.1 Transfer from Montenegro to abroad 10,454 10,211 9,124 10,727 8,084 12,461 54.1 CAPITAL AND FINANCIAL ACCOUNT BALANCE 11,900 71,843 133,030 170,905 77,851 144,240 85.3 CAPITAL ACCOUNT 0 0 0 0 FINANCIAL ACCOUNT 11,900 71,843 133,030 170,905 77,851 144,240 85.3 Direct investment 10,632 89,183 38,725 50,015 36,385 248,378 582.6 Equity capital 4,710 78,112 38,725 50,015 36,385 248,378 582.6 Reinvested earnings and undistributed branch profits 5,922 11,071 Portfolio investment-net -12 -213 942 5,524 1,978 5,900 198.3 Other investment -6,088 17,369 47,047 98,170 60,195 62,925 4.5 Loans 2,925 24,888 114,597 176,103 97,196 94,937 -2.3 Repaid loans 9,014 7,518 67,550 77,933 37,001 32,012 -13.5 Change in Net Foreign Assets 7,369 -24,144 45,759 32,237 -2,898 -79,285 Change in CBM for reserve assets (term deposits of CBM in for. banks)

0 -10,352 557 -15,041 -17,809 - 93,678

BALANCE OF CURRENT ACCOUNT CAPITAL AND FINANCIAL ACCOUNT

-183,511 -91,566 31,044 27,937 61,727 101,902

NET ERRORS AND OMISSIONS -183,511 -91,566 31,044 27,937 61,727 101,902


Chapter 9. Regional Comparison

ISSP - CEPS 82

9. REGIONAL COMPARISON o Almost all SEE countries increased their industrial production in the first half, as well as

in the first three quarters, of 2005 compared to the corresponding periods of 2004; o Annual CPI inflation in September 2005 was the lowest in Macedonia and the highest in

Romania and Serbia; o The lowest unemployment rates were registered in Romania, while the highest were

estimated in Bosnia and Herzegovina at the end of the third quarter of 2005. 9.1 MACROECONOMIC INDICATORS The physical volume of industrial production increased in all SEE countries in August and September 2005 compared to the corresponding months of 2004. According to the available official data, the level of industrial production in the period January-August 2005 increased by 9.4% in Bulgaria, 8.0% in Macedonia, 1.7% in Romania, and 0.2% in Montenegro compared to the same period of the previous year. The level of industrial production in the first eight months was also higher in Croatia and Bosnia & Herzegovina compared to the same period of 2004. According to the available data for September 2005, industrial production continued to increase in Montenegro and Bosnia & Herzegovina with annual growth rates of 9.3% and 9.7%. The reason for this improvement in production was an increase in the sector of manufacturing, since this sector has the highest share in total industrial production in almost all SEE countries. However, a significant number of production companies in SEE countries, especially in Serbia and Montenegro, Bosnia & Herzegovina, Albania, and Macedonia have rather old technologies and low labor productivity. This situation should also be improved through the privatization process by bringing new technologies and know-how to these companies.

Annual CPI inflation rate in September 2005 was 1.1% in Macedonia, 3.2% in Montenegro, 3.9% in Bosnia & Herzegovina, 3.1% in Albania, 3.8% in Croatia, 3.3% in Bulgaria, 8.5% in Romania, and 14.9% in Serbia. Generally, the main reason for the increased inflation rate in several countries in the first three quarters of 2005 was the increased oil prices, the influence of several internal factors in the countries, fiscal policy changes, as well as depreciation of their national currencies against the euro. This is especially true for Serbia and Romania, the two countries with the highest inflation rates in the region. On the other hand, Macedonia had the lowest inflation rate on an annual basis in September 2005.


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Table 9.1: Macroeconomic indicators of SEE countries

Alb

ania

Bos

nia

iHer

zego

vina

/ R

epub

lika

Srps

ka

Bul

gari

a

Cro

atia

Mac

edon

ia

Mon

tene

gro

Serb

ia

Rum

unia

2001 6.5 4.5 4.0 3.8 -4.5 4.0 5.7 5.0

2002 4.7 5.5 4.3 5.2 0.7 0.8 3.3 3.8

2003 6.0 3.5 4.3*** 4.3 2.2 1.5 2.5** 4.9***

Real annual growth rate of

GDP (in %)

2004 6.0**** - 5.8 3.8 - 3.0 7.0 4.5

2001 6.5 12.2/-12.9 1.6 6.0 -23.2 -2.7 0.0 8.4 2002 2.0 9.2/-2.5 6.5 5.7 13.7 0.7 1.7 6.0

2003 2.7 2.0/-1.6 (Mar)

15.6 4.0 0.5 (Nov)

6.5 2.4 -3.1 3.1

2004 - 9.0 23.4 3.0 -12.7(Jan-

Dec) 13.8 7.2 5.3

Annual change of industrial production

(in %) 2005 4.0 (June) 9.7 (Sept)

7.5 (Aug) 9.4 (Jan-

Aug) 7.2 (Jul)

4.3 (Aug) 8.0 (Jan-

Aug)

9.3 (Sept) 1.3 (Jan-

Sept)

8.6 (Aug)

-0.4 (Jan-Sep)

1.7 (Jan-Aug)

2001 3.5 3.2 4.8 2.6 1.2 24.0 38.7 34.5 2002 2.1 0.3 3.8 2.3 2.2 9.2 1.8 22.5

2003 3.3 0.3 4.7 1.8 -1.1 (Jul)

0.3 (Jan-Jul) 6.1

(Dec) 9.9 15.3

2004 3.5 -1.0 (Dec) 4.0 (Dec) 2.7 (Dec) -1.9 (Dec) -0.4(Jan-

Dec)

3.2 (Dec) 2.4 (Jan-

Dec)

13.2 (Dec) 11.4

(Jan-Dec)

11.9

Annual inflation

rate (CPI, in %)

2005 3.1 (Sept) 3.9 (Sept) 3.3 (Sep) 3.8 (Sept) 1.1 (Sept) 3.2 (Sep) 14.9

(Sept) 8.5 (Sept)

Currency name

Lek Convertible

Mark; BAM

Leva Kuna Denar Euro Dinar Lei

2005 (against €)

122.5 (Oct) 1.956 (Jun)

1.958 (Jun)

7.369 (Oct)

61.17 (Oct)

- 84.7

(Sept)

35,887.4 (Oct)

National currency

(against €)

Annual change in %

-3.92 - - -3.9 1.6 - 14.9 11.9

2001 15.4 39.9/ 40.2 17.3 22.2 30.5 24.8 27.7 8.8 2002 15.8 42.7/ 38.2 16.3 22.3 31.9 23.7 31.3 8.4

2003 15.0 43.1/36.6

(Mar) 13.5 19.1 36.7 21.6 (dec)

30.2 (dec)

7.2

2004 - - 12,6 18.7 37.0 19.5 (Dec) 31.9 (Jul) 6.2

Unemployment rate (

in %)

2005 14.3 (June) 44.9 (Aug) 11.0 (Jul.) 17.2 (Sept) 36

(September) 19.6 (Sep)

32.7 (July)

5.6 (Aug)

2001 -22.6 -74.9 -11.7 -5.9 -15.3 -31.3 -28.8 -13.2 2002 -17.5 -79.7 -10.2 -11.1 - -24.9 -33.4 -8.6 2003 -21.5**** -81.3 -12.5 -8.0 -21.0 -24.2 -27.8 -8.9

Trade Balance (as % of GDP)

2004 -23.0 -74.6 -8.5 -7.3 -21.7 -19.0 -27.0 -9.1 2001 -5.3 -25.3 -7.5 -3.7 -6.9 -15.7 -9.7 -5.9 2002 -9.5 -30.5 -5.6 -8.7 -9.4 -12.6 -13.0 -4.5 2003 -8.5**** -36.4 -9.2 -7.3 -3.0 -7.1 -12.0 -4.6

Current account (as % of GDP)

2004 -7.2 -34.1 -8.5 -5.2 -7.7 -9.3 -11.0 -6.6

Sources: Data for Montenegro are from ISSP database Data for other countries are from their central banks and statistical offices *Estimated by ISSP **www.dfat.gov.au; ***www.inss.ro

Unemployment rates1 within the countries of the region were the lowest in Romania (5.6% in August 2005), Bulgaria (11% in July 2005), Albania (14.3% in June 2005), and Croatia (17.2% in September 2005). On the other hand, Bosnia & Herzegovina, Serbia, and Macedonia still have the highest unemployment rates in the region, amounting to 44.9% in 1 Unemployment rates within the SEE countires are calculated through the implementation of different methodologies and thus data on unemployment rates cannot be completely comparable, despite the fact that these are the only available data.

Chapter 9. Regional Comparison

ISSP - CEPS 84

Bosnia & Herzegovina (in August 2005), 32.7% in Serbia (in July 2005), and 36% in Macedonia (in September 2005). The unemployment rate in Montenegro was 19.6% in September 2005. The exchange rate, or the value of national currencies against the Euro, was changed in the first three quarters of 2005. The national currencies of Albania and Croatia were stronger against the Euro in this period compared to the same period of 2004 (see table 9.1). On the other hand, the Serbian dinar (CSD) continued to depreciate against the Euro as a consequence of some internal factors in the country; the average exchange rate in October 2005 was 1 EUR= 84.7CSD. A similar situation is found with the Romanian national currency, which weakened against the Euro in the first three quarters of 2005. The national currencies of Bulgaria and Bosnia & Herzegovina are pegged to the Euro, and their exchange rate to the Euro is stable. Furthermore, the Euro is the official currency in Montenegro, so there are no exchange rates against the official currency of EMU, in the case of Montenegro.


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PART 2

Comments

ISSP - CEPS 86

COMMENT 1

EMPOWERING WORKERS: THE PRIVATIZATION OF SOCIAL SECURITY SYSTEM IN CHILE Author: José Piñera, president of the International Center for Pension Reform and co-chairman of the Cato Institute Project on Social Security Choice A specter is haunting the world. It is the specter of bankrupt government-run social security systems. The pay-as-you-go system that reigned supreme through most of the 20th century has a fundamental flaw, one rooted in a false conception of how human beings behave: it destroys, at the individual level, the link between contributions and benefits-in other words, between effort and reward. Whenever that happens on a massive scale and for a long period of time, the final result is disaster. Two exogenous factors aggravate the consequences of that flaw: the global demographic trend toward decreasing fertility rates and medical advances that are lengthening life. As a result, fewer workers have to support more and more retirees. Since increasing payroll taxes generates unemployment, sooner or later promised benefits have to be reduced, a telltale sign of a bankrupt system. Whether benefits are reduced through inflation, as in most developing countries, or through legislation, the result is the same: anguish about old age is created, paradoxically, by the inherent insecurity of an unfunded "social security" system. In Chile, the Social Security Reform of November 4, 1980 introduced a revolutionary innovation. The Reform (mainly DL 3.500 and DL 3.501) gave every worker the choice of opting out fully from the government-run pension system and instead putting the former payroll tax (10% of wages) in a privately managed personal retirement account (PRA). Since 95 percent of the workers chose the PRA system, the end result was a "privatization from below" of Chile's social security system. This same Reform introduced two important changes to the health system: a) it fully privatized the disability insurance system, which became an integral part of the so-called "AFP system" (the AFPs are the private companies that manage the PRAs on workers behalf); and, b) it allowed workers to opt out from the monopolistic government health insurance system with all their mandatory contribution (another 7% of wages), as long as they were willing and able to buy with that money a minimum health insurance plan in what became the "ISAPRE system" ( the ISAPRES are the private companies that offer diverse health insurance plans). After almost 24 years, this comprehensive Reform has changed dramatically Chile's economy and society. Six million workers (95% of the labor force) have a PRA and 1.5 million (almost 25% of labor force, and gradually increasing as higher wages allow their 7% of wages to buy the minimum health plan) have an ISAPRE plan, and they do not depend at all on the government for their retirement and health. The PRAs annual average rate of return for more than two decades has been around 10% above inflation. Retirement benefits in the AFP system already are 50 to 100 percent higher-depending on whether they are old-age, disability, or survivors' retirement benefits-than they were in the pay-as-you-go system. The resources accumulated in the workers PRAs amount


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to $50 billion, or around 65% of Chile's GNP. According to William Lewis ("The Power of Productivity", 2004), total government expenditures in Chile as a percentage of GDP declined from 34.3% in 1984 to 21.9% in 1990, and of that 12.4 points decline, Social Security and Welfare changes accounted for half. By increasing savings and improving the functioning of both the capital and the labor markets, this Reform has been the single most important structural change that has contributed to the doubling of the growth rate of the economy in the 1985-1997 period (from the historic 3 to 7.2%). HOW IT WORKS? Under Chile's new social security system, what determines a worker's retirement benefit is the amount of money he accumulates in his PRA during his working years. Neither the worker nor the employer pays a payroll tax. Nor does the worker collect a government-funded benefit. Instead, 10 percent of his wage coming from the previous payroll tax is deposited, tax free, by his employer each month in his own PRA. The 10 percent rate was calculated on the assumption of a 4 percent average real return on a PRA during a whole working life, so that the typical worker would have sufficient money in his account to fund a retirement benefit equal to approximately 70 percent of his final salary. A worker may contribute up to an additional 10 percent of his wage each month also deductible from taxable income, as a form of voluntary savings. The return on the PRA is tax-free. Upon retirement, when funds are withdrawn, taxes are paid according to the income tax bracket at that moment. A worker may choose any one of the private pension fund companies (called Administradoras de Fondos de Pensiones, or AFPs) to manage his PRA. A key provision is totally free entry to the AFP industry, for both domestic and foreign companies (foreign companies can own up to 100 percent of an AFP) in order to provide competition and thus benefit workers. Those companies can engage in no other activities and are subject to strict supervision by a government entity, the Superintendency of AFP, that was created to provide highly technical oversight to prevent theft or fraud. Each AFP operates five mutual funds, with different bond/share proportions (the original scheme allowed only one fund for each AFP). Older workers have to own mutual funds highly invested in fixed income securities, while young workers can have up to 80 percent of their funds in shares. Investment decisions are made by the AFP, but the worker can choose both the AFP and, within limits, the preferred fund. The law sets only maximum percentage limits both for specific types of instruments and for the overall mix of the portfolio; and the spirit of the reform is that those regulations should be reduced progressively as the AFP companies gain experience and capital markets work better. There is no obligation whatsoever to invest in government bonds or any other security. Legally, the AFP companies and the mutual funds are separate entities. Thus, should an AFP go under, the assets of the mutual funds-that is, the workers' investments-are not affected at all and only the AFP's shareholders lose their capital. Workers are free to change from one AFP company to another, and from one fund to another. There is then competition among the companies to provide a higher return on investment, better customer service, or a lower commission. Each worker is given a PRA passbook (to use if he wants to update his balance by visiting his AFP) and receives a statement by mail every three months informing him of how much money has been accumulated in his retirement account and how well his investment fund has performed. The

