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MONET

MONTENEGRO ECONOMIC TRENDS

March 2005

MONET TEAM

ISSP team leaders: Professor Veselin Vukotic

Petar Ivanovic

Researchers: Jadranka Kaludjerovic,

Maja Bacovic, Milica Vukotic, Milorad Katnic, Nina Labovic,

Ana Krsmanovic, Tijana Stankovic,

Jelena Janjusevic, Ivana Vojinovic, Milica Dakovic,

Gordana Radojevic, Ivan Jovetic,

Natasa Masonicic, Nebojsa Obradovic.

Lay out and web site: Boris Buskovic

ABOUT MONET

MONET (www.isspm.org) is the result of the work of ISSP. It is financed by the grant from the European Agency for Reconstruction.

ABOUT ISSP

The Institute for Strategic Studies and Prognoses (ISSP), established by Professor Vukotic in 1999, is the first independent economic institute in Montenegro. A key idea behind establishing the institution was to assemble young people that have an entrepreneurial way of thinking; a liberal understanding of economy and society, and that respect the importance of both formal and informal institutions (especially individual and moral) for individual behavior. 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: Macroeconomic reform in Montenegro o Privatization o Monetary Reform o Capital Markets Development o Fiscal Reform o Reform of the Pension System o Introduction of the SNA system

Macroeconomic indicators in Montenegro Economic education

CONTACTS ISSP Address: Naselje pod Ljubovic, Lamela C (1 i 2), 81000 Podgorica, Montenegro, Serbia and Montenegro Tel/Fax: (381) 81 634 338; 634 329 Website: www.isspm.org / Email: [email protected] All rights reserved. No part of this publication may be reproduced or distributed in any form or by any means, or stored in a database or retrieval system without the prior written permission of the publisher.

Montenegro Economic Trends

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© Institute for Strategic Studies and Prognoses

Dear readers, We have begun one of the most challenging years for Montenegro. It depends on every Montenegrin citizen to understand and act on these challenges and create a society in which we want to live. The future of Montenegro relies on our individual actions. One of the most important challenges is economic growth. During the last several years Montenegro has reached macroeconomic stability and has all the preconditions to blaze a trail to economic growth. In 2005 all sectors experienced positive trends. Overall economic activity increased, as well as wages and employment. Inflation decreased while total loans and deposits continued to grow. The stock exchange experienced a significant boom. These positive trends will continue if our future is based on openness and economic freedom. The year 2006 will be successful if the Government decreases its consumption and expenditures. It will be prosperous if it brings a friendlier environment for domestic and foreign businesses, which are leaders of economic growth. It will be promising if more barriers to market entry are removed and lower taxes are introduced. It will be beneficial if it brings a reformed pension system and improves the protection of private property. In order to contribute to the realization of Montenegro’s future ISSP will continue to advocate for further economic changes and produce independent analysis on the effects of different economic policy decisions. ISSP will also continue to monitor economic reforms in Montenegro. ISSP started the “years of challenges” with the realization of new ideas. As result we have the pleasure to present new content and design for MONET publications. From this issue of MONET, besides regular analysis, we will offer analysis of the IT sector and presentation of different research and surveys done by our Institute. We also have some new ideas that we will share with you in some of our future issues. And as this is the year of challenges it is important to remember that challenge is not about following the path but about blazing the trails.

Jadranka Kaludjerović ISSP program director

Monet March 2006

© Institute for Strategic Studies and Prognoses 3

TABLE OF CONTENTS

EVENTS 4

MACROECONOMIC TRENDS 8

CHAPTER 1. REAL SECTOR 9

CHAPTER 2. EMPLOYMENT 15

CHAPTER 3. WAGES 19

CHAPTER 4. PRICES 25

CHAPTER 5. BUDGET 34

CHAPTER 6. MONEY 48

CHAPTER 7. CAPITAL MARKET 59

CHAPTER 8. EXTERNAL SECTOR 69

CHAPTER 9. REGIONAL COMPARISON 73

CHAPTER 10. INFORMATION COMMUNICATION TECHNOLOGY IN MONTENEGRO 76

RESEARCH 82

SOCIAL ASSESSMENT FOR EDUCATIONAL SYSTEM DEVELOPMENT PROJECT 83

ANALYSIS 90

INFLUENCE OF OIL SHOCKS ON THE COUNTRY’S ECONOMY 91

THE FLAT TAX REVOLUTION 100

TRANSACTION COSTS ON THE CAPITAL MARKET OF MONTENEGRO 110

COUNTRYSIDE TOURISM, UNUSED POTENTIAL OF MONTENEGRO 114

STATISTICAL ANEX 119


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EVENTS

January 2005 The beginning of the year was marked with the traditional Christmas Proceedings on Economic Faculty, to which approximately 500 participants attended. The subject of the proceedings was “State and Person.” An important moment for the financial system in this month was the beginning of the new payment system. Commercial banks in Montenegro officially took over payment operations. Privatization revenues in 2004 were similar to the previous year. Namely, according to an announcement by the Privatization Council, Montenegro realized € 25.8 million in 2004 through the privatization of shares and assets of Montenegrin companies. Compared to 2003, revenues were 2% lower.

February 2005 For the first time in Montenegro electronic banking services were introduced. Montenegrin banks introduced electronic banking services that enable their clients to perform financial transactions, print abstracts of their accounts and conduct other banking operations all without going to the bank.

March 2005 The largest privatization was conducted in this month – privatization of “Telekom.” The Hungarian company, “Matav,” became owner of 51.2% of “Telekom” shares. “Telekom” was sold for € 114 million. The custom rate on imported flour that the Government of Montenegro introduced to protect domestic producers was abolished. Once again, negative effects of the free trade restrictions were evidenced, so the Decree on Protection from Excessive Wheat Flour Import that defined a 30% custom rate was abolished before the determined time.

April 2005 Center for Entrepreneurship and Economic Development (CEED) received an award from the American foundation “Atlas,” within the Program Templeton Anjards, for receiving outstanding scores in their support of the private sector’s development in Montenegro. Realization of the Privatization Plan for 2005 was continued in this month. Tender for five hotels with apartments of “Ulcinjska Rivijera”: “Mediteran,” “Galeb,” “Olimpik,” “Belvi,” and “Grand lido,” was announced. Domestic and foreign investors were called to convey their offers to the Ministry of Tourism of Montenegro through July 26, and for “Mediteran” and “Galeb” until June 10th.

May 2005 The Agency for Restructuring and Foreign Investments of Montenegro announced Tender for sale of 64.25% of the shares of Podgoricka bank. According to the Agency announcement, total assets of the bank amount to € 59 million and the bank has over € 16.7 million of equity capital. Additionally, Tender for the sale of 31.11% of the Coal Mine from Pljevlja was also announced this month, as well as the Thermal Plant from Pljevlja, for one buyer as part ownership of the Electric Company. The number of institutions on the Montenegrin capital market is growing. Two new brokers received their license for work - MB broker from Podgorica and Monte broker from Berane.

Monet March 2006


The Parliament of Montenegro adopted a new Law on Amendments on Tourism Law in this month. The Law specifically regulates private accommodation renting issues.

June 2005 One more privatization failed in this year. Namely, the sale contract for 34% of the shares of HTP “Korali” with “Miraž holography studio” company, which was signed more than two months ago, was terminated because the Slovenians didn’t pay in the € 3.2 million that they owed for the shares.

July 2005 Hotel “Mediteran” in Ulcinj has been sold. The price paid for the hotel by the buyer - “Becirovic Management Group” - amounted to € 940 thousand with € 6.15 million of investments. In addition to this privatization, another began; namely, the Commercial Court of the Republic of Montenegro launched International tender for the sale of “Galeb” hotel, which is owned by “Ulcinjska rivijera”. The Ministry of Finance of Montenegro signed an € 11.5 million credit arrangement contract with the European Bank for Reconstruction and Development, named for reconstruction of regional roads in Montenegro. This month was marked by the adoption of two important laws – The Law on Current and capital Transactions with Abroad and The Law on Bill of Exchange. The main goal of the Law on Current and Capital Transactions with Abroad is to provide a legal base for the regime of the free flow of money and capital in Montenegro and abroad. The Law on Bill of Exchange is completely harmonized with the Geneva Convention, as well as other adopted international standards in this area.

August 2005 The tourist season for the first six months of 2005 was successful. According to the announcement from the Ministry of Tourism, total tourism revenues for the first six months of this year were € 62 million. This is almost 80 percent more than in the same period of the previous year. The Company “Radvent” was privatized. The Russian company “Midland Resources” signed a purchase contract for 48.6 percent of “Radvent” from Niksic shares.

September 2005 The traditional Milocer Forum of Economist’s was opened in Budva. The forum’s topic was Competition of Economy, and more than 500 economists from Serbia and Montenegro took part at the Forum. The Agency for Restructuring and Foreign Investments of Montenegro announced Tender for sale of 49.81% of MMK Standard PLC shares, which are owned by: Republic of Montenegro (19.9080%), Republics’ Pension’s and Invalid’s Fund (18.5529%), Employment agency of Montenegro (6.1843%) and Development Fund of Republic of Montenegro (5.1716%).

October 2005 Abolished Tender for “Coal Mine” and “Termoelektrana Pljevlja”. Tender Commission for the privatization of these two companies disallowed three offers for their purchase. The problem was “formal failings.” It is expected that new tender would be announced in a month. According to the new announcement of the Ministry of Tourism of Montenegro, revenues from tourism in the first eight months of 2005 amounted to €181.2 million, which is 22% higher compared to the same period in 2004.


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The Bauxite Mine in Niksic was sold. The Government of Montenegro signed a contract with the companies “Salomon Enterprise” and “En+” for the sale of 32% of the shares of the Bauxite Mine in Niksic. Additionally, the Podgoricka bank was sold this month. The buyer was “Sosiete General Bank” from France. The French Bank will pay € 14.2 million for these shares. The first Human Development Report, prepared by ISSP in cooperation with UNDP, was presented. According to the human development index, which represents health, literacy and citizens’ economic life conditions, Montenegro is at the medium level.

November 2005 The Government of Montenegro adopted the Law on Free Access to Information. According to the Law, Montenegrin citizens are able to ask for information that the government bodies have. ISSP presented a Macroeconomic Model for Montenegro. The main goal of the Project was to create a Macroeconomic Model and to identify the main economic relation between macroeconomic aggregates within the Montenegrin economy. Construction of the Model is meant to help the decision makers by providing an overall view of the global interactions and relations in the Montenegrin economy.

December 2005 The Agency for Restructuring and Foreign Investments of Montenegro announced Tender for sale of 78.8% of the shares of “Pljevaljska bank.” Companies that realized a gain of more than € 1.5 million in the last three years are able to participate in the tender. The deadline for offers is March 2nd 2006. The Agency for Restructuring and Foreign Investments of Montenegro announced new Tender for the sale of “Termoelektrana,” as part of the property of the Electricity Company of Montenegro and 31% of the Coal Mine in Pljevlja. The Montenegrin banking system became richer by one new bank - Hypo Alpe Adria Bank. The Central Bank of Montenegro approved a license for Hypo Alpe Adria Bank to operate in the Montenegrin banking sector. The Economic Faculty of Montenegro held their 4th Conference of Postgraduate Studies “Entrepreneurial Economy.” Subjects covered by panel discussions included, among others, fiscal and monetary policy, capital market, EU and international cooperation, corporative governance, IT, and liberalism. In this month several laws were adopted. The Law on Financial Leasing was adopted with the aim of improving the financial leasing operations in Montenegro, as a specific form of credit. Additionally, the Law defined rules that would respond to the legal safety requirements and needs of modern business operations. The Law on Company Takeovers defines the conditions, methods and procedure for a company’s takeover, as well as the rights and obligations of the participants in this process. The Law on Custom Tariffs defines the goods that are imported on the custom territory of the Republic of Montenegro and defines the customs rates and amounts that are paid in accordance with this Law. The Accounting and Auditing Law defines accounting principles for business books, financial reporting, and the ways in which auditing of the financial reports is conducted. The Government of Montenegro adopted the Amendments to the Value Added Tax Law, in which 12 products that were free of paying VAT would be assessed with a tax rate of 7%. Among these products are: bread, oil, sugar, flour, fat, etc… The Law on Administrative Fees defines payment of administrative fees for documents and activities that are related to the bodies of the public sector, local government and others.

Monet March 2006


January 2006 Realized one more successful privatization – The Croatian company “PGM Ragus” and the Government of Montenegro signed a contract for the sale of Hotel “Galeb” for € 5.3 million. Additionally, another new privatization was begun. The Agency for Restructuring and Foreign Investments of Montenegro announced new Tender for the sale of 62.7% of the shares of the Adriatic Shipyard “Bijela”. The value of the company is estimated at € 33.61 million. The Montenegrin Parliament adopted a new law – Copy Right Law. The main goal of the Law is to provide complete and efficient protection of intellectual ownership rights. The Law is harmonized with the requests of the Republic, as well as WTO.


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MACROECONOMIC TRENDS

Monet March 2006


CHAPTER 1. REAL SECTOR 1.1 GENERAL OVERVIEW The situation in the real economy improved slightly in 2005 as compared to the previous year, due to the increase of value added in services. The total estimated economic activity in 2005 was higher due to higher production within the sectors of tourism (growth rate of 17%), retail trade (growth rate of 16.6%), forestry (growth rate of 20%), transportation of goods (growth rate of 3.7%) and construction (growth rate of 31%).1 On the other hand, industrial production of the entire economic activity in Montenegro, as an important contributor to GDP (with 21.2% of GDP), was lower in 2005, as well as, transportation of passengers. These two sectors contributed to the slower pace of growth within the real sector of the economy. Box 1: The Struture of GDP According to the latest official data (from 2004), the most dominanant sectors that contribute to the creation of Montenegrin GDP are: 1. Industrial Production (21.2% of GDP) 2. Trade (12.3% of GDP) 3. Agriculture, hunting and forestry (11.2% of GDP) 4. Transport, storage and communication (10.7% of GDP) 5. Public administration and defense, compulsory social security (7.6% of GDP) 6. Real estate, renting and business activities (7.5% of GDP)

7. Education (4.2% of GDP) 8. Health and social work (3.9% of GDP) 9. Construction (3.1% of GDP) 10. Hotels and restaurants (2.9% of GDP) 11. Other community, social and personal activities (2.8% of GDP) 12. Financial intermediation (2.4% of GDP) 13. Fishing (0.2% of GDP)

Graph 1.1. Situation in the real economy (seasonal adjusted-1998=100)2

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Source: Monstat; Index of activities in the real economy calculated by I

1 Measured by the value of construction activities 2 Graph 1.1 presents seasonal adjusted data of activities in the real sector. Aggregated index, which presents activities in the real economy, consists of weighted indices of industrial production, transport of goods, transport of passengers, retail trade, forestry, tourism, catering and construction. This is due to the fact that these sectors within the real economy participate on average around 50-55% in GDP since 2000.

In the material production sector, a key trend was related to a decrease of industrial production due to lower electricity and aluminum production. Production of services, which makes more than 54% of GDP, increased in large part due to the production increase of transport of goods, the higher number of registered tourists, the real growth of retail trade, the increased value added of financial intermediation, and the increased value added of real estate, as well as renting and business activities.


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1.2 INDUSTRIAL PRODUCTION 1.1.1. Industrial production Industrial production in 2005 was 1.9% lower than in 2004. In December 2005, industrial production decreased by 31.2% compared to December 2004. The main reasons for the decline in industrial production in 2005 were seasonal factors, old technology, the inappropriate use of production capacities, as well as the problems that occurred with the Steel Company Niksic and the low production of electricity and basic metals. In addition, lower production within several sub-sectors of the processing industry, such as food processing, beverages production, and textile production, contributed to the fall of total industrial production in 2005. In the last quarter of 2005, industrial production decreased by 9.6% compared to the same period of 2004. Three major industrial sectors Production within the processing industry sector, which represents 67.6%3 of total industrial production, was 2.5% higher in 2005 as compared to the corresponding period of the previous year. However, this production was 7.3% lower in the last quarter of 2005 as compared to the same quarter of the previous year. The annual growth rate of processing industry production was -13% in December 2005. The main contributors to the decreased production in the processing industry in 2005 were the decreased production levels within sectors, such as: manufacturing of base metals and metal products, textile and textile products manufacturing, and the manufacture of products of other nonmetal minerals. The sub-sector “manufacture of tobacco products” represents 2.8% of total industrial production and decreased its production by 32.8% in 2005 compared to 2004. The sub-sector “Manufacture of textile and textile products,” which accounts for 1.5% of total industrial production decreased its production by 20.7% in 2005 compared to 2004. One of the major sub-sectors of the processing industry, “basic metals and metal products manufacturing” (44.8 % of total industrial production), decreased its production by 6.7% in 2005 compared to the previous year; additionally, this sector’s production decreased by 27.2% in December 2005 compared to the same month of 2004. Production of the sub-sector “Manufacturing of products of other non-metal minerals” (6.0% of total industrial production) declined in 2005 by 0.4% compared to 2004, and by 2.5% in December 2005 compared to the same month of 2004. The industry “food products and beverages” (6.3% of total industrial production) increased its production by 10.6% in 2005 compared to the previous year. This production increased by 28.6% in December 2005 compared to the same month of 2004. The sub-sector “Wood processing and wood products,” which accounts for 1.6% of total industrial production, increased its production by 33.9% in 2005 compared to 2004. This production increased in December 2005 by 216.1% compared to the same month of the previous year. Production within the sector of “Manufacturing of paper; issuing and printing” (0.8% of total industrial production) increased by 26.6% in 2005 as compared to the previous year and by 9.5% in December 2005 compared to the same month of 2004. The sub-sector “Manufacture of chemical products and fibers” (2.1% of total industrial production) increased its production by 194.9% in 2005 compared to the same period in 2004. In December 2005, this production increased by 6.6% compared to the same month in 2004.

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

Monet March 2006


The second major industrial sector, electricity, gas and water, which accounts for 26.4% of total industrial production, saw its production decrease by 13.4% in 2005 compared to the previous year. The annual growth rate of its production was -34.8% in December 2005. The sector of mining and stone extracting, which accounts for about 6.0% of total industrial production, increased by 0.2% in 2005 compared to 2004. The annual growth rate of its production in December 2005 was –30.4%. Leading industrial producers One of the most important industrial producers - The Power Company of Montenegro (Elektroprivreda Crne Gore) produces electricity, which accounted for approximately 20% of total industrial production in Montenegro. This company decreased its production by 0.5% in 2005, compared to 2004. The annual growth rate of its production was -35% in December 2005. Graph 1.2 presents the aggregate planned and actual electricity production of the three power plants existing in Montenegro: Perucica Hydro Plant, Piva Hydro Plant, and Pljevlja Thermal Plant.

Graph 1.2. Total elecricity production

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Source: The Power Plant of Montenegro (EPCG) Total actual production of the three plants in 2005 was 20% above the planned level. Total actual production of two hydro plants in 2005 was 1,834,645 MWh, or 56.8% of total executed electricity production. The remaining production came from the thermal plant Pljevlja. Total actual production of the Perucica Hydro Plant was 14.0% above the planned level in 2005. Actual production of the Piva Hydro Plant also exceeded the planned level by 7.4% in 2005. Actual production of the Thermal Plant Pjevlja was 30.1% above the planned level in 2005. Generally, appropriate delivery of coal to this plant is the main reason for realizing production of the Thermal Plant. Despite the fact that executed electricity production was above the planned level in 2005, it was lower than executed electricity production in 2004.


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Graph 1.3. Dynamics of electricity production

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Source: EPCG Note: 12-month averages of annual changes are moving averages of annual changes during the past 12 months Aluminum production in 2005 declined by 0.3% compared to 2004. In addition, the exported quantity of aluminum produced by Aluminum Combine Podgorica (KAP) decreased by 26.6% in 2005 compared to 2004. One reason for the decreased aluminum production and export in 2005 was the privatization process of KAP. However, in 2006, as a post-privatization year, the volume of aluminum production, as well as its export, is expected to increase.

Graph 1.4: Aluminum production and exports prices

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Monet March 2006


Aluminum production, as graph 1.4 presents, increased in 2004, but it decreased a bit in 2005. The average monthly aluminum price has been going down particularly quickly in recent months from 2,033 $/ton in April to 1,985 $/ton in December 2005. 1.3 FORESTRY AND CONSTRUCTION Forestry Estimated production in the forestry sector increased by 20% in 2005 compared to the previous year4. Construction Average production in the sector of construction, measured by the value of the constructor’s activities, was 31% higher in 2005 compared to the same period of 2004. 1.4 SERVICES Tourism The total number of tourists in 2005 amounted to 820,457 and increased by 17% compared to the previous year. The number of domestic tourists amounted to 548,452 in 2005 and increased by 8% compared to the previous year, while that of foreign guests amounted to 272,005 and increased by 42% compared to 2004. In 2005, the share of foreign tourists was 33%.

Graph 1.5: Number of tourists in Montenegro

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Transport Estimated transport of goods increased by 3.7% in 2005 compared to 2004. This increase was achieved due to the higher railway transport of goods in 2005 compared to the previous year. Estimated transport of passengers in 2005 was 3.2% lower than in 2004. The decrease in

4 Due to the fact that official data about activity in the forestry sector were available for the first ten months of 2005, the ISSP estimated this production for the entire 2005.


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transport of passengers in 2005 was due to lower railway and road transport of passengers. (See graph 1.6).

Grafik 1.6: Transport of passengers and goods (seasonal adjusted, 1998=100)

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Retail trade The ISSP estimated retail trade turnover for 2005 based on monthly data obtained from Monstat’s limited sample from 2003. The average retail trade turnover nominally increased by 19.4% in 2005 compared to 2004. In real5 terms, retail trade turnover increased by 16.6% in 2005 compared to 2004. Catering The average level of catering turnover in 2005 was 15.7% higher than in 2004. In real terms, catering turnover increased by 13% in 2005 compared to the previous year. 1.5 GDP AND ITS FORECAST FOR 2006

Official GDP at current prices amounted to € 1.6 billion in 2005 and its real growth rate was 4.1%. GDP per capita amounted to € 2,638. According to ISSP, GDP at current prices is forecasted to be 1.786 billion with the real

growth rate of 4.5%. Forecasted GDP per capita in 2006 is €2,855.2.

5 Deflated by CPI

Table 1.3 GDP in Montenegro -forecast

GDP at current prices (€ million)

GDP per capita (€)

Real growth of

GDP (in%)

2006 1,786.5 2,855.2 4.5 2007 1,893.7 3,014.5 4.5

Source: ISSP

Monet March 2006


Table 2.1: Employment

Total number of employed persons 1

Unemployment rate %

(estimate)

2005 194,426 19.7 Jan-05 191,575 20.9 Feb-05 191,476 20.8 Mar-05 190,433 20.7 Apr-05 189,976 20.4 May-05 191,714 20.0 Jun-05 196,571 19.7 Jul-05 200,177 19.1 Aug-05 197,773 19.0 Sep-05 196,419 19.0 Oct-05 196,667 19.1 Nov-051 196,211 19.2 Dec-05 194,119 17.0

Source ISSP

CHAPTER 2. EMPLOYMENT

Total employment, in Montenegro increased 1% in 2005, according to ISSP estimates6. The average number of employed persons in Montenegro during the year was 194,426 persons, while the average unemployment rate reached 19%. Moreover, according to data from an ISSP household survey, conducted in December 2005 among 1440 households from all municipalities, the unemployment rate in December was estimated to be17%. 2.1. EMPLOYMENT AND UNEMPLOYMENT The dynamics in the number of employed persons experienced a similar trend to those of 2004, as is observable on Graph 2.1. Namely, the first half of the year was characterized by lower employment levels which later recovered over the second half of the year, particularly in the third quarter of 2005. For example, in July 2005, employment in the formal sector of the Montenegrin economy reached the highest level experienced in the last eight years. In the period from April to July, registered employment increased by approximately 6,000 persons. Furthermore, at the end of the year, the number of registered employees was higher by approximately 2,000 persons as compared to the beginning of the year. These encouraging developments in the area of formal employment are the results of positive trends which occurred in the Montenegrin economy over 2005, as well as of a reduction in the grey economy area of the labor market.

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

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193000

195000

197000

199000

201000

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

2002 2003 2004 2005

Source: Monstat

6 The official number of employed persons is not discussed in this issue, since the official statistics do not include entrepreneurs, the Ministry of Interior, farmers and the gray economy.


16


ISSP household survey results The ISSP conducted a household survey in December 2005. The survey sample included 1440 households from all municipalities in Montenegro. According to preliminary results, the unemployment rate in Montenegro in December was 17%. Observed by regions, unemployment rates were:

• 13.0% in the central region • 13.7% in the southern region • 21.7% in the northern region.

These results show a significant improvement over the last household survey of April 2004.

While these developments in the labor market are still modest, every increase in the level of registered employment is important for the overall economy. Observing month-to-month changes, one can see that employment decreased in the period February - April of 2005, in August - September and in the period November - December. Increases, on the other hand, were recorded as follows: January - 0.2%; May - 0.9%; June - 2.5%; and 0.1% in July and October. On an annual level, negative growth rates were recorded in January (0.1%), March (0.8%), April (1.9%) and May (1.1%), while in other months employment rose in annual terms by 1.3% on average. Observed by quarters, the highest employment rate, as mentioned above, was achieved in the third quarter, mainly due to the summer season. In the first quarter, employment was lower by 0.9% as compared to the previous quarter, while in the second and third quarters, employment had increased by 0.8% and 2.8% respectively. Employment in the fourth quarter was lower by 1.2% as compared to the third quarter of 2005. On an annual level, quarterly changes disclose that employment in the first quarter of 2005 was equal to that of Q1 2004, while Q2 2005 was lower than Q2 2004 by 0.6%. In annual terms, employment in the third and the fourth quarters recorded positive growth rates of 1.3% and 1.5%, respectively. The increase in total employment was followed by a decrease in registered unemployment. However, registered unemployment decreased much faster than compared to employment. The average number of registered unemployed persons was lower by 16.5% in 2005 as compared to 2004. Registered unemployment decreased by an average rate of 1.6% monthly.

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

47000

52000

57000

62000

67000

72000

77000

82000

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

2002 2003 2004 2005

Source: Employment Office of Montenegro

Monet March 2006


In annual terms, registered unemployment recorded high negative growth rates. Observed by quarters, in the first quarter, unemployment was lower by 17.5% relative to the first quarter of 2004, in the second by 17.6%, in the third by 14.5% and in the fourth quarter by 15.9% relative to corresponding periods of 2004. As was pointed out in previous issues of MONET, the decrease in registered unemployment is not due to an increase in employment. It is rather the result of an administrative measure for keeping records up to date by removing the names of persons no longer actively looking for a job.

Graph 2.3: The official number of employed, unemployed persons and pensioners (1994Q1-2005Q4)

47000

67000

87000

107000

127000

147000

1994

-Q1

1994

-Q2

1994

-Q3

1994

-Q4

1995

-Q1

1995

-Q2

1995

-Q3

1995

-Q4

1996

-Q1

1996

-Q2

1996

-Q3

1996

-Q4

1997

-Q1

1997

-Q2

1997

-Q3

1997

-Q4

1998

-Q1

1998

-Q2

1998

-Q3

1998

-Q4

1999

-Q1

1999

-Q2

1999

-Q3

1999

-Q4

2000

-Q1

2000

-Q2

2000

-Q3

2000

-Q4

2001

-Q1

2001

-Q2

2001

-Q3

2001

-Q4

2002

-Q1

2002

-Q2

2002

-Q3

2002

-Q4

2003

-Q1

2003

-Q2

2003

-Q3

2003

-Q4

2004

-Q1

2004

-Q2

2004

-Q3

2004

-Q4

2005

-Q1

2005

-Q1

2005

-Q2

2005

-Q3

2005

-Q4

Employed persons Unemployed persons Pensioners

Source: Monstat, Employment Office of Montenegro and ISSP Note: data are quarterly averages The average number of pensioners in 2005 was 0.32% higher than compared to the previous year, while the number of employed persons increased by 0.6%. The number of registered employees is increasing by a rate that is somewhat higher than the rate of increase in the number of pensioners, but as yet, not sufficiently so. 2.2. LABOR PRODUCTIVITY IN INDUSTRY Labor productivity within industry is calculated based on official data from 2005 on the number of employed persons in industry and on the industrial production index. The data indicates that productivity fluctuated on a monthly level and that this was caused by variations specifically related to the production process and not to labor, since there are no significant changes recorded in the number of employees. According to available data, labor productivity in industry in 2005 was higher by 0.4% than compared to 2004. Keeping in mind that industrial production in 2005 was lower than in 2004 by approximately 2%, this annual increase in the level of productivity was probably due to a reduction in the number of employees. However, the reliability of the productivity assessment depends fully upon the reliability of the data supplied.


18


Graph 2.4:Industrial production and employment indices(2004=100)

40

60

80

100

120

140

J-04

F-04

M-0

4

A-04

M-0

4

J-04

J-04

A-04

S-04

O-0

4

N-0

4

D-0

4

J-05

F-05

M-0

5

A-05

M-0

5

J-05

J-05

A-05

S-05

O-0

5

N-0

5

D-0

5

Index of production Index of employment

In the first half of 2005, labor productivity within industry was 2.7% higher than compared to the same period of the previous year, while in the second half of 2005, it was lower by 1.1% as compared to the corresponding period of 2004. However, labor productivity in the second half of 2005 was higher by 3.8% as compared to the first half.

Observed by components of industrial production in 2005, labor productivity in manufacturing increased by 3.4% and in mining by 7.2, while in the utilities sector it decreased by 12.6% as compared to the previous year.

