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MONET

MONTENEGRO ECONOMIC TRENDS

April 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

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Table of contents Events

3

Executive Summary

8

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

12 22 32 38 50 72 84 92

100

Part 2

Comment 1. Research on the Impact of the Introduction of Custom Duties on Flour Export

Comment 1. Regional Development of the Montenegrin Goods Trade

Comment 3. On the Road to Information Society Comment 4. Ownership and Monitoring

in Slovenian Companies Comment 5. A Room with a View Comment 6. Car Market in Montenegro

106

112 121

129 136 145

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Events January 2004 21. Treasury bills issue. Government of Montenegro issues 28-day-treasury bills in the amount

of € 12 million. 26. Montenegroberza adds four more companies to its listing. Montenegroberza adds shares

of HTP Berane to its A list, while shares of Brskovo, Mjesovito and Guming are added to its B list.

28. € 13 million for new workplaces. The Government of Montenegro and six Montenegrin commercial banks sign contracts for business support loans worth € 13 million. This credit line is designed to stimulate employment and to finance projects in agriculture and tourism.

February 2004.

03. Hotel Splendid sold. The company “Hotel Group Montenegro Stars,” from Kotor, purchased The Hotel Splendid. The new owner paid € 2,425,000 for the hotel and he should, within the next three years, invest € 4.7 million.

04. Treasury bills issue. Government of Montenegro issues 56-day-treasury bills in the amount of € 4.5 million.

09. Tender for Beranka announced. The Agency for Reconstruction and Foreign Investments of Montenegro announced tender for sale of approximately 80% of the shares of Beranka, from Berane, the factory for production and processing of paper.

10. Tender for Livnica announced. The Agency for Reconstruction and Foreign Investments of Montenegro announced tender for sale of approximately 87% of the shares of Livnica Nikšić.

17. New tender for Željezara. The Agency for Reconstruction and Foreign Investments of Montenegro repeated tender for sale of 57.9% of the shares of Niksic’s Holding Company, Zeljezara.

26. Agro budget – € 9.2 million. According to the announcement of the Montenegrin Ministry of Agriculture, Forestry and Water Management, the agro budget for 2004 amounts to € 9.2 million.

28. Tender for three Hotels announced. The Commercial Court from Bijelo Polje, together with the Ministry of Tourism, announced tender for sale of Hotels: Jezera, Zabljak, and Planinka, owned by the company SKI Center Durmitor.

March 2004. 03. Treasury bills issue. The Government of Montenegro issues 56-day-treasury bills in the

amount of € 4.5 million. 08. Tender for sale Beranka prolonged. The Agency for Reconstruction and Foreign

Investments of Montenegro prolonged the tender for sale of approximately 80% of the shares of Beranka, from Berane, the factory for production and processing paper.

12. Treasury bills issue. The Government of Montenegro issues 56-day-treasury bills in the amount of € 5.5 million.

20. Tender for sale Hotel Podgorica. The Agency for Reconstruction and Foreign Investments of Montenegro announced tender for sale of Hotel Podgorica, owned by the UTIP Montenegro.

22. Increase of petrol price. The price of “super” petrol and “unleaded” petrol increased 2 cents per liter. The new price of “super” and “unleaded” petrol is €0.88 and €0.89, respectively.

23. New Laws adopted. The Parliament of Montenegro adopted three new Laws: Law on Railways, Law on Political parties, and Law on Restitution of Disposed Property Rights and Repatriation.

24. Law on Civil Procedure and Law on Executive Procedure adopted. The Law on Civil Procedure abolishes the institution of the collective jury and introduces an institution of a judge as an individual, while the Law on Executive Procedure should facilitate the process of carrying out executive procedures.


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April 2004. 04. Treasury bills issue. Government of Montenegro issues 56-day-treasury bills in the amount

of € 5.5 million. 15. Treasury bills issue. Government of Montenegro issues 28-day-treasury bills in the amount

of € 17 million. 20. Registered around 40,000 new employees. In one year, since the time the Decree on Tax

Relief for New Employees was adopted, around 40,000 new employees were registered, or 40% more than were planned.

21. Adopted Law on Tax on Passenger Vehicle Use. The Government of Montenegro adopted the Law on tax on Passenger Vehicle Use, which introduced the obligation to pay a tax for the use of passenger vehicles in the amount of €15 to €50, depending on the vehicle size. This tax will be collected once a year, when the vehicle is registered.

May 2004. 05. Established the State Union Court. The deputies of the State Union Parliament established

the last institution of the State Union – the State Union Court. The Parliament of the Union was also established. The Rules of Work were adopted and members of the six delegations for European and world institutions and organizations were elected.

11. Announced Tender for the sale of the majority portion of the company Radoje Dakic. Agency for Reconstruction and Foreign Investments announced Tender for sale of 52.2% of the capital of “Radoje Dakic,” in its factories of transmissions, construction and equipment and in the factory of machines.

18. New petrol price increase. One liter of “super” petrol in Montenegro costs €0.97 instead of the previous price of €0.93. Unleaded petrol costs €0.98 per liter, diesel €0.76, eco-diesel €0.77 and oil €0.56.

26. New Broker House entered on the Montenegrin Capital Market. Montenegroberza and NEX Montenegro Stock exchanges accepted membership of the new broker House from Bijelo Polje – Market Broker.

June 2004. 01. Ironwork from Niksic was sold to “Midland”. Control share package of the Niksic

Ironwork, i.e. 59.27% of the share capital, was sold to the multinational holding company “Midland”. “Midland” accepted to engage 2,000 employees, of which 500 are on the waiting list. In the first year it is planned to engage 200, and in the next year, 300 employees.

03. New Tender for “Planinka”. The Commercial Court in Bijelo Polje, in cooperation with the Ministry of Tourism, repeated international Tender for sale of Hotel “Planinka”, which is in ownership of the SKY Center “Durmitor” in Zabljak. Tender for Planinka was announced at the end of February, together with tender for sale of Hotels Zabljak and Jezera, but there were no interested buyers.

09. Seven million dollars for health reform and five million dollars for pension system. The Board of Directors of the World Bank approved credit in the amount of 12 million dollars for Serbia and Montenegro. The World Bank would, with seven million dollars, finance the start of reforms in the health system of Montenegro.

10. Treasury bills issue. Government of Montenegro issues 28-day-treasury bills in the amount of € 15 million.

16. Adopted Law on Changes in Law on Privatization of the Montenegrin Economy. 17. Old foreign exchange currency saving converted into bonds. The Government of

Montenegro adopted the Decree on Foreign Exchange Currency Savings Conversion into Bonds. This Decree prescribes ways and conditions for bond realization, as well as conditions for their use before the due date.

24. Treasury bills issue. Government of Montenegro issues 56-day treasury bills in the amount of € 4 million.

April 2005

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July 2004. 01. Adopted Law on Changes and Amendments of the Law on Pension and Invalid

Insurance. According to the Law, taxes and contributions on all wages in Montenegro would be lowered by 5%. This tax relief relates to employers.


15. Adopted Law on Investment Funds. 18. Sold Confection Factory. After two unsuccessful tenders, the Confection Factory was sold

to the “Plus Komerc” from Niksic for €200,000. The new owner has the obligation to pay €60,000 after the contract is signed, while the rest would be paid in equal annuities over the next nine months.


29. Adopted Law on Mortgage.

August 2004. 05. Treasury bills issue. Government of Montenegro issues 28-day-treasury bills in the amount

of € 16 million. 05. Signed contract on Corporation “Jakic” sale. Corporation “Jakic” from Pljevlja was sold

to the American company, Prim Pacific. Total price amounted to € 9.5 million. In the next four years, the buyer of the corporation is obligated to invest € 7.8 million in development of the corporation.

09. Announced Tender for KAP. Preliminary Tender for sale of the Aluminum Mill from Podgorica was announced. Requests were accepted through September 13th.

10. Increased price of the eco diesel. One liter of eco diesel costs €0.8, which is 4% higher than in the last two weeks.


September 2004. 01. Expected annual revenue in the amount of $208 million. Over eight months in 2004 the

Aluminum Mill in Podgorica produced 80,393 tons of aluminum and realized revenues in the amount of approximately $137.8 million. In this period, approximately $117 million worth of aluminum was exported.

07. Auction for four companies. Shares and portions of property of the companies Crnagoraput, Zitoprodukt, Lovcen and Centrojadran were offered on public auction. A minority package of 30.2% of the shares of Crnagoraput from Podgorica, which is in ownership of the government Funds, was offered for a starting price of € 5.5 million.

17. $18 million credit for Montenegro. The Board of Directors of the World Bank approved credit for support of Montenegrin reforms in the financial, energy and health sectors, pension system and public administration, in the amount of €18 million. The credit should help the continuation and consolidation of improvements that were realized in these areas, and which were supported by WB and other donators.

22. The number of tourists increased by 22.9%. In August 2004, more than 208,000 tourists visited Montenegro, of which 161,000 were domestic and 47,000 were foreign. In total, tourist visits were around 22.9% higher compared to the same period last year. The total number of nights stayed in this period was also higher, by 25.1%. In the period from January to August of 2004, 529,000 tourists visited Montenegro, or 6.9% more than in the same period of 2003, while the total number of overnight stays was higher by 9.5%.

22. Economic Forum in Milocer. The Economic Forum was held in Milocer, in Budva. Over 400 economists from Serbia and Montenegro and the region, as well as representatives of international institutions participated in the forum.


ISSP - CEPS 6

October 2004. 05. Petrol price increase. The price of a liter of diesel petrol increased 4 cents and eco diesel

petrol 3 cents, i.e. to €0.83 and €0.84. 09. World Bank loan for Montenegro. The Government of Montenegro signed protocol on

loan with the World Bank in the amount of $ 18 million. 18. Tender for Telekom. The Government of Montenegro announced Tender for sale of

51.12% of the shares of Telekom. 28. Treasury bills issue. Government of Montenegro issues 28-day-treasury bills in the amount

of € 13 million. 29. Custom rate on wheat flower import. The Ministry for International Economic Relations

and European Integration of Montenegro adopt the Decree on Temporary Prevention from Oversize Wheat Flower Import. According to the Decree, the custom rate on flower import increased from 0% to 30%.

November 2004. 11. Treasury bills issue. Government of Montenegro issues 56-day-treasury bills in the amount

of € 5 million. 17. Treasury bills issue. Government of Montenegro issues 182-day-treasury bills in the

amount of € 2 million. 23. Tenders for “Standard” and “Promont”. The Agency for Reconstruction and Foreign

Investments announced tenders for sale of 49.81% of the shares of Niksic’s Standard and 46.7% of the shares of Promont. The main activity of Standard is trade and catering, and the Promont is company engaged in electro installation and architecture.



December 2004. 01. New prices in fixed telephony. Telekom of Montenegro adopted new tariffs in fixed

telephony, according to which the price for local telephone calls will increase three times (200 %), while calls to mobile operators and abroad will be 15% cheaper.



10. Adopted Action Plan. The Government of Montenegro adopted an Action Plan for Implementation Suggestions from the European Partnership and defined a list of priorities for adjustment.

21. Montenegro received credit rating. According to one of the most famous agencies in the world, Standard and Poors from London, Montenegro received a credit rating of BB.

22. The Law on Changes and Amendments of the Law on Corporate Tax was adopted. The Government of Montenegro adopted the Law, according to which the progressive tax rate on profit of 15% and 20% are replaced by a flat tax rate of 9%.



28. Adopted the Law on Budget. The Government of Montenegro defined the plan of annual revenues and expenditures, as well as the plan of public spending for 2005. According to the Law, gross budget will be about € 492 million.


April 2005

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January 2005. 01. Adopted Decision on the Method of Enforcement Collection from the Account of the Named

Debtor. The Central Bank of Montenegro adopted the Decision that regulates the method of enforcement collections from the account of the named debtor with the payment operations participant. According to the Decision, enforcement collection could be done only with a court decision.


25. New petrol price increase. According to announcement of the “Jugopetrol,” petrol prices in Montenegro will increase. One liter of diesel and eco diesel petrol increased 4% and «super» petrol increased by 3.4%.

27. Lower taxes for those who pay periodically. The Ministry of Finance of Montenegro adopted Rules on Periodical Taxation, which provides lower tax amounts for the entrepreneurs whose annual revenue is lower than €18,000. The tax amount will be between €70 and €2,290, instead of the earlier €120 and €2,880.

29. Privatization revenues in 2004 amounted to €25.8 million. According to the announcement of the Privatization Council of Montenegro, total privatization revenue in 2004 was 2% lower than in 2003.


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Executive Summary

First section Analysis of macroeconomic indicators in Montenegro shows that, in 2004, economy was characterized by positive trends. Positive trends relate to increases in total production, wages, and employment, decrease of inflation, increase in total loans and deposits, as well as the increase of activities on the Montenegro’s stock exchanges. Negative trends relate to the increase of budget expenditures and the increase of the current account deficit. In 2004, total production in Montenegro increased by 11% while industrial production increased by 13.8% compared to 2003. This was caused by higher production in the processing industry sector and increase of electricity production. Increase of total production was also caused by the increase of activities in the forestry and construction sectors, retail trade turnover and the increase of the number of tourists. ISSP has estimated that there are over 190,000 of employed persons in Montenegro. This estimate was based on various data sources - official data and surveys data. According to this estimate, number of employed persons in Montenegro in 2004 as compared to 2003 has increased by 1.1%. On the other hand, Household Budget Survey conducted in April 2004, provided data on unemployment rate by regions. Unemployment rate in Northern region in April 2004 was 28%, in Central 25.8% and 11.6% in the Southern region. Average wages and salaries excluding taxes and contributions reached 195.4€, which was by 12.3% higher than in 2003. Real average wages were positive throughout 2004, due to faster growth of wages compared to prices. Highest average wages in 2004 were achieved in the service sectors, especially public services, while the lowest average wages were in agriculture sector. Inflation in 2004 amounted to 3.2% (annual change of the costs of living index), registering a falling trend to 0.3% until November; while in December there was an increase due to the increase of local phone call charges. Food prices dynamics created the most significant deflationary effect on the total inflation rate, and tobacco and beverages also had a similar impact. The most significant inflationary effect came from the Telecom services, Clothes and Footwear, Education and Culture. Retailer price index in 2004 had a similar trend as the Cost of Living with an annual change of 6.2%. Projected inflation for 2005 is from 0.8% to 1.7%. In 2004 year, total budget revenues (excluding grants) amounted to €372.7 million or around 93% of the planned level and were 10% higher in comparison with 2003. The greatest share of 42,6% in total revenues is VAT revenue, which was by around 15% higher in comparison with previous years. Cash budget expenditures were €385.5 million and together with net lending they were at the level of €400.6 million, which is by 5% higher compared to 2003 and by 10% lower compared to this year plan. With the exception of interest payments, as a result of restrictive budget policy, almost all budget categories were executed below the planned level. The effect of this policy was particularly reflected in the amount of

April 2005

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budget deficit (€29.4 million), which was much lower than planned (€48.2 million) and makes up 1.9% of the GDP. Monetary aggregates, total deposits and total loans have experienced an increasing trend throughout 2004. Total household deposits, at the end of 2004, have reached €80.7 million, while the amount of loans approved to individuals (households) amounted €74.3 million. Total amount of loans approved to privately owned companies in December 2004 has reached €161.2 million €. The increase of the activities on the Montenegrin stock exchanges was evident during 2004. 169% more transactions were realized comparing to 2003, while total turnover was by 2% lower then in previous year. Current account deficit in Montenegro amounted to €142.9 million or 9% of GDP and has increased by 40% compared to 2003. Total goods trade deficit in 2004 was €430.9 million or 27.5% of GDP and has increased by 20% compared to 2003. The reasons for the goods trade deficit increase were higher imports value as a result of demand increase in the country, as well as external factors (oil prices increase at the international market). Total ratio of goods exports to imports in 2004 was 47% or 4 percentage points more than in 2003. Positive real GDP growth rate was reached in all SEE countries. Industrial production growth rates were high in Serbia, Montenegro and Bosnia and Herzegovina, while CPI inflation in 2004 decreased on the annual level in BiH, Macedonia and Romania compared to 2003. Bosnia and Herzegovina, Serbia and Macedonia are considered as countries with the highest unemployment rates in the region (from 30% to 40%). Current account deficit as % of GDP has not significantly decreased in 2004.

Second Section Research on the Impact of the Introduction of Custom Duties on Flour Import Free trade is one of the main preconditions for development of the Montenegrin economy. All protection measures (customs, contingents, import bans, etc.) have direct impact on the economic development by slowing it. One of the forms of free trade restrictions in Montenegro is also the “Decree on Protection from Excessive Wheat Flour Import”. Regional Development of the Montenegrin Goods Trade Within the European integration process, one of the important issues is, whether Montenegrin membership in the EU may induce an assimilation of trade structures and decrease its goods trade deficit. A complex set of different factors both of global and internal characteristic help to explain why taking part in European integration and accession will lead to the increase in trade shares of SEE and EMU countries in total Montenegrin trade.


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On the Road to Information Society The use of information technologies in Montenegro is increasing as well as readiness of younger population to increase and advance their knowledge in usage of computes and the Internet. Also, Montenegrin businesses seem to be highly dependent on the information technologies. However, there are some limitations in the further development of information society in Montenegro, the most important being the lack of funds and the living standard of population. Ownership and Control in Slovenian Companies Corporate governance is one of the key elements of the increase of microeconomic efficiency. There are two important factors influencing corporate governance: ownership and control. System of corporate governance in Slovenia and its convergence can serve as good example of successful corporate governance. A Room with a View Obvious trend in the whole economy is the decrease of transaction costs. Tourism, as one of strategic sectors of domestic economy should follow global trends. Internet advertising (especially for smaller tourist capacities – villas, apartments, private accommodation) is becoming a highly acceptable and useful tool. Basic costs are by ten times lower as compared to complete television advertising campaign, while the results could be even better. Car Market in Montenegro Car market in Montenegro is growing as well as different types of services, provided by the banks and companies in the process of sale and purchase of cars. Car market in Montenegro has two main segments: market of used cars and new cars market. Both segments of this market in 2004 have significantly increased their turnover in 2004 as compared to 2003.

Montenegro Economic Trends April 2005

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PART 1

Chapter 1. Output

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Table 1.1 Major developments in the Real sector

GDP Industrial production Touism Retail trade

turnover (real) Total Processing industry

1989

=10

0

Ann

ual c

hang

e in

%

2000

=10

0

Ann

ual

chan

ge 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

%

Inde

x 19

99=

100

Ann

ual c

hang

e in

%

2001 83.2 -0.2 98.0 -2.0 101.6 2.3 108,123 2,492,993 555,040 23.8 20.8 369 36.1

2002 83.9 0.8 98.7 0.7 103.9 1.3 116,482 2,194,516 541,699 -2.4 25.1 352 -4.5

2003 85.1 1.4 100.9 2.2 104.6 -2.1 120,212 2.586.420 598,539 10.5 23.6 413 17.3

2004 87.7 3.1 114.6 13.8 118.2 13.1 120,796 3,246,608

2003-Q1 108.5 23.3 104.4 29,744 1,010,097 26,913 -19.2 21.7 366.8 19.9

2003-Q2 87.9 -1.2 105.9 29,988 377,521 123,180 3.5 27.5 392.4 17.4

2003-Q3 98.1 -2.9 99.2 30,176 458,240 420,910 19.3 25.0 454.4 14.0

2003-Q4 106.8 -8.5 108.7 30,304 740,562 27,536 -25,0 29.5 438.3 18.5

2004-Q1 106.6 -1.7 111.3 6.6 30,168 840,947 26,265 -2,4 42.1 399.8 9.0

2004-Q2 117.5 33.6 121.0 14.3 29,783 981,060 121,790 -1,1 34.0 439.6 12.0

2004-Q3 104.7 6.7 113.8 14.7 30,335 518,626 512,740 21,8 26.0 460.3 1.3

2004-Q4 129.4 21.2 139.0 27.9 30,510 905,975

Jul-03 100.09 -3.9 96.3 10,190 183,360 182,814 20,8 18.8 432.8 3.6

Aug-03 98.79 6.9 96.3 10,213 143,300 169,966 23,9 20.7 477.3 10.5

Sep-03 95.53 -10.1 105.0 9,773 131,580 68,130 6,1 35.6 453.1 30.9

Oct-03 103.55 -11.1 119.1 10,135 170,262 13,723 -37,4 34.8 428.8 11.2

Nov-03 102.52 -10.8 95.9 9,881 222,064 7,436 8,9 31.4 436.9 21.2

Dec-03 120.67 1.6 111.1 10,287 348,236 6,377 -20,1 22.3 449.3 23.4

Feb-04 109.04 -3.5 115.5 -1.8 9,588 340,680 14,318 50,4 47.6 399.8 8.6

Mar-04 111.55 -1.1 131.0 14.9 10,305 224,540 5,369 -31,8 55.0 403.9 6.2

Apr-04 119.35 44.6 113.3 22.4 9,846 327,487 14,198 2,9 33.5 432.8 13.8

May-04 116.73 46.0 123.4 15.2 10,091 382,956 43,697 16,7 36.1 449.3 13.3

Jun-04 116.38 16.5 124.3 5.30 9,846 270,617 63,895 -11,2 32.5 436.9 9.1

Jul-04 105.56 6.1 108.8 13.00 10,291 158,113 177,957 -2,7 22.7 449.3 3.8

Aug-04 99.01 0.2 112.2 16.50 10,174 209,536 241,916 42,3 21.4 474.0 -0.7

Sep-04 109.51 14.6 128.6 14.6 9,870 150,977 92,867 36,3 33.9 457.5 1.0

Oct-04 111.04 7.3 129.8 9.0 10,321 188,282 21,242 54,8 40.7 432.8 0.9

Nov-04 122.25 19.4 143.0 49.1 9,934 296,330 8,074 8,6 39.1 441.0 0.9

Dec-04 154.77 28.3 139.7 25.7 10,256 421,363 9,493 48,9 34.7 490.5 9.2

Jan-05 112.98 13.3 95.4 19.0 350,921 7,999 21,6 30.3


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13

1. REAL SECTOR o Industrial production in 2004 was 13.8% higher than in 2003 and reached an annual

growth rate of 13.3% in January 2005; o Average electricity production in 2004 was 26% higher than in 2003 and 27% in

January 2005 compared to January 2004; o Average aluminum production in 2004 was 0.5% higher compared to 2003.

The most recent developments in the sectors of industrial production, tourism, transport, trade, forestry, construction and catering in 20041 are provided through the following analysis. Generally, industrial production accounted for about 20% of GDP, according to official data in 2001, while transport was the second greatest contributor, accounting for about 13% of GDP. Other sectors, like retail trade and forestry accounted together to 10% of GDP, while construction and tourism (hotels and restaurants) accounted for 7% of GDP2.

Graph 1.1: Situation in the certain sectors of the real economy (2000=100)

0

50

100

150

200

250

Jan-

01Feb

-01

Mar

-01

Apr

-01

May

-01

Jun-

01Ju

l-01

Aug

-01

Sep-

01O

ct-0

1N

ov-0

1D

ec-0

1Ja

n-02

Feb

-02

Mar

-02

Apr

-02

May

-02

Jun-

02Ju

l-02

Aug

-02

Sep-

02O

ct-0

2N

ov-0

2D

ec-0

2Ja

n-03

Feb

-03

Mar

-03

Apr

-03

May

-03

Jun-

03Ju

l-03

Aug

-03

Sep-

03O

ct-0

3N

ov-0

3D

ec-0

3Ja

n-04

Feb

-04

Mar

-04

Apr

-04

May

-04

Jun-

04Ju

l-04

Aug

-04

Sep-

04O

ct-0

4N

ov-0

4D

ec-0

4Ja

n-05

construction mining and stone extracting industry

processing industry electricity, gas and waterretail trade

Source: Monstat

1 Due to the lack of data, several sectors (health care, education, financial services and services to firms) of the economy are not included in the analysis, and hence, it is difficult to determine the prevailing aggregate trends in the real sector. However, the most important sectors were analyzed, which, when combined, account for approximately 50% of the GDP. 2 This structure is given according to official Data for 2001 published by Monstat.

Chapter 1. Output

ISSP - CEPS 14

Table 1.2. Industrial production: disaggregated indices of major industries

share in total

2001 2002 2003 2004 06.2004 07.2004 08.2004 09.2004 10.2004. 11.2004. 12.2004 01.2005

2003 2000 2002 2003 06.2003 07.2003 08.2003 09.2003 10.2003. 11.2003 12.2003 01.2004

INDUSTRY TOTAL 100 99,3 99,9 99,7 102,4 113,8 116,5 106,1 100,2 114,6 101,4 119,4 128,3 113,3 MINING AND STONE EXTRACTING 7,2 88,5 95,1 71,6 101,4 94,9 103,3 99,3 42,9 92,7 62,1 99,7 221,1 109,3 PROCESSING UNDUSTRY 67,9 101,6 103,9 101,8 97,9 113,1 105,3 113,0 116,5 119,6 104,5 149,1 125,7 119 ELECTRICITY, GAS AND WATER PRODUCTION 24,9 93,9 87,7 106,5 117,5 121 163,7 85,8 90,7 112,3 114,4 132,5 120,4 105,1 MINING AND STONE EXTRACTING 7,2 88,5 95,1 71,6 101,4 94,9 103,3 99,3 42,9 92,7 62,1 99,7 221,1 109,3 RAW MATERIALS EXTRACTION 2,8 78,0 119,1 89,2 85,4 94,1 96,8 102,6 72,8 115,0 106,3 87,1 94,1 78,2 OTHER RAW MATERIALS EXTRACTION 4,4 94,6 81,1 61,3 115,0 95,5 108,6 96,9 31,70 86,3 93,3 109,2 401,3 339,8 Metal ores mining 2,9 96,3 96,6 70,4 88,3 113 113,5 96,7 74,6 67,0 53,9 115,4 478,2 461,2 Other ores and stone extraction 1,5 90,3 41,9 38,5 217,8 62,2 81,8 98,1 5,90 100,0 393,4 61,7 83,9 121,2 PROCESSING UNDUSTRY 67,9 101,6 103,9 99,5 97,9 113,1 105,3 113,0 116,5 119,6 104,5 116,3 125,7 119 MANUFACTURE OF FOOD PRODUCTS, BAVERAGES AND TOBACCO

8,2 104,6 91,8 90,7 101,40 123,6 113,8 123,7 129,1 111,8 114,7 149,1 123,4 85,8

Manufacture of food products and baverages 6,9 100,1 90,0 98,1 109,50 101,5 90,2 102,8 94,5 86,0 93,8 97,1 96,8 84,1 Manufacture of tobacco products 1,3 121,9 99,1 62,8 73,00 239,5 577,2 283,4 305,4 205,0 180,5 732 238,1 93,4 MANUFACTURE OF TEXTILE AND TEXTILE PRODUCTS

1,4 72,1 81,5 61,2 75,20 117,1 171,9 161,4 116,4 184,1 107,8 101,6 98,8 132,6

Manufacture of yarn and fabrics 0,3 94,1 70,5 42,9 80,70 59,2 221,1 154,5 111,4 54,8 71,3 105,9 30,4 - Manufacture of wearing apparel and fur 1,1 64,9 85,0 67,1 73,80 134,1 167,7 162,2 118,2 239,8 132,5 100,5 143,6 144,2 MANUFACTURE OF LEATHER AND LEATHER PRODUCTS

0,1 73,6 57,3 40,5 60,4 4,7 21,80 9,0 - - - - - -

WOOD PROCESSING AND WOOD PRODUCTS 1,5 78,2 54,8 26,3 80,4 120,5 103,0 184,8 155,0 167,2 53,1 132,7 110,6 82,6 MANUFACTURE OF PAPER; ISSUING AND PRINTING

1 107,2 98,4 62,1 59,2 89 82,1 92,9 89,2 95,4 83,9 92,7 120,7 82,5

Maufacture of cellose, paper and paper processing 0,2 89,8 99,1 27,5 26,5 91,4 79,4 94,2 101,4 122,0 82,6 104,6 135,1 91,7 Issuing, printing and reproduction 0,8 129,7 97,7 106,7 101,8 88,2 83,1 92,4 85,3 87,1 84,4 88,8 114,2 80,7 MANUFACTURE OF COKE AND OIL DERIVATES 0,1 111,1 63,8 8,5 12,5 - - - - - - - - - MANUFACTURE OF CHEMICAL PRODUCTS AND FIBERS

1,5 99,9 105,5 71,8 78,5 167,2 134,1 128,2 83,7 65,2 52,1 383,9 629,2 566,6

MANUFACTURE OF RUBBER AND PLASTIC PRODUCTS

0,2 72,9 91,9 55,0 51,0 38 30,10 27,5 26,60 39,1 27,9 43,6 61,9 -

MANUFACTURE OF PRODUCTS OF OTHER NONMETAL MINERALS

7,3 107,2 112,9 110,6 100,3 95 102,3 98,2 91,5 98,7 97,5 81,7 98,7 99,9

MANUFACTURE OF BASE METALS AND METAL PRODUCTS

45,1 109,7 115,2 117,0 102,2 113,4 102,5 111,4 119,6 128,5 120,2 109,7 116,9 115,3

Manufacture of basic metals 43,7 111,2 116,8 118,5 102,1 112,5 104,0 111,1 118,3 126,5 117,5 107,4 116,3 115,7 Manufacture of metal products, except machines 1,4 75,4 97,9 102,0 104,7 140,2 76,0 119,8 168,1 191,3 189,4 203,5 135,3 96,9 MANUFACTURE OF MACHINERY AND DEVICES, OTHER

0,7 12,5 52,3 30,1 77,1 96,5 163,7 39,2 3113,3 15,5 128,5 107,2 92,2 170,5

MANUFACTURE OF TRANSPORT EQUIPMENT 0,7 144,0 174,0 167,9 95,8 114 95,3 105,7 44,1 133,4 86,4 156,0 107,7 - PROCESSING INDUSTRY, OTHER 0,1 39,6 63,3 11,6 33,1 67,2 49,2 56,3 68,5 54,3 89,5 82,5 11,6 96,8 ELECTRICITY, GAS AND WATER PROD. 24,0 93,9 87,7 106,5 117,5 1212,0 163,7 85,8 90,7 112,3 103,9 132,5 120,4 105,1


ISSP - CEPS

15

1.1. PRODUCTION The total production index in Montenegro was 11% higher in 2004 compared to the previous year. This index consists of the indices of industrial production, forestry, and construction. 1.1.1. Industrial production Industrial production in 2004 was 13.8% higher than in 2003. Annual growth rates of industrial production were 7.3%, 19.4%, and 28.3% in October, November, and December, respectively. In the fourth quarter of 2004, industrial production increased by 21.2% compared to the same quarter of 2003. The annual growth rate of industrial production in January 2005 was 13.3%. Three major industrial sectors The processing industry, which represents 67.6%1 of total industrial production, was 13.1% higher in 2004 than in the previous year. Annual growth rate of the processing industry in December 2004 was 25.7%, while it was 27.9% in the last quarter of 2004. In January 2005, the annual growth rate of the processing industry was 19%. Several sub-sectors of the processing industry increased their production in 2004. The industry food products, beverages and tobacco (8.2% of total industrial production) increased its production by 23.6% in 2004 compared to the previous year. In addition, one of the major sub-sectors of the processing industry, “basic metals and metal products manufacturing” (44.8 % of total industrial production), increased its production by 13.4% in 2004 compared to the previous year and 15.3% in January 2005 compared to the same month in 2004. The sub-sector “Manufacture of textile and textile products,” which accounts for 1.5% of total industrial production increased its production by 17.1% in 2004 and 32.6% in January 2005 compared to January 2004. The sub-sector “Wood processing and wood products,” which accounts for 1.6% of total industrial production, increased its production by 20.5% in 2004 compared to 2003. However, this production declined in January 2005 by 17.4% compared to the same month of the previous year. Furthermore, the sub-sector “Manufacture of chemical products and fibers” (2.6% of total industrial production) increased its production by 67.2% in 2004. In January 2005, this production increased by 466.6% compared to January 2004. However, several other sub-sectors within the processing industries sector experienced a decrease in production in 2004. The average production of the sub-sector “Manufacturing of products of other non-metal minerals” (7.4% of total industrial production) declined in 2004 by 5% compared to 2003, and –0.1% in January 2005. Production within the sector of “Manufacturing of paper; issuing and printing” (1.0% of total industrial production) declined by 11% in 2004 and 17.5% in January 2005 as compared to the corresponding month of the previous year. The second major industrial sector, electricity, gas and water, which accounts for 26.4% of total industrial production, saw its production increase by 21% in 2004 compared to the previous year. The annual growth rate of its production was 3.9%, 32.5%, 20.4%, and 5.1% in October, November, December 2004 and January 2005, respectively.

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

Chapter 1. Output

ISSP - CEPS 16

The mining and quarrying industry, which accounts for about 6.0% of total industrial production, declined by 5.1% in 2004 compared to 2003. The average annual growth of its production in October, November, December 2004 and January 2005 was 21.1%, -0.3%, 1.7% and 6.3%, respectively. Leading industrial producers The Power Company of Montenegro (Elektroprivreda Crne Gore), one of the most important industrial producers in Montenegro, increased its electricity generation by 26% in 2004 compared to 2003. The annual growth rate of its production was 22.3% in the fourth quarter of 2004, while it was 21% in December 2004 and 27% in January 2005. The following graph (1.2) presents the aggregate actual and planned 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

50,000

100,000

150,000

200,000

250,000

300,000

350,000

400,000

450,000

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

-05

Jul-

04

Sep-

04

Nov

-04

Jan-

05

MW

h

Planned production Actual production

Source: The Power Plant of Montenegro (EPCG) Total actual production of the three plants in 2004 was 4% above the planned level. The actual production in December 2004 was 18% above the planned level; while in January 2005, it was 7% above the planned level. Generally, total production of two hydro plants in 2004 was 2,348,148 MWh, or 72.3% of total electricity production. Production of the thermal plant Pljevlja was 898,460 MWh or 27.7% of total electricity production in 2004. Individually, actual production of the Thermal Plant Pjevlja in 2004 was 16.3% under the planned level, while in December 2004 alone it was 24.7% under the planned level. The lower production of the Thermal plant was executed due to the fact that this production was replaced by production of hydro plants because of very good hydrology. However, this production exceeded the plan in January 2005 when it accounted for 106% of the planned level.


ISSP - CEPS

17

Total actual production of the Piva Hydro Plant was 51% above the panned level in 2004 and 21.7% above the planned level in December 2004. In January 2005, actual production of the Piva Hydro Plant exceeded its planned level by 20.9%. Actual production of the Perucica Hydro Plant exceeded the planned level by 33.8% in 2004 and was 53.4% above the planned level in December 2004. However, actual production of the Perucica Hydro Plant was a bit under the planned level in January 2005 and accounted for 95.5% of the planned level.

Graph 1.3. Dynamics of electricity production

-100

-50

0

50

100

150

200

250

Jan-

00

Apr

-00

Jul-

00

Oct

-00

Jan-

01

Apr

-01

Jul-

01

Oct

-01

Jan-

02

Apr

-02

Jul-

02

Oct

-05

Jan-

03

Apr

-03

Jul-

03

Oct

-05

Jan-

04

Apr

-04

Jul-

04

Oct

-04

Jan-

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 According to the decision of the Government of Montenegro from December 2004, the planned electricity production for 2005 is 2,746,000 MWh, or 6.9% less than in 2004. Regarding electricity consumption, it should be emphasized that consumption in 2004 was 4,509,862 MWh and accounted for 152.8% of total electricity production in Montenegro. The Aluminum Plant of Montenegro (KAP) consumed around 45% of this consumption in 2004. The planned consumption for 2005 is 4,753, 000 MWH or 173% of the planned production in 2005. In 2004, production of the Aluminum Combine Podgorica (KAP) increased by 0.5% compared to 2003. Total aluminum production in the last quarter of 2004 was 0.7% higher compared to the corresponding period in 2003.

Chapter 1. Output

ISSP - CEPS 18

Graph 1.4: Aluminum production and exports prices

7000

8000

9000

10000

11000

Jan-

01

Mar

01

Maj

-01

Jul-

01

Sep-

01

Nov

-01

Jan-

02

Mar

02

Maj

-02

Jul-

02

Sep-

02

Nov

-02

Jan-

03

Mar

03

Maj

-03

Jul-

03

Sep-

03

Nov

-03

Jan-

04

Mar

04

Maj

04

Jul-

04

Sep-

04

Nov

-04

in t

ons

1300

1400

1500

1600

1700

1800

1900

2000

$/to

n

Aluminum production Export price

Source: KAP Graph 1.4 presents the monthly dynamics of aluminum production since January 2001, as well as prices at which KAP exported its aluminum. Aluminum production, as the graph presents, increased in March and May 2004 after falling in February and April. Since May, the increase continued until the end of 2004. Furthermore, and in line with the global trend of the rapid growth in metal prices, the average monthly aluminum price has been going up particularly quickly in recent months and has reached the level of 1,875 $/ton in December 2004. The aluminum production plan for 2005 has not been officially developed by KAP due to the privatization process of the company in this year. However, it is expected that production will be at least in line with production of2004, or a bit more. 1.1.2. Forestry and Construction The only available data that presents activities in the forestry and construction sectors are Monstat’s data and they are based on a rather limited sample of firms that are active in forestry and construction. Forestry Average production in the forestry sector in 2004 overall was 5% higher than in the corresponding period of 2003. In December 2004, the annual growth rate of forestry production was 30.1%. Construction Average production in the sector of construction in 2004 overall was 19% higher compared to the previous year. In December 2004, the annual growth rate of construction activities was positive, amounting to 61.6%.


ISSP - CEPS

19

1.2. TOURISM In 2004, the total number of tourists increased by 17.4% compared to 2003. The number of domestic tourists rose by 12.6%, while that of foreign guests increased by 32.6% compared to 2003. In 2004, the share of foreign tourists was 26.7%, or 3.0 percentage points more than in the corresponding period of 2003 (see graph 1.5). Tourism revenue in 2004, earned from domestic tourists, amounted to € 81.3 million and nominally increased by 9%, while revenue from foreign tourists amounted to € 82.2 million and increased by 33% compared to the previous year.

Graph 1.5. Annual growth rates of number of tourists*

-40%

-20%

0%

20%

40%

60%

80%

100%

120%

Jan-

01ja

n-fe

b 20

01ja

n-m

ar 2

001

jan-

apr

2001

jan-

maj

200

1ja

n- ju

n 20

01ja

n -

jul 2

001

jan

- av

g 20

01ja

n -

sep

2001

jan

- ok

t 200

1ja

n -

nov

2001

jan

- de

c 20

01ja

n 20

02ja

n-fe

b 20

02ja

n-m

ar 2

002

jan-

apr

2002

jan-

maj

200

2ja

n- ju

n 20

02ja

n -

jul 2

002

jan

- av

g 20

02ja

n -

sep

2002

jan

- ok

t 200

2ja

n -

nov

2002

jan

- de

c 20

02Ja

n-03

jan-

feb

03ja

n-m

art 0

3ja

n-ap

r 03

jan-

maj

03

jan-

jun

03ja

n-ju

l 03

jan-

avg

03ja

n-se

pt 0

3ja

n-ok

t 03

jan-

nov

03ja

n-de

c 03

Jan-

04ja

n-fe

b 04

Jan-

mar

04

Jan-

apr

04Ja

n-m

aj 0

4Ja

n-ju

n 04

Jan-

jul 0

4Ja

n-av

g 04

Jan-

sep

04ja

n-oc

t 04

jan-

nov

04ja

n-de

c-04

Domestic Tourist Foreign tourist All tourists

t

* compared to analogous period of preceding year

Source: Monstat In January 2005, the total number of tourists increased by 21.6% compared to the same month of the previous year. The number of domestic tourist increased by 11.1%, while the number of foreign tourists increased by 55.4% compared to January 2004. 1.3. OTHER SECTORS OF SERVICES Transport Monstat’s data on total transport index are not available. 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. In order to create the total transportation index, ISSP calculated two indices –transport of goods and transport of services. These two indices are aggregate of the above-mentioned indices of goods and passengers transport. In order to create 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 weight.

Chapter 1. Output

ISSP - CEPS 20

Estimated transport of goods in 2004 declined by 5.4% compared to 2003. Estimated transport of passengers in 2004 decreased by 4.4% compared to previous year. (see graph 1.8).