Comments

ISSP - CEPS 88

account bears the worker's name, is his property, and will be used to pay his old-age retirement benefit (with a provision for survivors' benefits). As should be expected, individual preferences about old age differ as much as any other preferences. Some people want to work forever; others cannot wait to cease working and indulge in their true vocations or hobbies. The pay-as-you-go system does not permit the satisfaction of such preferences, except through collective pressure to have, for example, an early retirement age for powerful political constituencies. It is a one-size-fits-all scheme that may exact a high price in human happiness. The PRA system, on the other hand, allows individual preferences to be translated into individual decisions that will produce the desired outcome. In the branch offices of many AFPs, there are user-friendly computer terminals on which a worker can calculate the expected value of his future retirement benefit, based on the money in his account, the life expectancy of his age group, and the year in which he wishes to retire. Alternatively, the worker can specify the retirement benefit he wishes to receive and determine how much extra money he must deposit each month if he wants to retire at a given age. Once he gets the answer, he simply asks his employer to withdraw that new percentage from his salary. Of course, he can adjust that figure as time goes on, depending on the actual yield of his pension fund or other relevant variables (for example, longer life expectancies). All workers, whether employed by private companies or by the government, were given the opportunity to opt out of the pay-as-you-go system. Self-employed workers are not compelled to participate in the PRA system, as they were not in the government pay-as-you-go system, because of the practical difficulties in a country like Chile of enforcing any mandatory system for self-employed people. But the pension reform allows them to enter the PRA system if they wish, thus creating an incentive for informal workers to join the formal economy. The social security reform system maintained a "safety net." A worker who has contributed for at least 20 years but whose benefit, upon reaching retirement age, is below what the law defines as a "minimum pension" is entitled to receive that benefit level from general government revenue sources once his PRA has been depleted. (Those without 20 years of contributions can apply for a welfare-type retirement benefit at a lower level.) The government-run disability and survivors' program, a source of systematic abuse, given the nonexistence of incentives to control its fair use, was also fully privatized. Each AFP has to provide this service to its affiliated workers by taking out, through open and transparent bidding, group life and disability coverage from private life insurance companies. This coverage is paid for by an additional worker contribution of around 2 percent of salary, which includes the commission to the AFP for administrative and investing expenses. A key feature of the reform was the change in the meaning of "retirement." The legal retirement age is 65 for men and 60 for women (those were the ages in the former pay-as-you-go system and were not discussed or changed during the reform process because they are not a structural characteristic of the PRA system). But in the PRA system, workers with sufficient savings in their accounts to buy a "reasonable annuity" (defined as 50 percent of the average salary of the previous 10 years, as long as it is higher than the "minimum pension") can cease working, begin withdrawing their money, and stop contributing to their accounts. Of course, workers can continue working after beginning to retire their money. A worker must reach the legal retirement age to be eligible for the government subsidy that guarantees the minimum pension. But in no way is there an obligation to cease working, at


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any age, nor is there an obligation to continue working or saving for retirement benefit purposes once you have assured yourself a "reasonable" benefit as described above. Upon retiring, a worker may choose from three general payout options. In the first case, a retiree may use the capital in his PRA to purchase an annuity from any private life insurance company. The annuity must guarantee a constant monthly income for life, indexed to inflation (there are indexed bonds available in the Chilean capital market so that companies can invest accordingly), plus survivors' benefits for the worker's dependents (wife and orphans under the age of 21). Second, a retiree may leave his funds in the PRA and make programmed withdrawals, subject to limits based on the life expectancy of the retiree and his dependents; with this option, if he dies, the remaining funds in his account form a part of his estate and can be given to his heirs basically tax-free. In both cases, he can withdraw as a lump sum the capital in excess of that needed to obtain an annuity or programmed withdrawal equal to 70 percent of his last wages. And third, he can choose any mix he wishes of the previous two. The PRA system solves the typical problem of pay-as-you-go systems with respect to labor demographics: in an aging population the number of workers per retiree decreases. Under the PRA system, the working population does not pay taxes to finance the retired population. Thus, in contrast with the pay-as-you-go system, the potential for intergenerational conflict and eventual bankruptcy is avoided. The problem that many countries face-huge unfunded government social security liabilities-does not exist under the PRA system. In contrast to company-based pension systems that generally impose costs on workers who leave the company before a given number of years and that sometimes result in the loss of the workers' retirement funds-thus depriving workers of both their jobs and their pension rights (such as in the infamous Enron case in the United States)-the PRA system is completely independent of the company employing the worker. Since the PRA is tied to the worker, not the company, the account is fully portable. Given that the pension funds must be invested in tradable securities, the PRA has a daily value and therefore is easy to transfer from one AFP to another. The problem of "job lock" is entirely avoided. By not impinging on labor mobility, the PRA system helps create labor market flexibility and neither subsidizes nor penalizes immigrants. As PRA systems spread around the world, I envision portability between countries as well, which will help people who are more internationally mobile (such as professionals or unassimilated immigrants). A PRA system also can accommodate flexible labor styles. In fact, some people are deciding to work only a few hours a day or to interrupt their working lives-especially women and youngsters. In pay-as-you-go systems, those decisions create the problem of filling the gaps in contributions and, in some cases, may entail no right at all to a retirement benefit, despite years of contributing to the system. Not so in a PRA scheme where stop-and-go contributions do not impinge on the right to get back the totality of (plus the return on) one's contribution. THE TRANSITION In countries that already have a pay-as-you-go system, one crucial challenge is to design and implement the transition to a PRA system. In Chile we set three basic policy rules: The government guaranteed those already receiving a social security check that their benefits would not be touched by the reform. It would be unfair to the elderly to break the promises

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made. I stated this basic rule in this way: "Nobody will take away your grandmother's check." Every worker was given the choice of staying in the pay-as-you-go system or moving to the new PRA system. Those who opted out of the former system were given a "recognition bond" that was deposited in their new PRAs. That bond was indexed to inflation and carried a 4 percent real interest rate. It was basically a zero-coupon Treasury bill maturing when the worker reaches the legal retirement age. The bonds can be traded in secondary markets, so as to allow the worker to use them to build the capital necessary for early retirement. The bond was calculated to reflect the rights the worker had already acquired in the pay-as-you-go system. The exact formula was in the law and was widely and simply explained to the people. Thus, a worker who had paid social security contributions for years did not have to start at zero when he entered the PRA system. All new entrants to the labor force were required to enter the PRA system. This requirement ensured the complete end of the pay-as-you-go system once the last worker who remained in it reaches retirement age. From then on, and for a limited period of time, the government has only to pay benefits to retirees of the old system. To give all those who might be interested in doing so an equal opportunity to create AFPs, the law established a six-month period during which no AFP could begin operations (not even advertising). Thus, the AFP industry is unique in that it had a clear day of conception (November 4, 1980) and a clear date of birth (May 1, 1981). Note that in this way we transformed May Day into a day celebrating the empowerment of workers through social security choice. We also ended the illusion-artificially maintained by lawmakers around the world-that both the employer and the worker contribute to social security. As economists know well, all the contributions are ultimately paid from the worker's marginal productivity, and employers take into account all labor costs-whether termed salary or social security contributions-in making their hiring and pay decisions. So, by renaming the employer's contribution an additional gross wage, our reform made it clear, without reducing workers' take-home pay, that all contributions are paid ultimately by the worker and that he can control his own money. Of course, at the end of the day, wage levels will be determined by the interplay of market forces. The financing of the transition is a complex technical issue that we addressed successfully without raising taxes and that each country must resolve according to its own circumstances. The key insight in this regard is that, contrary to the widely held belief, there is no "economic" transition cost, because there is no cost to GNP due to this reform (on the contrary). A completely different, and relevant, issue is how to confront the "cash-flow" transition cost to the government of recognizing, and ultimately eliminating, the unfunded liability created by the pay-as-you-go-system. The implicit pay-as-you-go debt of the Chilean system in 1980 has been estimated by a World Bank study at around 80 percent of GDP. As that study states, "Chile shows that a country with a reasonably competitive banking system, a well-functioning debt market, and a fair degree of macroeconomic stability can finance large transition deficits without large interest rate repercussions."


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We used five "sources" to finance the fiscal costs of changing to a PRA system: Using debt, the transition cost was shared by future generations. In Chile, roughly 40 percent of the cost has been financed by issuing government bonds at market rates of interest. These bonds have been bought mainly by the AFPs as part of their investment portfolios, and that "bridge debt" should be completely redeemed when the beneficiaries of the old system are no longer with us (a source of sadness for their families and friends but, undoubtedly, a source of relief for future treasury ministers). Since the savings rate needed in a defined-contribution system, like the PRA, to finance adequate retirement benefit levels was lower than the existing payroll taxes, a fraction of the difference between them was used as a temporary "transition tax" (which was gradually reduced to zero, lowering the cost of hiring labor and leading to more employment). In a government's balance sheet there are liabilities-such as social security and health obligations-but also government-owned enterprises, land, and other types of assets. Since we were also at that time privatizing government-owned assets, especially companies, that was one way to finance the transition that had several additional benefits, such as increasing efficiency, spreading ownership, and depoliticizing the economy. The need to finance the transition was a powerful incentive to reduce wasteful government spending. Prior to the reform, the government deliberately created a budget surplus, and for many years afterwards the treasury minister was able to use the need to "finance the transition" as a powerful argument to contain the permanent pressure from all sources to increase government expenditures. The increased economic growth fueled by the PRA system substantially increased tax revenues, especially those from the value-added tax. THE RESULTS Since the system began to operate on May 1, 1981, the average real return on investment has been 10.7 percent per year (during 21 years). Of course, the annual yield has shown the oscillations that are intrinsic to the free market-ranging from minus 3 percent to plus 30 percent in real terms-but the important yield is the average one over the working life of a person (say 40-45 years) or the full working plus retired life (say 55-60 years) if a person chooses the programmed withdrawal option. Retirement benefits under the PRA system (with a mandatory savings rate of only 10 percent) have been significantly higher than under the old, state-administered system, which required a much higher payroll tax. According to one study, the average AFP retiree was receiving, after 15 years of operation of the system, a retirement benefit equal to 78 percent of his mean annual income over the previous 10 years of his working life. Upon retirement, workers may withdraw in a lump sum their "excess savings" (above the 70 percent of salary threshold). If that money were included in calculating the value of the retirement benefit, the total value would come close to 84 percent of working income. Recipients of disability retirement benefits also receive, on average, 70 percent of their working income. The pension funds have already accumulated an investment fund equivalent of 55 percent of GNP, and some experts forecast that that percentage will rise to 100 percent of GNP when

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the system reaches full maturity. This long-term investment capital not only has helped fund economic growth but has spurred the development of efficient financial markets and institutions. The decision to create the PRA system first, and then privatize the large state-owned companies second, resulted in a "virtuous sequence." It gave workers the possibility of benefiting handsomely from the enormous increase in productivity of the privatized companies by allowing workers, through higher stock prices that increased the yield of their PRAs, to capture a large share of the wealth created by the privatization process. One of the key results of the new system has been, then, to increase the productivity of capital and thus the rate of economic growth in the Chilean economy. The vast resources administered by the AFPs have encouraged the creation of new kinds of financial instruments while enhancing others already in existence but not fully developed. Another of Chile's pension reform contributions to the sound operation and transparency of the capital market has been the creation of a domestic risk-rating industry and the improvement of corporate governance. (The AFPs appoint independent directors of the companies in which they own shares, thus shattering complacency at board meetings.) The new social security system has made a significant contribution to the reduction of poverty by increasing the size and certainty of old-age, survivors', and disability benefits; by the indirect but very powerful effect of promoting economic growth and employment; and by eliminating the unfairness of the old system. According to conventional wisdom, pay-as-you-go schemes redistribute income from the rich to the poor. However, when certain income-specific characteristics of workers and the modus operandi of the political system are taken into account, those systems generally redistribute income to the most powerful groups of workers, who are obviously not the most vulnerable or poor. Social security issues in Chile have ceased to concentrate the energy and focus of the government, thus depoliticizing a huge sector of the economy and giving individuals more control over their own lives. It is not surprising that the PRA system has survived intact three center-left governments in the last 12 years, since it really has become the "third rail" of Chilean politics. Not only has it been untouched in its structural design, but technical adjustments have improved it, for example, by allowing more competition in the management of voluntary retirement savings and enlarging the choices of funds from one to five. When the PRA system was inaugurated in May 1981, one-fourth of the eligible workforce signed up in the first month of operation alone, and today 95 percent of covered Chilean workers are in the PRA system. When given a choice, Chilean workers have voted with their money overwhelmingly for a free-market-based retirement system. For Chileans, their PRAs now represent real and visible property rights-indeed they are the primary sources of security for retirement, and the typical Chilean worker's main asset is not his used car or even his small house (probably still mortgaged) but the capital in his PRA. The new social security system has given Chileans a personal stake in the economy. A typical Chilean worker is not indifferent to the behavior of the stock market or interest rates. He knows that a bad economic policy can harm his retirement benefits. When workers feel that they themselves own a part of their country's assets, not through party bosses or a Politburo, they are much more attached to the free market and a free society. The overwhelming majority of Chilean workers who chose to move into the new system freely decided to abandon the government system even though some of the national trade


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union leaders and most of the political class advised against it. I have always believed that common workers care deeply about and pay a lot of attention to matters close to their lives, such as social security, education, and health, and make their decisions for the well-being of their families, not according to political allegiances or collectivist ideologies. The ultimate lesson of the Chilean experience is that the only revolutions that are successful are those that trust the individual and the wonders that individuals can do when they are free. EPILOGUE Why first in Chile? What was the political context? How did you manage to do it? Those are invariably the first questions I am asked whenever I explain the Chilean social security reform in my travels around the world. So let me answer them briefly here. It all began in 1956 when the Faculty of Economic Sciences of the Catholic University of Chile signed a three-year agreement of cooperation with the Department of Economics of the University of Chicago. The agreement was renewed twice, for a total of nine years. The extraordinary transfer of ideas that took place created the best economics faculty in Latin America. In the 1960s hundreds of students such as myself were learning rigorous economics and discovering public policy ideas based on individual freedom and private enterprise. Soon there was a critical mass of free-market economists, with a common diagnosis of the country's economic problems and similar views on the needed solutions. Since ideas have consequences, this group began to influence the public debate and began to be referred to as the "Chicago Boys." When I got my economics degree in Chile in 1970, I decided that after four years of intensive and rewarding study in a faculty that, from an intellectual point of view, was a "wholly owned subsidiary" of the University of Chicago, it would be enriching to go to another university for my postgraduate studies. So, breaking tradition, I went to Harvard University for my M.A. and Ph.D. in economics. Years later, when I was already a minister, some newspapers began calling me a "Chicago Boy" but a "Harvard Man." I am really proud of being both. In my four years in Cambridge (Massachusetts), not only did I deepen my knowledge of economics and other social sciences, but I immersed myself in the exhilarating climate of freedom of American society. In search of the ultimate causes of the success of America, I became a passionate admirer of the Founding Fathers and their two great legacies to all the world: the Declaration of Independence and the Constitution of the United States. I also found great inspiration in the works of thinkers on liberty such as John Locke, Adam Smith, Frederic Bastiat, Friedrich Hayek, Karl Popper, Ludwig von Mises, and Milton Friedman (in whose 1962 book, Capitalism and Freedom, I first read about the idea of privatizing social security). During those years, I became convinced that only fundamental economic and political reforms based on individual freedom could deliver my country from poverty and all forms of oppression. In the meantime, the communist takeover of Cuba in 1959 and its government's efforts to create, in the words of Che Guevara, "multiple Vietnams" in Latin America, led ultimately to the breakdown of democracy in Chile. Soon after, the new military government decided to invite some of the "Chicago Boys" to help reconstruct a destroyed economy and the real revolution began in Chile: a radical, comprehensive, and sustained move toward free markets. This "Chilean Revolution" doubled Chile's historic rate of economic growth (to an