Monet March 2006


CHAPTER 3. WAGES 3.1. WAGES AND SALARIES Average wages in Montenegro in 2005 recorded a 10.3% annual increase Wages in Montenegro continued to increase despite the constant minimum wage level, following trends from previous years. In 2005, average wages increased 10.3% compared to 2004. In January 2006, average wages dropped 17.3% compared to the preceding month. The average wage in 2005 amounted to €326.5 while the average wage after taxes and contributions amounted to €213.1. Average wages were higher than expected due to a sharp increase in the fourth quarter of 2005. Namely, in November 2005, the average wage was 12.2% higher than compared to November 2004. In December 2005, the average wage after taxes and contributions was 21.2% higher than in December 2004. In January 2006, while the average wage dropped 17.3% from the December 2005 figure, it was still 10.5% higher than the previous January. The monthly increase in December and decrease in January is a usual phenomenon mainly attributed to the methodology used in wage data collection. Namely, to calculate the average wage for each month, Monstat uses data on wages paid during that month. In December, however, wages are usually paid at the end of the month instead of at the beginning of the following month. This circumstance causes December wages to appear higher while January wages seem to decrease significantly. All months of 2005 experienced positive growth rates in average wages and wages after taxes and contributions compared to respective months in the previous year (1% to over 20%). Observing month-to-month changes, we find an average monthly increase in average wages after taxes and contributions of 1.9%, while average wages increased 1.6% on average. Negative growth rates were recorded in January, May and September. These negative growth rates, however, were offset by positive growth rates in other months. Observed by quarters, in the fourth quarter of 2005, the average wage after taxes and contributions was 13.9% higher than in the same quarter of 2004 and 6.4% higher than the previous quarter (Q3-2005). The average wage increased 5.9% on average in the second, third and fourth quarters, while in the first quarter it decreased by 5.3% relative to previous quarter.

Table 3.1: Average wages of employees

Min

imum

wag

e

Ave

rage

wag

es

of e

mpl

oyee

Ave

rage

wag

es

wit

hou

t ta

xes

and

con

trib

uti

ons

Ave

rage

pe

nsi

on (

paid

)

2003 50.0 271.2 174.0 113.0 2004 50.0 304.1 195.4 122.0 2005 50.0 326.5 213.1 128.2 Jan-05 50.0 283.4 185.1 124.6 Feb-05 50.0 299.2 196.4 124.6 Mar-05 50.0 309.4 203.0 128.7 Apr-05 50.0 325.6 212.2 128.6 May-05 50.0 297.8 191.6 128.7 Jun-05 50.0 329.6 214.7 128.7 Jul-05 50.0 329.8 215.8 128.7 Aug-05 50.0 338.8 220.5 128.7 Sep-05 50.0 336.5 219.4 129.1 Oct-05 50.0 336.9 219.6 129.1 Nov-05 50.0 343.3 223.6 129.1 Dec-05 50.0 378.8 253.7 129.1 Jan-06 50.0 313.2 205.2 136.8

Sources: Monstat, PIO Fund


20


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-0

3

Aug-

03

Sep-

03

Oct

-03

Nov

-03

Dec

-03

Jan-

04

Feb-

04

Mar

-04

Apr-

04

May

-04

Jun-

04

Jul-0

4

Aug-

04

Sep-

04

Oct

-04

Nov

-04

Dec

-04

Jan-

05

Feb-

05

Mar

-05

Apr-

05

May

-05

Jun-

05

Jul-0

5

Aug-

05

Sep-

05

Oct

-05

Nov

-05

Dec

-05

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

Sources: Monstat and ISSP calculations Due to low levels of inflation in 2005, the real annual growth rate of average wages was approximate to annual nominal growth. However, May was the exception, since the annual growth of wages was lower than the prices increase. 3.2. THE MINIMUM WAGE AND WAGE DYNAMICS IN MONTENEGRO Although deliberations on the minimum wage have started and officials have made several statements about increasing it, it remained the same during 2005. Nevertheless, keeping in mind wage dynamics over the last couple of years, it appears that there is no need to use the minimum wage as a social tool. Namely, in the period from 2002 up to 2005, average wages in the republic have increased by a rate which is close to 10% in nominal terms, while real growth, especially in 2004 and 2005, was approximate to nominal growth, due to low inflation. The impact of a minimum wage increase would be highest in the public services sector (administration, police, education and health), keeping in mind that the wages of public servants are directly dependent on its level. As far as other sectors are concerned, an increase would not benefit workers' standards since, for example, in the private sector, employees usually receive higher salaries than registered, so a minimum wage increase would not make any difference to them. The Ministry of Finance has proposed changing the General Collective Agreement to include a lowest gross wage, i.e. minimum base for calculation and payment of social security contributions. According to the Ministry’s proposal, the lowest gross wage would be set at €132 per month7, while the corresponding wage after taxes and contributions would be €95.55. The lowest gross wage, if accepted, would make more of an impact on the lowest paid workers (e.g. unqualified workers earning minimum wage) by improving the standard now and in the long run as well, through pensions and contributions. In addition, the Ministry has proposed to set minimum wage at €52 per month for the period up to August 2006 and thereafter to increase it by one euro, i.e. to €53 per month.

7 For details see http://www.vlada.cg.yu/minfin/index.php?akcija=vijesti&id=9736

Monet March 2006


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

0.0

50.0

100.0

150.0

200.0

250.0

300.0

350.0

400.0

J-02

A-02

S-02

O-0

2N

-02

D-0

2J-

03F-

03M

-03

A-03

M-0

3J-

03J-

03A-

03S-

03O

-03

N-0

3D

-03

J-04

F-04

M-0

4A-

04M

-04

J-04

J-04

A-04

S-04

O-0

4N

-04

D-0

4J-

05F-

05M

-05

A-05

M-0

5J-

05J-

05A-

05S-

05O

-05

N-0

5D

-05

J-06

Euro

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

Source: Monstat and ISSP calculations This proposal, according to the statements from the Workers Union, has been recently adopted by the Union but it still has to be accepted by employers and the Government.

The lowest gross wage is definitely a better mechanism to protect the most vulnerable members of the working population than the minimum wage and hopefully, its adoption will lead to the abolition of minimum wage and wage coefficients, as currently set in the collective agreement. The abolition of the minimum wage concept and the removal of wage coefficients would not worsen the position of workers because people are not likely to accept large decreases in their wages, which is often one of the key contra arguments. This is evidenced by the absence of the domestic labor force (despite high unemployment) in the tourism market during the summer season. It seems that Montenegrins are not attracted by the employment conditions in this area, low wages taking first place, so they do not apply for such jobs.

Box 1. New Methodology for Minimum Wage Setting

Social partners The Ministry of Finance, the Union of Employers and the Independent Alliance of Trade Unions have agreed on a new methodology for increasing the minimum wage which will serve as a mechanism for minimum wage adjustment in the future.

The main aim of minimum wage, as stated in the Methodology, is to protect the living standard and the purchasing power of employees. Factors to be considered in setting minimum wage are: o Needs of employees and their families o Average earnings of the four-member family o Level of labor productivity o Level of Gross Domestic Product o Basic economic indicators o Decrease in the percentage share of the wages expense for the public sector in the GDP

The economic needs of employees and their families are assessed based on Consumer market basket data published by Monstat. The average earnings of a four-member family are determined based on average wage data published by Monstat which is adjusted by the coefficient of average employment in a family of four. Labor productivity is obtained as the ratio of the industrial production index and the industry employment index.

Basic economic indicators are determined based on dynamics in the production and services sectors and assessments of employers on their ability to increase wages. Dynamics in the production and services sectors are determined by comparing results from the last six-month period to those from the preceding one. The ability of an employer to increase wages is determined based on changes in the number of employees that have received wages in the last six months, changes in the average wage/minimum wage ratio and the share of the wages expense in the economy in the GDP and assessment of its level.

A decrease in the wages expense for the public sector, as a percentage of GDP, is planned, based on the previous year's share, as declared by the Ministry of Finance.

For the negotiating process to start, there are several conditions that must be fulfilled:


22


o Value of employees’ and their families' needs in the current period as compared to the same period last year, must be changed by +/- 3.5%.

o Changes in dynamics in production and services o Labor productivity and economic indicators have positive dynamics

The minimum wage cannot be increased based on one criterion from the methodology. The minimum wage increase is negotiated between representatives of signatory institutions.

The partners in collective bargaining have done an impressive job. Any future minimum wage increase will be very difficult to negotiate. Methodology is very confusing and vague -- it gives a lot of space to the government to maneuver and to avoid future increases in minimum wage, while the union will have a difficult job in lobbying for minimum wage increases.

3.3. AVERAGE TAX WEDGE ON THE LABOR COST

Since the fiscal burden of wages is often mentioned as one of the most important concerns of employers, the ISSP has calculated the effective burden of taxes and contributions on labor costs, using official wage data.

An indicator called a tax wedge measures the fiscal burden imposed on labor costs. The tax wedge represents the percentage share of paid contributions and taxes in the total labor cost. The lower the tax wedge is, the lower the fiscal burden on labor costs.

The tax wedge is calculated as a ratio between total labor costs reduced by disposable income of employees and total labor costs. Disposable income of employees includes net wage plus all other monetary benefits that employers provide, such us meal allowances, holiday allowances, etc.

In Montenegro, the average tax wedge on labor, calculated based on average wage in Montenegro as published by Monstat, is constantly declining. A huge decrease in the tax wedge in Montenegro occurred in 1999 of roughly 10 percentage points, or from 53.3% to 44.3%. Namely, in 1999, the proportional taxation of income, by the rate of 19%, was introduced and this replaced progressive taxation, where the average effective tax rates amounted to around 30%.

Graph 3.3: Tax wedge on labor in Montenegro (2001-2005)

35%

37%

39%

41%

43%

45%

47%

49%

51%

53%

55%

1998 1999 2000 2001 2002 2003 2004 2005

Source: Monstat, ISSP calculations

Table 3.3. Effective PIT rate and the tax wedge

Average effective tax rate (%wages

and salaries)

Tax wedge on labor

2003 14.1 42.7 2004 14.0 42.1 2005 13.5 40.4 Jan-05 12.5 39.5 Feb-05 13.5 39.8 Mar-05 13.5 40.0 Apr-05 13.5 40.5 May-05 13.5 40.1 Jun-05 13.5 40.6 Jul-05 13.4 40.6 Aug-05 13.4 40.8 Sep-05 13.5 40.7 Oct-05 13.5 40.7 Nov-05 13.6 40.8 Dec-05 14.0 40.8

Source:ISSP calculations

Monet March 2006


A shift from proportional to progressive taxation in 2002 did not increase the tax wedge because the effective rates of taxation by the new system were lower than the 19% flat rate of the previous system. The tax wedge in 2005 was 40.4%, meaning that from every euro an employer spent on an employee, €0.404 was allocated to taxes and contributions while the employee received €0.596. 3.3. AVERAGE WAGE DYNAMICS BY ACTIVITY In 2005, the highest average wages after taxes and contributions were recorded in the industry sector, amounting to €234.03. Average wages after taxes and contributions in the services sector amounted to €230.82, while the lowest wages were recorded in the agriculture sector, amounting to €130.18. Relative to the previous year, average wages increased in all three sectors. As expected, banking and finance recorded highest average wages after taxes and contributions in 2005, amounting to €467.15, while the lowest average wages were recorded in the fisheries. With the exception of the last activity, "Other communal, social and service activities", average wages in all sectors recorded positive growth rates on an annual level. The highest growth rates of wages were achieved in the Fisheries sector (72.3%), in Construction (34.3%) and in Mining (32%). In the public services sector, despite the constant minimum wage, average wages increased by 5%, 2.8% and 4.6% in administration, education and health, respectively. As mentioned in the previous text, the minimum wage generally has a strong impact on wages in this sector. In this case, however, although it did not increase, average wages did. This can be explained in part by the factor of accumulated working experience since for every year of working experience, wage coefficients for an employee increase8. Also, as far as administration is concerned, a law on wages of public servants and clerks has increased their wages, on average.

8 For employees with up to 10 years of working experience, wage coefficients are increased by 0.5%, for employees with 10 to 20 years of experience, by 0.75% and for those with over 20 years of experience, by 1%. This means that employees that started to work on January 1, 2004 with a wage coefficient of 3.3, would have a wage coefficient as of January 2006, of 3.3165.

Table 3.3. Average wages after taxes and contributions by activity

Average 2004 (in €

monthly)

Average 2005 (in €

monthly)

Average change(in %)

Agriculture, forestry and water 155.14 171.57 10.6

Fisheries 51.54 88.78 72.3 Mining 224.14 295.92 32.0 Manufacturing 169.74 194.56 14.6 Utilities 269.87 315.43 16.9 Construction 96.98 130.21 34.3 Wholesale and retail 133.97 140.43 4.8 Hotels and restaurants 119.19 139.55 17.1 Transport, traffic and communications 262.85 263.21 0.1

Banking and finace 384.88 467.15 21.4 Mortgages, renting and business act. 194.08 210.79 8.6

Public administration and social insurance 232.39 243.9 5.0

Education 228.32 234.75 2.8 Health and social work 209.03 218.62 4.6 Other communal, social and service activities

162.49 159.06 -2.1

Sources: Monstat and ISSP calculations


24


3.4. AVERAGE WAGES BY MUNICIPALITY

In the year 2005, the average wages without taxes and contributions increased in all regions (by 11.6%, 12.1% and 1.5% in the central, northern and the southern regions, respectively). The highest average wages after taxes and contributions were achieved in the central region, amounting to €238.6, while wages in the southern and northern regions amounted to €193.2 and €158.6, respectively.

Observed by municipalities, the highest average wages without taxes and contributions in 2005, amounting to €257.06, were achieved in Podgorica, while the lowest wage was recorded in Rozaje (€114.05).

Table 3.5: Average wages after taxes and contributions by municipality (2004-2005)

2004 in € monthly 2005 in € monthly Change in % (2005/2004)

S Andrijevica 154.56 185.07 19.7% J Bar 194.12 164.40 -15.3% S Berane 150.61 164.75 9.4% S Bijelo Polje 111.49 136.61 22.5% J Budva 185.56 227.29 22.5% C Danilovgrad 181.61 187.05 3.0% S Žabljak 143.91 130.22 -9.5% S Kolasin 164.31 163.24 -0.7% J Kotor 225.12 227.53 1.1% S Mojkovac 125.72 154.80 23.1% C Niksic 193.89 235.31 21.4% S Plav 115.09 133.89 16.3% S Pluzine 165.65 189.98 14.7% S Pljevlja 199.34 213.24 7.0% C Podgorica 240.56 257.06 6.9% S Rozaje 106.25 114.05 7.3% J Tivat 194.33 211.83 9.0% J Ulcinj 122.43 140.01 14.4% J Herceg Novi 191.64 203.93 6.4% C Cetinje 119.16 144.70 21.4% S Šavnik 173.41 188.65 8.8%

Sources: Monstat and ISSP calculations Note: S-northern region, J-southern region, C-central region On an annual level, average wages increased in eighteen municipalities, while in three of them they decreased. Negative annual growth rates of average wages were achieved in Bar (-15.3%), Zabljak (-9.5%) and Kolasin (-0.7%). The highest positive growth rates of over 20% were recorded in the northern region in Bijelo Polje and Mojkovac, in the southern region in Budva and in the central region in Niksic and Cetinje.

Table 3.4: Average wages without taxes and contributions and effective PIT rates by region in the year 2005

Weighted average wages after taxes and contributions (in € monthly)

Weighted average tax rate

(% monthly)

South 193.2 12.7

Center 238.6 14.0

North 158.6 11.3

Sources: Monstat and ISSP calculations Note: Both average wages after taxes and contributions and the tax rate are weighted by the number of employees by municipality.

Monet March 2006


CHAPTER 4. PRICES

Table 4.1. Prices

CPI RPI PPI

2000= 100

Monthly change in

%

Annual change in

%

2000= 100

monthly change in

%

annual change in %

2000= 100

annual change in

%

2000 100.0 3.4 36.1 100.0 25.0 100.0 16.5 2001 120.2 1.8 21.8 123.0 8.6 23.1 114.4 14.5 2002 142.0 0.7 16.8 147.6 3.1 17.4 121.6 4.6 2003 151.6 0.50 6.8 159.4 0.5 7.7 127.8 2.9 2004 155.2 0.26 2.4 164.4 0.3 3.3 138.0 5.8 2005 161.6 0.20 104.1 173.8 0.2 5.5 140.8 2.1 2004-Q1 155.0 0.1 5.5 161.9 0.1 7.1 130.9 7.6 2004-Q2 154 0.2 6.3 161.7 0.2 7.5 129.9 7.2 2004-Q3 155 0.1 5.5 161.9 0.1 7.1 130.9 7.6 2004-Q4 156.1 1.2 1.3 166.7 0.8 3.1 138.5 4.3 2005-Q1 160.0 0.1 3.2 172.40 0.1 5.9 139.47 3.1 2005-Q2 161.9 0.5 4.1 173.77 0.28 5.2 140.34 0.9 2005-Q3 161.3 -0.1 4.8 174.04 0.05 3.6 141.45 1.6 2005-Q4 163.0 0.4 4.4 174.9 0.1 4.3 142.1 2.6 Jan-05 159.8 0.1 3.2 172.1 0.1 6.2 130.7 3.6 Feb-05 160.0 0.1 3.1 172.4 1.1 5.8 131.0 3.3 Mar-05 160.3 0.2 3.2 172.7 2.1 5.9 133.8 2.5 Apr-05 161.1 0.5 3.7 173.4 3.1 6.2 131.9 0.4 May-05 162.0 0.6 3.8 173.8 4.1 5.8 140.2 0.5 Jun-05 162.5 0.3 4.8 174.2 5.1 3.8 141.3 1.7 Jul-05 160.9 -1.0 4.6 173.8 6.1 3.5 141.3 1.5 Aug-05 161.2 0.2 4.7 173.9 7.1 3.5 141.4 1.3 Sep-05 161.8 0.4 5.2 174.4 8.1 3.7 141.6 2.1 Oct-05 162.3 0.3 5.2 174.8 0.2 3.3 141.6 2.1 Nov-05 163.3 0.6 5.7 174.9 0.1 3.4 141.7 2.2 Dec-05 163.5 0.2 2.5 175.1 0.1 1.8 143.0 3.5

Sources: Price indices published by Statistical Office of Montenegro (December 2004 calculation, for the 2004-Q4 monthly rates of change figure, was made by ISSP). o Table presents end-of-period values for monthly data and average period values for quarterly and annual data. o One-base index is calculated as chain index according to Monstat indices based on respective previous

years o Monthly and annual changes are based on data taken from Monstat publications (except for December

2004 monthly rates of change which was calculated by ISSP). PRICES Inflation in Montenegro was 2.5% in 2005, nearing the euro-zone level. The main source of inflation in 2005 came from an increase in the price of oil products, while food prices in December also pushed total inflation up. Inflation forecasts for 2006 are in the range of 2.4% - 4.2%.

4.1. CONSUMER and RETAIL PRICE INDEX (CPI and RPI) CPI annual inflation was 2.5% in 2005. This is lower than the 3.2% rate of 2004. The main factors boosting inflation in 2005 were increases in the prices of oil (during most of the year) and food products (in December). On the other hand, a high level of annual inflation occurred in the period December 2004 – November 2005 (average 4.2%) and originated from a “local-call charges” increase in December 2004. This period was characterized by increasing inflation, from 3.2% in January 2005 to 5.7% in November 2005.

BOX 1 Food still takes up 60% of the total consumer basket in Montenegro, which makes CPI very sensitive to food price changes. The weight of food in developed countries is from 10% to 18%, while in our country almost two-thirds of consumption is spent for food and beverages. Thus, two questions arise: Do Montenegrin families really spend so much for existential products? and Could significant food weight in CPI create the situation where food prices make total inflation artificially higher and thus, real wages lower? The answer could be a revision of the weight system for the CPI basket.


26


BOX 2 Annual inflation in the euro zone was 2.2% in 2005, which is 0.2 percentage points lower than compared to 2004. Austria had the lowest annual inflation (1.6%) while Spain experienced the highest (3.7%). EU25 annual inflation was 2.1% in 20059. Thus, Montenegro's rate is getting closer to euro-zone inflation, which was one of main aims of euro introduction. The annual CPI in the USA was 3.4% in 200510.

Average inflation and average annual inflation were 4.1% in 2005, while average monthly inflation amounted to 0.2%. End-period inflation in the fourth quarter was 2.4%.

CPI Inflation in 2005

Annual change11 “Average change”12 Average annual change13 Average monthly

change 14

Q1 3.2 3.2 3.2 0.1 Q2 4.8 4.1 4.1 0.5 Q3 5.2 4.8 4.8 -0.5 Q4 2.4 4.4 4.4 0.4

2005 2.5 4.1 4.1 0.2

Source: Monstat Calculations: ISSP Annual inflation rates for October and November 2005 were 5.2% and 5.7% respectively. Monthly CPI changes in the Q4 2005 were: 0.2% in October, 0.1% in November and December.

Graph 4.1. CPI inflation

-1

0

1

2

3

4

5

6

7

8

9

Jan-

03

Mar

-03

May

-03

Jul-0

3

Sep-

03

Nov

-03

Jan-

04

Mar

-04

May

-04

Jul-0

4

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04

Nov

-04

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05

Mar

-05

May

-05

Jul-0

5

Sep-

05

Nov

-05

%

Monthly Annual

Source: Monstat Calculations: ISSP

9 www.eurostat.org 10 www.eurostat.org (CPIs are not strictly comparable) 11 “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. 12 “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. 13 “Average annual inflation” represents arithmetic average of indices of annual change in an observed period. 14 “Average monthly inflation” is calculated by applying geometric averages for monthly inflation in observed period (3 months in quarter or 12 months in year).

Monet March 2006


Retail prices experienced an annual inflation rate of 1.8% in 2005. This is significantly lower than the 6.2% rate of 2004. October and November 2005 registered 5.5% annual inflation in both months. Average inflation and average annual inflation were both 5.5% in 2005, while average monthly inflation was 0.2%. By analyzing main inflation indicators in the Q4, we arrived at the following results:

RPI in 2005

Annual change “Average change” Average annual change Average monthly

change

Q1 3.5 5.9 5.9 0.1 Q2 3.5 6.0 6.0 0.3 Q3 3.7 5.8 5.8 0.1 Q4 1.8 4.3 4.3 0.1

2004 1.8 5.5 5.5 0.2


Graph 4.2. RPI Inflation

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Source: Monstat Calculations: ISSP Monthly changes of retail prices in the Q4 2005 were: 0.2% in October and 0.1% in both November and December. 4.1.2. Disaggregated price changes Considering the average annual rate of Total Index for 2005 (4.1%), the main components with the highest average annual rates were traffic vehicles, transport and telecom services (63.0%) and tobacco and drinks (4.3%); while the lowest rates were observed for food (-0.1%), education and culture (0.6%), accommodation (0.6%), hygiene and personal care (0.8%) and clothes and footwear (2.1%)..


28


Analyzing annual rates for December 200515, we came to the conclusion that the deflationary effect originates from hygiene and personal care (0.4%), accommodation (0.5%), education and culture (0.8%) and clothes and footwear (1.0%). Food (2.54%), tobacco and drinks (3.0%) and traffic vehicles, transport and telecom services (6.6%) pushed Total Index up. The main component with the highest monthly rate in December 2005 was food (0.3%). Education and culture, accommodation, hygiene and personal care and transport and telecom services were unchanged in December, compared to November 2005, while clothes and footwear and tobacco and drinks registered monthly changes of 0.1% and 0.2% respectively. Concerning detailed sub-indices in December 2005, these are the most significant price changes: Food product prices (57.6%16) registered the highest annual inflation for fresh vegetables (13.8%) and eggs (5.1%), while deflation came from a decrease in fish prices (-4%). High inflation of food products in December was the result of an increase in demand, due to the holiday season, as well as increases in seasonal prices of some fresh food products, on the one hand, and an increase in food production costs, on the other hand. Tobacco and beverages (7.3%) prices registered a high annual inflation rate for alcoholic drinks of 20.4%, while the rate for tobacco remained unchanged. Clothing and footwear prices (8.2%) began their deflationary impact on total inflation. This is especially characteristic for footwear prices, which registered annual inflation of 0.5%, considering the fact that this group maintained a high annual rate during the past period, pushing Total Index up. Clothing reached 1.4% of annual change. None of the sub-groups of Accommodation prices (11.2%) exceeded 0.9% of annual inflation. None of the sub-groups of Hygiene and personal care (5.3%) exceeded 0.7% of annual inflation. In Education and culture (4.8%), the most significant annual change of 2.2% came from services for education. Traffic vehicles and transport and communication services (5.7%) dropped from the November 64% annual rate to 3%. Persistent high annual inflation came from sub indices fuel and lubricants (15.8%) and outlay for car maintenance (15.0%). Traffic and PTT services, after a high annual level influenced by a local-call-charge increase, maintained the same rate compared to December of the previous year.

BOX 3 Although increases in prices of oil products (fuel and lubricants) were the main reason for inflation growth in 2005 (See Graph 4.1.1), the fourth quarter of 2005 was, in fact, characterized by monthly decreases in oil products prices. Thus, the question arises: Will producers and retailers calculate this decrease in their costs?

15 Which are also end-period inflation rates for 2005 16 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.

Monet March 2006


4.3. Oil product (fuel and lubricants) indices in CPI basket in 2005

-8

-6

-4

-2

0

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14

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20

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%

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Source: Monstat Comparing our figures to Eurostat annual inflation rates of components of the consumer basket, we notice similar trends in price changes for December 2005. Namely, components suffering the highest annual inflation for euro-zone total CPI were the following: housing (5.1%), transport (4.5%) and alcohol and tobacco (2.7%); while lowest annual rates were experienced by communication (-2.8%), recreation and culture (0.1%) and clothing (0.3%)17. With regards to the three analyzed indices in December 2005, the highest annual inflation came from food, tobacco and beverages with 2.9%. Goods less tobacco and beverages registered 1.7%, while services reached 1.5%. 4.1.3. COST OF THE FOOD CONSUMER BASKET (FCB)18 Table 4.2 Cost of the food basket in Montenegro (in €)

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec 2004 257.73 257.08 257.11 255.51 260.36 264.52 253.43 255.45 253.82 254.85 245.61 244.07

2005 240.22 241.54 241.09 241.99 246.21 267.34 259.32 259.96 261.10 262.37 263.06 263.13

Source: Monstat The cost of the food consumer basket registered annual inflation of 7.8% in 2005. This is 13.5 percentage points more than in 2004. As in previous months, the trend of the FCB cost followed the trend of the food index for the total consumer basket. Annual changes in October and November were 3.0% and 7.1%, respectively. The most significant upward impact came from fresh vegetable and fruit products, the result of a seasonal effect, explained above.

17 www.eurostat.org . Harmonized Indices of Consumer Prices (HICPs) are harmonized inflation figures required under Article 121 of the Treaty of Amsterdam (109j of the Treaty on European Union). They are designed for international comparison of consumer price inflation. The focus is on quality and comparability among the indices of different countries as well as on their relative movements.

Price changes as measured by the HICPs, the Monetary Union Index of Consumer Prices (MUICP), the European Index of Consumer Prices (EICP3) and the European Economic Area Index of Consumer Prices (EEAICP) are used as measures of inflation in the Member States, in the euro-zone, in the European Union, and in the European Economic Area.

18 The food consumer basket consists of a group of basic food products in 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.


30


Graph 4.4. Food consumer basket (annual change)

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Source: Monstat

Monthly changes of FCB cost were: 0.5% in October, 0.3% in November and 0% in December.

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

230

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euro

Source: Monstat 4.2. PRODUCER PRICE 4.2.1. PPI Inflation

Producer and Wholesale annual inflation was 3.5% in 2005. Compared to the previous year (3.6%), it has not changed significantly. In April 2005, it reached a low of 0.4%, rising constantly in the next months mainly due to increases in oil and oil product prices. Oil represents a significant input for production and wholesale. Thus PPI is very sensitive to oil price changes. On the other hand, since oil and oil product prices in Montenegro depend upon prices on the world oil market, the Government of Montenegro can not implement economic policy that could notably impact oil prices in the country. Average change and average annual change of PPI were 2.1% in 2005, while average monthly change was 0.3%.

Monet March 2006


PPI annual change was 2.1% in October and 2.2% in November 2005. Monthly inflation in the Q4 2005 was: -0.1% in October, 0.1% in November and 0.8% in December.

Graph 4.6. PPI inflation

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Source: Monstat 4.2.2 PPI disaggregated changes

The deflationary effect of PPI in 2005 came from production costs of electricity and construction materials, while the inflationary impact originated from the mining and stone extraction and processing industries.

Mining and stone extraction registered a high 5.6% average annual inflation in Q4, mostly due to high annual inflation of the price of oil and oil products -- one of the main expenses in this kind of production industry.

Processing industry prices experienced an increase in annual rate in December to 4%. Although the processing industry pushed total PPI up, an analysis of observed sub-indices showed a general deflationary effect on total PPI: o Food, tobacco and beverage production showed an increasing trend in Q4 2005, but the

annual rate (2.1%) was still lower than total PPI. o Chemical products production prices, after having unchanged annual inflation from Q1 to

Q3 (-2.7%), dropped significantly to -16.8% in Q4 2005, pushing Total Index down. o Textile production remained unchanged, at 0% annual inflation, from May 2004 to

December 2005.

The high annual rate for the processing industries was due to annual inflation of metal (10%) and furniture production (34%)

Construction materials annual inflation decreased, beginning in August, to 2.6%, keeping almost this same level up to December 2005 (2.5%).

Electricity, gas and water prices did not change on an annual basis after April 2004. 4.3 INFLATION MEASURED BY DIFFERENT INDICATORS: PPI, RPI AND CPI Graph 4.10 shows annual rates of change of consumer, retail and producer price indices. From June to November 2005, the composition of these three indices was theoretically ideal.