Graph 1.6: Quarterly change of the transport of goods and passengers (1998=100)

0

20

40

60

80

100

120

140

160

1999-Q4 2000-Q2 2000-Q4 2001-Q2 2001-Q4 2002-Q2 2002-Q4 2003-Q2 2003-Q4 2004-Q2 2004-Q4

year

inde

x

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

With respect to the disaggregated indices, positive trends were registered in road transportation of passengers (2%) and railway transportation of goods (68%) in 2004 compared to 2003. On the other hand, road transportation of goods was 9% lower than in 2003, while the analogous figure for railway transportation of passengers was 32% lower as compared to 2003. (See the table 1.3). Revenues from the export of transportation services, as evidenced in the Balance of Payments statistics, amounted to € 45.3 million and nominally increased by 30% in 2004 compared to 2003. This is firstly due to the increase of railway transportation of goods and road transportation of passengers within the season. Retail trade The average level of real2 retail sales services was 1.6% higher in 2004 than in the corresponding period of 2003 (or 4% higher in the case of nominal retail sales). The annual real growth rate of retail sales was 7.6% in December 2004, while in nominal terms it was 9.2%. Catering The average real level of catering in 2004 was 1.5% lower than in 2003, while in nominal terms, it was on the same level as in 2003. On an annual basis, the real growth of catering in December 2004 amounted to –4.3%.

2 Deflated by CPI


ISSP - CEPS

21

Table 1.3 Indices of development in the various sectors of the economy

index value 2000 2001 2002 1-12.2004 06/2004 07/2004 08/2004 09/2004 10/2004 11/2004 12/2004

base period

1999 1-12.2003 06/2003=100

07/2003=100

08/2003=100

09/2003=100

10/2003=100

11/2003=100

12/2003=100

Total 102.5 101.5 101.5 101.0 111.0 115.0 106 101 109 111 119 145

Industrial production 103.3 101.2 101.9 104.2 114.0 116.5 106.1 100.2 114.6 107.3 119.4 128.3

Forestry 121.5 104.5 94.0 93.7 105.0 76.2 98.5 107.3 109.3 140.3 59.2 69.9 Production

Construction 160.0 177.6 198.9 168.2 119.0 147.4 115.5 78.3 180.0 174.7 261.6 107.5

road (goods) 84.0 100.0 97.0 88.2 91.0 95.1 101.1 112.9 73.6 95.6 73.9 82.5

road(persons) 102.6 72.8 65.6 66.9 102.0 111.3 83.4 83.4 85.2 82.7 92.7 90.8

sea (goods) 79.7 41.4 2.1 1.8 87.0 70.8 79.8 65.2 80.0 106.6 141.8 108.3

railway (goods) 84.0 83.2 106.4 178.8 168.0 151.0 169.1 225.2 174.2 170.0 195.0 174.4

Transport

railway (persons) 103.0 110.2 98.1 66.7 68.0 75.8 54.9 61.4 64.3 119.9 100.0 88.3

current prices 131.0 144.1 136.9 142.4 104.0 109.1 103.8 99.3 101.0 100.9 100.9 109.2 Retail trade

deflated by CPI 107.4 96.9 79.3 118.2 101.6 108.1 102.9 98.5 100.7 100.6 100.6 107.6

current prices 124.0 186.0 221.3 255.9 98.0 108.6 85.2 96.9 127.4 123.5 103.7 100.0 Catering

deflated by CPI 101.6 125.1 128.2 212.6 95.7 107.6 84.4 96.1 127.0 123.1 103.4 98.5

CPI 122.0 148.7 172.7 120.4 102.4 100.9 100.9 100.8 100.3 100.3 100.3 101.5

Source: Monstat Monthly Statistical review, no. 8/2001, 4/2002, 9/2003, 10/2003 and , 02/2005.

Chapter 2. Employment

ISSP - CEPS 22

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.

Table 2.1. Labor force and unemployment

Population mid -year1

Employed persons (all

sectors)

Total number of employed persons 2

Number of registered unemployed (2)

Unemployment rate % Unemployment

rate % (estimate)

Official data ISSP estimate based on official data

ISSP

1991 591,843 144,045 153,667 58,144 27.5 13.4 1992 594,137 134,205 145,653 64,632 30.7 17.1 1993 596,432 130,901 143,657 62,818 30.4 17.6 1994 598,727 128,835 140,684 58,210 29.3 18.6 1995 601,022 125,090 137,232 59,045 30.1 19.9 1996 603,317 124,264 137,743 60,225 30.4 19.2 1997 605,611 120,604 147,083 63,995 30.3 17.5 1998 607,906 117,745 147,233 68,373 31.7 16.7 1999 610,201 115,349 145,571 75,303 34.1 20.1 2000 612,496 113,818 140,762 83,583 37.4 20.1 2001 614,791 114,076 141,112 81,561 36.6 19.5 2002 617,085 113,743 140,778 80,865 36.5 21.6 2003 618,233 111,852 142,679 71,679 33.4 22.9 2004 620,706 109,429 143,479 65,185 31.2 22.3 2003-Q1 112,587 143,616 76,275 34.7 24.2 2003-Q2 112,173 143,088 72,744 33.7 23.4 2003-Q3 112,338 143,298 66,964 31.8 21.9 2003-Q4 110,312 140,714 70,732 33.4 23.2 2004-Q1 108,185 141,850 71,123 33.4 24.5 2004-Q2 109,709 143,847 68,589 32.3 23.6 2004-Q3 110,713 145,163 61,602 29.8 21.5 2004-Q4 109,106 143,056 59,422 29.3 21.2 Jan-03 112,673 143,726 76,584 34.8 24.2 Feb-03 112,771 143,851 76,077 34.6 24.1 Mar-03 112,317 143,272 76,165 34.7 24.2 Apr-03 112,132 143,036 74,896 34.4 23.9 May-03 111,738 142,533 73,250 34.0 23.7 June-03 112,648 143,694 69,735 32.7 22.6 July-03 112,905 144,022 66,951 31.7 21.8 Aug-03 112,647 143,693 66,277 31.6 21.7 Sep-03 111,461 142,180 67,664 32.2 22.2 Oct-03 110,911 141,478 71,023 33.4 23.2 Nov-03 110,387 140,810 72,547 34.0 23.6 Dec-03 109,639 139,856 68,625 32.9 22.8 Jan-04 108,562 142,343 69,573 32.8 24.0 Feb-04 107,359 140,765 71,419 33.7 24.7 Mar-04 108,634 142,442 72,378 33.7 24.7 Apr-04 109,623 143,734 72,202 33.4 24.5 May-04 109,642 143,759 68,993 32.4 23.7 June-04 109,863 144,049 64,572 31.0 22.5 July-04 110,886 145,390 62,143 29.9 21.7 Aug-04 111,158 145,747 62,159 29.9 21.6 Sep-04 110,094 144,351 60,503 29.5 21.3 Oct-04 109,696 143,830 59,930 29.4 21.2 Nov-04 109,394 143,434 59,387 29.3 21.1 Dec-04 108,228 141,905 58,950 29.3 21.2

1.

Source: Monstat, Employment Office of Montenegro and ISSP

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 are estimated by ISSP


ISSP - CEPS

23

CHAPTER 2. EMPLOYMENT o According to Monstat data, the average number of employed persons is by 0.6% higher

in 2004 as compared to the average number of employed persons in 2003. o The average number of registered unemployed persons is by 9.1% lower in 2004 as

compared to the last year. o According to the ISSP household survey, the unemployment rate in Montenegro in April

2004 was 23.7%. In this issue of MONET we will provide two sets of employment data as published by Monstat. Namely, in January 2005 the Monstat decided to adjust their regularly published monthly data according to new methodology proposed by the Employment Office. The main features of this methodology is the adjustment of regular monthly data by the data from Health Fund on the number of registered employees for health insurance as well as with the PIO Fund data on registered number of persons who are paying pension contributors. Also, for the adjustment of the data on the number of employed persons Monstat will use their semiannual surveys with broader sample including entrepreneurs and small shops (less than five employees). However, every year Monstat has published in the Statistical Yearbook 20043 this number (adjusted to a semiannual survey results) but only on the annual level, while monthly data were as we have published (table 2.1. - “Employed persons (all sectors)”). However, from January 2005 Monstat will publish only those new data, so our analysis will be focused only at those data. In order to have a data series we have made backward estimates of monthly data (in the table 2.1 – “Total number of employed persons”), assuming that dynamics in the number of employed persons is the same as in the existing monthly data. In this issue of MONET we will analyze new estimated monthly data (in the table 2.1 – “Total number of employed persons”). 2.1 EMPLOYMENT AND UNEMPLOYMENT – OFFICIAL DATA After experiencing a consistent increase during the period of March through August, according to estimate based on Monstat data, the number of employed persons began to decrease in September, ultimately declining to a total of 141,905 employed persons in December. The average number of employed persons in 2004 was 143,479 persons and was higher by 0.6% as compared to average number in 2003.

3 Statistical Yearbook 2004, page 301, table 43.-3,


ISSP - CEPS 24

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

139000

140000

141000

142000

143000

144000

145000

146000

147000

148000

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

2001 2002 2003 2004

Source: Monstat

Quarterly fluctuations appear with the first and fourth quarters showing the number of employed persons decreasing, while the second and third quarters show this number increasing. These fluctuations in the number of employed are purely a seasonal effect, caused by the tourist season. However, if we observe annual changes, except for the first quarter, employment in all months of 2004 is higher as compared to the corresponding periods in 2003. 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

unemployed persons

Annual changes in thenumber of

unemployed persons

Monthly changes in the number of

unemployed persons %

Jan-04 -1.0 1.8 -9.2 1.4 Feb-04 -2.1 -1.1 -6.1 2.7 Mar-04 -0.6 1.2 -5.0 1.3 Apr-04 0.5 0.9 -3.7 -0.2 May-04 0.9 0.0 -6.2 -4.4 Jun-04 0.2 0.2 -7.4 -6.4 Jul-04 1.0 0.9 -7.2 -3.8 Aug-04 1.4 0.2 -6.2 0.0 Sep-04 1.5 -1.0 -10.6 -2.7 Oct-04 1.7 -0.4 -15.6 -0.9 Nov-04 1.9 -0.3 -18.1 -0.9 Dec-04 1.5 -1.1 -14.1 -0.7

Source: Monstat, Employment Office, ISSP calculations On the other hand, the average number of registered unemployed persons has decreased by 9.1% as compared to the previous year. In the last quarter of 2004, the average number of registered unemployed persons was 16% lower than in the last quarter of 2003. However,


ISSP - CEPS

25

the month-over-month comparisons show that, as usual, unemployment has increased during the first three months and decreased thereafter.

Graph 2.2: Number of unemployed persons (2000-2004)

58000

63000

68000

73000

78000

83000


2001 2002 2003 2004

Source: Employment Office of Montenegro For the first three quarters of 2004, graph 2.2 shows that the dynamics of the official number of unemployed persons in 2004 is similar to that of 2003. The differences noted in the fourth quarter are due to changes that took place in 2003; specifically, all health ID’s were replaced with new ones and everybody had to reregister for health insurance, causing the number of registered unemployed persons to increase. The reform of the health system influenced an increase in the number of unemployed because for those who were employed in the shadow economy or in agriculture the only way to secure health insurance was to be registered as unemployed.

Graph 2.3: The official number of employed, unemployed persons and pensioners (1994Q1-2004Q1)

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

Employed persons Unemployed persons Pensioners

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


ISSP - CEPS 26

Despite consistent fluctuations in the number of pensioners in 2004 (increased up to June, decreased during June and July by 0.1% and 0.4% respectively, increased in August and September, and decreased again by 0.1% and 1.2% during October and November), the average number of pensioners in 2004 is 2.8% higher as compared to the average number of pensioners in 2003. 2.1 EMPLOYMENT AND UNEMPLOYMENT – AS ESTIMATED BY ISSP The labor force statistics in Montenegro in the last couple of years were in the focus of attention. Namely, lack of reliable data on the labor market and the high share of gray economy, blurred the picture on true developments in the labor market, over the last decade. The ISSP has researched this issue and concluded that one of main shortages of statistical data on employment are concepts and definitions applied in Montenegro, as opposed to those defined by International Labor Organization. The most important statistics related to the number of employed persons has a narrower definition in Montenegro. Also, the coverage of private sector or sample for the survey on labor, implemented by Monstat, apparently is not representative for the whole Montenegro. The statistical system of Montenegro defines employed person as follows: “As employed are considered: (1) persons engaged by employer that have rights and commitments arising from the labor contract; (2) person employed in a company or organization, regardless to type of labor contract (permanent or temporary contact) and to is status (fulltime, part-time), (3) employed in the private sector and self-employed. Unpaid family workers, students on vocational training, incarcerated persons are not considered as employed.4” In the “Resolution concerning statistics of the economically active population, employment, unemployment and underemployment”5 ILO defines employed person as follows: “The "employed" comprise all persons above a specified age who during a specified brief period, either one week or one day, were in the following categories:

(a) "paid employment": (a1) "at work": persons who during the reference period performed some work for wage or salary, in cash or in kind; (a2) "with a job but not at work": persons who, having already worked in their present job, were temporarily not at work during the reference period and had a formal attachment to their job.

(b) "self-employment": (b1) "at work": persons who during the reference period performed some work6 for profit or family gain, in cash or in kind; (b2) "with an enterprise but not at work": persons with an enterprise, which may be a business enterprise, a farm or a service undertaking, who were temporarily not at work during the reference period for any specific reason.”

4 Statistical Yearbook 2003 – chapter Methodological Explanations 5 http://www.ilo.org/public/english/bureau/stat/res/ecacpop.htm 6 “Some work” notion might be interpreted as work for at least one hour


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27

Moreover, the ILO regards as employed: o Persons temporarily not at work because of illness or injury, holiday or vacation, strike

or lockout, educational or training leave, maternity or parental leave, reduction in economic activity, temporary disorganization or suspension of work due to such reasons as bad weather, mechanical or electrical breakdown, or shortage of raw materials or fuels, or other temporary absence with or without leave should be considered as in paid employment provided they had a formal job attachment.

o Employers, own account workers and members of producers' co-operatives should be considered as in self-employment and classified as "at work" or "not at work", as the case may be.

o Unpaid family workers at work should be considered as in self-employment irrespective of the number of hours worked during the reference period.

o Persons engaged in the production of economic goods and services for own and household consumption should be considered as in self-employment if such production comprises an important contribution to the total consumption of the household.

o Apprentices who received pay in cash or in kind should be considered in paid employment and classified as "at work" or "not at work" on the same basis as other persons in paid employment.

o Students, homemakers and others mainly engaged in non-economic activities during the reference period, who at the same time were in paid employment or self-employment.

o Members of the armed forces should be included among persons in paid employment. The armed forces should include both the regular and the temporary members as specified in the most recent revision of the International Standard Classification of Occupations (ISCO).

However, the Monstat publishes the number of employed persons, on the annual level that partly includes SME employment and entrepreneurs (in table 2.3. – total non-farming civilian employment). This number, as stated does not includes military and police personnel, farmers and gray economy. Second information on the number of employed persons, as listed in the table 2.2 is “Employed persons (all sectors), this number does not include self-employed and small private shops. The ISSP estimate of employed persons in Montenegro includes all persons as defined under ILO concepts (Table 2.3, Total number of employed ILO definition). For this estimate we have used official data, Labor Force Survey 7(LFS) from Federal Statistical Office, ISSP Household Survey. The number of farmers is estimated using LFS data on number of farmers and unpaid family workers. The number of employed in the military and police as well as number of temporary members of armed forces, is estimated using several sources of information - the structure of Montenegrin population by activity from 1991 census, information form ISSP Household survey No. 5 (structure of employees by occupation) and information received from atricles in the daily newspapers and interviews8 and the Government programs for reduction in the number of public servants and military personnel. Also as a tool for verification of our results we have used ISSP Household Surveys (from 2001-2004). Basically, the definition applied in Montenegro assumes as employed only those persons with a signed labor contract. On the other hand, the ILO assumes as employed persons those that for undertaken activity receive some kind of compensation in money or in kind.

7 Federal Statistical Office - Labor Force Survey from 1995-2003, www.szs.sv.gov.yu 8 For example interview of Mr. Zarko Rakcevic for the Radio Free Europe in September 2000 (http://www.danas.org/programi/aktuelno/2000/09/20000922022121.asp)


ISSP - CEPS 28

Table 2.3. Estimate of employment and unemployment in Montenegro

Employed persons (all

sectors)9

Non-farm civilian

employment10

Total number

of employed ILO definition11

Active population12

Number of unemployed13

1 2 3 5 (3+6) 6

1991 144,045 153,667 205,453 237,280 31,827

1992 134,205 145,653 196,747 238,146 41,399

1993 130,901 143,657 196,134 239,015 42,881

1994 128,835 140,684 194,575 239,887 45,312

1995 125,090 137,232 192,259 240,763 48,504

1996 124,264 137,743 194,434 241,641 47,207

1997 120,604 147,083 199,295 242,523 43,227

1998 117,745 147,233 201,987 243,408 41,420

1999 115,349 145,571 194,598 244,296 49,698

2000 113,818 140,762 195,271 245,187 49,916

2001 114,076 141,112 197,388 246,082 48,695

2002 113,743 140,778 192,901 246,980 54,079

2003 111,852 142,679 190,417 247,903 57,486

2004 109,429 143,479 192,501 249,093 56,592

Sources: Monstat, ISSP Household Survey Besides the definition of employed persons, there is also a difference in definition of unemployed person. Montenegrin statistical system regards as unemployed person only those registered as unemployed in the Employment Office of Montenegro. The ILO definition is as follows: “The "unemployed" comprise all persons above a specified age who during the reference period were: (a) "without work", i.e. were not in paid employment or self-employment; (b) "currently available for work", i.e. were available for paid employment or self-employment during the reference period; and (c) "seeking work", i.e. had taken specific steps in a specified recent period to seek paid employment or self-employment. The specific steps may include registration at a public or private employment exchange; application to employers; checking at worksites, farms, factory gates, market or other assembly places; placing or answering newspaper advertisements; seeking assistance of friends or relatives; looking for land, building, machinery or equipment to establish own enterprise; arranging for financial resources; applying for permits and licenses, etc.” To be classified as unemployed, according to ILO, person has to be out of work and actively searching for a job and is available for work, while the Montenegrin system requires just the registration in the Employment Office. However, Employment Office in the last two

9 Number published in the Monthly Statistical Review by Monstat 10 This number is published in the Statistical Yearbooks, published by Monstat, and does not include military, police and farmers. 11 Total number of employed ILO is ISSP estimate of number of employed persons in Montenegro. 12 Active population is estimated based on 1991 Census data, namely the share of active in the total 13 Estimated as a difference between estimated economically active population and estimated number of employed persons.


ISSP - CEPS

29

years requires regular reporting, taking trainings when offered, and similar. On average, the number of registered unemployed persons is by 20% higher than the ISSP estimate showed in table 2.3 (number of registered unemployed persons in the Employment Office is given in the table 2.1). 2.2. UNEMPLOYMENT RATE BY REGIONS – ISSP HOUSEHOLD BUDGET SURVEY In April of last year, ISSP conducted a regular Household Budget Survey. The sample included 1,000 households from all over Montenegro. We have calculated the unemployment rate by region from the results of the survey. This rate is presented in table 2.3. Table 2.4: Unemployment by region

Unemployment rate (%)

Region July 2002 October 2002 April 2004

Northern 19.7 26.9 28.0 Central 14.1 19.3 25.8

Southern 8.6 16.3 11.6 Total 13.7 20.7 23.7

Source: ISSP household surveys, issue No. 5&6 - 2002 and issue No.10 -2004 The unemployment rate in Montenegro in April 2004 was 23.7%, which is relatively high. However, April is usually an inactive month, and as stated previously the number of unemployed persons usually increases over the first quarter while the number of employed persons tends to decrease. Although data for the presented periods cannot be compared, we would like to note that July and October are seasonally impacted (tourist season and harvests), which could explain the high difference among rates during these periods. Again, the northern region is worse off as compared to the central region and significantly so when compared to the southern region. It seems that unemployment in the southern region, regardless of seasonal influence, is significantly lower as compared to the remaining two regions. 2.3. INCIDENCE OF REGISTERED LONG – TERM UNEMPLOYMENT Long-term unemployment is defined as the share of persons unemployed for more than one year in the total number of unemployed persons. Long-term unemployment is a serious problem, and one that is hard to correct as the employability of a person decreases over time. In Montenegro, long-term unemployment represents a serious problem, and the structure of unemployed persons is shifting towards having a higher share of persons with low employability. From 1999 to 2002, long-term unemployment continued to increase, reaching 82.4%, and in 2003, this figure decreased to 64.7%. As shown in graph 2.4, long-term unemployment is higher among females, nearly twice as high as among males.


ISSP - CEPS 30

Graph 2.4:Incidence of long-term unemployment by gender

0

10

20

30

40

50

60

1999 2000 2001 2002 2003

%

Male Female

Source: Employment Office (www.zzzcg.org) Long-term unemployment by region shows that the Northern region is lagging behind the Southern and the Central regions. Namely, in 2003 the incidence of long-term unemployment in the Northern region was 72%, while in the central and southern regions long-term unemployment was 63.8% and 51.7%, respectively.

Graph 2.5: Incidence of long-term umeployment by regions (2003)

0

10

20

30

40

50

60

70

80

Suthern Central Nothern

%

Source: Employment Office (www.zzzcg.org) If we observe the incidence of long-term unemployment by municipality, the highest incidence of long-term unemployment is recorded in Bar (85.8%) and in Rozaje (81.3%), while the lowest incidence is in Kotor (37.7%) and Herceg Novi (47.9%). In Podgorica, as the largest city in Montenegro, the incidence of long-term unemployment is 60.6%.


ISSP - CEPS

31

On the other hand, if we observe the changes in the number of unemployed persons over a period of 10 years, or 2003 as compared to 1993, in general the number of registered unemployed persons is higher. Table 2.5: Number of unemployed persons by municipality

Number of unemployed persons Region* Municipality

1993 2003

Incidence of long-term unemployment 2003

N Andrijevica 151 448 64.7 S Bar 2,543 3,297 85.8 N Berane 5,831 4,249 64.7 N Bijelo Polje 8,681 7,703 77.1 S Budva 586 1,268 53.1 C Danilovgrad 1,432 1,351 62.0 N Žabljak 334 502 61.2 N Kolašin 1,014 1,115 71.3 S Kotor 640 2,697 37.7 N Mojkovac 2,035 1,808 77.3 C Nikšić 9,331 9,683 71.1 N Plav 1,315 1,117 66.4 N Plužine 341 456 51.3 N Pljevlja 5,056 5,236 67.6 C Podgorica 15,281 16,623 60.6 N Rožaje 2,543 3,067 81.3 S Tivat 1,235 1,460 59.1 S Ulcinj 1,578 1,727 68.2 S Herceg Novi 1,562 2,212 47.9 C Cetinje 684 2,193 56.3 N Šavnik 287 413 76.3

Total: 62,818 68,625 64.7

Source: Employment Office of Montenegro, ISSP calculations *N-northern region, S-southern region, C-central region

Bearing in mind all of the statements towards the poor performance of the northern region, and looking at the unemployment data, one could find it very confusing that in almost all municipalities in the northern region, the number of unemployed is lower in 2003 as compared to 1993; while on the other hand, in almost all municipalities in the southern region, the number of unemployed persons has increased over a 10 year period. A possible explanation for this could be migrations from the northern region to the central and southern regions. Namely, according to Population Census 2003 data, almost all municipalities in the northern region have recorded negative rates of population growth; in other words, the population has decreased; while the southern and central region municipalities have shown positive population growth rates. Therefore, the decrease in the number of unemployed persons is actually a consequence of a reduced labor supply in the northern municipalities.

Chapter 3. Wages

ISSP - CEPS 32

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 EURO IN EURO 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 contri.

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 50.0 301.1 108.9 192.1 122.0 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 Jan 03 50.0 242.5 88.0 154.5 112.0 32.4 327.1 13.4 Feb-03 50.0 198.9 72.2 126.7 113.0 39.5 272.7 11.8 Mar-03 50.0 259.2 91.6 167.6 113.0 29.8 350.5 13.9 Apr-03 50.0 276.4 100.4 176.0 113.0 28.4 369.4 14.4 May-03 50.0 273.3 99.3 174.0 113.0 28.7 365.5 14.3 Jun-03 50.0 273.1 98.6 174.6 113.0 28.6 365.9 14.3 Jul-03 50.0 275.5 97.8 177.7 113.0 28.1 370.5 14.3 Aug-03 50.0 280.6 100.1 180.5 112.0 27.7 376.5 14.5 Sep-03 50.0 289.8 104.2 185.6 112.0 26.9 387.2 14.7 Oct-03 50.0 288.1 102.3 185.8 112.0 26.9 386.4 14.6 Nov-03 50.0 275.8 97.3 178.5 112.0 28.0 371.5 14.3 Dec-03 50.0 321.2 114.6 206.5 112.0 24.2 427.2 15.3 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 Oct-04 50.0 312.8 109.6 203.1 123.6 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 50.0 345.0 118.6 226.4 124.6 22.1 426.1 13.9 Jan-04 50.0 283.4 98.2 185.1 27.0 377.2 12.5

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, till now 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

33

CHAPTER 3. WAGES AND SALARIES o The average wage and salary after taxes and contributions in 2004 amounted to 195.4€,

12.3% higher than in 2003. o In December 2004, wages and salaries after taxes and contributions reached 226.39€,

which is 9.6% higher than in December 2003. o In January 2005, wages and salaries after taxes and contributions are lower by 12.2%

as compared to December 2004. o The highest average wages and salaries after taxes and contributions in Montenegro in

2004 were achieved in the financial intermediation sector, amounting to 383.7€. 3.1. WAGES AND SALARIES In 2004, average wages and salaries were higher by 12.1% as compared to the average in 2003, amounting to 304.1€. The average wages and salaries (w&s) after taxes and contributions show similar changes, and achieved an average annual increase of 12.3%. However, the average w&s after taxes and contributions in 2004 on a monthly level did not have clear trend, neither increasing nor decreasing. The highest monthly increase was achieved in December 2004, when w&s rose by 13.6%, going from 199.3€ to 226.4€. The higher level of December wages is a usual seasonal phenomenon, due to the methodology that Monstat uses and the well known tendency of employers to pay the December wage at the end of December, instead of at the beginning of the following month, as it is typically done. As a consequence, January wages are usually lower, which explains the lower levels of wages recorded each January. Moreover, in January 2005, the average w&s after taxes and contributions is lower by 12.2% as compared to the previous month, decreasing from 226€ in December to 185.1€ in January. However, in annual terms, average w&s after taxes and contributions in January 2005 record an increase of 13.4%. On a quarterly level, with the exception of the first quarter, the average w&s after taxes and contributions have increased, by 5.5% in the second quarter, by 4.8% in the third, and by 4% in the fourth quarter, as compared to previous quarters. 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-04 9.8% -17.9% 10.1% -16.9% Feb-04 48.0% 10.6% 46.9% 9.4% Mar-04 12.9% 0.9% 12.8% 0.1% Apr-04 9.4% 1.7% 9.1% 3.1% May-04 9.0% -1.5% 8.7% -1.4% Jun-04 11.4% 2.5% 11.6% 2.6% Jul-04 12.9% 3.2% 11.5% 0.8% Aug-04 12.5% 1.3% 11.5% 1.9% Sep-04 8.1% -1.2% 7.1% -0.8% Oct-04 9.3% 1.3% 8.6% 0.8% Nov-04 11.6% -1.9% 11.2% -1.9% Dec-04 13.6% 9.6% 7.4% 12.5% Jan-05 9.2% -18.2 13.4% -12.2%

Source: Monstat and ISSP calculations

Chapter 3. Wages

ISSP - CEPS 34

In annual terms, wages in 2004 were significantly higher than in the corresponding months of 2003. However, if we compare the level of 2004 w&s after taxes and contributions to those from December 2003, only the average wage in December 2004 was higher, by 9.6%. The minimum wage remained constant throughout 2004. The average tax rate in 2004 was 14.0%, or employed persons on average paid 42.2€ of tax. The average tax rate in 2003 was 14.1%, or employees on average paid 38.6€ of income tax.

Graph 3.1: Wages and salaries, wages and salaries after taxes and contributions and minimum wage (July 2002-December 2004)

0.0

50.0

100.0

150.0

200.0

250.0

300.0

350.0

400.0

J-02

A-0

2

S-02

O-0

2

N-0

2

D-0

2

J-03

F-0

3

M-0

3

A-0

3

M-0

3

J-03

J-03

A-0

3

S-03

O-0

3

N-0

3

D-0

3

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

Eur

o

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

Source: Monstat and ISSP calculations The real wages in 2004 were positive during the whole period and were close to nominal wages, in some months even equal to nominal wages (July, August, and September). However, minimum wage, which has been the same since July 2002, in real terms is negative, due to inflation rates higher than 0.


ISSP - CEPS

35

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

Aug

-03

Sep-

0 3

Oct

-03

Nov

-03

Dec

-03

Jan -

04

Fe b

-04

Ma r

-04

Apr

-04

May

-04

Jun -

04

Jul-

04

Au g

- 04

Sep -

04

Oc t

- 04

No v

-04

De c

-04

Jan-

0 5

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

Sources: Monstat and ISSP calculations The average pension in 2004 amounted to 123€. The government announced that the adjustment in January pensions would be 3.25%. However, the Montenegrin Constitutional Court has declared the Decision on pension adjustment made by the PIO Fund in January 2004 to be illegal, when pensions were adjusted to inflation. Namely, in the period of July 2002 - December 2003, pensions remained at the same level; the Statistical Office hasn’t published any wage data. The old Pension law anticipated an adjustment according to changes in net wages, while the new Pension Law1 anticipates an adjustment based on 50% change in inflation and 50% change in wages. 3.2. AVERAGE W&S AFTER TAXES AND CONTRIBUTIONS BY ACTIVITY (2004) In 2004, the highest average w&s after taxes and contributions was achieved in the public services sector, similar to previous years. The lowest average w&s after taxes and contributions were achieved in the agriculture sector. Table 3.4: Average wages and salaries after taxes and contributions by sectors (in € per month)

Industry Agriculture Public services

sector Services sector

Other services sector

7-12/2002 177.4 86.2 200.6 182.9 174.5

1-6/2003 161.9 83.4 204.4 190.2 153.5

7-12/2003 178.4 90.0 217.9 206.7 183.1

1-6/2004 176.5 97.7 218.3 208.2 142.5

7-12/2004 188.2 103.6 222.5 218.0 162.4

Sources: Monstat and ISSP calculations Note: Industry sector includes mining, manufacturing, utilities and construction; Agriculture includes agriculture, forestry fisheries and water supply; Public services sector includes state administration, education and health; Services sector includes trade, transport, mortgages, hotels and restaurants, financial intermediation; Other services sector includes communal, social and other services

1 In force since January 2004

Chapter 3. Wages

ISSP - CEPS 36

If we observe individual activities, the highest average W&S after taxes and contributions in 2004 were achieved in the Financial Intermediation, amounting to 383.7€.

Graph 3.3:Average W&S after taxes and contributions by activity (average 2004)

53.4

383.7

194.5

0.0

50.0

100.0

150.0

200.0

250.0

300.0

350.0

400.0

450.0 F

ishe

ry

Con

stru

ctin

g

Hot

els

and

rest

oran

ts

Who

lesa

le a

nd r

etai

l

Agr

icul

ture

, fo

rest

ry a

nd w

ater

Oth

er c

omm

unal

, so

cial

and

ser

vice

activ

ities

Man

ufac

turi

ng

Mor

tgag

es,

rent

ing

and

busi

ness

act

.

Tot

al

Hea

lth a

nd s

ocia

l wor

k

Min

ing

Edu

catio

n

Pub

lic a

dmin

istr

atio

n an

d so

cial

insu

ranc

e

Tra

nspo

rt,

traf

ic a

nd c

omm

unic

atio

ns

Util

ities

Fin

anci

al in

term

edia

tion

in e

uros

Sources: Monstat and ISSP calculations On the other hand, the lowest average w&s after taxes and contributions was achieved in fisheries, amounting to just 53.4€. Wages above the national average (194.5€, see graph above) were achieved in the public services (health, education, public administration) and in transport, mining and utilities activities. 3.3. EFFECTS OF REDUCTION IN THE TAX AND CONTRIBUTIONS RATE In order to estimate the influence of the adopted reductions in the fiscal burden on wages, we have used an average wage in the economy, as published by Monstat. The adopted reduction in the tax and contribution rates has decreased the tax burden on wages, as well as taxes paid and the effective tax rate. Tax burden on wages is defined as a ratio between total labor cost and take home pay (w&s after taxes and contributions). The average tax burden in the first half of the year (prior to reduction of 10%) was 108%, and in the second half, it was reduced to 102%, while in January 2005, the tax burden on wages was further reduced to 97%. The low level of tax burden in January is partly caused by the low level of wages in January since taxation is progressive, lower amounts are taxed at lower rates, thus the tax burden is lower. Also, this lower level is influenced by the reduction in the tax and contribution rates.


ISSP - CEPS

37

Compared to the first half of 2004, the effective tax rate on average w&s is reduced by 1 percentage point. The difference in the tax rate with and without reduction is highest in January and amounts to 1.5 percentage points. Table 3.5: Effects of tax and contribution rate reductions

Tax burden on

wages after reduction

Tax burden on wages without

reduction

Average tax rate (after

reduction)

Average taxrate

without reduction

Average paid tax

after reduction

Average paid tax without

reduction In % in €

Jan-04 110 110 13.6 13.6 36.2 36.2

Feb-04 107 107 14.2 14.2 41.5 41.5

Mar-04 107 107 14.2 14.2 41.6 41.6

Apr-04 108 108 14.4 14.4 43.4 43.4

May-04 108 108 14.3 14.3 42.5 42.5

Jun-04 108 108 14.5 14.5 44.1 44.1

Jul-04 101 105 13.6 14.5 41.8 44.6

Aug-04 101 105 13.7 14.7 43.0 45.8

Sep-04 102 106 13.7 14.6 42.5 45.3

Oct-04 107 112 13.7 14.7 43.0 45.8

Nov-04 101 106 13.6 14.5 41.8 44.5

Dec-04 99 103 13.9 15.2 44.8 47.8

Jan-05 97 104 12.5 14.0 35.4 39.6

Average 1-6/04 108 108 14.2 14.2 41.6 41.6

Average 7-12/04 102 106 13.7 14.7 42.8 46.5

Average 2004 105 107 14.0 14.5 42.2 44.0

Source: Monstat & ISSP calculations Although the effects of the reduction in the tax and contributions rate, when applied on the average wage, seem modest - every reduction in the fiscal burden, regardless of its level, is positive and very welcomed by businesses. We hope that this is just the first step in the direction of reducing the fiscal burden of businesses and individuals.

Chapter 4. Prices

ISSP - CEPS 38

Table 4.1. Prices

Consumer Price Index (Cost of Living) )1

CPI Total RPI Total Producer Price

Indeks

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

2003-Q1 146.7 0.1 7.3 4.5 7.5 4.8 158.2 0.4 8.9 121.6 -0.7

2003-Q2 152.4 0.5 6.7 3.1 10.4 5.1 161.1 0.2 8.2 128.2 4.5

2003-Q3 153.0 0.2 6.6 3.9 11.7 10.5 161.9 0.1 7.1 129.3 0.2

2003-Q4 154.3 0.3 6.3 4.2 7.3 9.0 162.0 0.0 6.7 132.1 7.5

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

Oct-03 154.0 0.3 6.3 4.1 10.2 9.5 162.0 0.1 7.1 130.9 7.0

Nov-03 154.2 0.1 6.4 4.3 6.0 9.0 162.0 0.0 6.8 132.1 7.3

Dec-03 154.7 0.3 6.2 4.2 5.8 8.4 162.0 0.0 6.7 133.3 8.2

Jan-04 154.9 0.1 5.2 3.5 8.6 7.3 162.2 0.1 5.2 133.0 6.3

Feb-04 155.2 0.2 5.4 3.8 8.1 8.1 163.0 0.5 5.7 133.8 6.9

Mar-04 155.3 0.1 5.8 4.3 7.6 7.6 163.1 0.1 5.5 0.0 8.7

Apr-04 155.4 0.0 2.6 2.0 2.6 7.0 163.3 0.1 2.3 139.0 6.3

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

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


ISSP - CEPS

39

4. PRICES o Consumer prices inflation reached 3.2% in 2004 o Retail prices inflation was 6.2% in 2004 o Telecom call charges were increased by 200% in December 2004 o Food price deflation in May had decreasing effect on total inflation in 2004 o The cost of the Food consumer basket amounted €244 in December 2004 o Producer’s prices registered higher inflation in 2004 (3.6%) relative to the retail prices,

but with downward trend. o Inflation forecasts for 2005 in the range of 0.8%-1.7% o Both CPI and RPI annual rate of change the same in January as in December 4.1. CONSUMER PRICE INDEX (CPI) CPI based end-period annual rate of inflation was 3.2% for 2004, which was lower compared with 6.2% in 2003. The annual change of CPI registered decreases during first eleven months 2004 reaching 0.3%. This was a sharp fall compared to 6.4% in November 2003. According to ISSP’s calculations, final end-period inflation in 2004 increased to 3.2%. The sharp increase was due to actual “local call charges” price increase of 200% in December. “Local call charges” represent one of 365 products/services in consumer basket of Cost of Living Index. The average annual change in 2004 was 2.4%, the same as the average change in 2004. The average monthly inflation was 0.3% in 2004. The annual inflation in January 2005 was 3.2% as in December, with monthly rate of change of 0.1%. The fourth quarter of 2004 was characterized by low annual inflation in October and November (0.3% in both months) and its increase in December. Various measures of CPI inflation in the three quarters of 2004 are presented below:

Inflation in 2004

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

Q1 5,8% 5,8% 5,5% 0,1%

Q2 0,9% 2,0% 2,1% -0,1%

Q3 0,3% 0,6% 0,7% -0,3% CPI

Q4 3.2% 1.2% 1.3% 1.2%

CPI in 2004 3.2% 2.4% 2.4% 0.3%

Source: Monstat Calculations: ISSP

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 observed period (3 months in quarter or 12 months in year).

Chapter 4. Prices

ISSP - CEPS 40

Monthly CPI changes in the fourth quarter of 2004 were: 0.3% in October, 0.3% in November and 1.2% in December.

Graph 4.1. CPI inflation

-4

-2

0

2

4

6

8

10

12

14

16

18

20

Jan-

02

Mar

-02

May

-02

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

%

Monthly Annual

Source: Monstat Calculations: ISSP Retail prices were on a downward trend until November 2004, but with slower dynamics than CPI. The “call charge” price increase of 200% was also a reason why RPI increased sharply in December 2004. According to the ISSP calculations, retail prices end-period inflation was 6.2% in 2004. Compared to 2003 average, RPI increased for 2.4% in 2004, while average annual inflation was 3.4%. RPI annual inflation in January 2005 was 6.15% and monthly inflation was 0.05%.

RPI in 2004

Annual change Average change Average annual Average monthly

Q1 5,5% 5,8% 5,5% 0,2%

Q2 2,0% 1,8% 2,5% 0,2%

Q3 2,4% 1,6% 2,1% 0,1% RPI

Q4 6.2% 3.3% 3.7% 1.5%

RPI in 2004 6.2% 2.4% 3.4% 0.5%

Source: Monstat Calculations: ISSP


ISSP - CEPS

41

Monthly inflation of retail prices in the fourth quarter was 0.5% in October, 0.1% in November and 3.1% in December.

Graph 4.2. RPI Inflation

0

2

4

6

8

10

12

14

16

18

20

22

24

26

28Ja

n-02

Mar

-02

May

-02

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

%

Monthly Annual

Source: Monstat Calculations: ISSP This difference between effect of call charge price increase on CPI and RPI occurred due to different share of total services in CPI basket and RPI total products/services. Therefore, share of services in the total CPI basket is 8% and 19% in RPI products/services structure respectively. Therefore larger effect of services makes total RPI more sensitive to their price changes.

Chapter 4. Prices

ISSP - CEPS 42

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 2003

100 58.10 6.80 8.23 11.20 5.25 4.80 5.62

Consumption Weights in 2004

100 57.56 7.34 8.23 11.16 5.25 4.8 5.66

2003.

Jan 8.4 7.8 4.88 13.8 4.09 9.99 31.6 2.2 Feb 7.17 6.4 4.62 13.83 3.5 9.08 30.07 2.86 Mar 6.46 4.71 4.54 14.39 3.38 8.59 26.9 6.08 Apr 7.69 5.02 3.23 10.59 15.66 9.07 27.62 7.18 May 6.12 3.16 1.41 9.58 15.74 8.6 25.18 5.14 Jun 6.56 4.39 0.32 10.41 15.18 5.68 24.54 4.52 Jul 6.90 4.38 0.25 9.89 17.19 5.42 23.72 7.43 Aug 6.70 4.38 -0.04 9.52 16.20 5.34 22.55 7.55 Sep 6.28 4.11 -0.08 7.91 16.24 5.69 18.29 7.64 Oct 6.33 4.60 -0.11 6.70 16.13 5.23 18.25 6.75 Nov 6.42 4.79 -0.18 6.28 16.20 5.11 18.42 6.14 Dec 6.23 4.67 -0.13 7.30 16.14 4.20 15.51 5.54

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 3.16 -2.08 1.04 3.98 0.73 1.28 1.39 68.11

Source: Monstat Calculations: ISSP Food, tobacco and beverages products exhibited average annual inflation of 0.6% for 2004. Higher average annual inflation of 3.8% was registered by Goods less food, tobacco and beverages products. Services prices still had the highest average annual inflation of 9.2%. Annual inflation for each of seven main product/service groups was decreasing in 2004. The highest annual rate of changes for the majority of the groups was registered in the first quarter. After that the prices of product/services prices were falling, even deflating until the end of the year, reaching the lowest average annual inflation in the Q42004. Most of the product/services groups had deflatory effect on total inflation in January 2005. Food prices lower by 2.1% compared to January 2004 strongly pushing total inflation down. Lower than total inflation was registered at Accommodation (0.7%), Tobacco and Beverages (1%), Hygiene and personal care (1.28%) and Education and culture (1.4%). Vehicles transport and telecom services brought strong pro-inflatory effect with 53,7% annual inflation, as well as Clothes and footwear (4%).