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average of 7 percent a year from 1984 to 1998), drastically reduced the proportion of people living in poverty, and unleashed the forces that brought liberal democracy and the rule of law. At the end of 1974, I faced a very difficult choice: remain in Boston enjoying the academic life I loved so much or go back to help found a new country from the ashes of the old one. When I went back, I knew the road ahead was full of dangers and risks. Almost immediately, I became very active in promoting the ideas of economic, social, and political liberty in public debate. Two years later, in 1977, I gave a speech in which I described a possible future for the country should we choose to make a dash for economic freedom. The next day, I was invited by the president, whom I had never met before, to repeat the speech to him and the full cabinet, and in December 1978, I became Chile's secretary of labor and social security with two big goals: creating a new social security system and reforming the rigid and anti-employment labor law of my country. My ideas for social security reform were then part of an overall vision of a free market and a free society in Chile. At the ministry, I assembled an excellent team to help me design not only the new system but also a transition strategy. For decades in Chile, those striving for social security reform had failed, because their plans were partial and flawed. I decided that we should "take the bull by the horns." My motto was that we needed a "radical reform with a conservative execution." I remember often reiterating to my team that there was nothing as satisfying in life as to do something others deem impossible. We were bound together by our faith in the power of ideas and by the conviction that we could make a difference for millions of Chilean workers. During my two years in the ministry, I divided my seven-day workweek equally between excruciating work with my team, perfecting every detail of the reform project, and educating people on the values and logic of those ideas. I had countless meetings with workers across the country, and I began a weekly, three-minute explanation of the reform on one of the prime-time TV news programs. Those TV appearances, promoting the reform in the most simple and truthful terms, were crucial to building the popularity of pension reform among the nation's workers. Let me share two revealing anecdotes regarding the temptations a reformer faces and must avoid. At some moment, it seemed very likely that the pension reform would finally be approved, as the idea was gaining support everywhere. But some special interest groups thought they could hash out some last-minute compromises. One day, I was petitioned to attend, by myself, a closed-door meeting with the top union leaders of the country. After a round of cordial greetings, their spokesman explained that, although they were ideologically opposed to the reform, they knew that it was likely to be passed. "We have come to suggest to you that our support could be helpful in the future. After all, you are a young man of 30, maybe with a promising political career in front of you. . . . So, we are willing to immediately give you our public support, as long as you are reasonable and modify a single detail in your project: instead of giving workers the right to choose the manager of their individual accounts, it should be the exclusive decision of the directors of the unions to which workers belong." He continued: "The workers, Mr. Minister, do not know how to make a decision of that nature. If we can come to an agreement about this, we will be very pleased to be of use to you in the future." I must confess to having been surprised, not only by the brazen nature of the offer, but also by the Olympian contempt they showed for the freedom and dignity of the workers. In formulating a response, I opted for humor. "Unfortunately, I cannot accept the offer that you


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have come to tender, because I am concerned with saving your souls." "How is that, by God?" shouted several of them at the same time. "It's just as you heard it, gentlemen. As we all know, union leadership in our country has always been highly politicized, but it is not corrupt. If the manager selection becomes a union leader decision-as opposed to one made by each worker-you directors would be inundated by so many pressures that it would not be easy to maintain your integrity. The pension managers, who would love to manage the retirement savings of large groups, will find it much cheaper to corrupt union officials than to compete for the accounts in the free market by offering better returns or lower commissions. I will not accept that, because it will lend itself to temptations which none of you would want to face." Nobody raised his voice after that. The meeting was quietly adjourned, though much less cordially than it had begun. The next visit was that of the chairmen of the most powerful banks in Chile. They told me they fully supported the concept of private individual retirement accounts, but that they wanted the system to be managed only by the banks. One of them even made an impassioned argument against allowing "foreign" financial institutions to manage the workers' retirement savings. As I had the trade union leaders', I pondered their arguments but rejected their position completely. Competition was crucial to providing good service. And it was out of the question for me to restrict workers' choices to grant Chilean financial businessmen a monopoly on managing the system. I knew I was creating adversaries, but there is nothing more dangerous than diluting the coherence of a reform in order to please those with vested interests. It is not only moral and intellectual dishonesty, but also very bad policy. Those two meetings reminded me of Thomas Jefferson's words, which had been engraved on my mind and soul since I first read them: "Whenever a man casts a longing eye on public office, a rot begins in his conduct." The key phrase here is "a longing eye," by which Jefferson distinguished between the necessary role of public men and the illegitimate desire to hold office for its own sake. That wise man saw the need for real leadership in order for a republic to survive and prosper. But he also illuminated clearly the difference between leadership and the mere quest for power. On November 4, 1980, the reform was finally approved. The law gave the pension fund companies six months to start up, which would have set May 4 as the date. An idea suddenly hit me: to move the inauguration date up to May 1, the international Labor Day. It is a date that historically has had a special meaning for workers but that regrettably had been turned into an occasion for protest fueled by the rhetoric of class warfare. For Chile in the future, I foresaw that day as one of celebration of a reform that gave freedom and dignity to our nation's workers. With this minor adjustment approved, I rushed to my office to share the good news with the rest of the team. In the midst of all the cheering, a voice broke through the noise: "We did it! We took the bull by the horns! Viva Chile!" I arrived home very late that evening. I was extremely happy but completely exhausted. To relax, I turned on the TV news. They were announcing the breaking news that Ronald Reagan had just been elected president of the United States. As I slept that night, my dreams were filled with hope for Chile and hope for the world.

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COMMENT 2

TOWARDS PRIVATIZATION OF MONTENEGRIN PENSION SYSTEM Author: Ivana Vojinović, ISSP INTRODUCTION At present, developed and transitional Europe, as well as worldwide countries is in the process of reform of the current system of pensions financing (PAYG)1. Reform means establishing a system that lies on three pillars and is projected and drafted by the World Bank. What has created the need for reform, especially in the east-European countries? The need has arisen primarily due to the unfavorable situation of European demographics, especially in the Balkans, which finds the ratio between the number of active payers who are contributing to the fund and the number of pension right bearers to be inadequate2; the only exception in the area is in Albania, which has positive demographic growth. The Bizmak system is no longer sustainable because the population is aging rapidly and the birth rate is very low; thus, the population is not being renewed. The Pension Fund deficit is a simple problem of proportion; the number of employees earning pensions to pay those who have retired is continuously falling and has become less than the number of pensioners deserving to be paid. Additionally compounding the problem is that the state turned out to be a bad investor (especially in the ex-socialist economies), for during the years when the state pension Funds ran huge surpluses, it did not hesitate to spend money without adequate planning. These two arguments are equally applied in the case of Montenegro. In Montenegro, the share of pensions in the GDP is about 8%, which represents one third of all budget expenditures. However, pension contributions are insufficient and can pay only about 80% of the pensions; so, with the hopes of achieving regularity in pension payments, the Ministry of Finance gives significant subsidies from its budget to complement the Pension Fund budget3. With an insufficient amount of contributions to begin with, it is impossible to invest them further. Additionally, bearing in mind the state’s liabilities in the future, related to the settlement of external debt, transfers will represent an even greater burden on the budget. Overall, the system is in a bad situation; since pensions are linked to the average salary, the stock of salaries is increasing, but the percentage of overall employment is decreasing. Thus, the current pension system can no longer function in this way. How can the current situation be resolved? The solution is to increase employment, and secondly, to tighten control of contributions payments. Essentially, the problem relates to the control mechanism because, in the long term, the problem can be resolved only by increasing employment, reducing the scope of the black market, and introducing private pensions insurance.

1 Pay as you go system means that pensions are paid regardless of whether or not sufficient contributions exist. This system was developed from 1945 to 1970 when the population was relatively young, and it was based upon the solidarity principle, all with the view of providing minimal income for the years of old age. It was provided, by Law, a minimal and maximum pension amount based on the individual's best working period. 2 In 2004 in Montenegro, this ratio was 1.6:1. 3 During the 90’s, the lack of authentic revenues on contributions was resolved by postponing pension payments.


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CURRENT SITUATION IN THE MONTENEGRIN PENSION SYSTEM Throughout the years 2001 to 2005 total expenditures of the Pension Fund have been increasing. In 2001, expenditures were at €132.96 million and by 2004 they reached €168.17 million. In 2005, total expenditures are planned at €179.45 million, which is 6.7% higher than in 2004. In accordance with the increase of total Pension Fund expenditures, the amount of paid pensions also increased in the mentioned period. Thus, total pensions paid went from €106.58 million in 2001 to €136.60 million in 2004. In 2004, total pensions were 11% higher than the previous year because of the pensions’ adjustment that was done twice that year, totaling 8.89%4. Contributions for pensioners’ health insurance, also paid from the Pension Fund, are accounted for on the paid net pensions at the rate of 19%. In the mentioned period, annual contributions paid to the Health Fund were lower than planned, which means that the Pension Fund does not regularly meet its liabilities. Here, it is necessary to state the fact that fulfillment of these liabilities depends, in great part, on the dynamic in which the GoM pays its receivables of the Pension Fund from the budget. In accordance with the increase of expenditures, the Pension Funds’ total revenues increased as well. However, in 2004 revenues from contributions were 18.6% lower than in 20035. In 2004, budget transfers were at €37.6 million, which is approximately the level reached in the previous year, and were capped at about 2.4% of GDP. REFORM OF THE MONTENEGRIN PENSION SYSTEM Reform means to change the way in which pensions are paid, and Montenegro has already taken the first step towards improving the financial sustainability of the 1st pillar. Reform of the 1st pillar,6 or of the model based on generational savings, is comprised of a gradual increase of the age limit necessary to receive pensions, to 65 and 60 years for men and women, respectively7; an introduction of the pension formula based on the principles of points; a gradual increase in the number of years used to account for pension levels over one person’s complete period spent within the pension insurance; an adjustment to the pension value for one personal point in accordance to the “SWISS formula”8, a broadening of the base of insurance holders and contributions payments via contributions and personal income tax, consolidated data collection, and reporting9, a tightening of the conditions necessary for getting right to the invalid and family pensions, and a change in the procedure for getting invalid pensions, etc. However, these changes should not represent the end of first pillar reform because further efforts should be made towards greater improvements, especially when the second pillar is introduced; for improvement of the first pillar’s financial sustainability can, in great respect, help transition towards the second pillar.

4 These adjustments on a gross salary of approximately €14 million amount to more than €1 million, which is, certainly, a significant burden on the Pension Fund budget. 5 In 2004, the contribution rate was reduced by 10%, which caused lower payment of revenues on this basis. At the moment, the total rate is 21.6%. 6 It comprises reform of the current situation, that is of pillar I, and preparations of the normative infrastructure for implementation of, the third pillar first, and later the second pillar, as well as a reorganization of the organizational structure of the Pension Fund. 7 Rare EU member or candidate countries have increased the age limit to 65 years. In addition, in the developed countries the share of services is greater than the share of physical work, and that is why it is easier to work during old age. 8 The percentage used for the adjustment represents half the sum of the percentage of the increase (or decrease) of cost of living and of the percentage of increase (or decrease) of the average gross salary. 9 The intention is to move towards centralized collection of revenues from contributions.

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The following part of the commentary is more focused on the issue of reform, aimed at defining long-term effects of reform, despite short-term costs that must be paid in order to achieve that. In addition, it is necessary to emphasize that private pension schemes cannot eliminate, but may significantly reduce, the vulnerability of the pension system to demographic changes and political pressures. In that way, pensions will become more of an economic issue rather than a political one.

DEEPENING OF REFORM In Montenegro, the next step is to implement the third, and then the second pillar. Namely, pillar III is less damaging to public finance, which is the main problem brought by the introduction of pillar II; it is a fact that if one part of the population is oriented towards the second pillar, the inflow of funds in the state fund is lower, and so, the Pension Fund deficit is increased10. In order to be successful, further reform requires fulfillment of certain prerequisites. The most important are the following: o consolidation of the financial structure is necessary for the new pension system because

the existence of a bad financial system makes applying a good system very difficult; o stimulating the establishment of pension funds via financial incentives concerning tax

incentives for single pension activity cannot be developed without tax incentives; o provision of a stable legal framework and the creation of institutions to stimulate and

encourage financial inflows in the private funds; reform without created institutions will hardly be successful;

o introduction of an integral IT system, which will be comprised of insurance holders; o strengthen the education of the population and create a way of thinking that recognizes

the importance of personal initiative with respect to choice and planning for ones financial future, thus, stimulating individuals and employers to save for pensions;

o open a dialogue with the private sector; because of the decrease of necessary funds for pensions payments within the first pillar, additional revenue is required, and so, therefore, everybody is oriented towards the private sector and expecting that it should provide additional revenues.

VOLUNTARY PENSION SAVINGS (PILLAR III) As already mentioned, the next reform step in Montenegro is the introduction of the third pillar11, which is not a substitution, but a supplement to the first pillar. The introduction of the third pillar offers a way to complement the current pension system with voluntary deposits in the pension funds, which will in the future provide additional payment to what is already being provided by the state. The third pillar establishes a voluntary pension fund that requires contributions payers to create their own future and decide for themselves to place funds in their personal account, and at every moment, they have the ability to monitor

10 Europe, Slovenia and the Chezk Republic have chosen this type of pension fund, while the most successful world example is Chile. In 1981, Chile’s pension financing was substituted with a private pension system with total financing and private management. After 20 years, significant results were gained: over $35 billion was accumulated in the private pension system, which is about 40% of GDP, the growth rate increased from 3.5% to 6.5%, and the capital and labor market function better, etc. 11 Voluntary insurance is not created by the Law force, but by insurance contract conclusion between insurance holder and voluntray pension fund.


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and verify the amount of their accumulated money. Private pension accounts represent property rights and are one of the basic mechanisms providing material and social safety in old age. One of the main activities of private pension funds is the investment of members’ funds. Funds deposited in voluntary pension funds are further invested in different types of assets with the intention of gaining revenue and reducing investment risk. Every employee, employer, third person on behalf of deposit payer, as well as any other person, regardless of whether he is employed or not, may be a deposit payer. The introduction of the third pillar has two dimensions. The first dimension is social, which is partial and to a certain degree gives employees’ the alternative to offer provision of pensions, and the second, equally important, is financial. The expected effects of reform are the following:

strengthening the link between paid contributions and pensions

strong incentive for development of the capital market through the increased investments volume and rate of return on the invested funds

At the moment this is very important for Montenegro, being a small country with a small volume of funds and little available money inflow for investments. To that effect, an overall system of macroeconomic policy should be created and the overall economy should be adjusted to the developing economy on the demand market side. However, on the other hand, creation of the demand aggregate means an increase of demand towards all securities. As already emphasized, funds deposited in pensions funds are invested in different types of financial assets and it is certain that their rate of return is higher than the “indirect” rate of return that current pensioners are getting within the PAYG pension system.

increase the national savings level

Private pension funds will influence savings mobilization, leading to the increase of the rate of return on capital accumulation, which is again, of crucial importance for countries such as Montenegro. However, to further direct the accumulated funds, adequate channels and developed market mechanisms should exist.

long term financial sources

lower pressure on the state budget

Likely, the biggest “positive externality” of pension reform will be felt in the area of the state budget deficit.

stimulating development of the insurance sector

In a word, introduction of the supplementary voluntary pension insurance benefits: employees, people from the gray area, unemployed persons, employers, financial and capital market, economy and state. However, introduction of the third pillar will be difficult because of the fact that our GDP per capita is low and it is not easy to convince citizens of this type of investment. Thus, it is expected that only a small portion of the population will be able to participate in voluntary pension insurance. Primarily, those with above average salaries who have a developed way

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of thinking regarding the importance of voluntary pensions insurance will be those who participate. COMPULSORY PRIVATE PENSIONS SAVINGS (PILLAR II) It has already been emphasized that in Montenegro the introduction of the second pillar is postponed because of the huge expenditures that will occur in the Montenegrin pension, and thus, in the overall financial system12. This situation requires a means of distributing the transition burden (the most frequently used means for covering expenses are public debt issue or/and privatization revenues)13 and strong external financial support. Additionally, a possible solution to the problem of the Pension Fund deficit and a means of more fair distribution of the unfavorable economic situation might be a cut to personal income tax, while increasing contributions. Namely, personal income tax could be reduced and contributions could be increased in the same amount, which would make no difference to the employer but would completely cover the Pension Fund and relieve the budget of additional expenditures for pension payments. Pillar II means compulsory savings. The difference in relation to the third pillar is the fact that deposits are paid by the employer (employment is a condition for membership in the pension fund) at the rate determined by Law. In this system, each insurance holder has his own savings account, in the private pension fund, to which contributions are paid. Those funds are invested and the gained profit is added to the individual’s private account assets, which is private property of the insurance holder used by realization of the pension right. Citizens can choose on their own which of the funds14 on the market to have their contributions invested in. Thus, the selection process creates competition between funds to offer higher rates of return and better service. The basic principles of investing in the compulsory pension funds are the following: o economic aspect– to satisfy the insurance holders by providing higher revenues for their

golden years. o capital market development –The entry of pension funds creates significant movement on

the demand side. Pension funds are a partnership between the public and private sectors15 and thus, the most risky shares are not purchased, but the most valuable securities are.

o investment safety- A pension fund is not the classic investment fund, for it is a conservative investment fund with a completely conservative investment policy16.