32


Beginning in May, the annual rate of PPI mostly increased, more than the RPI and CPI rates. This was the result of two impacts: o Several oil price increases during 2004 and 2005 had an impact on PPI. Since most

producers keep oil reserves bought at old (lower) oil prices, their calculated total expense is lower than what it would be using actual oil prices. Therefore, the effect of new (higher) oil prices on production and wholesale costs was delayed. Due to this, a shorter, but also delayed effect on retail prices could appear in the next months.

o After 12 months under the impact of high annual inflation of services, CPI and RPI annual inflation dropped, reaching a lower rate than compared to PPI.

Inflation rates for food, tobacco and beverages products in the retail sector followed the same increasing trend as production costs for these categories. This was mostly due to an increase in the price of alcoholic beverages. On the other hand, the textile and leather production annual rate was almost unchanged, which had an impact on retail prices of clothing and footwear. Corresponding with negative rates for chemical production, retail prices of hygiene and personal care products experienced a decreasing trend. Electricity prices remained unchanged in both the production and retail sector. Production prices of textiles continue to remain the same at monthly and annual levels. Annual change of retail prices of textiles and leather experienced a significant drop to 1.6% in September, which could have come from 0% inflation of the same category in PPI.

Graph 4.7. PPI, RPI and CPI - annual changes

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PPI RPI CPI

Source: Monstat 4.4. FORECASTS

ISSP projected inflation up to 2% in 2005. The actual rate was 2.5%. In December 2005, there was an unexpected sharp rise in annual inflation of oil products prices and an increase in food production costs, resulting in higher food retail prices as well. Since food takes up a great part of the consumer basket, Total Index is very sensitive to food price changes.

For the next twelve months we forecasted an increase in oil product prices, an actual increase of the tax rate for basic products and an energy price increase. As we wrote in the previous issue, oil and energy prices have a direct impact on cost of household consumption, through household consumption and an indirect impact through production and service costs of producers and distributors. The instability of the world oil market will have an impact on the Montenegrin market, while energy prices in Montenegro are still awaiting gradual liberalization.

Monet March 2006


The optimistic scenario for inflation developments in the next 12 months (January – December 2006) assumes:

Continuation of CPI dynamics in the next as in the previous twelve months

Projected monthly increase of fuel prices of 0.15%, and a corresponding increase of outlay for car maintenance of 0.04%.

Monthly increase of basic products (grain products, lard, sugar, oil, education capital, etc) in

the range of 3% to 7% in January 2006

Slower-paced increase in prices of alcoholic drinks The pessimistic scenario for inflation developments in the next 12 months (January – December 2006) assumes:

Consumer prices increase a bit faster than compared to the optimistic forecast

Increase in the price of electricity of 15% in March 2006.

Projected monthly increase in the price of fuel of 0.20% The resulting projected inflation in 2006 (the next 12 months) ranges from 2.4% to 4.2%, as shown in Graph 4.11. A sharp decrease in December 2005 resulted from a CPI increase for the same month of the previous year. According to the optimistic scenario, the inflation rate for the four quarters of 2006 is projected to be: 2.8% in Q1, 2.6% in Q2, 2.3% in Q3 and 2.4% in Q4. According to the pessimistic scenario, the inflation rate is projected to be: 4.1% in Q1, 4.0% in Q2, 3.9% in Q3 and 4.2% in Q4.

Graph 4.8. Twelve months inflation forecast

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forecast

Source: ISSP


34


CHAPTER 5. BUDGET

In 2005, Montenegro significantly improved its fiscal stance, mainly through reforms in taxes undertaken by the Government over the last couple of years, on the one hand, and by following a more prudent spending policy in order to better manage expenditures. Fiscal tightening improved budgetary policy, as evidenced by the fact that both the overall deficit as well as public spending are decreasing in absolute terms and as a percentage of GDP. Bearing in mind future budget liabilities regarding public debt repayment, as well as privatization of the pension system, these achievements are very important and are creating a sustainable course of action for the coming years.

5.1 CONSOLIDATED PUBLIC SPENDING IN THE YEAR 2005 According to statements by the Ministry of Finance in Bulletin No. II, consolidated public spending for 2005 amounted to €761.94 million, which was financed by taxes (€430.68 million), duties (€14.02 million), contributions (€205.38 million), capital revenues (€4.97 million) and deposits (€59.30 million). The consolidated deficit of public spending amounted to €47.58 million (with project loans) and is comprised of the deficit generated within the republic budget (€51.91 million, including project loans), the Pension Fund (€2.45 million) and the Employment Fund (€2.99 million). Funds aimed for deficit financing amounted to €91.64 million. Due to the fact that financing items were significantly higher than the actual fiscal deficit, general state deposits increased by 44.06 million. Financing items were high as a result of high privatization receipts (€169.36 million), offsetting, therefore, negative domestic and foreign financing, which all together amounted to €101.94 million. Instruments of financing policy also included donations and project loans, in the amounts of €2.72 and €21.50 million, respectively. 5.2 CENTRAL BUDGET FOR 2005

5.2.1 Budget balance and financing At the end of 2005, the overall balance of the budget (excluding grants and project loans19) amounted to €30.41 million, 11.5% lower than . This amount represents a 1.8% share of GDP, which means that 2005 experienced fiscal consolidation of 0.7 percentage points in comparison with the actual deficit of the previous year.

Graph 5.1. Actual central budget deficit for the period 2001-2005 as % of GDP

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0

2001 2002 2003 2004 2005

Source: Ministry of Finance, ISSP calculations 19 In 2005, project loans amounted to €21.50 million.

Monet March 2006


In the year 2005, the total amount of accumulated funds aimed for deficit financing amounted to €67.70 million. Due to the fact that financing items were significantly higher than the actual fiscal deficit, republic budget deposits increased by 37.29 million. Financing items were high as a result of high privatization receipts (€136.31 million, mainly from the privatization of Telekom which occurred in the first quarter of 2005), offsetting, therefore, negative domestic and foreign financing, which all together amounted to €71.11 million. Grants, also used for deficit financing, amounted to €2.50 million. 5.2.2 Total revenues and grants At the end of 2005, total revenues (including grants) of the central budget amounted to €431.79 million, which is 1.7% lower than the planed amount.

Graph 5.2. Actual budget revenues in the period 2001-2005 (mil €)

0.000

50.000

100.000

150.000

200.000

250.000

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350.000

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450.000

500.000

2001 2002 2003 2004 2005

Source: Ministry of Finance, ISSP calculations 5.2.2.1 Tax revenues Total tax revenues accounted for 91.4% of total revenues and grants, exceeding the 2004 figure by 17%. This is an indicator of the improved liquidity position of the Montenegrin budget. A review of tax revenues for the period 2001-2005, as presented in Table 1, uncovers a continuous shift of tax revenues from direct towards indirect taxes. Table 1. Tax structure (€ mil)

2001 2002 2003 2004 2005

Indirect taxes 121.426 133.690 232.263 257.921 292.880 Value added tax (VAT) 58.488 56.528 137.222 158.096 188.894 Excises 35.664 50.786 58.197 61.527 61.257 Customs 13.894 12.605 35.078 33.893 37.542 Transit 13.380 13.771 1.766 2.850 1.447 Other taxes 0 0 0 1.556 3.74Direct taxes 66.574 75.231 80.655 82.408 89.445 Personal income tax (PIT) 56.654 57.889 63.961 63.961 65.585 Corporate income tax (CIT) 5.974 12.516 13.394 16.526 21.29 Estate tax 3.946 4.826 3.3 1.921 2.57

Source: Ministry of Finance, ISSP calculations


36


INDIRECT TAXES

Value added tax is the most important tax revenue for the Montenegrin budget. At the

end of 2005, it amounted to €193.38 million and represented 44.8% of overall budget revenues. This is 2.4% higher than planned. This tax category is characterized by a strong seasonal character and every year substantially increases (as shown in the following graph) its share in budget revenues.

Graph 5.3. VAT revenues in the period 2003-2006 (€ mil)

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2003 2004 2005 2006

Source: Final budget accounts, Budget Laws

From its introduction, VAT has been the most important mechanism for preserving budgetary liquidity and stability and at the same time an instrument for reducing the level of the gray economy in the country.

Box 1. VAT Law changes In December 2005, the Montenegrin parliament adopted the Changes on the VAT Law amendment, which was put into force as of January 1, 2006. These changes are comprised of the introduction of the following two reduced rates: 7% for 12 products that were earlier freed from taxation (bread, oil, sugar, lard, etc.) and 12% for tourism services. It is not expected that the introduction of the 7% rate will cause wholesalers and retailers to increase prices of taxed products, which, by the previous legislation, were not eligible for reimbursement of entry VAT (being only an expense calculated in the price of the product and paid by the customer). As of now, it is permissible to charge exit VAT and thus, have a right to entry VAT reimbursement. With respect to the 12% tax rate for tourism services, it is expected that it will provide a strong incentive for the development of this sector in Montenegro.

Excises revenues amounted to €65.60 million and were higher than both the forecasted

amount as well as the 2004 actual figure, by about 7%. Thus, excises turned out to be the tax category that exceeded the 2005 forecast by the widest margin.

Taxes on international trade and transactions (customs duties and transit) amounted to

€41.09 million and were 5.4% higher than the forecast and 12.1% higher than the 2004 balance.

Other taxes20 amounted to €3.74 million and were 20.5% higher than planned.

20 Tax on motor vehicles and insurance services.

Monet March 2006


DIRECT TAXES

Personal income tax is the second biggest tax revenues category, representing 17% and 15.5% of taxes and overall revenues, respectively. This year, execution exceeded projections by 2.3%.

Corporate income tax is the only tax category whose execution was lower than forecasted for 2005, by 15%. This is due mainly to an excessively high projection for this category. Namely, in accordance with the Rebalanced Budget, corporate income tax was forecasted to be €25.07 million for 2005, which is almost 52% higher than the 2004 execution. The 2005 CIT execution, however, was actually 29% higher than the 2004 figure. This year, CIT was calculated in accordance with the old rates, while a reduced flat rate is effective as of January 1, 2006.

Estate tax amounted to €2.57 million and was 40.4% higher than the forecast and almost

39% higher than the previous year's execution. 5.2.2.2 Other revenues Non tax revenues accounted for 6.8% of overall revenues, out of which €22.73 million relates to deposits (use of public national resources, resources from budget units and other) and the remaining €6.83 million to fees (administrative, court, residence, registration and other). Capital revenues (dividends) amounted to €4.97 million and were 62% higher than planned and 61% higher than 2004 execution. Every year, the Republic budget is faced with a reduced amount of grants. At the end of the year 2005, these amounted to €2.50 million, which is 32.2% lower than the forecast and 64% lower than the 2004 amount. 5.2.3 Total expeditures and net lending

Total expenditures (including net lending) amounted to €459.71 million, which is lower than the forecast by 2.2%. Non-interest spending amounted to €379.00 million, a 3.6% lower from the forecast. This was mainly due to a decreased amount of social transfers to extra-budgetary funds.

Graph 5.4. Actual budgetary expenditures and net lending in the period 2001-2005 (€ mil)

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2001 2002 2003 2004 2005

Source: Ministry of Finance, ISSP calculations


38


Wages and salaries for public sector employees amounted to €155.93 million, which is

2.3% lower than planned. Other types of remunerations for public sector employees were also lower than planned (by 11.2%) and amounted to €11.26 million. The total share of wages and salaries and other types of remunerations for public sector employees in overall expenditures accounted for 34%.

Expenditures on goods and services accounted for 12.5% of total budgetary

expenditures and amounted to €57.39 million. This item was 6.8% lower than its projection.

Social benefits and social security transfers amounted to €117.22 million, 17.3%

lower than the forecast and almost 13% lower than the previous year's execution. Out of that amount, €63.41 million relates to social benefits (whole range of transfers to socially vulnerable citizens, transfers to non-profit and humanitarian organizations, NGOs, individuals, etc.). The remaining €53.71 million represents transfers to extra-budgetary funds and local governments. Each social fund (local governments included) received significantly lower amounts of transfers from the central budget than planned. The distribution occurred as follows: Pension Fund - €44.14 million (lower by 27.6%), Health Insurance Fund - €5.89 (lower by 18.53%), Employment Fund - €3.23 (lower by 35.4%) and municipalities - €0.45 million (lower by 55%).

Subsidies amounted to €6.33 million -- nearly equal to the forecast.

At the end of 2005, rent and other expenditures and reserves amounted to €1.81 and

€29.16 million, respectively.

In 2005, the Government of Montenegro paid a higher amount of interests than planned, with the aim of achieving regularity with respect to the public debt service and thus create enough room for future fiscal deficit reduction. Interest amounted to €20.36 million, which is one-third higher than projected.

Capital expenditures amounted to €30.63, being 24% lower than the forecast.

Net lending of the central budget amounted to €7.46 million and was 4.6% lower than the

2005 plan. 5.3 SOCIAL FUNDS This part of this chapter presents a short analysis of budget execution for social funds (Pension Fund, Health Insurance Fund and Employment Fund) during the year 200521. 5.3.1 Pension fund In 2005, the Pension Fund ran a deficit in the amount of €2.45 million. Total revenues amounted to €169.88 million and were 2.3% lower than planned. On the other hand, total expenditures amounted to €172.33 million, which is approximately the planned figure for expenditures for 2005. Net liabilities of the Pension Fund at the end of the period amounted to €3.80 million, while privatization receipts reached €19.97 million22. As a result of the deficit and negative domestic financing (loan amounts provided were greater than their repayments), which was not completely covered by privatization revenues, the Pension Fund's deposits were lowered by €6.25 million. 21 Budget execution of the social funds will be presented in MONET, for the first time, according to IMF classifications. 22 In December, the Pension Fund received the largest injection of revenue from privatization, amounting to €14.621 million.

Monet March 2006


The category generating the largest

amount of revenue was contributions, amounting to €118,314 million, which is 2% higher than the previous year's execution. The Transfers (from the Budget) category was the second largest, recording €44.14 million in revenues, an amount which is as much as 17% higher than compared to the 2004 execution, but at the same time, lower by 27.6% in comparison with the forecast. Other revenues (deposits) amounted to €7.43 million.

Gross pensions payments (pensions and

other remunerations for pensioners) had an 84% share in total expenditures and amounted to €144.91 million. Net pensions amounted to €136.641 million with a coverage to contributions ratio of 0.87%, an improvment over 2004 when the rate was 0.85%. Transfers, on the basis of health insurance contributions to the Health Insurance Fund, amounted to €20.015 million, which is 21.4% higher than compared to the previous year. The remaining €7.405million in expenditures relates to wages and salaries, good and services, capital expenditures and so forth.

5.3.2 Health insurance fund In 2005, the Health Insurance Fund was the only social fund which ran a surplus. The surplus amounted to €2.00 million. Total revenues amounted to €101.87, while total expenditures amounted to €99.87 million, which is approximately the figure forecasted for this account. At the end of the period, the Health Insurance Fund had no liabilitites and its deposits had increased by €2.00 million.

The contributions had the highest revenues with

€74.74 million in execution, out of which €43.511 million came from economic activity, €29.317 million from non-economic acitvity, €1.655 from self-employment and €0.255 from agriculture. Transfers cumulatively amounted to €26.62 million, out of which €20.667 were from the Pension Fund and €5.69 were from the Republic budget. Transfers were lower than planned by about 15%. Other revenues amounted to €0.87 million.

As in previous years, in 2005, the Health

Insurance Fund had as its largest expense, medical care payments, in the amount of €92.84 million, representing 93% of total expenditures. Medical care is comprised of: outpatient and hospital services (€34.48 million), treatments in hospitals (€29.40 million), expenses for medicines (€27.40 million), orthopedic devices (€0.96 million), and other health care (€0.60 million). Other expenditures in this area (including gross salaries, travel costs, sickness compensations etc.) amounted to €7.02 million.

Table 2. Budget of the Pension Fund (€ mil) Plan for

2005 Execution in 2005

I TOTAL REVENUES 177.55 169.88 1. Contributions 115.05 118.31 2. Transfers (from Budget) 61.00 44.14 3. Other revenues (deposits) 1.50 7.43 II TOTAL EXPENDITURES 177.55 172.33 1. Gross pensions 144.25 144.91 2. Other expenditures 33.30 27.42

III DEFICIT/SURPLUS (I-II) 0.00 -2.45 IV FINANCING 16.00 -3.80 1. Domestic financing 0.00 -23.78 2. Foreign financing 0.00 0.00 3. Privatization revenues 16.00 19.97

V DEPOSITS CHANGES (III+IV) 16.00 -6.25

Source: Pension Fund, Ministry of Finance, ISSP calculations

Table 3. Budget of the Health Insurance Fund (€ mil) Execution

in 2005

I TOTAL REVENUES 101.87 1. Contributions 74.74 2. Transfers (from Budget and

Pension Fund) 26.62

3. Other revenues (deposits) 0.87 II TOTAL EXPENDITURES 99.87 1. Medical care 92.84 2. Other expenditures 7.02 III DEFICIT/SURPLUS (I-II) 2.00 IV FINANCING 0.00 1. Domestic financing 0.00 2. Foreign financing 0.00 3. Privatization revenues 0.00

V DEPOSITS CHANGES (III+IV) 2.00

Source: Health Insurance Fund, Ministry of Finance, ISSP calculations


40


5.3.3 Employment fund In 2005, the Employment Fund ran a deficit in the amount of €2.67 million. Total revenues amounted to €15.988 million and were 16.42% lower than forecasted. Total expenditures amounted to €18.655 million, which comes close to planned expenditures for 2005. Net receivables of the Employment Fund at the end of the period amounted to €7.625 million, with privatization receipts reaching €7.527 million and grants (for the needs of observatory and public works) amounting to €0.098 million. Having privatization receipts and grants exceeding the amount of the deficit, caused the Employmet Fund to increase its deposits by €4.958 million.

The category holding the highest revenues was contributions, which amounted to €7.273 million and were 9.31% lower than the forecast. Other revenues (including fees, loan repayments, selling of fixed assets etc.) reached €5.079 million. Transfers from the Republic budget amounted to €3.636 million and were 27.3% lower than the projection. (lower executions were also the case with the other two social funds).

Gross compensations for unemployed

persons, with a 23% share of total expenditures and net lending, was the largest expenditures category. At the end of 2005, these compensations amounted to €4.326 million. Gross wages and salaries for Employment Fund employees reached €3.184 million, while the personnel training fund amounted to €2.633 million. The remaining €5.556 million related to other expenditures (new employees, goods and services etc.). At the end of the period, net lending amounted to €2.956, out of which €3.128 million were new, self-employment loans and the rest were repayments.

5.4 BUDGET FOR 2006 This year's budget represents a response by the Government of Montenegro to commitments made in the Economic Reform Agenda, regarding, among other things, two specific goals: the reduction of the fiscal deficit and the consolidation of public spending, both in absolute terms and as a percentage of GDP. Attaining these goals means creating conditions for a stable concept of public finances and improving the relationship with IFIs. Reduction of the budget deficit has two important consequences for Montenegro: (i) reduction of the need for banking sector financing and, thus, allowing a significant amount of “fresh” money to be used for productive purposes; and (2) increase of fiscal discipline as well as of the efficiency with which fiscal funds are managed. The public spending deficit is directly linked to the republic budget deficit, with the view of preserving the liquidity of extra-budgetary funds and reaching objectives of the social welfare system in Montenegro. It is important to mention, as well, that the methodology used in budget creation improved and that all estimations are completed on the basis of a series of quality monthly statistics, which provide for good extrapolations.

5.4.1 Consolidated public spending for 2006 The share of public spending in GDP forecasted for 2006 (excluding project loans) was 44.64 %. After consolidation of contributions paid by employers, the actual share of public spending

Table 4. Budget of the Employment Fund (€ mil) Plan for

2005 Execution in 2005

I TOTAL REVENUES 19.130 15.988 1. Contributions 8.020 7.273 2. Transfers (from Budget) 5.000 3.636 3. Other revenues 6.110 5.079

II TOTAL EXPENDITURES AND NET LENDING 18.930 18.655

1. Total expenditures 15.290 15.699 2. Net lending 3.640 2.956

III DEFICIT/SURPLUS (I-II) 0.200 -2.667 IV FINANCING 2.100 7.625 1. Domestic financing 0.000 0.000 2. Foreign financing 0.000 0.000 3. Privatization revenues 2.100 7.527 4. Grants 0.000 0.098

V DEPOSITS CHANGES (III+IV) 2.300 4.958

Source: Employment Fund, Ministry of Finance, ISSP calculations

Monet March 2006


in GDP was much lower and stood at 42.78% or, in absolute terms, €785.26 million. These figures, shown in the following table, point out the decreased share of public spending in GDP. Table 5. Public spending in Montenegro in the period 2004-2006 (absolute amount and as % of GDP)

2004-actual 2005-plan 2006-plan Description amount

(mil €) % GDP amount (mil €) % GDP amount

(mil €) % GDP

Public spending- I line of consolidation 698.66 45,52 742.86 45,19 785.26 44,64

Public spending- II line of consolidation 667.00 43,45 710.13 43,20 752.50 42,78

Source: Budget Law for 2006 year Sources of financing for public spending in 2006 will be: taxes -- in the amount of €462.66 million, contributions -- amounting to €203.99 million, fees -- in the amount of €18.34 million, compensations -- €28.20 million, other revenues -- €40.36 million and deposits -- in the amount of €4.93 million. The forecast for budget spending for 2006, excluding transfers, is €423.10 million (24.05% of GDP), spending of the Pension Fund is forecasted at €5.13 million (9.39% of GDP), Health Insurance Fund spending at €112.09 million (6.37% of GDP) and Employment Fund spending at €16.23 million (0.92% of GDP). Consumption by local governments is projected to be €68.71 million or 3.91% of GDP. 5.4.2 Consolidated deficit of public spending The consolidated deficit of public spending (excluding old foreign savings) for 2006 is forecasted at €30.07 million, which is €13.04 million lower than compared with the year 2005. It is estimated that the deficit in 2006 will have a 1.71% share of GDP, which means a drop of about 1 index point. Beside the deficit, the Government has planned to repay debts in 2006 in the amount of €31.39 million, so the cumulative funds for deficit financing and repayment of debts are expected to amount to €61.39 million. Table 6. Public spending deficit in Montenegro in period 2004-2006 (absolute amount and as % of GDP)

2004-actual 2005-plan 2006-plan Description amount

(mil €) % GDP amount (mil €) % GDP amount

(mil €) % GDP

Deficit 43.36 2,82 51.81 3,15 38.77 2,20 Deficit (reduced by the old foreign savings) 39.05 2,54 43.11 2,62 30.07 1,71

Source: Budget Law for 2006 Planned sources of deficit financing (including repayment of debts) are loans in the amount of €9.18 million, donations in the amount of €5.50 million, project loans amounting to €12.00 million, privatization receipts in the amount of €29.28 million and deposits amounting to €5.51 million. 5.4.3 Budget deficit and finansing According to ISSP calculations, the budget deficit (excluding grants, old foreign savings (€8.77 million) and project loans (€12.00 million)) should amount to €18.073 million. This projection is 29.4% lower than the central budget deficit projected for the year 2005. The planned €18.07 million deficit represents a 1.01% share of projected GDP, a reduction of 0.5 percentage points in comparison with the year 2005. The deficit will be financed by: privatization receipts (€7.000 million), grants (€5.504 million) and net domestic and foreign financing (€5.569 million).


42


Grants are comprised of: EU macro-financial assistance (€4.5 million), Environment Global Fund (€0.099 million), EAR funds (€0.90 million) and USA donations (€0.004 million). Overall borrowings and loans are forecasted at €5.108 million, based on the following: IDA loans for the project to improve the pension system (€1.50 million), the project to improve the health care system (€2.50 million) and the project for the improvement of the education system (€1.11 million). Funds transferred from the previous year amount to €21.195 million. Repayment of debts amounts to €20.734 million and is comprised of: repayment of loans and securities in the amount of €12.03 million (€5.00

million for residents and the remaining €7.03 million for following non-residents: World Bank (IBRD) – €6.10 million, European Council - €0.50 million, Paris Club - €0.40 million)) and old foreign savings repayment (€8.7 million).

Graph 5.5. Sources of deficit financing in 2006

privatization revenues39%

net domestic and foreign financing

31%

grants30%

Source: Budget Law for 2006,, ISSP calculations 5.4.4 Total revenues Total revenues (including grants) for 2006 are estimated to be €485.61 million, which is 10.6% higher than compared with the forecast for 2005.

Box 2. Project loans Project loans represent a part of the broader concept of a consolidated budget (they are realized out of the budget but have an impact at the level of a broader definition of the budget deficit) and significantly influence its development and accelerate the investment cycle. In 2006, they will provide financing for the following: delayed investment maintenance of road network (€2 million), tunnel Vrmac reconstruction (€2 million), regional roads reconstruction (€4 million), seaside area sorroundings protection (€1 million), seaside water supply improvement (€2 milliona) and recycling center “Livade”-Podgorica (€1 million).

Monet March 2006


Graph 5. 6. Structure of planned revenues for 2006

taxes89%

fees2%

compensations2%other revenues

7%

Source: Ministry of Finance TAXES Total tax revenues for 2006 are planned to account for 88.44% of planned overall budget revenues. Compared to the 2005 forecast, expected tax revenues are 10.36% higher.

According to the budget forecast for 2006, value added tax still represents a dominant account in the total planned tax revenues. For 2006, VAT is planned to reach €215.1 million (its rate of growth of 10% is higher than the rate of growth of GDP). VAT rate of growth is more conservative than the empirical dynamic of the previous period because of the fact that VAT revenues are the strongest in the first three years after its introduction, which is why these revenues are expected to have a more moderate dynamic of growth in the future. Value added tax in 2006 will represent 50.66% of total planned tax revenues and 44.81% of total budget revenues. Personal income tax revenues are planned in the amount of €70.3 million, which, in comparison with the previous year's plan, is higher by 7.19% (rate of growth is the same as it is in the case of GDP). Revenues from Excises are set at the level of €77.545 million for 2006, which is 26.6% higher than the 2005 forecast. Planned excises represent 18.3% of total planned tax revenues for 2006. The most important of these are excises on imports and their rate of growth corresponds with the payment of the import VAT. Taxes on trade and international transactions for 2006 are forecasted at €39.7 million, which is almost the same amount as forecasted for 2005. A lower customs revenue is expected for 2006 due to the signing of an agreement on free trade by countries in the region. The agreement stipulates the introduction of reduced or 0% customs rates for participant countries. In 2006, a decree on compensation for the use of roadways, in the goods transit process over the territory of Montenegro, will be out of force, and thus, transit revenues are not projected. With respect to corporate income tax for 2006, a short-term reduction of revenues of 36%, as compared with the 2005 plan, is forecasted and will amount to €16.04 million. This is due to the fact that from January 1, a lower flat rate of 9% is effective and also because of the tax reimbursement obligation to legal entities in the amount of €1.8 million. Estate and real estate tax revenue is planned to be €2.26 million, which is 34.4%23 higher than compared with the plan for 2005. Other taxes are projected at €3.34 million, which is 7.4% higher than the plan for 2005.

23 Estate and real estate tax is a derivative tax and is divided between the Republic budget (50 %) and local governments budgets (50 %).


44


NON-TAX REVENUES Revenues from fees for the year 2006 are forecasted at €10.55 million, being 57.5% higher than the 2005 forecast. Fees revenues are dominated by administrative fees in the amount of €8.64 million24. Planned compensations for 2006 amount to €10.83 million. The greatest share relates to the use of public natural resources in the amount of €2.95 million, ecological compensation amounting to €1.80 million, lottery games compensations in the amount of €1.75 million and compensations for roads amounting to €1.76 million. Other non-tax revenues amount to €30.861 million, which is 24.64% lower than compared with the plan for 2005. The dominant share of this category is held by other revenues in the amount of €21.46 million (payment of tax claims from the previous period, amounting to €15.77 million and other revenues in the amount of €5.69 million), while the remaining €7.96 million relates to cash penalties and deprived estate benefits. CAPITAL REVENUES Capital revenues are forecasted at €3.277 million, which is 7% lower than compared with the previous year's plan. These have a 0.67% share of total revenues. 5.4.5 Total expenditures and net lending Planned budget expenditures and net lending amount to €498.179 million and are 8.13% higher than compared with the plan for 2005. Current expenditures (interest and non-interest expenditures) amount to €454.78 million, being 10.21% higher than the 2005 plan and having a 91.29 % share in the total planned budget for 2006. Out of this amount, €439.282 million relates to non-interest expenditures, while €15.498 million is planned for interest spending. Capital expenditures are forecasted to be 3.16% lower in comparison with the previous year's plan and will amount to €35.079 million (7.04% of total expenditures). Gross/net borrowings and loans are projected at €8.320 million (nearly 30% lower than compared with the 2005 plan)25. During 2005, the greatest part of liabilities, on the basis of issued securities, was paid and thus, in 2006, due to decreased liabilities, a lower level of funds for these purposes has been planned. In addition, the more intensified privatization process reduces the need of huge systems for Government loans.

CURRENT EXPENDITURES

In 2006, as in previous years, the greatest part of budget expenditures, a 34.46% share (or €171.674 million), relates to gross wages and salaries and other remunerations for public sector employees. These funds are about 0.4% lower than compared with the plan for the previous year26. Funds for gross salaries and contributions paid by employers for 29,618 employees27 are planned in the amount of €163.33 million, which represents 31.5% of overall planned expenditures for 2006. The share of planned funds for gross salaries and contributions paid by employers in GDP is continuously decreasing. In 2004 and 2005 they represented 10.49% and 10.28% of GDP, respectively, while in 2006 are set at 9.61% of GDP28, as shown in the graph below.