ISSP - CEPS

43

Food product prices (57.6%6) were the main reason why total annual inflation decreased in 2004. It has been deflating between May and December, with average annual inflation of 0.6% in 2004. Corn products (8.9%) registered annual inflation rate of 3.6% in 2004. This increase occurred due to 8.3% average annual change of milled corn products in Q42004. Fresh and processed vegetables (6.2%) prices caused total Food inflation to decrease by 15% in average during Q42004. Fresh and processed fruits (5%) prices registered average annual deflation of 2% in Q42004. Fresh and processed meat (17.5%) prices increased for 2% in average on an annual basis in Q42004. Fish price increased by 12.4% in October and 7.7% in November compared to same months of the previous year. In Q42004 Milk and milk product (8.9%) prices were by 0.5% higher in average on an annual basis. Eggs (1.8%) prices increased in December for 3.3% on an annual basis. Average Lard (3.2%) prices fell by 11% in Q42004 in comparison to the respective months of Q4 previous year. The rest of food product (5%) prices (coffee, sugar, candies, spices, etc.) also fell by 5% in Q42004 compared to the respective months of 2003. Tobacco and beverages (7.3%) product prices registered average annual inflation of 0.6% for 2004 and 0.7% in Q42004. Tobacco (4.5%) product prices remained unchanged in Q42004, while the average annual inflation of beverages (2.8) price was 1.8%. The product prices pushed total inflation downward, as well as food prices. The group Clothes and Footwear prices (8.2%) continued inflatory effect in 2004 with average annual change of 5.9%. The steady increase was derived from monthly inflation of both groups of products. Clothes prices (4.4%) registered average annual inflation of 2.6% and monthly inflation of 0.3% in Q42004. Footwear prices (3.8%) were in average 8.4% higher in Q42004 compared to the respective months of the same quarter of 2003. These prices increased by 0.4% in October and by 0.9% in November compared to the respective months. Average annual inflation of Apartment prices (11.2%) was 4.8% for 2004 mostly due to its high of 15% in Q12004. The rest of the months in the year registered annual rate of change below 1%. Average annual change for apartment prices was 2.6% (due to communal prices increase) and 1.2% for apartment equipment (1.7%), while electricity prices (7.2%) remained unchanged. During the second and the third quarter of 2004, Hygiene and personal care (5.3%) registered downward trend in 2004, but with 2.3% of average annual inflation. Hygienic means (3.6%) prices registered average annual change of 0.6% in Q42004. Prices of health care services (0.8%) pushed inflation of this group up by 5.9% average annual change in Q42004. The same indicator for medicines (0.6%) was 1.1%. These prices remained unchanged on the monthly level. Education and culture (4.8%) prices fell on an annual level after high inflation in the Q12004. Following high annual changes in the first months of 2004 and inflation which was below 2% in the last quarter, the prices registered 5.4% average annual rate of change for 2004. Education equipment (3.4%) prices fell in average by 1% in Q42004 in comparison to the same quarter of the previous year. Average annual rate of change of Education services (1.5%) was 7.1% in Q42004, which is the main reason for the high annual inflation of the whole group.

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.

Chapter 4. Prices

ISSP - CEPS 44

Traffic vehicles and transport and communication services registered variable annual inflation during 2004, mostly due to the change in fuel and telecom service prices, reaching average annual inflation at the high of 9,3%. The high level occurred due to the call charge prices increase of 200%. Average annual inflation was 3.1% from January to November. Average Traffic vehicles (0.2%) prices were almost the same in Q42004 as in Q42003. Fuel and lubricants (1.8%) experienced volatile price changes at the monthly and annual level in Q42004. In October and November the prices increased by 1.6% and 3.1% respectively at the monthly level, while in December they fell by 9.5%. Annual inflation of the products was 11.6% in October, 15.1% in November and 4% in December, or in average 10.5% in Q42004. The prices of outlay for keeping cars (0.5%) had high average annual inflation of almost 10%. Communication services (2.3%) prices registered annual deflation of –0.6% in October and November, while in December, as mentioned hereinabove, it was 53,7% due to Telecom call charges increase of 200%. The fixed call charges for local services were increased from 0.003€ to 0.009€. To make a summary, Food, Tobacco and Beverages price changes, having 65% share in the consumer basket, pulled down total inflation in 2004. Prices dynamics of Food created the most significant deflatory effect on the total inflation rate. Except for the period from September to November, Tobacco and Beverages also registered deflatory effect on the total inflation in 2004. Other products/services prices created pro-inflatory effect on the total inflation. The most significant effect came from the Telecom services, Clothes and Footwear, Education and Culture. In addition total inflation rate was influenced by the inflatory prices of Accommodation and Hygienic and personal care products, but having lower effect on total inflation rate. 4.1.3. COST OF THE FOOD CONSUMER BASKET (FCB)7 Table 4.2 Cost of the food basket in Montenegro (in €)


2003 240.06 242.10 241.72 246.01 257.92 263.57 252.86 260.00 264.15 262.06 258.73 258.74

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

Source: Monstat

The total cost of the food consumer basket for a four-member family amounted to €244.1 in December 2004, which is 5.7% lower compared to the same month of the last year and in average 4.5% annually in Q42004. The trend of Food consumer basket is deflatory, the same as the Food category in the total CPI basket. FCB in Serbia registers negative, but slower annual changes in Euros (average -2.3% in Q42004) and positive changes in Dinars due

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 4.6. Food consumer basket (annual change)

-6

-3

0

3

6

9

12

15

18

Jan-

03

Mar

-03

May

-03

Jul-

03

Sep-

03

Nov

-03

Jan-

04

Mar

-04

May

-04

Jul-

04

Sep-

04

Nov

-04

%

Crna Gora Srbija (eur) Srbija (din)


ISSP - CEPS

45

to its depreciation (average 12.1% in Q42004). Most fresh Vegetables and Fruits products prices registered high negative annual rates of change. The most significant average annual changes in Q42004 were observed for: potatoes -25%, spinach -30% in Q3, lettuce -28%, cabbage -21%%, peppers -27% and grapes –42%. Considering the average annual inflation of processed food products, sugar registered the most significant average annual change of 16% in Q42004. The most significant average annual increases in Q42004 came from: apples 9%, honey 19%, flour 9% and beef meet 10%.

Graph 4.5. Cost of FCB in Montenegro and Serbia (in euro)

170

180

190

200

210

220

230

240

250

260

270

Jan-

02

Mar

-02

May

-02

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

euro

Montenegro Serbia

Source: Monstat and Federal Statistical Office (www.szs.sv.gov.yu) The comparable food consumer basket cost amounted to €181 in Serbia. Comparing to Serbia’s FCB, Montenegrin basket was in average for 66€ more expensive in Q42004 (70€ in Q1€ and Q2 and 74€ in Q3). The difference between Montenegrin and Serbian FCB is narrowing, so Montenegrin was by 35% more expensive than the same in Serbia in December 2003 (38% in March, 36% in June and 40% in September). The value of FCB was 241,5€ in January 2005, which is by 1% lower compared to the previous month or lower by 6.3% compared to January 2004. 4.2. PRODUCER PRICE 4.2.1. PPI Inflation Producer and Wholesale inflation measured by the end-period rate of change of the Producer Price Index (PPI) fell in 2004 to 4.3% (the same indicator in 2003 was 6.7%). Downward trend was still registered in the first three quarters of 2004, but an upward trend occurred in October and November (2.4 and 2.5% respectively) and in particularly in December (4.3%). Comparing the average annual inflation of 5.8% for 2004 and 2.8% for 2003 we come to a significant difference of 3-percentage points.

Chapter 4. Prices

ISSP - CEPS 46

Graph 4.7 PPI inflation

-2

-1

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%

Annual Monthly

Source: Monstat January 2005 did not bring significant as monthly (0.1%) as annual changes (3.6%). 4.2.2 PPI disaggregated changes The main factor of the increase of PPI prices was the increase of oil prices in October and November. However, decrease of oil prices in December and the increase of PPI in the same month could be explained by previously purchased oil and lagged effect on producer prices. On the other side December inflation was also caused by increase of prices in nonmetal, furniture production and production of construction materials. Deflatory effect impact was caused by Food, Beverages and Tobacco production. Mining and stone extraction prices remained unchanged on a monthly basis in Q42004, while average annual inflation was 1.3% in the same quarter. Processing industries prices decreased during 2004, reaching 5.5% average annual inflation in Q42004. Production of nonmetal products, furniture and construction materials pushed PPI up with 9%, 14% and 3.3% respectively in December 2004. o Annual price change of food, tobacco and beverage production registered inflation of

1.1% in October, deflation of 0.7% in November and 3.1% in December. o Chemical products production prices remained the same at monthly and annual level

since July 2004. o Textile production remained the same at monthly and annual level since May 2004. Average increase of Construction materials prices in Q42004 was 2.8%. Electricity, gas and water prices did not change on an annual or monthly basis until the end of 2004.


ISSP - CEPS

47

Processing industry created an inflatory effect of 4.6% on an annual basis on the total PPI in January 2005 (prices of production of metal and nonmetal products increased by 12.2% and prices of production machines, equipment and furniture increased by 18.2% compared to January 2004). Annual inflation of mining and stone extraction, electricity and construction materials created deflatory effect on total inflation in January 2005 (1.2%, 0% and 3.2% respectively). 4.3 INFLATION MEASURED BY DIFFERENT INDICATORS: PPI, RPI AND CPI Graph 4.10 shows annual rates of change of consumer, retailer and producer price indices. Since September 2003, PPI has been registering higher annual rates of change than CPI and RPI. This difference was in average 3 percentage points (See MONET 18, Prices). In December retail and producer prices dynamics came closer to each other. Decrease of Food, beverages and tobacco production prices was reflected through lower retail prices of food. However retail prices of food and beverages are decreasing faster in comparison to their production prices. This trend is not economically logical, because changes of PPI should be followed by slower changes and adjustments of retail prices. Nevertheless, textile and leather production prices have been keeping the same or even lower level as in the previous year, but their retail prices have been registering steady increase on monthly and annual basis. We should take into consideration the positive impact of imported prices on dynamics of domestic prices. This trend could be explained either by the increased demand for the products, being higher than supply or monopolies in clothes and footwear retail sector.

Graph 4.10. PPI, RPI and CPI - annual changes

-4

0

4

8

12

16

20

24

28

Jan-

02

Mar

-02

May

-02

Jul-

02

Sep-

02

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-02

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03

Mar

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-03

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03

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03

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-03

Jan-

04

Mar

-04

May

-04

Jul-

04

Sep-

04

Nov

-04

Jan-

05

%

PPI RPI CPI

Source: Monstat

Chapter 4. Prices

ISSP - CEPS 48

4.4. FORECASTS Actual annual inflation in 2004 was 3.2%, while our optimistic forecasts had foreseen a 3.7% rate. As usual, we provide inflation forecasts for both an optimistic and a pessimistic scenario. The different assumptions are made for each of the two scenarios are based on the previous developments, electricity price increase9 and volatile oil and oil derivates prices increases in the world market: The optimistic scenario for the inflation developments in the next 12 months (January – December 2005) assumes:

Actual inflation in January 2005

Continuation of the CPI dynamics as in 2004

Increase of Electricity price by 15% in November 2005.

Projected monthly increase of fuel price by 0.15%. The pessimistic scenario of inflation developments in the next 12 months (January – December 2005) assumes:

Actual inflation in January 2005

The consumer prices increase a bit faster in 2004 compared to 2003

Electricity price increase of 18% in September 2005

Projected monthly increase of fuel price by 0.20% The resulting projected inflation in the next 12 months ranging from 0.8% to 1.7%, as shown in Graph 4.11. Sharp decrease in December 2005 resulted from CPI increase in the same month of the previous year. According to the optimistic scenario, the inflation rate in the four quarters of 2005 is projected to: 3.0% in Q1, 2.9 % in Q2, 3.1% in Q3 and 0.8% in Q4. According to the pessimistic scenario, the inflation rate in the four quarters of 2005 is projected to amount to: 3.4% in Q1, 3.4% in Q2, 5% in Q3 and 1.7% in Q4.

9 Estimations are based on Energy Law of the Republic of Montenegro.


ISSP - CEPS

49

Graph 4.11 Twelve months inflation forecast

0

1

2

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03

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-04

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-04

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-04

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05

Feb-

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Mar

-05

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-05

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-05

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-05

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-05

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-05

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-05

Optimistic scenario Pesimistic scenario

forecast

Chapter 5. Budget

ISSP - CEPS 50

5. BUDGET Fiscal year 2004: o Total budget revenues (excluding grants) amounted to €372.7 million or around 93% of

the planned level were 10.0% higher in comparison with 2003; o Cumulative amount of cash budget expenditures was €385.5 million and with the net

lending they were at the level of € 400.6 million, which is 5% higher compared to 2003;

o Total budget deficit amounted to €29.4 million, which was significantly lower than the plan for 2004 (€ 48.2 million) and its share of GDP was around 1.9%;

o Two-phase reduction of tax rates on personal income tax and contributions on pension and health insurance in the total of 10% occurred on 1st July and 1st December, respectively.

5.1. BUDGET EXECUTION IN 20041

5.1.1. Budget revenues and grants

Analysis of budget revenues and grants in 2004 by months, demonstrated certain fluctuations, in such way that the first quarter of 2004 is characterized by the low level of realized revenues. Budget revenues in the second and third quarter showed an increase reaching the maximum level in August and September. Reason for such budget revenues trend lays in the seasonal increase of service based revenue (tourism) that results in tax revenue increase (turnover tax). Last quarter of 2004 is characterized by the decrease of budget revenues until December, after which they have almost reached August and September levels. Similar trend in budget revenue increase and decrease occurred in 2003.

Graph 5.1. Monthly budget revenue trend

0

5

10

15

20

25

30

35

40


2003 2004

Source: Ministry of Finance of Montenegro Note: 2003 data includes revenues that were directly transferred to the Pension Fund and other institutions in 2002.

1December revenues have been derived based on preliminary data of the Ministry of Finance of Montenegro.


ISSP - CEPS

51

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

2001 2002 2003 2004 2004 2005

Jan-

Dec

E

xecu

tion

Jan-

Dec

E

xecu

tion

Jan-

Dec

E

xecu

tion

Jan-

Dec

Pl

an

Jan'

E

xecu

tion

Feb

' E

xecu

tion

Mar

' E

xecu

tion

Apr

il '

Exe

cutio

n

May

'

Exe

cutio

n

June

'

Exe

cutio

n

July

'

Exe

cutio

n

Aug

' E

xecu

tion

Sept

' E

xecu

tion

Oct

E

xecu

tion

Nov

. E

xecu

tion

Dec

. E

xecu

tion

Jan/

Dec

E

xecu

tion/

Plan

%

Jan/

Dec

Pla

n

Deposits from previous year A Total revenue and grants (1+2) 233.140 256.804 350.103 406.987 19.94 24.22 29.49 31.23 30.34 32.98 35.58 36.95 37.06 30.48 31.87 38.00 92.91 432.155 1 Total revenue (1.1+1.2) 221.220 229.847 337.519 400.987 17.21 24.22 26.69 30.81 30.34 32.98 35.58 36.95 37.06 30.48 31.87 37.00 92.57 428.464 1.1 Current revenue (1.1.1+1.1.2) 221.220 229.847 337.519 400.987 17.21 24.22 25.49 30.81 30.34 32.98 35.58 36.95 37.06 30.48 31.87 36.70 92.19 423.064 1.1.1 Tax revenue (1.1.1.1+1.1.1.2+1.1.1.3+1.1.1.4+1.1.1.5) 187.999 208.931 312.918 358.518 16.18 22.62 22.28 28.58 28.34 28.08 31.87 34.39 33.51 28.01 30.08 33.57 94.14 383.369 1.1.1.1 Personal income tax 56.654 57.889 63.961 71.231 2.71 5.26 3.55 6.68 4.84 5.16 5.48 5.00 5.49 4.88 5.62 6.56 85.97 71.900 1.1.1.2 Turnover (sales) tax 58.488 56.528 137.222 146.600 6.88 10.30 10.57 12.53 13.04 12.39 16.80 17.30 15.42 12.79 15.07 15.01 107.84 177.100 1.1.1.3 Excises 35.664 50.786 58.197 70.700 3.74 3.94 3.84 5.20 5.42 5.25 3.49 6.58 7.65 5.35 4.46 6.60 87.03 66.597 1.1.1.4 Taxes on international trade and transactions 27.274 26.376 36.845 47.000 1.52 2.53 2.91 2.91 3.36 3.33 3.97 3.76 3.16 2.85 2.92 3.42 77.98 43.779 1.1.1.4.1 Custom tariffs 13.894 12.605 35.078 44.000 1.38 2.43 2.66 2.67 3.11 3.07 3.71 3.48 2.92 2.57 2.71 3.19 77.03 42.434 1.1.1.4.2 Custom transit fees 13.380 13.771 1.766 3.000 0.15 0.19 0.25 0.24 0.26 0.26 0.27 0.28 0.23 0.28 0.21 0.23 94.99 1.345 1.1.1.5 Other taxes 9.920 17.342 16.694 22.987 1.33 0.60 1.41 1.26 1.67 1.94 2.13 1.75 1.79 2.13 2.01 1.99 87.04 23.994 1.1.2 Nontax revenues 33.221 20.916 24.601 42.469 1.02 1.60 3.21 2.23 2.00 4.90 3.71 2.56 3.55 2.46 1.79 3.12 75.74 39.694 1.2 Capital revenue 0.000 0.00 0.00 1.19 0.00 0.00 0.00 1.59 0.00 0.00 0.00 0.00 0.30 5.400 2 Grants 11.920 26.958 12.584 6.000 2.73 0.00 2.80 0.41 0.00 0.00 0.00 0.00 0.00 0.00 0.00 1.00 115.78 3.691 B Total expenditure and net lending (1+2) 259.309 266.771 381.090 449.159 20.211 22.613 30.190 35.362 30.497 31.946 38.839 38.137 35.078 30.831 31.168 55.729 89.190 454.0641 Total expenditure (1.1+1.2) 252.585 247.517 358.924 440.659 18.381 22.535 28.920 33.564 29.414 31.325 37.382 36.140 33.207 29.629 29.919 55.072 87.480 443.3641.1 Current expenditure (1.1.1+1.1.2) 233.287 236.697 345.235 418.505 18.145 21.831 28.268 32.549 28.377 29.532 35.960 34.395 32.261 29.142 28.997 53.381 89.088 415.4321.1.1 Interest 0.622 12.880 14.136 17.500 5.004 0.346 2.821 0.302 0.249 5.239 0.140 0.466 3.104 0.372 0.428 5.207 135.299 19.5001.1.2 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) 232.665 223.818 331.099 401.005 13.141 21.485 25.447 32.247 28.129 24.293 35.820 33.929 29.157 28.770 28.568 48.174 87.071 395.9321.1.2.1 Wages, salaries, allowances 108.464 110.178 134.262 173.142 2.065 11.628 9.834 16.756 8.553 14.228 19.771 16.246 13.041 14.693 13.390 24.182 94.944 170.9051.1.2.2 Goods and services 55.351 41.817 37.858 60.856 1.726 2.509 3.572 4.321 3.545 3.728 3.676 4.327 3.663 3.440 4.673 7.725 77.075 58.3161.1.2.3 Social Insurance and Social Security Transfers 45.327 35.825 132.795 132.969 8.464 6.207 9.881 9.244 12.910 3.212 10.012 8.207 9.003 8.673 7.189 10.782 78.050 144.6581.1.2.4 Subsidies to enterprises 12.249 18.169 14.631 9.200 0.251 0.460 0.803 0.470 1.164 0.643 0.746 0.800 0.765 0.564 0.777 1.040 92.189 5.6421.1.2.5 Reserves 6.461 14.819 8.388 13.482 0.390 0.517 0.408 0.587 1.616 1.750 0.864 3.570 1.461 0.699 1.256 3.570 123.778 12.6361.1.2.6 Other non - interest expenditure 4.813 3.010 3.165 11.356 0.246 0.164 0.949 0.869 0.341 0.732 0.750 0.780 1.224 0.701 1.285 0.875 78.517 3.7741.2 Capital expenditure 19.298 10.820 13.688 22.154 0.236 0.704 0.652 1.016 1.036 1.793 1.422 1.745 0.946 0.487 0.922 1.691 57.101 27.9322 Net lending 6.723 19.254 22.167 8.500 1.830 0.078 1.270 1.798 1.084 0.621 1.457 1.997 1.872 1.202 1.249 0.657 177.827 10.700 Lending 13.974 19.490 22.590 8.500 1.830 0.371 1.400 1.798 1.088 0.937 1.457 2.002 1.878 1.203 1.250 2.428 207.551 10.700 Repayment 7.250 0.236 0.423 0.000 0.000 0.293 0.130 0.000 0.004 0.316 0.000 0.006 0.006 0.001 0.001 1.771 0.000 Overall budget balance excluding grants (cash) (A-B-2) -38.089 -36.925 -43.571 -48.172 -3.005 1.607 -4.696 -4.548 -0.158 1.030 -3.256 -1.185 1.982 -0.351 0.702 -18.729 -25,599 Overall budget balance (cash) (A-B) -26.169 -9.967 -30.987 -42.172 -0.274 1.607 -1.894 -4.134 -0.158 1.030 -3.256 -1.185 1.982 -0.351 0.702 -17.729 -21,908 Financing (1+2) 26.129 38.254 18.395 42.172 3.110 -0.987 -1.653 3.565 2.180 -4.093 3.484 1.503 0.412 -0.403 -0.463 12.455 21,908 1 Domestic and foreign financing (net) 17.007 0.568 6.234 36.172 3.110 -0.987 -1.653 3.065 0.455 -4.093 2.483 1.503 0.412 -0.717 -0.463 12.455 15,908 Borrowings 76.436 40.445 48.246 36.172 10.979 2.105 0.330 4.865 1.525 3.010 5.703 2.463 1.119 0.000 0.000 19.012 53.609 Repayment 59.430 39.877 42.012 0.000 7.869 3.092 1.983 1.800 1.070 7.103 3.220 0.960 0.707 0.717 0.463 6.557 37,700 2 Privatization revenue 9.122 37.686 12.161 6.000 0.000 0.000 0.000 0.500 1.725 0.000 1.001 0.000 0.000 0.315 0.000 0.000 6.000

Source: Ministry of Finance of Montenegro, ISSP calculations

Chapter 5. Budget

ISSP - CEPS 52

Observing total budget revenues category on the monthly basis in 2004, increasing trend can be noticed from January to September.1 After that, they show a slight decrease, and in December they go back to September level. Analyzing smallest and largest executions, it can be noticed that the smallest budget revenues were executed in January (€ 17.2 million), while the largest budget revenues were executed in September (€ 37.1 million). Reason for that lays in the fact that such increase of total budget revenues was predictable considering the impact of the summer tourist season, and related revenues.

Graph 5.2. Monthly budget revenues in 2002, 2003 and 2004

0

20

40

60

80

100

120

Jan

'02

Feb

'02

Mar

'02

Apr

'02

May

'02

Jun

'02

Jul '

02A

ug '0

2Se

p '0

2O

ct '0

2N

ov '0

2D

ec '0

2Ja

n '0

3Fe

b '0

3M

ar '0

3A

pr '0

3M

ay '0

3Ju

n '0

3Ju

l '03

Aug

'03

Sep

'03

Oct

'03

Nov

'03

Dec

'03

Jan

'04

Feb

'04

Mar

'04

Apr

'04

May

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'04

Jul '

04A

ug '0

4Se

p '0

4O

ct '0

4N

ov '0

4D

ec '0

4

Source: Ministry of finance, ISSP calculations Total budget revenues in 2004 amounted to € 372.7 million, representing 92.6% of the planned level. If total budget revenues execution in 2004, is compared with the executions in 2003, it can be noticed that around € 33.6 million (or around 10%) more revenues were executed in 2004. Structure and execution of individual revenues

Compared to the total revenue, personal income tax revenue makes up around 16.5 % of total revenue in 2004. During 2004, € 61.2 million of these revenues, was executed which represents around 86% of the planned level. Some changes are observed if comparing realization of personal income tax with previous years. Although the revenue from personal income tax is higher (by 5-7%) in 2004, in comparison with 2001 and 2002, however, compared to 2003 execution of this revenue is lower by 5%.

Value Added Tax, as a dominant item on the revenue side of the budget, exceeded

planned level in 2004 and shows a significant growth in comparison with previous years. Its portion in total revenue amounts around 42.6% in 2004. The lowest execution of VAT was noticed in January of 2004 and it amounted to € 6.9 million, while the largest

1Total budget revenues exclude grants, privatization revenue, and revenue from borrowings and credits.


ISSP - CEPS

53

execution was noticed in August and amounted to € 17.3 million. VAT decrease in January is probably caused by lowered consumption, reduced number of working days/holidays, etc. Total execution of this tax in 2004 amounts to € 158.1 million, which is by 7.8% higher than the level planned for 2004. Percent of executed value added tax is higher by 15.2%, compared to 2003 (when it amounted to € 98.3 million).

Grafik 5.3. Monthly VAT revenues

0

2

4

6

8

10

12

14

16

18

20

Apr

'03

Maj

'03

Jun

'03

Jul '

03

Avg

'03

Sep

'03

Okt

'03

Nov

'03

Dec

'03

Jan

'04

Feb

'04

Mar

'04

Apr

'04

Maj

'04

Jun

'04

Jul '

04

Avg

'04

Sep

'04

Okt

'04

Nov

'04

Dec

'04


Excises, as one of the most important item in the total revenue side of the budget, make up 16.6% of total revenues in 20042. Therefore, there were no significant changes of participation percent comparing to the in 2003 (17%). Excise based revenues in 2004 amount to € 61.5 million, which is around 13% lower than the planned level. Comparing trends in 2004 with previous years, it can be noticed that the excise based revenue is by 72% higher compared to 2001; 21% higher compared to 2002; and higher by 5.7% in comparison with 2003.

Cumulative revenue from custom tariffs in 2004 amounted to € 33.9 million,

representing 77% of execution comparing to the plan for 2004. Comparing customs tariff revenue execution in 2003 with 2004, execution of revenues shows a 3.4% decrease. Custom tariffs participation in the total budget revenue in 2004 was 9.1%.

2 Cigarette excises were established in the middle of 2004., and revenues planned for six months amounted to € 1.3 million.

Chapter 5. Budget

ISSP - CEPS 54

Graph 5.4 Monthly custom tariff and custom transit fee revenues

0

1

2

3

4

5

6


Custom tariffs '03 Custom tariffs '04 Custom transit fees '03 Custom transit fees '04


Custom transit fees were significant, and nearly at the same level as expected in 2004. Deviation of custom transit fees from the plan amounts around 5%, or, these revenues show the execution at around 95%, compared to the plan. Realized revenue (graph 5.3) was at its lowest in January (€ 0.1 million), while the largest revenue was executed in August and October (€ 0.3 million). Comparing these executions to the same category in 2003, they have exceeded the executions of custom transit fees in 2004 by 61.4% compared to the previous year. Low growth rate of custom transit fees is the result of their decrease since the first quarter of 2004.

Other taxes (revenues from corporate income tax and real estate tax) in 2004 were executed 87%, compared to the plan. These revenues in 2004 amounted to € 20 million, cumulatively, which is around 19.9% higher than in 2003. The least revenue on that basis was executed in February (€ 0.6 million), while the largest one was in July (€ 2.1 million).

Non-tax revenues, which relate to fees and other revenues, cumulative amount is € 32.2 million, which is 75.7% of the amount planned for 2004. Comparing the same category to the execution in 2003, 2004 is characterized by the increase of executed non-tax revenues by around 30%.

Grants Grants planned for 2004 were € 6 million. However, executed grants in 2004 amounted to € 6.9 million, which is 5% higher than the amount planed for 2004. In comparison with 2003 total grant amount in 2004 decreased by 52.4%, (€ 12.6 million).


ISSP - CEPS

55

5.1.2 Budget expenditures and net lending Cash budget expenditures in 2004 year cumulatively amounted to € 385,5 million. If we add net lending, we get total expenditures of € 400,6 million. Total expenditures are 5% higher in comparison with 2003 year. Budget expenditures, in great measure, follow the trend of the increase/decrease of budget revenues. Traditionally, the highest expenditures are related to the month of December, due to the payment of two salaries, which caused an increase of the total Q4 expenditures for 5% (Q4 expenditures amounted to €117,7 million) in comparison with the Q3 expenditures (when expenditures were also high).

Graph 5.4: Monthly budgetary expenditures

0

10

20

30

40

50

60

jan feb mar apr may june july aug sept oct nov dec

mil

euro

2003 2004

Source: Ministry of Finance, ISSP calculations Due to the restrictive budget policy in 2004, most expenditures categories were executed below the planned level. Non interest expenditures were executed below the planed level for about 13%, while the execution of the interests exceeded the plan for about 35%, which all together caused about 12% lower execution of total expenditures than planed. In the last quarter of 2004, according to the legal provision3, GoM adopted Savings measures so as to provide more room for attaining reform goals in the coming years. Namely, every year after Q3 Ministry of Finance carries out the revision of the budget revenues and expenditures execution. The savings measures are not compulsory and depend on the budget liquidity4. In the previous years Ministry of Finance adopted similar savings measures.

3 According to the article 2 and article 8 of the Budget Law (Official Gazette of RoM 40/01,44/01) 4 This year, according to the Ministry of Finance classification, with these measures total revenues and expenditures are reduced by around €14,9 million which caused the decrease of the budget deficit to the level of €39,2 million.

Chapter 5. Budget

ISSP - CEPS 56

Execution of expenditures categories

Disregarding the fact that, at the end of 2004 year, expenditures for public sector employees’ wages, salaries and other payments are executed below the planed level for about 5%, they are still the largest expenditures category in the total amount of €164,4 million and represent 41% of total budget expenditures. Additionally, they are larger than last year execution by 25%. This year, all payments regarding public sector employees are executed significantly above the last year level, but also, below the planed level. Net wages and salaries are executed above the plan and last year execution for about 3% and 23%, respectively. Although, payment of taxes and contributions on wages did not meet the planed levels (payment of taxes is lower for 10% and of contributions for 15% in comparison with the plan), significant improvement of their payment is noticed in comparison with 2003. Payment of contributions in the amount of €43,3 million is 45% higher than last year, while payment of taxes on wages in the amount of €19 million is 14% higher than last year.

Taxes and contributions on public sector wages in period 2003-2004

0.00

5.00

10.00

15.00

20.00

25.00

30.00

35.00

40.00

45.00

50.00

taxes on wages contributions

mil

euro

2003 2004

Source: Ministry of Finance, ISSP calculations

Payments of all other categories regarding public sector employees (meal allowances, accommodation, travel, temporary jobs, political parties representatives, etc.), with the exception of the regress payment (its level was significantly below the plan, and at the end of the year only 44% of the previous year level was executed), were higher by 13% in comparison with the last year.

At the end of 2004 year, expenditures on goods and services amounted to about €47 million and represented 13% of total expenditures. They were 23% higher/lower in comparison with the last year execution/planned level.


ISSP - CEPS

57

Total expenditures for social insurances and social security transfers5 amounted to €103,8 million and were lower by 22% from the planned level. Their share in total expenditures is 26% and is the second largest expenditure category. Although transfers to the extra budgetary Funds have the largest share in this category (almost 50% or €49,6 million), their execution is lower than the planed level by 35%. Funds for social care6 (FMS, child allowances, other people medical care, veteran benefits....) amounted to €30,4 million or 94% of the plan and in the same time were higher than last year execution by 13%. Transfers to the individuals (students, republic awards, scholarships to sports players and young talents, etc.) were exactly at the same level (€6,3 million) as last year. This year, GoM gave seven time more funds for financing of University, Red Cross, Center for Refugees, NGO’s, Health Institute, religious communities, etc., in the total amount of €12,7 million, which is, however, by 19% lower than planed. Transfers for the roads construction, streets reconstruction, improvement of rural areas, donations to municipalities amounted to €3,2 million and represented 75% of the planed level.

At the end of 2004 year, cumulative capital expenditures amounted to €12,6 million or

57% of planed amount, thus being the expenditures category with the lowest execution in comparison with the plan for 2004.

Other non-interest expenditures (rent, other expenditures and payment of frozen

savings), at the end of 2004, cumulatively amounted to €8,9 million. This category cannot be compared with last year execution, for, in the last year, it did not include repayment of frozen savings. Rent and other expenditures were executed below the planed level by 8% and 11%, respectively. At the beginning of the 2004, GoM decided to execute payment of frozen savings in the total amount of €8,1 million7, but at the end of the year total payment was 47% lower than planned.

In 2004 year, GoM was very disciplined regarding interests payments, for they were

paid in the amount of €23,7 million, or 67% and 35% higher than last year and planed amount, respectively. Interest paid to residents amounted to about €3 million and was six time higher in comparison with the planed amount (€ 0,5 million)8. Interest to non-residents was paid in the amount of €20,6 million and was almost double than the last year level. The higher execution of the overall category is due to the strengthening of the debt management policy implemented by the Ministry of Finance.

At the end of 2004 year, reserve category (€16,7 million) was executed above the planed

level for about 24%. Current budget reserve (€15,9 million) was almost three times higher than last year level, while the permanent budget reserve (€0,77 million) was 74% lower than the last year level.

The execution of subsides was very low in comparison with the last year execution, due

to the fact that they were planed on the much lower level in comparison with 2003. At the end of 2004 total amount of subsidies was €8,5 million or 58% of last year execution. The share of public enterprises subsides in total subsides is 90% or €7,6 million, while the rest of 10% represents other enterprises subsides (€0,86 million).

5 A comparison of this category with the previous year is not relevant because previously this category included funds for the financing of the State Union in the total amount of €40,0 million, which is not the case in 2004 6 Including funds for social protection within Ministry of Defense of Union Serbia and Montenegro 7 Within the framework of Savings measures, planed amount was reduced to the level of €5,1 million and in comparison with this amount, repayment was lower for 17%. 8 the plan was probably not realistic

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Net lending

At the end of 2004 year, total lending amounted to €17,6 million, out of which €7,2 million are credits given to the public and other enterprises and the other credits, while the rest of €10,4 million relates to the repayment of the liabilities based on the given guarantees. At the beginning of 2004 year, GoM decided to give credits in the total amount of €8,5 million, but at the end of the year they were lower by 15%. The high execution of the overall category is related to the repayment of the liabilities based on given guarantees9 in the amount of €10,5 million, whose share in the total category is 60%. Credits to the public enterprises are given in the planed amount of €2,3 million, while the credits to the other enterprises are given in the 7% lower amount than planed. At the end of 2004 year, repayment of loans was at the level of €2,5 million. The level of receivables was the highest in the third quarter of fiscal year 2004, totaling €5,3 million. Consequently, net lending at the end of 2004 year, was €15,1 million, which is 78% higher than planed level and in the same time 32% lower than the last year (due to the much lower repayment of loans in 2003 year). 5.1.3. Budget balance and financing

Overall budget balance With the exception of February, June, September and November, the budget balance was negative in all remaining months of 2004. Cumulatively, the cash budget deficit at the end of 2004 amounted to €29,4 million, which is much lower than planed (and is an indicator of the restrictive budget policy during a year). Financing Negative budget balance (budget deficit) is financed by grants (€6,9 million), privatization revenues and foreign and domestic borrowing. Privatization revenues in 2004 were €3,5 million which decreased compared to the plan for 2004 by 41% (€6 million). It's important to emphasize that privatization revenues in 2003 were €12,6 million (due to the sale of Jugopetrol and privatization of Montenegrobank). Compared to 2003, total amount of privatization revenues in 2004 has decreased. The GoM took €51,1 million of credits (41,3% higher than the plan) and repaid €35,5 million, therefore, net liabilities at the end of 2004 year amounted to €15,6 million (only in the second quarter repayments were higher than borrowings by €0,6 million). At the end of 2004 year, GoM is much more (2,5 times ) indebted in comparison with 2003. 5.1.4. Treasury bills During 2004, 36 auctions of treasury bills were held. Of the total number, thirteen auctions referred to 28-day T-bills, twelve to 56-day T-bills, seven to 91-day T-bills and four auctions referred to 182-day T-bills. Comparing amounts of issues in the first and in the last month in 2004 (January and December), the value of T-bills issued in December comparing to January was increased by 60%. This was the result of 91-day T-bills issued in December. The total amount of the issued T-bills was € 11.1 million. The lowest interest rate on T-bills was about 8.6%, while the highest interest rate was 10.9% (see tables 5.5. and 5.6.). 9 Plan did not include repayment of liabilities based on the given guarantees in this year.


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28- day T-bills The first quarter of 2004 is characterized by three auctions of 28-day T-bills. Proposed price of those T-bills was € 35 million while the average weighted interest rate was 10.5% (Table 5.2.). The second quarter of 2004 had also three auctions of 28-day T-bills. Proposed price was € 46.4 million with an average weighted interest rate of 10.5%. The third quarter had four 28-day T-bills auctions with price of € 63.4 million and an average weighted interest rate of 10.1%. The last quarter of 2004 is characterized by three 28-day T-bills auctions with price of € 34.3 million and an average weighted interest rate of 9%. Table 5.2. Overview of 28-day T-bills

Number Date of auction

Amount of issue

Total offered amount

Amount of sold T-bills

Date of maturity

Weighted average

1 22.01.2004. 12 12.16 12 19.02.2004. 10.10

2 19.02.2004. 12.5 11.22 11.22 18.03.2004. 10.71

3 18.03.2004. 12 11.65 11.65 15.04.2004. 10.72

4 15.04.2004. 17 15.03 15.03 13.05.2004. 10.73

5 13.05.2004. 16 15.84 15.84 10.06.2004. 10.49

6 10.06.2004. 15 15.55 15 08.07.2004. 10.45

7 08.07.2004. 15.5 15.13 15.13 05.08.2004. 10.48

8 05.08.2004. 16 16.56 16 02.09.2004. 10.45

9 02.09.2004. 16.1 18.81 16.1 30.09.2004. 9.92

10 30.09.2004. 13.5 12.96 12.96 28.10.2004. 9.59

11 28.10.2004. 13 12.56 12.56 25.11.2004. 9.38

12 25.11.2004. 10.5 11.14 10.56 23.12.2004. 8.92

13 23.12.2004. 10.7 10.62 10.62 19.01.2005. 8.83

Source: Ministry of finance, Montenegro Note 1: Categories in million € Note 2: Annual interest rates 56- day T-bills Total offered amount of twelve 56-day T-bills held in 2004, was € 53 million (Table 5.3.). In the first quarter there were three auctions. Proposed price of those T-bills was € 9.7 million, with an average weighted interest rate of 10.5%. The second quarter is characterized by four auctions of 56-day T-bills, with worthiness of € 11.6 million and an average weighted interest rate of 10.5%.