Surveillance of private pension funds is of crucial importance for their development, for in this system, it is the individuals who bear the investment risk. Thus, the existence of a 12 The important issue with respect to the introduction of the second pillar, is that the contribution rate at which funds will be deposited in the private fund is going to be legally regulated. 13 In Chile, about 40% of transition expenses were financed by the state bonds issue at the market interest rate. The need to finance the transition was a strong incentive for decreasing state expenditures. 14 It is necessary to differentiate between pension companies and pension funds. A pension company manages a fund; a company is a legal person while the fund does not have legal subjectivity. A fund is property of the insurance holders. A pension insurance company is a bridge that is subsequently manifested when pensions are paid – they will pay pensions. 15 Money is given to pension funds, which, with certain compensation, are managed by the pension companies, which are, on the other hand, in the property of the banks, insurance companies or similar. In Croatia, a few towns already issue bonds, and by this, finance its infrastructure projects. The experience of this country shows that pension funds grow rapidly. 16 In Croatia, at the beginning about 90% of property was held in bonds-state securities, which were the safest. Then, prices of stocks and bonds fell and rose, respectively, high turnover was experienced, and a very good system was created.


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surveillance institution is necessary whose constant function would be to supervise, regulate and satisfy the interests of the pension funds' members, as well as to strengthen and develop capitalized pension insurance funding. Control might be done daily and special attention is placed on “off site” control that assists in recognizing problems in advance. Surveillance of pension funds and pension fund companies should be equal for all. To that effect, it is necessary to make insurance holders register, which is, informative-technical body aimed at matching data. When the employer pays in money it goes on the account and from there to the personal account of each individual. In Croatia, the infrastructure of the old SDK was used for that purpose. Namely, the SDK transformation was the central office for payment operations; they were the financial agency responsible for the overall financial base, overall infrastructure, and additional projects. Pension companies are necessary in order to maintain that in the future.

CONCLUSION Pension system reform cannot be performed in isolation. To put it differently, pension insurance should be a part of the social policy strategy, which is, a part of the overall strategy of our country’s economic development. Thus, without organizing the financial area and financial system, the second and third pillars cannot be introduced. Only if we are oriented towards long-term development will we stay steady in our decision to introduce the second and third pillars. Thus, the introduction of the pension funds and the healthy and financially sustainable three-pillar pension system in Montenegro is only one segment of stimulating private initiative, freedom of choice, and personal interest in the national economy. Further development of the financial market, where pension funds, as well as investment funds and insurance companies will have a role as investment depositors will follow. With the introduction of the compulsory and voluntary pension funds, risk is diversified, keeping in mind different revenue sources during the period of retirement. The system that is going to be developed should feature future generations as a stable pension system, which contributes to the stability of the overall economy policy. In order to achieve that, we need to have clarity with respect to our project, people and objectives. If we have that, work will be done quickly. References: 1. Jose Pineira: Toward a world of worker-capitalists, www.pensionreform.org 2. Nandita Markandan: India: Basis for pension reform, www.pensionreform.org 3. Mirjana Grbović: Dopunsko penzijsko osiguranje u Srbiji i iskustva zemalja u regionu, zbornik

radova sa Miločerskog ekonomskog foruma 2005 4. Radoje Žugić: Sistem penzijskog i invalidskog osiguranja-razvoj kroz reformu, zbornik radova sa

Miločerskog ekonomskog foruma 2005 5. Tijana Stanković: Kapitalizacija penzijskih sistema, magistarski rad, 2004 6. Tijana Leković: Penzijske reforme u Crnoj Gori, Working Paper, ISSP, Podgorica, 2002 7. Zoran Anušić, Philip O’Keefe, Sanja Madzarevic-Sujster (2003), Pension Reform in Croatia,

Social Protection Discussion Paper Series, World Bank 8. Round Table: Reforma penzijskog sistema u Srbiji, Ekonomist Magasine 9. www.dunav-tbi.co.yu 10. www.hagena.hr

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COMMENT 3

THE CHALLENGE OF GLOBAL AGING Author: Svetlana Miljevic, ISSP 1. INTRODUCTION Aging and its impact on labor markets and pension systems is a very important issue. The older population is growing rapidly. Although the population in Western European countries is the oldest, that of Central and Eastern Europe and that of CIS countries is aging faster. In Central and Eastern European countries, where full pension coverage had been achieved and served to cushion economic shocks in the early 1990s, many countries adopted radical reforms, including measures to scale down social insurance in favor of privately managed individual savings accounts. In the CIS, although hyperinflation reduced the real values of pensions until the mid-1990s, pension schemes were one of the most reliable means of preventing poverty in the early transition years. In southeastern Europe, millions have been left destitute as national pension schemes have come under financial stress as a result of various factors, including political turmoil, armed conflict, the loss of subsidized employment, heavy foreign debt, high inflation, the growth of the informal economy, and non-payment of contributions. Montenegro’s pension system is experiencing severe fiscal pressure. In recent years, expenditures have increased rapidly despite little growth of contributions. This trend will continue due to the aging of the population, and may be further worsened should evasion of mandatory contributions continue to increase. A comprehensive reform of the pension system is required to prevent further fiscal deterioration, and to ensure that the system will remain viable in the future. 2. FUNDING PROBLEM IN GOVERNMENT-RUN PENSION SYSTEMS Most European public pension programs are financed on a pay-as-you-go (or pay-go) basis. That is, today's workers pay taxes to support today's retirees, meaning that benefits paid to current recipients are financed by taxes levied on today’s workers and their employers. In essence, a government-run pension system is an inter-generational transfer program and not a retirement savings program in the traditional sense. The problem facing both Europeans and Americans is that this kind of pension system was created on the assumption that there would be a relatively large and growing class of younger workers who, through payroll taxes, would support a relatively small class of retirees or beneficiaries. However, the funding problem of public pension systems has arisen because the number of persons drawing benefits is rising more rapidly than the number of working persons paying taxes to fund those benefits. Demographers project that these trends will continue over the next several decades; thus, without reforms, the funding problems of Pension Systems will only worsen.


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3. DEMOGRAPHIC TRENDS What explains the decline in the number of persons currently paying taxes relative to those drawing benefits? The answer has two parts. First, over the past century, the world has experienced an increase in average life span. Second, most of the countries have also experienced a decline in the fertility rate, especially since 1960 or so. Consequently, the number of persons who have reached the age at which they are eligible for benefits has been rising faster than the number of persons in the labor force paying taxes. Demographers expect these trends in life span and birth rate to continue. 3.1. Increase in average life span The increase in life span reflects the wonders of modern medicine and our rising standard of living. Until the Industrial Revolution, the chances of encountering an elderly person were about one in 40. Today, in the developed world, they are one in seven; by 2030, they will be at least one in four, and they may be as high as one in three. The world’s fastest growing age group is comprised of those persons aged 80 and over. In 2000, 69 million persons, or 1.1 percent of the world’s population were aged 80 or older. By 2050, the number aged 80 or older is expected to more than quintuple, to 377 million and be 4.2 percent of the world’s population. In that year, 21 countries or areas are projected to have at least 10 percent of their population aged 80 or over. Japan is expected to have 15.5 percent of its population over aged 80, the highest of any country, and nearly 1 percent of its population aged 100 or more. Worldwide, life expectancy has risen more over the past 50 years than over the previous 5,000. In Europe, over the past 50 years, life expectancy has increased from 63 to 73 years and is expected to rise to 80 years by 2050. The United States is projected to have 7.2 percent of its population consist of those 80 and older. In 1940, U.S. life expectancy at age 65 was an additional 13 years; today it is an additional 18 years. Table 1 shows that in Montenegro, life expectancy at birth will increase by 5.3 years in 2060, compared to 2003. In 2003, Montenegro life expectancy at age 60 was 16.4 for men and 20.1 for women. In 2060, it is expected to rise by nearly 4 years. Table 1: Life expectancy at birth and at age 60, for both genders in Montenegro 2003 2010 2020 2030 2040 2050 2060

Male 70.1 71.0 72.0 73.0 74.0 75.0 75.4 Life expectancy at birth Female 76.1 77.0 78.0 79.0 80.0 81.0 81.4

Male 16.4 17.0 17.6 18.3 19.0 19.7 20.0 Life expectancy at age 60 Female 20.1 20.7 21.4 22.2 23.0 23.8 24.1

Source: ISSP calculations 3.2. Declining Fertility Rates Another demographic trend that aggravates the situation is the very large drop in fertility rates. Thirty years ago, the average global fertility rate was about 5.0 births per woman. Today, it is barely half this rate.

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The reasons for this decline may not be fully understood, but they include a combination of affluence, urbanization, an increase of women in the work force, and the legalization of abortion and birth control. In order to keep a population stable, a replacement rate of 2.1 births per woman is necessary. Today, the average fertility rate for the world's developed countries is about 1.6, and the rates for many of the European countries are well below that number. For example, Germany has only 1.3 births per woman and the United Kingdom has 1.6. The fertility rate in Italy is just 1.2, and in the northern part of the country, it is less than 1.0. Japan has a very low fertility rate as well, with only 1.32 births per woman. In the 1950s, women in the United States had, on average, 3.5 children in their lifetime. By 2000, the fertility rate had fallen to about 2.1, the minimum necessary for a population to be self sustaining. The United Nations projects the U.S. fertility rate will continue to fall to about 1.85 by the middle of the century.

In Montenegro, total fertility rate17 (Chart 1) is 1.78 children, while the general birth rate18 in 2004 was 13.5. Compared to 16.5 in 1991, the birth rate has fallen by 18.18%, which is not enough for simple population recovery.

Chart 1: Birth rates in Montenegro (1921-2002.)

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1921 1931 1948 1953 1961 1971 1981 1991 2002

Source: Statistical office of the Republic of Montenegro, ISSPcalculations 3.3. Implications for Demographic Structure Today, in Europe, the median age (i.e., the age that divides the older and younger halves of the population) is 38 years. By 2050, unless fertility rises, it will be 51. And that's the average; in Germany, it will be 53; in Italy, 57.

17 Total fertility rate is equal to live birth per woman in reproductive ages 18 The general birth rate is equal to live births per 1000 people in the observed year


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Chart 2: Population Pyramids: Age and Sex Distribution, 2000 and 2050

2 0 5 0

P e r c e n t a g e o f p o p u l a t i o n 8 6 4 2 0 2 4 6 8

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P e r c e n t a g e o f p o p u l a t i o n8 6 4 2 0 2 4 6 8

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F e m a l e s M a l e s

A g e

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2 0 5 0


1 0 0 + 9 0 8 0 7 0 6 0 5 0 4 0 3 0 2 0 1 0

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0

Source: The Sex and Age Distribution of the World Populations: the 1998 Revision, Volume II. The Population Division, Department of Economic and Social Affairs, United Nations Secretariat In contrast with the United States, the groups in Europe below age 40 are not of equal size, and are getting smaller for each younger group. Consequently, Europe will face a huge problem in 2050 (and even sooner) when the numerically largest age group will be that between 60 and 65 (those who are retired or about to retire) and the younger age groups (those who are of working age and their children) are smaller in each decreasing age group. The Montenegrin population is aging more rapidly (Chart 3 and 4) than in past decades, due to a rise in longevity coupled with lower fertility rates.

Chart 3 and 4: Montenegro population by age groups in 1998 and 2021.

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Source: ISSP calculations

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Therefore, it is obvious that the population structure in Montenegro is moving toward older age groups.

Chart 5: Total population 1998/2021

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Source: ISSP calculations 4. FALLING RATIO OF WORKERS TO RETIREES. These aging trends will soon put an unprecedented burden on the working-age people. In Japan, the number of workers who are under 30 years old will fall by a stunning 25 percent by 2010. By the 2020s, the total working-age population will be shrinking in every developed country, with the possible exception of the U.S. This has profound implications for the economy. Because pension systems almost everywhere are designed on a pay-as-you-go basis, it is very important to look at the ratios of workers (who pay taxes) to retirees (who receive the benefits). The average ratio in the developed world as a whole today is about 3 to 1. While the ratio of workers to retirees in the United States is now slightly more than 3 to 1, it is expected to decline to little more than 2 to 1 by 2030. In Europe, the situation is considerably graver. In Italy, for example, the ratio will fall to 3 workers for every 2 pensioners by 2030, or even less, nearly a 1 to1 ratio. The Montenegro dependency ratio, which represents the number of workers to the number of retirees, is 1.3. In the last 12 years it has declined from 2.05 to 1.3.


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Chart 6: “Scissors” pensioners and employees (1991-2002.)

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Source: Statistical office of the Republic of Montenegro and Fund PIO Persons born in the first years of the post-World War II baby boom are today nearing retirement age, and as this demographic group passes from their working years into retirement, the funding gap in pension insurance system will open wide. Though many countries have increased the legal retirement age for men, and especially for women, the average exit age from the labor force in the formerly 15 EU countries (“EU-15”) is still low, ranging from 58.5 years in Belgium to 63.2 years in Sweden. In the new EU Member States the exit age is even lower, ranging between 56.9 years in Poland and 62.4 years in Latvia. If the retirement age remains low, the number of dependent retired persons relative to the number of working persons will rise to levels never seen before.19 The funding gap between taxes paid and benefits received due to the aging population may be further worsened should the evasion of mandatory contributions and the unemployment rate continue to increase. In the 1990s, employment declined by over 20% in most countries in central and southeastern Europe, while the number of pensioners rose by about 20% on average, and by 40% to 60% in some countries, such as Poland and Romania.20 In Montenegro, the unemployment rate21 in 2004 was 27.7. Chart 7 shows Montenegro’s population aged 15 years and over according to economic activity. 19 The European Council in Barcelona (2003) set a target for a progressive increase of about five years in the average exit age from the labor market by 2010. Finland introduced a flexible retirement age of between 62 and 68 years as from 2005 and Spain has allowed the combination of pensions and work after 65. In 2004, some parametric measures have been introduced into the Montenegrin pension system regarding the legal retirement age for men and women, i.e. a progressive increase of five years in the legal retirement age (men 65, women 60) by 2014. 20 The European Councils in Lisbon (2000) and Stockholm (2001) set targets for 2010 for raising employment rates in the EU to close to 70 per cent for the working age population. These targets imply an increase in employment of about 20 million in the EU-15. 21 Unemployment rate represents a share percentage of unemployed persons in total active population.