Graph 7. Share of expenditures on gross wages and salaries, contributions paid by employer

and other remunerations for public sector employees in GDP 24 This large amount of planned administrative fees is the result of implementation of regulation on the universal classification of accounts for the Republic budget, extra-budgetary funds and local governments budgets. 25 Budget plan does not comprise repayments of loans and this is why gross and net borrowings and loans are equal. 26 This estimation takes into account a likely increase of the minimum wage in 2006. 27 The greatest part is for financing salaries (11,256 employees) for the primary and secondary program of education. 28 ISSP estimations of GDP

Monet March 2006


Graph 5.7. Share of expenditures on gross wages and salaries, contributions paid by employer and other remunerations for

public sector employees in GDP

0

2

4

6

8

10

12

2001 2002 2003 2004 2005 2006

Source: Final accounts for 2001, 2002, 2003 and 2004, Budget Laws for 2005 and 2006, ISSP calculations An increase of net salaries of approximately 1.8% is planned, which means that at the end of 2006, these should reach €90.900 million. Taxes on salaries are higher when compared to the 2005 plan by about €0.898 million. Contributions are forecasted to be €47.726 million, out of which 52% or €24.848 million relates to contributions paid by employees, and the rest, about 48%, to those paid by employers. The municipal surtax should amount to €3.052 million. Funds for other remunerations are planned in the amount of €8.35 million and have a 1.68% share of overall planned expenditures for 2006.

Expenditures for goods and services and current maintenance, having a share of 13.62% in overall planned expenditures for 2006, are forecasted at €67.851 million and are almost 9% higher than compared with the previous year's plan. Expenditures for goods and services are projected to be €48.739 million, which is 2.45% higher than compared with 2005 (the largest amount of €25.44 million relates to the financing of contract services), while current maintenance is set at €19.11 million and is about 51% higher than the 2005 forecast.

Social benefits and social security transfers are planned to reach €156.802 million,

having a 31.48% share in overall planned expenditures. Social benefits should amount to €34.610 million (higher by 10% than the previous year's plan), out of which 91.3% or €31.609 million relate to social security benefits, while the remaining €3 million are funds for redundant labor force. Transfers to institutions, individuals, NGOs and the public sector are forecasted at €122.193 million and represent 24.53% of budget expenditures. Out of that amount, €24.58 million relates to transfers to public institutions, €3.12 million to transfers to NGOs, political parties and associations, €10.46 million to transfers to individuals, while the rest are social funds transfers.

Transfers to the Pension Fund are planned in the amount of €69.33 million and have a 13.92% share of overall planned funds for 200629. Transfers to the Health Insurance Fund are expected to be €7.05 million and are related to financing of health care for unemployed persons (€3.73 million), health care for refugees and displaced persons (€2.00 million) and

29 The amount of €12.09 million represents reserve funds for the possible payment of military pensions. The remaining €57.24 million in transfers to the Pension fund are planned for financing of pensions which are exempted by Republic and Union regulations, pensions determined by the law on public administration, pension of the employees of the Ministry of Interior and Criminal Justice Department, pensions of civil servants in the Military of the Union SaM, and for financing the deficit of the Fund.


46


financing of capital expenditures (€1.32 million). Transfers to the Employment Fund, in the amount of €5.57 million, are planned for financing of salaries and other remunerations of apprentices as well as compensations for unemployed persons. Transfers to municipalities are forecasted at €1.83 million, and relate to compensations for natural disasters (€0.30 million), the work of inspection agencies in the construction field (€0.43 million) and conditional donations (€1.1 million). Transfers to public enterprises, amounting to €0.24 million, are for compensation of damages from natural disasters.

Subsidies30 are planned in the amount of €6.07 million, and represent 1.22% of total

planned expenditures for 2006. The share of subsidies in the state budget is decreasing every year. The forecasted amount for 2006 is 3.30% lower than compared to the previous year.

Interests are planned to account for €15.50 million and have a 3.11% share of total

planned expenditures for 200631, which is about 1.5% higher in comparison with the 2005 plan. Interest funds are directly related to payment of the following obligations which have become due: World Bank (IBRD) -- €13.36 million, European Investment Bank -- €1.85 million, European Council -- €0.11 million, IDA/Internal Development Agency -- €0.13 million and European Union -- €0.04 million.

Overall reserves are planned in the amount of €16.03 million, which is 45.8% higher than

last year’s plan. This increase is caused by the higher amount allotted for the permanent budgetary reserve, projected at €5.00 million (for 2005, €0.850 million was planned), which relates to the financing of the organizational costs of the referendum and parliamentary elections this year. The current budgetary reserve is forecasted to be €11.03 million and will be used for urgent and unplanned expenses during the year.

Other expenditures (rent, other expenditures and repayment of unsettled obligations of

budget users from previous years) are projected at €20.851 million, which represents a 4.19% share of planned budget expenditures for 2006.

CAPITAL EXPENDITURES

Planned capital expenditures are 3.2% lower than compared to the previous year's plan, amounting to €35.079 million. The drop relates to the fact that foreign project loans provide sources of financing of strategic infrastructure projects. 5.4.6 Borrowings and loans According to the budget plan for 2006, borrowings and loans (including repayment of loans based on given guarantees) amounts to €8.320 million, which is almost 30% lower than the plan for 2005. Borrowings and loans are planned to amount to €6.32 million and are about 5.7% lower than the previous year's plan. These are comprised of: borrowings and loans to non-financial institutions (€3.00 million), student loans (€1.5 million) and loans for small and medium enterprises (€1.82 million). The budget plan envisages a reduced amount of funds for repayment of loans based on given guarantees, for these represent only 50% of last year's plan and amount to €2.00 million. Out of that amount, €1.00 million is forecasted for repayment of domestic loans based on given guarantees, and the remaining €1.00 million for repayment of foreign loans based on given guarantees. The plan does not predict repayment of the loans, and thus, gross and net borrowings and loans (including repayment of loans based on given guarantees) are equal.

30 Subsidies for: agriculture, forestry, water supply, energy supply, veterinary agencies and tourism. 31 Interests to non-residents and residents in the amount of €15.398 and €0.100 million, respectively.

Monet March 2006


5.4.7 Expenditures according to the functional classification

Graph 5.8. How is the taxpayer's money spent?

health3%

education18%

economic services13%

other activities1%

public services20%

defense services8%

public order ans security

13%

social care and protection

21%

sport, culture and religious activities

2%

environment protection

1%

Source: Ministry of Finance

According to the budget plan, on the basis of functional classification, the greatest share of funds is allotted to social security (20.1%), which covers the Pension Fund, the Ministry of Labor and Social Affairs and the Employment Fund. These funds are about 6% lighter than in the 2005 plan. Expenditures for general public services are forecasted at €100.10 million and relate to the public debt repayment, executive and legislative bodies and fiscal and foreign affairs. Education expenditures are a little higher than in the previous year and amount to €91.91 million. For public order and security, an amount of €84.20 million is planned which is 29% higher than compared to the year 2005; while for Military financing, a figure of €39.50 million has been determined. Spending for economic affairs has a 12.54% share and amounts to €65.09 million. The remaining funds, in the cumulative amount of €33.85 million, comprise: health care, environment protection, housing and community affairs and sport, culture and religion.

Box 3. Program budget

Within the framework of the Budget Law for 2006, the Ministry of Finance continues implementation of the program budget. This year, the program budget is projected for the following budgetary users: Ministry of Education and Science, Ministry of Maritime Affairs and Transportation, Ministry of Tourism, Montenegrin Touristic Organization, Education Institution, Institution for Criminal Penalities, Ministry of Interior, Agency for National Security, Ministry of Culture and Media, Motenegrin National Theatre, Royal Theatre ”Zetski dom”, State Audit Institution, State Roads Directorate and InspectionCenter.

The main goal of the program budget is to make clear the activities of budget users, and any changes or additions to those activities which occur in the planning stages. On the basis of the activities of the above mentioned users, for each user, the following is prepared: programs, sub-programs (they should be carried out before realization of the programs themselves) and performance indicators (they should measure the results of realized activities).


48


CHAPTER 6. MONEY

The previous year, if we speak in terms of the domestic banking sector, was marked by the privatization of public banks as well as the entrance of new ones on the Montenegrin market. By the end of 2005, 86.24% of the domestic banking sector was privatized. E-banking implementation, the entering into function of the Regulatory Loan Bureau and finalization of adjustment with Basel 1, are also associated with 2005. The main indicators of the success of doing business in this sector (total approved loans, deposits, as well as the values of the general monetary aggregates) were characterized by stable positive growth rates during 2005.

6.1. MONETARY AGGREGATES During 2005, all monetary aggregates registered positive annual growth rates as compared to the end of last year, as well as to the same period in the previous year.

Graph 6.1. Monetary aggregates

0

100,000

200,000

300,000

400,000

500,000

600,000

700,000

800,000

900,000

Jan-

03

Mar

-03

May

-03

Jul-0

3

Sep-

03

Nov

-03

Jan-

04

Mar

-04

May

-04

Jul-0

4

Sep-

04

Nov

-04

Jan-

05

Mar

-05

May

-05

Jul-0

5

Sep-

05

Nov

-05

M0 M1 M11 M2 M21

In 2005, the monetary aggregate M0 permanently increased its value as compared to the previous year. The highest growth rate, when compared to the end of 2004, was registered in November, at 11.81%. The high growth rates were influenced by an increase in bank deposits to the Central Bank of Montenegro. An average annual growth rate of these deposits during 2005 was 58.37%. At the end of November 2005, the monetary aggregate M0 amounted to €325.2 million. The monetary aggregate M1 (deposits of the central bank and government are excluded) amounted to €546.3 million at the end of November 2005, which is 30.47% higher than compared to the same month in 2004. An average annual growth rate of this monetary aggregate was 20.86%. The increase of M1 was influenced primarily by the growth of demand deposits in euros, which comprised the majority of bank deposits. The monetary aggregate M11 also registered only positive annual growth rates during the first eleven months of 2005. An average annual growth rate was 24.15%. This increase was mainly influenced by an increase in demand deposits in euros, which registered an average annual increase of 70.28% in the first eleven months 2005. In November 2005, the monetary aggregate M2 registered an annual growth rate of 43.11% and amounted to €748.7 million. Additionally, influencing the increased value of M2, were term deposits in euros (without government deposits), which, compared to November 2004,

Monet March 2006


increased 93.51%. However, term deposits in other currencies (without government deposits) registered negative annual growth rates in April, July and August, while in the period from September to November, the average annual growth rate was 110.6%. During the first eleven months of 2005, the average annual growth rate of the widest monetary aggregate, M21, was 39.76%, while the average monthly growth rate was 4.10%. The highest increase amounted to 24.50% and was registered in March, as a result of a term-deposits increase, after the privatization of Telecom Company. At the end of November 2005, this monetary aggregate amounted to €832.6 million, which is 52.0% higher than compared to the end of 2004, while the annual growth rate was 54.04%. The table presented shows growth rates reached by monetary aggregates in November 2005, as compared to November 2004, as well as to December 2004. Table 6.1. Monetary aggregates growth rates

2004 2005 Growth rates

XI XII XI XI-05/XII-04

XI-05/XII-04

M0 290,897 290,935 325,239 11.79% 11.81%

Banks' deposits with CBM-Payment Operations 40,897 40,935 75,239 83.80% 83.97% Estimate of cash in circulation 250,000 250,000 250,000 0.00% 0.00%

M1 418,685 430,659 546,275 26.85% 30.47% M0 290,897 290,935 325,239 11.79% 11.81% Demand deposits in EUR 118,148 130,220 204,122 56.75% 72.77% Demand deposits within banks in EUR 115,362 129,813 202,999 56.38% 75.97% Demand deposits within CBM-Payment Operations in EUR 2,786 407 1,123 175.92% -59.69%

Demand deposits in other currencies 9,640 9,504 16,914 77.97% 75.46%

M11 427,719 436,876 575,682 31.77% 34.59% M0 290,897 290,935 325,239 11.79% 11.81% Demand deposits in EUR 126,805 136,064 232,800 71.10% 83.59% Demand deposits within banks in EUR 122,477 135,623 219,994 62.21% 79.62% Demand deposits within CBM-Payment Operations in EUR 4,328 441 12,806 2803.85% 195.89%

Demand deposits in other currencies 10,017 9,877 17,643 78.63% 76.13%

M2 523,180 535,550 748,723 39.80% 43.11% M1 418,685 430,659 546,275 26.85% 30.47% Term deposits in EUR 97,928 98,128 189,501 93.12% 93.51% Term deposits in other currencies 6,567 6,763 12,947 91.44% 97.15%

M21 540,472 546,287 832,561 52.40% 54.04% M11 427,719 436,876 575,682 31.77% 34.59% Term deposits in EUR 106,186 102,648 243,932 137.64% 129.72% Term deposits in other currencies 6,567 6,763 12,947 91.44% 97.15%

In November 2005, the greater part of M21 related to the aggregate M11 (69.0%), while the remaining consisted of term deposits (31.0%). 6.2. DEPOSITS Total deposits Total deposits permanently increased during the first eleven months of 2005. At the end of November 2005, they reached €464.0 million -- 80.56% higher than compared to November 2004 and 80.6% higher than compared to the end of that year.


50


Graph 6.2. Total deposits (in 000 €)

0

50000

100000

150000

200000

250000

300000

350000

400000

450000

500000

Dec

-02

Dec

-03

Jan-

04

Feb-

04

Mar

-04

Apr-

04

May

-05

Jun-

04

Jul-0

4

Aug-

04

Sep-

04

Oct

-05

Nov

-04

Dec

-04

Jan-

05

Feb-

05

Mar

-05

Apr-

05

May

-05

Jun-

05

Jul-0

5

Aug-

05

Sep-

05

Oct

-06

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Observed by deposit categories, the most important growth rates related to physical entities, which recorded an annual growth rate of 132.39%. Deposits of financial institutions also realized annual growth of 68.69% in November. According to figures, these deposits amounted to €139.2 million in November and registered a positive growth rate of 34.72%. Within the non-financial institutions category, deposits of domestic private companies registered an increase of 81.48% in November 2005 as compared to November 2004 and amounted to €102.2 million; additionally, they also represent 73.40% of overall deposits of non-financial institutions. Further, entrepreneurs’ deposits recorded an annual growth rate of 84.26% in November 2005.

Graph 6.3. Trend of different categories of total deposits

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From the total amount of deposits at the end of November 2005, 54.19% were demand deposits and 45.81% term deposits. Demand deposits at the end of November 2005 amounted to €239.9 million and were 76.59% higher than the year before. With regards to term deposits in November 2005, these amounted to €224.2 million, an increase of 85.01% over the same period last year.

Monet March 2006


The term structure of deposits varies when observed by depositors. Participation of demand deposits was lowest in financial institutions (35.12%) and significantly higher in non-financial institutions and physical entities (66.17% and 52.80%, respectively). Participation of domestic private company deposits in total deposits amounted to 72.21% in November 2005, while the participation of entrepreneurs’ deposits within demand deposits was 99.43%. Growth rates of total deposits registered in November 2005, as compared to November 2004 and the end of 2004 are shown in the table below. Table 6.2. Total deposits’ growth rates

Growth rates

2004 2004 2005 Description/Period

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1 Financial institutions 24,211 30,584 40,841 33.54% 68.69% Banks 13,756 18,297 13,007 -28.91% -5.44% Domestic 2,243 5,208 2,968 -43.01% 32.32% Foreign 11,513 13,089 10,039 -23.30% -12.80% Other financial institutions 10,455 12,287 27,834 126.53% 166.23% Domestic 9,531 11,256 23,628 109.91% 147.91% Foreign 924 1,031 4,206 307.95% 355.19% 2 Non financial instititions 103,324 103,588 139,200 34.38% 34.72% Public non financial corporations 40,841 24,829 22,425 -9.68% -45.09% State companies 26,181 13,716 17,063 24.40% -34.83% Publicly owned organizations 14,660 11,113 5,362 -51.75% -63.42% Other non financial corporations 62,483 78,759 116,775 48.27% 86.89% Domestic private companies 56,300 70,691 102,174 44.54% 81.48% Entrepreneurs 1,150 1,065 2,119 98.97% 84.26% Foreign companies 5,033 7,003 12,482 78.24% 148.00% 3 Government 43,881 46,233 103,512 123.89% 135.89% Central government 13,739 10,691 28,660 168.08% 108.60% Agencies and institutions of central government 5,915 12,695 15,889 25.16% 168.62% Local government - municipalities 2,233 2,029 3,492 72.10% 56.38% State funds 21,994 20,818 55,471 166.46% 152.21% 4 Physical entities 70,706 79,275 164,312 107.27% 132.39% Domestic 65,981 74,150 145,971 96.86% 121.23% Foreign 4,725 5,125 18,341 257.87% 288.17% 5 Non profit organizations 5,565 5,260 12,845 144.20% 130.82% Domestic 3,789 4,038 11,532 185.59% 204.35% Foreign 1,776 1,222 1,313 7.45% -26.07% 6 Other 9,307 8,257 3,319 -59.80% -64.34% TOTAL 256,994 273,197 464,029 69.85% 80.56%

The structure of total deposits by depositors, in November 2005, shows that the largest depositors were non-financial institutions (30.00%) and physical entities (35.41%). Participation of domestic private company deposits in total deposits amounted to 22.02%. A significant depositor was the government and participation of its deposits in the total amounted to 22.31%.


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Graph 6.4.: Structure od total deposits by clients (November 2005)

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Household deposits Total household deposits registered an increasing trend during the year 2005. The average monthly growth rate was 7.35%. At the end of November 2005, these deposits amounted to €164.3 million with an annual growth rate of 132.4%. Such high growth rates of household deposits point to the fact that there is more and more confidence in the banking sector among citizens.

Graph 6.5. Household deposits

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At the end of November 2005, over half of total household deposits (52.80%) were demand deposits, while the rest (47.20%) were term deposits.

Monet March 2006


Demand deposits registered significant annual growth rates during the year 2005, and at the end of November they amounted to €86.8 million, which represents an increase of 158.60% annually. Also during 2005, term savings of up to 1 year registered positive growth rates as compared to the previous year. The highest annual growth rate in 2005 was registered in October and amounted to 107.13%, while the lowest was registered in April and amounted to 40.89%. Term savings of over 1 year, registered during 2005, experienced an average growth rate of 300.32%. At the end of November 2005, their value amounted to €18.5 million.

Graph 6.6. Annual change of household deposits

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The average participation of demand deposits in total household deposits was 50.70% in 2005. Within total deposits, the average participation of term deposits of up to 1 year was 38.20% in 2005. The share of term deposits of over 1 year, after a significant increase in March (15.98% of total household deposits), began to fall, and in October, the share was only 8.39%. The share started to grow again in November when these deposits reached an 11.26% participation rate. 6.3. LOANS Total loans provided by Montenegrin banks increased during the first eleven months of 2005. According to data, total provided loans in November amounted to €371.5 million and participated in total assets of the banking sector with 56.80%. The attained level is 37.78% higher than compared to the level attained in November 2004. Loans approved for financial institutions, except in April and May, registered high annual growth rates during 2005. Namely, the highest annual growth rate of loans approved for financial institutions was registered in August and amounted to 1,509.09%. The annual growth rate in November was 240.09% and total loans provided to financial institutions amounted to €1.4 million.


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Graph 6.7. Loans provided by banks in Montenegro

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Loans to non-financial institutions registered positive annual growth rates during the year 2005. In November, total loans to non-financial institutions amounted to €231.1 million and the annual growth rate was 26.15%. A portion of these loans, loans to domestic private companies, registered an average annual growth rate of 36.33% in 2005. Loans to physical entities were 44.02% higher in November 2005 than compared to the same month in 2004 and totaled €101.9 million. Loans to the government amounted to €31.7 million at the end of November 2005, which is 109.85% higher than compared to the same month in 2004. Growth rates of total loans computed for November 2005, and as compared to the same month last year as well as the end of 2004, are presented in the table below.

Table 6.3. Total loans’ growth rates

2004 2005 XI XII XI

1 Financial institutions 424 3,854 1,442 Banks 32 1,000 24 Domestic 32 1,000 24 Foreign 0 0 0 Other financial institutions 392 2,854 1,418 Domestic 392 2,819 1,418 Foreign 0 35 0

2 Non financial institutions 183,237 186,934 231,149 Public non financial institutions 17,329 18,969 25,398 State companies 11,874 11,267 17,922 Publicly owned organizations 5,455 7,702 7,476 Other non financial corporations 165,908 167,965 205,751 Domestic private companies 158,874 161,188 199,504 Entrepreneurs 6,030 5,773 4,361 Foreign companies 1,004 1,004 1,886

3 Government 15,110 18,788 31,708 Central government 6,027 9,162 7,589 Agencies and institutions of central government 1,049 435 2,217 Local government - municipalities 1,390 1,735 3,958 State funds 6,644 7,456 17,944

4 Physical entities 70,734 74,325 101,869 Domestic 70,650 74,236 101,758 Foreign 84 89 111

5 Non profit organizations 104 180 5,298 Domestic 104 180 5,298 Foreign 0 0 0

6 Other 0 0 8 TOTAL 269,609 284,081 371,474

Monet March 2006


Box 1. Expansion of loans Since banks started approving loans, especially cash ones, numbers show that day after day Montenegrin citizens owe more and more money. The fact that every household in Montenegro owes on average €533.2 to banks because of loans taken, supports this claim (according to the first results from MONSTAT, dating from the year 2003, there are 191,047 households in Montenegro). Furthermore, the average net salary in November in Montenegro was €223.63. Because of this, the debt issue raises even more concern. According to data acquired from the banks, of all services, the greatest demand is for cash loans of up to €1,000. Employees often receive just a receipt instead of their paycheck because their entire salary goes to paying the monthly loan payment. And, if they do not make their payments, banks are forced to use an administrative ban on the endorser’s salary as well, and to start court proceedings for payment, if credit is not secured by a mortgage.

Loans and deposits ratio In the year 2004, total loans were 3.0% higher than the sum of money, which was deposited in domestic banks. Since the ratio between loans and deposits should not exceed 80.0%, a large percentage of approved loans indicates that these are mainly being financed from deposits, which can be very risky, especially when the number of depositors with large deposit amounts is small. This is the main reason why domestic banks, when they cannot service all approved loans from their own sources, tend to request loans themselves from foreign banks, mainly the ones that are their owners. In the year 2005, this ratio returned to normal limits, so that at the end of the third quarter, an average of €0,83 were credited for every €1 deposited. In November 2005, the credit-deposit ratio was 80.1%.

Graph 6.8. Structure of loans provided (November 2005)

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In November 2005, the majority of total approved loans were given to non-financial institutions (62.22%), while 27.44% were given to physical entities.

In 2005, in order to decrease the loan risk and also to further the work of shortening the procedure for approving loans and simplifying credit checks on potential clients, the Regulatory Loan Bureau was established.

Box 2. Regulatory Loan Bureau started work The Regulatory Loan Bureau started working within the Central Bank of Montenegro in mid-2005. Data from the bureau should help commercial banks to select their clients more easily and with more certainty. In the first phase of implementation, data will be available to the control sector of the central bank, which initiated the introduction of the bureau. The bureau gathers information from commercial banks and creates a database. The purpose of such a bureau is to provide a more precise and more dynamic evaluation and to track down loan-related risks in banks, either at the level of the whole system, or at the individual level. Data on all loans, loan histories and placements in certain activities, on instruments of security and on interest rates will be used to manage loan risk and track its presence and concentration level in particular businesses. In addition, data will be used to track eventual transfers of loan risk between banks, to better prepare for direct control and to create a larger information base for testing the entire banking sector. Aside from this, the database will make it easier to control market and operational risks in banks and will provide accounting and tracking of average pondering interest rate for system, or for individual loan lines or other structures. The bureau can provide statistical data and analysis which can give useful indicators of trends in the credit industry, all of which contributes to the development and enlargement of the quality of monetary statistics. It is also very important to mention that the existence of the bureau sends a positive message to potential investors. It also facilitates the shortening of the time period needed for credit approval, including all phases, starting from the application, solvency analysis and formation of a credit record, up to determining interest rates depending on the security of placement. Interest rates are determined according to the credit history of every client in the system.


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6.4. THE EVENTS THAT HAVE MARKED 2005 6.4.1. The change in the shareholder structure of the banking sector – an influence on further business Maybe the most significant event in 2005, when speaking of the banking sector, is the privatization of the Bank of Podgorica. The renowned French Société Générale Bank became the major shareholder of this bank. The entrance of foreign banks on the domestic market is very important, particularly as a necessary condition for the efficient transition of the banking sector. Currently, 86.24% of the domestic banking sector is privatized, i.e. foreign owners have a share in the total banking sector, which amounts to 60.99%. It is also important to stress that the privatization of two other domestic banks, the Bank of Niksic and the Bank of Pljevlja has been announced for next year. The privatization of the Bank of Podgorica, the appearance of Hypo Alpe Adria Bank on the domestic market, the merging of Euromarket Bank and Montenegro Bank, as well as the sale of the majority shares of the Hipotekarna Bank to a foreign investor increased competition in the banking sector of Montenegro. In addition, considering the positive economic indicators, we can safely say that conditions for a decrease in current interest rates have been created. In Montenegro, the general risk level has decreased as well, justified by a low inflation rate in the past few years. The fact is that in Montenegro, deposits and savings are higher day after day and the financial potential is also significantly higher taking into account indicators for the region. Increased supply on the financial market also favors the expected decrease of interest rates, as well as a decrease of banking provisions and refunds. None of the sectors in Montenegro have a better performance than the banking sector. This year, bank balances increased 30.0% and interest rates decreased 2.0%.

Box 3. Change of ownership structure in the domestic banking sector Merger of Montenegro Bank and Euromarket Bank At an extraordinary shareholders meeting of Montenegro Bank in September 2005, shareholders decided to merge with Euromarket Bank. In that meeting the statute was amended and changed and the logo and name were standardized according to the criterion of New Ljubljana Bank, which now owns the majority of stocks of both Montenegro and Euromarket banks. The merger led to the creation of the second largest bank in Montenegro, after the Montenegrin Commercial Bank, which had 37.3% of market penetration at the end of 2005. According to data from the central bank, Euromarket and Montenegro Bank had 10.0% of market penetration each. Privatization of the Bank of Podgorica In October 2005, the Bank of Podgorica was privatized. The largest shareholders (largest shareholders own 83.5%) are: Societe General – 64.4%; International Financial Corporation, USA – 10.0%; “AD Plantaze Podgorica" – 4.9%; “Duvanski kombinat AD Podgorica” – 4.1%. This concluded the privatization of one of two banks where the Government was the majority owner. Bank of Pljevlja and Bank of Niksic In October, the privatization council decided to privatize the Bank of Niksic (165 shareholders welcomed the decision) and the Bank of Pljevlja by organizing a public tender. The Government owns the majority of stocks in both banks. Hipotekarna Bank Hipotekarna Bank, as the only commercial bank, which had a negative outcome in the year 2005, attracted foreign capital. Namely, investors from Italy bought approximately 54.0% of stocks from HLT Fond, the Port of Bar, Lovcen Insurance, Adriatic Shipbuilding, Official Gazette, Railways and DKP. In the next phase, investors plan to sell stocks of this bank to Podravka Bank, after the Croatian Central Bank approves the sale. Hypo Alpe Adria Bank also in Montenegro At the end of 2005, the Council of the Central Bank gave permission to work to the Hypo Alpe Adria Bank in Podgorica. The bank is permitted to collect deposits from citizens and companies and to provide loans and other placements. The founders of the bank were the Hypo Alpe Adria Bank from Klagenfurt and Hypo Alpe Adria Leasing from Podgorica, which was the first from the group to start operating in Montenegro. The Bank should start to work in the first months of 2006.

Monet March 2006


6.4.2. Adjustment with the international standards

During 2005, a lot has been done to further the reform of the banking sector. Reform should cause an increase in the efficiency of the business of the domestic banking sector, its conformation to international standards, its strengthening and an increase in the clients' trust. In 2005, there was a significant movement towards effecting the compliance of businesses to international standards. Namely, adjustments are almost finalized when it is comes to control of the banking business by application of the basic principles of efficient control. These principles are better known as the principles of Basel I.

In 2005 a lot of work was done towards the reform of payment operations. The existing ZOP payment system was canceled at the end of 2004. The reform of payment operations in Montenegro, which is being conducted by the central bank, has as its goal the creation of conditions which enable better monitoring of participants' liquidity, provide better managing of sources and allow for a decrease in fees charged for payment operations. 6.4.2. Reform of payment operations As of the beginning of 2005, every commercial bank individually took on the role of ZOP. This should contribute to an increase in financial discipline and the creation of legal conditions enabling the introduction of value papers and notes, which will contribute to further development of the financial market. Box 5. Introduced new payment system in Montenegro As of 2005, commercial banks officially complete the technical processing of payment operations. In the new system of payment in Montenegro, a commercial bank handles all payment orders and related transactions for its customers: processing tasks, the provision of reports for customers, publishing of statements and so on. Every bank basically became a mini ZOP. In the process of payments between depositor-customers of different banks, the Central Bank of Montenegro continues in the role of the middleman and charges a fee for that role. A very important development in the new payment system in Montenegro is that it is now adjusted to international standards and practices of developed market economies. The new system should make payment operations more efficient and should contribute to the creation of conditions for market competition between commercial banks, as well as to an increase in the quality of bank services through the introduction of e-banking. Every commercial bank, in order to satisfy its customers, implemented its own payment system. The central base for these new systems is the information system of the Central Bank of Montenegro for processing payments between banks and payments to and from customers. Before the new system, the fee for transacting payments was 0.3% of the transaction value and it has now been lowered by a third. This is thanks to the fact that the 0.1% refunds to the Pension Fund and disability insurance are not paid any more.