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The third quarter had three auction of 56-day T-bills with price of € 17.2 million. Weighted interest rate was 10%. In the last quarter of 2004, there were only two auctions of 56-day T-bills, with proposed price of € 12 million and an average weighted interest rate was 8.7%. Table 5.3. Overview of 56-day T-bills


Amount of issue

TOTAL OFFERED AMOUNT


Date of maturity

Weighted average

1 13.01.2004. 5.5 3.79 3.79 4.03.2004. 10.22

2 5.02.2004. 4.5 3.40 3.40 01.04.2004. 10.48

3 4.03.2004. 4.5 2.57 2.57 29.04.2004. 10.8

4 1.04.2004. 4.0 3.09 3.09 27.05.2004. 10.63

5 29.04.2004. 3.0 2.84 2.84 24.06.2004. 10.82

6 27.05.2004. 4.0 4.19 4 22.07.2004. 10.57

7 24.06.2004. 4.0 4 4 19.08.2004. 10.19

8 22.07.2004. 4.5 4.49 4.49 16.09.2004. 10.41

9 19.08.2004. 5.0 7.15 5 14.10.2004. 9.98

10 16.09.2004. 5.5 5.52 5.5 11.11.2004. 9.78

11 11.11.2004. 5.5 7.40 5.5 06.01.2005. 8.78

12 9.12.2004. 5.2 4.62 4.62 02.02.2005. 8.62

Source: Ministry of finance, Montenegro Note 1: Categories in million € Note 2: Annual interest rates 91-day T-bills In 2004, there were seven auctions of 91-day T-bills. Proposed price of those T-bills was € 24.4 million and an average weighted interest rate was 10.3% (Table 5.6.). The issue of 91-day T-bills began at the end of second quarter in 2004 (in July). Table 5.4. Overview of 91-day T-bill auctions

Number Date of auction Amount of issue



Date of maturity Weighted average

1 25.06.2004. 2 2 2 24.09.2004. 10.90

2 1.07.2004. 2 2.11 2 30.09.2004. 10.97

3 24.09.2004. 2.1 2 2 23.12.2004. 10.90

4 30.09.2004. 5 9.13 5 30.12.2004. 9.80

5 23.12.2004. 2 2 2 23.03.2005. 10.66

6 29.12.2004. 4 2.03 2.03 29.03.2005. 9.50

7 30.12.2004. 5.1 5.10 5.10 30.03.2005. 9.70

Source: Ministry of finance, Montenegro Note 1: Categories in million € Note 2: Annual interest rates


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182-day T-bills In 2004, there were four auctions of 182-day T-bills, beginning from third quarter, i.e. from July (Table 5.5.). Total amount of issued T-bills was € 8.5 million, with an average weighted interest rate 9.9%. Table 5.5. Overview of 182-day T-bills


Amount issue



Date of maturity

Weighted average

1 16.07.2004. 3.5 3.5 3.5 13.01.2005. 10.8

2 17.11.2004. 2 0 0 17.05.2005. 0

3 25.11.2004. 2 2.5 2 25.05.2005. 10.15

4 2.12.2004. 2 2.5 2 01.06.2005. 9

Source: Ministry of finance, Montenegro Note 1: Categories in million € Note 2: Annual interest rates Box 1: T-bills in 2005 Government of Montenegro, in February 2005, announced Statute on T-bills auction. The plan for 2005 will not increase net debt up to €14.000.000,00, without issuing costs. T-bills can be issued from 1st February 2005. in denomination from €100. 5.2 SOCIAL FUNDS

In the reminder of this chapter there is a short analysis of revenue and expenditure execution in social funds (Pension, Health, and Employment Fund) during 2004 year. Table 5.6: Social funds revenues and expenditures (in mil €)

Social funds Revenues in

2003 Revenues in

2004 Expenditures in

2003 Expenditures in

2004

Pension Fund 174.25 170.80 161.40 168.18

Health Fund 95.84 95.00 96.57 94.69

Employment Fund 15.04 11.88 14.61 11.53

Source: Social Funds, Ministry of Finance

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Pension Fund

At the end of 2004 year, total Pension Fund revenues amounted to €170,8 million (about 97% of the planned level) and were by 2% lower in comparison with 2003. Revenues based on contribution payment amounted to €86,1 million and were 22% lower in comparison with the plan and approximately at the last year execution level. Pension Fund database includes 6,062 enterprises, out of which 3,624 (or about 60%) make regular contribution payments, while the remaining 2,438 (40%) does not do it regularly10. The second largest expenditures category relates to budget transfers11 in the amount of €65,8 million, which is 14% and 11% higher than the planned level and last year execution, respectively. Revenues based on withdrawn deposits amounted to €8,1 million and were 37% higher than the last year execution. Revenues from fees charged by the ZOP (House for Settlements and Payments) represented 3,6% of total revenues and amounted to €4,9 million. Although dividends were not anticipated within the plan, at the end of 2004, they have amounted to €3,3 million and represented 1,9% of total revenues.

Total expenditures amounted to €168,18 million, or about 96% of planned level, and

were by 4% higher in comparison with last year execution. Beside the pensions payment, all expenditures categories are executed below the planned level. Payment of pensions represent around 80% of total expenditures and amounts to €136,4 million. Pensions are paid in the amount higher by 4% and 11% in comparison with the planned level and last year execution, respectively. Pensions adjustments, which were done twice in 2004 year in the total amount of 8,89%, had the greatest impact on the increase of pensions payments. The first adjustment relates to the 18-month period12 at the rate of 7,4% and the second for the 6-month period13 at the rate of 1,49%. Additionally, there was a significant inflow of 3,100 new pensioners. Health contributions are paid in the amount of €16,5 million and represent 10% of total expenditures. Unfortunately, only 64% of planned health contribution payment was executed, which directly caused lower revenues of the Health Fund.

At the end of 2004, surplus of the Pension Fund amounted to €2,63 million.

Plan for 2005 In 2005, Pension Fund will take further steps to provide efficient and timely realization of pensions insurance rights to its bearers14. As in previous years, pensions will be adjusted twice a year on 1st January and 1st July on the basis of the trend of living costs and increase of wages. For 2005, total budget of Pension Fund is planed in the amount of € 179,5 million, which is by 2% higher than plan for 2004. Revenues based on paid pensions contributions are planed to represent 60% of total revenues in the amount of € 107,3 million. Budget transfers 10 Pensions contributions are paid at the rate of 21,6%, out of which 12% is paid by the employee and 9,6% by the employer 11 Transfers from budget relates to the deficit covering and realization of pension rights 12 from 1st July 2002 to 31st December 2003 13 from 1st January 1st to July of 2004 year 14 According to the Pension Fund data base, Fund provides pensions-invalid insurance rights to the 105,654 persons, out of which 39,920 relates to the old-age pensions, 26,508 of invalid pensions, 25,732 of family pensions, 2,156 are users of the right on the other people care, 8,051 users of the compensations for the body damages and 3,287 are employed and unemployed work invalids of 2nd and 3rd category


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including deficit covering will amount to € 66,0 million or 37% of total revenues, which is 5% higher than the last year plan and at the level of 2004 execution. On the expenditures side, there is a planed increase of the pensions payment15(€ 138,4 million) and health contributions payment (€ 27,0 million) by around 6% and 5% in comparison with the 2004 plan, respectively. Health Fund At the end of 2004 year, total Health Fund revenues amounted to € 95,0 million which is almost the same as the last year level. In the same time they were 7 % lower than the planned level. As regards expenditures, they amounted to € 94,7 million or 91% of the planned level. As a result of the Health Fund activities at the end of 2004 year, financial result was positive in the total amount of € 0,31 million.

The greatest part of health fund revenues consist of contribution payments, out of which € 39,8 million comes from economic activity, € 33,7 million from non-economic activity, € 1,4 million from self employed workers, € 16,9 million represent pensioners health care contributions, € 0,4 million are contributions from agricultural workers and 0,1 relates to the contributions for un-employed persons. In 2004 overall contributions payments category (€ 92,5 million) is higher for 2,5% in comparison with the 2003 year. The rest of revenues relates to the budget transfers for unemployed persons (€ 1,4 million) and other revenues (€ 1,3 million).

Ambulant and clinic services have the greatest share of 34% in the total expenditures in

the absolute amount of € 32,2 million. Medicines expenditures amounted to € 26,4 million and were for 1% lower than the planned level16. Another significant expenditures category relates to the treatments in hospitals in the total amount of € 26,2 million. Expenditures regarding material and administrative costs amounted to € 4,7 million or 5% of total expenditures. The share of travel costs and daily allowances in total expenditures is 2,3%, while the share of compensations during the sick leave was about 1% or € 1,04 million.

Employment Fund Total Employment Fund revenues at the end of 2004 amounted to € 11,9 million and total expenditures amounted to € 11,5 million, and were lower by 21% in comparison with the last year level. As a result of revenue inflow and expenditure execution, at the end of 2004, Employment Fund had a positive financial result in the amount of € 0,4 million.

The largest revenue category, with the share of 34%, is related to the contribution payments (paid by employers as a part of income tax) in the total amount of € 4,1 million. Budget transfers amounted to € 2,8 million, out of which € 1,5 million represent cash compensations for unemployed persons, € 1,2 million are funds for the support of new employees and the rest of 0,1 million are credits for self-employment. In 2004 Employment Fund received € 2,7 million based on self-employment loans plus interests

15 In this figure are also included payments of invalid pensions of employed and unemployed work invalids of 2nd and 3rd category 16 One of the weak points of the Montenegrin health system is huge spending on medicines with a share of almost 30% in total health expenditures. One of the aims of the Health Fund in 2004 year was the reduction of this type of expenditures by the introduction of the informative system in pharmacies at the beginning of the year.

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repayment, which represented 23% of total revenues. Fees for non-residents employment reached € 1,1 million or around 9% of the total revenue. In the structure of total expenditures, the largest part, or 23% is related to administrative costs17 in the total amount of € 2,7 million. Material costs amounted to 1,9 million or 16% of total expenditures. In 2004 year, loans for self-employment significantly decreased in comparison with the 2003 and amounted to € 1,6 million or only 30% of the last year amount. In the 2004, expenditures for preparation of the workers amounted to € 1,5 million or 58% of the last year amount.

5.3. BUDGET IN 2005. Montenegrin Parliament adopted Law on Budget for 2005 on 28 December 2004. The Law includes information about planned revenues and expenditures of the Government in 2005. Economic policy priorities for 2005 prescribed by the Law are logical continuation of the processes already started in previous years. Therefore, top priorities are: increase of production of goods and services with the goal of increasing exports; increase of employment; transformation and privatization of companies; decrease of poverty rate, with the objective of rising the standard of living. Total revenue planned for 2005 amount to € 432.1 million, while predicted expenditures amount to € 454,1 million and the planed deficit (excluding grants) is approximately € 26 million. The consolidated public consumption is planed at the level of € 727,2 million. Within the framework of the Budget Law for 2005, program budget implementation, started last year, has continued. This year budget is expected to be sustainable, for it has been prepared within the 3-year framework, with the assistance of IMF. The more detailed analyze is presented in the text below. 5.3.1 Budget revenues Budget revenues in 2005, according to the plan, will amount to € 428.5 million (excluding grants), which is by 6.8% higher comparing with the plan in 2004 (€ 400.9 million). Significant increase of budget revenue in 2005 is expected in the third quarter as the result of positive anticipated results of the tourist season, retail tax revenues, and custom tariffs and excises on imported goods. Structure of budget revenues in 2005 comparing with 2004 has practicaly similar trend and same methodology.

17 wages and salaries, taxes for the Employment Fund employees


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0%

20%

40%

60%

80%

100%

2001 2002 2003 2004 2005

Graph 5.5. Structure of budget revenues, 2001-2005

Other taxes

Taxes on international trade

VAT and excises

Personal income

Source: Ministry of finance of Montenegro, ISSP calculations Note: Data for 2005 are from the Budget Law for 2005. Taxes Total budget revenues planned for 2005 amounted to € 383.4 million, which is by 6.9% higher compared to the plan in 2004.

In 2005, revenue from the personal income tax was planned at the level of € 71.9 million, while its portion in total revenues is at the level of 16.8%. Execution decrease of these revenues is expected to be 0.9% in 2005, comparing to the executions in 2004. It is necessary to emphasize that evaluation of this category was largely influenced by decreasing contributions rates on pension and disability and health insurance by 5% (in July), and additional 5% in December.

Turnover tax and revenue based on VAT in 2005 is planned at the level of € 177.1 million, which represents 41.3% of total revenues. This budget category increased 20.8% in 2005 comparing with the plan in 2004. Decreasing trend of revenues is expected in 2005 for this budget category, especially during the summer tourists' season.

Excises were planned at the level of € 66.6 million, which is, comparing to 2004 lower by 6%. Excise taxes paid in production and VAT share in total revenues is 15.5% (that percentage amounted to 17.6% in 2004.).

Revenues expected on the basis of custom tariffs were planned at the level of € 42.4 million, representing around 10% of portion of the total revenues of the Government. If the same category is to be compared to the plan in 2004 (planned revenues based on custom tariffs amounted to € 44 million), execution of revenues based on this category in 2005 will be around 4% lower than in 2004.

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Revenues on the basis of custom transit fees will continue their decreasing trend in the next year. Therefore, analyzing this category and its portion into the total revenues, it can be noticed that its portion decreased comparing to 2004 when it was around 0.7%. In 2005 share of custom transit fees in the total revenues is expected to be around 0.3%.

Planned revenues on the corporate income tax basis will be at the level of € 17.3

million, which is, observing anticipated executions and comparing to 2004, higher by 10.6%. Corporate income tax will represent 4,5% of total budget revenues in 2005.

Revenues from the real estate tax for 2005 were planned at the total amount of € 3.5

million, which is by 18.4% lower compared to the plan in 2004. This was partly a result of very poor execution of these revenues in the first three quarters of 2004.

Fees Revenues based on fees (administrative, court, residence, registration and other) in 2005 were planned at the level of € 7.1 million, which is, observing planned amount in 2004, higher by 15.3%. In 2005, as it was in previous year, revenues on the basis of administrative and court fees will be the most dominant revenues. Planned administrative fees in 2005 amounted to € 4.6 million. Comparing with 2004 they are higher by 21.6%. Similar situation applies for court fees. According to 2005 plan, they amount to € 2.3 million and comparing to 2004 plan, they are higher by 28.8%. Other Republic’s revenues This budget category in 2005 represents 7.6% of total revenues and was planned at the level of € 32.6 million. If this category is compared to the 2004 plan (when these revenues amounted to € 33.3 million), it can be concluded that these revenues for 2005 are lower by 3.7% comparing with those in 2004. 5.3.2. Budget expenditures and net lending As it was previously mentioned, total expenditures and net lending are planned in the amount of € 454,1 million (excluding net lending, total expenditures will amount to € 443,4 million), which is by 1% higher than the last year plan. The greatest share of around 92% is current expenditures in the total amount of € 415,4 million. Expenditures related to the activities of expenditure units in the structure of total expenditures have a share of about 87%, funds related to the lending and repayments of debts have a share of 10,7%, while the share of overall reserve is 2,7%. In comparison with the last year plan, the greatest changes are noticed in the plan of capital expenditures, interest and social insurance and social security transfers (increase of 26%, 11% and 9%, respectively), and of subsides to enterprises (decrease of 40%). Analysis of the budget expenditures structure is given in the text below.


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According to the Budget Law for 2005 year, public sector employees’ wages, salaries and allowances18 have the greatest share of almost 38% in total expenditures and will amount to € 170,9 million. Gross wages and salaries are planed to be almost at the same level as in the 2004 plan, which is a total amount of € 158,6 million. Net wages are planed to increase by 7% in comparison with the last year plan and will amount to € 90,3 million. Taxes and contributions on wages are planed to be lower than in the 2004 by approximately 10% and will amount € 19 million and € 46,6 million, respectively. In comparison with the last year plan, one new category has been introduced- surtax on personal income tax19, which will amount to € 2,8 million. This year will be no wages increase, since public administration should be rationalized in order to meet IMF requirements. Namely, GoM undertook responsibility to lay off 3,200 public sector employees by the end of 2005. If this goal is met, wages increase might be expected in the coming years. All other allowances related to the public sector employees (meal allowances, accommodation, travel, temporary jobs, bonuses, etc.) are planed to be lower in comparison with the 2004 plan and represent 2,7 % of total planned expenditures.

Expenditures for goods and services are planed to be at the level of € 58,3 million or

96% of the last year plan (their share in the total expenditures is 12,8 %). The greatest share of 41% in this entire category is contracted services. They are planed to be at the level of around € 24 million, which is almost 30% higher than 2004 plan. Ministry of Culture and Media has the largest share in contracted services, in the amount of € 3,1 million, followed by the Ministry of Environmental Protection and Physical Planning in the amount of € 2,21 million, Ministry of Education and Science and Education Office in the amount of €1,82 million and €1,76 million, respectively. Expenditures for current maintenance of Republic’s buildings, material and electricity are lower in comparison with the last year plan for about 35, 24% and 13%, respectively. On the other hand, expenditures for business trips and entertainment increased by 53%.

Expenditures on social insurance and social transfers are planed to be at the level of €

144,7 million or for 9% higher than the level planed for 2004, and represent the second largest expenditures category with the share in total expenditures of 32%. The greatest share in this category (almost 60%) have transfers to the extra budgetary funds: Pension Fund (€ 66,0 million), Health Fund (€ 7,23 million)20, Employment Fund (€ 7,0 million)21; and the transfers to the Ministry of Defense of the State Union Serbia and Montenegro (€ 4,56 million)22. Expenditures on social care are planed to be at the level of € 34,2 million, which is about 5% higher than last year plan23. Transfers to the NGOs and other organizations are planed in the amount of € 12,76 million, out of which 1,48 million is for the activities of parliamentarian parties, while the rest of 11,28 million is for University financing (€ 10,0 million), activities of Red Cross, NGOs, Center for

18 According to the ISSP calculations, about 35% of official employed persons in Montenegro are public sector employees. The figure of € 170,9 million is related to employees in: public administration, health, education, police, Ministry of Defense of Union Serbia and Montenegro etc. 19 Surtax is an addition to the tax, whose basis for payment is already paid tax. 20 Besides payment of health contributions of unemployed persons, starting from this year Republic Budget will finance health care of refugees and displaced persons and capital expenditures in the health system. 21 Transfers to the Pension Fund increased for about 15% (which is in accordance with the commitment not to allow further liquidity problems of the Pension Fund), to the Health Fund for 2%, while to the Employment Fund decreased for 36%, in comparison with the 2004 plan. 22 Funds for the social allowances on the territory of Montenegro. 23 In comparison with the last year plan, majority of categories remained at the same level, except: veteran benefits (reduced for 6%), FMS (increased for 3%), one time assistance and allowances in travel (increased for 4%).

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Refuges, Health Institute, religious organizations, etc. Transfers to individuals will amount to € 8,5 million (almost 30% higher than the previous year plan). Funds for improvement of rural areas, reconstruction of local roads and streets and donations to municipalities will amount to € 4,4 million.

Graph 5.6. Composition of budget expenditures, 2001-2005

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2001 2002 2003 2004 2005

Net lending

Capital expenditure

Reserves and other non-interest expenditure

Social transfers andsubsidies

goods and services

wages and salaries

Interest

Source: Ministry of Finance, ISSP calculations

Capital expenditures represent 6,2% of total expenditures and will amount to € 27,9 million. They are higher from the previous year amount by 26% due to the increased financing of infrastructure construction24 and equipment purchase (64% higher) in the total amount of € 24,4 million.

Other non interest expenditures25 are planed to be at the level of € 3,8 million. We cannot compare this category with the last year plan, for it included, in the last year, repayment of the frozen savings. Total expenditures on rents are planed to be at the level of 1,9 million, other expenditures will amount to € 1,9 million26.

Expenditures on interests are planed to be 11% higher than last year plan (due to the

increased payment of interests to non residents, since payment of interests to domestic banks remained the same as the last year planed level of € 0,5 million27) and will amount to € 19,5 million. The share of interests in total expenditures is 4,3%. The largest amount of interests charged on the previous foreign borrowings will be paid to World Bank (IBRD) in the amount of € 13,6 million, Paris Club (€ 3,5 million), European Investment Bank (€ 1,8 million) and IDA (€ 0,1 million).

24 This include activities within the Office of Public Roads related to the reconstruction of roads, schools, living dwellings etc.; and two programs from the Program budget of the Ministry of Maritime Affairs and Transportation: Public Roads and Railway Transport. 25 Include: payment of rents and other expenditures payment . 26 Compensations for natural disasters, persons sent in prison by mistake, VAT return etc. 27 The amount of € 0,5 million will be probably exceeded if it is going to follow the 2004 year trend


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Overall reserves will amount to € 12,6 million, out of which 11,8 million is related to

the current budget reserve and the rest of 0,9 million is permanent budget reserve. Funds of the current budget reserve are related to the payment of the inadequate planed expenses and of those not included in Budget. The amount of € 2,9 million from the current budget reserve will be used by the Ministry of Internal Affairs. According to the Article 11 of the Budget Law, funds of the current budget reserve in the amount of € 7,0 million will be used from June 30th 2005, if budget revenues for the first six months are not executed in the planed amount. The share of overall reserves in total expenditures is around 3%.

This year, GoM decided to significantly reduce the amount of subsides (€ 5,6 million) due to the reduced amount of subsides to public enterprises (€ 4,6 million), which are about 45% lower than the last year plan. The rest of the overall amount is related to the subsides to other enterprises in the amount of € 1,0 million. If we analyze total subsides from the aspect of the activity, € 3,25 million are designated for the agriculture, water management, forestry etc., € 0,57 million to the railway transport, € 0,80 for energy supply, € 0,70 million for tourism (Initiative for the infrastructure development) and € 0,32 million as incentive to the export and competitiveness of domestic products.

According to the budget plan, funds of € 10,7 million are planned for lending, out of which € 0,5 million are for the public enterprises, 0,6 million to the other enterprises, € 5,6 million are other loans and €4,0 million represent repayment on the basis of given guarantees. As in 2004, the plan for 2005 does not include repayments, therefore lending is equal to net lending.

5.3.3 Budget deficit and its financing According to the ISSP calculations, budget deficit (excluding grants) is expected to be at the level of €25,6 million, which is much lower (47%) in comparison with the previous year plan (€48,2 million). The majority of the budget deficit (€15,9 million)28 will be covered by domestic and foreign credits. Foreign credits (by the World Bank)29 are planned in the amount of €14,6 million, while domestic credits are planed in the gross amount of €39,0 million, out of which €29,0 million are planned repayments. Beside this amount, repayments category, this year, includes repayment of frozen savings (€ 8,7 million). The remaining €9,7 million of budget deficit is supposed to be covered by the privatization receipts (€6,0 million) and by grants (€3,7 million).

28 The actual figure of €24,6 million is reduced with the repayment of old foreign exchange savings in the amount of €8,7 million 29 €7,3 million (SAC II for structural adjustment) and €7,2 million (IDA specific purpose credits –pension reform, health reform, education)

Chapter 5. Budget

ISSP - CEPS 70

Graph 5.7 Plan of budget deficit financing

14.4 %

23.4 %

62.1 %

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

grants privatization receipts net domestic and foreign financing

Source: Ministry of Finance, ISSP calculations 5.3.4 Expenditures according to the functional classification

Graph 5.8. Where is taxpayers’ money spent?

public services

defense services

public order and securityeducation

health

social care and protection

housing-utility services

sport, cultural and religious activities

energy supply

agriculture, forestry, hunt and fishing

mining

transport

other economic activities

Source: Ministry of Finance According to the planed budget expenditures for 2005 by functional classification, the majority of funds are aimed for public bodies (36%). Expenditures for public order and security are planed in the amount €64,6 million, and together with the expenditures for army and civil defense (€41,6 million), whose user is Ministry of Defense of Serbia and Montenegro, represent 21,6% of total expenditures. Funds for financing education are planned at the level of €89,1 million (18,1%). These mentioned categories, together with the


ISSP - CEPS

71

money for social insurance and social protection (€43,3 million), represent about 85 % of total expenditures. Box 2: Program budget Within the framework of the Budget Law for 2005 year, Ministry of Finance continued, with the assistance of the US Treasury experts, the implementation of the program budget. This year, program budget has been made for six budget users: Ministry of Education, Ministry of Maritime Affairs and Transportation, Ministry of Tourism, Tourist Organization of Montenegro, Education Office and Office for Execution of Criminal Penalties. The main scope of the program budget is to explain the activity budget user is dealing with, as well as significant changes related to the additional activities planning. Starting for the activities of six mentioned budget users, for each of them are prepared: programs, sub-programs (which have to be conducted before the realization of the program) and performance indicators (designed to measure the results of the realized activities). 5.3.5 Overall public spending in 2005 In 2005 year, consolidated public spending is planned to be at the level of €727,2 million, around €1,173 for every man, woman and child in the Montenegro. In absolute terms, public spending increased in comparison with the previous year for nearly 3%, but as a % of GDP it is supposed to decrease by 2% (from 47,9% to 45,9%). The share in overall public spending is the following: republic budget with 52,7%, Pension Fund (21%), Health insurance Fund (14,9%), municipalities (8,8%) and Employment Fund with 2,6%. Actual revenues will amount to €692,9 million and planed deficit (€34,3 million) is completely related to the Republic budget (in order to maintain liquidity of the Pension Fund) and will represent 2,17% of GDP30. The aim of the public consumption policy in 2005 is deficit reduction and public consumption financing from the real sources.

30 Ministry of Finance estimates

Chapter 6. Money

ISSP - CEPS 72

6. MONEY o Monetary aggregates show an increase in 2004 o Total deposits reached the level of €273.7 million at the end of 2004 o Total household deposits reached €80.7 million at the end of 2004 o Total amount of loans approved by Montenegrin banks in December 2004 was €284.1

million o The total amount of loans to privately owned companies reached the level of

€161.2million in December, while total loans to individuals were €74.3million. 6.1. MONETARY AGGREGATES In this issue we will analyze trends of monetary aggregates in 2003 and 2004, as according to the new definition of aggregates adopted by the Central Bank in 2004, these data are available and comparable.


ISSP - CEPS

73

Table 6.0. Monetary Aggregates, end of the month, in 000 EUR

2003 2004

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

M0 302,084 302,656 293,161 286,643 284,909 287,193 280,347 281,275 279,117 281,920 283,695 288,879 299,300 292,280 290,181 290,897 290,935 Banks' deposits with CBM-Payment Operations

52,084 52,656 43,161 36,643 34,909 37,193 30,347 31,275 29,117 31,920 33,695 38,879 49,300 42,280 40,181 40,897 40,935

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

M1 435,973 433,804 415,360 391,676 386,121 391,052 382,434 387,310 389,670 389,576 393,308 410,620 439,927 417,157 427,968 418,685 430,659

M0 302,084 302,656 293,161 286,643 284,909 287,193 280,347 281,275 279,117 281,920 283,695 288,879 299,300 292,280 290,181 290,897 290,935

Demand deposits in EUR 110,547 107,922 103,273 86,387 83,148 84,268 85,445 90,508 94,638 91,435 98,495 109,231 126,067 110,533 126,168 118,148 130,220 Demand deposits within banks in EUR 107,032 104,102 99,681 83,947 82,688 82,445 83,518 89,168 93,181 89,423 94,889 105,902 123,326 107,996 122,653 115,362 129,813

Demand deposits within CBM-Payment Operations in EUR 3,515 3,820 3,592 2,440 460 1,823 1,927 1,340 1,457 2,012 3,606 3,329 2,741 2,537 3,515 2,786 407

Demand deposits in other currencies 23,342 23,226 18,926 18,646 18,064 19,591 16,642 15,527 15,915 16,221 11,118 12,510 14,560 14,344 11,619 9,640 9,504

M11 449,377 446,065 427,267 412,045 402,586 400,366 391,913 394,775 396,409 398,675 399,198 416,972 447,869 424,993 434,108 427,719 436,876

M0 302,084 302,656 293,161 286,643 284,909 287,193 280,347 281,275 279,117 281,920 283,695 288,879 299,300 292,280 290,181 290,897 290,935

Demand deposits in EUR 123,552 119,649 114,031 105,594 98,776 91,992 93,954 97,531 100,908 100,043 103,921 115,080 133,591 117,472 131,943 126,805 136,064 Demand deposits within banks in EUR 115,629 112,351 105,899 102,176 97,894 89,923 88,621 95,050 99,376 96,127 99,425 110,357 130,159 112,810 127,128 122,477 135,623

Demand deposits within CBM-Payment Operations in EUR 7,923 7,298 8,132 3,418 882 2,069 5,333 2,481 1,532 3,916 4,496 4,723 3,432 4,662 4,815 4,328 441

Demand deposits in other currencies 23,741 23,760 20,075 19,808 18,901 21,181 17,612 15,969 16,384 16,712 11,582 13,013 14,978 15,241 11,984 10,017 9,877

M2 506,953 507,354 491,153 476,798 460,837 470,602 465,199 467,799 473,032 480,053 485,328 503,033 535,928 517,416 531,556 523,180 535,550

M1 435,973 433,804 415,360 391,676 386,121 391,052 382,434 387,310 389,670 389,576 393,308 410,620 439,927 417,157 427,968 418,685 430,659

Term deposits in EUR 67,716 70,309 72,440 81,695 71,229 75,811 78,422 75,681 77,120 84,555 85,872 86,265 84,034 97,414 98,423 97,928 98,128

Term deposits in other currencies 3,264 3,241 3,353 3,427 3,487 3,739 4,343 4,808 6,242 5,922 6,148 6,148 11,967 2,845 5,165 6,567 6,763

M21 528,756 530,861 509,339 503,204 494,290 489,035 483,563 485,177 487,620 496,274 497,293 516,633 551,720 533,682 545,950 540,472 546,287

M11 449,377 446,065 427,267 412,045 402,586 400,366 391,913 394,775 396,409 398,675 399,198 416,972 447,869 424,993 434,108 427,719 436,876

Term deposits in EUR 76,115 81,539 78,704 87,718 88,203 84,916 87,293 85,580 84,969 91,677 91,947 93,513 91,884 105,844 106,677 106,186 102,648

Term deposits in other currencies 3,264 3,257 3,368 3,441 3,501 3,753 4,357 4,822 6,242 5,922 6,148 6,148 11,967 2,845 5,165 6,567 6,763

Source: Central Bank of Montenegro

Chapter 6. Money

ISSP - CEPS 74

Monetary aggregates have been fluctuating during 2004. Most of the aggregates recorder negative annual growth rates during many months of 2004, except during the last quarter when the growth rates were mainly positive. As cash estimation was not changed during 2004, dynamics of M0 was defined by dynamics of bank deposits within the Central Bank. Bank deposits with Central Bank had negative growth rates during all months of 2004, except November and December. The annual growth rate of this category in December was 17.26% and it reached the level of €54.78mn. Total demand deposits of non-banking sector in Euro as part of M1 (deposits of the Central Bank and Government are excluded) recorded positive annual growth rates during the whole 2004 except in February (-2.7). Total deposits recorded annual growth rate of 56.61% in December 2004 and reached the level of €130.2mn. Two components of total demand deposits-deposits of non-banking sector with commercial banks and with the Central Bank- have been fluctuating during the observed period. However, demand deposits in banks in € recorded a positive annual growth rates during the whole observed period, while deposits at the Central Bank recorder both positive and negative annual growth rates. Demand deposits of non-bank customers in banks reached the level of €129.8mn in December, which is by 56.99% higher then in the same month of 2003. Demand deposits in other currencies, as part of M1, have been decreasing constantly during 2004. At the beginning of this year they reached the level of €19.6mn while at the end of December they were at the level of only €9.5mn or by 47.30% lower then in the same period 2003. The fluctuations of M11 (deposits of the Central Government included) were same as fluctuations of M1. The main reason is that demand deposits of Central Government present a small share of the M11 (from 9% to 4% in the total demand deposits in € as part of M11). Participation of the Government deposits in Euros in the demand deposits with banks have been constantly decreasing during 2003 and 2004, from 31.3% in January 2003 to 4.2% in December 2004. This trend is a consequence of the transfer of Government accounts from commercial banks to the Central Bank. However, it is interesting that demand deposits of the Government with the Central Bank have been decreasing constantly (from 66.8% in January 2003 to 7.7% in December 2004). In addition participation of the Government non euro deposits in all non euro deposits part of M11 have been decreasing from 13.13% in January 2003 to 3.77% in December 2004. M2 has recorded significant annual growth rates. However, both components of this aggregate (excluding M1) have been increasing during 2003 and 2004. Term deposits in Euro have reached the level of €98.1mn and recorded positive growth rate of 37.76% in December 2004. In the same month term deposits in other currencies have recorded annual growth rate of 93.96% and reached the level of €6.7mn.


ISSP - CEPS

75

6.1. DEPOSITS

Table 6.1.a: Total deposits, in 000 EUR 2002 2003 2004 XII XII I II III IV V

Description/ Period

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

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 4,203 14,395 18,598 3,179 13,911 17,090 4,578 16,100 20,678 4,788 20,511 25,299 5,986 23,185 29,171

Banks 3,658 1,653 5,311 1,081 764 1,845 2,526 12,202 14,728 1,721 11,209 12,930 2,808 12,266 15,074 3,098 12,290 15,388 4,341 14,257 18,598 Domestic 485 992 1,477 489 364 853 2,087 900 2,987 1,083 905 1,988 1,756 921 2,677 2,106 946 3,052 1,974 917 2,891 Foreign 3,173 661 3,834 592 400 992 439 11,302 11,741 638 10,304 10,942 1,052 11,345 12,397 992 11,344 12,336 2,367 13,340 15,707

Other financial institutions

1,280 9 1,289 1,373 520 1,893 1,677 2,193 3,870 1,458 2,702 4,160 1,770 3,834 5,604 1,690 8,221 9,911 1,645 8,928 10,573

Domestic 1,262 9 1,271 1,359 520 1,879 1,604 1,578 3,182 1,418 2,088 3,506 1,770 3,219 4,989 1,661 2,574 4,235 1,585 3,415 5,000 Foreign 18 0 18 14 0 14 73 615 688 40 614 654 0 615 615 29 5,647 5,676 60 5,513 5,573

2 Non financial institutions

69,331 30,999 100,330 69,942 40,042 109,984 63,002 34,165 97,167 58,863 36,238 95,101 60,669 30,806 91,475 62,936 29,275 92,211 59,933 31,231 91,164

Public non fin. corporations

22,779 7,347 30,126 12,037 9,986 22,023 20,204 9,416 29,620 15,865 9,033 24,898 6,505 5,031 11,536 10,568 6,762 17,330 16,270 6,891 23,161

State companies 3,746 3,667 7,413 4,670 4,791 9,461 8,802 5,081 13,883 7,813 6,008 13,821 4,409 1,844 6,253 4,831 5,513 10,344 6,531 5,140 11,671

Publicly owned organizations

19,033 3,680 22,713 7,367 5,195 12,562 11,402 4,335 15,737 8,052 3,025 11,077 2,096 3,187 5,283 5,737 1,249 6,986 9,739 1,751 11,490

Other non financial corp.

46,552 23,652 70,204 57,905 30,056 87,961 42,798 24,749 67,547 42,998 27,205 70,203 54,164 25,775 79,939 52,368 22,513 74,881 43,663 24,340 68,003

Domestic private companies

41,972 23,370 65,342 52,640 28,916 81,556 37,742 23,308 61,050 38,263 25,762 64,025 49,403 24,390 73,793 47,341 21,126 68,467 38,787 23,121 61,908

Entrepreneurs 0 0 429 628 1,057 537 7 544 576 0 576 626 0 626 697 0 697 Foreign companies 4,580 282 4,862 5,265 1,140 6,405 4,627 813 5,440 4,198 1,436 5,634 4,185 1,385 5,570 4,401 1,387 5,788 4,179 1,219 5,398 3 Government 58,238 11,078 69,316 19,402 25,685 45,087 15,488 26,883 42,371 14,365 25,387 39,752 16,713 27,483 44,196 15,796 24,763 40,559 17,524 27,055 44,579

Central government

40,221 7,077 47,298 5,738 8,223 13,961 8,005 9,325 17,330 5,607 9,088 14,695 6,323 8,464 14,787 6,664 7,849 14,513 7,194 7,122 14,316

Agencies and institutions of central gov.

13,907 1,246 15,153 9,468 258 9,726 3,138 6,043 9,181 1,930 902 2,832 4,606 3,699 8,305 3,387 1,793 5,180 3,672 6,640 10,312

Local government-municipalities

339 44 383 1,324 10 1,334 1,196 10 1,206 1,575 2 1,577 1,604 2 1,606 1,303 2 1,305 1,673 2 1,675

State funds 3,771 2,711 6,482 2,872 17,194 20,066 3,149 11,505 14,654 5,253 15,395 20,648 4,180 15,318 19,498 4,442 15,119 19,561 4,985 13,291 18,276 4 Physical entities 11,469 10,743 22,212 22,206 22,864 45,070 18,560 23,971 42,531 18,359 26,106 44,465 20,868 26,633 47,501 22,731 27,748 50,479 22,315 29,018 51,333 Domestic 11,469 10,743 22,212 22,206 22,864 45,070 17,764 23,532 41,296 17,634 25,729 43,363 19,058 25,971 45,029 20,733 27,115 47,848 20,405 28,363 48,768 Foreign 0 0 796 439 1,235 725 377 1,102 1,810 662 2,472 1,998 633 2,631 1,910 655 2,565

5 Non profit organizations

1,315 1,229 2,544 2,452 1,285 3,737 3,103 1,310 4,413 3,308 1,015 4,323 3,101 1,295 4,396 4,721 1,130 5,851 3,947 1,130 5,077

Domestic 298 234 532 1,601 235 1,836 1,791 260 2,051 1,829 265 2,094 2,848 280 3,128 3,034 280 3,314 2,931 280 3,211 Foreign 1,017 995 2,012 851 1,050 1,901 1,312 1,050 2,362 1,479 750 2,229 253 1,015 1,268 1,687 850 2,537 1,016 850 1,866 6 Other 2,954 1,574 4,528 1,376 2,016 3,392 9,246 357 9,603 9,840 315 10,155 7,879 528 8,407 7,187 75 7,262 7,475 306 7,781 Total 148,245 57,285 205,530 117,832 93,176 211,008 113,602 101,081 214,683 107,914 102,972 210,886 113,808 102,845 216,653 118,159 103,502 221,661 117,180 111,925 229,105


Chapter 6. Money

ISSP - CEPS 76

Table 6.1.a: Total deposits, in 000 EUR 2004 VI VII VIII IX X XI XII

Description/ Period

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

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

3,220 24,089 27,309 4,464 29,844 34,308 7,046 29,643 36,689 8,323 23,612 31,935 6,956 23,995 30,951 6,640 17,571 24,211 10,706 19,876 30,582

Banks 1,827 15,551 17,378 2,743 18,555 21,298 3,588 18,255 21,843 3,308 17,388 20,696 2,893 16,434 19,327 3,339 10,417 13,756 6,006 12,297 18,303 Domestic 1,345 411 1,756 1,767 415 2,182 3,204 415 3,619 2,849 526 3,375 2,341 393 2,734 1,866 377 2,243 4,846 368 5,214 Foreign 482 15,140 15,622 976 18,140 19,116 384 17,840 18,224 459 16,862 17,321 552 16,041 16,593 1,473 10,040 11,513 1,160 11,929 13,089

Other financial institutions

1,393 8,538 9,931 1,721 11,289 13,010 3,458 11,388 14,846 5,015 6,224 11,239 4,063 7,561 11,624 3,301 7,154 10,455 4,700 7,579 12,279

Domestic 1,380 2,658 4,038 1,695 5,398 7,093 3,400 6,538 9,938 4,994 5,267 10,261 4,039 6,661 10,700 3,277 6,254 9,531 4,569 6,679 11,248 Foreign 13 5,880 5,893 26 5,891 5,917 58 4,850 4,908 21 957 978 24 900 924 24 900 924 131 900 1,031

2 Non financial institutions

60,456 32,948 93,404 64,910 30,978 95,888 79,543 32,696 112,239 61,267 33,589 94,856 69,701 32,743 102,444 63,227 40,097 103,324 68,475 34,289 102,764

Public non fin. corporations

17,290 6,258 23,548 19,411 11,611 31,022 27,537 12,174 39,711 18,862 12,342 31,204 18,099 12,269 30,368 20,322 20,519 40,841 12,687 10,730 23,417

State companies 9,025 4,408 13,433 11,163 9,345 20,508 13,762 8,853 22,615 10,130 8,291 18,421 11,023 8,183 19,206 9,850 16,331 26,181 5,581 6,734 12,315

Publicly owned organizations

8,265 1,850 10,115 8,248 2,266 10,514 13,775 3,321 17,096 8,732 4,051 12,783 7,076 4,086 11,162 10,472 4,188 14,660 7,106 3,996 11,102

Other non financial corp.

43,166 26,690 69,856 45,499 19,367 64,866 52,006 20,522 72,528 42,405 21,247 63,652 51,602 20,474 72,076 42,905 19,578 62,483 55,788 23,559 79,347

Domestic private companies

37,904 25,471 63,375 40,236 18,123 58,359 47,257 19,278 66,535 38,535 20,003 58,538 47,290 19,230 66,520 37,880 18,420 56,300 51,555 19,251 70,806

Entrepreneurs 979 0 979 1,413 0 1,413 1,691 0 1,691 1,282 0 1,282 1,210 0 1,210 1,150 0 1,150 1,057 2 1,059 Foreign companies 4,283 1,219 5,502 3,850 1,244 5,094 3,058 1,244 4,302 2,588 1,244 3,832 3,102 1,244 4,346 3,875 1,158 5,033 3,176 4,306 7,482 3 Government 14,696 25,895 40,591 17,888 26,013 43,901 20,080 26,009 46,089 19,661 32,206 51,867 18,054 33,370 51,424 18,689 25,192 43,881 18,124 28,111 46,235

Central government

4,999 6,075 11,074 4,958 7,248 12,206 7,252 6,849 14,101 5,711 6,427 12,138 4,840 6,248 11,088 7,491 6,248 13,739 6,176 4,507 10,683

Agencies and institutions of central gov.