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Chart 7: Population aged 15 years and over according to economic activity22

October 2004, Republic of Montenegro

Source: Statistical office of the Republic of Montenegro 5. KEY LESSONS FOR MONTENEGRO’S PENSION SYSTEM

Delaying reform narrows policy choices - The longer the delay in reforming the pension system, the more difficult and painful the necessary trade-offs become for workers and retirees.

Moving from an unfunded system to a fully funded pension program can ease the

transition to a new economy with a much older demographic composition.

Policymakers can examine a diversity of options for moving from a pay-as-you-go system of financing to a funded pension program - Examples range from the types of systems implemented in Britain and the Netherlands to those of Sweden and Central and Eastern European countries.

Broad and profound economic consequences result from the success or failure of a

government's pension policy - What policymakers do, or do not do, will have a direct impact on the tax burden, opportunities for savings and investment, and prospects for job creation and economic growth.

Montenegro needs a sustainable pension system that provides: o adequate minimum pensions o transparent and direct link between lifetime contributions and benefits o diversified sources of financing between current contributions and accumulated savings The aging population is a challenge for society and social protection, but no threat. What remains to be seen is whether we can accommodate the new realities global aging brings in its wake. Global aging will not adjust to our visions. We will have to adjust to it. 22 Active population (labor force) means all employed and unemployed persons Inactive population stands for all persons aged 15 and over not classified under active population.

37.37%

14.31%

48.32%

Employed Unemployed Inactive


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APPENDIX 1: Multipillar Pension Systems in the world

Multipillar Pension System in the year 1985

Multipillar Pension System in the year 2000

Projected Multipillar Pension Systems in the Year 2010

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COMMENT 4

MONTENEGRO'S HUMAN DEVELOPMENT PROFILE23 Author: Maja Baćović, Faculty of Economics and ISSP INTRODUCTION Recent experience in certain countries' development affirmed once again the need to pay special attention to the existing link between economic and human development. A large number of countries with a rapid pace of development are facing the fact that high rates of domestic product growth fail to reduce and/or eliminate the socio-economic problems that a significant portion of the population is beset with. High income does not ensure protection from problems such as drug and alcohol abuse, AIDS, homelessness, violence, terrorism or family break-up. On the other hand, low-income countries have shown that it is possible to achieve high levels of human development if available tools are utilized efficiently and appropriately to build and further enrich human capacities. In that sense, human development is the process of extending the possibilities for individuals while directing the course of their own lives (who they want to be and what they want to do). That choice should offer the possibility of living long and healthy lives, reaching desirable levels of education, with adequate living standards. Human development has two basic characteristics: 1) enriching human capacities (through improved health, knowledge and skills), 2) utilizing the capacities – for entertainment, production, and activities in the cultural, social and political area. Human development signifies more than just health, education, decent living standard and political freedoms. Everyday experience confirms the fact that the increase of production and wealth are merely tools, while the ultimate developmental goal should be people’s general welfare. In a time of universal globalization, cultural diversities and freedoms give additional dimensions to human well-being. This paper focuses on human development indicators in Montenegro. Among the most useful statistical exercises undertaken on a yearly basis are the calculations of the Human Development Index (HDI), Gender Development Index (GDI) and Gender Empowerment Measure (GEM). These various indices are used to compare the performance of individual countries over time and the performance against other countries – and have helped to draw attention to some of the most pressing social and economic issues facing all countries and what this implies for economic and social policy.

HUMAN DEVELOPMENT INDEX (HDI) The key indicator of human development analysed in this paper is the Human Development Index which has been calculated for the whole of Montenegro and for the individual municipalities. This is the first time that the HDI (including a series for earlier years) and the other indices have been published for Montenegro24. According to calculations, the HDI 23 This paper is based on Montenegrin Human Development Report: “Diversities – Potential for Development”, published by ISSP and UNDP, October 2005 24 The HDI encompasses three essential components of human existence and is based on the following:

a) Average life expectancy;


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for 2004 in Montenegro was 0.799, which is slightly higher than in 1991 (at the beginning of the transition process and political crisis in the region). (See Table and Graph below.) Over time, average life expectancy has slightly decreased (from 75.2 to 73.1 years) but adult literacy rates have increased to 97.5 percent. However the value of GDP per capita (PPP) has increased somewhat since 1991, from $5,347 to $6,641 in 2004 - or by approximately 24.2%25. Over the intervening years, a fall in GDP per capita was recorded, but after 1999 there was a recovery until 2004. ISSP estimation shows that human development in Montenegro started growing from 1999 onwards26. The HDI in the period from 1999-2004 had positive growth rates and increased from 0.760 (1999) to 0.799 (2004). Compared to other countries in the region, Montenegro has a medium level of human development (between 0.5-0.8). These are the levels calculated in 2002 for the following countries: Bulgaria (0.796), Russia (0.795), Macedonia (0.793), Albania (0.781), Bosnia and Herzegovina (0.781), Romania (0.778), etc. Other transition countries have achieved high levels of human development (in 2002): Slovenia (0.895), the Czech Republic (0.868), Estonia (0.853), Poland (0.850), Hungary (0.848), Lithuania (0.842), Slovakia (0.842), Croatia (0.830), and Latvia (0.823). Graph 1 shows HDI values in 2002 for Montenegro and a range of other countries that Montenegro is most commonly compared to, in terms of progress and transition achieved.

Graph 1. Comparable HDI Data from 2002

0.7710.781

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Montenegro BiH Croatia Bulgaria Slovenia Estonia

b) Literacy rates; and c) GDP per capita based on purchasing power parity in US dollars (PPP $).

25 The largest increase occurred in 2003 and 2004, and was largely due to US dollar depreciation (the US dollar depreciated by 19.6% compared to the Euro in 2003, and 9.9% in 2004) 26 The growth was dominantly influenced by an increase in the literacy rate from 94.9 in 1991 to 97.5 ten years later, as well as by an increase in GDP per capita (PPP), which occurred in 2003 and 2004 due to US dollar depreciation and an average positive real GDP growth rate of 2.5% per year. Purchasing power in Montenegro grew in these years due to the Montenegrin economy’s high reliance on imports. Because of fluctuations on the international currency exchange market, a considerable portion of imported goods and services became less expensive in real terms as compared to the euro, as the only official currency, thus making a positive influence on the population’s purchasing power. Accordingly, the positive HDI growth trends recorded in the past few years were partly a product of external factors, i.e. they were not conditioned merely by positive economic trends in Montenegro; hence, it will be possible to make corrections in future HDI calculations. For further notes on PPP calculation in the Balkan region, see the reports of the Vienna Institute for International Economics (www.viiw.at).

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The following Table contains indicators used for HDI computation in Montenegro.

Table 1: HUMAN DEVELOPMENT INDEX (HDI)

1991 1999 2000 2001 2002 2003 2004

Life expectancy at birth (years) 75.2 73.4 73.4 73.4 73.0 73.1 73.1

Adult literacy rate (%) 94.9 97.5 97.5 97.5 97.5 97.5 97.5

Combined primary, secondary and tertiary gross enrolment ratio (%)

70.2 74.8 74.0 72.4 74.2 72.5 73.9

GDP per capita (PPP US$) 5,347 3,107 3,430 4,035 4,438 5,834 6,641

Life expectancy index 0.837 0.807 0.807 0.807 0.800 0.802 0.802

Adult literacy index 0.949 0.975 0.975 0.975 0.975 0.975 0.975

Gross enrolment index 0.702 0.748 0.740 0.724 0.742 0.725 0.739

Education index 0.867 0.899 0.897 0.891 0.897 0.892 0.896

GDP index 0.664 0.574 0.590 0.617 0.633 0.679 0.700

Human development index (HDI) value 0.789 0.760 0.764 0.772 0.777 0.791 0.799

Graph 2. Human development index (HDI) value

0.789

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1991 1999 2000 2001 2002 2003 2004

TERRITORIAL DIFFERENCES REFLECTED THROUGH HDI VALUES HDI is a valuable instrument not only for the needs of international comparison, but also for the analysis of the levels of development possibilities in various regions within one country, which are faced with various socio-economic conditions. From this perspective, possible index criticism (due to its composite nature) becomes its major strength. Thanks to its composite nature, this index can serve as an adequate instrument which better reflects the multidimensionality of development which influences people’s lives. This is still only the first step in the analysis. With the aim of its use as a development policy definition tool, the HDI provides different options.


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For that purpose, index disaggregation is necessary. Namely, the index value at the national level gives the idea of where a country is, from the point of view of human development in relation to other countries in the world. Disaggregated HDI, i.e. its value at the level of certain parts of a country, or again at the level of certain social groups, can show where (and why) various administrative units or groups within a country stand in relation to one another, what the good and bad sides and accordingly which priorities should be at the level of central and local government. From this perspective, the purpose of disaggregation of the HDI is not simply the ranking of municipalities or groups, but rather the establishment of the ways in which each one of them achieved the HDI value (good economic performance at the expense of health or good educational possibilities). It is about helping local authorities focus on what they should be focused on. The table below27 shows that the highest level of human development is achieved in the central region, and the lowest in the northern region. Still, it is important to mention that the northern region gradually realizes positive trends in the fluctuation of the level of human development. See the graphs below. Table 2: HDI values in Montenegro (per regions)

Region 2000 2001 2002 2003 2004

North 0.707 0.710 0.737 0.753 0.765

Centre 0.781 0.787 0.786 0.800 0.813

South 0.761 0.770 0.777 0.789 0.802

Three municipalities (Šavnik, Andrijevica, Plav) have an index in the interval from 0.600 to 0.700, whilst the index of human development for the majority of other municipalities (Berane, Bijelo Polje, Danilovgrad, Žabljak, Kolašin, Kotor, Mojkovac, Nikšić, Pljevlja, Rožaje, Tivat, Ulcinj, Herceg Novi, Cetinje) is in the interval from 0.700 to 0.800. Four municipalities (Bar, Budva, Plužine and Podgorica) have a high level of human development (HDI>0.800). Differences in the HDI values by region and municipality to a certain extent reflect wider economic, social and demographic situation in these areas. Still, one should be careful with certain comparisons. What they suggest is that the differences have got to be taken into consideration on the occasion of planning on the Republic level and that the state development plans have got to deal with the causes of regional inequalities.

27 HDI per regions and municipalities was calculated using the statistical data per municipalities (education, average life expectancy and GDP estimate).

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Figure 1: HDI values (per municipality)

Legend: Parts of Montenegro

GENDER DIFFERENCES REFLECTED IN GENDER-SENSITIVE HUMAN DEVELOPMENT INDEXES The development index by gender (GDI) uses the same variables as HDI. The difference is in the fact that GDI adjusts the average achievements of each country in basic indicators – average life expectancy, level of education and income – in accordance with the disparity in achievements between men and women. The greater disparity between genders in basic assumptions of human development, the lower GDI in a country in comparison with HDI. GDI adjusts maximum and minimum values related to average life expectancy, because of the fact that women live longer than men. For women, maximum average life expectancy is 87.5 years, while minimum value of this indicator is 27.5; for men, these values are 82.5 and 22.5 years (HDI uses the range between 25 and 85 years). Income index construction is rather complex. Gender index development (GDI) at the level of 0.787 in 2004 marked a slight increase from 1991 and a significant increase from 1999 – probably pointing to ever increasing income differences between genders. According to this indicator, Montenegro is ranked among the countries with an average level of human development. The table below shows partial indices and the gender development index for the mid-term period 1991-2003. Table 3. Partial gender indices and Gender development indices (GDI): 1991-2004.

1991 1999 2000 2001 2002 2003 2004

Gender development index (GDI) 0.775 0.748 0.753 0.760 0.765 0.779 0.787

Weighted life expectancy index 0.810 0.781 0.781 0.781 0.774 0.776 0.776

Weighted education index 0.860 0.900 0.897 0.892 0.898 0.892 0.893

Weighted income index 0.655 0.564 0.581 0.608 0.624 0.670 0.691

The gender empowerment index (GEM) is another human development indicator which measures inequalities in three areas: o Political participation and decision making power, measured with proportional

participation of women and men in the parliament;


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o Economic participation and decision making power, measured with two indicators – proportional participation of women and men in the number of legislators, senior officials and managers, and proportional participation of women and men in professional and technical positions;

o Power over economic resources, measured through the estimated earned income of both men and women (PPP US$).

The table below shows partial and total GEM values in Montenegro. Table 4. Partial indices and Gender empowerment index (GEM)

1991 1999 2000 2001 2002 2003 2004

Gender empowerment index (GEM) 0.351 0.332 0.361 0.366 0.431 0.442 0.452 Weighted EDEP for the participation in parliament

0.193 0.191 0.191 0.191 0.377 0.377 0.377

Weighted EDEP for economic participation

0.736 0.736 0.816 0.816 0.816 0.816 0.824

Weighted EDEP for income 0.122 0.070 0.077 0.092 0.101 0.134 0.152

The GEM index value at the level of 0.452 in 2004, indicates that according to this indicator, Montenegro falls among the countries with medium level of human development. The index value is low compared to developed countries but it is quite close to the value in most transition countries characterized by medium human development level (Russia – 0.467; Macedonia – 0.517; Romania – 0.465). CONCLUSION In order to achieve higher level of human development, we believe that economic prosperity is extremely important. The vision of strategic development in Montenegro, created in 1998 is based on three basic development pillars, which are the following: a) Open market economy b) Predominance of private ownership c) Protection of ownership rights and security of contracts

We strongly believe that full enforcement of listed principles will encourage economic development and growth and therefore human development. Reference: 1. Diversities – potential for development: Montenegrin Human Development Report, ISSP and

UNDP, Podgorica, 2005 2. Human Development Report 2004: Cultural liberty in today’s Diverse World, UNDP, 2004 3. Bacovic Maja: Demografske promjene i ekonomski razvoj Crne Gore – analiza investicija u

humani kapital, Ekonomski fakultet, Podgorica, 2005 (doktorska disertacija) 4. Vukotic Veselin: Makroekonomski racuni i modeli, CID, Podgorica, 2001

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COMMENT 5

MARITIME SECTOR OF MONTENEGRO Author:Jelena Musikic, ISSP INTRODUCTION The sea is the biggest route for huge shipments of goods and the development of international trade. Almost three fourths of all world trade is conducted by sea (food products, industrial raw material, most finished goods, etc.). The existence and development of world trade cannot be imagined without the maritime sector. Therefore, countries that have access to the sea and nations that are knowledgeable to use it have a head start as compared to countries without sea access. The goal of development for any maritime state should be to conceive and fully develop its maritime resources and to become a maritime state. Why? Development of the maritime sector is of great importance for a country, observed from an economical, political and strategic aspect. From an economical point of view, the maritime sector leads to the enhancement of foreign trade; it enhances the import and, above else, the export of goods, which brings a growth of foreign currency influx and a better capital account for the country. The role of the maritime sector in the whole economy should be the foundation of the country’s economical development and a guideline for defining strategic goals aimed at joining Montenegro with the European, and world, trade and economy trends. World maritime (buildings and harbors, safety and environmental protection, education, etc.) are no longer traditional. The way that the trade and economical sector is being managed has been completely changed. With the goal of attaining optimal logistic and economical effects, this sector has received the characteristics of a highly industrialized and technically advanced market segment with the use of advanced technologies and information. Evolution of the world maritime sector has been marked by processes of world globalization and liberalization, and it provides great chances to those that can effectively adjust at the right time to the new conditions and rules of behavior on a unique and total world maritime scene. DEVELOPMENT OF THE MARITIME SECTOR IN MONTENEGRO The actual position of the Montenegrin maritime as a vital segment of the country’s total economy is quite unsatisfactory. The last two decades were marked not only by stagnation, but by a decline of all economic activities related to the sea. That declining trend is a loss not only for the country’s economy, but it is also a warning of the lagging world trend in the maritime sector and trade.