Box 6. Montenegro and e-banking The year 2005 brought e – banking to Montenegro, which allows a customer to access banking services by using a computer from work, from home or while traveling without the help of a bank employee. E-banking allows customers to complete all no-cash activities, such as checking account balances and sending and receiving communications to and from a bank, literally, “from the armchair”. Electronic transaction orders from an account go to the central system of the bank, where they are immediately processed, assuming the request can be fulfilled. In the case that a particular order cannot be executed, it is sent to a committee with the notice that the system refused to complete the transaction. Considering that all transactions through e-banking are carried out via a public communications media, it is very important to have developed mechanisms for the protection of these transactions. Towards that purpose, so-called smart cards, top technology for user identification, as well as digital signing of

Box 4. Adjustment with the Basel I principles The important part of accomplishing a healthy banking system is the effective control of the banking organizations. The main goal of bank control is the protection of depositors and creditors, by application of the Basel I principles. In order for a country to exercise efficient control, it is necessary to apply these principles. In 2005, international experts evaluated adjustments in Montenegrin bank controls against the basic principles of Basel I. Of the total 28 principles comprising Basel I, Montenegrin controls and regulations conformed to 27 of these. The evaluation was done using qualitative bases . Two of the principles are not applicable in Montenegro . There is as important inconsistency with one principle (OP 11 – Management and identification of country risk and bank transactions) but significant efforts are underway to accomplish a complete adjustment.


58


transactions with secret and public passwords, are used. It is clear from the above that the main purpose of e-banking is to enable users to save the time they would otherwise spend coming in to a bank to see whether a payment has been sent or received. Thanks to the latest advances in e-banking, a phone, computer, fax or card is enough to gain access to an account in order to check a balance or order transactions. E-banking services are already provided by Euromarket Bank, Montenegrin Commercial Bank, Atlasmont Bank of Podgorica, Montenegro Bank and the Bank of Niksic. In 2005, a service center for e-banking began functioning. The task of the service center is to provide access to accounts as well as security of transactions. The base of the service center is the system, which makes available for use e-banking through the internet, mobile and fixed telephony. In Montenegro, laws regarding measures for usage and security of the e-signature, sources for providing it and the system of certification that provides for the security of computer transactions entered into force. However, in order to use the e-signature in practice, it is necessary to form a central register of electronic signatures.

CONCLUSION When we summarize everything that has been accomplished in the domestic banking sector, we can conclude that the year behind us was very successful. Montenegro enters 2006 with an almost totally privatized banking sector in which almost two-thirds of the capital is foreign. Also in 2005, numerous preconditions were created to further facilitate the entrance of banks into our market and to further stimulate competition, which will lead to a decrease in interest rates and transaction costs and an increase in the quantity and quality of banking services. During 2005, only one Montenegrin bank had a negative business result. All other banks ended business in 2005 with approximately € 4 million of pure profit. This data is especially significant if we mention the fact that during 2004, domestic banks lost €1.1 million. According to income statements, among the ten banks that were doing business during 2005 in the domestic banking sector, one, the Montenegrin Commercial Bank, realized almost two-thirds of the total positive result. Conversely, Hipotekarna Bank, following a loss in 2004 of €7.3 million, once again registered a deficit in 2005 of more than €2 million.

Monet March 2006


CHAPTER 7. CAPITAL MARKET

The following analysis gives an overview of the trading on the Montenegrin capital market in 2005. The year 2005 was a year of success for the Montenegrin capital market in every aspect. The positive expectations of market participants were accompanied by a substantial growth in turnover. The number of transactions increased as well as the month-to-month level of market capitalization. The main feature of 2005, with relation to the capital market, was the possibility to gain high earnings in stock exchange trade. Namely, the prices of a great number of securities (especially common shares and shares of Mutual Investment Funds - MIF) had high growth rates. Furthermore, Montenegrin citizens recognized this opportunity and in 2005, a remarkable thing happened - Montenegrin citizens began to buy or sell securities on the stock exchange. A trend was also evident in that a number of citizens actually took out bank loans in order to participate in the stock exchange trade. 7.1. INDICES32 Values of the stock exchange indices represent the situation on the capital market. Namely, the constant growing trend of the indices in 2005 indicates that the capital market is continuing to grow and develop. The next two graphs present the trend of the index values in 2005. In the following text we will give a detailed analysis of these.

Graph 7.1 Stock exchange indices NEX 20 and NEX PIF

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Source: NEX Montenegro

32 There are three stock exchange indices on the Montenegrin capital market. Montenegroberza introduced one index – MOSTE, which include prices of 35 securities, including investment units of all six Funds. NEX Montenegro introduced two indices: NEX 20 and NEX PIF. NEX 20 represents shares of the twenty companies with the largest market capitalization and liquidity on the NEX Montenegro stock exchange. NEX PIF represents the price trend of the investment units of MIFs (according to the last index revision the participation of the MIFs in the index is as follows: HLT – 23.52%, Euro Fund – 20.09%, Trend– 19.25%, Atlasmont – 17.62%, Moneta – 10.76% and MIG – 8.77%).

The year 2005 was marked by high growth rates of the stock exchange indices. Turnover and number of transactions in 2005 continued to increase. In fact, total turnover and number of transactions in 2005 were higher than in all four previous years combined.


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From graph 7.1 it is obvious that both indices of the NEX Montenegro stock exchange had significantly higher values in 2005 than in the previous year. This growth is particularly evident in the last quarter of 2005. The NEX Montenegro stock exchange index, NEX 20, was the index with the highest registered values, as well as growth rates. NEX 20 represents shares of the twenty companies with the largest market capitalization and liquidity on the NEX Montenegro stock exchange. According to the last index revision (December 15, 2005), the companies with the highest participation in this index are: “Electric Company”, “Telekom”, “Port of Bar”, “Jugopetrol” and “Budvanska Rivijera.” The highest value for the index was registered on November 20th in the amount of 10,906 points. Compared to the previous year, the index value increased 360%. On the other hand, compared to its initial value, the value is 10 times higher. The lowest value for the index occurred at the beginning of January (2,523 points), after which it exhibited continuous growth. The increasing index value was most influenced by price increases of shares from “Telekom” (increase was 85% in 2005), the “Electric Power Company of Montenegro AD Niksic” (increase was 1,900% in 2005), the “Port of Bar” (1,150%), and “Jugopetrol” (increase was 330% in 2005). Additionally, there were increased number of transactions and realized turnover with shares The second index of the NEX Montenegro stock exchange, NEX PIF, also had a growing value trend during 2005. The highest index value was reached at the beginning of November and amounted to 9,906 points. Compared to the initial index value, this represents a nine-fold increase. Additionally, compared to the same period in the last year, the index value was higher by 520%. The lowest index value in 2005 occurred at the beginning of the year and amounted to 1,603 points. The increasing index value was most influenced by the growth in share price of all six MIFs, par excellence Eurofond, Atlasmont and Trend. As graph 7.1 shows, on October 27th 2005, the index value showed a significant increase of 56.35% from the previous day. This increase was caused by the high growth rates of all six funds, after all HLT and Moneta, whose value increased over 100% compared to the previous day. Additionally, Eurofond increased 61%, Atlasmont 41%, and Trend 38%. The next graph presents values of MOSTE, the index of Montenegroberza in 2004 and 2005. Analysis will be focused on 2005.

Graph 7.2 Stock exchange index MOSTE

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Source: Montenegroberza

Monet March 2006


Values of the MOSTE in 2005 were on a significantly higher level than compared to previous years. Namely, in 2005, month to month values of this index continuously increased. The highest index value was reached on November 11th and amounted to 522 points. Compared to the same date in 2004, the value of the index increased over 400%. Compared to the initial index value, the increase is five times greater. The increasing trend was mostly due to the increase in value of “Coal Mine Pljevlja”, “Plantaze”, “Lovcen Insurance Fund”, “Adriatic Shipyard”, “Railway Company of Montenegro” and “KAP”. Additionally, the increased price of shares of MIFs, par excellence Eurofond, Trend and Atlasmont, contributed to the increased index value. 7.2 TURNOVER ON STOCK EXCHANGES Table 7.1. Stock exchange trade in Montenegro

MONTH MONTENEGROBERZA NEX MONTENEGRO TOTAL

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

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

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

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

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

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

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

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

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

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

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

Oct-05 0 9,962,236 9,962,236 6,342 0 8,371,492 8,371,492 5,474 0 18,333,728 18,333,728 11,816

Nov-05 0 1,6198,399 16,198,399 6,598 0 10,065,888 10,065,888 6,450 0 26,264,287 26,264,287 13,048

Dec-05 1,019,364 2,0062,965 21,082,329 4,291 14,093 7,391,471 7,405,564 4,396 1033457 27,454,436 28,487,893 8,687

Total 05 2,836,482 79,480,871 82,317,353 51,773 14,093 115,782,380115,796,473 59,290 2,850,575 195,263,251 198,113,826111,063

The year 2005 was marked by events on the Montenegrin stock exchanges. The capital market was the subject of interest for domestic and foreign investors, as well as for the common citizens. Total turnover realized in the previous year on both stock exchanges amounted to almost € 200 million. Additionally, the number of realized transactions (111,063) indicates that Montenegrin citizens understand that the capital market is a financial resource as well as a tool that offers the possibility to earn money. Comparing total turnover in 2005 with total

Box 7.1: Regional comparison of the capital markets If we compare the ratio between total turnover and GDP of Montenegro with other countries in the region, it is obvious that Montenegro (12%) took a high position. Only Iceland, Ireland and Croatia (325%, 28%, 12%, respectively) had a higher ratio. Worse ratios than Montenegro were experienced by: Slovenia, Macedonia, Serbia, Bulgaria, Bosnia, Cyprus, Malta and Romania (4.5%, 3.14%, 3.01%, 2.61%, 2.25%, 1.42%, 1.04% and 1.02%, respectively). Comparing market capitalization to GDP, Montenegro took second position (96%), after Iceland (138%). In a lower position were: Ireland, Croatia, Serbia, Bosnia, Malta, Slovenia, Cyprus, Romania, Macedonia, and Bulgaria.


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turnover in 2004, it is evident that it increased 460%, while the number of transactions increased almost 200%. It is important to note that turnover realized in 2005 was 76% higher than compared to the turnover realized in the period 2001-2004. Additionally, the number of transactions in 2005 was 32% higher than compared to the period 2001-2004. Market capitalization at the end of 2005 amounted to around € 1,475 million. Compared to 2004 values of all companies traded on the Montenegrin stock exchanges in 2005 significant increased. Graph 7.3 presents total turnover and number of transactions in 2005.

Graph 7.3 Total turnover and number of transaction

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Source: NEX Montenegro and Montenegroberza Monthly turnover as well as number of transactions had increasing trends in 2005, with some small variations. The lowest turnover was realized in January 2005, in the amount of € 2.4 million, while the highest was in March (€ 43 million). A similar situation occurred with the number of transactions. The fewest transactions were realized in January - 4,999 transactions, while the greatest number of transactions were realized in December – 13,048. Average monthly turnover in 2005 amounted to approximately €16.5 million. Compared to 2004, when it was approximately € 3.5 million, the average monthly turnover in 2005 was almost 400% higher. On the stock exchanges, average monthly turnover on NEX Montenegro was around € 9.6 million (350% higher than compared to 2004) and on Montenegroberza € 6.8 million (380% higher than compared to 2004). The greatest influence towards this turnover increase came from transactions of shares of “Telekom” (26% of total trade), “Coal Mine Pljevlja” (5.2% of total trade), “Electric Company of Montenegro” (5% of total trade), “Hipotekarna Bank’, “HTP Primorje” and others. Additionally, significant influence came from trade with old foreign currency savings bonds (8% of total trade) and shares of MIFs (9.6%). As in previous years, in 2005, the majority of turnover was realized on the secondary market. Namely, total turnover realized on the secondary market amounted to €125,263,251, representing 98.56% of total trade. On the other hand, turnover realized on the primary market amounted € 2,850,575, representing 1.44% of the total realized trade.

Monet March 2006


Graph 7.4 Primary and secondary market

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Source: NEX Montenegro and Montenegroberza 7.2.1. Trade on the secondary market Total turnover on the secondary market in 2005 reached over € 195 million. Compared to 2004, this amount was nearly 5 times higher. The structure of turnover was similar to that in previous years. Namely, the majority of turnover on the secondary market was realized with shares (around € 160 million or 82%), followed by shares of MIFs (€ 18.8 million or 10%); while the minority of turnover occurred with old foreign currency savings bonds (€ 15.9 million or 8%). The structure of trade on the secondary market is presented in the following graph.

Graph 7.5 Turnover on the secondary market

Shares82%

Old foreign currency saving bonds - 8%

Investment units of PIF-s -10%


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In the following text we will analyze each type of security individually. Trade with shares Shares of around 125 companies were traded on the NEX Montenegro stock exchange. On the other stock exchange in Montenegro – Montenegroberza, shares of around 150 companies were traded. The next two tables present the shares with the highest realized turnover and the highest number of transactions in 2005 on both stock exchanges. Table 7.2 Ten shares with the highest realized turnover in 2005.

Issuer Turnover in €

“TELEKOM CRNE GORE A.D. PODGORICA” € 51.7 million

“RUDNIK UGLJA A.D.” € 10.3 million

"ELEKTROPRIVREDA CRNE GORE" A.D. NIKŠIĆ € 10.2 million

“HIPOTEKARNA BANKA A.D.” € 7 million

HTP "PRIMORJE" € 5.8 million

"LOVĆEN OSIGURANJE" PODGORICA” € 5.4 million

“ATLAS MONT BANKA A.D.” € 5.03 million

“RUDNICI BOKSITA A.D. “ € 4.1 million

AD LUKA BAR € 4.05 million

“HTP PRIMORJE” € 3.9 million

Source: Stock exchanges in Montenegro, ISSP calculations As table 7.2 shows, shares of the ten companies realized € 107.4 million of turnover and made around 55% of total turnover on the secondary market. It is important to note that trade with shares of “Telekom” represented almost 26% of the total trade. Table 7.3 presents the shares of companies, which experienced the highest number of transactions, amounting to 37,088. This is about 34% of the total number of transactions realized in 2005. Table 7.3 Ten shares with the highest number of transactions realized in 2005

Issuer Turnover in €

TELEKOM CRNE GORE A.D. PODGORICA 9,315

"ELEKTROPRIVREDA CRNE GORE" A.D. NIKŠIĆ 5,375

AD PLANTAŽE 4,203

AD LUKA BAR - BAR 3,850

HTP BUDVANSKA RIVIJERA 3,497

RUDNIK UGLJA A.D. 2,873

HTP "BOKA" AD - HERCEG NOVI 2,134

“JADRANSKO BRODOGRADILISTE BIJELA A.D.” 2,103

“KOMBINAT ALUMINIJUMA” 1,955

JUGOPETROL AD 1,783

Source: Stock exchanges in Montenegro, ISSP calculations

Monet March 2006


Box 7.2: Possibility to gain high profit rates In the previous year participants in stock exchange trade could make high gains. We will name some examples of possible earnings. For example, if a trader bought shares of the Electric Company of Montenegro in January 2005, his earning could be almost 2,000% if he sells those shares in October 2005 (price increase from €0.17 to €3.5). If a trader bought shares of the “HTP Budvanska rivijera” in January 2005 (€0.85), he could have sold them in November (€ 11.9) and earned around 1,300%. By buying shares of “Plantaze” in January 2005, an investor could have earned 450% (price increase from € 0.14 to € 0.77) selling them in November. Furthermore, by buying one share of “Coal Mine” in January 2005, investors could have earned over 520% selling it in December (from € 0.49 to € 3.08). Next graphs present price trends of Electricity Company and Plantaze in 2005.

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Trade with shares of Mutual Investment Funds (MIF)33 Shares of all six Funds participated in the stock exchange trade during 2005. In this period, a total of € 18.8 million in turnover was realized (47% on NEX Montenegro and 53% on Montenegroberza). With regards to number of transactions, a total of 50,900 transactions were realized (44% on Montenegroberza and 56% on NEX Montenegro). Turnover and number of transactions with these securities is presented in the next graph.

Graph 7.6 Turnover with investment units of MIFs

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33 Two of six Funds in 2005 were transformed into the Mutual Investment Funds – Euro Fund and Moneta.


66


As the previous graph shows, the highest turnover with shares of Funds was realized in November (€ 6 million), while the lowest was realized in February (€ 274,006). In terms of number of transactions, the greatest number of transactions realized with this security occurred in November (5,850), and the lowest in February (2,918). The highest turnover was realized with shares of Trend (23%), HLT (22%) and Atlasmont (19%), while the lowest turnover was realized with shares of Moneta (5.6%). The highest price increase was experienced by shares of: Euro Fund 1,185%, Atlasmont 837%, and Trend 707%. Table 7.4 Prices and turnover with MIFs shares in 2005

Fund Min price Max price No of transactions Turnover

"ATLAS MONT" 0.1200 0.0128 8,048 3,575,571

"EURO-FOND" 0.0900 0.0070 12,532 3,467,311

"HLT-FOND" 0.0650 0.0150 11,385 4,118,501

"MIG" 0.0899 0.0150 5,320 2,281,784

"MONETA" 0.0800 0.0118 4,126 1,071,566

"TREND" 0.1300 0.0161 9,485 4,318,566

Source: Security Exchange Commission of Montenegro Trade with shares of old foreign currency savings bonds Old foreign currency savings bonds were very attractive to investors in 2005. This was confirmed by the continuous increase of trade with these securities. Data for 2005 shows that investors in the Montenegrin capital market are especially interested in bonds with longer maturity dates. Namely, trade with bonds with maturity dates in 2014, 2015, 2016 and 2017 represent almost 50% of the total trade with this security. Turnover realized with these securities in 2005 amounted to: € 1.66, € 1.77 million, € 1.94 million and € 2.10 million, respectively. Table7.5. Old foreign currency saving bonds on both stock exchanges

SECURITY NO OF TRANSACTION TURNOVER % OF TURNOVER

Bonds with maturity in 2005 142 86,960 0.54%





Bonds with maturity in 2010 586 1,108,572 6.93%








TOTAL 6,764 15,996,638

Source: NEX Montenegro and Montenegroberza

Monet March 2006


Box 7.2 Research on citizens’ participation in stock exchange trade As we already mentioned, more and more Montenegrin citizens are interested in the situation on the capital market. In addition to world and national news, citizens are now also interested in news about the stock exchanges. This has inspired the conduction of research related to citizens' participation in stock exchange trade. According to official data, around 60% of citizens invested their vouchers in PIFs. As reasons for their decision, citizens noted: risk diversification, confidence in the expertise of the PIF team, the “follow effect” (following the lead of cousins, friends, neighbors), as well as uncertainty in making a choice about companies. Citizens who invested their vouchers in one or more MVP companies, on the other hand, listed the following as reasons for their decision: expected gains in the future, the will to make a decision independently and to face the consequences of that decision as well as a belief that gains from investment in MVP companies would be higher than compared to PIF gains. The majority of citizens independently made their decision on voucher investment (81.3%), while 14.7% of citizens consulted friends and only 4% consulted experts. Of the total number of respondents, 70.7% did not sell their vouchers; 25.6% sold all 5,000 voucher-points, while only 3.8% sold part of the voucher. As reasons for selling the vouchers, in the majority of cases, citizens listed a lack of financial resources and poor material conditions as well as the need to use the capital to invest in private business. Among those citizens that had not yet sold their voucher, the majority (83.3%) expected that the price of the voucher would increase in the future, while the rest noted a lack of interest. However, 60% of the respondents plan to sell the voucher in the future. According to the research, citizens have confidence in the capital market institutions (85%). The citizens have confidence in every institution, especially those related to the stock exchanges, the Security Exchange Commission, as well as Broker Houses. With regards to the future, 65% of respondents have certain expectations about the capital market. They expect further capital market development, opportunities to earn money and personal interest, professional development and education, employment and linkage with stock exchanges from the region. It is important to note that as many as 96.3% of the respondents believe that the capital market of Montenegro will continue to develop in the future, while only 3.7% had no answer to this question. Of the total number of respondents, 62.1% had never traded on the stock exchange, while 37.9% had. However, 45% of the respondents that gave a negative answer on this question, planned to trade in the future. Citizens that had traded on the stock exchanges mainly traded with common shares (50%), followed by those who traded with a combination of common shares and shares of MIF and old foreign currency savings bonds (42%), while only 8% with shares of MIFs.

CONCLUSION The analysis and data presented show that the Montenegrin capital market is developing. The capital market is becoming a very important part of the Montenegrin economy. In a relatively short time period, the Montenegrin capital market became competitive with other capital markets in the region. The number of domestic and foreign investors is increasing. The biggest foreign investors in Montenegro are the Hungarian Telekom, QVT Fund, Eurocem Trade, Zavarovalnica Triglav, Sivent among others. Additionally, the number of citizens who are interested in taking their chances on the stock exchange trade increased as well. While inflow of foreign capital continuously increases, domestic investments rise as well. There are many people obtaining loans from the banks in order to invest that money on the capital market. People are making decisions on their own and are ready to face the consequences of these decisions. Finally, the stock exchange in Montenegro exists as any other market, with securities as instruments of trade that are bought and sold in order to earn money in the same way as any other good. Turnover realized on the stock exchanges in Montenegro in 2005 reached approximately 12% of GDP. This amount includes only trade that was realized on the stock exchanges. On the other hand, if we compare market capitalization with the GDP we get the following rate – 96%. These figures speak for themselves.


68


Judging by trends in previous years, it is expected that the growing trend of trade on the Montenegrin capital market will be continued in the future, especially in 2006. However, we should take into consideration the fact that since the major accelerator of the development of the capital market was the privatization process, turnover trends in the next years (especially after 2007) will not be as high as in previous years. The fact is, however, that Montenegro has a capital market and that this sector of the Montenegrin economy realizes high turnover. Despite all of these positive trends on the capital market, it is important to note that the primary market is still not developed. It has taken a small part of the total capital market. Development of the primary market is important for new investments, i.e. new capital. Additionally, the number of trading instruments is still small and narrow, considering that there are only three types of securities. Nevertheless, if we take into consideration that the capital market of Montenegro is relatively young, it may be unrealistic to expect a wider variety of securities on our stock exchanges at the moment. Every process needs time, especially the process of capital market development. The fact remains that the capital market of Montenegro is an example of how it is possible, in a relatively short period of time, to develop market infrastructure and its legal framework.

Monet March 2006


CHAPTER 8. EXTERNAL SECTOR

As far as the External Sector is concerned, the situation was not improved in 2005 compared to previous years. Namely, the goods trade deficit, one of the main contributors to the external economic disequilibria, increased in 2005 in absolute value and as a percentage of GDP. As a result, the current account deficit increased as well and accounted for 8.6% of GDP in 2005 (compared to 7.8% of GDP in 2004).

8.1. BALANCE OF PAYMENTS 8.1.1. Current Account The current account deficit in Montenegro amounted to € 140.7 million in 2005, a 17.6% increase over 2004 caused by a drop in exports of goods. Trade balance In 2005, the total trade balance deficit in Montenegro amounted to € 314.9 million, or 17.4% more than in 2004. The trade deficit accounted for 19.2% of GDP or 1.7 percentage points more than in 2004 (when it accounted for 17.5% of GDP). Goods trade The total goods trade deficit in 2005 amounted to € 505.9 million, or 21.5% more than in 2004. This deficit accounted for 30.8% of GDP compared to 27.2% of GDP in 2004. Total trade of goods (imports plus exports) was around € 1.4 billion in 2005, an increase of 4.1% compared to the previous year. Total exports of goods amounted to € 434.5 million, a decrease of 3.9% compared to 2004, as a consequence of lower exports to Serbia. On the other hand, total imports of goods amounted to € 940.3 million, an increase of 8.3% compared to 2004. Overall, the ratio of exports to imports in 2005 was 46.2%, or 5.9 percentage points less than in 2004. Foreign Trade Structure by Goods With regards to foreign trade according to SITC34 and concordant with previous estimates, the most dominant sectors on the exports side in 2005 were sector 6 (“Manufactured goods classified chiefly by materials”), and sector 2 (“Crude materials, inedible, except fuels”). A similar structure was also observed in 2004. As far as imports are concerned, the most dominant sectors in 2005 were sector 7 (“Machines and transport equipment”), sector 6 (“Manufactured goods classified chiefly by materials”), sector 0 (“Food and live animals”) and sector 8 (“Miscellaneous manufactured articles”). Balance of service Total revenues from services amounted to € 314.5 million or 26% more that in 2004. Total expenditures for services amounted to € 123.5 million in 2005 and increased by 21.8% compared to the previous year. The surplus in the balance of services in 2005 was € 191 million, an increase of 28.9% compared to the previous year. The reason for the increasing surplus was an increase in revenues from tourism (of 25.2%) and transportation services (34.1%).

34 Standard International Trade Classification


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With respect to the structure of revenues from services, the most dominant in 2005 were revenues from tourism services (68% of total revenues from services) and revenues from transportation services (19%), while the remainder of revenues related to financial and other services. Income The surplus in the balance of income amounted to € 116.2 million, an increase of 34.7% compared to the previous year. This was mainly due to an increase in compensations to employees of 29.1% in 2005 as compared to the previous year. Transfers The balance of transfers in 2005 was in surplus, amounting to € 58 million, a 7% drop, nevertheless, when compared to 2004. The drop was primarily due to a decrease in foreign assistance of 13.9% in 2005 as compared to the previous year. 8.1.2. Capital and Financial Account35 Financial Account In the financial account of Montenegro, “foreign direct investments” continued to be the most significant entry, amounting to € 374.7 million, or 22.3% of GDP (compared to 3.3% of GDP in 2004). This significant growth of the net FDI was the result of the privatization of several state-owned companies (Telekom, The Aluminium Plant – "KAP", several hotels, etc.) in 2005. “Net portfolio investments” in 2005 amounted to € 4.8 million or 12.8% less than in 2004. The entry “change in net foreign assets of commercial banks” was € -65.4 million in 2005, while the “change in CBM foreign reserve assets” remained negative (€ -112.9 million). 8.1.3. Net Errors and Omissions The total balance of the current, as well as capital and financial accounts, was € 46.3 million in 2005, an improvement compared to 2004. This surplus in these accounts is exactly the same as “net errors and omissions”, in order to achieve equilibrium of the balance of payments (see table 8.1 below). 8.2. TERMS OF TRADE36 Over the last several years in Montenegro, the highest import share was held by oil and oil derivatives (8.0% in 2004 and around 10% in 2005), while with respect to exports, the most dominant was aluminium (49.7% of total exports in 2004 and 45% of total exports in 2005). Thus, the ratio of aluminium prices and the ratio of oil prices are used to measure Montenegrin terms of trade, despite the fact that they do not precisely represent the profitability of those terms of trade.

35 Data on capital and financial transactions are, thus far, 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. 36 Terms of trade are defined as a ratio of the price level of the most important exports and the price level of the most important imports.

Monet March 2006


Graph:8.1 Prices of crude oil and aluminium prices

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

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

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2005

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

Source: ISSP calculations based on data obtained from KAP and International Financial Statistics According to the previous graph, terms of trade in Montenegro began a deteriorating trend after the end of 2002. The reason for the general deterioration of the Montenegrin terms of trade was that the price of crude oil increased much faster than the price of aluminum exports, despite the fact that export prices of aluminum in 2005 ($ 1,985 in December) increased compared to 2004.