4,148 5,548 9,696 4,346 4,249 8,595 4,898 3,927 8,825 6,705 9,828 16,533 5,556 9,471 15,027 3,988 1,927 5,915 6,342 6,339 12,681

Local government-municipalities

1,804 2 1,806 2,140 7 2,147 1,516 107 1,623 1,350 107 1,457 2,144 107 2,251 2,126 107 2,233 1,843 186 2,029

State funds 3,745 14,270 18,015 6,444 14,509 20,953 6,414 15,126 21,540 5,895 15,844 21,739 5,514 17,544 23,058 5,084 16,910 21,994 3,763 17,079 20,842 4 Physical entities 22,983 29,650 52,633 26,318 30,366 56,684 28,593 31,675 60,268 29,979 33,575 63,554 35,104 34,988 70,092 33,566 37,140 70,706 40,143 40,536 80,679 Domestic 21,284 28,875 50,159 24,522 29,272 53,794 26,899 30,376 57,275 27,652 32,114 59,766 32,669 33,346 66,015 30,504 35,477 65,981 37,027 38,613 75,640 Foreign 1,699 775 2,474 1,796 1,094 2,890 1,694 1,299 2,993 2,327 1,461 3,788 2,435 1,642 4,077 3,062 1,663 4,725 3,116 1,923 5,039

5 Non profit organizations

3,795 992 4,787 4,662 916 5,578 4,896 916 5,812 4,639 913 5,552 4,481 802 5,283 4,813 752 5,565 5,089 171 5,260

Domestic 2,876 130 3,006 3,713 104 3,817 3,624 104 3,728 3,571 138 3,709 3,461 138 3,599 3,701 88 3,789 3,928 110 4,038 Foreign 919 862 1,781 949 812 1,761 1,272 812 2,084 1,068 775 1,843 1,020 664 1,684 1,112 664 1,776 1,161 61 1,222 6 Other 7,685 71 7,756 7,873 100 7,973 8,569 169 8,738 7,492 180 7,672 7,708 373 8,081 8,899 408 9,307 7,864 371 8,235 Total 112,835 113,645 226,480 126,115 118,217 244,332 148,727 121,108 269,835 131,361 124,075 255,436 142,004 126,271 268,275 135,834 121,160 256,994 150,401 123,354 273,755



ISSP - CEPS

77

Total deposits at the end of 2004 reached the level of €273.75 million which is by 29.74% higher then in the same period last year.

Graph 6.1: Total deposits in 000 €

0

50000

100000

150000

200000

250000

300000

Dec-02 Dec-03 Jan-04 Feb-04 Mar-04 Apr-04 Maj-04 Jun-04 Jul-04 Avg-04 Sep-04 Okt-04 Nov-04 Dec-04

Different categories of total deposits exhibited different annual growth rates. The most significant increase was recorded in the deposits of financial institutions category, with the annual growth rate of 718.14% in December 2004. On the other hand, deposits of non financial institutions, in the same period, recorded negative growth rate of 6.56%. This decrease was mainly due to the decrease of deposits of domestic private companies, which in December 2004 were by 13.18% lower then in December 2003. At the end of December, deposits of households recorded significant positive annual growth rate of 79.01%.

Graph 6.2. Trend of different categories of total deposits

0

20,000

40,000

60,000

80,000

100,000

120,000

Dec-02 Dec-03 Jan-04 Feb-04 Mar-04 Apr-04 Maj-04 Jun-04 Jul-04 Avg-04 Sep-04 Okt-04 Nov-04 Dec-04

in 0

00 E

ura

Financial institutions Nonfinancial institutions GovernmentPhysical entities Other Ostalo

Chapter 6. Money

ISSP - CEPS 78

Majority of deposits are demand deposits (54.94%) while the rest are term deposits (45%). If we analyze the structure at the end of 2002 and 2003 we can conclude that participation of demand deposits in total deposits have a decreasing trend (they made 72.13% and 55.48% of total deposits in 2002 and 2003 respectively). The change of the term structure of total deposits is the result of the increased confidence in the banking sector. Structure of deposits by clients, analyzed based on data for December 2004, shows that major depositors are non financial institutions (37.54% of all deposits). The most important client in this category are domestic legal entities (25.86% of total deposits). The second major depositor category is physical entities (citizens) whose deposits make up 29.47 % of all deposits in the baking sector. On the graph below the structure of deposits by clines in December 2004 is presented.

Graph 6.3.: Structure od total deposits by clients (December 2004)

11.17%

37.54%

16.89%

29.47%

1.92% 3.01%

Financial instiutions Nonfinancial instiutions Government

Physical entities Nonprofit organisations Other

If we compare structure of deposits by clients at the end of last three years (2002, 2003 and 2004) the most significant conclusion is that deposits of physical entities (households) are constantly increasing. Thus, participation of those deposits in total deposits at the end of 2002 was 10.81%, 21.36% at the end of 2003, and 29.47% at the end of 2004.


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Deposits of households, in 000 EUR 2. Term savings up to 1 year 3. Term savings over 1 year

1.Demand deposits in euros

other currencies

total in euros other

currencies total in euros

other currencies

Total (1+2+3)

Dec-00 2034.942 932.09 1102.86 428.46 62.89 365.57 2.05 0.00 2.05 2465.45

Okt-01 1750.663 893.74 856.93 655.48 553.73 101.75 56.75 55.22 1.53 2462.89

Nov-01 2092.206 1179.04 913.17 809.38 668.26 141.12 466.30 465.28 1.02 3367.88

Dec-01 3516.666 2378.53 1138.14 1557.40 1332.43 224.97 549.64 548.62 1.02 5623.70

Jan-02 2843.805 1984.84 858.97 2089.65 1754.75 334.90 617.13 594.12 23.01 5550.58

Feb-02 2791 1714 1077 2336 1909 427 702 679 23 5829.00

Mar-02 4139 3358 781 3418 1853 1565 741 680 61 8298.00

Apr-02 4874 4135 739 4443 2525 1918 773 711 62 10090.00

Maj-02 4329 3813 516 4732 2815 1917 525 463 62 9586.00

Jun-02 4629 4212 417 5609 3013 2596 615 553 62 10853.00

Jul-02 5036 4579 457 6089 3394 2695 702 640 62 11827.00

Avg-02 4269 3802 467 7217 5184 2033 928 906 22 12414.00

Sep-02 3984 3183 801 7669 4798 2871 1663 1497 166 13316.00

Okt-02 5686 4730 956 8012 6140 1872 1038 1012 26 14736.00

Nov-02 5205 4310 895 9515 6772 2743 1099 1065 34 15819.00

Dec-02 11370 5154 869 9650 6823 2827 1127 1090 37 22147.00

Jan-03 11122 4426 1295 10326 7562 2764 1188 1170 18 22636.00

Feb-03 11339 4912 1389 10926 8138 2788 1194 1179 15 23459.00

Mar-03 9887 4303 1711 14446 10744 3702 1166 1142 24 25499.00

Apr-03 13409 5352 2253 13466 10421 3045 1179 1153 26 28054.00

Maj-03 11379 3443 2408 13368 10752 2616 1199 1174 25 25946.00

Jun-03 12133 4168 1370 13848 10624 3224 1340 1292 48 27321.00

Jul-03 14433 5624 1201 13386 10554 2832 1463 1385 78 29282.00

Avg-03 16917 6418 1253 14576 11618 2958 1522 1405 117 33015.00

Sep-03 16967 7330 1252 16512 13563 2949 1554 1439 115 35033.00

Okt-03 19863 8084 1686 18983 15935 3048 1633 1522 111 40479.00

Nov-03 19502 6288 2128 19851 16082 3769 1658 1547 111 41011.00

Dec-03 22559 17050 5509 20258 17045 3213 2341 2260 81 45158.00

Jan-04 18560 14712 3847 20639 18110 2529 3331 2307 1024 42530.00

Feb-04 18359 15007 3352 23115 19269 3846 2987 2653 334 44461.00

Mar-04 20865 18034 2831 24108 22228 1880 2525 2156 369 47498.00

Apr-04 22730 20495 2235 25102 20628 4474 2647 2163 484 50479.00

Maj-04 22314 20316 1998 26104 21653 4451 2914 2386 528 51332.00

Jun-04 22986 20623 2363 26393 22711 3682 3254 2581 673 52633.00

Jul-04 26320 23207 3113 26592 22149 4443 3770 3106 664 56682.00

Avg-04 28716 24039 4677 28277 23110 5167 3327 2691 636 60320.00

Sep-04 29980 26549 3431 30168 28600 1568 3407 2758 649 63555.00

Okt-04 35105 31902 3203 28203 25745 2458 6786 6003 783 70094.00

Nov-04 33571 30429 3142 33388 27650 5738 3743 2914 829 70702.00

Dec-04 40143 37071 3072 36097 29934 6163 4433 3060 1373 80673.00

During all three month of the last quarter of 2004, all categories of household deposits exhibited positive annual growth rates. Thus, total household deposits had positive increasing trend during 2004. This positive trend resulted in the level of total household deposits of €80.6 million in December 2004, which is by 78.65% higher then the level of these deposits in the same month of 2003.

Chapter 6. Money

ISSP - CEPS 80

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Graph 6.4. Deposits of households

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

As it can be seen from the graph presented above majority of household deposits are term deposits (up to 1 year and over 1 year). Participation of demand deposits in the total households deposits have been fluctuating from 41.3% (February) to 50.08% (October) during 2004. If we observe individually share of two categories of term deposits, we can conclude that term deposits over 1 year recorder share of 5.2% (April) to 9.7% (October) in total household deposits during 2004. The highest share of term deposits up to 1 year during 2004 was reached in February (52%) while the lowest share was reached in October (40.2%). Positive trend of all categories of deposits was recorder through positive annual growth rates during 2004. Exceptions were, in particular months, certain categories of deposits in currencies other then Euro.

Graph 6.5. Annual change of deposits

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

The analysis of annual growth rates shows that demand deposits of households in December 2004, recorded positive annul growth rate of 77.96%. This category recorded highest annual growth rate in March 2004 (111%) while the lowest rate was recorded in February (61%). The same situation is with the term deposits. Actually, term deposits up to 1 year recorded,


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in December 2004, annual growth rate of 78.19% while term deposits over 1 year recorder annual growth rate of 89.36%. The highest growth rate of term deposits up to 1 year recorded during 2004, was 111% and was reached in February, while the lowest rate was reached in October and was 48%. Term deposits exhibited more significant fluctuations. Thus, the highest annual growth rate of this category was 315% (October) and lowest was 89% (December).

Demand deposits

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As it can be seen from the graph above the majority of all categories of deposits is in Euros. Participation of deposits in other currencies in demand deposits records constant fluctuations, if we observe last three years. However, participation of these deposits in term deposits up to 1 year is decreasing, while participation in deposits over 1 year is slightly rising.

Chapter 6. Money

ISSP - CEPS 82

6.2. LOANS

Total loans from Montenegrin banks have been growing during 2004. Result of this positive trend is the level of total loans in December 2004 of €284.98 millions, which is by 42% higher then the amount of loans in December last year.Not only total loans, but also different types of loans recorded positive trends during 2004. Thus, in December 2004, loans to financial institutions recorded growth of 127%, while loans to non-financial institutions recorded growth of 46%. As part of the loans to non-financial institution category, loans to domestic private companies, recorded growth of 41% in the same month. Total loans to the Government and its institutions were 9% lower in December 2004, compared to the same period last year. Loans to individuals/physical persons, recorded annual growth rate of 49% at the end of 2004, while loans to NGOs, in the same month, recorded a very significant growth of 186%.

Graph 6.6. Loans provided by banks in Montenegro

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Dec-02 Dec-03 Jan-04 Feb-04 Mar-04 Apr-04 May-04 Jun-04 Jul-04 Aug-04 Sep-04 Oct-04 Nov-04 Dec-04

in m

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Financial instiutions Nonfinancial instiutions GovernmentPhysical entities Nonprofit organisations

The structure of the loans by customers did not change much during 2004. Majority of loans is given to domestic private companies (56.74% in December 2004) or €161.2 million. Total amount of loans to physical entities, at the end of 2004, is €74.3mn which makes 26.16% of total loans. Share of other categories of loans in total loans, in December 2004, is presented in the graph below.

Graph 6.7. Structure of loans provided (December 2004)

65.80%

6.61%

26.16%

0.06%1.36%

Financial instiutions Nonfinancial instiutions Government Physical entities Nonprofit organisations


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Table 6.2. Approved loans in 2002, 2003 and 2004 (in 000 €)

2002 2003 2004

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

1 Financial institutions 788 1,695 2,078 668 472 359 646 609 488 121 128 160 424 3,854 Banks 35 1,525 1,850 525 25 25 323 400 325 0 25 25 32 1,000 Domestic 35 1,525 1,825 525 25 25 23 100 25 0 25 25 32 1,000 Foreign 0 0 25 0 0 0 300 300 300 0 0 0 0 0 Other financial institutions 753 170 228 143 447 334 323 209 163 121 103 135 392 2,854 Domestic 753 170 228 143 447 334 323 209 163 121 98 130 392 2,819 Foreign 0 0 0 0 0 0 0 0 0 0 5 5 0 35

2 Non financial institutions 80,984 128,338 132,275 141,169 141,941 148,918 156,730 159,832 157,311 159,958 163,248 176,912 183,237 186,934 Public non financial corporations 10,641 14,186 17,198 16,859 16,211 16,423 17,747 18,061 18,382 16,188 14,026 15,483 17,329 18,969 State companies 8,448 12,413 15,401 14,963 13,945 13,464 14,364 14,018 14,213 11,847 9,370 10,004 11,874 11,267 Publicly owned organizations 2,193 1,773 1,797 1,896 2,266 2,959 3,383 4,043 4,169 4,341 4,656 5,479 5,455 7,702 Other non financial corporations 70,343 114,152 115,077 124,310 125,730 132,495 138,983 141,771 138,929 143,770 149,222 161,429 165,908 167,965 Domestic private companies 70,305 114,148 110,638 120,020 121,168 127,717 133,802 136,664 132,656 137,385 142,763 154,597 158,874 161,188 Entrepreneurs 4,435 4,286 4,558 4,778 5,177 5,103 5,269 5,385 5,455 5,828 6,030 5,773 Foreign companies 38 4 4 4 4 0 4 4 1,004 1,000 1,004 1,004 1,004 1,004

3 Government 20,531 20,570 16,844 15,760 15,705 17,555 16,194 12,433 12,177 14,728 10,832 12,911 15,110 18,788 Central government 16,373 16,495 13,813 13,050 12,349 13,832 12,933 8,213 7,755 7,379 6,278 5,905 6,027 9,162

Agencies and institutions of central government 916 141 678 160 598 505 490 477 460 661 504 1,134 1,049 435

Local government-municipalities 842 910 1,129 1,136 1,165 1,459 1,467 1,463 1,644 1,392 1,435 1,334 1,390 1,735 State funds 2,400 3,024 1,224 1,414 1,593 1,759 1,304 2,280 2,318 5,296 2,615 4,538 6,644 7,456

4 Physical entities 22,290 49,959 48,809 51,504 58,138 61,022 63,350 65,029 65,668 64,816 65,578 67,977 70,734 74,325 Domestic 22,290 49,959 45,817 51,504 58,138 61,013 63,341 65,020 65,660 64,808 65,570 67,970 70,650 74,236 Foreign 2,992 0 0 9 9 9 8 8 8 7 84 89

5 Non profit organizations 70 63 142 66 9 49 561 126 83 120 127 88 104 180 Domestic 70 63 142 66 9 49 48 126 83 120 127 88 104 180 Foreign 0 0 0 0 0 0 513 0 0 0 0 0 0 0

6 Other 0 0 0 0 0 0 0 0 0 0 0 0 0

Total 124,663 200,625 200,148 209,167 216,265 227,903 237,481 238,029 235,727 239,743 239,913 258,048 269,609 284,081


Chapter 7. Capital Market

ISSP - CEPS 84

7. CAPITAL MARKET o Total turnover in 2004 was 30% higher than in the previous year o Total number of transactions increased 169% in 2004 compared to 2003 o All stock exchange indices continued their growth 7.1. INDICES The following Graph presents the stock exchange indices in Montenegro in 2003 and 2004, but the following analysis of the indices trends will focus on 2004.

Graph 7.1 Stock exchange indices in Montenegro

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"MOSTE" "NEX 20" "NEX PIF"

Source: NEX Montenegro and Montenegroberza The Montenegroberza stock exchange index MOSTE showed a relatively stable trend. From the beginning to the end of the year, the index showed fairly stable movement; however, several oscillations were recorded. For nearly the entire analyzed period, the value of the index was above its initial value; the only exceptions being at the end of September, the beginning of October, and the end of November 2004, when the index value negligibly decreased. In the period of September 24th to October 4th, the value of the index was around 990 points; this decrease was caused by the decreased share price of Hipotekarna Bank. At the end of November, the value of the index was around 980 points after being influenced by the decreased share price of “Budvanska rivijera” and all six PIF’s 1. At the end of the year, the value of MOSTE was 1115, which is approximately 11.5% higher than its initial value. Compared to the previous year, the index showed a similar trend. Two indices of the NEX Montenegro stock exchange, NEX 20 and NEX PIF, showed increasing trends throughout 2004. NEX 20 registered the most significant value increase

1 Source: Montenegrobeza Stock exchange


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among all three indices. The value of the index at the end of 2004 (2,523) was 106% higher as compared to its value at the beginning of the year (1,219). The greatest influence on the index value was the increased share price of Telekom. This company increased its share price by approximately 134%, going from €0.8511 to €2.52. In addition to the influence of Telecom, the index value was influenced by the increased share prices of Budvanska Rivijera and Zetatrans, as well. The annual growth rate of the index at the end of 2004 was approximately 124%. NEX PIF had a mostly stable trend until the beginning of July; at this point, the value of the index started to increase and its growth continued through the end of the year, reaching 1,667 points3. Compared to the beginning of the year, the index value increased approximately 49%, this increase being attributed to an increase of the investment units of all funds, except Moneta. The highest price increase was for the investment units of the HLT Fund, up 139.7%4. The annual growth rate of the index at the end of 2004 was approximately 30%. 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 15331 10,790,617 32,763,728 43,554,345 21,324

Jan-04 230,000 4,644,774 6,944,774 389 0 314,863 314,863 1,555 230,000 779,340 1,009,340

Feb-04 0 5,308,853 5,308,853 639 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 4506

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 0 723,381 723,381 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 18,886,27825,703 2,584 2,399,5391 23,997,97531,654 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

Source: Montenegroberza and NEX Montenegro

2 Average price at the end of 2004 – source NEX Montenegro stock exchange 3 December 26th 2004 4 Source: NEX Montenegro stock exchange


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7.2 TURNOVER ON STOCK EXCHANGES Total turnover and the number of transactions realized on the Montenegrin stock exchanges during 2003 and 2004 are presented in the next graph.

Graph 7.2 Total turnover and number of transactions

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Source: Montenegroberza and NEX Montenegro In 2004, turnover of €43 million was realized on the Montenegrin stock exchanges. Compared with the same period last year, total turnover actually decreased. However, the decrease in turnover was not caused by decreased activities on the Montenegrin Stock exchanges; but rather, the reason lies in the privatization of Montenegrobank5. Therefore, in order to get a “clearer” picture of the Montenegrin capital market, turnover from 2004 should be compared to turnover in 2003, without the noted transaction. If we exclude trade with Montenegrobank shares from our analysis, we can conclude that turnover in 2004 showed a significant increase of 30%. In January 2005, total turnover on the Montenegrin capital market was approximately €2.5 million, an increase of 146% as compared to the same month in 2004. This activity and growth on the Montenegrin capital market is confirmed by the number of transactions realized in 2004. The total number of transactions in 2004 amounted to 57,357 (169% higher than in 2003). The number of transactions varied per month, with the highest number of transactions being realized in December (8,595) and the lowest in January (1,944). In January 2005, 4,999 transactions were realized, 160% higher than in January 2004. Total turnover also varied per month, with the highest being realized in December (€13,367,298) and the lowest in January (€1,009,340). The average monthly turnover amounted to €3,573,688.

5 In July 2003, Montenegrobank was sold to Ljubljanska bank from Slovenia and this transaction was realized on Montenegroberza in the amount of €10.6 million, accounting for approximately 43% of the total turnover realized in 2003.


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7.2.1. Trade on the primary market Trade on the primary market has significantly decreased in 2004 as compared to last year. Total turnover on the primary market in 2004 amounted to €1,648,872, which is significantly lower than turnover in the same period last year – 84% lower. The reason for this is that in the previous two years banks and insurance companies issued their shares because of the legal adjustment for the level of prescribed capital.6

Graph 7.3 Turnover on primary and secondary market

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Source: Montenegroberza and NEX Montenegro The majority of turnover on the primary market was realized on Montenegroberza (99.8%), with a very small percentage (0.2%) being realized on NEX Montenegro. No turnover was realized on the primary market in the months of February, April, May, August, September and October of 2004. 7.2.2. Trade in the secondary market The majority of turnover in 2004 was realized on the secondary market, €41,235,381, or 96%. Compared to last year, total turnover on the secondary market increased by 25%. This percent is much higher if we exclude transactions with Montenegrobank shares form the total turnover amount. In that case total turnover on the secondary market actually increased by 86%. Total turnover realized in January 2005 is related to the secondary market. Compared to the same period last year, turnover in January 2005 increased more than 3 times (over 200%). This confirms that activities and the number of eminent on the Montenegrin capital market increased.

6 For further explanation see MONET 18, Chapter Capital Market, page 64


ISSP - CEPS 88

Graph 7.4 Structure of trade on the secondary market in 2004

Shares85%

Invest units of PIFs7%

Foreign exchange bonds8%

Source: Montenegroberza and NEX Montenegro As graph 7.4 depicts, the highest turnover on the secondary market was realized with shares – 85%, followed almost equally by old foreign currency saving bonds – 8% and investment units of PIFs- 7%. Trade with shares On the NEX Montenegro stock exchange, during the analyzed period, shares of more than 140 companies were traded. A similar situation was found on the Montenegroberza, where shares of more than 130 companies were traded. The following tables present shares with the highest turnover and those with the highest number of transactions. Total turnover realized from shares of the following ten companies amounted to €18,013,173, making 45% of the total turnover realized on the secondary market. Table 7.2 Ten shares with the highest turnover in 2004

Issuer Turnover in €

TELEKOM CRNE GORE A.D. PODGORICA 5,509,807

A.D. RUDNICI BOKSITA 3,460,762

ATLAS MONT BANKA AD 1,436,907

"ZETATRANS" AD, 1,293,435

AD "NAPREDAK" KOTOR 1,206,685

"POMORSKI SAOBRAĆAJ" AD 1,099,991

"PLUS COMMERCE" AD 1,064,460

A.D."MJEŠOVITO"- HERCEG NOVI 1,002,998

FILMSKO PREDUZEĆE "ZETA FILM" 988,790

JUGOPETROL AD 949.482

Source: Security Exchange Commission of Montenegro


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The total number of transactions realized with shares of the next ten companies amounted to 13,703, making 30% of the total number of transactions realized on the secondary market during the analyzed period. Table 7.3 Ten shares with the highest number of transactions in 2004

Issuer Turnover in €

TELEKOM CRNE GORE A.D. PODGORICA 4,769

A.D. RUDNICI BOKSITA 2,699

AD PLANTAŽE 2,351

JUGOPETROL AD 1,177

"ZETATRANS" AD 968

INDUSTRIJA PIVA I SOKOVA TREBJESA 424

TP PKB HERCEG NOVI AD - ZELENIKA 400

KOMBINAT ALUMINIJUMA A.D. PODGORICA 330

"ELEKTROPRIVREDA CRNE GORE" A.D. NIKŠIĆ 298

" C - PROMET " AD - CETINJE 287

Source: Security Exchange Commission of Montenegro Trade with investment units of Privatization Investment Fund The legal framework related to investment funds was changed in 2004. The Law on Investment Funds was adopted. According to the Law, all six Privatization funds were transformed into privatization investment funds with their management companies. On the Montenegrin stock exchanges, in 2004, investment units of all six Privatization Funds were traded. In this period, a total of 35,460 transactions were realized, of which 20,628 were on NEX Montenegro and 14,832 were on Montenegroberza. It is important to note that the number of transactions realized with investment units of PIFs accounted for 61% of the total number of transactions realized on Montenegrin stock exchanges in 2004. Total turnover amounted to €3,292,940 (€1,715,515 on Montenegroberza and €1,577,434 on NEX Montenegro).


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Graph 7.5 Monthly turnover with investment units of PIFs

0

100000

200000

300000

400000

500000

600000

700000

800000

900000

1000000

1100000

Jan-

04

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-04

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-04

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-04

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-04

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04

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04

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-04

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04

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-04

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-04

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-04

in e

uros

0

500

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2500

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3500

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4500

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5500

Total turnover Number of transactions

Source: Montenegroberza and NEX Montenegro Turnover and prices of the investment units of PIFs Turnover realized with investment units of PIFs is presented in the next table. The highest turnover was realized with investment units of the HLT Fund (€1,641,656). The HLT Fund also had the highest price of all investment units during the analyzed period, when it reached 0.0199€. Table 7.4 Prices and turnover with PIF investment units in 2004

Fund min price max price turnover

ATLAS MONT 0.0080 0.0160 299,765

EURO-FOND 0.0070 0.0099 226,963

MIG 0.0106 0.0161 248,166

MONETA 0.0116 0.0145 240,638

TREND 0.0111 0.0172 575,070

HLT-FOND 0.0060 0.0199 1,641,656

Source: Security Exchange Commission of Montenegro


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Trade with shares of old foreign currency saving bonds In the period from March to July no trade with old foreign exchange currency bonds was realized.7 In July of 2004, trade with old foreign currency saving shares began. Total turnover realized with old foreign currency saving bonds in 2004 amounted to € 3.2 million, through a total of 2,400 transactions. In Montenegroberza, 1 euro of old foreign currency savings was worth between € 0.11 and €0.95, while in the NEX Montenegro 1 euro of old foreign currency savings was sold for between €0.30 and €0.93. Conclusion The capital market of Montenegro has begun its development slowly. Steps forward are evidential. Turnover and number of transactions realized on Montenegrin stock exchanges are constantly increasing. The number of participants on the capital market is also increasing. Related to GDP, in previous two years, volume of the trade in Montenegro amounted around 4,11%. This ratio in Slovenia amount 6,4%, in Serbia 2%, Croatia 1,6%, and Macedonia 0,79 %8. The Montenegrin capital market is developing gradually, and is not yet adequately developed. For further development, activities on the capital market should be oriented towards improvement of the regulatory framework and its implementation (especially regulation related to trade with short term securities), market infrastructure recruitment, and market expansion.

7 In November 2003, the Parliament adopted the Law on Settlement of Obligations and Claims related to Foreign Debt and Frozen Foreign Exchange Savings, which put out of power the Decree on the Purchase of Shares with Old Foreign Currency Savings. As a consequence of this change, old foreign currency saving bonds weren’t issued until the end of June 2004, when the Decree on Conversion of Citizens Old Foreign Currency Saving into Bonds (Official Gazette RoM, no 42/04) and the Decision on Issuing Bonds of the RoM according to the Old Foreign Currency Savings (Official Gazette RoM, no 42/0) were adopted. With their adoption, the market became “richer” by 14 series of the old foreign currency saving bonds. Total nominal value of this series is € 150 million. 8 Izvor: Komisija za hartije od vrijednosti Crne Gore

Chapter 8. External Sector

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Table 8.1 Imports and Exports in 2003 and 2004 (in EUR)

Exports Imports 2003 2004 2003 2004

Sector

tota

l in

euro

s

as %

of

tota

l

tota

l in

euro

s

as %

of

tota

l

tota

l in

euro

s

as %

of

tota

l

tota

l in

euro

s

as %

of

tota

l

0 Live animals 1,200 0 0 0.00 13,818 0.00 8,150.00 0.00 1 Meat and meat products 84,587 0.04 40418.88 0.02 14771496 3.90 16,713,026 3.38 2 Milk products and eggs 332,287 0.17 127,332 0.05 5932481 1.64 5,372,080 1.09 3 Fish and fish products 105,142 0.05 135,664 0.05 2781321 0.78 3,891,763 0.79 4 Cereals and cereal products 839,048.50 0.43 957,033 0.37 6721570 1.56 14,536,569 2.94 5 Vegetables and fruits 4,376,604.41 2.27 2162811.72 0.83 12366830 3.48 11,614,164 2.35 6 Sugar, sugar products and honey 190,650.80 0.10 22,413 0.01 6276695 1.64 9,841,383 1.99 7 Coffee, tea, cocoa and spices 377,759.71 0.20 95,395 0.04 7426166 2.02 16,872,251 3.41 8 Animal fodder (except cereals) 118,765.30 0.06 530,213 0.20 862,301 0.23 1,282,614 0.26 9 Various nutrition products 285,963.93 0.15 20,679 0.01 6072798 1.59 6,679,871 1.35 11 Beverages 4,139,066.78 2.14 4,838,343 1.85 4224847 1.18 5,920,699 1.20 12 Tobacco and tobacco products 7,260,924.49 3.76 5,200,374 1.99 2584249 0.71 5,119,898 1.04 21 Raw leather and pelt 1,708,982.38 0.89 4,047,497 1.55 36,300 0.01 0 0.00 22 Oil grain 7,380,339 3.82 0 0.00 45,290 0.01 116,779 0.02 23 Natural rubber 0 0.00 0 0.00 7,479 0.00 25,219 0.01 24 Cork and wood 2,719,606.96 1.41 3,334,470 1.28 616388 0.17 339,952 0.07 25 Cellulose and paper pulp 82,349.99 0.04 113,490 0.04 466,450 0.13 0 0.00

26 Textile fibers and textile byproducts

42,163.50 0.02 41,506 0.02 513246 0.14 716,941 0.14

27 Compost and minerals 1,464,728.65 0.76 2,486,127 0.95 403647 0.11 493,762 0.10

28 Metal ores (nickel, aluminum and copper)

3,211,901.84 1.66 5012275.23 1.92 1023818 0.29 1,082,469 0.22

29 Animal and plant products 189,385.83 0.10 45,380 0.02 1319003 0.38 856,397 0.17 32 Mineral coal, coke and briquettes 6,073.04 0.00 5,949 0.00 8,454 0.00 15,929 0.00 33 Oil and oil derivates 12,932,695.92 6.70 535716.95 0.20 42346523 10.86 42,600,558 8.61 34 Natural and industrial gas 0 0.00 0 0.00 403336 0.11 368,771 0.07 35 Electricity 0 0.00 0 0.00 11800480 2.83 0 0.00 41 Animal oil and fat 0 0.00 0 0.00 55,910 0.02 617 0.00 42 Solid animal oils and fats 17,902 0.01 2876.82 0.00 978867 0.28 641,062 0.13 43 Animal and vegetable fats and oils 85,400.38 0.04 89667 0.03 21205 0.01 24,149 0.00 51 Organic chemical products 12,182.12 0.01 12731.25 0.00 263570 0.06 774,472 0.16 52 Inorganic chemical products 39,420.46 0.02 3701260.85 1.42 3670519 1.07 4,541,672 0.92 53 Products for painting 824,569.61 0.43 1517596.73 0.58 2414799 0.66 3,267,125 0.66

54 Medical and pharmaceutical products

74,261.75 0.04 198231.88 0.08 6518410 1.90 11,529,631 2.33

55 Ether oils, perfumes and other products

486,265.51 0.25 228991.22 0.09 14036459 3.87 20,846,142 4.21

56 Fertilizers (except unprocessed) 0.00 0.00 0 0.00 171,088 0.05 293,957 0.06 57 Unprocessed plastics 20,928.07 0.00 22,826 0.01 319173 0.09 494,178 0.10 58 Molded plastics 21,887 0.01 4171.97 0.00 2846053 0.76 4,780,676 0.97 59 Chemical substances and products 5,371.32 0.00 190,034 0.07 3417859 0.94 5,048,149 1.02 61 Leather and leather products, pelts 0 0.00 0 0.00 5474 0.00 17,379 0.00 62 Rubber products 261,631.96 0.14 368,116 0.14 3319284 0.92 5,096,674 1.03 63 Cork and wood products 175,240.44 0.09 136,520 0.05 2851399 0.78 5,260,474 1.06

64 Paper, cardboard and cellulose products

183,326.90 0.09 53385.63 0.02 9136826 2.67 13,799,338 2.79

65 Yarn, tissue and textile products 32,320.10 0.02 270,579 0.10 2774549 0.70 4,329,449 0.88

66 Construction materials (cement, glass, sand etc.)

128,802.05 0.07 385503.52 0.15 16958008 4.50 26,179,226 5.29

67 Iron and steel 5,762,324.48 2.99 19,881,757 7.61 9513695 2.69 8,819,367 1.78 68 Ferrous metals 107,863,371.98 55.88 158617434.3 60.68 1780703 0.47 4,182,173 0.85 69 Metal products 5,939,291.57 3.08 5244113.53 2.01 10258189 2.72 14,946,426 3.02 71 Industrial machines and devices 2,241,134.51 1.16 2,055,368 0.79 1801922 0.51 2,034,366 0.41 72 Special purpose machinery 827,212.18 0.43 1,615,467 0.62 6727163 1.83 12,333,559 2.49 73 Machines for metal processing 12,159.19 0.01 84,336 0.03 1109492 0.29 1,569,496 0.32 74 Industrial machines for general use 762,559.01 0.40 1,602,473 0.61 12247446 3.32 21,382,708 4.32

75 Machines for offices and data processing

88,721.90 0.05 292881.59 0.11 7834606 2.09 8,842,660 1.79

76 Telecommunication equipment 150,386.20 0.08 407799.85 0.16 21004199 5.64 19,978,471 4.04 77 Electrical machines and equipment 536,489.13 0.28 746869.57 0.29 18250323 4.97 26,506,440 5.36 78 Vehicles 1,130,473.03 0.59 1225455.09 0.47 34757007 9.14 63,692,865 12.88 79 Other transportation equipment 14,751,792.00 7.64 29262663.05 11.19 12923020 3.70 4,171,227 0.84 81 Prefabricated buildings 72,909.45 0.04 150035.35 0.06 2626262 0.72 3,764,707 0.76 82 Furniture and parts 449,362.23 0.23 348,625 0.13 7596155 2.08 10,868,163 2.20 83 Traveling equipment 3,186.10 0.00 12,792 0.00 751094 0.21 1,030,759 0.21 84 Clothing 436,948.20 0.23 576,368 0.22 5137215 1.42 7,625,830 1.54 85 Footwear 815,824.47 0.42 446,340 0.17 4246535 1.21 5,664,102 1.15 87 Scientific instruments 504,865.82 0.26 167,680 0.06 2764274 0.66 3,870,367 0.78 88 Cameras and clocks 163,208.57 0.08 162,668 0.06 1357910 0.36 2,082,839 0.42 89 Other finished products 295,425.69 0.15 1,509,006 0.58 10768822 2.89 19,852,357 4.01 93 Special transactions 14,376.42 0.01 47,605 0.02 1,744 0.00 1900 0.00

TOTAL 193,041,759 100 261393316.8 100 371435679 0 494614394.78 100.00



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8. EXTERNAL SECTOR o Ferrous metals (aluminium) were the key export in 2004 (60.7%); o Vehicles were the most dominant import in 2004 (12.9%); o Considering imports by country of origin, the most dominant trading partners in 2004

were Italy, Slovenia, Bosnia and Herzegovina, Germany, Austria and Greece; o Considering exports by country of destination, the structure in 2004 is dominated by

Italy, Switzerland, Greece (due to the export of aluminium) as well as Bosnia and Herzegovina and Croatia;

o Trade deficit (goods plus services) in 2004 amounted € 291 million or 18.6% of GDP and was deteriorated compared to 2003 when it amounted for 16.9% of GDP;

o The current account deficit in Montenegro in 2004 amounted to €142.9 million or 9% of GDP and was deteriorated compared to 2003 when it accounted for 7% of GDP.

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 divisional structure of imports and exports by goods for 2003 and 2004 (see table 8.1). Data includes foreign trade with all countries, excluding Serbia (see table 8.2). With respect to exports by sector, the most dominant sector in total exports is “ferrous metals” (aluminium), whose share amounted to 60.7% in 2004 or 4.8 percentage points more than in 2003. Other dominant sectors on the exports side were “other transportation equipment” (11.2% in 2004 and 7.6% in 2003) and iron and steel, which ranked third with a share of 7.6% in total exports, higher than its share in 2003 (3%). The fourth most dominant export sector in 2004 was “metal ores (nickel, aluminium and copper)” whose share increased to 1.9% in total exports in t2004 as compared to 1.7% in 2003. All together, the above-mentioned export sectors accounted for 81.4% of total exports in 2004. With respect to imports by sectors in 2004, vehicles accounted for the highest share of total imports, which significantly increased to 12.9% from 9.1% in 2003. Oil and oil derivatives ranked second with a share of 8.6% in total imports in 2004, which is less than in 2003 (10.9%). Other key imports in 2004 were construction materials (5.3% of total imports in 2004 compared to 4.5% in 2003), electrical machines and equipment (5.4% in 2004 and 5% in 2003), industrial machines for general use (4.3% in 2004 and 3.3% in 2003), ether oils, perfumes and other products (4.2% in 2004 and 3.9% in 2003) other finished products (4.0% in 2004 and 2.9% in 2003), telecommunication equipment (4.0% in 2004 and 5.6% in 2003), meat and meat products (3.4% in 2004 and 3.9% in 2003). Total imports within these sectors accounted for 52.1% of all imports in 2004.

1 Standard International Trade Classification


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8.1.2 Foreign Trade Structure by Country of Destination and Origin Foreign trade structure by countries is presented in the table 8.2 Table 8.1.2 Foreign Trade Structure by Countries

Imports Exports

2002 jan-dec 2003 jan-dec 2004 jan-dec 2002 jan-dec 2003 jan-dec 2004 jan-dec Country

in % of total imports in % of total exports

Bonia and Herzegovina 3.5 8.50 9.10 2.2 9.40 6.40

Croatia 9.5 6.60 8.80 0.7 1.80 2.80

Slovenia 9.6 12.10 12.60 0.4 1.20 1.10

Italy 11 13.40 14.40 5.6 11.30 41.90

Greece 7 11.90 7.10 0.3 3.10 15.70

Germany 5.9 7.60 8.60 0.3 0.6 1

Cyprus 4.4 4.50 2.10 2.3 3.40 2.10

Hungary 1.9 1.90 3.00 2 1.40 2.30

Virgin Islands 1.6 0.70 0.60 0.6 2.50 0.60

Albania 0.8 0.40 0.50 1 1.20 2.10

Austria 4.4 6.20 7.10 0 0.04 0.50

Great Britain 8.1 3.90 1.50 0.1 0.10 1.90

Liechtenstein 0.9 0.20 0.10 0 0.00 0.00

Switzerland 2 2.90 3.10 59.3 57.30 9.60

USA 5.9 1.70 2.60 0.3 0.20 0.10

Other 23.2 17.40 18.80 24.90 5.71 11.90

Total 100 100.00 100.00 100.00 100.00 100.00

Source: Central bank of Montenegro. Note: Trade with Serbia and Kosovo iz not included Data on export and import of goods according to their origin or assignment comes from the Balance of Payment statistics. Data are provided for 2003 and 2004 and do not include Serbia (see table 8.2). With respect to exports by country of destination, the structure was dominated by exports of aluminium to Italy and Switzerland. While the share of aluminium export to Switzerland was much lower in 2004 (9.6%) as compared to the previous year (60.1%), the share of export to Italy significantly rose to 41.9% in 2004 compared to 11.3% in 2003. The reason for this structural change is exports of aluminium, which is now recorded to be exported to the countries (Italy and Greece), which have aluminium plants and use primary aluminium for their production. During the previous years, it is recorded that aluminium was exported only to Switzerland where its main purchasing company (Glencor) has been set up. Exports to Greece rose to 15.7% in 2004, from 3.2% in the previous year; this overall increase is the consequence of much higher recorded exports of aluminium to this country as well. Exports to Bosnia and Herzegovina (BiH) accounted for 6.4% of total exports in 2004, compared to 9.4% in 2003. Exports to Croatia increased from 1.8% in 2003 to 2.8% in 2004. In this period of 2004, Cyprus had a significant share of total exports (2.1%), followed by Albania (2.3%), Slovenia (1.1%), Germany (1.0%) and the Virgin Islands


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(0.6%). Exports to these countries accounted for 82.6% of total Montenegrin exports and the overall structure has changed in favour of Italy and Greece in 2004. Montenegrin imports in 2004, according to the country of origin come mostly from the former Yugoslav republics and Italy and Greece. Imports from Bosnia and Herzegovina accounted for 9.1% in 2004 compared to 8.5% in 2003. The share of imports from Slovenia was 12.6% in 2004 (almost the same as in 2003 when it amounted 12.1%). The share of imports from Croatia rose in 2004 to 8.8% from 6.6% in 2003. Considering imports by industrialised countries, the share of Germany increased from 7.6% in 2003 to 8.6% in 2004. Italy’s share of total imports increased to 14.4% in 2004 from 13.4% in 2003. Imports from Austria accounted for 7.1 % of total imports in 2004, compared to 6.2% in the previous year. Imports from Switzerland accounted for 3.1% in 2004, nearly the same participation as in 2003 (when accounted for 2.9%). Imports from the USA were 2.6% in 2004 compared to 1.7% in 2003. 8.1.3 “TERMS OF TRADE” ISSP has estimated terms of trade as a ratio of the price level of the most important export and the price level of the most important imports in Montenegro2. Rather high share of imports consistently belongs to oil and oil derivatives (8.6% in 2004 and 11% in 2003), while on the exports side, aluminium accounts for the main share of all exports (60.7% in 2004). Despite the fact that the ratio of prices of aluminium to prices of oil products does not precisely represent terms of trade, it is a good measure of profitability of Montenegro’s foreign trade.