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From the mid 80’s to the beginning of the 90’s, the maritime economy was an important segment of the total Montenegrin economy. By the mid- 80’s, the import and export that occurred through Yugoslav ports was approximately 31 million tons of goods. At that time, Serbia and Montenegro’s share in total Yugoslav import and export was 36%, which means that these two republics had roughly 30% of all export and import done via sea among the Yugoslav states, or approximately 10 million tons of goods. Shipping Prior to the break of SFR Yugoslavia, Montenegro had a significant number of vessels. There were two maritime companies – Jugooceania Kotor and BArska Plovidba Bar; Jugooceanija had 28 and Barska Plovidba had 21 cross oceanic ships. After the break of Yugoslavia, the trade navy of Serbia and Montenegro was only 27% of the total capacity of the ex – SFRJ. With that, the size of the fleet related to Montenegro is significantly lagging. In addition to that, the structure of the capacities characterized by dysfunction, the minimal share of modern ships in the fleet, and the older average age of ships are all negative characteristics. After the sanctions were imposed on SRJ, all the ships of the Montenegrin fleet were stopped in the ports they were currently in and then began to deteriorate. Namely, due to the high costs of insurance, port costs, and a lack of maintenance, the ships began to physically deteriorate, they were not bringing any profit, and the debts began to grow (the abovementioned costs, as well as the interest on loans and penalties since most of those ships had been purchased on credit). As a result of all of that, Montenegro came out from sanctions with high debts, which were met only by the sale of ships. In addition to the ships, the Montenegrin maritime sector lost its human resource because most of the seamen went to work on foreign ships. The only ship that was still in the possession of Montenegro after the sanctions was the Sveti Stefan, which was not sold due to its age and its inability to function decomposed. One ship – Moraca – was sold, and with that money, the ship Sveti Stefan 1 was purchased; this ship is owned by Barska Plovidba but it sails under a foreign flag. Prior to the sanctions, the Montenegrin naval fleet had 41 ships of 1,068,188 DWT. “Jugooceanija” had 22 ships, while “Prekookeanska plovidba” had 19 ships. After the sanctions were imposed, which also stated that ships could not have port in a world harbor nor could they leave one, the Montenegrin maritime sector faced bare survival. Sanctions left long term consequences for the development of shipping. At the time sanctions were imposed, the contracts were canceled with penalty charges, the costs of ships in ports were augmented, the outflow of seamen to foreign companies occurred, and the ships physically deteriorated. The damage that the Montenegrin maritime sector suffered is well illustrated by the fact that in 1992 the material costs of naval shipping exceeded its gross product. The next table presents the shipping situation in Montenegro before and after the sanctions.

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Table 1. The maritime sector -- before and after sanctions

1989 1993 1994 2003 2004

CAPACITY AND SIZE OF SERVICES

Number of ships 41 3 34 3 2

Carriage capacity in DWT 1,080,793 940,574 na 8,928 5,330

Transported cargo (in tons) 5,328,613 1,159,179 na 70,000 63,000

Capacity usage (%) 89 12 na

Gross foreign currency influx 115,064,000$ na na 12,707,000 € 8,191

Net foreign currency influx 42,374,000$ na na 10,233,000€ 6,327

Average age of the fleet 12.5 na na na na

EMPLOYEMNT

Number of employees 2,309 1,373 1,179 88 89

On forced vacation na 663 624 na na

Left the company na 736 394 na na

Source: MONSTAT Up until the year 2003 the situation in the maritime sector in Montenegro worsened, leaving Jugooceanija without a single ship and Barska plovidba with a fleet of three ships. Additionally, two private companies were formed: “Nimon,” which has three ships and “Normont,” which has two ships. Capacities were significantly diminished on two passenger ferry ships owned by Prekookeaska plovidba Bar. Jugooceanija is in the process of liquidation. As mentioned before, the total parameters of the Montenegrin fleet are given in the following table. Table 2 Total parameters of the Montenegrin navy

Barska

plovidba NIMONT NORMONTE

Pomorski saobraćaj

Other Total

Ships 3 3 2 4 0 12 DWT 3,731 11,118 24,000 700 0 39,459 Value 10 3.4 12 2 0 27.4 Number of employees

240 40 40 51 2 373

Source: MONSTAT Shipbuilding When it comes to shipbuilding, a significant portion of the capacity was in the former states of the SFRJ. Development of shipbuilding in the ex-SFRY is an economic sector that has contributed to the augmentation of its economic efficiency. Profitability indicates the rate of income (income per average engaged business assets) and the rate of accumulation (net accumulation per average engaged business assets). The income rate in 1985 was 24.29%, level with PZ “Jadran Brod,” while the coefficient of the entire economy was 26.84%. On the other hand, the rate of accumulation in 1985 was level with “Jadranbrod,” at 6.28%, while the level of the entire economy was 2.64%. In the same year, the productivity


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indicator of PZ “Jadranbrod,” which is stated by the ratio of income per worker, was 2.769%, while it was 1.350% for the economy of SFRY overall.28 The condition of the Montenegrin shipbuilding capacities, represented through the two ship repair companies “JSC Brodogradiliste Bijela” and “MRTZ Savo Kovacevic” is in a positive position due to the price structure and the experience in those companies. The ships are repaired in or close to the lines in which they transport the goods. In that way, a ship carrying goods through the Mediterranean will find a ship repair company in the vicinity of its transport route, also in the Mediterranean. The Mediterranean has many ship repair companies, in many countries, but is, in fact, a single market. Ship owners can choose where to have their ships repaired independent of the company’s home country, but based instead on the terms offered by the ship repair company. In Montenegro, these two companies, which represent the ship repair sector, had income of 23.6 million EUR and had a 1.5% share in the Montenegrin GDP. In the sector of shipbuilding, according to data from the statistical office, there are 804 employees; however, according to data provided by the companies JSC Bijela and MRTZ SAvo Kovacevic, there are 1,350 employees. The ship repair sector in Montenegro is a perspective industry sector. It is characterized by having large capacities but a lack of market share. The undefined ownership structure is a key problem. The solution to this problem lies in the upcoming privatization of these two companies. Also, in this period these two companies are struggling for market share. Their competitive advantages over ship repair companies in the region lie in the size of their capacities and infrastructure, but the lack of investment is a serious hurdle they must overcome in order to conduct business. Ports There are six ports in Montenegro. Among them, Port of Bar is the largest, followed by Port of Kotor, port of Budva, and the ports of Zelenika, Tivat and Herceg Novi. The port of Bar is the largest and the only real port, not only in Montenegro, but in the whole of SCG. However, apart from the fact that it is the biggest in SCG, the Port of Bar is, by European standards, a small port. In addition to the port of Bar, there are several small ports like Zelenika, Herceg Novi, Kotor and Tivar. However, over 90% of all port transport is done through the port of Bar. After 1990, the amount of activity in the Montenegrin ports has decreased significantly, which is shown in the following data.

28 Source: Ibid

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Table 3 Turnover in the Montenegrin ports in 2004

Transport in Montenegrin ports in 2004 29 Transport of passengers Transport in 000 tons

Ports Number of ships in ports T

otal

Dep

arte

d

Arr

ived

Tot

al

Loa

ded

carg

o

Of

whi

ch

expo

rts

Unl

oade

d ca

rgo

OF

whi

ch

expo

rt a

nd

tran

sit

Bar 868 70,224 37,975 32,249 1,616,695 1,022,316 939,956 594,379 594,379

Herceg Novi

0 0 0 0 0 0 0 0 0

Kotor 91 15,578 7,981 7,597 0 0 11,488 71,307 71,307

Tivat 0 0 0 0 0 0 0 0 0

Zelenika 104 9,403 3,952 2,990 5,451 116,575 2,216 10,446 114,359

Total 1,063 95,205 49,908 42,836 1,622,146 1,138,891 953,660 476,132 780,045

Source: MONSTAT The Port of Bar has a dominant share. As the largest port in Montenegro, the Port of Bar dominates the other Montenegrin ports in the total number of serviced ships as well as total transport per year. Its dominance is due not only to its size, but also to its very good geographical position and its superior workforce and capacities. In total transport the Port of Bar had a share of 73.8%, while the ports of Kotor and Zelenika had a share of 16.4% and 9.8%, respectively Turnover in ports in 2004 Port of Bar. In 2004, the port of Bar transported a total of 1,949,013 tons of cargo and provided services to 612 ships. Of total transported cargo, the greatest share was of non-container cargo, with transport of 982,248 tons and 139 ships serviced. General and liquid cargo accounted for 510,940 tons (371 ships) and 456,723 tons (102 ships), respectively, of total transport. Port of Zelenika: According to the unofficial data, total transport of this port in 2004 was 174,360 tons. In this same period, this port rendered service to 134 ships. Port of Kotor: A total of 100 ships sailed into this port in 2004 with total transport of 51,798 tons. Montenegrin ports do not receive any help or subsidies from the state. Generally, the maritime sector does not receive any form of assistance, neither direct nor indirect.

29 Izvor navedenih podataka je “MONSTAT” Zavod za statistiku Crne Gore


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Graph 1 Transport of passenger by seaports in 2004

73.8%

16.4%

9.8%

Port of Bar Port of Kotor Port of Zelenika

Source: MONSTAT CONCLUSION AND RECOMMENDATIONS Analysis of the maritime sector identifies that this sector of the Montenegrin economy has huge potential for development, which is currently not being used. The current condition in the maritime sector can hardly be characterized as good. The Montenegrin maritime sector is faced with a string of problems. First among them are the problems of financing, old legislature, old technology, low use of capacity, insufficient foreign and domestic investments, extra employees on one side, and insufficient expert staff on the other side. Evaluation of the world maritime sector, which has been marked with the processes of globalization, liberalization and regulation, offers great possibilities to those that adapt quickly to the new rules of behavior on the world maritime scene. If Montenegro wants to be an equal player in that scene, it must develop its competitive maritime activities with precisely defined basic criteria for development, goals, and measures that would define the means necessary to catch up and adapt to the new European and world trends. Therefore, activities in the scope of revitalization and further development of the maritime sector should be directed towards liberalization of conducting business, privatization, the creation of a legal framework, concordance with international standards, improvements to data access, and statistic reform Related to the fact that maritime activities are, for the most part, for export activities, it is very significant to work towards the liberalization of conducting business in the sense of: o Decreasing custom and non-custom protection; o Abolishing quantitative limitations in all import\export activities to eliminate

discretionary powers; and arbitrarily o Abolishing all elements of extra custom protection (like levies) that raise the price of the

import and make it more difficult.

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Privatization is a key factor and a powerful catalyst for further economic growth. The basic goal of Montenegro as a microstate is the privatization of state property into private property. The maritime sector is mostly under state ownership. In 2005, the Port of Bar is planned for privatization and the shipbuilding company “Bijela” is as well. Related to the fact that the state hasn’t the funds to finance development projects, further steps should be taken to join private capital and the maritime economy. Therefore, activities in this sector should be pointed towards a quick privatization of the entire sector. Finally, the key for the development and revitalization of the maritime economy in Montenegro is foreign direct investments. Without foreign direct investments (FDI) and the creation of a suitable ambient for investments there will be no development of the maritime economy in Montenegro. With the goal of foreign investment in the maritime economy, export tax cuts should be implemented.


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COMMENT 6

SOFTWARE LEGALIZATION – IMPORTANCE OF IMPLEMENTATION Author:Milica Dakovic, Center for Applied Research and Analysis (CARA) INTRODUCTION The development of ICT in recent years was generated from the revolution of technology that has had a positive influence on consumers in different countries. By influencing consumers, ICT influenced the development of economies that invested in technology. For example, from 1995 to 2002, the number of ICT companies increased by 37%. In 2003, the ICT sector engaged more than 9 million employees and collected more than $700 billion, according to paid taxes. However, ICT development is not just characteristic of high-tech developed countries. In the last seven years, 32 developing countries increased their growth rates up to 60% because of the ICT sector and new companies in that area, thus producing 108% growth in new workplaces in correlation with industrialized countries. Growing innovations in ICT create the demand for regulations to protect intellectual property rights. The struggle against software piracy is important in developing countries, as well. For example, software piracy creates great losses in the software industry; in the United States, more than $11 billion per year is lost in this way. Adoption and implementation of regulations in the area of intellectual protection is one of the first steps in the struggle against software piracy. Also, it is important to make both companies and households legally use and register software. Montenegro is beginning this project. Before that can happen, it is important to create the ambient for software legalization through a strong campaign about the legalization process and the consequences related to piracy. This is especially related to companies in Montenegro. Not long ago, Microsoft and the Government of Montenegro ratified an arrangement about software legalization in Montenegrin companies, thus bringing us one step further in the development of the information society in Montenegro. According to that, it’s important to adopt and implement the Law on intellectual property protection. That law will be adopted and implemented as of January 1st 2006. This law will have financial penalties related to the use of or production of illegal software. In that way, the process of developing the information society in Montenegro will continue to forward. SOFTWARE PIRACY Original software, PC, CD, DVD origin is very important. Are we breaking the law just sitting in front of our PC? Intellectual property and its importance, the struggle with piracy, and the mechanisms of protection have become actual and very important topics in IT meetings. The concept of intellectual property rights is very old; it is derived from ancient Greeks (V century BC). The same concept still exists in the Law on intellectual property protection. This emphasizes the importance of protecting property rights.

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The main reasons for the emergence of software piracy are: o Lack of regulations and existing imperfections in the current laws; o Lack of perception that piracy is a negative aspect; o High level of legalized software. Software piracy still exists in industrialized countries. This benefits neither the software creators nor the countries’ development. Piracy includes not only the illegal copying of a disc, but also owning and working on an illegal disc that was created by others. There are several types of software piracy today: End User piracy– represents a situation where users copy software and they don't have a license for that copy. The same situation can also occur if one owns an unlicensed PC. Pre-installed software- represents a situation where a PC user has one copy of software and installs it on more than one PC. Internet piracy- represents a situation where copies are downloaded through the Internet. Downloads are only permitted in situations where the original producer authorizes this kind of distribution. Counterfeiting- represents a situation in which illegal software copies are made and distributed in packages that are imitations of the original package. As a solution to this problem, count registration cards are included with the software, and each card has its own unique series of numbers. HOW TO PROTECT THE SOFTWARE? In the beginning, there were some ways to protect the software, such as patent rights and intellectual property rights. During the 70’s, the IT industry began its transformation. With the increasing technology, the demand for computers increased as well. Very soon, computers became available not just in large systems, but in SMEs and households. Development of the software industry led to an increase in piracy as well. Software protection was in focus. During the 80’s and 90’s, software piracy was actualized, and during that time, companies began to struggle with the protection of their intellectual property rights. HOW MUCH DO WE KNOW ABOUT SOFTWARE LEGALIZATION? During 2004, 300 cases of software piracy were registered in Serbia and Montenegro, and in the first six months of 2005, another 300 new cases. Two-thirds of enterprises in Serbia (65%) still have illegal programs. The struggle against piracy makes the possibilities for creating new work places in the software industry more difficult. However, there is also a lack of knowledge about software legalization in companies in Montenegro (according to the ‘Survey about PC and Internet usage in Montenegro’, 2005). From the total number of companies in Montenegro (sample size 200), nearly half (48.5%) were not informed about software legalization (this low awareness was particularly prevalent in the northern region, 62.1%, while fewer than one-quarter (23%) were preparing, and 16.4% had already licensed software. In preparation for further software legalization, one of


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five companies (20%) are in process of making contacts and collecting information while 80% are planning to buy the license.