72


Table 8.1: Balance of Payments of Montenegro (in 000 €)

2001 2002 2003 2004 2005

Change in 2005

(in %) compared to 2004

CURRENT ACCOUNT BALANCE -195 -163409 -101,986 -119,642 -140,715 17.6 Total current account revenues 631,606 692,315 642,531 910,625 999,168 9.8 Total current account expenditures 827,017 855,724 744,517 1,030,267 1,139,883 10.6 GOODS AND SERVICES BALANCE -390,675 -323,883 -247,597 268,260 314,870 17.4 GOODS BALANCE -487,527 -424,705 -359,330 416,436 505,886 21.5 Total export goods 235,365 322,624 270,574 452,148 434,458 -3.9 Exports of goods excl. trade with Serbia and Kosovo 209,925 220,738 177,575 259,553 274,489 5.8 Exports to Serbia and Kosovo 25,440 101,895 92,999 192,595 159,969 6.9 Total import of goods 722,892 747,329 629,904 868,584 940,344 8.3 Imports of goods (excl. trade with Serbia and Kosovo) 608,398 567,928 413,091 566,730 612,877 8.1 Import form Serbia and Kosovo 114,495 179,401 216,813 301,854 327,467 8.5 SERVICES BALANCE 96,852 100,822 111,733 148,176 191,016 28.9 Total revenues from services 150,228 175,969 191,395 249,529 314,506 26.0 Total expenditures from services 53.376 75.147 79.662 101,353 123,490 21.8 Total transport revenues 28.384 32.041 35.009 45,448 60,936 34.1 Transport, official data about revenues 26.404 29.084 29.634 39,847 50,371 26.4 Transport revenues from Serbia (estimate) 1.981 2.957 5.375 5,601 10,565 88.6 Total transport expenditures 20.059 22.029 25.904 29,420 34,896 18.6 Transport, official data about expenditures 18.652 17.790 19.801 19,300 21,443 11.1 Transport expenditures from Serbia (estimate) 1.407 4.239 6.103 10,120 13,453 32.9 Balance of transport services 8.326 10.012 9.105 16,028 26,040 62.5 Total revenues of tourism 105.970 124.236 136.046 171,764 215,120 25.2 Revenues from tourists abroad (estimate) 40.580 61.655 61.753 71,995 97,347 35.2 Revenues from tourists from Serbia 65.390 62.581 74.293 99,769 117,773 18.0 Total expenditures of tourism 5.020 8.009 10.096 6,963 10,277 47.6 Expenditures for tourism aboard 4.852 6.394 8.043 5,224 6,308 20.8 Montenegrin tourists in Serbia 167 1.615 2.053 1,739 3,969 128.2 Balance of tourism 100.950 116.227 125.950 164,801 204,843 24.3 Revenue of Financial Services 4.094 2.686 2.848 4,041 3,477 -14.0 Commission fee 4.044 2.262 1.567 3,314 2,907 -12.3 Commission fee– exports/imports with Serbia and Kosovo 50 424 1.281 727 570 -21.6 Expenditures of Financial Services 3,191 3,332 6,761 6,490 8,113 25.0 Commission fee 3,113 2,814 5,517 5,318 6,431 20.9 Commission fee- exports/imports with Serbia 78 52 1,244 1,172 1,682 43.5 Balance of financial services 903 655 -3,913 -2,449 -4,636 89.3 Revenues of other services 11,779 12,755 17,492 28,276 34,973 23,7 Expenditures of other services 25,106 39,133 36,901 58,480 70,204 20.0 Balance of other services -13,327 -26,378 -19,409 -30,204 -35,231 16.6 INCOME BALANCE 46,482 74,201 99,510 86,242 116,157 34.7 Total revenues 86,777 99,569 125,337 135,455 175,280 29.4 Compensation of employees 40,841 46,342 85,496 125,541 162,124 29.1 Revenues from Serbia for physical persons 44,329 53,226 39,261 9,323 12,042 29.2 Received dividends 170 3 45 0 0.00 Interest revenues 1,438 158 577 546 1,114 104.0 Investments abroad 980 Total expenditures 40,295 25,368 25,827 49,213 59,123 20.1 Compensation of employees 33,544 3,155 3,362 6,323 12,809 102.6 Expenditures from Serbia for physical persons 115 313 1,083 2,783 1,537 - 44.8 Interest expenditures 2,287 13,807 12,568 24,814 24,641 - 0.7 Paid dividends 4,349 8,405 8,814 CURRENT TRANSFERS BALANCE 148,781 87,056 46,101 62,376 57,998 -7.0 Transfers from abroad to Montenegro 170,596 102,755 58,413 27,104 34,983 29.1 Foreign assistance 69,518 42,074 21,807 20,089 7,123 -64.5 Foreign assistance - financial and material (NGO, humanitarian organizations)

78,357 50 30,230 26,300 32,818 24.8

Expenditures of transfers from Montenegro 10,454 10,211 9,124 11,117 16,926 52.3 Transfers from Montenegro abroad 10,454 10,211 9,124 11,117 16,926 52.3 CAPITAL AND FINANCIAL ACCOUNT BALANCE 11,900 71,843 133,030 58,705 186,989 218.5 CAPITAL ACCOUNT 0 0 0 FINANCIAL ACCOUNT 11,900 71,843 133,030 58,705 186,989 218.5 Direct investment 10,632 89,183 38,725 50,567 374,731 541.1 Equity capital 4,710 78,112 38,725 50,567 374,731 541.1 Reinvested earnings and undistributed branch profits 5,922 11,071 Portfolio investment-net -12 -213 942 5,524 4,816 -12.8 Other investment -6,088 17,369 47,047 -19,599 14,262 -27.2 Loans 2,925 24,888 114,597 144,853 176,681 22.0 Repaid loans 9,014 7,518 67,550 -50,330 -49,448 -1.8 Change in Net Foreign Assets 7,369 -24,144 45,759 31,820 -65,438 Change in CBM for reserve assets (term deposits of CBM in for. banks) 0 -10,352 557 -9,607 -112,858

BALANCE OF CURRENT ACCOUNT, CAPITAL AND FINANCIAL ACCOUNT -183,511 -91,566 31,044 -60,937 46,274

NET ERRORS AND OMISSIONS -183,511 -91,566 31,044

Source: Central Bank of Montenegro

Monet March 2006


CHAPTER 9. REGIONAL COMPARISON

In 2005, real GDP growth was positive in all SEE countries and almost all SEE countries increased their industrial production in this year as well. Annual CPI inflation in December 2005 was the lowest in Macedonia and the highest in Romania and Serbia. Unemployment rates in 2005 were lowest in Romania while the highest were estimated for Bosnia and Herzegovina.

9.1 MACROECONOMIC INDICATORS Estimated real GDP growth in 2005 remains strong in this region, the average rate of the seven SEE countries was close to 5%

Estimated real growth of GDP was 5.2% in Bosnia-Herzegovina, 6.0% in Albania, 6.0% in Bulgaria, 5.2% in Romania, 5.0 % in Serbia, 4.1% in Montenegro, 4.0% in Macedonia and 3.2% in Croatia.

In 2005, consumption and investments were the main engines of economic growth in the region.

Graph 9.1 presents the cumulative real GDP index for most countries in the region, starting with 1996:

Graph 9.1 Real GDP in SEE (1996=100)

80

100

120

140

160

180

200

220

240

1996 1997 1998 1999 2000 2001 2002 2003 2004 2005*

Albania Montenegro Bosnia and HerzegovinaBulgaria Croatia RomaniaMacedonia Serbia

Source: IMF, CIA, central banks of the countries and ISSP

Industry, as the sector which makes an important contribution to GDP growth in most SEE countries, increased production in 2005 in almost all them. The physical volume of industrial production increased in Serbia, Romania, Bosnia and Herzegovina and Macedonia, while it decreased in Montenegro in 2005 compared to the previous year, due to drops in the production of electricity, steel and aluminum .

In most Southeast European countries, price stability or low inflation rates characterized the economy in 2005. Only Serbia had a rather high inflation rate. Among foreign factors influencing the rates, increasing oil prices had a negative impact on inflation development, on the one hand, while, on the other hand, the appreciation of the euro against the US dollar, supported decreasing inflation in 2005. In most Southeast European countries currencies are fixed to the euro (Montenegro actually adopted the euro as its de-facto currency). Thus, the appreciation of the euro has meant the appreciation of these currencies against the US dollar,


74


which caused a decrease in the prices of import goods denominated in dollars. The annual CPI inflation rate in December 2005 was 2.0% in Albania, 1.2% in Macedonia, 2.5% in Montenegro, 6.5% in Bulgaria, 3.6% in Croatia, 4.5% in Bosnia & Herzegovina, 8.6% in Romania, and 17.2% in Serbia. Accordingly, Serbia and Romania were the two countries with the highest inflation rates in the region. On the other hand, Macedonia had the lowest inflation rate on an annual basis in December 2005. Table 9.1: Macroeconomic indicators of SEE countries

Alb

ania

Bos

nia

and

H

erze

govi

na/

Rep

ublik

a S

rpsk

a

Bu

lgar

ia

Cro

atia

Mac

edon

ia

Mon

tene

gro

Serb

ia

Rom

unia

2001 6.5 4.5 4.0 3.8 -4.5 4.0 5.7 5.0 2002 4.7 5.5 4.3 5.2 0.7 0.8 3.3 3.8 2003 6.0 3.5 4.3*** 4.3 2.2 1.5 2.5** 4.9*** 2004 6.0** - 5.8 3.8 - 3.1 7.0 4.5

Real annual growth rate of GDP (in

%) 2005 6.0** 5.2** 6.4 (first

three quarters)

3.2** 4.0** 4.1 5.9 (first

three quarters)

5.2**

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

2003 2.7 2.0/-1.6 (Mar) 15.6 4.0 0.5 (Nov)

6.5 2.4 -3.1 3.1

2004 - 9.0 23.4 3.0 -12.7(Jan-Dec) 13.8 7.2 5.3

Annual change of industrial production (in %)

2005 3.0* 5.1 (Dec) 9.3 (Oct) 6.9 (Dec) 5.1 (Jan-

Dec)

3.7 (Dec) 7.0 (Jan-

Dec)

-21,2 (Dec)

-1.9 (Jan-Dec)

0.3 (Dec) 0.5

(Jan-Dec)

2.0 (Dec)

2.0 (Jan-Dec)

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

2003 3.3 0.3 4.7 1.8 -1.1 (Jul) 0.3 (Jan-

Jul)

6.1 (Dec) 9.9 15.3

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

Dec)

3.2 (Dec) 2.4 (Jan-

Dec)

13.2 (Dec) 11.4 (Jan-Dec)

11.9

Annual inflation

rate (CPI, in

%)

2005 2.0 (Dec) 4.2 (Dec) 6.5 (Dec) 3.6 (Dec) 1.2 (Dec) 2.5 (Dec) 17.2 (Dec)

8.6 (Dec)

Currency name Lek

Convertible Mark; BAM

Leva Kuna Denar Euro Dinar Lei

2005 (against €)

123.1 (Oct)

1.956 (Dec)

1.958 (Dec)

7.313 (Dec)

62.8 (Dec) - 87.4

(Dec)

3.6217 (Dec)

National currency (against

€) Annual

change in % -4.0 - - -3.9 1.6 - -2.3 -5.4

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

2003 15.0 43.1/36.6 (Mar) 13.5 19.1 36.7 21.6 (dec) 30.2

(dec) 7.2

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

Unemployment rate

( in %)

2005 14.4 (Dec) 44.0 (Dec) 11.0 (Dec.)

18.0 (Dec) 34 (Dec) 17.0 (Dec) 32.6

(Dec) 5.9

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

Trade Balance (as % of

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

Current account (as % of

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

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

Monet March 2006


Unemployment rates37 in December 2005 were lowest in Romania (5.9% ), Bulgaria (11%), Albania (14.4%), Croatia (18.0%) and Montenegro (17.0%); while Bosnia & Herzegovina, Serbia, and Macedonia continued to have the highest unemployment rates in the region, amounting to 44.0% in Bosnia & Herzegovina, 32.6% in Serbia , and 34% in Macedonia. Despite the fact that several countries in the region increased exports of goods and services in 2005 (i.e. Romania, Croatia), their current account deficits became even greater since expenditures grew more rapidly than revenues. The estimated current account deficit in Serbia, however, decreased in 2005 and this improvement was achieved due to the faster growth of exports over imports. The estimated current account deficit in Montenegro was higher in 2005 than compared to the previous year.

37 Unemployment rates within the SEE countires are calculated through the implementation of different methodologies and thus data on unemployment rates cannot be completely comparable, despite the fact that these are the only available data.


76


CHAPTER 10. INFORMATION COMMUNICATION TECHNOLOGY IN MONTENEGRO

ICT has an important place in developed countries and developing economies, as well. According to that, MONET will contain analysis of the Montenegrin telecommunication market. Analysis will include basic statistical data in the area of telecommunications (fixed and mobile telephony, Internet, public telephones), regulations, and regional comparisons. Every new issue will analyze one special topic in the area of telecommunications. This issue will present the overall telecommunication market of Montenegro and be specially focused on fixed telephony in Montenegro. The telecommunication market in socialistic economies was very poorly developed. Decentralization and open market economy developed the telecommunication market in most developing countries. Big changes in this area included implementation of liberalization, privatization, and globalization. The telecommunication market and services were part of state ownership in Montenegro during the last decades. However, changes in regulation caused changes in the area of telecommunications. Adoption and implementation of new regulation caused privatization of the state owned company in the area of telecommunication, which resulted in liberalization and fair market play.

Graph 10.1. Value of telecommunication markets

0

200

400

600

800

1000

1200

1400

1600

1800

2000

Montenegro BIH Macedonia Bulgaria Croatia Albania Serbia Romania

Source: Cullen International Report Note: Data in million euros Development of a telecommunication market in Montenegro is very similar to that of other developing countries in the region. The most important indicators represent positive trends in comparison with previous years. o Population is more knowledgeable about ICT implementation; o Increasing usage of PCs among companies in Montenegro; o Increasing number of PCs in households; o Increasing number of households with Internet connection; o 3G system development in area of mobile telephony; o Increasing competition among operators of mobile telephony.

Monet March 2006


Table 1 Telecommunication market in Montenegro 2001 2002 2003 2004 200538

Revenue of telecommunication market (in mill euros) 89.2 150.6 162.7 170.2 Total number of fixed lines users (in 000) 184 190 188 185 Total number of mobile lines users (in 000) 356 445 420 483 558 Total number of fixed and mobile phone users (in 000) 540 635 608 668 Penetration of fixed telephone lines 28.4 28.6 28 29 Digitalization 87 92.5 98 99.8 Penetration of mobile telephone lines 53.9 67.4 62.7 78 90 Percentage of mobile phone users in total number of users 65.9 70 69 72.5 Number of Internet subscribers (in 000) 18 27 37 51 61.2 Number of Internet users (in 000) 18 27 83 100 Internet penetration 2.6 4.1 12.5 16.1 19.5 Number of Internet service providers 1 2 2 2 2

Source: Agency for Telecommunications, Annual Report 2004 Note 1: Penetration of fixed telephone lines represents number of main telephone lines per 100 citizens of Montenegro. Note 2: Penetration of mobile telephone lines represents number of mobile phone subscribers per 100 citizens of Montenegro. Note 3: Internet penetration represents number of Internet users per 1,000 citizens of Montenegro. The telecommunication market of Montenegro increased from 2001 to 2005. Accordingly, total revenue of the telecommunication market increased by 90.8% in the observed period. The total number of fixed telephone lines was the highest in 2002 (190,000 users). The number of mobile phone users increased by 56.7% from 2001-2005. Internet penetration was at 19.5% in 2005, as compared to just 2.6% in 2001.

Graph 10.2. Revenues according the segments

43

55

2

Fixed phones Mobile phones Internet services

Source: Agency for Telecommunications, Annual Report 2004 At the end of November 2005 there were over 558,000 mobile phone users in Montenegro, which represents penetration of 90%. Among them, 465,900 were prepaid and 92,000 were postpaid users. ProMonte had 328,300 users (58.8%) and Monet had 230,000 (41.2%). The total number of mobile phone users increased by 12% as compared to the same period of the previous year. In November, a total of 31.7 million messages were sent; ProMonte users sent 19.5 million and Monet users sent 12.2 million. In the same observed period, a total of 23.9 million messages were sent, which was 32% fewer in comparison with the previous year. There were 19.2 million outgoing calls from ProMonte and 17.3 million from Monet. 38 Observed period January-November 2005.


78


The number of Internet dial-up subscribers increased by 24.4%, totaling 61,200. Montsky subscribers increased by 56.2%, which represents penetration of 19.5% and is 3.5% higher than 2004.

Box 1. Expectations in 2006

The ICT market of Montenegro in 2006 will be marked with different changes. Firstly, a new mobile phone operator is expected to come. Secondly, it is planned to issue a license for 3G mobile phones and implementation of cable distributive systems, which will enable several channels for cable TV with popular prices. Finally, 2006 will be focused on developing and using new services in the area of telecommunications.

FIXED TELEPHONY IN MONTENEGRO Fixed telephony in Montenegro is still weakly developed and is represented with one dominant fixed phone operator. The most important indicator of fixed telephony in the Montenegrin telecommunication market is low fixed lines penetration. Penetration is, according to data from Telekom Montenegro and ITU, the lowest in comparison with other ex-YU republics. The main reasons for that are focused on insufficient investments in infrastructure, high investing costs, poor terrain, and poor economic conditions. Telekom Montenegro, as the only fixed phone operator, has different activities in the area of fixed telephony, some of which include servicing and exploitation of the telecommunication system and providing services for its users. Number of fixed line users The number of fixed line subscribers in 2004 was 184,560, which is 1.8% lower than 2003. The main reason for the decline is the re-installation of old telephones centrals and the replacement of analogue connectors. ICT market analysis in other countries shows a poor share of fixed telephony in Montenegro. Some of the ex-YU republics, such as Croatia and Slovenia, have a system that is as developed as in other countries in the EU.

Graph 10.3. Subscribers

0

20000

40000

60000

80000

100000

120000

140000

160000

180000

2001 2002 2003 2004

Companies Citizens

Source: Agency for Telecommunications, Annual Report 2004 The level of capacity usage in centrals is 75.4%. One complication for future development is a lack of infrastructure of local telephone networks. Digitalization level was very important during the last years.

Monet March 2006


Graph 10.4. Digitalization level

80

85

90

95

100

105

1 2 3 4

Source: Agency for Telecommunications, Annual Report 2004 The level of ISDN usage in a basic connection (ISDN-BA) was 19.8% in 2004, while it was 22% in a primary connection (ISDN-PRA). Telekom Montenegro created IP-MPLS net in 2004 as a platform for creating IP services. Tariffs

The total number of impulses in 2004 was 6,023. Expended impulse analysis decreased in 2004 in comparison with 2003 by 3% because of the increasing number of mobile phones and their usage in Montenegro.

In December 2004 Telekom Montenegro rebalanced the price of its services, resulting in increased prices for local telephone communication by 200%. However, they reduced prices in mobile telephony and international calls by 15%. Monthly subscription for citizens, including VAT, is €2.99, and for companies it is €4.78. Regional comparison shows that the fee for monthly subscription is at the lowest level in Montenegro.

Tariffs for local traffic are subsidized according to the revenue in local and international traffic. The price of a 3-minute local call for citizens is €12.04, which is half of the EU average. The price of 3-minute international call for companies is near to the EU average. It can be concluded that tariffs in Montenegro are the lowest in the region.

Graph 10.5. Structure of calls

International

Country

Mobile

Serbia

Source: Agency for Telecommunications, Annual Report 2004


80


Table 2. ICT indicators (telephone lines) POPULATION GDP TELEPHONE LINES

Country Total population (in million)

Population (per km²)

GDP per capita (USD)

Total (in thousands)

Telephone lines (per

100 people)

Albania 3.19 111.00 1,332.00 1,355.00 44.10Belarus 9.85 47.00 1,805.00 4,189.00 42.43BIH 4.19 82.00 1,836.00 1,988.00 51.88Brazil 180.66 21.00 2,864.00 107,987.00 59.78Bulgaria 7.83 71.00 2,550.00 7,500.00 95.80China 1,313.31 137.00 1,096.00 647,267.00 49.29Romania 22.28 94.00 2,626.00 14,604.00 65.55Serbia and Montenegro 10.52 103.00 1,451.00 7,415.00 70.49Montenegro 0.60 47.00 1,535.00 244.00 39.61Macedonia 2.07 80.00 1,301.00 62.42Ukraine 48.15 80.00 1,038.00 25,877.00 53.74Argentina 38.23 14.00 3,426.00 22,212.00 58.11Croatia 4.42 78.00 6,588.00 4,424.00 101.15Czech Republic 10.23 130.00 8,984.00 14,221.00 139.07Estonia 1.31 29.00 6,720.00 1,700.00 129.95Hungary 10.10 109.00 8,182.00 12,304.00 121.86Lithuania 2.29 36.00 4,783.00 2,168.00 94.82Latonia 3.45 53.00 5,315.00 4,242.00 123.09Poland 38.55 123.00 5,427.00 29,694.00 76.95Russia 144.20 8.00 2,370.00 73,493.00 50.20Slovak 5.38 110.00 6,072.00 5,526.00 102.61Turkey 72.32 93.00 3,392.00 53,833.00 74.44Andorra 0.07 144.00 87.00 103.40Australia 19.91 3.00 25,436.00 27,321.00 137.20Austria 8.21 98.00 31,209.00 11,753.00 143.22Belgium 10.34 338.00 29,048.00 13,888.00 134.33Canada 31.74 3.00 23,223.00 33,296.00 104.88Cyprus 0.81 87.00 18,211.00 1,059.00 131.21Denmark 5.38 125.00 39,312.00 8,641.00 160.75Finland 5.22 14.00 30,860.00 7,356.00 141.03France 60.43 111.00 24,057.00 78,422.00 129.76Germany 82.53 231.00 28,987.00 125,866.00 152.52Greece 10.98 83.00 15,051.00 16,202.00 147.60Iceland 0.29 3.00 36,377.00 482.00 164.45Ireland 4.04 59.00 38,062.00 5,799.00 143.44Israel 6.86 310.00 16,307.00 10,188.00 148.46Italy 58.00 193.00 25,252.00 88,707.00 152.94Japan 127.80 338.00 31,324.00 150,262.00 117.58Luxemburg 0.46 177.00 59,626.00 899.00 199.13Malta 0.40 1,266.00 11,818.00 513.00 128.15Holland 16.23 394.00 25,866.00 22,682.00 139.78Norway 4.55 14.00 48,162.00 6,391.00 139.53Portugal 10.53 115.00 13,993.00 14,600.00 138.66Singapore 4.32 6,320.00 21,794.00 5,725.00 132.67Slovenia 1.98 98.00 13,896.00 2,551.00 127.77Spain 43.20 86.00 15,928.00 56,581.00 130.98Sweden 9.01 20.00 33,586.00 15,674.00 174.62Switzerland 7.42 180.00 36,738.00 11,538.00 155.60England 59.80 244.00 26,369.00 94,791.00 158.51USA 297.04 32.00 36,273.00 359,052.00 120.88World average 6,379.47 47.00 5,530.00 2,897,827.00 45.54Europe 804.68 31.00 14,341.00 852,169.00 105.68

Source: Agency for Telecommunications, ITU CARA calculations

Monet March 2006


Graph 10.6. Number of telephone lines per 100 habitants

0

20

40

60

80

100

120

140

160

180

Icel

and

Ital

y

Irel

and

Aust

ria

Czec

h Re

publ

ic

Cypr

us

Esto

nia

Slov

enia

Leto

nia

Hun

gary

USA

Euro

pe

Slov

akia

Croa

tia

Bulg

aria

Pola

nd

Serb

ia a

nd M

onte

negr

o

Rom

ania

Mac

edon

ia

BIH

Rus

sia

Wor

ld a

vera

ge

Alba

nia

Mon

tene

gro

Source: Agency for Telecommunications, ITU CARA calculations One of the main reasons for the lack of development in fixed telephony is the expansion of mobile telephony. It is more interesting in terms of revenue and complexity of investing as compared to fixed lines.


82


RESEARCH

Monet March 2006


SOCIAL ASSESSMENT FOR EDUCATIONAL SYSTEM DEVELOPMENT PROJECT Jelena Janjusevic, ISSP

INTRODUCTION The Institute for Strategic Studies and Projections, in cooperation with the Ministry of Education and Science, and with the support of the World Bank, conducted research on the educational system in Montenegro. The research was conducted in April 2005. Two basic goals of the analysis were: to identify the opinions and viewpoints of different stakeholders – those who have an interest in reform of the educational system regarding the quality of the system in Montenegro; and to deduce satisfaction with the school system among elementary and high school pupils. A special methodology of pattern selection was created and applied to select 6 municipalities; in other words, the selected schools were part of the pattern. Profiles were created for each municipality (Podgorica, Ulcinj, Herceg Novi, Bar, Niksic i Pljevlja) that followed the pattern. Different quantitative research methods were applied for data collection, such as: informational interview on the local and national level with different stakeholders, parents, and pupils, household interviews in selected municipalities, and focus groups. We have conducted 18 informational interviews, 420 household inquiries (touching 1,105 individuals), and we have organized 12 focus groups during which we have had dialogue with 54 individuals. RESEARCH RESULTS Economic and social development of a country is, in great deal, determined by the quality of that country’s educational system. If pupils have not, during their schooling, learned and mastered the basic values and skills needed to become “good citizens” or if they have not gained the knowledge that will give them the opportunity to become productive, the basic role of education in the country hasn’t been achieved. A qualitative education is one that creates persons who have the capacity for future work and life, in other words, persons who know how to practically apply their own knowledge and skills. The majority of interviewed individuals agreed in their understanding of the role, function and quality of education; agreement was found similarly among pupils and their parents, teaching staff, psychologists, school executives and NGO, local government and representatives from other institutions connected to education. Based on the stakeholder’s opinions, we can isolate basic preconditions for obtaining a satisfactory level of quality in the education in Montenegro: 1. Legal framework; 2. International standardization; 3. Developed education institutions network; 4. Education institutions accoutrement; 5. Adequate curriculum; 6. High-quality textbooks; 7. High-quality teaching staff and school management; 8. Parental support; 9. Absence of discrimination. The legal framework has been estimated to be of good quality, in general, and is mostly in line with international standards. However, its implementation represents a problem; in other words, a significant number of respondents believe that the framework isn’t being practically applied. A certificate system has been noted to be an important segment of international standardization. Implementation of this system has been recommended because it represents


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a significant segment of educational system competitiveness in Montenegro. Most respondents were not familiar with the current legal framework, particularly parents and pupils, as well as teachers and representatives of the schools’ management. Among those parents who declared familiarity with the regulation, but were not satisfied with it, most were unable to define the reasons for their dissatisfaction; so, their concrete proposals are omitted. Teachers are more often than not only familiar with pupils’ rights and responsibilities; while more detailed knowledge of the regulation exists only in cases where a particular problem was present and the importance of a certain issue was intensified. Individuals who were most familiar with the legal regulation were parties that come from the public institutions (Ministries, Education Office, and international organizations that deal with this issue). More frequent organization of round tables and public debates was suggested to better engage all interested parties in the process of creating the legal regulation. There are an insufficient number of educational institutions in Montenegro, especially professional schools, minority language schools, and schools for children with special needs. The opening of private schools represents one of the ways to expand the educational institutions network. Representatives of public institutions and establishments that believe private schools would bring about even greater discrimination are the only ones who disagree with this approach as a means of expanding the network. Parents of pupils who have declared themselves as members of Albanian nationality note the importance of schools to hold classes in the language of a particular minority. Parents also believe that in order to have a quality educational system, schools for children with special needs are necessary. Most parents (58.8%) believe that these children should attend special schools and not be intermixed with children without disability39. However, one-fourth of the parents (25.5%) asserted that a certain level of communication between children with special needs and children without is necessary. On the other hand, representatives of government, as well as representatives of the private and international institutions, believe that children with special needs should be more involved in the regular educational system. School accoutrement represents a significant obstacle for improving the educational quality. Respondents believe that improvements of technical accoutrements in schools (obvious apparatus) is necessary in order to make the school environment comfortable for pupils, make them more interested in school, inspire them to work, and to eliminate arid and monotonous lessons and courses by developing pupils’ visual experience of the subjects, creating impelling group work, etc. The necessity of computing equipment has also been specifically noted, since it is necessary to provide qualitative and efficient instruction performance in informatics, and other subjects as well. Quality of curriculum has been evaluated as satisfactory in general, but it is emphasized that it is very voluminous. More than half of the pupils (53.3%) are satisfied with the curriculum in their schools, 15.6% are not, and 31.1% are only partially satisfied. In most cases, the reasons noted for pupils’ dissatisfaction are that the subject matter is too large, too heavy, and very weakly explained. When asked specifically about the volume and difficulty of the curriculum, nearly half of the parents (49.2%) responded with a positive answer, 35.8% think that it is partially difficult, and 15.0% responded negatively. Most parents of primary school pupils responded positively to this question (62.2%); while fewer respond this way among parents of high school pupils (40.5%). According to parents, overloaded study material leaves little time for pupils’ extracurricular activities and demands additional engagement of their parents in their work. Furthermore, a curriculum that is too comprehensive causes a certain number of pupils to take private lessons (11%). According to a significant number of parents, the curriculum is

39 9.6% of parents could not give any specific answer to this question

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overloaded with a large number of general subjects. Parents believe that the curriculum doesn’t emphasize enough the teaching of foreign languages and informational technology. According to teachers, an overloaded curriculum disables all pupils from expressing themselves equally. Pupils also believe that the curriculum is overloaded, that study material is too hard, and that it is poorly explained. However, pupils believe that foreign languages are adequately taught, but they agree that informational technology is studied very little. Over 60% of pupils don’t practice on computers. The majority of pupils believe that there are no subjects missing from the curriculum that should be included. The majority of pupils also believe that there are no subjects that should be excluded from the curriculum. Pupils would also like to have some subjects in the curriculum that they could choose independently; and their parents agree. One proposal related to reducing the comprehensive curriculum was to join two or three similar subjects into one class offering. All of the respondents believe that a more comprehensive introduction of practice into the current curriculum is necessary, in high schools (especially in vocational schools), as well as in elementary schools. With this, pupils who have finished their education would have much greater knowledge and skills and would be able to find faster employment. Opinions about textbooks are not unique. Most pupils and parents are satisfied with the textbooks from which pupils study. According to the research results, somewhat more than half (50.7%) of pupils are mostly satisfied, 26.7% are totally satisfied, while 12.3% of pupils are satisfied only with some of their textbooks, and 10.3% are not satisfied at all. The pupils who are not satisfied with the textbooks think that they are too comprehensive, imprecise, and provide poor explanations. For the greatest proportion of students, the textbooks are accessible just in time, they were able to obtain textbooks for all of their subjects, and they buy their textbooks. Parents’ opinions on textbooks are fairly positive with nearly half (47.8%) of parents believing that the quality of textbooks is good, while 38.1% think it is average. Only 1.1% of parents think that the textbook quality is bad and 0.9% feel that their quality is very bad. On the other side, 3.6% of parents believe that the quality of the textbooks is excellent. It can be noted that parents, pupils, and teachers alike are all dissatisfied with the translation of the textbooks into the Albanian language. Additionally, the representatives of the teachers, schools, and corresponding institutions on the national level believe that the textbooks are quite outdated, poorly illustrated, and loaded with too much data that drive children to study mechanically. It is proposed that the textbooks should have more pictures, schemes, and graphs, and to be more colorful so they could attract more attention, be more interesting to pupils, and stimulate the visual memory. All of the respondents agreed that a very important precondition of a quality educational system is the teaching staff. The teaching staff influences pupils’ love towards the subject and school. The majority of parents assess the quality of their children's teaching staff positively; 32.2% of parents assessed the quality of staff as excellent, 36.2% as satisfactory, 28.8% as average, and 2.7% of the parents are not satisfied with the quality of the teaching staff. The teaching staff received a satisfactory rating from 39.4% of parents whose children attend reform school and 26.8% ofparents whose children do not attend reform school. The teaching staff was assessed as average by 33.3% of parents whose children attend reform school and 16.9% of parents whose children do not attend reform school. Opinions about the evaluation system are quite divided. While a large proportion of pupils and parents report that marks are formed based on written assignments and tests and not upon participation in the class; another group of respondents, dominated by teachers, does not agree with this statement. Additionally, a fair proportion of pupils believe that objectivity is greater when marks are given based on oral responses rather than on written assignments.