Graph:8.1 Price of crude oil and aluminium prices

15

20

25

30

35

40

45

50

M1

2001

M2

2001

M3

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001

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1M

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002

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004

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200

4

USD

per

bar

rel

1300

1400

1500

1600

1700

1800

1900

2000U

SD p

er t

on

Crude oil (left axis) Aluminum (right axis)

Source: KAP (export prices), International financial statistics (IFS)- average crude oil prices, SPOT oil)

2 This is due to the fact that the Monstat does not calculate the full official terms of trade.


ISSP - CEPS 96

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 listed in the IMF’s International Financial Statistics (see the graph 8.1).

Graph 8.2: Terms of trade in Montenegro (Approximation)

70

80

90

100

110

120

130

M1

2001

M2

2001

M3

2001

M4

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003

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1 20

04M

2 20

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5 20

04M

6 20

04M

7 20

04M

8 20

04M

9 20

04M

10 2

004

M11

2004

M12

200

4

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

Source: ISSP’s calculation based on data from KAP and International Financial Statistics An approximation of the Montenegrin terms of trade is shown by the graph 8.2. The graph shows that Montenegrin terms of trade have improved in 2001, deteriorated in 2002, recovered somewhat in 2003, and then deteriorated in 2004 due to the oil price increase. In December 2004, they were at a level of 70.1 points (compared to 100 in 2000:1). 8.2. BALANCE OF PAYMENTS The following text presents the latest data on the Balance of Payments of Montenegro. The data in euros were obtained from the Central Bank of Montenegro and cover the period since 2001. 8.2.1 Current account The current account deficit in Montenegro in 2004 amounted to €142.9 million (or 9.1% of GDP), a nominal increase of 40% compared to 2003. Total revenues were equal to € 830.4 million, and increased of 29% compared to 2003. On the other hand, total expenditures of the current account in 2004 amounted to €973.4 million, a nominal increase of 31% compared to the previous year.


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Goods trade Total goods trade deficit in 2004 was € 430.9 million or 20% more than in 2003. This deficit accounted for 27.5% of GDP in 2004. Total trade of goods (imports plus exports) was € 1.2 billion in 2004, representing a 33% increase compared to the total trade of goods in 2003. Exports of goods amounted €381.6 million (or 24.3% of GDP) in 2004 and nominally increased by 41% or faster than imports compared to the previous year. Imports of goods amounted to € 812.5 million (or 51.8% of GDP) and increased by 29% compared to the previous year. Overall, the ratio of exports to imports in 2004 was 47% or 4 percentage points more than in 2003. Exports in 2004 increased as result of the production increase in the sector of processing industry (by 13.1%) as the main contributor to Montenegrin exports of goods. Furthermore, exports in 2004 increased, primarily due to the increase of exports to Serbia and Kosovo (31% higher than in 2003), as the result of higher demand from this country, as well as due to the increase of exports of aluminium (44% higher than in 2003). Balance of services The net balance of services in 2004 was in surplus and amounted to € 139.9 million (8.9% of GDP), a nominal increase of 25% compared to 2003. This increase is a result of increased transportation revenues from non-residents, by 29.5%, firstly due to the increase of transportation of passengers. Furthermore, the number of non-resident tourists increased by 8.1% and generated € 163.5 million revenues from non-resident tourists, or 20.2% more than in 2003. Income The surplus of income amounted to €103.8 million, a nominal increase of 6.6% in 2004 compared to 2003. This increase is mainly due to a 52% increase of total income revenues compared to 2003. Transfers The net balance of transfers in 2004 was in surplus, amounting to € 44.2 million, a decrease of 4% compared to 2003. This decrease of the surplus is primarily due to lower foreign assistance, which decreased by 8%, i.e. from € 21.8 million in 2003 to € 20 million in 2004.


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8.2.2 Capital and financial account 3 Financial account In the financial account of Montenegro, “foreign direct investments” still make up the most significant position, amounting to € 50 million or 3.2% of GDP in 2004.This represents an increase of 29% compared to 2003. The main reason for the increase of foreign direct investments is the privatisation process of several state-owned companies. “Other investments” in 2004 amounted to € 98.2 million, an increase of 109%, mostly due to the increase of foreign loans. Net portfolio investments were positive in 2004 and amounted to € 5.5 million, a significant increase from the € 0.9 million in 2003. The position of “change in net foreign asset of commercial banks” was € 32.2 million in 2004, while it was € 45.7 million in 2003. The change in CBM foreign reserve assets remained negative (€-15 million) in 2004 while it was € 0.5 million 2003. Net errors and omissions The total balances of the current, as well as capital and financial accounts, was € 27.9 million in 2004 and was improved compared to € 31 million in 2003. 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.


ISSP - CEPS

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Table 8.3 Balance of Payments of Montenegro 2001-2004 (in € 000)

2001 2002 2003

as % of GDP in 2003

2004 as % of GDP

in 2004

Change in 2004 (in %) compared to

the same period of

2003 CURRERNT ACCOUNT BALANCE -195 -163409 -101,986 -6.96 -142,968 -9.12 40 Total current account revenues 631606 692315 642,531 43.86 830,398 52.97 29 Total current account expenditures 827017 855724 744,517 50.82 973,366 62.09 31 GOODS AND SERVICES BALANCE -390675 -323883 -247,597 -16.90 -291,021 -18.56 18 GOODS BALANCE -487527 -424705 -359,330 -24.53 -430,900 -27.49 20 Total export of goods 235365 322624 270574 18.47 381,607 24.34 41 Export of goods excl. trade with Serbia and Kosovo and aluminum 51952 54015 67849 4.63 101,484 6.47 50 Export of aluminum 157973 166715 109,726 7.49 158,069 10.08 44 Export to Serbia and Kosovo 25440 101895 92,999 6.35 122,054 7.79 31 Total import of goods 722892 747329 629,904 42.99 812,507 51.83 29 Import of goods excl. oil, electricity and trade with Serbia and Kosovo 400629 413082 316,441 21.60 456,559 29.12 44 Import of electricity 37211 48816 46,526 3.18 48,777 3.11 5 Import of oil and oil derivatives 170558 106030 50,124 3.42 61,380 3.92 22 Import from Serbia and Kosovo 114495 179401 216,813 14.80 245,791 15.68 13 SERVICES BALANCE 96852 100822 111,733 7.63 139,879 8.92 25 Total revenues from services 150228 175969 191,395 13.06 241,123 15.38 26 Total expenditures for services 53376 75147 79,662 5.44 101,244 6.46 27 Total Transportation Revenues 28384 32041 35,009 2.39 45,341 2.89 30 Transport official data about revenues 26404 29084 29,634 2.02 39,756 2.54 34 Transport revenues from Serbia 1981 2957 5,375 0.37 5,585 0.36 4 Total Transportation Expenditures 20059 22029 25,904 1.77 29,378 1.87 13 Transport official data about expenditures 18652 17790 19,801 1.35 19,262 1.23 -3 Transport expenditures to Serbia 1407 4239 6,103 0.42 10,116 0.65 66 Balance of transportation services 8326 10012 9,105 0.62 15,963 1.02 75 Total Revenues from Tourism 105970 124236 136,046 9.29 163,495 10.43 20 Revenues from tourists abroad (estimate) 40580 61655 61,753 4.21 82,204 5.24 33 Revenues from tourists from Serbia 65390 62581 74,293 5.07 81,291 5.19 9 Total Expenditures to Tourism 5020 8009 10,096 0.69 6,951 0.44 -31 Expenditures for tourism abroad 4852 6394 8,043 0.55 5,214 0.33 -35 Expenditures for tourism in Serbia 167 1615 2,053 0.14 1,737 0.11 -15 Balance of tourism 100950 116227 125,950 8.60 156,544 9.99 24 Revenues from Financial Services 4094 2686 2,848 0.19 4,035 0.26 42 Commission fee 4044 2262 1,567 0.11 3,308 0.21 111 Commission fee on Serbian import/export (estimate) 50 424 1,281 0.09 727 0.05 -43 Expenditures to financial services 3191 3332 6,761 0.46 6,462 0.41 -4 Commission fee 3113 2814 5,517 0.38 5,290 0.34 -4 Commission fee on Serbian import/export (estimate) 78 52 1,244 0.08 1,172 0.07 -6 Balance of financial services 903 655 -3913.00 -0.27 -2427.00 -0.15 -38 Revenues from other Services 11779 12755 17,492 1.19 28,252 1.80 62 Expenditures for other services 25106 39133 36,901 2.52 58,453 3.73 58 Balance of other services -13327 -26378 -19409.00 -1.32 -30201.00 -1.93 56 INCOME BALANCE 46482 74201 99510 6.79 103834 6.62 4 Income revenues 86777 99569 125,337 8.55 152,722 9.74 22 Compensation of employees 40841 46342 85,496 5.84 129,822 8.28 52 Revenues from Serbia for physical persons 44329 53226 39,261 2.68 22,314 1.42 -43 Received dividends 170 3 0.00 45 0.00 1,400 Interest revenues 1438 158 577.00 0.04 541 0.03 -6 Income Expenditures 40295 25368 25,827 1.76 48,888 3.12 89 Compensation of employees 33544 3155 3,362 0.23 6,289 0.40 87 Expenditures for physical persons in Serbia 115 313 1,083 0.07 2,782 0.18 157 Interest expenses 2287 13807 12,568 0.86 24,524 1.56 95 Paid dividends 4349 8405 8,814 0.60 15,293 0.98 74 CURRENT TRANFERS BALANCE 148781 87056 46,101 3.15 44,219 2.82 -4 Current transfers to Montenegro 159235 97267 55,225 3.77 54,946 3.50 -1 Transfers to Montenegro from abroad 11361 5488 3,188 0.22 8,568 0.55 169 Foreign assistance 69518 42074 21,807 1.49 20,078 1.28 -8 Foreign assistance financial and material (NGO, humanitarian organisations)

78357 50 30,230 2.06 26,300 1.68 -13

Expenditures 10454 10211 9,124 0.62 10,727 0.68 18 Transfers from Montenegro abroad 10454 10211 9,124 0.62 10,727 0.68 18 CAPITAL AND FINANCIAL ACCOUNT BALANCE 11900 71843 133030 9.08 170,905 10.90 28 CAPITAL ACCOUNT 0 0.00 0 0.00 FINANCIAL ACCOUNT 11900 71843 133,030 9.08 170,905 10.90 28 Direct investment 10632 89183 38,725 2.64 50,015 3.19 29 Equity capital 4710 78112 38,725 2.64 50,015 3.19 29 Reinvested earnings and undistributed branch profits 5922 11071 0.00 Portfolio investment-net -12 -213 942 0.06 5,524 0.35 486 Other investments -6088 17369 47,047 3.21 98,170 6.26 109 Loans 2925 24888 114,597 7.82 176,103 11.23 54 Repaid loans 9014 7518 67,550 4.61 77,933 4.97 15 Change in Net Foreign Assets 7369 -24144 45,759 3.12 32,237 2.06 -30 Change in CBM for. reserve assets (term deposits of CBM in for. banks)

0 -10352 557 0.04 -15,041 -0.96 -2,800

BALANCE OF CURRENT ACCOUNT AND CAPITAL AND FINANCIAL ACCOUNT

-183511 -91566 31,044 2.12 27,937 1.78 -10

NET ERRORS AND OMISSIONS -183511 -91566 31,044 2.12 27,937 1.78 -10 Gross Domestic Product (at current prices) 1465100 100 1567700 100

Source: Central bank of montenegro.

Chapter 9. Regional Comparison

ISSP - CEPS 100

9. REGIONAL COMPARISON o Industrial production in 2004 increased in all CEE countries, except in Macedonia. o CPI inflation in 2004 decreased on an annual basis in several SEE countries

(Montenegro, Macedonia and Bosnia and Herzegovina, Romania). o The lowest unemployment rates in 2004 were registered in Romania and Bulgaria, while

the highest unemployment rates are still present in Bosnia and Herzegovina. o Current account balance as % of GDP was slightly improved in several SEE countries in

2004. 9.1 MACROECONOMIC INDICATORS The data on real GDP growth rate in South Eastern European countries for 2004 are still not available for all countries, except the estimation for Albania (6%), Montenegro (3%), Croatia (3.7% in first three quarters of 2004) and Bulgaria (5.7% in first three quarters). These growth rates in 2003 were estimated at 6% in Albania, 4.5% in Romania, 2.5% in Serbia and 1.5% in Montenegro. Official GDP growth rate in 2003 was 3.5% in Bosnia, 4.3% in Croatia, and 2.2% in Macedonia. Industrial output in 2004 continued its growth. The most obvious changes of industrial production growth were in Serbia, Montenegro, and Bosnia and Herzegovina, which were 7.2%, 13.8% and 9% respectively. On the other hand, the level of industrial production in Macedonia was lower in 2004 (-12.7%) due to the significant fall within Macedonian industrial production in January, May and November 2004 on monthly and annual bases. CPI inflation in 2004 decreased on an annual basis compared to 2003 in several SEE countries. The most pronounced decline took place in Bosnia and Herzegovina, Macedonia and Romania in December 2004. The reasons of the inflation decline were stable currency and the fact that countries follow the conditions within the EU integration process. For example, the main reason why inflation rate in Macedonia declined to 0.4% in 2004 was the fact that Macedonian Government reduced average customs rate from 12.16% in 2003 to 11.09% in 2004 due to the accession to WTO in 2003. On the other hand, inflation in 2004 increased on an annual basis with the growth rates of 13.2% in December in Serbia and 2.7% in December in Croatia (see the table 9.1). The main reasons of strong inflation growth in Serbia were changes within the fiscal policy and real increase of the government’s consumption. The oil prices growth also explains higher inflation rates in several countries in 2004. This caused inflation rate growth in Croatia as well. However, Croatian inflation rate growth is within the planned level and it was mostly not a result of internal factors within the country.


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Table 9.1: Macroeconomic indicators of SEE countries

Alb

ania

Bos

nia

iHer

zego

vina

/Rep

ublic

of

Srps

ka

Bul

gari

a

Cro

atia

Mac

edon

ia

Mon

tene

gro

serb

ia

Rom

ania

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 GDP growth (change in %)

2004 6.0**** - 5.7 (Jan-

Sep) 3.7(Jan-

Sep) - 3.0 -

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

Annual change of industrial production (in %) 2004 - 9.0 23.4 3.0

-12.7(Jan-Dec)

13.8 7.2 5.3

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 (July) 0.3 (Jan-

July)

6.1 (Dec)

9.9 15.3 Annual inflation rate (CPI, in %)

2004 3.5(Jan-

Dec)**** -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 (Jan-Dec)

Currency name

Lek Convertibile

Mark; BAM

Leva Kuna Denar Euro Dinar Lei

2004. (Related to

€)

127.0 (Dec)

1.956 (Dec)

1.958 (Dec)

7.67 (Dec)

61.47 (Dec)

- 78.9 (Dec)

39,820 (Dec)

National currency (per €)

Annual change in

% -0.55 - - 0.3 0.02 - 15.5 -0.23

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 (Dec) 36.7 21.6 (Dec) 30.2 (Dec) 7.2

Unemployment rate (in %)

2004 - - 11.8 (Oct) 18.7 (Dec) 37.0 19.5 (Dec) 31.9 (July) 6.2 2001 -22.6 -59.0 -11.6 - -15.3 -31.3 -26.1 -13.2 2002 -17.5 -59.2 -10.2 -11.5 - -22.0 -34.8 -8.6 2003 -21.5**** -48.2 -12.0 -7.9 -21.0 -17.3 -32.3** -8.9

Trade balance (goods and services) as % of GDP

2004 - -53.2 -13 -7.0 -26.1 -18.5 - -9.1

2001 -5.3 -25.3 -6.5 -3.7 -6.9 -17.1 -5.5 -5.9 2002 -9.5 -35.0 -4.5 -8.7 -14.2 -14.8 -9.0 -4.5 2003 -8.5**** -45.7 -7.0 -6.9 -14 -7.1 -11.0 -4.6

Current account balance (as % of GDP) 2004 - -39.7 -5.8 -4.6 - -9.1 - -6.6

Sources: Data for Montenegro are from ISSP database Data for other countries are from their central banks and statistical offices Data for Bosnia and Herzegovina in 2003 are from IMF *Estimated by ISSP **www.dfat.gov.au; ***www.insse.ro ****http://strategis.ic.gc.ca/epic/internet/inimr-ri.nsf/fr/gr126287f.html

With respect to unemployment rates1, Bosnia and Herzegovina, Serbia and Macedonia are considered as the countries with the highest unemployment rates within the region with estimated unemployment rates from 30% to 40%. Unemployment rates declined in several 1 Unemployment rates in the SEE countries are calculated using different methodologies, and due to this fact, data on unemployment rates are not completely comparable, but they are only available data.


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countries in 2004 compared to 2003. These countries are Romania (6.2% in 2004 vs. 7.2% 2003), Bulgaria (11.8% in October 2004 vs. 13.5% at year end 2003) and Croatia (18.7% at year-end 2004 vs. 19.1% at year-end 2003). Generally, Romania and Bulgaria continue to be the countries with the lowest unemployment rates in the region. These countries make some efforts toward unemployment reduction within the EU accession process. Data on current account deficit (as a percent of GDP) were not available for all countries for 2004. Considering trade deficit as % of GDP it is obvious that almost all SEE countries did not achieve its improvement in 2004. Import in almost all countries increased due to the high imports of oil and oil products (Serbia, Montenegro, Macedonia), nutrition products, industrial and electrical machines. Despite the fact that trade deficit increased as % of GDP due to the faster increase of imports of goods than an increase of GDP the current account deficit as % of GDP declined in Croatia, Bulgaria and BiH. However, Bosnia and Herzegovina continues to be the country with the highest current account deficit as % of GDP. 9.2 SEVERAL SEE COUNTIRES WITHIN THE EU PRE-ACCESSION PROCESS In 2004, Romania, Bulgaria and Croatia became candidate countries within the EU accession process. Bulgaria and Romania made significant progress in the past year in their efforts to meet the accession criteria, according to the regular reports adopted by the European Commission. Their objective of accession in 2007 must remain the firm focus of these three countries' preparation and the Commission will support them in achieving this goal. Bulgaria and Romania both continue to fulfill the political criteria, and are closer to fulfilling the economic and legal criteria. In addition, the Stabilization and Association Agreement with Croatia, as a third candidate country enters into force on February 1, 2005. The European Commission presents to the Council, a three-year common financial framework for the accession of Bulgaria and Romania in order to prepare the ground for the completion of negotiations. Actually, financial support is provided within ISPA2, SAPARD3 and PHARE4 programs, according to the European Commission’s plan until 2006. EU Pre-accession Financial Assistance to Romania The global economic situation in Romanian economy was improved in last several years and corruption was reduced. From 2000 onwards, three main instruments provide the EU pre-accession aid to Romania: o the PHARE Program; o ISPA; o SAPARD. The total volume of pre-accession assistance available to Romania is substantial (around €700 million per year from PHARE, ISPA and SAPARD). This represents a very important financial resource for Romania, equal to around 1.4% of GDP, 4.4% of consolidated budget revenues, or 36% of investment expenditure from the national budget.

2 The pre-accession instrument providing investments in transport and environmental infrastructure 3 The financial instrument supporting agriculture and rural development 4 Funding for institution-building and investment in support of EU accession preparations


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EU Pre-accession Financial Assistance to Bulgaria Despite the difficult global economic situation, the Bulgarian economy continued to benefit from high growth and stability. In its 2004 Regular Report, the European Commission reiterated its recognition of Bulgaria as being a functioning market economy (first recognized as market economy in 2002). Furthermore, the 2004 report concludes that Bulgaria should be able to cope with competitive pressure and market forces within the Union. The Commission’s Regular Report also mentions Bulgaria’s further good progress in structural reforms over the last years. This holds in particular for the increasing role of the private sector through privatization and the reduction of state aid, the positive development of the banking sector and some improvements in the regulatory environment. However, further structural reforms are needed: o Streamlining the regulatory procedures for the enterprise sector o Improving the efficiency of the administrative and judicial system o Privatization of remaining public enterprises o Restructuring and liberalizing the network industries (particularly in the energy sector) o Improving the flexibility of the labor market and the efficiency and quality of the

education system The EC Financial assistance remains significant in supporting Bulgaria’s accession process. It helps Bulgaria to prepare for membership and is also a key indicator of Bulgaria’s readiness for membership and for handling the increased volumes of EC funding that come with it. The EC raises the amount of financial assistance to Bulgaria by an average of 30% in the period 2004-2006. Bulgaria receives around € 400 million per year reaching 2% of its GDP. Three instruments mainly provide the EC’s pre-accession aid to Bulgaria: o the PHARE Program; o ISPA; o SAPARD. EU Pre-accession Financial Assistance to Croatia The Stabilization and Association Agreement with Croatia enters into force on February 1, 2005. The full implementation of the SAA will help Croatia in its preparations for EU-membership. With a view to Croatian integration in European structures, the European Union supports Croatia's efforts on democratic stabilization (including the return of refugees and displaced persons), economic and social development, justice and home affairs, the building of administrative capacity, environmental protection and a real commitment to regional co-operation. The EU puts special emphasis on the importance of Croatia's active commitment to the principles and objectives of the Stability Pact. Most of the assistance provided to Croatia is being implemented in the framework of the Community Assistance for Reconstruction, Development and Stabilization (CARDS). The CARDS program is the main channel for the EU financial and technical assistance co-operation with the countries of southeastern Europe. The CARDS National Program is designed to support Croatia in meeting its most difficult challenges and fulfilling obligations undertaken in the framework of the Stabilization and Association Agreement, including the Interim Agreement. In the


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future, assistance will focus more and more on accession related matters, supporting in particular the establishment of structures aimed at enforcing the Acquis communautaire. Other SEE countries Macedonia and Albania are already members of WTO and have received some financial aid within the financial programs EU (especially Albania). Macedonia signed the Stabilization and Association Agreement (SAP) in 2001 and began with its implementation in 2004. This country is now waiting for the status of the candidate country for the EU accession. Albania started with negotiation process within the SAP in 2003. Bosnia and Herzegovina got the positive Feasibility Study in 2003, and should successfully complete negotiation process within SAP in order to sign this Agreement. Montenegro has required joining WTO and EU according to principle of “twin track” or independently from Serbia. After getting the positive Feasibility Study, Montenegro is expected to start negotiations within the Stabilization and Association Process in order to sign and implement the Stabilization and Association Agreement. Beginning of negotiations is expected in the second half of 2005, due to the fact that the Feasibility Study on the level of the State Union of Serbia and Montenegro was estimated as a positive. Generally, Serbia and Montenegro made the worst improvement within the stabilization and association process in order to get the status of candidate country for the EU accession. EU provides financial support within the CARDS program (Community Assistance for Reconstruction, Development and Stabilization) for the Western Balkan countries. According to its plan until 2006, the European Commission provides € 4.65 billion for the countries of Western Balkan (and Serbia and Montenegro within this group of countries). The Commission makes an indicative plan on an annual basis, i.e. for 2005-2006 in order to realize CARDS program for this year in cooperation with the European Agency for Reconstruction. The plans are usually made in order to support economic and social development, investments in transportation infrastructure, energy, and environment within the CARDS programs. This means that the Commission has it strategic papers on how to spend the financial funds within the CARDS and additionally determines the most important areas (e.g. in Montenegro), which need financial support. After the end of the support through the CARDS programs in 2006, other programs of financial support provided by the European Commission (PHARE, ISPA and SAPARD) for the future members of the EU are not available for Montenegro in the pre-accession period. This means that the Commission is going to provide a new program for the rest of Western Balkan countries as the pre-accession instrument. This program should provide further support for Montenegro within the European Partnership and other priorities in medium and long term.


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PART 2

Comments

ISSP - CEPS 106

COMMENT 1

RESEARCH ON THE IMPACT OF THE INTRODUCTION OF CUSTOM DUTIES ON FLOUR EXPORT Janjušević Jelena, ISSP INTRODUCTION Institute for Strategic Studies and Prognoses (ISSP) has been developing the idea of free trade in Montenegro in the past years. Free trade implies elimination of all kind of obstacles to undisturbed trade of goods, including low custom duties (and their complete elimination), liberalization of import regime, simplified procedures and legal protection1. Countries such as Montenegro, which are small systems, are not in a position to make an influence on prices of imported goods. It happens very often that the introduction of domestic economy protection measures (custom duties, levies, quotas) leads to the reduction of trade or imposes additional burden on final consumers. Thus, custom duties introduction/increase leads to reduction of trade of those import goods. Therefore, custom revenue is reduced (due to reduction of tax basis), so the argument, which is often used by opponents of free trade, the increase of budget revenues, is very often invalid. Final consumers pay for higher prices of imported goods caused by higher custom rates. The question is, how much are these measures really protective and whom are they protecting? These and many other questions have been brought up after the enactment of the Decree on Protection from Excessive Wheat Flour Import. For the purpose of obtaining answers on all this questions Institute has carried out the research and have analyzed the impact and soundness of this Decree. LEGAL REGULATION Until 1999, unique Customs Law and Foreign Trade Law were in force in Serbia and Montenegro2, i.e. it was a unique customs territory. Since then, de facto, there are 3 individual custom domains: Serbia, Montenegro and Kosovo and Metohija. In subsequent years, Montenegro has created and implemented it’s own regulations that define foreign trade policy (Decree on Levy Introduction, Custom Tariffs Regulation, etc.). Some of these changes in foreign trade policy were related to trade liberalization and reduction of trade barriers. In September 2003 with the Action Plan, i.e. process of harmonization between Serbia and Montenegro resulted in the increase of custom duties on individual products.

1 Petar Ivanović, Why is Free Trade Important for Montenegro, MONET 14 2 Federal Law on Foreign Trade enacted in 1992 was in force in Montenegro until 2000 when Montenegro addopted it's own Custom Tariffs Regulation. The old Federal Law still existed, only Montenegro foreign trade activities and custom duties calculation were conducted by regulations that were enacted on the level of Montenegro. The old Federal Law generaly defined temporary protection measures, without accurate criteria for implementation and deadline (article 59 and article 60 of old Federal Law of Foreign Trade Activities).


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Wheat flour belonged to a group of 56 strategic agriculture products whose custom rates were not changed by the Action Plan3. At the end of October 2004, based on Foreign Trade Law (Official Gazette no. 28/04) and the Decree on Foreign Trade Law Implementation (Official Gazette no. 52/04), Government of Montenegro enacted Decree on Temporary Protection from the Excessive Wheat Flour Import in the form of the custom rate of 30%. Namely, current Foreign Trade Law defines »protection measures from excessive import4« (Article 44) and anticipates that temporary protection measure can be introduced in case of increased import which endangers domestic producers of similar or same product that jointly satisfy over 50% of total production of those products in the Republic. Two representatives of the mill industry in Montenegro - Žitopromet AD Spuž and Montemlin “Šajo” have submitted the request for protection5. It is specified that temporary protection measure should be applied no later than 200 days from it’s announcement. Provisions of Foreign Trade Law maintain a possibility of introduction of protection measures. Is that right? Should the Government protect particular industry? Do such decisions have an influence on better performance and efficiency of producers, i.e. processors in this case? Even if we presume that protection is justified, is the fact that particular industry makes 50% of total domestic production sufficient reason for protection? Government interference in economy has to be maintained on the minimum level. Managers shouldn’t require resolutions for their companies from the Government, through subventions and protection, but on the market. Government makes the rules of the game and takes care of their implementation. Government shouldn’t define results of the market game. Market is the best indicator of efficacy and efficiency of the companies. Company, with its product struggles for its market share. Specified legal provisions provide possibilities for the Government to define winners in market game. In such manner, Government subsidizes inefficient producers. Interests of one small party are being protected on the account of final consumers. Altogether, it leads to inefficiency of overall economy. All this reasons refer to revision of the above-mentioned Law. Also, conditions under which particular production gets protection are disputable. As it was specified, according to the Law, domestic producers that mutually satisfy over 50% of total production of particular products in Republic, have the right on protection from excessive import. If we presume that protection is needed, can this be a sufficient reason for its introduction? Case of Montenegrin mills speaks exactly the opposite. Market balance needs for wheat flour in Montenegro are between 7.500 - 9.500 tons per month; depending on volume of tourist 3 Until new Custom Tariffs Regulation was defined and implemented on territory of Montenegro (in 2000), Montenegro was implementing Law that was in force in ex FRY (Serbia and Montenegro). According to that law, custom rate for wheat flour was 30%. After Decision on Implementing New Custom Tariffs in Montenegro, custom rate for wheat flour was 0%. It maintained its zero level even after the adoption of the Action Plan, and it belonged to the group of 56 products for which custom rates were not adjusted. 4 Redundant import implies that particular product is being imported in larger amount , compared to domestic production, and in such way makes or threatens to make a serious loss for domestic producers of the same or similar product. 5 According to data from the Ministry of International Economnic Relations and European Integrations, these two mills represent over 50% of domestic production.

Comments

ISSP - CEPS 108

capacity exploitation, yield of agriculture production and performance of confectionery industry. Real capacity of domestic mills (4.000 - 6.000 tons per month) can satisfy 50% to 60% of market needs. The rest of it has to be compensated by import. Is protection of domestic production that cannot satisfy domestic market justified? Furthermore, Law predicts that measures for protection can last up to 8 years, which additionally refers to the revision of particular Law. Soon, Montenegro will begin negotiation for EU accession. EU accession implicates no trade barriers between member countries, which means that custom border between Montenegro and for instance Germany, Great Britain, France, Slovenia and even Serbia, if it becomes EU member country, won’t exist. The question is, in what way in that particular situation domestic producers will protect themselves? How will they cope against competition that comes from EU countries and whom will they ask for protection if their sales begin to drop? IMPACT ANALYSIS What does introduction/increase of custom rate on particular product mean? Introduction of custom protection, without any doubt raises the cost of import. Prices of imported goods rise for the value of custom duties. Let us presume that particular product is imported for 100€ with zero custom rate. Also, let us presume that Government decides to introduce 30% custom rate on import of this particular product. That means that cost of particular product will be:

100€ + 100€*30%=130€

Therefore, there would be an increase of 30€ per product unit. If one imports 1.000 units of particular product, he will have to pay 30.000€ more. Each producer will transfer this expense on final consumer by raising prices for the amount of custom duty. The consumer can decide between domestic product which costs 105€ and foreign product that he was buying for 100€ before, and which costs 130€ now. Consumer is obligated to buy domestic product whose quality wasn’t satisfactory before or he can spend 30€ more to buy product that he was buying before, that satisfies his needs. If we presume that budget of consumers is fixed, this means that his freedom of choice is very narrowed. Additionally, domestic producers use rise of prices on imported goods and raise prices of their own goods. Introduction of custom duties on wheat flour import have an impact on: o mill industry o baking industry and o final consumers. Custom rate of 30% on wheat flour import was introduced with the objective of protecting mills in Montenegro from redundant flour import. Accordingly, value of flour import should decrease, and production and sales of domestic mills should increase. Besides, price of flour in domestic mills should be lower than price of imported flour, which is loaded by custom duties. However, as it can be seen on following graphs, months after custom duties were introduced, production volume did not increase, i.e. sales of Montenegrin mills, and price of flour in domestic mills is still higher than the price of imported flour.


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109

Production performance and sales of Zitopromet Spuz mill

0

500000

1000000

1500000

2000000

2500000

3000000

jan

feb

mar apr

may jun jul

aug

sep

oct

nov

dec

Proizvodnja Prodaja

Wheat flour sales in Montemlin in first 11 months in 2004

250000

350000

450000

550000

650000

750000

850000

950000

1050000

Jan-

04

Feb

-04

Mar

-04

Apr

-04

May

-04

Jun-

04

Jul-

04

Aug

-04

Sep-

04

Oct

-04

Nov

-04

u eu

rim

a

Source: Žitopromet Spuž and Montemlin Spuž If we take a look at foregoing graph which represents production performance and flour sales in Žitopromet for 2004, we can see that flour production have decreased since March and that there is a difference between production and sales from March till late September. One portion of produced flour stays unsold, i.e. stays in store. The question is, whether this gap is the reason for custom duties introduction request? Reasons could be also found in higher flour import from Serbia, which had an impact on sales reduction, and lower flour production in this mill. However, in that case, the question is why the introduction of not so low custom rate at the level of 30%, didn’t result in a higher flour production volume, up to the level it was before the harvest in Serbia? Instead, at the end of 2004 production was lower, compared to the period after harvest and period before introducing custom duties. In Montemlin, second biggest mill in Montenegro, there’s a similar situation. Flour sales were constantly declining since April till the end of October. Introduction of custom protections didn’t increase flour sales in this mill. What is the impact of this particular Decision on the baking industry in Montenegro? It was expected that introduction of custom duties and higher price of imported flour will change preferences of domestic bakers and that domestic bakeries will buy flour from domestic mills. ISSP have conducted a research of baking industry in Montenegro with the objective to investigate the situation in this sector after introduction of custom duties on imported flour. 90,9% of total number of interviewed people doesn’t justify the introduction of particular measure, and only one has given a positive answer (9,1%). According to research, 60% of bakers buy imported flour, and 40% combine domestic and imported flour. Besides, most of them, around 40% believe that imported flour, compared to flour which is produced in domestic mills, is better; 18% of all bakers believe that imported flour and flour from domestic mills have similar quality, and only 9% believe that flour from domestic mills is of better quality. Besides, after introduction of custom duties, prices of imported flour are still lower than prices of flour from domestic mills. Prices of flour from domestic mills range from 23,4 to 27,1 cent/kg (excluding VAT). Flour prices in Serbia range from 16 to 19 cent/kg (excluding VAT) and after introduction of VAT in Serbia prices are slightly higher, from 1 to 2 cent/kg. After interviewing some of biggest bakeries in Montenegro, we found out that after the introduction of 30% custom rate, imported flour is still cheaper. Following Box is illustrating that.

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BOX 1. AFTER INTRODUCTION OF CUSTOM DUTIES IMPORTED FLOUR IS STILL CHEAPER Based on data that ISSP obtained from several large bakeries in Montenegro, it can be concluded that the price of imported flour is still lower than the price of flour from domestic mills. Bakery X buys flour from the mill that is situated in Novi Sad. Price of flour ranges from 0,20€ to 0,22 €, excluding VAT. There are discounts for advance payments and in that case price of flour ranges from 0,14€ to 0,20€. Bakery Y imports flour mostly from Vojvodina. Price of flour that they buy ranges from 0,14€ to 0,16€, while for the advance payments they receive discount and in that case they pay 0,12€. CALCULATION Purchasing price 14€ - 14 + 17%14 + 30%14 + 0.02=0.206 € / kg Purchasing price 0.16€ - 14 + 17%16 + 30%16 + 0.02=0.235 € / kg 17% - VAT 30% - custom rate 0.02 € average transport cost per kg. Transport cost from Serbia amounts to 500 € per truck, which is 25 tons; which means that price is 20€/ton and 0.02 €/kg. Price of flour from domestic mills (type 500) ranges from 0,24€ to 0,27€. What is the impact of the Decision on consumers? The increase of custom rate leads to the higher price of imported goods, which means that final consumers now pay more for the same product. Second option that they have is to buy domestic product. That way, consumers’ preferences are being forcibly changed and inefficient producers are being subsidized. Introduction of 30% custom rate on flour import didn’t lead to bread price increase in the country. However, in this case we have raw material, which explains why the effect of custom duties introduction didn’t make an impact on bread prices at once. In the case of final product an impact of this particular measure would be noticed much sooner. Besides, prices didn’t rise because Decision was implemented for very short period of time. According to results of before mentioned research that was conducted by ISSP, around 40% of bakers believe that introduction of custom duties on imported flour will lead to bread price increase in particular bakery, and 60% believed the opposite. Presented analysis showed that consequences of custom protection are negative, protection of mill industry is not in favorable for baking industry and final consumers. DECISION ABOLITION In March 2005 Government of Montenegro enacted the Decision on Temporary Abolishment of the Decision, which additionally confirms that Decision was unjustified and unnecessary. Decision was in force for 145 days. This measure, same as the duty of 30 cents per liter on imported beer, were reasons that Bosnia and Herzegovina is once again starting to levy full


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price on flour and beer from Montenegro, even though according to Free Trade Agreement with State Union, those products are custom-free. As a reason for premature abolishment of Decision, it is stated that »temporary custom duties have accomplished their aim and enabled subsistence of domestic mill industry». Even if we presume that protection is needed, presented analysis showed that that objective is not fulfilled. In the observed period we have seen that increase of production and sales in domestic mills didn’t happen; Montenegrin bakeries still buy imported flour and their price, after introduction of 30% custom rate, is still lower than price of flour in domestic mills. Decisions like this one lead us to the conclusion that every production, processing or any other business, when faced with problems should ask for help from the Government which will solve their problems. But, where’s the market there? In situations like this we can hardly speak about market economy and efficient performance. CONCLUSION Free trade is one of the most important preconditions for Montenegrin economy development. All protectionist measures (custom duties, contingents, import bans…) have direct impact on economy development by lagging it. Decision makers shouldn’t steer events in order to avoid competition, but create conditions for equal participation in the market game. Increase of custom rates raises pressure on price increase, and consequently on household expenses. Furthermore, Montenegro is not in position to influence prices of import goods, thus high custom rates lead to trade reduction and/or additional burden on final consumers. Positive effect on budget income, at first glance, as a result of higher custom duties is questionable. If custom duties are high then trade decreases, which reduces the custom basis. Custom duties on wheat flour import increase prices on such goods, which are paid by final consumers. Large portion, 60% to 70% of total household consumption in Montenegro refers to alimentary goods. Each request for custom rate accession on import of these goods or respective raw materials implicates reduction of household budget in Montenegro. Introduction of 30% custom rate on wheat flour import can be understood as monopolist interests protection. Interests of one small party are put against the interests of majority. Branch that has around 200 employees (mill industry) is being protected on account of other branch that has over 1.500 employees (baking industry) and on account of the entire population of Montenegro. Good quality product and producer shouldn’t fear the market game, but in our country such producers are very rare. Every endless protection of producers is counter-productive. Therefore, zero custom rates have to be a long-term strategy and the objective of recovering society and economy.

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COMMENT 2

REGIONAL DEVELOPMENT OF THE MONTENEGRIN GOODS TRADE Nina Labović, ISSP ABSTRACT

This paper is related to aspects of further Montenegrin trade integration with South-Eastern Europe (SEE) countries and the EMU. The main question here is whether further European integration of Montenegro may induce an assimilation of trade structures and decrease its goods trade deficit. A complex set of different factors, both global and international, help to explain why taking part in European integration and accession will lead to increase in trade shares of SEE and EMU countries in total Montenegrin trade. The growth of the Montenegrin economy depends on the development of Montenegrin exports to the Switzerland, European Union and Serbia6, which are by far the biggest markets for Montenegrin products. The paper includes structural equations for the exports demand from the above-mentioned countries. On the other hand, Montenegro has a highly import-dependent economy. Thus, the paper presents a structural equation for the imports demand from Montenegro. Key words: Export Demand, Import Demand, Real External Value, Price Elasticity 1. INTRODUCTION The biggest market for Montenegrin products today are Switzerland, European Monetary Union and SEE countries7 and the growth of the Montenegrin economy depends on the development of the exports of goods to these destinations. Therefore, it seems important to investigate the driving forces behind the Montenegrin exports to Switzerland, EMU and Serbia in order to develop an exports demand equations which can be used for short-term forecasts. Furthermore, the driving forces behind Montenegrin imports are investigated as well. This paper presents three structural equations for the demand for Montenegrin goods from the EMU member countries, Switzerland and Serbia. Trade with Serbia is officially considered as a part of intra trade within Serbia and Montenegro, however it is a trade with a non-resident. With respect to imports, the paper presents one structural equation related to imports demand from Montenegro.