Graph 1. Are you preparing for the future software legalization?

0 10 20 30 40 50 60

Don't have information

Not preparing

Software licensed

Preparing for software legalization

Source: ‘Survey about PC and Internet usage in Montenegro’ CARA EXAMPLE: SOFTWARE LEGALIZATION IN SERBIA Microsoft started with the idea of software legalization in Serbia in 2001. In that period, 150 companies from Serbia were authorized for OSL agreements with other companies. The legalization campaign started with OSL, which is an agreement of paying for software in three annual rates. It is estimated that piracy in Serbia still exists but at a lower level than in 2001. The Microsoft project resulted in decreasing the level of illegal software by 11.4% in the business environment and 3.4% in households. Software legalization targeted the ‘Enterprise’ market segment and mostly great systems. About 30% to 40% of agreements were implemented in great systems, which is 70% of the total result. Software legalization in the future will target the market segment of ‘Small organizations’ – enterprises with less than 50 computers. The process of software legalization in Serbia was successful and the percent of legalized software today is 69%. Future legalization will be more oriented towards the industry sector and legalized software implementation in that area. The highest level of software piracy exists in Bulgaria (78%) and Romania (77%). INSTEAD OF CONCLUSION The software industry has been an initiator of economic and innovative development over the last twenty years. Development in this area is revolutionary. IT developments have changed our way of thinking and living. Software piracy negatively influences a country’s economic prosperity and decreases the number of working places. The losses are different: tax revenues can be decreased, the companies lose by having to invest in different anti-piracy technology programs rather than

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creating new products and services, and individuals lose as well – they lose the possibilities of new employment. The struggle against software piracy is just the first step. Some actions will help to decrease the level of piracy: o Adoption and implementation of new regulations in the area of intellectual property

protection; o Development of anti piracy technologies; o Sanctions for individuals and companies that produce and sell illegal software; o Organization of a body that will observe the process of software legalization; o Affordable price of legalized software. The information society began its development in Montenegro. The law on protection of intellectual property rights will be implemented and will create conditions for intellectual property protection in Montenegro. These processes will have a positive influence on the development of the information society in Montenegro. Literature: 1. Judy Strauss, Adel El-Ansary. 'E-Market', Prentice Hall 2005 2. Siwek, Stephen E. 'Copyright industries in the US Economy – the 2004 Report', Economic

Incorporated, International Intellectual Property Alliance, 2004 Web sites: www.microsoft.com www.clickz.com www.crime-research.org www.factbook.net www.osa.co.yu www.emagazin.co.yu www.ekonomist.co.yu


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COMMENT 7

EUROPEAN FREE TRADE AGREEMENT (EFTA) AND OPPORTUNITIES FOR MONTENEGRO Author:Anja Vrandečić and Nina Labović, ISSP If we start from the fact that the main objective for Montenegro is membership in the EU, then we can see the agreement with EFTA as one of the steps towards that goal. The first step would definitely be membership in CEFTA, then EFTA, then WTO, and finally the EU. The most important thing during the climb towards the EU is to be cautious with how much Montenegro givens at the first three steps so that can save as much as possible for negotiations with the EU. Since Montenegro skipped the first two steps and went directly to the WTO, we tried to point out a few things that could be beneficial for Montenegro that only EFTA can provide. 1. ABOUT THE CONVENTION The European Free Trade Association (EFTA) was established by a Convention signed in Stockholm on January 4, 1960. Today, the EFTA members are Iceland, Liechtenstein, Switzerland and Norway. The main objective of the Association is to provide a framework for the liberalization of trade in goods amongst its Member States. To strengthen the already preferential relationship between the EFTA States and the European Union, the European Economic Area (EEA) was concluded in the early 1990s. The EEA establishes a single market for all forms of trade, including trade in services and the free movement of persons between and among the EU and the EFTA States, excluding Switzerland. Since the early 1990s, the EFTA States have also been expanding trade relations with partners in Central and Eastern Europe and the Mediterranean region. Three of the more recent agreements, with Mexico, Singapore and Chile, cover not only trade in goods but also a number of new areas such as investment, trade in services, and other current trade areas. Another important development was the conclusion by Switzerland, in 1999, of a set of bilateral agreements with the European Union covering a wide range of areas, including movement of persons, transport, and technical barriers to trade. 1.1 The updated convention The updated Convention from 2002 includes several significant changes and innovations, which allows all EFTA members to now benefit from virtually the same privileged relationship among them as they do with the EU. The main areas in which the Convention has been modernized include: Mutual recognition of conformity assessments - this comprises the entire body of technical regulations that determine the requirements that products must fulfill concerning safety, consumer protection, health and the environment, as well as the procedures for testing conformity with such requirements. Intellectual property rights - this covers copyrights, including computer programs and databases, as well as of neighboring rights, trademarks for goods and services, geographical

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indications, industrial designs, patents, plant varieties, topographies of integrated circuits, and undisclosed information. Movement of persons, social security and mutual recognition of diplomas - this introduces the free movement of persons by opening the labor markets of the EFTA States, and it applies to workers, the self-employed, and persons who otherwise have sufficient financial means, including, under certain conditions, their family members. Investment and services - the movement of capital is free of any restrictions. The framework for investments and trade in services contains specific rules regarding the financial markets, most notably the right of an EFTA State to restrict the supply of financial services in their territories for reasons of prudence or public security. Land and air transport - special rules apply to transport services. In the field of land transport, the EFTA Convention now provides for a gradual reciprocal opening of the markets for the transportation of both persons and goods by road and by rail between all EFTA States. The rules on civil aviation outline the terms on which an EFTA State air transport company will have access to the air transport markets of another EFTA State. Public procurement - in the area of public procurement, the revised EFTA Convention builds on the EFTA States’ commitments under the World Trade Organization’s Agreement on Government Procurement (GPA), to which all EFTA States are Parties. Moreover, the Convention goes beyond the WTO rules by extending the sectoral coverage. This extended coverage includes: purchases of products and services, including construction services, by railway operators, entities active in the field of energy other than electricity, and private utilities active in the fields of drinking water, electricity, urban transport, ports, and airports in the EFTA States. Agriculture - no substantive changes were made to the provisions and treatment for processed agricultural products. The existing tariff concessions for basic agricultural products were integrated. Furthermore, individual EFTA States made additional concessions for certain basic agricultural products such as cheese, certain vegetables (lettuce and cucumbers), live horses, and meat of sheep or goats. In addition, trade in seeds and organically produced agricultural products were considerably facilitated by the reduction or elimination of a number of technical barriers, along the same rules as under the EEA Agreement. 2. EEA – EFTA LEGISLATION AND PROCEDURES The EEA Agreement is based on the primary legislation (Treaty of Rome) of the European Union, and on the succeeding secondary legislation (EEA-relevant regulations, directives, decisions, and certain non-binding instruments adopted by the EU institutions on an ongoing basis - also referred to as acquis communautaire). Hence, a large part of the EEA Agreement is identical to the relevant parts governing the four freedoms as laid down in the Treaty of Rome of 1957. The dynamic aspects of the Agreement One of the central features of the EEA Agreement is that its common rules are continuously updated by adding new EC legislation. This aspect is essential given the large output of Community legislation on the Internal Market. Each month, a number of EEA-relevant


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pieces of legislation are incorporated into the EEA Agreement by decision of the EEA Joint Committee. Decision-making Whenever an EEA-relevant legal act is amended or a new one adopted by the EU a corresponding amendment should be made to the relevant Annex of the EEA Agreement. This is essential in maintaining the principle of homogeneity of the EEA. Amendment of the EEA Agreement should ensure that the ensuing text is as close as possible to the adopted legislation on the EU side, with a view to permitting a simultaneous application in the Community and in the EFTA States. The EEA EFTA States can request for consultation on matters of concern. The EEA EFTA States can negotiate adaptations to Community legislation when this is called for by special circumstances and agreed on by both sides. Policy-shaping The EEA EFTA States have the opportunity to influence the shaping of EEA-relevant legislation, i.e., proposals at the preparatory or pre-pipeline stage by the EU. This opportunity is enshrined in the EEA Agreement as a right for representatives of the EEA EFTA States to participate in the expert groups of the European Commission, and to submit EEA EFTA comments on upcoming legislation. While the EEA EFTA States use these opportunities to shape legislation actively, they have little influence on the final decision on the legislation on the EU side. They can neither sit nor vote in the European Parliament or the European Council of Ministers (co-legislators on the EU side for most EEA-relevant legislation), and hence have to incorporate into the EEA Agreement what has ultimately been decided, if not necessarily shaped, by others. 2.1. Institutional Aspects The institutional arrangements under the EEA Agreement are laid down in a two-pillar structure with EEA EFTA institutions matching those on the EU side. Substantive decisions relating to the EEA Agreement and its operation are a joint venture and are taken by joint bodies. The original plan for the EEA lacked the EFTA Court or the EFTA Surveillance Authority, and instead had the European Court of Justice and the European Commission to exercise those roles. However, during the negotiations for the EEA agreement, the European Court of Justice informed the Council of the European Union by way of letter that they considered giving the EU institutions powers with respect to non-EU member states would be a violation of the treaties, and therefore the current arrangement was developed instead. Joint bodies The EEA Joint Committee is responsible for the ongoing management of the EEA Agreement. It is a forum in which views are exchanged and decisions are taken by consensus to incorporate Community legislation in the EEA Agreement. The EEA Council, composed of the foreign ministers of the EU and EEA EFTA States, provides political impetus for the development of the Agreement and guidelines for the Joint Committee. The EEA Joint Parliamentary Committee (EEAJPC) comprises members of the national parliaments of the EEA EFTA States and Members of the European Parliament (MEPs). The Committee contributes, through dialogue and debate, to a better understanding between the Community and the EFTA States of the fields covered by the Agreement. The EEA Consultative Committee comprises members of the EFTA Consultative Committee and the Economic and Social Committee of the EU. The Committee works to strengthen contacts between the social partners on both sides and to cooperate in an organized and regular

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manner to enhance awareness and provide input on the economic and social aspects of the EEA. EEA EFTA bodies (EEA EFTA pillar) The Standing Committee of the EFTA States serves as a forum in which the EEA EFTA States consult one another and arrive at a common position before meeting with the EU in the EEA Joint Committee. It is made up of representatives of Norway, Iceland and Liechtenstein and observers from Switzerland and the EFTA Surveillance Authority. Two other important bodies exist under the EEA EFTA pillar. The EFTA Surveillance Authority ensures that the EEA EFTA States fulfill their obligations under the EEA Agreement. In addition to general surveillance of compliance, the Surveillance Authority has powers in relation to competition, state aid and public procurement, reflecting the extended competencies of the European Commission in these fields within the Community. The EFTA Court corresponds to the Court of Justice of the European Communities in matters relating to the EEA EFTA States. The Court deals with infringement actions brought by the EFTA Surveillance Authority against an EFTA State with regard to the implementation, application, or interpretation of an EEA rule. 2.3. European Neighborhood Policy The EU is in the process of developing a coherent policy framework for its new neighborhood. The policy is targeted at Ukraine, Belarus, Moldova, Russia, Armenia, Azerbaijan, Georgia, and the ten southern Mediterranean countries with which the EU is now sharing an external border, and hopefully Serbia and Montenegro. EEA EFTA States share the objectives of the policy to prevent new dividing lines and promote democratic and economic development in the new neighborhood. 3. EXTERNAL RELATIONS At present, the EFTA network consists of fourteen free trade agreements and seven Declarations on cooperation. Several more agreements are currently under negotiation, including those with countries in the Middle East and Africa. It is the goal of the EFTA third country policy to safeguard the economic interests of the EFTA States, to support and reinforce the process of European and interregional integration, and to contribute to world-wide efforts in liberalizing trade. 3.1 EFTA’s Third Country Relations Joint declarations on cooperation (JDCs) Joint declarations on cooperation (JDCs) are a first step towards free trade relations between the partners concerned and aim to: o Promote the harmonious development of economic relations o Create an environment supportive of private entrepreneurship, free competition and

economic activity based on market forces o Examine ways and means to expand and liberalize trade relations They are based on mutual benefit, non-discrimination and reciprocity and they cover co-operation on trade-related issues such as: o Technical barriers to trade o Information on foreign trade


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o Competition o Public procurement markets o Intellectual property rights They also aim to improve conditions for the implementation of private sector cooperation projects. Free trade agreements (FTAs) Since the JDCs are the “preparation” for the Free trade agreement, Free trade agreements (FTAs) establish a free trade area between the partners. They provide for free trade in industrial products, including fish and other marine products, and provide for trade disciplines and rules preventing restrictions on payments relating to the movement of goods. Special arrangements apply for processed agricultural products, while trade in basic agricultural products is covered in bilateral agreements. What is in the free trade agreements? Scope All EFTA free trade agreements with third countries cover trade in industrial products, processed agricultural products, and fish. They include trade disciplines as well as rules on competition, protection of intellectual property, and payments and transfers. Trade in basic agricultural products is covered by bilateral arrangements between the individual EFTA countries and their respective partner countries. Symmetry and asymmetry EFTA free trade agreements with several partner countries have been conceived to take into account their different level of economic development by providing for an asymmetrical approach: while the EFTA States abolish barriers to trade at the entry into force of the agreement, or during a relatively short transition period, the partner countries can phase them out during a longer transition period, giving them the necessary time to adapt their economy to free trade conditions. Such a period may last up to ten years. Rules of origin In an FTA, rules of origin determine the country of origin of products, thus indicating which goods qualify for preferential market access treatment. Products need to be either “wholly obtained” (such as agricultural products) or “sufficiently worked or processed” in order to be considered as originating products. The globalization of production processes has made the identification of the country of origin increasingly complex, as there are very few products without any input of foreign origin. Therefore, one of the main functions of rules of origin is to determine to what extent domestic products may contain imported materials from a country outside the free trade area concerned without losing their preferential status. Within the European continent, different systems of origin rules have been conceived. They cover intra- EFTA trade, trade between the EFTA countries and the EU, as well as trade between these two entities and their free trade partners outside EFTA and the EU. Processed agricultural products Most EFTA free trade agreements contain protocols on processed agricultural products. The duties on these products reflect the difference between the domestic market price and the world market price of the basic agricultural component of the product. Duties on the industrial (processing) component are eliminated. Each country has its own list of products for which it grants such concessions to its partner countries. Since the EFTA States do not

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have a common agricultural policy, basic agricultural products are dealt with in bilateral arrangements concluded between each EFTA State and the partner country in parallel with the main agreement. Fish and other marine products The fishery sector accounts for around half of Iceland’s total exports in goods and is a major contributor to Norway’s economy (exporting to more than 170 countries). A large part of fish and other marine products from the EFTA States benefited from immediate duty-free access to the Mexican market, while other fish products were subject to gradual tariff dismantling. Technical regulations The EFTA FTAs contain three types of provisions on technical regulations: o The FTA concluded with Turkey contains an information procedure on draft technical

regulations. o Other FTAs, such as those with Bulgaria and Morocco, contain no such information

procedure but provide for consultations and cooperation. They also foresee notifications in accordance with the WTO Agreement on Technical Barriers to Trade (TBT).

o The FTAs with Mexico, Singapore, and Chile state that the rights and obligations of the parties are to be governed by the WTO Agreement on TBT. They specify areas for cooperation and call on the parties to facilitate the exchange of information. As is the case with the second category of FTAs, a consultation mechanism has been set up for these FTAs; the aim being to work out solutions in conformity with the WTO Agreement on TBT.