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The majority of pupils had a positive evaluation of the teachers’ objectivity; while approximately 13% of pupils believe that teachers are just a little or not at all objective. According to both teachers and parents, there is a lack of objectivity. It is interesting that almost 40% of pupils said that their complaints don’t count. Most pupils have written tests once a month, which mostly follow the lectures. Most pupils consider the written tests to be a knowledge check (only 15% feel that the tests stimulate their continuous work and studying). Teachers have emphasized that awards for excellent and talented pupils are modest. Pupils think that awards are good practice because they motivate pupils. A large proportion of respondents agreed that there should be some effort to introduce awards and stimulations for good pupils and they believe that the local community and companies could be included in this process. Respondents believe that the parents’ role is of great significance to the educational system; this belief is especially strong among the teaching staff and school management. Respondents observe that cooperation is much better in smaller schools, especially in the suburbs, because the schools have better and stronger relationships with the parents and the whole community. Teachers especially emphasize that parents are not interested and they don’t come to parents’ meetings. In a way, parents’ responses also indicate their lack of participation because a great number of parents are unable to answer questions related to the problems that their children face in schools or questions related to the lectures or curriculum. The schools do have Parent Councils; among all parent respondents, 17.4% are members of the Parent Council, and among them, 63.4% find that suggestions and recommendations of parents are accepted. Approximately 11.4% of parents whose children attend primary school are members of a Parent Council, while parents of children in secondary school are slightly more likely to be a part of this group, 15.8%. Among parents of children attending reform school, 17.2% of them are members of the Parent council, while this percentage is 15.4% among parents whose children do not attend reform school. When asked about activities organized in cooperation with the Parents' Council, 30% of parents state that such activities occur only sometimes, while 14.6% of parents answered positively and 9.9% of parents report that such common activities are not conducted. Activities of the Council are mostly seen as finding donors, which should be only one aspect of the Council’s activities. Parent Council activities should be aimed at improving the lectures by organizing different pupils’ activities such as plays, performances, quizzes, sporting events, etc. An excellent example is the Music School in Podgorica, where the Parent Council organized a pupils’ concert and, thanks to a symbolic ticket price, they raised the funds necessary for new musical instruments, and in that way improved the working and studying conditions in this school. Therefore, respondents insist that the Parent Council should conduct more activities like this in the schools. Moreover, it is mentioned that in addition to the Parent Council being part of the schools that a Student Council should also exist. The need for better, more frequent and more active communication with the parents is emphasized. Parents should “enter into Montenegrin schools” in order to solve the pupils’ problems more efficiently and to identify the real desires, predispositions, and talents of the pupils as well. The majority of respondents have denied the presence of discrimination. However, some opposing viewpoints were voiced. Overall, discrimination is most present on a social basis. Religion is viewed as a basis for discrimination among 5% of parents and 5.6% of pupils. Roma parents and pupils, as well as those of other nationalities (Muslims, Croatians etc.) were more likely to note the presence of discrimination. Education of the Roma population is emphasized as a problem; specifically, their insufficient participation in the educational system. According to most parents, the solution to this problem is to improve the living conditions of the Roma population, with different incentives and with the education of the Roma children’s’ parents. One suggestion is to establish schools for the Roma population offering a free education. Teachers share a similar opinion and some suggest that schools introduce subjects such as the Roma language or the Roma history with the

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thought that an increased knowledge of the Roma population would contribute to a decrease in prejudices and lead to better participation of these children within the overall social system. Teachers have also emphasized that Roma children should have a better grasp of the official language. According to Roma parents, the solution is in the long-term resolution to the problems that face the Roma population; additionally, the Roma population needs assistance in obtaining textbooks, study material, or money. With regards to sex discrimination of pupils by teachers, a slight percentage of pupils and parents feel that this exists (around 3.0 to 4.0%). However, attitudes towards social discrimination are a little bit different. One of ten parents (11.0%) believe that their children are exposed to such discrimination by teachers. The same opinion is shared by almost 14.0% of pupils. Among pupils who reported social discrimination, a majority feel that pupils are more respected if they are excellent in their achievements, or if they have some family relationship with the teachers, or if they are better financially situated. Additionally, pupils believe that not enough attention is devoted to pupils with financial or health problems. A few of the focus group members emphasized the presence of prejudices between children from the urban and rural areas. The respondents were asked to share their opinions related to education reform. All agreed that education reform is taking a positive direction and they believe in reform success. With respect to their familiarity with the education system reform in Montenegro, 34.5% of respondents were familiar, while 28.8% were not. Around 36.7% of parents from the sample are partially familiar with the reform process. Among all parents who are either partially or completely familiar with the education system reform, 43% are satisfied with the results of the reform, 11.9% are not satisfied with the results, while 45.1% are partially satisfied. Among parents who have one child attending reform school, 14.3% are dissatisfied with the reform process, while among parents who do not have children attending reform school, 10.2% are dissatisfied. Additionally, two-fifths of parents who have at least one child going to reform school (40.3%) and nearly half of parents whose children do not attend reform school (48.5%) are partially familiar with the process of reform. Among those parents who are either partially or totally dissatisfied with the reform process, the most prevalent reasons given for their dissatisfaction were: voluminous teaching material for pupils (22.8%), curriculum (17.5%), and the pace of conducting reforms (5.3%). The indicator of dissatisfaction with the reform is the same for both the group of parents that have at least one child attending reform school and the group of parents whose children do not attend reform school. This indicator amounts to 0.31 (its values can range from –1 to 1). Expectations of the reform process include rationalization of the curriculum, introduction of modern methods, better school facilities, and improved textbooks. The main goal of the reform should be the creation of young people who can apply their knowledge and skills and quickly find jobs. Parents have particularly emphasized the rationalization of the curriculum and the unburdening of pupils. According to that, most respondents agreed that changes would be identified in the long-term through a decrease in the number of unemployed people, quicker employment, and satisfied and successful employers as well. The success of the reform, according to the opinion of all respondents, depends on the mutual activities of teachers, school management, children and parents, Government, Ministries and the local community. Only if all parties recognize their interest and get actively involved in the reform can the reform be successful. Namely, according to the majority of parents interviewed (85%), the crucial role for the success of the reform is played not only by pupils, but also by parents and teachers. Only 0.2% of the interviewed parents consider the role of parents as crucial for the success of reforms. 2.2% of parents feel that the pupils have the key role in this process, and 12.6% think that this role belongs to the teachers. However, according to a great number of respondents, the economic development, i.e. overall living standard, is important to


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the reform process. Teachers have shown their interest and readiness for vocational perfection and additional education in this area. A positive example of this can be noted in that the teaching staff, which has completed some types of education related to the reform, organizes courses for their colleges in order to share their acquirements and information. Individuals who doubt the reform success believe that reform doesn’t offer the freedom to choose subjects at one’s own will, that it is too quick tempered, and that it targets too many elements of the educational system. A final conclusion is that the initial educational system reform has already garnered positive results, but there is a lot to do in education quality improvement in Montenegro. PUPIL’S SATISFACTION WITH THE SCHOOL Although previously analyzed questions explain the pupils’ satisfaction with the school, and their attitudes toward issues related to their school and the education system, one set of questions is created with the goal to estimate if pupils are enjoying school. Young pupils, up to the fourth grade of elementary school, in most cases like to go to school; however, there are some who don’t (around 5%) and they explained that school is boring, that they don’t like to study, and that school is hard for them. Almost 20% of the “young” pupils believe that school is hard. Older pupils also enjoy their time spent in school, in most cases (60%), or they enjoy it sometimes. The moments they cite as the most enjoyable in school are during school breaks, but also during classes that use interactive teaching methods. If they could change something, the older pupils would reduce the study material and the number of subjects, change the teaching staff, and improve the school’s interior. Around 29% of these pupils wouldn’t change anything in the school. According to half of the parents, their children experience school as an obligation, while according to the other half, their children experience school as a pleasure. Around 60% of pupils from the first grade to the fourth grade said that they miss school while they are on break. Around 30% of the older students skip school without a valid reason, which is mostly related to high school students. Lectures that are missed due to absence can be easily made up. The percentage of parents who are satisfied with the success of their children is higher among parents whose children go to primary reform school (92.5%) than among parents whose children attend primary non-reform schools (81.7%). Also, reform school parents are more likely than parents of children who don’t attend reform school to believe that their children experience school as a pleasure, and they believe that that kind of system stimulates the children to continue their education. The pupils that attend the reform school enjoy their time while they are in the school; they are less loaded with homework and have more time for other activities. In addition to that, they believe that teachers are more motivated, more prepared to spend some extra time with their pupils, often respect the pupils’ initiatives and suggestions, and pay more attention to pupils’ special predispositions, as well as to pupils who have financial and health problems. Parents that are not satisfied with the success of their children at school have been asked to specify reasons/conditions they find appropriate for the better success of their children. The majority of these parents (68.6%) feel that their children should have had better success and should have learned more. Parents of 19.6% of children find that the success of their children could have been better had the curriculum at the school been less voluminous. Parents of 8.8% of children find that the success of their children could have been better had the teachers given more attention to the pupils, while 2.9% of parents think that the success of their children could have been better had they worked with their children at home more often. The percentage of parents whose children attend certain reform schools and think that their child should have realized better results in terms of the amount learned was 37.5%, while this percentage for parents whose children do not attend certain reform schools amounted to

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73.8%. Additionally, 25% of parents whose children attend reform school responded that their children could have had better success at school had the teachers given more attention to their activities, while this percentage within the group of parents whose children do not attend reform school is 4.8%. Around 37.5% of parents responded that the success of their children could have been much better had the curriculum been less voluminous, while 14.3% of respondents within the group of parents whose children do not attend reform school stated the same. Based on these answers it can be concluded that the launched reform of the education system has already garnered its first results. CONCLUSION Education is one of the crucial factors of the economic prosperity of Montenegro. It presents the basic instrument for increasing the Montenegrin competition level. Establishing and reaching standards of knowledge that are comparable to the European standards allows for functional linkage with the developed countries. According to the research, current reform of the educational system in Montenegro was positively evaluated and it provides positive results. It is necessary to further work on the reform implementation and further increase the quality of the education.


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ANALYSIS

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INFLUENCE OF OIL SHOCKS ON THE COUNTRY’S ECONOMY Marijana Mitrovic

ABSTRACT The increase in oil prices has become a source of potential risk all over the globe, appearing in developed countries as well as in emerging countries. The high increase in prices on the oil market has had a significant impact on inflationary expectation and growth in most countries. The latest oil surge was driven by demand, not by supply side factors, as in the past. In industrial countries, the capital market incorporates this signal as an input on investors’ decision-making process, implying that there is a negative correlation between oil and bonds pricing. However, at the start of 2005, the implication is more that the markets recognize this increase as a tax on oil consumption rather than as a result of market forces pricing. However, the current market reaction to oil prices has inflationary expectations, and poses a risk to inflation and growth in developing countries as well. In addition to inflation and growth, it also poses a risk to the balance of payment, living standard, and nominal interest rates. This paper will present empirical evidence of how oil shocks affect both developed countries (USA, Japan and Euro zone) as well as our emerging market country (Montenegro). INTRODUCTION Over the last thirty years the world economy has experienced several oil price shocks, which are known as “oil shocks” in economic theory. Bearing in mind the importance of this product, both as a semi-product and a final product, the effects of volatility in this market are promptly transferred to the country’s whole economy. A change in prices on the oil market is a signal and it causes different reactions among the economic actors in terms of inflationary expectations and expected growth rate of the overall economy. This paper has two main parts. The first part provides an overview of how an increase in oil prices reflects on the global market (US, Euro zone, Japan), which recognizes this sign on the capital markets; while the second part provides analysis of the influence that oil prices have on the Montenegrin economy. The applied methodology in these two surveys is different according to available data sources, which in the case of Montenegro is a limiting factor. GLOBAL MARKET Historically, the development of the oil market indicates that the price of this product is not just a result of changes in supply and demand, but as has been seen in different periods, the price is often affected by political factors and regulative limitations. Dominant factors that create an oil crisis on a world level can be recognized through several characteristics that mark changes on this market. Firstly, oil crises are often products of political and military situations, especially within the Middle East, which owns almost half of the world’s oil reserves. An uncertain situation in this region is the primary cause for the increased risk, and therefore, the increased price of this good. A second characteristic of the oil market is regulation on the supply side through the establishment of several cartels. For instance, OPEC, Organization of the Petroleum Exporting Countries, which consists of 11 member countries, has a huge influence on the control of quantity of this product and in that way also has control of its price. OPEC has set in its policy the lowest and the highest possible price of oil per barrel, thereby controlling the price.


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Quantities among member countries are limited based on a quota system of 26.5 million barrels per day; and today, in the current crisis, OPEC exploits just over 30 million barrels daily. Today, this organization closely cooperates with producers outside the cartel, such as Oman, Mexico, and Norway -- countries that have large reserves of this raw material. Concentration of producers is another factor that influences the price and stems from the supply side. However, stemming from the demand side, another factor has recently appeared that has had an impact on the increased oil prices and that is the increase in consumption over the last three decades. China and India have recorded constant growth of their economies and therefore they are consuming more oil. According to official Chinese data, the state today consumes one million more barrels of oil than it did in 2000, making it the second largest importer of oil, following the USA. Although the supply side has dictated conditions in the past and the control of quantities and the prices was evident (see graph), all indicators show that the demand in this decade will increase and that classical methods for maintaining oil prices, used in the past, will not be efficient. The prices of oil will be more and more set according to market principle of supply and demand. Chronology of the most important events that have marked this market is shown in the following graph.

Major Events and Real World Oil Prices, 1970-2005(Prices Adjusted by Quarterly GDP deflator, 2Q 2005 Dollars)

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$10

$20

$30

$40

$50

$60

$70

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$90

19701972

19741976

19781980

19821984

19861988

19901992

19941996

19982000

20022004

Con

stan

t $20

04 p

er b

arre

l

1973 Arab Oil Embargo

Iranian Revolution; Shah Deposed

Iran-Iraq War Begins; oil prices peak

Saudis abandon "swing producer" role; oil prices collapse

Iraq Invades Kuwait

Gulf War

Asian economic crisis; oil oversupply; prices fall sharply

Prices rise sharply on OPEC cutbacks,

Prices fall sharply on 9/11 attacks; economic weakness

Prices spike on Iraq war, rapid demand increases, constrained OPEC capacity, low inventories, etc.

Saudi Light

Imported RAC

Source: EIA

Fluctuation range of oil prices in the Global market

0

10

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70

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1992

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2005

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Market oil price Min rangeMax range

Source: Bloomberg L.D.

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The above graph shows that the political events during the seventies and eighties had a higher influence on oil prices as compared to the events that occurred later. The economic impact of oil shocks has experienced a declining trend and has become progressively less destructive to the growth of the world’s economy. Less and less this factor creates inflationary expectations and now there is more empirical proof that after the initial increase “overshoot,” prices return to the lower level. With these expectations in mind, business policies are created and business decisions are made, whose results are estimated through prices on the capital market. The influence of oil prices on the economies of developed capital markets can be evidenced through changes in stock and bond prices on these markets. In developed economies, informational technology transfers every signal from the market into input for investors, who then incorporate this information in their decisions. Ten-year treasury bills have become securities that describe the situation in developed economies in a consistent and quality manner. This instrument absorbs all signals from the market while at the same time picturing mid-term expectations and developing macroeconomic policy (monetary and fiscal policy of a country). An increase in the price of treasury bills, as one of the most secure placements, implies that investors feel increased risks in the economy and have pessimistic expectations in the area of the real economy. Based on these expectations, investors place their capital in treasury bills thereby dispersing their risk. Increased investment in bonds creates a lower demand for shares, whose price then decreases, thereby signaling an economic recession. The positive correlation between oil prices and bond prices is interpreted as a threat to companies’ growth and profits, therefore, the value of the companies also declines with the decreased expectations (the price of oil increases, the price of bonds increase, while the price of shares decrease). The response to these changes has typically been one of panic and the events that occurred within the developed economies markets during 2004, which were caused by the sudden increase in oil prices, are an example of such panic. With this view of events, the increase in oil prices was more interpreted as an indirect tax on consumption and a measure to decrease demand, rather than as a general factor that influences inflation. However, in the beginning of 2005, the negative correlation between the price of oil and the price of bonds (the price of oil increases,

the price of bonds decreases, the price of shares increases), indicates that investors have incorporated this price increase into their expectations and they do not see the increase in oil prices as a destructive factor for business nor as a danger for an increase in inflation. An increase in oil prices is seen as a result of increased demand, led especially by China and India, two of the biggest importers and consumers of oil at this time, both with high GDP growth rates. Economies’ “thirst” for raw materials, such as these two

countries, has become a dominant factor of supply and is dominating the influence on the market, pushing the price up.

World stock exchanges, especially the US, Japan and European markets react promptly to any change, as well as to any political or military crisis in the world; their reaction is reflected through changes on the capital markets.

Bond and Oil Price Correlations(Levels)

-0.6

-0.4

-0.2

0

0.2

0.4

0.6

0.8

1

1/1/2004 4/1/2004 7/1/2004 10/1/2004 1/1/2005 4/1/2005 7/1/2005-0.6

-0.4

-0.2

0

0.2

0.4

0.6

0.8

1

eu r o

usa

japan

Source: Bloomberg L.P.


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IMPACT OF OIL PRICES ON THE MONTENEGRIN ECONOMY The high increase in oil prices of today is favorable for producers, but has unsettled the consumers’ world. An increase in the price of oil by 50% on the international market influences all import dependent economies, and Montenegro as well. The main distributors of oil products in Montenegro are private companies, which react to fluctuations on the international market and adjust their prices to these flows. According to official statistics and characteristics of demand in Montenegro, it is very difficult to build a correlation between changes on these markets and other sectors of the economy. The following graphs try to depict changes to better understand the course and intensity of the increased price of oil’s influence on the Montenegrin economy.

Global oil prices and import of oil in Montenegro

0.00

3,000,000.00

6,000,000.00

9,000,000.00

12,000,000.00

15,000,000.00

18,000,000.00

21,000,000.00

24,000,000.00

27,000,000.00

Janu

ary

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chAp

rilM

ay Jun

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ctob

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Import of oil in MontenegroGlobal oil prices

Source: Bloomberg L.D. i CBCG

in USD in USD

2003 20042005

Linear trend

Oil trade balance in Montenegro

-35,000,000

-30,000,000

-25,000,000

-20,000,000

-15,000,000

-10,000,000

-5,000,000

0

5,000,000

April 03

Jun 03

August 03

Oct.03

Dec.03

Feb.04

April 04

Jun 04

August 04

Oct.04

Dec.04

Feb.05

April 05

Jun 05

August 05

Source: CBCG

in US $

An increase in the monthly value of imported oil in Montenegro, and accordingly the trade balance of this product, provides argument for the claim that the distributors of oil in Montenegro have adjusted their prices in response to world prices. The overall quantity of oil that is consumed in the country is acquired abroad and paid for in euros. Thus, an increase in oil prices has, as a consequence, an increase in the value of imports, and accordingly, an increase in the trade deficit. Despite the fact that the trade balance is worsened due to this, one cannot argue that it represents a threat to the overall system. Directly, it is reflected through deterioration in the trade balance – this is an alarming sign that should be given more attention in order to alleviate the negative consequences of imported inflation, the increased costs and the decreased competitiveness of products – of the so called secondary impacts on the economy. Considering the prognosis that the price of oil could only increase further or fluctuate around the current level, import dependent economies such as Montenegro could expect an increase in the retail prices of their economy.

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Table 1. IMF estimate on changes of oil prices in the future (price in $ per barrel)

11/2/2005 Exp Avg: 1/

WTI 40(West Texas light) Brent41 Dubai WTI Brent Dubai Future

2/ 3/ 4/ APSP

Feb-05 47.96 45.56 39.82 47.96 45.56 39.82 44.56 Mar-05 54.17 53.08 45.58 54.17 53.08 45.58 50.93 Apr-05 52.96 51.86 47.10 52.96 51.86 47.10 50.64 May-05 49.81 48.67 45.00 49.81 48.67 45.00 47.81 Jun-05 56.39 54.31 50.98 56.39 54.31 50.98 53.89 Jul-05 58.67 57.58 52.85 58.67 57.58 52.85 56.37 Aug-05 64.96 64.09 56.63 64.96 64.09 56.63 61.89 Sep-05 65.54 62.98 56.54 65.54 62.98 56.54 61.69 Oct-05 62.36 58.52 53.67 62.37 58.52 53.67 58.19

Nov-05 59.80 58.83 51.88 59.87 58.76 51.73 56.79 Dec-05 59.75 58.38 52.11 59.84 58.40 52.00 56.74 Jan-06 60.49 58.88 52.16 60.54 58.84 52.06 57.15 Feb-06 60.92 59.37 52.35 60.96 59.32 52.24 57.50 Mar-06 61.20 59.72 52.45 61.22 59.66 52.41 57.76 Apr-06 61.40 59.97 52.67 61.41 59.92 52.63 57.98 May-06 61.52 60.10 52.78 61.51 60.04 52.73 58.09 Jun-06 61.58 60.17 52.85 61.56 60.11 52.79 58.15 Jul-06 61.63 60.25 52.92 61.60 60.19 52.87 58.22 Aug-06 61.65 60.32 52.98 61.61 60.26 52.93 58.27 Sep-06 61.66 60.36 53.01 61.62 60.30 52.97 58.30 Oct-06 61.67 60.35 53.00 61.62 60.28 52.95 58.28 Nov-06 61.63 60.34 53.00 61.57 60.26 52.93 58.25 Dec-06 61.58 60.32 52.98 61.50 60.23 52.91 58.21 Jan-07 61.44 60.22 52.89 61.35 60.12 52.80 58.09 Feb-07 61.34 60.10 52.78 61.24 59.99 52.69 57.98 Mar-07 61.25 59.97 52.67 61.14 59.86 52.57 57.86 Apr-07 61.15 59.84 52.56 61.04 59.72 52.46 57.74 May-07 61.03 59.71 52.44 60.91 59.59 52.34 57.61 Jun-07 60.91 59.58 52.33 60.79 59.45 52.22 57.49 Jul-07 60.77 59.45 52.21 60.64 59.32 52.10 57.36 Aug-07 60.62 59.32 52.10 60.49 59.19 51.99 57.22 Sep-07 60.47 59.19 51.99 60.33 59.05 51.87 57.09 Oct-07 60.31 59.06 51.87 60.17 58.92 51.75 56.95 Nov-07 60.15 58.93 51.76 60.00 58.79 51.64 56.81 Dec-07 59.99 58.80 51.64 59.84 58.66 51.52 56.67 Dec-08 58.54 57.32 50.34 58.37 57.16 50.20 55.24 Dec-09 57.19 56.36 49.50 57.01 56.18 49.35 54.18 Dec-10 56.24 56.18 49.34 56.04 56.00 49.19 53.74 Dec-11 55.69 56.02 49.20 55.49 55.83 49.04 53.46

Source: IMF Oil products constitute a significant share of a great number of final products whose increase in prices could, through the “cost push” mechanism, lead to higher inflation. The methodology used to estimate consumer basket prices, through which Monstat calculates inflation, is unrealistically weighted and is unadjusted to real consumption in the Republic. Due to this problem, it is very difficult to identify a timely influence of an increase in oil prices on the growth rate of retail prices and the cost of living, which is expressed in the official data. In most countries, the structure and weights of the consumer basket are adjusted annually based on the households’ consumption surveys. Based on the Monstat methodology, the contribution of oil prices in the consumer basket is given a weight of just 1.4%, which is one of the lowest weights in the narrow and broader surrounding.

40 WTI - West Texas Intermediate – prices of crude oil are published according to the prices achieved in the place Cushing in the state Oklahoma, which is the main location for crude oil trade in the USA. The price achieved in Cushing is a benchmark for many other types of raw oil all over the world, as well as a benchmark for term trade with oil on NYMEX. 41 Brent – In Europe Brent quality of oil is a reference for quality of oil sourced from the North Sea. Each market demands reference in order to establish prices of oil for different qualities. Oil of Brent quality, among rest, is obtained from following oil fields in the North Sea: Magnus, Gulfaks, N. Alwin, Troll, Frigg, Bruce, Heimdal, lClaymore.


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Table 2. : Share of oil in overall consumer basket of good and services used for calculation of inflation in different countries

1 2 3 4 5 6 7

Country Slovenia Croatia Serbia Montenegro EU UK Luxemburg Share of oil 8.2% 4.86% 8.31% 1.41% 4.5% 2.8% 9.5%

Source: Central Bank of Montenegro Although economic statistics require more time to identify a trend of increase in prices, companies and citizens feel the price shocks in the actual moment. Companies feel it through increased production costs and decreased profits, and citizens feel it by decreased living standards and decreased spending possibilities. The problem with the methodology used to calculate the inflation rate disables additional analysis in this area. Despite the fact that an increase in oil prices is not yet identified as a threat through the official indicators in Montenegro, it is present as a real and/or potential threat for economic development. (See next graph for details; see Report of Price Changes, Central Bank of Montenegro, August 2005)

-15.0-10.0

-5.00.05.0

10.015.020.0

jan feb march apr may jun july august sept oct nov dec jan feb march apr may jun july august sept

2004 2005

oil price in Montenegro Global oil price

Source: Monstat and Monthly oil market reports, OPEC

As a consequence of increased oil prices and derived costs, which are linked to this, could be a decrease in purchasing power, both among households and a number of companies that are sensitive to these changes. Therefore, we see that the problem of increased oil prices causes a chain reaction and increases other prices as well. In this spiral chain, the highest price is paid by the poorest households in the society. The redistributive effect of inflation goes from the users of oil within import dependent countries to the countries that export oil. The price increase, in that sense, favors oil producers, and especially OPEC as a central figure on the world market; while on the other hand, the price increase hinders the development capacities of all developing economies, as well as all other economies whose activities are not based on the production of oil. Montenegro does not have its own reserves of oil and oil derivatives; it imports them. Therefore, the increased price of these products greatly influences the cost of living for all citizens and the economy as a whole. Potential impacts of oil shocks on the Montenegrin economy are: 1. Potential inflation (chain increase of other prices) 2. Decrease in living standards; 3. Decrease in economic activities due to increased costs of production; 4. Decrease in competitiveness of Montenegrin products due to eventual increase in prices due

to higher costs; 5. Pressure on nominal interest rates; 6. Decrease in investment consumption; 7. The high demand for oil and oil products would decrease investment possibilities.

Restructuring of the economy and transition implies a high volume of direct investments that require energy raw materials. “Dead weight cost” -- irrational cost due to an increase in oil prices -- decreases the available means for investments and decreases the volume of investments. Except for the threat to investment consumption, final consumption of this

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good is high. The high import of automobiles in Montenegro represents an additional source of demand (see next graph), and by that additional costs.

0.00

10,000,000.00

20,000,000.00

30,000,000.00

40,000,000.00

50,000,000.00

60,000,000.00

2003 2004 (9 months) 2005

Total import of cars in Montenegro

28.2 (in mil.$)

54.2 (in mil. $)

45.4 (in mil.$)

Source: CBCG

POSSIBILITIES FOR ADJUSTMENT TO EXTERNAL SHOCKS Due to the loss of an exchange rate policy, there is basically no possibility to adjust to shocks that come from surroundings, both in the case of oil prices or prices of any other good. Faced with these shocks, the economy must deal with real losses/gains without the possibility of alleviating them through adjustments in the exchange rate. A system that is tied to the dollar operates under market principles without the possibility for direct interventions from the government. Of course, excluding the exchange rate policy, there are alternatives for adjustments that are available in situations with asymmetrical shocks and balance of payments deficit: increase in capital inflow in the country, decrease in fiscal deficit, decrease in prices through a decrease in taxes, and an increase in wage flexibility (rarely). The system is moving towards new equilibrium through adjustment on the market. If in Montenegro it was an option to amortize the sudden increase in oil prices, two possible solutions could be isolated. The first solution is to increase labor productivity thereby generating more income to balance the costs incurred by the increase in oil prices. The second solution implies intervention through fiscal policy to alleviate the consequences of the increased costs. By increasing productivity, additional revenues are generated in the corporate sector and the pressure on business is decreased. Increased productivity would alleviate the negative effect felt by the increase in real prices (incentive measure), and would therefore decrease the pressure on the household budget. Changes in the fiscal area could be effected through a decrease of the fiscal burden on oil and oil derivates directly, VAT and excise, or a decrease of other tax liabilities that are included in the costs, such as a decrease of taxes and contributions on wages. Authorities in Montenegro are more in favor of this second option because they think that results of such measures could have long-term positive effects on the development of entrepreneurship in the country.