6 Trade with Serbia is considered as an intra-trade for the economic purposes of the paper and regarded as trade with non-resident country 7 Mostly Serbia. For economic purposes trade with Serbia is considered as a trade with non-resident.


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2. DETERMINING FACTORS OF MONTENEGRIN EXPORTS AND IMPORTS 2.1 Regional Development of the Montenegrin Exports With respect to Montenegrin export of goods according to their destination, four dominant destinations are presented within the analyses. These destinations are: Switzerland, EU-15 (mostly EMU), seven SEE countries (SEE-7)8 and ten new countries of EU (C-10). Exports structure according to destination is shown by the figure 1:

Graph 1: Export of goods by destination(Share in total exports)

0

10

20

30

40

50

60

70

80

EMU C10 SEE Switzerland Rest World

countries

in %

2001 2002 2003 2004

Source:CBOM Despite the fact that export to Switzerland had significant share in the total Montenegrin exports, it has decreased from 70% in 2001 to 40% in 2003, and to around 8% in 2004. This is also due to the changes in trade structure and exports increase to SEE-7 and EMU countries. On the other hand, the share of exports to SEE countries rose from around 15% in 2001 to 39% of total exports in 2004. In 2004, Montenegro experiences a significant increase of the exports share to EMU. The share of the ten new EU countries is less significant within Montenegrin foreign trade of goods, especially on the export side. Harmonization of the trade legislation with European standards and implementation of the new laws in this field9 should contribute to the further liberalization of exports and imports, which is going to decrease unbalance of the balance of payments in the long term. In addition, free trade agreements with other South-Eastern European (SEE) countries, which have already come into force, are considered as a significant requirement for trade barriers abolishment and increase of goods trade with these countries within the European integration process. This has already happened with Montenegrin trade with Bosnia and Herzegovina, which is, after Serbia, the most important Montenegrin trade partner in the region. Namely, 41% of total Montenegrin imports in the period 2001-2004 were from seven SEE countries, while 31% of total exports were to these countries.10 Exports structure, (especially ferrous metals) since 2001, has been changed in favor of EMU (in particular Italy and Greece),

8 Serbia and Kosovo, Bosnia and Herzegovina, Croatia, Albania, Macedonia, Romania and Bulgaria 9 The Customs Law in 2003, Foreign Trade Law in 2004 10 About 76.9% of total exports to SEE countries in the period 2001-2004 was to Serbia

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while exports to Switzerland decreased. The reason for this was the change in the manner of aluminum exports registration since the company, which purchases aluminum from Montenegro has been registered in Switzerland, but it sells that aluminum further to raw aluminum processing factories in Italy and Greece. Thus the structure of Montenegrin exports by destination in 2004 has changed due to the manner of registration, not due to the changes in the actual situation. Therefore, in the course of institutional framework harmonization with the trade integration process it is expected that the export oriented production development will change its export structure, especially regard goods destination. This change should provide export value increase due to the abolishment of exports barriers, which will improve the goods trade balance within the Montenegrin balance of payments. 2.2 Hypothesis on the export demand function Assume that country A (the home country) is the exporting country and the country B (the foreign country) is the importing country. Country B’s demand for goods depends on its preferences, commodity prices and income.

The Marshall demand function (Di) reads as follows: Xi= Di (p1, p2, p3…..pn, Y) (i=1,......n) Where p= (p1, p2, p3…..pn) is the vector of prices and Y denotes the monetary income. To simplify, it is assumed that country B is only interested in two types of goods: the imported good (xA) and a domestic commodity (xB). The price of xA (pA) is fixed in the currency of country B. Furthermore, it is assumed that: o The import good (xA) is customary imported good, e.g. a rise in country B’s aggregate

income (YB) leads to a rise in its demand for xA (positive income elasticity); o Country B’s demand curve for the import good (xA) has the normal negative slope; e.g. a

rise in pA leads to a fall in the demand for xA (negative own-price elasticity); o The import good (xA) is a substitute for the domestic commodity (xB): e.g. a rise in pB

leads to an increase in country B’s demand for xA (positive cross-price elasticity). While empirical exports demand functions usually depend on prices and income, modern literature includes the growing international division of labor as additional determining factor with has a positive influence on exports. Thus, the exports demand function reads as follows: (-) (+) (-) xA= xA (pA/ e*pB, YB, div) where e is the nominal exchange rate and div stands for the growing international division of labor. The single prices are transformed into relative prices, which is in fact a real external value (effective exchange rate). The variable is a measure of the price competitiveness of country A’s exporters. 2.3 Regional Development of the Montenegrin Imports With respect to import of goods according to their origin, the most dominant imports are from the SEE-7 countries, which accounted for 41.4% of total Montenegrin imports in the


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period 2001-2004. The imports come mostly from Serbia and Kosovo and account for 60% of total Montenegrin imports from SEE-7 in the above-mentioned period. The second most important region of imports origin is EMU, which accounted for 30% of total Montenegrin imports in the period 2001-2004. The third group of countries is the ten new EU countries (C-10). Imports from these countries, in particular from Slovenia, accounted for 13% of total Montenegrin imports in the period 2001-2004. This structure is presented by the following figure:

Graph 2: Imports of goods by origin(Share in total imports)

0

10

20

30

40

50

60

EMU C10 CEE Switzerland

countries

%

2001 2002 2003 2004

Source: CBOM Generally, import equation in this paper is defined only for total import, because imports demand always exist and is more determined by domestic factors regardless of the country of origin. However, transaction costs of goods imports could be reduced if Montenegrin imports came mostly from the EMU, in regard of the exchange rate fluctuation risks, but other factors like domestic demand, harmonized Montenegrin legal framework with the countries of imported goods origin are more important for Montenegrin imports. This is due to the fact that Montenegro imports some consumption goods and production materials despite the imports price change because there is a high demand in the country which cannot be substituted by domestic products due to the fact that there is no production of such a goods and raw materials in the country. 3. DATA Since Montenegro is an import-dependent economy, this paper examines the development of Montenegrin total imports of goods. On the other hand, the growth of the Montenegrin economy intrinsically depends on the development of the exports of goods to the Switzerland, South-Eastern Europe and European Monetary Union (see figure 1). Therefore, the driving forces behind the Montenegrin total imports of goods and Montenegrin exports

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of goods to the Switzerland, South-Eastern Europe (mostly Serbia)11 and euro zone were investigated in order to develop imports and exports demand equations. In exports demand equations estimation, exogenous variables, which were used, are the indexes of industrial production in the country of destination because they reflect the dynamic of economic activity of that country. The second exogenous variable was the real external value of the official currency in Montenegro in relation to the currency of the country of exports destination, which is a good measure of the price competitiveness of Montenegrin exporters. It was calculated as a follows: first, the bilateral foreign exchange rate was calculated for Yugoslav Dinar and later for the Deutsche Mark or Euro12 based on relative consumer prices (CPI). In addition, real external value of the official currency in Montenegro in relation to a basket of the currencies of the exports countries is compiled by weighting the bilateral external values with the respective countries share in Montenegrin exports. That is how the real external value of Montenegrin exports is obtained. There are three estimated equations on the exports side:

1) Exports to Switzerland as a function of the industrial production in Switzerland, the real external value based on the weighted bilateral external value of the official currency in Montenegro and USD13 multiplied with the relative CPI in Montenegro and Switzerland.

2) Exports to the EMU as a function of the industrial production in EMU, weighted

bilateral external value of the Yugoslav Dinar in 1999 and the Euro multiplied with the relative CPI in Montenegro and EMU;

3) Goods sale to Serbia as a part of the intra- trade of Serbia and Montenegro. This

dependent variable is explained by the weighted bilateral external value between the Euro and Dinar, since the year 2000, multiplied by the relative CPI in Montenegro and Serbia.

With respect to imports, it was not necessary to estimate several equations according the regions, because imports demand always exists and is more determined by domestic factors then by the situation in the country of goods origin. 4. ESTIMATING THE EXPORT DEMAND FUNCTION The estimation is based on unadjusted monthly figures covering the period 1999:9-2004:12. Equation 1 (Exports to Switzerland) In order to clearly present the estimation results, the following notation is used: XV_CH_REAL denotes Montenegrin real exports to Switzerland, INDP_SW stands for industrial production in Switzerland and REV_CH denotes the real external value of the

11 About 76.9% of total Montenegrin exports of goods to SEE countries during 2001-2004 was to Serbia 12 The estimations of the exports and imports in this paper are based on monthly figures covering the period 1999:9 – 2004:12 and accordingly consider Yugoslav Dinar as official currency in 1999, than the Deutsche Mark until March 2002, and than the Euro since March 2002. 13 Bilateral exchange rate between Montenegrin official currency and USD, related to exports to Switzerland, was calculated due to the fact exports of aluminum to Switzerland was in USD, not in CHF. Therefore, CHF was not used in calculation of the real external value in trade with Switzerland.


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official currency in Montenegro towards the USD, while I0012, I0206 and I1202 and denotes seasonal dummies. Demand function of the exports to Switzerland reads as follows (t-values in parentheses): ∆lnXV_CH_REAL= -66.2- 0.86*lnXV_CH_REALt-1 + 14.7*lnINDP_SWt-6 + (-1.8) (-7.3) (1.8) 0.61*lnREV_CHt-5 - 4.0*I0012 + 3.5*I1202 + (3.45) (-1.7) (1.97) +0.11*∆lnXV_CH_REALt-4 + 21.7*∆ln INDP_SWt-5 - 8.78*I0206 (1.6) ( 2.7) (-5.25) Accordingly, the level of industrial production in Switzerland in period (t-6) and the level of the Montenegrin official currency external value in period (t-5) positively influenced Montenegrin exports to Switzerland. The growth rate of industrial production in Switzerland in period (t-5) and the increase real exports value growth rate to Switzerland four months ago or in period (t-4), positively influenced Montenegrin goods exports to Switzerland. This means that the increase of the industrial production growth rate in Switzerland by one percentage points in period (t-5) caused increase of the real growth rate of Montenegrin exports to this country by 21.7 percentage points in the current period. Increase of the growth rate of the real exports to Switzerland four months ago (in t-4 period) by 1-percentage points caused increase of the real exports growth rate by 0.11 percentage points in the current period. Equation 2 (Exports to European Monetary Union) In order to clearly present the estimation results, the following notation is used: XV_EMU_REAL denotes Montenegrin real exports to European Monetary Union, INDP_EMU stands for industrial production in European Monetary Union and REV_EMU denotes the real external value of the official currency in Montenegro (first Yugoslav Dinar, followed by DM). Trend denotes the linear trend, while I0012 denotes seasonal dummy. Demand function of the exports to European Monetary Union reads as follows (t-values in parentheses): ∆lnXV_EMU_REAL= 87.95 - 0.722*lnXV_EMU_REALt-1 +1.95*lnIND_EMUt-10 + (2.67) (-3.77) (2.52)

+0.21*lnREV_EMUt-15- 1.43*I0012 + 0.03*Trend- (1.83) (-2.58) (2.70)

- 0.28*∆lnXV_EMU_REALt-1 - 14.69*∆lnIND_EMUt-6

(-1.92) (-1.50) The equation above shows the positive impacts of the level of the real external value of the Montenegrin official currency since 1999 as well as the level of the industrial production in EMU on Montenegrin goods exports. The growth rates of the Montenegrin real exports to the EMU in period (t-1) and the industrial production in EMU in period (t-6) had a negative impact on Montenegrin exports of goods. This means that the increase of real exports to the EMU by one percentage point in the previous month caused decrease of the real exports growth rate by 0.28 percentage points in the current period. Furthermore, the increase of the industrial production growth

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rate in EMU by one percentage points six months ago, caused decrease of the growth rate of real exports to EMU in the current period by 14.7 percentage points. Equation 3 (Exports to Serbia)14 In order to clearly present the estimation results, the following notation is used: XV_SR_REAL denotes Montenegrin real exports to Serbia, INDP_SRSA stands for industrial production in Serbia and REV_SR denotes the real external value of the official currency in Montenegro toward Yugoslav Dinar. Demand function of the exports to Serbia reads as follows (t-values in parentheses): ∆lnXV_SR_REAL= -2.91 - 0.38*lnXV_SR_REALt-1 + 1.40*lnINDP_SRSAt-17 – (1.64) (-3.52) (3.12)

0.06*lnREV_SR t-19 + 0.29*∆lnXV_SR_REALt-11 - 4.04*∆lnINDP_SRSA t-7 + (-1.79) (2.64) (-2.92)

0.16*∆lnREV_SRt-6

(2.62)

According to equation above, Montenegrin exports of goods to Serbia is positively influenced by the level of industrial production in Serbia (as a demand from Serbia in period (t-17)), but negatively by the real external value of the EUR toward Yugoslav Dinar in period (t-19). On the other hand, the growth rate of industrial production in Serbia in (t-7) period had a negative impact on Montenegrin exports of goods to Serbia, while, the real external value growth rate in (t-6) period positively influenced this exports. Obviously, higher level of industrial production in Serbia influenced increase of the Montenegrin exports of goods to Serbia. 5. ESTIMATING THE IMPORT DEMAND FUNCTION Equation 4 (Total imports of goods to Montenegro) In order to clearly present the estimation results, the following notation is used: MVTSA_CONS_00 denotes Montenegrin real imports of goods, IIND_CGSA stands for industrial production in Montenegro, H_CONS_REAL denotes real households consumption in Montenegro, while XVTSA_CONS_00 and CPISA stand for the real goods exports and seasonal adjusted consumer price index, respectively. Demand function of the Montenegrin imports of goods reads as follows (t-values in parentheses):

∆lnMVTSA_CONS_00 = 9.79 - 0.67*lnMVTSA_CONS_00t-2 + (3.24) (-5.06)

+1.37*lnH_CONS_REAL t-8-0.84*lnIIND_CGSAt-6+

(1.56) (-1.57)

14 For the purposes of trade analyses in this paper, trade with Serbia is considered as a trade with non-resident status country.


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+1.22*lnCPISAt-5 - 0.29*lnXVTSA_CONS_00t-5 –0.79*∆lnMVTSA_CONS_00t-1- (2.28) (-2.11) (-5.89)

+0.98*∆lnH_CONS_REAL t-2- 1.55*∆ln IIND_CGSA t-3 +

(3.21) (-3.03)

0.42*∆lnMVTSA_CONS_00t-3 - 3.92*∆lnCPISAt-8 (3.94) (-3.45)

Montenegrin imports of goods is positively influenced by the level of the seasonal adjusted CPI in period (t-5), and the level of the real consumption in period (t-8), but negatively influenced by the level of industrial production in Montenegro in period (t-6) and the level of real exports in period (t-5). The real imports growth rate increase by one percentage point in period (t-3) and the growth rate increase of the real consumption for one percentage point in period (t-2) or two months ago, positively influenced total real imports of goods which increase by 0.4 and 0.98 percentage points respectively. Accordingly, consumption in Montenegro is the most dominant factor that influences increase of Montenegrin imports of goods, much more than industrial production. 6. CONCLUSION During the process of the trade integrations within the European Community, Montenegrin foreign trade is expected to be more developed and expand its exports. Currently, Montenegrin foreign trade is considerably independent of exchange rate influences in trade with the EMU countries and thus less susceptible to disturbances in this respect. However, it is still dependent of exchange rate influences in trade with new 10 EU countries, SEE countries and Switzerland. These factors are primarily related to the changes of foreign trade legal framework that significantly influenced trade flows. Harmonization of this legislation with the European standards and implementation of the new laws in this field15 should contribute to the further liberalization of exports and imports, which is going to decrease the balance of payments disequilibrium in the long term. In addition, free trade agreements with other South-Eastern European (SEE) countries, which have already come into force, are considered as a significant condition of trade barriers abolishment and goods trade increase with these countries within the European integration process. Above presented econometric analyses contains results that show how trade structure change by exports destination influence Montenegrin total exports and how domestic factors influence total imports of goods. The estimation equation for the Montenegrin exports of goods to Switzerland, EMU member countries and Serbia combines reliable and innovative elements. The reliable aspects include the explanation of exports using the demand from abroad and the price competitiveness of Montenegrin exporters. The relationship between these variables is relatively stable. The innovative aspect of this study is that that the variable reflecting the demand from abroad (industrial production in Switzerland, EMU and Serbia) is constructed in such a way that the

15 The Customs Law from 2003, Foreign Trade Law from 2004

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aggregated time series is not distorted by exchange rate fluctuations. It is expected that the careful separation of exchange rate and demand effects will have strong influence on the estimated price and income elasticity. However, the price competitiveness of the Montenegrin exporters is more important that the demand from abroad. With respect to import, Montenegrin industrial production and real household consumption as well as consumer prices were considered. Exchange rate fluctuations in trade with non-EMU countries have an influence on the prices of the imported goods, which are used in domestic production and consumption. REFERENCES 1. Babic Mate, Babic Ante (2000):”International Economics”, CIP, Zagreb 2. Bleymüler Josef, Günter Gehlert, Herbert Gülicher (2004): “Statistics for Economists,” Munich 3. Gordaliza V. Eva Maria (2004):”Exports and Imports equations within the study for

measurement of price differences in the EU,” Technical University, Berlin 4. Kovacs Zoltan Akos (2004): „Is There Any Convergence in Trade Structure Following EU

Accession?” KOPINT-DATORG, Budapest 5. Krugman Paul, Obstfeld Maurice (2003): “International Economics” Adison Wesley, Boston 6. Marno Verbeek (2003) A Guide to Modern Econometrics, Tilburg University 7. Mladenović Z., Petrović P.(2002) „Introduction to Econometrics“, Faculty of Economics,

Belgrade 8. Mrak Mojmir (2002): “International Finance” Ljubljana 9. Ülgen Sinan und Yiannis Zahariadis (2004) : « The Future of the Turkish-EU Trade Realtions -

Deepening vs Widening,” CEPS, Brussels 10. Stephan Sabine (2002): “German Exports to the Euro Area,” German Institute for Economic

Research, Berlin 11. Vukotic Veselin (2002): Macroeconomic Accounts and Models” Podgorica


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COMMENT 3

ON THE ROAD TO INFORMATION SOCIETY Milica Dakovic, CARA 1. INTRODUCTION Rapid science and technology development, especially in the second half of XX century, caused a variety of changes that were quickly globally revolved. Changes caused by constant innovations in the field of information technology (IT) in developed countries caused the need of developing countries to find a way to bridge the gap and constant ‘jogging’ in information technology implementation and use. Modern business, communications and life in general, depend on the level of information technology development in modern economies and developing countries. However, all of the above-mentioned has its elements. IT literacy, as the most important factor of development, emerged. Information society. What does it means? Beside the fact that it represent a number of computers on one hundred residents in one country, or represents the society with specific percent of active informatics literate population, can’t be partially analyzed. Information society implies participation of specific knowledge, standards and rules in the area of information technology in a society. It’s worth mentioning the concept of information culture and its contribution to IT sector development. Information culture represents usual habits and practice developed by the individual, institutions and whole society related to the use of wide spectrum of information, based on computer and telecommunication technology. Seeking the answers on the importance of information society development in Montenegro, Center for Applied Research and Analysis conducted a survey on computer and Internet use in Montenegro. Any changes with the objective of improving the development of information society, cannot be done without previous analysis of specific conditions and environment demands. Currently, there is not enough data and surveys related to the IT development in Montenegro, therefore we have decided to conduct the survey. IT sector survey in Montenegro encompassed a sample of 1,220 respondents in three regions of Montenegro (north, central and south). Survey included three target groups: households, enterprises and, specially, enterprises in the IT sector area. A total of 990 households were polled; 200 enterprises and 30 enterprises in area of IT sector. One of the main reasons for the survey is the necessity to initiate development of information culture and the need for information on computer and Internet use in households and enterprises. In following text short insight in the basic results obtained by the survey is presented.

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2. HOUSEHOLDS IT sector survey in Montenegro was done on the sample of 990 Montenegrin households. Basic reason for this survey was the interest in determining real situation of IT literacy and the analysis of incentives/obstacles of the households on the road to information society. Regionally observed, 54.1% of respondents are from central part of Montenegro; 24.4% from north, while 21.5% is from south. (Graph 1.).

Graph 1. Percentage of households by regions

24.4%

21.5%

54.1%

Center North South

Analyzing sample by age, 92.3% of respondents gave the following answer: 41.9% were 18 years old, while 24.4% were from 31 to 50 years old. Surveyed households (66.5%) had two or three children younger than 18. This information is important in analyzing the need for future efforts for increasing the level of information literacy among young population. Average number of children in sample households is 2,1. One of the goals of the survey was the research of the purchasing power of households in order to analyze ability to purchase PCs and equipment (90.9% gave an answer). 29.4% households have a monthly salary lower than 200€, 25.3% from 200€ to 300€, while only 8.6% has monthly salary higher than 700€ which points to the relatively low standard of households, considering that 46.3% households have only one employed person, 39.8% has two; 5.0% has more than three employed members of the household, while 2.5% have no employed members. Such situation, in spite of the household willingness to buy PCs and additional education, makes the whole process difficult. Analyzing households that have no employed members only 42.1% of them have intention to buy computer in the near future as well as households with a monthly salary under 200€ (55.5%). As the main constraint for the purchasing of PCs and equipment, 80.3% of households have specified the lack of financial resources (9.6% stated the lack of interest; 7.1% lack of spare time; only 1.7% lack of knowledge and 1.3% other).


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Analyzing the number of computers owned by households (98.3% responded to that question) 41.5% has its own computer, while 58.5% do not own one. Among households that own a computer 88.7% has one PC. From the total number of households that don’t own a computer, 68.4% intend to buy one in near future, while 31.6% don’t have the intention of buying a computer.

Graph 2. Does the household own a computer?

58.5%

41.5%

Yes No

From the total number of respondents who own a computer, 93.1% answered a question on the when they have bought the computer. If the household owned more than one computer it represented the year of buying the last one. By the 2000 24.8% of respondents bought a computer; in the period from 2001 to 2003 48.3%, while in 2004 26.9% of households bought a computer. This data shows willingness of population to acquire new knowledge and join the information society. It’s important to mention that the analysis of total number of households where there is at least one PC user, shows that the most frequented users are children under 18 (54.7%)! According to the previous results, younger generation shows a great need for additional development, therefore special attention should be focused on upgrading the level of their education. It’s worth mentioning that the greatest numbers of respondents are self-taught (39.5%), or taught with a help of friend, cousin, etc. (15.4%). Their readiness for additional education shouldn’t be disregarded, considering the fact that of a total number of sample respondents, 88.7% are willing to engage in additional education. Out of that percentage, 76.6% of households have children under 18 that are planning additional education. Considering that the Internet is obligatory part of informatics literacy of the individual, it has been separately analyzed. From the total number of respondents on question about Internet use, 87.1% gave the answer. From that number, 47.7% of them are Internet users, while 52.3% are not. Respondents usually use the Internet at home (67.2%); at work (12.8%); at cousin’s home (9.0%); in Internet café (5.9%) or at school/faculty (5.1%).

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3. ENTERPRISES IT sector research in Montenegro, besides households also involved the enterprises. The sample involved 200 enterprises within three regions of Montenegro. Analysis of enterprises showed that 43.5% enterprises are from the central region, 36.5% from south region and 20% from north region. Observing the quantity of the enterprises, according to the number of employees (91% of respondents answered this question), 52.7% of enterprises employ up to 10 employees, 35.7% employ between 10 and 20 employees, 10.4% between 50 and 250 and 1.1% employs over 250 employees. Among the surveyed enterprises, 21.0% was founded between 1995 and 2000, 30.4% in the period between 1990 and 1995, 20.7% of them were founded after 2000, while only 17.9% of enterprises were founded in 1990 or earlier. The research involved enterprises from different economy sectors. Mostly, it involved commercial enterprises: 35.0% of them were wholesaler and 28.5% were retailers; 17.0% of production enterprises, 11.5% from the construction sector, 8.0% from tourism, 7.5% hotels and restaurants, 6.5% are enterprises from transportation, traffic and communications, 4.0% are from financial mediation, 1.0% from agriculture, forestry and water management, 0.5% from light industry, and 0.5% related to real estate, renting and business activities. According to annual turnover of enterprises, 30.8% of them has an annual turnover up to € 100,000, while 13.2% of sample enterprises have a turnover from 500,000 to € 1,000,000.

Graph 3. Enterprises by regions

20.0%

43.5%

36.5%

South Center North

According to the overall number of enterprises that answered the question weather they are using computers, 93.4% answered positively. Only 1% of the enterprises from the sample did not give an answer to this question. High percentage of enterprises that use computer for their activities indicates that owners and employees recognize that modern business is almost inconceivable without the use of information technology. Related to the average of 6.6% enterprises that don’t use computers, the same refers to 10.7% of enterprises that are founded between 1990 and 1995. Observing the structure of enterprises according to their size, or number of employees, it is concluded that 12.6% of


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enterprises with up to 10 employees don’t use computers, while all of the enterprises from sample, with over 10 employees use computers in their activities. Also, 20.4% of enterprises with annual turnover up to € 100,000 and 4.8% of enterprises with annual turnover between 100,000 and € 250,000 don’t use computers, while all the enterprises from sample with turnover over € 250,000 use computers in their activities.

Graph 4. Are computers used in enterprises?

93.4%

6.6%

Yes No

Of the overall number of polled enterprises, 6.6% don’t use computers. As the main reason for not using computers 46.2% specified lack of funds for purchasing and maintenance of computers, 7.7% specified the lack of knowledge for computer use, while 46.2% of enterprises answered that they have no need to use computers, and 15.4% gave other reasons (purchase of computers is in process and lack of time for purchasing computers). Of the overall number of enterprises that have computers, 91.9% of them answered the question if their business is dependent on computer use. Most of them answered that they could not function at all without computers (49.4%). Of the overall number of enterprises from the sample that have answered that without computers their efficiency would be lower, 96.8% specified how much their efficiency would be decreased. The type of operating system mostly used in enterprises is Windows XP (45.2%); followed by Windows 98 (36.7%) and Windows 2000 (18.1%). Operating systems that are used the least in these enterprises are Linux and Unix (1.2%). The enterprise that is ready to adopt new technologies, should, on the other hand, invest in education of employees and thus create new force that will contribute its further development and follow the modern way of operating. Related to 97.8% of enterprises that gave the answer on the question about the manner of educating employees to use computers, 43.8% are self-taught, 27% receives education within enterprises (courses organized for employees), while 23.6% attend computer courses elsewhere, financed by parent enterprise.

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Internet represents inevitable tool in modern business, but it is also one of requirements if the enterprise is planning to open itself to new markets. Of overall number of enterprises that have a computer, 81.2%, have Internet connection and less than 5 employees use the Internet. The average number of employees that use the Internet in enterprises that have computers and Internet connection is 5.91%. Only 5.5% of respondents stated that the Internet is used for fun/chat. Also, the indicator that e-commerce is still not common, is the fact that only 4.2% of enterprises use Internet for e-commerce. Of the overall number of enterprises involved in this survey, 43.0% of them don’t have its own web site, 34.0% have a web site, 14.5% don’t have but they are planning to build one, while 8.5% of enterprises didn’t answer this question. 4. IT SECTOR ENTERPRISES Special part of this research was dedicated to enterprises in the IT sector in Montenegro, in order to analyze their role in the improvement of the development of informatics literacy and overall development of information society. The sample involved 30 enterprises within three regions. Analyzing the answers, with prior classification of enterprises by the number of employees to micro (up to nine employees), small (from 10 to 49 employees), medium (from 50 to 249 employees), and large enterprises (over 250 employees), we have obtained the data that of the overall surveyed number of enterprises, 64.0% are micro, while 36.0% are small enterprises. Average number of employees in enterprises is 10.3. Enterprises are performing a wide variety of activities including: production, selling, projecting, servicing, consulting, maintenance, education, and development of information system and software. Among the enterprises in the IT sector, 77.8% have their own web site, while 22.2% of them don’t. Enterprises that have web sites mostly used the services of their employees while constructing their web sites (71.4%), and some other enterprises in the IT sector (19.0%), as well as services of physical persons (4.8 %). Analyzing barriers in doing business the most frequently named are: high taxes (0.7%), administrative barriers (0.6%), inaccessibility of foreign capital (0.5%) and corruption (0.5%)16. Within the ideas that would contribute to the further development of IT sector in Montenegro, enterprises have stated: increased investment in education (34.4%), nullifying VAT on computers and computer equipment (28.1%), increase of earnings (7.4%) and stimulation of the IT sector (7.4%).

16 Indicators have been used.


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Graph 5 Institutions important for information society development

0 10 20 30 40 50 60

Media

The Ministry od Education andScience

Government

Households

0 10 20 30 40 50 60 70 80

The Ministry od Education and Science

Universtiy of Montenegro

Government

Enterprises

0 5 10 15 20 25 30 35

Media

IT sector

Government

IT sector

Households, enterprises and IT sector enterprises gave their opinion on which institutions are crucial for the development of information society in Montenegro. These institutions are: The Government of Montenegro, Ministry of Education and Science; University of Montenegro; media and IT sector.

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INSTEAD OF CONCLUSION Developing process of information society evolution has started. However, it is important to emphasize that it is not sufficient to adopt regulations, establish institutions and bodies that will contribute to its development. It’s important to analyze the real situation and eliminate obstacles on the way to information society. Where is Montenegro in that whole process and what are the main conditions necessary for information society developing? It’s important to understand that information society development through information literacy increase is not a process that will bypass Montenegro, as a developing country. It’s necessary to understand that information society and its system of functioning represent a necessity and is one of the main prerequisites of development. It is also very important to know what is the level of specific IT product used by the population, or what are the main conditions that need to be fulfilled in order to increase population demand for those products? Survey of the IT sector in Montenegro represents two different sides. Households and enterprises generally have aspirations to increase their level of knowledge, education, implementation of new technologies, but on the other side, there are some obstacles, often based on the lack of financial resources, unemployment and low standard. Generally, it is important to improve the knowledge in the area of information technologies, especially between special target groups, like young people, and upgrade education level in schools and other relevant institutions. Permanent learning and following of modern technologies in the area of IT needs to be become a habit that will produce future information society in Montenegro.


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COMMENT 4

OWNERSHIP AND MONITORING IN SLOVENIAN COMPANIES Ljubica Knežević Cvelbar17 1. INTRODUCTION Corporate governance can be defined as a set of relations between firms’ management, its board, shareholders and stakeholders. It is one of the key elements that improve companies’ performance, the fluctuation of the capital markets and that stimulate the innovative activity and development of enterprises (Gregorič, 2003). Corporate governance also affects the development and functioning of capital markets and has a strong influence on resource allocation (Maher and Anderson, 1999). Furthermore, corporate governance can be defined as the whole system of rights, processes and controls established internally and externally over the management of company with the objective of protecting the interests of all stakeholders18 (CEPS, 1995). Ensuring a proper functioning of the corporate governance mechanism is crucial for the efficiency of companies and the economy as a whole. As such, corporate governance is one of the key elements of microeconomic efficiency improvement (Maher and Anderson, 1999). Corporate governance in Slovenia represents ownership structure that is moving towards concentration of ownership, two-tiered corporate governance system, domestic and foreign companies and institutional investors (investment and state funds) as important individual owners, relatively high insider ownership, illiquid capital market and relatively poor protection of minority shareholders. The following text is giving further prospective on Slovenian corporate governance system and its convergence. Text discuses two important factors that influence the corporate governance: ownership and control. In order to understand the corporate governance mechanisms and basic conflict that occur in the corporate governance short literature overview and empirical evidence on the case of Slovenia is presented. 2. OWNERSHIP AND CONTROL The most important factors in discussing the corporate governance are ownership and control structures of the firm. They define the use of various mechanisms of agency problem solving and within the broader economic and legal environment shape the corporate governance system (Berglof and Pajuste, 2002). The two most basic conflicts that occur in corporate governance are: o the conflict between large controlling shareholders and outside minority shareholders,

and o conflict between controlling managers and owners – agency problem (Gugler, 2001). The nature of stated conflicts is shown in table 1. Considering ownership and voting power concentration there are four possible situations (adopted from Gugler, 2001).

17 Institute for Southeast Europe, Faculty of Economics, University of Ljubljana; Kardeljeva ploščad 17, 1000 Ljubljana; e-mail: [email protected] 18 Company stakeholders are: employees, creditors, customers, suppliers, broader public etc.

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Table1: Dispersion of concentration tradeoffs for investors

DISPERSED OWNERSHIP

Quadrant I Dispersed voting power Advantages

Liquidity Diversification opportunity Low cost of capital

Disadvantages Lack of direct monitoring (free-riding problem)

Implications Strong managers – Weak owners Takeover possibilities Management control

Quadrant II Concentrated voting power Advantages

Direct monitoring Liquidity Diversification opportunities Lower cost capital then in QIII

Disadvantages Cash-flow and control initiatives misaligned Potential collusion (manager-block holder) Extraction of private benefit

Implications Strong Voting Block Holders, Weak Minority Owners Takeovers unlikely

CONCENTRATED OWNERSHIP

Quadrant III Dispersed voting power Advantages

Some protections of small shareholders from voting right restrictions

Disadvantages Cash-flow and control incentives misaligned Few means of intervention Low liquidity Low diversification opportunities High cost of capital

Implications Strong Managers, Weak Owners Takeovers difficult

Quadrant IV Concentrated voting power Advantages

Direct monitoring Cash flow and control interests aligned

Disadvantages Low liquidity Low diversification opportunities High cost of capital Potential rents extraction by majority owner

Implications Weak Managers, Weak Minority Owners, Strong

Majority Owners

Source: Becht (1997), Becht and Mayer (2001), Gugler (2001).

In quadrant I of table 1, when ownership is dispersed, the incentives to perform direct monitoring are not available. Advantages of the dispersed ownership are liquidity of stocks, better diversification opportunity and presumably lower cost of equity capital. On the other side, monitoring problems and high monitoring costs in the case of dispersed ownership can be an important source of corporate governance problems. The major disadvantage in this situation is that mangers have considerable discretion and power and may follow their own and not owners interests. As results, free-riders problem occur more frequent and we have strong managers-weak owners’ situation (Roe, 1994; Grossman and Hart, 1980). Opponents to this view claim that threat of takeover, board of directors, managerial labour market, competition and product market or the financial structure of the firm are discipline mechanism that lead managers to act in the accordance with owners aims and to assure the most important among them profit maximization (Fama, 1980). Holmstrom and Tirole (1993) have a similar point of view and they argued that the share price in the secondary market provide valuable information about the firms performance. To obtain accurate information secondary market has to be sufficiently liquid. Liquidity raises need for improving information on the share price at the secondary market in order to provide better incentives for owners. According to this view the market is monitoring the management and its actions.

The opposite situation is in the case of concentrated ownership and voting rights, quadrant IV of table 1. In this case major shareholders have the incentives and power to monitor managers and reduce the agency costs and improve the corporate governance system. Bolton and Von Thadden (1998) claim that potential benefit of concentrated ownership and monitoring management actions will take place on an ongoing base, while in dispersed ownership can provide monitoring only in crisis situations. However, some of the authors have moderately different point of view. Becht at.al, (2002), claims that monitoring of lager


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shareholders can be very beneficial. Pagano and Roell (1998) argue that one important motive for going public is that managers may want to free themselves from “over monitoring “. Even if there are different opinions in literature it is hard to disagree that concentrated ownership is leading to a greater incentive to monitor a firm’s management and thereby reduce the agency problem. On the other side concentrated ownership is bringing some of the disadvantages such as: reduced possibility for diversification and liquidity of the stocks, and large block holders’ exploitation of the minority shareholders interests.

It is also possible to concentrate ownership and dispersed voting power (quadrant III). This situation has the most disadvantages from corporate governance perspective. Voting – rights dispersion diminished efficient monitoring of management actions, while concentrated ownership is reducing the liquidity and diversification on the stock market and increases the cost of capital. However, minority shareholders have advantages because they are better protected from rent seeking activities of the large block holders since their voting rights have a disproportionately larger impact.

Opposite situation is shown in the quadrant II in the table 1, dispersed ownership and concentrated voting power. In this case some degree of liquidity and diversification opportunity is preserved and direct monitoring is retained. Disadvantages are seen in the relation between large and minority stockholders. In this case controlling block holders have a disproportional stake in the companies profit and they seek others form of compensation. The block holders only bear a fraction of the cost of rent-seeking activities but receive the full benefit. The problem arises from the conflict of interest between controlling block holders and small shareholders. The best examples are pyramidal groups19 of the listed companies where minority shareholders can be expropriated by block holders who control the whole group (Barca 1997, Zingales, 1994).

In the practice corporate governance systems are more or less converging to the dispersed ownership – dispersed voting power situation (quadrant I) or concentred ownership-concentrated voting power situation (quadrant IV). Frank and Mayer (1992) proposed distinction between two systems: outsider system and insider system of corporate governance. United Kingdom and United States are referred as the countries with the outside system (quadrant I) of the corporate governance. On the other hand, most of the countries in continental Europe and Japan have the insider system of corporate governance (quadrant IV). However, the main problem with the definition and distinction between two systems is that there are no systems that are mutually very different. In fact, each of the continental European systems has some elements of the outside system and opposite. The second important characteristic of the corporate governance system is dependence on the board structure and function. Two systems can be recognized: one-tier and two-tier corporate governance system. The difference between the two systems lies in the forming of an intermediate body (Supervisory Board) between the shareholders (the Shareholders Assembly) and the management (Management Board). In the one-tier corporate governance system the Management Board is appointed by representatives of the shareholders and members of the Management Board. In a two-tier system the Supervisory Board represents shareholders’ interests and its main roles are to control and appoint the Management Board. The one-tier system is found in U.K., U.S., Belgium, France, Italy etc., while the two-tier system can be found, for example, in Germany and Netherlands. There are also some countries, e.g. Slovenia that make possible for the company to choose which corporate governance system it will introduce. 19 In the pyramid structure, one firm owns for example 51% of the second firm, which owns 51% of the third firm and so on. The owner at the top of pyramid has effective control of the pyramid with the increasingly small investment in each firm down the line.

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3. PRIVATIZATION PROCESS AND CORPORATE GOVERNANCE SYSTEM IN SLOVENIA One of the highly important mechanisms of the corporate governance is the privatisation process (Becht et.al, 2002). Privatization has, also, highly influenced corporate governance system in Slovenia. The Privatisation Law (1992) was the legal framework for the privatization of state-owned companies in Slovenia. The Privatization Law (1992) defined privatization as a combination of voucher and cash privatization. Pursuant to the Law, 20 percent of a firm’s shares were allocated to insiders (workers), 20 percent to the Development Fund that auctioned the shares to investment funds, 10 percent to the National Pension Fund, and 10 percent to the Restitution Fund. The remaining 40 percent of company shares was given to the workers' council or board of directors (if one existed) to allocate them for sales to insiders (workers) or outsiders (through a public tender). Based on the decision on the allocation of this remaining 40 percent of the shares, firms can be classified as being privatized to insiders (internal privatization) or outsiders (external privatization).

After privatization, the Slovenian legal framework for corporate governance was introduced by the Companies Act in 1993. The Companies Act allowed companies to introduce both one- and two-tier corporate governance systems. Exceptions were the joint-stock companies that include a public gathering of capital and firms listed on the official or free markets of the Ljubljana Stock Exchange. For these firms, the two-tier system is compulsory under the law. As most privatized Slovenian firms opted for the form of a joint-stock firm, they also introduced the two-tier system of governance with a Supervisory Board (Gregorič, Prašnikar, Ribnikar, 2000). Further, research results showed that insiders have the highest number of representatives in the Slovenian Supervisory Boards (Prašnikar, Domadenik, Svejnar, 1999).

After the privatization process was completed, the ownership structure in Slovenian companies was dispersed and most companies were privatized to insiders. Internal privatization took place in approximately 80 percent of companies. Gregorič and Prašnikar (2000) claim that average share of insider ownership was 31.16 percent with a management share of 3 percent. However, trend showed decreasing insider ownership (the trend reveals a decreasing ownership share in the hands of workers and an increasing ownership share in the hands of managers) and concentration of ownership of individual owners, investment and state funds.

4. OWNERSHIP AND CONTROL IN SLOVENIAN COMPANIES

Ownership and control in Slovenia will be discussed based on the research performed by the Institute for South-East Europe (ISEE) in August and September 2003. Primary qualitative research20 ended up with a sample of 204 Slovenian companies in the period from 1998 to 2002 and panel data set with approximately 1000 observations21.

20 The variables from the questionnaire comprised information on: ownership structure (total ownership by separate groups of owners), an evaluation of the influence of separate groups of owners, composition of the Supervisory Board (in Slovenia the two-tier system is mandatory for most companies), issues related to characteristics of the Management Board - educational and personal characteristics of managers, tenure, managerial turnover (with an indication of express reasons for any replacement) and annual managerial pay (fixed, variable amounts in Tolars20 or percentage of total pay). 21 The panel is unbalanced, there are some missing values for different reasons (e.g. the company was established after 1998), therefore the actual number of observations differs from analysis to analysis.