Public procurement Effective liberalization of public procurement markets is an integral objective of the agreements. In the agreements with the Central and Eastern European countries, the EFTA States granted asymmetrical treatment for goods at the central government level during a transition period. In more recent agreements, future liberalization based on the principles of reciprocity, non-discrimination and transparency is envisaged. The joint committee is entrusted with the elaboration of rules for ensuring such liberalization. All agreements - with some minor exceptions - include a clause stipulating that parties should aim to accede to the WTO Government Procurement Agreement (GPA) in the future. Intellectual property rights Intellectual property (IP) rights are the rights given to people over the creations of their minds, including literary and artistic works, as well as inventions and industrial designs. The EFTA States follow these developments of protection improvement closely and aim towards adjusting IP provisions in their FTAs to the highest available standards. The WTO Agreement on Trade Related Aspects of Intellectual Property Rights (TRIPS) defines minimum levels of protection and sets out basic principles on non-discrimination: national treatment and most favored nation (MFN) treatment. EFTA FTAs protection of intellectual property includes measures for the enforcement of such rights against infringement, counterfeiting and piracy, which are based on the principles of most-favored-nation treatment and national treatment, in accordance with the TRIPS Agreement. Rules of competition The EFTA free trade agreements contain rules on competition based on the assumption that the removal of traditional barriers to trade, such as tariffs and quantitative restrictions, do not as such guarantee free trade and market access. The rules on competition have been introduced to ensure that liberalization of trade under the agreements is not hindered by new


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barriers in the form of agreements or practices between enterprises whose objective or effect is to prevent, restrict, or distort competition. The provisions on competition also applies to the activities of public undertakings and undertakings to which the partner countries grant special or exclusive rights, in so far as application of the competition rules does not obstruct the performance of the particular tasks assigned to these entities. State aid Some first-generation EFTA free trade agreements contain comprehensive and specific rules governing the granting of state aid by public authorities of the partner countries, as well as rules on notification and reporting. The objective of these provisions is to ensure that subsidies granted by such authorities to private entities do not distort, or threaten to distort, competition among undertakings in the applicable territories of the agreement. Services and investment Most EFTA FTAs with European countries and countries in the Mediterranean region contain an evolutionary clause on services and investment in which the parties undertake to cooperate, with the aim of achieving gradual liberalization and a mutual opening of markets for investments and trade in services. The EFTA States have been actively involved in the liberalization of services and investment in the framework of the European Economic Area (EEA), the Organization for Economic Cooperation and Development (OECD) and the World Trade Organization (WTO). All EFTA States and most of their free trade partners are members of the WTO and thus parties to the General Agreement on Trade in Services (GATS) and the Agreement on Trade Related Investment Measures (TRIMS). All recent agreements include provisions on investment, which cover, as the case may be, promotion, protection, transfers and/or establishment. Joint Committee Joint Committees composed of representatives of the EFTA States and the respective partner country supervise the implementation of each FTA. The committees may set up subcommittees as necessary to assist them in their work, for example in the field of customs and origin. Arbitration Diplomacy remains the fundamental principle for the settlement of disputes under international law. The same applies to disputes between the EFTA States and their FTA partners. The EFTA agreements foresee that the parties endeavor to solve any differences between them regarding the interpretation and application of their agreements by direct consultation and by consultations in the Joint Committees. There has, however, been an increasing international trend over the last decade to establish dispute settlement mechanisms under free trade agreements for cases where diplomatic means fail. The WTO dispute settlement mechanism is good proof of this development. Accordingly, dispute settlement mechanisms, by way of arbitration, have been introduced by the EFTA States in their FTAs negotiated after 1997. 3.2. EFTA’s first free trade partners EFTA States signed an FTA with Turkey in 1992. An FTA with Israel to offset the effects caused by Israel’s free trade agreements with both the EC and the United States entered into force in 1993. Hungary, Poland and the former Czechoslovak Republic (CSFR) were EFTA’s first free trade partners among the transition economies in Central and Eastern

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Europe, and Rumania and Bulgaria entered the same year. The FTA with Slovenia entered into force in 1998. In response to Slovenia’s request for closer cooperation with EFTA, the EFTA Council approved the principle of enhanced cooperation in November 1995, allowing Slovenian experts to participate in relevant EFTA committees. Following the signature of Declarations on Cooperation with the Baltic States in December 1991, the EFTA States played a major role in collaboration with the European Union by providing technical assistance and training in the fields of customs and origin and statistics. Following this example, it could be the known path that could lead SCG. Most of the EFTA States had concluded bilateral FTAs with the newly independent Baltic States in 1992. EFTA free trade agreements with Latvia, Lithuania, and Estonia entered into force in 1996 and 1997. On May 1, 2004, the Czech Republic, Estonia, Hungary, Latvia, Lithuania, Poland, Slovakia, and Slovenia joined the European Union. Consequently, these countries terminated their free trade agreements with the EFTA States on that date. 3.3. Towards the confines of Europe and beyond The EFTA States are committed to making a substantial contribution to the common European effort to bring peace and stability to the Balkans. EFTA is providing scholarships and extending technical assistance in areas such as customs and origin matters, and statistics to Albania, Macedonia, Croatia and former Yugoslavia (today Serbia-Montenegro) under the joint declarations on cooperation (JDCs) signed in 1992, 1996, and 2000 respectively. A preliminary declaration of cooperation was signed with EFTA in December 2000, pledging asymmetric treatment of Serbia and Montenegro products in the markets of the four member countries. The spirit of the Barcelona Conference creates the necessary conditions for the EFTA economic operators to participate in a future Euro-Mediterranean Free Trade Area. Against this background, the EFTA States signed JDCs with Egypt, Morocco and Tunisia in 1995, with Jordan and Lebanon in 1997, and with Algeria in 2002. Negotiations with Egypt and Tunisia are in the final stages. 4. EFTA TECHNICAL COOPERATION EFTA technical cooperation is in accordance with the principles for technical cooperation with countries outside the EU, established by the EFTA Council Decision. Such activities are directed in principle towards countries that have concluded declarations on cooperation or free trade agreements with the EFTA States. The Balkan and the Mediterranean countries remain at the core of these activities. Due attention is given to recent and prospective partners in other areas, including countries to the east of the boundaries of the enlarged EU. In 2004, the allocated budget for technical cooperation is 1.6 million Swiss francs. This amount does not include bilateral programmes and projects, but they are not coordinated among EFTA Member States. The activities are divided into two categories: a) Participation by EFTA in EU projects and programmes, and b) Trade policy projects and scholarship programmes, which are financed exclusively by EFTA.


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4.1 EFTA’s participation in EU projects and programmes The cooperation is now in three substance areas: 1. Statistics,

• Cooperation under PHARE/CARDS • Cooperation in the Mediterranean region (MEDSTAT)

2. Customs and origin matters and, 3. Product quality infrastructure projects in EU candidate countries. The EU and EFTA are jointly financing a project to promote quality infrastructure in the new EU Member States and the candidate countries to ensure the quality and safety of products in the Internal Market. The beneficiary countries are Bulgaria, the Czech Republic, Estonia, Hungary, Latvia, Lithuania, Poland, Romania, Slovakia and Slovenia. Continuation of this project is currently being envisaged with Romania and Bulgaria, possibly to be extended to Croatia if it becomes an official candidate for accession. 4.2. Activities related to EFTA’s Free Trade Agreements and declarations on cooperation financed exclusively by EFTA Member States Since the early 1990s, EFTA has actively negotiated declarations on cooperation and free trade agreements with countries from Central and Eastern Europe and the Mediterranean Basin. EFTA technical cooperation projects have traditionally aimed to assist free trade partners in implementing their agreements with EFTA and aid declaration partners to prepare free trade relations. The budget for 2004 is 500,000 Swiss francs (EFTA trade policy projects and EFTA scholarship programme). 4. EFTA STATES’ TRADE FIGURES World merchandise trade has expanded considerably over the last 10 to 15 years. Between 1990 and 2003, the value of world trade has more than doubled. According to the WTO, trade recovered at an increased rate in 2003, propelled by higher than expected economic growth in Asia and the United States. A 2.5% increase in global output in 2003 spurred world trade to recover by 4.5%. The EFTA States’ trade with the world has been characterized by a similar positive trend. In 2003, EFTA’s total merchandise trade amounted to 309 billion US dollars, up 14% from 2002, and represented roughly 2% of world trade. EFTA’s most important trading partner is the European Union (EU), receiving 69% of EFTA’s exports in 2003. More than three-quarters of the EFTA States’ imports originated in the EU (78%). The EFTA States’ second largest trading partner is the United States, accounting for 10% of their exports and 5% of imports in 2003. Preferential trade under the EFTA Free Trade Agreements amounted to 7.6 billion US dollars in 2003, representing 2.5% of EFTA’s total trade. Combined, EFTA’s 13 FTA partners constitute the EFTA States’ fourth largest trading partner. Preferential trade under EFTA FTAs is expected to increase in the future, as EFTA is currently negotiating free trade agreements with a number of other countries (Canada, Egypt, SACU and Tunisia) and plans to launch free trade negotiations with several other countries. In 2003, their combined GDP amounted to 535 billion US dollars while their combined GDP per capita (PPP) was 24,244 US dollars. EFTA’s exports per capita ratio reached 13,969 US dollars in 2003, which is the highest of all the regional groupings in the world.

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5. MONTENEGRIN TRADE WITH EFTA Considering Montenegrin foreign trade structure by countries, it is obvious that its trade with EFTA is rather low. With respect to exports, according to the country of destination, EFTA countries were not dominant partners in 2004, nor in the first half of 2005. Exports to Switzerland accounted for 6.6% of total merchandise export in 2004 and around 1.2% of total merchandise export in the first six months of 2005 (see the table below). In 2003, exports to Switzerland were significantly higher due to the fact that aluminum exports were recorded to be exported only to Switzerland, where its main purchasing company (Glencor) was set up, but aluminium was ultimately delivered to Italy and Greece and Slovenia, which have aluminium plants and use primary aluminium for their production. However, since 2004, aluminium exports have been recorded to be exported to Italy, Greece, and Slovenia, and not to Switzerland. This explains the significant change in the export structure in 2004 compared to 2003, which is more of a statistical issue than anything else. Considering the other three EFTA countries, Montenegrin products are almost not exported to them. One of the most significant parts of FTA with EFTA compared to the EU is that it enables free trade with Switzerland. With respect to imports, Switzerland is the most important trade partner and imports from this country accounted for 1.7% of total merchandise imports in 2003 and 2.5% of total goods imported in 2004. In the first six months of 2005, imports from this country significantly increased to 35.6 million € and accounted for 9.16% of total merchandise imports in this period. Imports from the other three EFTA countries accounted for almost 0% of total merchandise imports (see the table below). Table 1: Exports and imports with EFTA in 2004 and 2005

Export of goods Import of goods

2004 Jan-Jun 2005 2004 Jan-Jun 2005 Country

In € In % of

total In €

In % of total

In € In % of

total In €

In % of total

Switzerland 25,114,000 6.60 2,384,000 1.2 20,585,000 2.53 35,593,000 9.16

Liechtenstein 2,120.3 0.05 0 0.0 661,806.2 0.08 461,883.1 0.12

Iceland 0 0.0 0 0.0 8,270 0.00 5,631.7 0.00

Norway 0 0.0 0 0.0 580,816.9 0.07 28,575.8 0.00

Source: Central Bank of Montenegro 6. FTA’S ADVANTAGES AND DISADVANTAGES 6.1 Advantages The European Economic Area (EEA) unites the 25 EU Member States and the three EEA EFTA States (Iceland, Liechtenstein and Norway) in an Internal Market governed by the same basic rules. These rules aim to enable goods, services, capital, and persons to move freely about the EEA in an open and competitive environment, a concept referred to as the four freedoms. The objective of the EEA Agreement is to “promote a continuous and balanced strengthening of trade and economic relations between the Contracting Parties… with the view of creating a homogenous European Economic Area.” The EEA Agreement provides for equal conditions for businesses across the entire Internal Market, through competition and state aid rules. It also contains horizontal provisions relevant to the four


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freedoms, as well as cooperation outside the four freedoms in so-called flanking areas. The latter covers areas such as research and technological development, information services, education, training and youth, employment, enterprise and entrepreneurship, and civil protection. Cooperation is to be carried out through common activities of various types, such as EEA EFTA participation in EU programmes. According to the above-mentioned data, it is obvious that Montenegrin trade with EFTA countries is rather undeveloped and should be improved, especially on the export side. A preliminary declaration from 2000 has paved the way for a future free trade agreement between EFTA and Serbia and Montenegro. This Declaration is pledging asymmetric treatment of Montenegrin (Serbia and Montenegro) products in the markets of the four EFTA member countries. At the first official meeting of the working group in September 2001, EFTA has ascertained its commitment to following the dynamics of liberalization of Serbia and Montenegro trade with the European Union. With respect to symmetry and asymmetry, the EFTA free trade agreement with Montenegro as a partner country should be conceived to take into account its different level of economic development by providing for an asymmetrical approach: while the EFTA States abolish barriers to trade at the entry into force of the agreement, or during a relatively short transition period, the partner country – Montenegro -- can phase them out during a longer transition period, leaving it the necessary time to adapt its economy to free trade conditions. An important advantage of Montenegro’s membership in EFTA should be the free movement of goods, services, capital, and persons in an open and competitive environment. Cooperation outside the four freedoms is also important after becoming an EFTA member; this is particularly important in the following areas: technological development, information services, education, training and youth, employment, enterprise and entrepreneurship, and civil protection. 5.2 Disadvantages On the other hand the EEA Agreement does not cover the following EU policy areas: Common Agriculture and Fisheries Policies (although the Agreement contains provisions on various aspects of trade in agricultural and fish products); a Customs Union; a Common Trade Policy; a Common Foreign and Security Policy; Justice and Home Affairs (even though Iceland and Norway are part of the Schengen network); and the Monetary Union (EMU). The EEA EFTA States have not transferred any legislative competences to the EEA institutions and all decisions on the EEA EFTA side are therefore taken by unanimity. CONCLUSION Montenegro should request closer cooperation with EFTA in order to use certain advantages of FTA, especially in areas that are not covered by the WTO rules (e.g. extended sectoral coverage in the area of public procurement). A free trade agreement with EFTA is very important for Montenegro since it should cover trade in industrial products, processed agricultural products, etc. It should include trade disciplines as well as rules on competition, protection of intellectual property, and payments and transfers. A free trade agreement with EFTA should enable the free movement of goods, services, capital, and persons between Montenegro and EFTA countries.

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A free trade agreement with EFTA provides nearly all of the advantages that are provided by the WTO membership, as well as the EU membership. However, free trade with EFTA leads to much more extended sectoral coverage (e.g. in the area of public procurement) than that accorded in the WTO rules. In addition, as already mentioned, the WTO Agreement on Trade Related Aspects of Intellectual Property Rights (TRIPS) defines minimum levels of protection and sets out basic principles on non-discrimination: national treatment and most favored nation (MFN) treatment. However, EFTA FTAs offer more in this area and relate to the protection of intellectual property, which includes measures for the enforcement of such rights against infringement, counterfeiting and piracy, which are based on the principles of most-favored-nation treatment and national treatment, in accordance with the TRIPS Agreement.

Literature: 1. Derek Beach: “The Dynamics of European Integration: Why and When EU Institutions Matter

(European Union S.)” 2. www.efta.int, 3. Stevanovic Sonja, Diploma paper “EU Institutions”, Budapest 2004, 4. www.eftacourt.yu, 5. news paper article “blic” 22.03.2005, 6. vlada.cg.yu.

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