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Ownership of the firm was divided into four categories: o OWN_FUNDS - ownership of the state and privatization investment funds; o OWN_INTERNAL - internal ownership (employees, former employees, retired persons

and their relatives); o OWN_MANAGEMENT - management ownership (managers – top, middle, low

managers) and o OWN_D_F_COMP - ownership of foreign and domestic companies (legal entities; banks

excluded). Average ownership shares are presented in table 2. Table 2: Ownership structure and concentration in the sample period (1998 – 2002)

Variable N Mean Std. Dev. Minimum Maximum

OWN_FUNDS 1136 28.5 26.7 0 100 OWN_D_F_COMP 1135 32.9 37.2 0 100 OWN_INTERNAL 1135 17.4 22.1 0 100 OWN_MANAGEMENT 1135 4.0 13.4 0 100 C1 562 34.7 20.1 5.9 99.7 C5 556 61.3 20.7 10.0 100

Source: Questionnaire data and own calculation As it can be observed, foreign and domestic companies are holding approximately 33 percent of ownership shares, followed by the institutional owners with an average share of 28.5 percent. The trend is showing decease of ownership share of insiders (employees and manager) that decreased from approximately 30 percent in 2000 to 21.4 percent in 2002. However, managerial ownership did show slightly increase in comparison to the previous years, while employees ownership decreased. Data on the identity and ownership stakes of the largest shareholders were not included in the questionnaires, since they had already been obtained from the official Shareholders’ Register kept and updated by the Central Clearing Securities Corporation. With regard to that data, the largest owners (C1) in companies in the sample have an average share of 34.7 percent, while the first five owners (C5) have on average 61.3 percent. This points to gradual concentration of ownership in Slovenian companies, with significant share of large block-holder. In terms of monitoring Slovenian companies Supervisory Board structure and size were researched. The results are presented in table 3. Table 3: Size and structure of Supervisory Boards in the sample period (1998 – 2002)

Variable N Mean Std. Dev. Minimum Maximum

SB_SIZE 945 4.84 2.54 0 17 SB_BANKS 905 0.82 4.54 0 33.33 SB_FUNDS 905 20.48 22.67 0 100 SB_NON_FIN 905 9.62 20.917 0 100 SB_INTER 905 38.89 21.98 0 100 SB_INDEP 905 24.82 27.34 0 100

Source: Questionnaire data and own calculation

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In terms of Supervisory Board composition in Slovenia, an important share is reserved for insiders. The average Supervisory Board in Slovenia has 2.5 members (minimum 0, maximum 17)22. Representatives of managers and employees (employees’ representatives of the internal owners and employees nominated by the workers’ council) (SB_INTER) on average make up 38.89 percent of Supervisory Board members. This gives as opportunity to managers to control employees voting power and increase agency problem and agency costs though proxy voting. Knežević Cvelbar and Pahor (2004) are of the opinion that managers and employees are not efficient monitors in Slovenian companies and that increased voting power in the hands of insiders is reducing the probability that inefficient managers will be replaced in the case of company’s poor performance. Representatives of the state and privatization investment funds (SB_FUNDS) have 20.48 percent shares in Supervisory Board composition, while independent experts (SB_INDEP) take an active part in Supervisory Board composition with a 24.8 percent share. Representative of investment funds and independent experts are increasing probability that inefficient manager will be replaced (Knežević Cvelbar and Pahor, 2004). Representatives of banks (banks as creditors and banks as shareholders) (SB_BANKS) have on average just 0.82 representatives on Supervisory Boards, while representatives of non-financial companies (SB_NON_FIN) have on average 9.6 percentage of representatives in Supervisory Board compositions. 5. CONCLUSIONS Empirical evidence is showing that Slovenian corporate governance system is closer to the “inside” corporate governance system. The trend in the last years in showing the increase of ownership concentration and ownership shares in the hands of domestic and foreign companies, which are holding on average 33 percent of the ownership shares, while institutional investors are following with the average share of 28.5 percent. Insider owners, as important investors after the privatization process, are currently reducing their average ownership share in Slovenian companies. It is expected that ownership concentration trend will continue in the future. Further, ownership share of insiders will continue to decrease. This will not be the case with the managerial ownership that is slightly increasing, however, there is a large debate on the managerial ownership and it is believed that managers are holding higher ownership shares, which are not visible due to the pyramidal structures. In regard to the monitoring function, the efficiency of the Supervisory Boards is questionable, because insiders hold on average 40 percent of the Supervisory Boards and are inefficient monitors. This is favourable situation for managers that are using proxy voting, thereby increasing agency problems and agency costs. Previous research showed that more efficient monitors are primarily independent experts, followed by investment funds, and that its share in the Supervisory Boards should increase. There are also signals from real sector that it can be expected that Slovenian companies will converge to the one-tiered corporate governance system. Finally, in studying and understanding corporate governance systems we have to have in mind the political and economical environment in which it is developed. An efficient model

22 The legal requirement for companies, that are required to have a supervisory board (based on size and number of owners) is three members, however, not all companies in the sample are required to have one.


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of corporate governance can be developed in theory, however, each time it will have to be adapted to local conditions and the political decisions of the society in which it operates. LITERATURE 1. Barca F., (1997), Alternative Models of Control: Efficiency, Accessibility and Market Failures,

in Property Relations, Incentives and Welfare, proceedings of a conference held in Barcelona, by the International Economics Association, ed. J.E. Roemer, New York and London: St Martins Press and Macmillan Pres ltd.

2. Becht M., Bolton P., Röell A., (2002), Corporate Governance and Control, European Corporate Governance Institute, Finance Working Paper N. 02/2002.

3. Becht, M., (1999), European Corporate Governance: Trading off liquidity against control, European Economic Review.

4. Becht, M., Mayer, C., (1999), Ownership and voting power in Europe, In Barca, F., Becht, M., (Eds), Ownership and Control: An European Perspective.

5. Berglof, E., Von Thaden E., (1999), The changing Corporate Governance Paradigm: Implications for Transition and Developing Countries, SITE.

6. Bolton, P., Von Thadden E. (1998), "Blocks, Liquidity, and Corporate Control", Journal of Finance, 53, 1-26.

7. CEPS, (1995), Corporate Governance in Europe. 8. Domadenik, P., Prašnikar J., Svejnar, J., (1999), Restructuring Slovenian firms in imperfectly

developed markets. Working Papers, Faculty of Economics, Ljubljana. 9. Fama, E.F., (1980), Agency Problem and the Theory of Firm, Journal of Political Economy, 88,

pg. 288-307. 10. Franks, J., Mayer, C., (1998) Bank control, takeover and corporate governance in Germany.

Journal of Banking and Finance. 11. Gregorič A., Corporate governance in Slovenia an International Perspective, Doctoral

Dissertation, 2003. 12. Gregorič A., Prašnikar J., Ribnikar I. (2000), Vladanje v slovenskih podjetijh – primerjava z

razvitimi državami. V Prašnikar J. (ur.): Internacionalizacija slovenskih podjetij. Ljubljana: Finance, 23 str.

13. Grossman S., Hart O., (1980), Takeover Bids, the Free-Rider Problem and the Theory of Corporation, Bell Journal of Economics, 11, pg.42-64.

14. Gugler K., (2001) Corporate governance and economic performance, Oxford University Press. 15. Holmstrom, B., and Tirole J., (1993), Market Liquidity and Performance Monitoring, Journal of

Political Economy 101, 678-709. 16. Knežević Cvelbar, L. Pahor, M. (2004), The influence of management turnover on enterprise

performance and corporate governance: the case of Slovenia. Econ. bus. rev. vol. 6, no. 4, str. 279-324.

17. Maher, M., Anderson, T., (1999), Corporate Governance: Effects on Firm Performance and Economic Growth, Paris, OECD, Paper presented at Tilburg University Law and Economics Conference on ‘Convergence and Diversity in Corporate Governance Regimes and Capital Markets’, Eindhoven, The Netherlands, 4/5 November.

18. Pagano, M, and Röell A., (1998), The Choice of Stock Ownership Structure: Agency Costs, Monitoring, and the Decision to Go Public, Quarterly Journal of Economics 113, 187-225.

19. Prašnikar, J., Gregorič A., (2002), The influence of workers participation on the power of management in transitional countries: The case of Slovenia. Annals of Public and Cooperative Economics.

20. Roe M. (1994) Strong managers, Weak Owners: The Political Roots of American Corporate Finance, Princeton: Princeton University Press.

21. Zinagales L., (1994), The Value of the Voting Rights: A Study of the Milan Stock Exchange, Review of Financial Studies, 7, pg. 125-148.

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COMMENT 5

A ROOM WITH A VIEW Nataša Masoničić, ISSP Marko Ćalasan, CARA I INTRODUCTION Tourism, as all other markets is very complex, but it follows some global trends. The apparent trend in the entire economy is the lowering of transaction costs. Communications are growing, as well as their accessibility. In the general sense, that is portrayed in the tourism sector through the use of Internet for the marketing of tourist capacities. The advantage of Internet compared to other medias is a very low cost of advertising. If you want your hotel/complex/Riviera/state to be advertised on a foreign TV network, especially during “prime time”, you need substantial funds, let alone for a marketing campaign. Because of this, smaller markets, or smaller chains have little or no ability, to reach the consumer, especially foreign, through TV or newspaper advertising. Since the use of global TV and newspaper advertising campaigns is not a problem for big hotel chains (Hilton, Hyatt) or greater tourist oriented states/regions (Portugal, Ibiza) they have advantage over smaller markets/chains. Thus, the advertising through Internet becomes very acceptable and useful tool.

The above-mentioned reasons have inspired us to try and analyze if these advantages provided by the Internet are used in our country for promoting tourist capacities. We have also tried to identify main problems that our country is facing in this area. At the end we gave some suggestions that might be useful in solving these problems and that could improve our tourist offer on the Internet. Inexpensive reaching of consumers through the Internet Internet search engines index a web site by its name and contents. If you type “Hotel Adriatic”, the search engine will show all the sites with that contents, whether they are multimillion hotel chains or some modest villas. The basic costs are some 10 times smaller than the one of a full TV marketing campaign, but the outcome could possibly be even better. More than 60 percent of tourists travel not by using tour operators, but by self-planning, and most of them travel alone, organizing trip and acquainting the country through the Internet. Certainly, one must not forget marketing strategy for the offer of the hotels, as well as the complexity of the market of Internet booking operators. Before we can continue with the analysis, we must define and examine the general tourist offer on the Internet.


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II THEORETICAL EXPLANATION OF THE TOURIST CAPACITIES OFFER ON THE INTERNET For better understanding, we have divided the Internet offer into three categories. This will help us to follow and analyze our tourist offer on the Internet. We have based our analysis on all of these categories. Tourist capacities on offer on the Internet can be classified in these categories: 1. Informative Content; 2. Overview Content; 3. Full Service. Informative Content

Web sites or parts of web sites, that are considered under this content point to specific regions/states, some tourist destinations, and best arrival methods to the specific place. Considering Montenegrin sites, there are many web sites and links towards Montenegrin sites that can give a general overview of a place. These Internet sites are interesting from a wider aspect of advertising of the state as a tourist destination, but they are mostly weak, and have no use if the visitor can not get information regarding prices of lodgings, types of hotels, transport costs etc. There are many domestic sites that provide this kind of information. It is also very important to emphasize that most of these sites are bilingual (information is available mainly in English). Overview Content Overview content implies the existence of a website with detailed information regarding: the number of hotels, types of hotels, contacts, possibly pictures of rooms, and additional information on local events. The above-mentioned sites mainly fulfill this field, however it is important to note that these presentations of Montenegro as a tourist destination have to be available in more foreign languages. We are suggesting Czech, Bulgarian, Slovak, German, etc., because the largest number of tourists visiting Montenegro come from these countries. Full Service Full service is implying the existence of an overview/content with the option of reservations, paying, checking room availability, and a full level of services attached to the contact of a tourist company. Such type of service is common for most international sites. Also, foreign tourists are used to have all necessary information when they are going on holiday. The recent trends in USA, West Europe, Australia, and New Zealand show that the number of people that reserve their rooms directly is on the increase. Currently, 79 percent of Americans reserve their accommodation instead of using classical tour-operators. The biggest “players” in this game are – Expedia, BizTravel, Orbiz. Their constant competition is one of the major determinants of the equally constant fall in transportation fares – mainly airline.

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III ANALYSIS OF THE CURRENT MONTENEGRIN TOURIST CAPACITIES IN RELATION TO THE INTERNET OFFER Table bellow includes an overview of the types and number lodging capacities. The rise of Internet tourist offer especially benefits private lodging capacities (villas, rooms, apartments, etc). Table 1. Structure of accommodation capacities in Montenegro

Region Number of Hotels A Category B Category C Category

Seaside 75 19 56 0 Inland 16 4 10 2 Mountain 13 0 13 0

Total 104 23 79 2

Source: www.hotels-montenegro.com Table 2 Structure of other accommodation capacities in Montenegro

Type of accommodation Capacity

Motels 8 Villas and lodging-houses 67 Apartments and room 11 Camps 20

Source: www.hotels-montenegro.com Based on the presented data mentioned we can see that B category hotels and smaller villas and lodging houses represent the bulk of the Montenegrin tourist offer. It can also be seen from the table below: Table 3. Development strategy of the accommodation capacities

1997 2010 2010

Statistic Estimation Plan Plan Hotel

Beds % Beds % Beds % Increase of the number of beds

Share in the increase in %

Total 25,879 27.5 25,879 10.1 50,000 100 22.2

L/5***** 240 240 2,500 5 1.1 2,260.00 1.72

A/4**** 4,489 4.8 4,489 1.8 15,000 30 6.7 10,511.00 8.02

B/3*** 20,830 22.2 20,830 8.6 20,000 40 8.9 -830.00 -0.63

C/2** 273 273 12,500 25 5.6 12,227.00 9.33

D/1* 47 47 - - 0.00

Camping 18,492 19.7 18,492 7.6 15,000 6.7 -3,492.00 -2.66

Private rooms 19,592 20.8 78,434 32.3 50,000 22.2 30,408.00 23.20

Other 30,033 32 30,033 12.4 15,000 6.7 -15,033.00 -11.47

Apartments 90,090 37.1 95,000 42.2 95,000.00 72.49

Total 93,996 100 242,928 100 225,000 100 131,051.00 100.00

Source: Tourism Development Master Plan


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The rise of the private apartments type of accommodations is 72,49% of the total rise of tourist capacities (by 2010). It is generally known that these types of accommodation benefit mostly from the online booking (smaller niche resorts). Also by the master plan, there is the estimation of the structure of 45% of foreign guests by the year 2010. Target groups are tourists from Western Europe and there is a growing interest from the Eastern Europe. The trend of IT development that has caught all countries of Eastern Europe has largely reduced the gap between Western and Eastern Europe. There are some inherent institutional problems for the development of e-commerce in Eastern Europe, but as well as in Montenegro these problems will soon be diminished. As the basic source of information Internet is equally dominant in East and West Europe. Also there are proposals of the positioning of Montenegro in niche markets, i.e. the development of alternative tourism. This type of tourism brings a well-informed tourist, since the times when a printed glossy brochure was the only information source, are long gone. IV OBSTACLES TO THE DEVELOPMENT OF THE INTERNET OFFER OF MONTENEGRIN TOURIST CAPACITIES The main problems that prevent further development can be classified in two categories: E-commerce E-commerce is still a problem for Montenegro. Namely, one can’t have full service mainly due to the undeveloped legislative sector for this type of business, rather than undeveloped banking sector, and the low level of interest of companies from the tourist sector to work on rendering these types of services. Non-unified offer Inefficient manner of Montenegrin tourist offer presentation is a great problem, not only on the Internet but also in other forms of tourist marketing. There are no (effective) channels for consumers that are searching for the information on tourist service. Tourist arrangements of tour-operators and tourist agencies are not considered as effective channels, i.e. such channels should reach the individual consumer. Another trend in the tourist industry is the consolidation of tourist agencies and the re-orienting of their operations. Tourist agencies have always been the intermediaries between the transport and tourist sector on one side and the consumer on other side. However, nowadays anyone can buy a ticket and find lodging, by using an Internet agency, or directly on the site of the transport/tourist company. Such competitive edge was firstly available to large chains, and they have promoted it through campaigns such as “20% discount on online booking”, because the “middle-man” was disappearing, and the transaction costs were lowered.

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V RESEARCH AND ANALYSIS OF THE PRESENCE OF MONTENEGRIN TOURIST DESTINATIONS ON INTERNATIONAL WEB SITES www.planetholiday.com This international site, for example plies Belgrade as only destination. There are presentations of hotels “Royal” and “Intercontinental”, and the possibility of online booking. This is not sufficient, because the main goal of our tourist offer is to attract middle class tourists. Therefore, the emphasis has to be on much cheaper hotels, for example on three star hotels. Also, we shouldn’t forget the importance of promoting apartments, as well as hostels that are very popular especially within younger population, that also have to be included in tourist offer of Montenegro on international sites. http://serbia_and_montenegro.hotelkey.com/hotel/serbia_and_montenegro/europe/yugoslavia/en There is no online reservation option for hotels in Montenegro. This site is offering only basic information. Again, reservations are only possible for international hotels in Belgrade (Hyatt and other), and information is dated, e.g. the capital of Montenegro is referred to as Titograd, a name that has been changed some fifteen years ago. Therefore, all of the above-mentioned impose the conclusion that this site is currently of no use. http://www.southtravels.com/europe/serbiamontenegro/ This international site presents an example of using a foreign booking agency in order to get Full Service. Reservations are available for 3 hotels in Budva, one in Petrovac and one on Miločer. This site can be used as a good model for other accommodation owners in Montenegro. Surely, a lot needs to be done in order to improve the existing offer of this site. Primarily, more hotels, apartments and other types of accommodation have to be available on this site. http://www.hostels.org.yu/start_s.htm This site includes information on accommodations in Belgrade, Kladovo, Sutomore, Bijela and Buljarice. It is possibly one of the most promising online booking agency, featuring cheaper lodgings, (as well as high end), very much suited for younger travelers, students etc. These sites, in most cases, do not have a detailed presentation of hotels on their list, but a great advantage is the possibility of a Full Service (reservation + booking). The presentation of Montenegro as a tourist destination through international sites is very poor. Also there are no possibilities, for now, for foreign tourists to get the basic information about our tourist capacities, let alone full service, as booking, paying etc. In our opinion, such manner of presentation is the most important for promoting Montenegrin tourist capacities to foreign tourist. This is because international sites have higher reputation, so the number of visitors to their sites is much higher in comparison with domestic sites.


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VI RESEARCH AND ANALYSIS OF EXISTING WEB PORTALS THAT OFFER TOURIST CAPACITIES OF MONTENEGRO IN DIFFERENT MANNERS We’ve tried to extract the sites that offer the most information and services that could be able to fulfill potential tourists needs. www.hotels-montenegro.com ''Hotels-Montenegro'' is the website that represents the entire offer of hotels and other accommodations in Montenegro (motels, villas, lodging houses, apartments, camps...). Some basic information can be found regarding the city, as well as information on tourist agencies of Montenegro. There are 104 hotels listed on this site. For 101 hotels phone number, fax, address and possibly e-mail address can be found, while for other three hotels there are some basic descriptions of the hotel, location and a picture gallery. For some exclusive hotels such as “Kraljičina plaža” and “Xanadu” there is also information on the hotel capacities. www.visitmontenegro.com This website contains data for a larger number of hotels, including smaller hotels. Besides contacts, this website gives information on available capacities. This site also provides access to some tour operators, mostly on the coast (Budva, Sveti Stefan, Bečići etc.), but the data is not unified, some have prices, some only a brief overview and online booking is not available. www.turizamcg.com Tourist service of Montenegro offers the possibility of the overview of all hotels in Montenegro. First you choose the city in which you want to reside, and then you get the list of all the hotels in that town, as well as their telephone numbers for getting a more detailed information. For some hotels more information can be obtained. There is a feeling that this site is more oriented towards tour operators, rather than individual consumers, but it is definitely a step in the right direction. www.montenegro.com From January 2005 this site is offering the possibility of reserving accommodation, where a potential tourist enters data regarding the type of accommodation he/she requires. After 24 hours he will get a response, from a tourist agency in Montenegro, i.e. an offer based on his request. This semi-automated process is currently the best offer available. It is important to note that information on this site is available in several languages.

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There are many websites that represent individual hotels (www.hotel-danica.cg.co.yu www.hotelevropa.cg.yu); a total of 13 hotels have their web presentation, while 4 are advertised through a smaller joint site www.ulcinjska-rivijera.cg.yu or www.primorje.cg.yu). Therefore, it can be concluded that the Internet offer of Montenegro is rather week. Also, there is a lack of recognition of the possible perspective of the development of tourism of Montenegro. All of the above-mentioned collective services that represent Montenegrin tourist offer are state-owned or funded (ministries, associations, Tourist Organization of Montenegro), except www.montenegro.com VII ANALYSIS OF THE EXISTING AND SUCCESSFUL PORTAL FOR THE PRESENTATION OF A TOURIST OFFER OF AN AREA IN CROATIA (DUBROVNIK AND THE SURROUNDING AREA – CASE STUDY) Dubrovnik portal – www.dubrovnikportal.com Dubrovnik portal is a site that was founded in November 2000. The site is designed and maintained by a private company Laus CC from Croatia. In the beginning the site was made for the purpose of the popularization of web technologies and services, as well as providing web information services to the citizens, mostly information regarding Dubrovnik and surrounding area. The secondary task was promotion of the company and its possibilities and competence in the field of Internet technologies. LAUS CC is one of the first companies that in 1996 began to provide commercial services in Internet field in Croatia. On this Internet site, about 200 private resort owners are represented. 70,000 people, who have read approximately 120.000 pages of details of accommodations, visited this site in 2004. Under the definition mentioned above, this site is an Overview Content site. Croatia is good for comparative analysis because of the likeness of the surrounding (legal, institutional and cultural), and the development possibilities. There is a similarity of problems between Croatia and Montenegro regarding online business. Although the legal and banking framework is better, there is still an existent inertia of owners of accommodations to accustom themselves to use electronic trading, therefore with all the competence of the firm LAUS CC, a complete service is still unavailable. Because of that the visitors of this website directly communicate with the owners, make arrangements regarding reservations and price, and pay using some of the traditional ways (paying in advance, through a bank account, paying 30% of the gross price etc…) The estimation of the company management is that 5% to 10% of the visitors rent rooms at one of the represented tourist capacities (about 3,500 to 7,000 people). The profit of this and other companies in this sector is still very low, mostly because of the hotel owners, who haven’t yet responded properly to this type of capacity reservation. Therefore websites such as these are abundant with advertising banners of mostly larger hotels.


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As said by Pero Cvjetanovic, manager of LAUS CC: “I must admit that part of the revenues from which Dubrovnik portal is financed is not significant at all, and does not meet the logic of economic profitability. The sensibility of hotels and other tourist companies for promotion through the site www.dubrovnikportal.com, is by our estimation, far away from needed and sufficient (to us and to them)” This is just one of websites that successfully draws tourists into Croatia. According to the data by Croatian Institute for Tourism (www.iztzg.hr) around 34% of total foreign guests that have arrived in the area of Dubrovnik (Dubrovačko-Neretvljanska županija) have gained information on Croatia and accommodation through the Internet) Dubrovnik portal is just one way to present tourist capacities offer of the region; the other would be the registration of the capacities on some international online booking agency. Having in mind that smaller accommodations (villas, boarding etc.) would have great benefits from the Internet offer, the entrance in a working system such as a booking agency is not hard, but it requires the extra effort of the owners to find the companies willing to work with them, make arrangements and contracts, and standardize its capacities, so that they can be categorized. There are many such agencies in the online tourism market. VIII SUGGESTIONS AND OVERVIEW OF PROPOSED SOLUTIONS TO THE POOR INTERNET OFFER OF MONTENEGRIN TOURIST CAPACITIES A real breakthrough in these services is only possible if the private sector recognizes possible sources of income from the presentation of capacities, through the profit margin of the reservations through their site, and more importantly the “readiness” of hotel owners to accept and actively search for this kind of presentation. Although there is an intermediary between the hotel and the tourist (the online booking agency), this sort of a “middle man” is less expensive than a classical tourist agency. A website has fixed expenses weather it is visited by 10 or 10,000 people, which is not the case for a Tourist agency. The agencies sometimes have very complicated arrangements where a certain capacity in a hotel is bought, and there is often the situation when those capacities are either under used, or not used enough, both resulting from the bad estimation of the tourist agency. By this proposal, the end of tourist agencies is not foreseen, but only their transformation and reorientation into Internet based tourist agencies. There are two paths, but they are not mutually excluding, for the presentation of Montenegrin capacities through the Internet o Using foreign online booking agencies (like www.southtravels.com); o The collection of the offer from a domestic and/or regional company (like

www.montenegro.com). If the first option is used, the presentation is good, there is a good theoretical potential for an effective capacity presentation, but the specificities of the Montenegrin tourist offer would not be seen, because of the “blending” required to represent among thousands of other hotels. The other option is certainly more difficult, because it requires the cooperation of two sectors: IT and Tourist sector. As it was shown on web site www.dubrovnikportal.com,

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most of these companies hold the advertising activities as their “side jobs”, but that is the space for greatest improvement. A serious and strong IT partner would show the tourist workers the possibilities of such a synergy, but a special start period would be needed. Such period is marked by gathering, categorization, database creation, and many other preparatory activities before such a system is put into operative use. Both of these ways already exist in Montenegro, but the main problem is in the volume of their operations. SOURCES: 1. The booking prize, Clark Lindsay Caterer & Hotelkeeper; 10/28/2004, Vol. 193 Issue 4347, p50, 2p, 2c 2. Integrated systems can be an hotelier's best friend. Adams, Bruce Hotel & Motel Management; 06/19/2000, Vol. 215 Issue 11, p36, 2p, 2bw 3.Sectorial analysis of tourism-CARA 4.Daily independent Vijesti, Interview Professor of University in Oregon Gregory Ringer www.isspm.org ISSP www.vlada.cg.yu Government of Montenegro www.iztzg.hr Institute for Tourist Research of Croatia www.monstat.cg.yu


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COMMENT 6

CAR MARKET IN MONTENEGRO Anja Vrandečić ISSP Nebojša Obradović ISSP INTRODUCTION The research of the car market that has been conducted in January 2005, had for a goal the analysis of size and structure of the car market, overview of the environment in which the market develops in Montenegro, and the analyses of significance of the banking sector for the car market. We are witnessing the growing number of automobile showrooms. Additionally, one of the most important parts of Montenegrin banks’ offers refers to car loans. According to the Central Bank data, the import of the used and new cars in 2004 was over 43 million €. Is the demand for cars on Montenegrin market that big? Are all imported cars sold on the territory of the Montenegro? What do car dealers think about Montenegrin Government decision to allow the import of cars without the limits on production year? These are some of the questions that we have tried to answer in our research. The research consisted of two parts. The first part of the research was conducted through the questionnaire created by the Institute for Strategic Studies and Analyses (ISSP) team, which was send to the dealers of used and new cars in Montenegro. Of the total 44 registered automobile showrooms, 18 have responded to this questionnaire. This sample is representative, because 18 automobile showrooms mentioned above, cover 70% of the car market in the Montenegro. Questionnaire was filled out by automobile showrooms owners. The goal of this part of the research was to collect the data about the number of sold cars and turnover of polled automobile showrooms. The other part of the research consisted of direct interviewing of the owners of automobile showrooms. In direct conversation we wanted to find out what owners think about the business environment in Montenegro and the barriers for the development of the car market. THE SIZE AND THE STRUCTURE OF THE CAR MARKET According to the data of the Ministry of Internal Affairs the number of registered passenger cars in Montenegro in 2004 amounted to 92.685. If we put the number of registered cars in relation with the number of over 18 years old citizen (466.957)23 we get the number of cars per citizen that meet the legal requirements for obtaining the driving license. Therefore, in Montenegro for 1000 citizens that meets legal requirements for obtaining driving license there are 198 cars.

23 Statistical Yearbook 1992, Register 2003 and Working group for the pension reform (2003), calculation: ISSP

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On the EU level, this parameter for 1999 amounts to 460 cars on 1000 citizens. Within the EU, Luxemburg had the best parameter for 1999, i.e. 680 cars on 1000 citizens.24

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Graph 1. Number of Registered Passenger Cars in Montenegro

the number of registered vehicles

Car market in Montenegro can be divided in two basic segments: used car market and new car market. According to the results of the research in 2003 in Montenegro, 706 used cars was sold, while that number in 2004 was higher by 64.8% and amounted to 1164. Realized turnover from the sale of used passenger cars in 2003 amounted 2.7 million €, while in 2004 it amounted to 5.3 million €. The data shows that in 2004 compared to 2003, there has been an increase of the turnover realized from the sale of used cars by 2.6 million €, or 95.7%. As it can be seen from the data on the number of sold cars and the data on the amount of realized turnover, the market of the used cars has a growing trend. The research shows that in 2003, 933 new passenger cars were sold in Montenegro. In 2004, there was a 24% increase in a number of new cars sold; therefore the number of new cars sold in Montenegro amounted to 1157. Turnover realized from the sale of new passenger cars in 2003 amounted 10.3 million €, while in 2004 it was higher by 45% and amounted 15 million €. Comparison of the number of cars sold on new and used cars markets demonstrates that the equal number of cars is sold on both markets, which bring us to conclusion that the size of these two markets is nearly the same. However, if we compare the turnover on these markets, we can conclude that turnover on the market of new cars is significantly higher. Considering that this market is developing, we can expect that its turnover will have positive growth trend in the future. On the other hand, trends in developed EU countries shows that people are purchasing much more used cars than new cars. If this trend is accepted in Montenegro, it is possible to expect that the turnover of new and used car markets will be brought closer in long term. 24 Recent data was not available.


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Graph 2.Relation between imported and sold new passenger vehicles

imported vehicles sold vehicles

Based on the comparison of research data related to sold cars and Central Bank data on the import of cars (Graph 2.) it can be concluded that the number of imported new cars is almost equal to the number of sold new cars. This means that the overall import is realized at the territory of Montenegro and that most of the new imported cars is sold through the authorized automobile showrooms. If we compare data obtained from the Central Bank on the value of car import with our data on the value of sale from the sample, it can be noticed that in 2004 sale turnover amounted 25 million€, while the value of the import was 43 million €. Therefore, almost 60% of import is realized through authorized car dealers and showrooms. The other percentage of cars is sold through physical person and firms that are not registered for the car sale.

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Graph 3. Value of imported and sold new and used passenger vehicles

Value of sold vehicles Value of imported vehicles

Source: Central bank of Montenegro (the value of the import)

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PURCHASE (SALE) OF CARS According to the results of the research, from the total number of cars sold in 2003, 40.6% was sold on credit, while 59.4% for cash. Also, in 2004, larger number of cars was sold for cash (57.3%), while 42.6% of cars was sold on credit. However, data show that significant number of cars was bought on credit, i.e. through banks.

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Graph 4. Number of sold used passenger vehicles in 2003 and 2004

u 2004 u 2003

In contrast to used vehicles, new vehicles can be purchased on leasing. Thus, according to the research data, of a total number of sold new cars in 2003, 42.6% was sold on credit, 53.5% for cash, while 3.7% was sold on leasing. The data for 2004 show that 35% of passenger cars was sold on credit, 53% for cash, while 12% was sold on leasing.

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Graph 5. Number of sold new passanger vehicles in 2003 and 2004

2004 2003


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The largest number of used and new cars is still bought for cash. However, a significant number of cars are sold on credit (35% - 45%). Additionally, there is a significant increase of leasing in 2004, which shows that the banking sector, its services and terms, is very important for the development of car market and other markets. There are two basic types of services (loans and leasing) that banks offer to car buyers on the Montenegrin market. This leads us to a question what are the conditions of those services. Any solvent loan applicant that has opened an account with the bank (current, gyro, foreign currency, saving, etc.) can get a loan. In order to get a loan, loan applicant has to meet all requests related to loan collateral. These requests usually, but not in all cases, imply the arrangement of administrative ban on earnings (pension) of the loan user issued by his employer, as well as the bill of exchange pledged by the loan user in the amount of total debt, guaranteed by two solvent endorsers. The available loan amount depends on loan applicant income, i.e. his collateral. The loan applicant has to secure a deposit (usually 20% of the total loan). Loans are usually approved on 5 years term with the annual interest rate around 11%. These terms may differ from bank to bank, but in most cases they range within these limits (e.g. if the car buyer takes a loan of 10.000 €, on 5 years, with effective interest rate of 11.99%, loan will be paid in equal annual amounts of 217€). The other option for the buyer is to buy the car on leasing. The difference between loan and leasing is that in the case of leasing the car owner is the bank until the final amortization of the leasing. In the case of the car loan, the buyer becomes the owner of the car. Box 1- Leasing Contract Rapid development of the technology, especially in the past decades brought, besides huge economic progress, new economic activities, and a new way of doing business. That has resulted in the appearance of adequate instruments to achieve greater economic efficiency. This had an impact on the area of contracts – new type of contracts have emerged, that were significantly different from classic contracts in the area of the classical civil and obligation Law. The typical representative of this contract group is the leasing contract. Simply, the leasing contract enables acquiring of equipment and other assets to persons that don’t have enough funds to purchase them, and who would like to perform some sort of the economic activity and gain profit, i.e. one is purchasing the modern equipment without involving personal or borrowed funds. ’’The leasing contract obligates the lessor to give the asset for use to the lesee for a certain period of time or for a certain job (work, usage). The lesee is obliged to pay a certain amount (lease) in installments, but by the end of the leasing contract he needs to return the item to the lessor, or extend the use or purchase the asset.’’(Djurović). The importance of leasing on a micro as well as on the macro level is proved by numerous data e.g. financing investment equipment trough leasing of a total amount of the investment is represented by 30 % in the USA, 13-17% in most developed European countries and nearly 20% in Japan, with the constant increase from year to year. Unfortunately, we are far from global trends in this area. Lesee decides on the subject of leasing (car in this case) and discusses with the car dealer sale terms (price, delivery, etc.). Customer bears the responsibility for any possible risks related to the purchase and leasing. The bank evaluates the solvency of the loan applicant,

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i.e. determines his capability to fulfill the obligations from the leasing contract. After the approval of leasing, the buyer concludes sales contract with the dealer, thus becoming the owner of the leasing subject, and only after the signing of the contract with the bank; lesee acquires the right to use the leasing subject (car). The same rules apply for the lesee and the loan applicant, except that in the case of leasing some additional loan collateral is required (e.g. insurance policy of the real estate, personal participation, etc.). Considering that only one bank in Montenegro approves purchasing vehicles on leasing, there are certain conditions under which buyers can purchase a vehicle. Adoption of the new Leasing Law is expected in second quarter of 2005, and turbulent changes in financial market can be expected. Namely, the Law is defined in order to regulate movable property and real estate. Initial capital of a company shall be 100.000€ which will facilitate establishing of smaller companies and encourage competition. New Law will be beneficial to customers and leasing companies. For example, from the leasing company aspect, the procedure of confiscation of the leasing subject (if the obligations are not fulfilled) will last only 7 days, while the lesee may return the leasing subject (e.g. car) if he is unsatisfied or transfer the leasing right the third person. Therefore, it can be concluded that both leasing companies and clients are legally protected, which is a condition for the entry of large leasing companies on our market. If the legal protection is guaranteed, many new leasing companies and clients will emerge, considering that leasing (protected by Law) can stand more risky clients. Spreading of the market will without doubt affect the banking sector, decrease interest rates, increase competition and improve the entire financial market.

BOX 2 – Conditions under which buyers can purchase a vehicle: 1. The largest amount of financial leasing: depends on personal income of the

applicant; 2. Payment term: up to 4 years; 3. Interest rate: 11% on annual basis Effective interest rate = 11.61%

(customer); 4. Payment: Equal monthly annuities; 5. Fees: Lesee pays single fee for processing and approval of financial leasing; 6. Deposit: Minimum 25% of the total amount; 7. Manner of payment: transferring assets on the account of the lessor; 8. Collateral:

a. Arrangement on administrative ban on earnings of the lesee, issued by his employer,

b. The Bank keeps the right to request additional collateral if necessary, c. Insurance policy of real-estate that is a subject of a fiduciary transfer of

property. e.g. If, according to specified terms customer concludes the contract with the bank in the amount of 10.000€, his monthly annuity will be 260.3 Euro in next 4 years.


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According to data obtained from the banking sector, Montenegrobank and Crnogorska Komercijalna Bank approved the largest number of car loans during the 2004. Namely, Montenegrobank approved 706 car loans, Crnogorska Komercijalna Bank 407, Podgorička Bank 198, and Euromarket Bank approved 49 car loans. Turnover on car loans in 2004 by banks was the following: Montenegro Bank 4.252.000 €, Crnogorska Komercijalna Bank 2.704.650 €, Podgorička Bank 714.102 € and Euromarket Bank 217.233 €.

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CKB Montenegro Bank Euromarket Bank Podgorička Bank

Graph 6. Number of vehicles bought on credit in 2003 and 2004

2003 2004

Source: Commercial banks Note: Data for 2003 was not available for all of the above- mentioned banks

2704

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CKB Montenegro Bank Euromarket Bank Podgoricka Bank

Graph 7. Value of approved credits in 2003 and 2004

2003 2004

Source: Commercial banks Note: Data for 2003 was not available for all of the above- mentioned banks

Comments

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Car leasing was approved almost exclusively by Montenegrobank. During 2003, and 2004, this bank approved 33 and 139 leasing, respectively. Considering the increased number of vehicles sold on leasing and possibility that other banks will start offering this service, it is possible to expect the increase of leasing sales in the future. Based on presented analyses it can be concluded that the banking sector in Montenegro influences the development of the car market. Thanks to the further increase of the competition in the banking sector, improvement of banking services, growing trend of non-cash payment, as well as further development of the car market, increase of car loans and leasing can be expected in total car sales in Montenegro. CAR MARKET DEVELOPMENT BARRIERS Interviewing automobile showrooms owners we obtained the answers to questions related to their evaluation of: general state of Montenegrin economy, business environment for crediting customers without bank intercession, legal framework influence and competition on the car market. General state of Montenegrin economy. On the question that refers to global state of Montenegrin economy owners of automobile showrooms have answered that the overall state is unsatisfactory, emphasizing that the payment capability of citizens is on a very low level and that they take loan liabilities easily and unprepared, not knowing what the taking a loan means and that liabilities that they have undertaken must be fulfilled. Business environment for crediting customers without bank intercession. Current business environment for crediting customers without bank intercession is unfavorable. It is impossible to undertake this kind of activity, not due to the capital that is on sufficient level, as owners say, but due to the lack of protection measures, which are extremely expensive, and inefficient system of creditor protection, i.e. inefficient legal system that should provide adequate protection in case of loan non-performance. Evaluation of authorized agency decision on vehicle import without limitations on production year. Adopted decision is evaluated as very poor, because it is very hard to confirm with 100 % certainty the condition of imported vehicles, which are up to 15-20 years old. That represents a risk for car buyers and other traffic participants. On the other hand, number of car dealers on the market has increased as a result of agency decision on vehicle import without limitations on the year of production. Automobile showrooms owners point out that nowadays anyone who has 10 to 15 thousand euros can import around twenty vehicles (in poor condition) and open a showroom or any other sale premises where vehicles can be displayed. However, that will not have an influence on sales in automobile showrooms that are in business for long time and whose name is recognized as a brand in this region. Interviews with automobile showrooms owners indicated significance of banking sector for car market development, decision on car import without limitations, competition increase on this market and lack of efficient mechanisms for collection which causes the absence of direct crediting of car buyers (by automobile showrooms).


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CONCLUSION Based on the sample, which included 70% of registered car dealers in Montenegro, the turnover of the car market share in GDP in 2003 amounts to 1 %, while in 2004 this share amounted to 1,4 %. This data indicates to the continuing growing trend of car sale on the Montenegrin market. Considering the entire situation on the car market we are noticing the trend of engaging in new ways of doing business that are typical for developed countries, particularly all the leasing as a type of financing, improved service quality, well-informed citizens, and other services that affect the annual increase of the number of sold cars, especially new cars. Banking sector played a significant role in providing car loans to citizens that had no other possibilities to purchase a car, which especially affected the sale of used cars. The situation on car market has significantly improved compared to previous period when irregular cars that were in very poor condition were imported. These cars are still on our roads and present the potential danger for owners as well for other participants in the traffic. This is confirmed by the huge number of daily newspaper headlines on the increasing number of car accidents. On the other hand, technical control of cars in some cases is not done according the existing regulations, which also is one of the risk factors. Therefore, the Government decision on vehicle import without limitation on production year is incomprehensible. We hope that the revenues from customs and registrations fees will not be above human lives and that in future the government will make a decision that will show that human life is still more important.

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