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CHANGES IN EXCISE POLICY AS A MEASURE TO ALLEVIATE THE IMPACT OF OIL PRICES INCREASE In table 3, the structure of retail prices of fuel in Montenegro is given. Table 3. : Structure of retail prices of fuel in Montenegro

Fuel Super Unleaded Diesel Eco-diesel

Import price (€) 0.270 0.273 0.317 0.358

Custom (€) 0.007 0.007 0.008 0.009

Excise (€) 0.364 0.364 0.270 0.270

Wholesaler margin (€) 0.025 0.035 0.030 0.031

VAT (17%) (€) 0.113 0.155 0.106 0.114

Highway tax (€) 0.070 0.059 0.000 0.000

Ecological tariff (€) 0.002 0.002 0.003 0.003

Wholesale price with VAT(€) 0.891 0.855 0.734 0.785

Gas-station profits (€) 0.039 0.095 0.146 0.045

Retail price (€) 0.930 0.950 0.880 0.830

Source: Institute for Strategic Studies and Prognoses Despite the fact that the level of excise is according to EU directives, there is an open issue of rationale and correctness of such calculation. In the table above, it is obvious that excise on super and unleaded fuel is higher than the import price and amounts to €0.364 per liter (excise is 25.82% higher than the import price of super fuel), while excise on diesel and eco-diesel fuel is €0.270 per liter (which is only 14.83% less than the import price of diesel and 24.58% lower than the price of eco-diesel). It is hard to accept the existence of such a system for calculations, especially when combined with the current increase in oil prices it only increases the products’ prices. The calculation of excise taxes on the base, which includes customs, and later charging VAT on the base, which includes customs and excise, indicates that there is a double taxation of already charged taxes. Alleviation of cost shocks is achieved either through an increase in revenues, similar to the case of increased productivity when higher costs are covered by higher revenues, or through a decrease in costs, such as in the case of changing the fiscal policy. INSTEAD OF CONCLUSION (CONCLUDING REMARKS) The increase of oil prices to nearly $65 per barrel (September 2005) has increased the margin of cost-effectiveness and playability to a level that allows for significant investment in new and renewable (alternative) sources of energy and to move forward in substituting oil and commercial exploitation of these new sources. The increase in oil prices initiates reconsiderations to exchange oil as a source of energy with some substitute. For years now, alternative sources of energy, depending on the increase or decrease in oil prices, have become more attractive and higher amounts are invested in research of these new and renewable sources of energy. Research of alternative sources of energy is concentrated on the following: 1. Nuclear energy, 2. Solar energy, 3. Geothermal energy

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4. Energy of biomass 5. Energy of waves 6. Energy of tide 7. OTEC thermal energy of ocean 8. Wind energy. Bearing in mind that the number of sunny days in Montenegro is approximately 200 days per year, there is the potential to exploit solar energy. Literature: 1. How Oil Shocks Affect Markets, Roger Kubaruch, The International Economy, 2005 2. Oil and the Global Economy in 2006 and beyond: Oil at $100 and Return to Stagflation?,Nouriel

Roubini, Stern School of Business, New York University and Roubini Global Economics, LLC 3. The Crude Story, Investment Strategy Weekly, June 2004 4. The Global Economy: Oil a risk, Maxine Koster, FIXED INCOME RESEARCH INTERNATIONAL, August

2005 5. Correlation Monitor, Marijana Mitrovic, IMF, 2005 6. Makroekonomski modeli, Veselin Vukotic, 2000 7. Dealing with Higher Petroleum Prices—Fund Policy Advice, Teresa Ter-Minassian and Mark Allen,

IMF, November, 2004 8. Issues in Energy Pricing Policy, (EBS/91/129, 8/2/91), p. 14. This note draws, in part, on the analysis

in this Board Paper. Web-sites: 1. www.imf.org 2. www.bloomberg.org 3. www.rgemonitor.com


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THE FLAT TAX REVOLUTION Author: Ivana Vojinović, ISSP

1. INTRODUCTION Tax systems represent a totality of tax categories of one country and are subject to continuous evolution. Development of tax systems has a long history, showing some general tendencies. In the Middle Century, poll taxes and indirect taxes (excises) were the most frequent. During the last century, personal income tax was introduced. After the First World War, relatively balanced tax systems were developed as well as social insurance contributions and personal income taxes were introduced as a new phenomenon. That time period is characterized by tax progressivism being one of the important instruments of the welfare state. The seventies showed that progressive taxation is strictly correlated with disincentive effects on the economic efforts of individuals, for problems with tax evasion and avoidance became much greater during this time. During the eighties, thoughts to eliminate progressive taxes and to broaden the tax base were included in the tax systems. In the last thirty years, the most important changes in the tax systems were the introduction of the value added tax (VAT) and the harmonization of the tax systems, which is the adjustment of tax systems with those of EU member states; also of great importance is the implementation of EU Directives in the different areas of the Tax Law. Modern tax systems rely upon the concept of tax pluralism, which means that the state realizes tax objectives by using different types of taxes.

Today, dramatic changes regarding tax system reforms are related to the introduction of flat tax regimes, which took place in Eastern Europe. The recent successful implementation of the flat tax in Eastern European countries has led a number of Western countries to discuss the flat tax alternative in their Parliaments. Given the present trend towards fiscal simplification and the increased debate surrounding the flat tax, this commentary discusses the impact and effect of these changes during the last decade.

2. EXPLANATION OF FLAT TAX SYSTEMS Flat tax structures were common to the industrialized world in the first half of the 19

th

century. The first calls for a ‘progressive’ income tax structure came from Karl Marx in his 1848 Communist Manifesto. Karl Marx’s progressive tax structure was designed so that the tax burden was heaviest on those who were most able to contribute and lightest on those least able to contribute - the principle of wealth redistribution. Fairness or “capacity to pay doctrine” are the chief reasons why most countries have imposed multiple rates of tax. The paradox is that today it is the old capitalist countries that remain strongly committed to progressive tax, while several former Communist countries are in favor of flat taxes.

Flat taxes refer to tax structures that have a single marginal tax rate. They can also describe a tax system that applies the same flat rate across the different tax bases of personal income, corporate income, and even consumption (VAT) and avoids the double-taxation of savings. .Tax credits and exemptions are removed as far as possible so that the simplicity of the structure is preserved. Flat taxes are not synonymous with low taxes. Usually flat taxes are advocated by those who believe in tax-cutting policy, but the flat tax could be used to increase government revenue by simply raising the tax rate.

However, the term flat tax is most often discussed in the context of income taxes. A flat tax on personal income combines a threshold (an exempt amount) with a single rate of tax on all income above it. The flat tax rate is paid by all those whose income exceeds the personal allowance. The progressivism of such a system can be varied within wide limits using just these two variables (threshold and single rate of tax). Some authors argue that this is

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technically a two-bracket progressive tax rather than a flat tax, but others maintain that the lowest “bracket” has a zero tax rate, making it an exemption rather than a bracket. 2.1 Arguments for

Flat taxes are designed to boost labor supply, increase investment and bring part of the gray economy into the official economy because marginal tax rates are usually kept lower. Proponents of the flat tax are convinced that the existing progressive tax system raises a barrier against working extra hours, reinvesting, or saving. They believe that taxes are higher than the optimal tax rate T* described by the Laffer analysis, and that a lower flat rate would increase tax revenue. They argue that if tax rates were lowered, people would have a greater incentive to work and invest, which would boost the whole economy. The main benefit of simplifying the tax structure is reducing compliance costs while increasing overall compliance. Similarly, the lack of credits and exemptions in a flat tax structure should lead to a significant reduction in avoidance and evasion, as potential loopholes are eliminated. A limited amount of exceptions make the system more fair and less vulnerable to possible manipulations by taxpayers. Every additional exception distorts the system, creates additional costs for administration and may also create inequality by being applied incorrectly. Fewer brackets are simpler to administer, but one bracket is simplest of all. So, to its proponents, the flat tax is the ultimate in fiscal simplification.

In a progressive tax system some types of income, like fringe benefits, are never taxed at all. Other income types, like dividends and capital gains, are taxed twice: once at the corporate level and then again at the shareholder level. Even worse, some types of income, such as interest income, can be either taxed or not taxed, depending on the taxpayer's ability to avoid taxation. By radically simplifying the tax system, by removing any deductions or reliefs, and by eliminating double taxation, the flat tax would rid the current system of these anomalies. Under systems such as those in America or those operating in most of western Europe, the incentives for the rich to avoid tax (legally or otherwise) are enormous; and the opportunities to do so, which arise from the very complexity of the codes, are large as well. So, it is not surprising to discover, as experience suggests, that the rich usually pay about as much tax under a flat-tax regime as they do under a progressive code42. Below is a synopsis of the most important benefits of a flat tax system:

1. The flat tax eliminates double taxation on savings and investments. Since all forms of income are taxed once and only once, as close as possible to its source, people are free to choose which investment maximizes their profits. Without any government restrictions on certain types of investments, the economy is able to reach its full potential. 2. The flat tax increases government revenue. As a result of a more dynamic economy and less tax evasion, the government actually collects higher revenue. As shown by Laffer’s analysis and by the history of tax cuts in several countries, lower tax rates give incentives to a substantial economic boom.

3. The flat tax considerably reduces the time and cost of completing tax forms. The flat tax system makes tax filing much simpler and more efficient. Taxpayers save the money they currently pay for financial advice and guidance, while fiscal specialists are able to switch to more productive forms of economic activity. 4. The flat tax ends special interest lobbying, which is responsible for the growing complexity of the tax regime. Not only is the progressive fiscal system unnecessarily complex, but it also tends to become more and more complicated every year. By eliminating many of the reliefs and allowances, the 42 With the rich, and other tax minimizers, not paying their contribution, and the poor not having much to pay, government revenues decrease.


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flat tax gets rid of all tax lobbyists who try to get new loopholes in the system for the benefit of their businesses. 5. The flat tax exempts the poor from paying any tax by providing a generous tax-free allowance. Due to the generous personal allowance, a large proportion of low-earning individuals pay no tax at all. An appropriate level of personal allowance makes it possible for many kinds of deductions and reliefs to be removed and richer people find fewer mechanisms to avoid payment of taxes. 6. The flat tax offers individuals more control over their money and reduces government infringements on privacy. Instead of letting the government design biased policies and programs, people are left with more money to take care of their needs. 7. The flat tax reduces tax evasion, by lowering the opportunity cost of avoiding taxes (compliance benefits). People are more willing to pay the correct tax burden when the tax is lower. Under a flat tax, individuals are less willing to cheat and risk being interrogated by fiscal authorities. Also, the government spends less money on monitoring and auditing a simpler fiscal system. 8. The flat tax makes the fiscal system more attractive to foreign investment. In a global economy in which investors freely move across country borders, a simple fiscal system attracts global businesses. In turn, foreign investments further boost an economy with a simple, efficient fiscal system. 9. The flat tax achieves simplicity, economic efficiency, and fairness. These are the traditional measures of effective taxation. Evidence from countries that have gone through major fiscal reforms confirms that the flat tax is a viable alternative. 10. Flat taxes are more fiscally neutral Namely, fiscal authorities tax each currency unit at the same rate, regardless of who has earned it or how much they have earned. 11. Flat taxes give incentives to working effort Individuals who are currently unemployed might be able to find a job as a result of the economic expansion generated by the flat tax. Also, taxpayers who now pay the starting and basic rate might be willing to work harder since they would no longer face increasing marginal tax rates. 12. The cost of administering such a system is lower Because such a system is comprised of few exemptions and deductions, the cost of running and auditing the tax system decreases because it is harder for taxpayers to find loopholes to minimize their taxable income. By decreasing the costs of collection and compliance, more resources are left for productive purposes, and, eventually, GDP increases. 2.2 Arguments against Those who oppose a flat tax claim that it will benefit the rich at the expense of the poor because the loss of deductions means that some tax relief for the middle class will disappear. Opponents point out that the progressive tax code could be simplified, and the loopholes (various exemptions and deductions) could be removed, without flattening the tax brackets. Although the flat tax is advertised as fair, in fact it shifts the tax burden off the upper class onto the middle class. The personal allowance also makes the tax system progressive for people with average incomes. Only rich people, for whom the allowance represents a minor part of

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their income, pay a rate very close to the flat rate. Also, flat-tax opponents have always countered that it is unjust not to have higher marginal rates for the rich. Some opponents of the flat tax movement argue that it is intolerable for developed EU countries to finance EU subsidies to countries that are luring investment and jobs out of them by slashing taxes. According to them, East European countries can afford to set low flat taxes thanks only to the big EU subsidies and they argue that it is intolerable for them to support such “fiscal dumping.” Negative effects of the flat tax that are recognized in economic theory are the following: (1) weak anti-inflator effects because flat tax rates are neutral, which means that each taxpayer, no matter the amount of his nominal income, has an equal tax burden and (2) non-elastic source of public revenues. 3. THE CHALLENGE: FINDING THE OPTIMUM SETTINGS The full benefits of the flat tax structure will only be reaped if the tax rate and personal allowance are set appropriately.

With regards to the rate, the risks of setting the rate too high, or even at the average rate of a progressive tax structure, is that the tax burden will increase too much on the lesser earning taxpayers, and therefore the largest section of the population43. Creating too high a tax burden will prevent the flat tax structure from reducing the taxpayers’ efforts to avoid and evade the tax structure. It will also fail to stimulate the labor supply and will not be able to compete with progressive structures, and thus the benefits that a flat tax structure presents in terms of competitive investment incentives will also be lost. Thus overall, the tax yield will fall.

The main risk, however, is setting the rate too low and overestimating the impact on the tax base from improved compliance and economic efficiency, leading to a long-term loss of government revenue. Indeed, given that some of the positive effects on the tax base from cutting rates need years to filter through while the cut in rates have a clear and immediate negative impact on revenue, in the short-term revenue shortfalls are to be expected. It can therefore be extremely difficult and take a considerable amount of time to assess whether the rate has been set at the right level.

Thus, a flat rate of taxation is often first set in line with what would be the standard rate of a progressive structure. Over time this can be reduced (Estonia’s example), and such a margin ought to be maintained for as long as possible so that the government can reinvigorate the incentive effects of the flat tax structure and better manage the trade-off between the long-term positive effects and the short-term negative impact on tax revenue.

Setting the personal allowance is the second key challenge. In general, given that the personal allowance is the only mechanism left to preserve a measure of ‘progressiveness,’ the allowance tends to be higher in flat tax structures than in progressive structures. However, there are risks if it is set too high. Not only would revenues fall, but lifting too much of the population out of the tax structure might encourage persistent high levels in the gray economy. In some cases this is achieved by low earners being taken out of the tax system if the threshold is raised beyond the individual’s income level. For other individuals, if the threshold rises and the flat rate is no higher than their previous rate, their effective rate falls44.

43 This is what has happened in Russia where the lowest tax rate rose from 12 to 13%. Alternately, in most countries the flat rate is set no lower than the existing base rate. 44 The important decision that should be made in this respect is whether the equity threshold will be determined on a personal or family basis.


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4. INTRODUCTION OF FLAT TAXES IN EAST EUROPEAN COUNTRIES The flat tax is fast gaining ground in Europe. Analyzing the economy of countries in which the flat tax has already been implemented is a good start for assessing the potential of the flat tax to replace a progressive tax system. Of course, every country is a unique case, and the tax system is only one of the numerous factors influencing an economy. But, looking at economic developments in a series of countries that have gone through the same kind of fiscal reforms will show the possible advantages of implementing the flat tax.

4.1. Estonia

The experiment started in a small way in 1994, when Estonia became the first country in Europe to introduce a flat tax on personal and corporate income45 and, thus, replaced the progressive three-rate tax on personal income and a single different rate on corporate profit. Under this tax system all three types of income – earned income, business income and capital gains – are taxed at the same flat tax rate of 26%, irrespective of how much a person earns. For individuals’ personal income tax there is a minimum entry threshold, but beyond that the same rate is applied to all income. The amount of basic tax-exempt income (personal allowance) is 20,400 Estonian kroons (approx. 1,302 euros)46. Parents with children under 17 years have an additional personal allowance per third and every following child47 and certain state pensions and pensions from compulsory pension schemes are subject to an additional personal allowance of 36,000 Estonian kroons per year (2,298 euros). There are very few deductions available for individuals. The most important deductions that can be made from taxable income are mortgage interest, educational expenses, gifts and donations, and payments to certain voluntary pension schemes48. Due to the very simple and transparent system, individuals spend an average of 10-15 minutes to submit their annual tax return. In principle, taxpayers can access their tax return through the Internet, which is already pre-filled by the tax authority and they simply have to confirm (or correct, if necessary) the data included in the return. In 2004, approximately 75% of taxpayers submitted their tax return via Internet.

The economy of this tiny Baltic country has flourished49. Growth reached double digits in 1997, and has since settled at around 6% annually, after a slump at the turn of the century. Switching from progressive tax rates to a flat tax rate did not have a negative impact for the state budget. Repealing its high tax rate on the rich did not erode the country's tax base as some might have feared. When tax rates were lowered, eliminating different incentives broadened the tax base simultaneously, enabling the tax rate to be further reduced. In December 2003, the Estonian Parliament decided to reduce the tax rate. As of January 1, 2005 and 2006, the tax rate is 24% and 23%, respectively, and it will be gradually reduced to 20% by 2009 (tax rates will be 22% in 2007, 21% in 2008, and in 2009 the tax rate will be 20%). At the time of its reform, Estonia also taxed labor and capital at the same rate. After 2000, however, it chose not to tax profits at all until they were distributed to shareholders as dividends. As long as money is kept in the company and used to generate new business, there is no taxation. This gives companies an incentive to retain their earnings and reinvest them.

45 Flat direct tax (personal income & company profit tax) 46 As of January 1, 2006 personal allowance will be 24,000 kroons (approx. 1,532 euros) per year. 47 As of January 1, 2006 it will be extended to the second and every following child. 48 The amount of deductions is limited to the smaller of the following two conditions: 50,000 Estonian kroons (3,192 euros) per year or a maximum of 50% of taxable income. 49 At the 2003 capitalist ball staged by The Centre for the New Europe, Mart Laar, a former prime minister of Estonia, was given a special award to celebrate the fact that, in 1994, his country had become the first in Europe to introduce a flat tax.

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4.2 Other European countries Other countries followed Estonia’s example. First, Estonia's Baltic neighbors - Latvia and Lithuania52; then in 2001 Russia, facing widespread tax evasion, flattened its personal income taxes, collapsing 12%, 20% and 30% bands into a single, uniform 13% rate. The most remarkable turnaround in government revenues was recorded in Russia. A year after the reform, personal income tax was raising almost 26% more revenue in real terms. Some of this was due to the rebound in the economy: real wages grew by 12% that year, and the take from all taxes, flat or otherwise, consequently improved53. In Russia, compliance was the major problem addressed by the flat tax because there was a very high level of avoidance and substitution under the earlier multi-rate system. Over the next two years, Serbia and Ukraine followed, with rates of 14% and 13%54, respectively. It is interesting to mention that in 1994, Ukraine's top rate reached the level of 90%, before descending, in stages, to its current single rate of 13%. The flat-tax experiment that has attracted the most attention in the EU is that of Slovakia, where a 19% rate for all personal, corporate and value-added tax (VAT)55 was introduced in 2003 for the sake of symmetry rather than economic logic, it seems. Slovakia's flat tax became a lot more significant when the country joined the EU a year later, thereby gaining complete and unfettered access to Europe's single market. As advocates of the flat tax had long predicted, Slovakia's fiscal innovation helped to spur foreign investment and economic growth, while actually leading to a slight increase in tax revenues. It was shown that this kind of tax system discourages an obvious form of “tax arbitrage.” Then Georgia, fresh from a democratic revolution, introduced the lowest flat tax of 12%. The newest flat tax example is that of Romania, which is supposed to join the EU in 2007, and has just introduced a flat tax of 16%. So far, eight countries have followed Estonia's example56. 4 Rabushka–Hall model The world wide best known flat tax proposal is that of Robert Hall and Alvin Rabushka from the Hoover Institution; in 1985, they wrote “The Flat Tax,” usually described as "the flat-tax Bible." The important aspect of the flat tax system developed by Hall and Rabushka is that all income is classified as either business income or wages, but taxes on both types of income are equal,

50 As already mentioned, in the year of introduction, the rate was set at the level of 26%. 51 As above mentioned at the time of reform profits were taxed at the same rate as personal income. But, since 2000 Estonia chose not to tax profits at all until they were distributed to shareholders as dividends. 52 The examples of these two countries are not as successful as that of Estonia. For example, Lithuania’s 33% rate is rather high. 53 Anna Ivanova and Michael Keen from Hoover Institute find little evidence that Russians, freed from progressive taxation, suddenly started working much harder. This is perhaps not surprising, as Russia's reform actually raised personal income taxes for the many households that previously fell into the 12% bracket. They did discover a conspicuous increase in compliance with the tax authorities, however. In the year before the flat tax, Russians in the two higher tax brackets reported only 52% of their income to the taxman. In 2001, after falling into the new 13% bracket, these same households reported 68%. 54 Ukraine replaced five brackets of 10, 15, 20, 30, and 40% with a single rate of 13%. In 2007 the rate will be raised to 15%. This tax covers salary income, dividends, royalties, investment income and gifts, but special tax rates apply to inheritance, winnings, prizes, bank interest, and income received by non-residents that is subject to tax at the double standard tax rate (26%), except for interest, royalties, dividends and salary incomes paid by a Ukrainian employer. 55 Flat direct and indirect tax-comprehensive tax system. The previous personal income tax included five different personal income tax rates (10, 20, 28, 35 and 38%.), while corporate tax was 25%. 56 The center-right opposition parties in Poland and the Czech Republic are both now pushing the idea of flat taxes set at 15%.

Table 1. Different flat tax regimes Flat tax on:

country PersonalIncome

Corporate Income

Consumption (VAT)

year introduced

Estonia50 23 X51 X 1994 Lithuania 33 X X 1994

Latvia 25 X X 1995 Russia 13 X X 2001 Serbia 14 10 X 2003 Ukraine 13 X X 2004 Slovakia 19 19 19 2004 Georgia 12 12 X 2005 Romania 16 16 X 2005

Note: X = no flat tax, Source: Ministry of Finance of above mentioned countries


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with no rate differentials between different types of income57. This model proposed a two exemption flat tax at 19% in the USA. This has a single personal exemption and an exemption on money saved and invested. The Personal Income Tax. Under the Hall–Rabushka proposal, only actual payments of wages, salaries, and pension benefits are deemed personal income and subject to personal income tax. Income from dividends, capital gains, interest, or fringe benefits are not subject to personal income tax because they are already taxed at the business level. Since the system also gets rid of all the credits, deductions, or additional exemptions, individuals and families would simply add up their income from wages, salaries and retirement benefits and subtract the personal exemption to arrive at their taxable income. This amount is then multiplied by the flat tax rate to determine the individual or family tax bill for the year.

Income Tax = Flat Tax x [Wages, Salaries, Pensions] less Personal Allowance]

The Corporate Income Tax. The second component of the Hall–Rabushka system is carefully designed to tax every bit of income other than wages, salaries and pensions. The business tax has no deductions for interest payments, dividends, or any other type of payment to the owners of the business. Business taxable income is calculated by taking total revenue from the sale of all products and subtracting three kinds of payments. First, the firm would subtract wages, salaries, and pensions paid to workers, since income tax will be paid on these items. Second, the firm would subtract purchases of inputs from other firms, since the seller has already paid business tax on these items. Third, the firm would be able to deduct the entire cost of investment (plant and equipment) as an expense in the year of purchase. This immediate deductibility of investment both encourages capital formation and eliminates all depreciation schedules and the bureaucracy necessary to interpret them.

Business Tax = Flat Tax x [Total revenue from sales of goods less purchases of inputs from other firms

less wages, pensions paid to workers less purchases of plant and equipment]

Hall–Rabushka proposed that the flat tax is a consumption-based tax because it provides an immediate 100% tax allowance for new investment and exempts the returns on savings (interest and dividends) from taxation. Thus, not only are efficiencies gained by moving towards a consumption-based system of taxation, but also considerable incentives are created for increased savings and the formation of capital. Slovakia, which taxes profits made by firms, but not the dividends they distribute, perhaps comes closest to this model. 5. CAN MONTENEGRO DO THE SAME? It might be said that Montenegro has taken several steps towards a comprehensive flat tax system as an ultimate goal of both fiscal and overall economic system simplification. First, in 2003 it introduced VAT with a single rate of 17%. Since the start of 2006, the VAT system gained some progressivism with the implementation of the reduced rate on some items that were earlier freed from taxation as well as the reduced rate on tourism services. Thus, the Montenegrin tax system oriented its structure towards indirect taxation, rather than direct.

57 The single exception that makes the Hall-Rabushka proposal to some extent progressive is the generous allowance exempting lower-income individuals and families from taxation. Consequently, under the flat tax system a significant number of lower-income families pay absolutely no income tax, while all families with income above the allowance only pay tax on the amount they earn above the exemption level.

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Secondly, the flat tax rate of 9% on corporate income tax (the lowest in the region) was effective as of January 2006 with the view of encouraging entrepreneurial activity58. However, personal income tax is still progressive and remains one of the challenges that the Montenegrin economy is faced with – to simplify by switching to the flat rate system, if possible. 5.1 Personal income tax in Montenegro

As previously stated, Montenegro operates a progressive system of personal income taxation with three-brackets. As of July 2004, tax rates were lowered and currently stand at 15, 19 and 23%. This legal change reduced the effective rate by about 10%. Personal income revenues are collected on a so-called “cumulative basis” by the Department of Public Revenues. That means that Montenegrin

citizens are taxed on the basis of expected income. The greatest share of revenues of employees is collected according to the PAYE system or “Pay as You Earn,” which means that employers directly extract from employee's income the amount of taxable income and pay it on his behalf to the Department of Public Revenues. In Montenegro, taxable income is the difference between income from personal earnings, self-employment activity, estate and estate rights, capital, and capital gains in total and expenses of the tax payers related to making and preserving the above mentioned income categories, which should be appropriately documented.

Personal income revenues represent totality of revenues shared between Republic and municipalities budgets. According to the Law on local governments financing, the local government has a right to 10% of personal income revenue collected on its territory (exceptions are Podgorica and Cetinje, with 15%). Additionally, for the sake of financial adjustment, municipalities establish the Egalization Fund, whose resources are set at the level of 10% of personal income revenue59. According to the Department of Public Revenues data, at the end of 2005, gross personal income revenues amounted to €90.03 million (3.43% higher than in 2004). Table 3. Gross personal income revenues collected in the period January-December of 2005 (€ million)

2004 2005 Index

Personal income revenue 87,041,880.93 90,031,229.00 103.43 Revenue from personal earnings 81,057,768.37 86,801,885.06 107.09 Revenue from self-employment activity 1,994,259.43 1,892,172.38 94.88 Revenue from estate and estate rights 597,015.23 854,843.77 143.19 Revenue from capital and capital gains 2,884,592.92 310,171.06 10.75 Personal income revenue based on annual registration 508,244.98 172,156.73 33.87

Source: Department of Public Revenues Table 3 shows that revenue from personal earnings represents about 93% of overall personal income revenue, while the remaining 7% is related to the other categories of this tax. At the end of November 2005, Republic budget personal income revenues amounted to €58.29 million and represented 15.4% of overall budget revenues.

58 The new Law on corporate income tax replaced the progressive system that was comprised of two brackets (15% and 20%). 59Additionally, according to Article 7 of this Law, the municipality has a right to establish on its territory municipal surtax on the personal income tax at the rate of 13% (exeptions are Podgorica and Cetinje, with 15%).

Table 2. Personal income rates Taxable income (€) Tax rate

up to 785.00 0% from 785.00 to

2,615.00 €0 + 15% on amount over

€785.00 from 2,615.00 to

4,577.00 €274.00 + 19% on amount

over €2,615.00

over 4,577.00 €647.00 + 23% on amount over €4,577.00

Source: The Changes on Law on Personal income tax


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Table 4. Personal income revenues of the Republic budget (€ million)

Jan Febr Mar Apr May Jun July Aug Sept Oct Nov Dec Total

2002 2,815 3,698 5,100 5,132 4,221 4,769 5,042 5,736 6,199 5,021 4,486 5,689 57,908

2003 3,236 4,092 5,674 6,836 4,989 4,833 5,314 5,552 5,260 5,555 4,715 7,903 63,961

2004 2,710 5,258 3,553 6,680 4,842 5,165 5,483 4,997 5,492 4,879 5,618 6,559 61,235

2005 2,003 4,150 5,509 5,875 5,084 5,960 5,658 7,100 5,441 5,396 6,657

Source: Ministry of Finance For 2006, the Government plans personal income revenues of the Republic budget at €70.3 million, which is 7.19% higher than last year’s plan. The share of such revenue in tax revenues is 16.6%. What would happen if the Montenegrin Government decides to switch to the flat tax system? Are revenues going to be much lower or, on the contrary, exceed that which is already planned? It is hard to predict the overall macroeconomic effects of such a radical tax reform. Certainly, switching from a progressive fiscal system to the flat tax is a very radical reform and has to be carefully managed. The challenge is enormous and before any modifications are made, in-depth analyses should be made in order to create a viable and efficient tax system. The possible change of the personal income tax in Montenegro must be supported by other changes in the tax system as well, other than the expected broadening of the tax base, all with the view of preserving current government revenues. This is very important because personal income tax is an important source of budget revenues in Montenegro and the potential changes should not increase the budget deficit.

Evidence from the East European countries has shown that the flat tax would increase the percent of government revenue paid by the highest-income individuals. Consequently, not long after its implementation, the flat tax would have important positive economic and social effects. It is certain that a fiscal system with only one tax rate for all levels of income, in which all income is taxed once and only once, might offer an advantageous alternative to the current system. It would give a boost to the economy by considerably improving incentives to work, save, invest and take entrepreneurial risks60. The flat tax reform would have a huge impact on the whole economy, would modify the role of the government, provide a healthy fiscal environment and would influence Montenegrin’s position on the international business scene. A long-term goal might be its equalization with the corporate income tax rate (initial example of Estonia and the recent examples of Georgia and Romania). This solution would prevent taxpayers’ behavior of moving income from one tax base to the other for the rate is the same for personal and corporate income tax. In this situation, it is completely irrelevant whether income is taxed at the personal or business level since all income is taxed at the same rate. So, the answer to this chapter’s question is that Montenegro can perhaps do even better. 6. CONCLUSION Pioneered in Eastern Europe, flat tax systems seem to work because they are simple. An old idea that for decades elicited the response, “Fine in theory, just not practical in the real world,” seems to be working as well in practice as it does in theory. Some optimists predict that the flat-tax movement in Europe will be imitated around the world, rather like the Thatcher-Reagan cuts in income-tax rates and Ireland's cuts in corporate tax. 60 Although the economy can be significantly influenced by a variety of government actions such as monetary policy, regulatory policy, and trade policy, fiscal policy has always had a powerful impact on the state of the economy. Looking at three major tax cuts in American history, the Coolidge tax cuts of the 1920s, the Kennedy tax cuts of the 1960s and the Reagan tax cuts of the 1980s, one can discern a clear pattern: when tax rates are reduced, the economy prospers, tax revenues grow, and low-income citizens bear a lower share of the tax burden. This is particularly important for Montenegro, being a small country in which the euro is the official currency, and, thus, the importance of the fiscal policy is even greater.

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The flat tax, in other words, is an idea whose time has come. For a start, it is worth looking at the countries where the idea has been implemented. However, although there is no current move towards adopting a pure flat tax structure, the trend for cutting top rates and reducing the number and complexity of tax bands is showing continued strength. Most of the negative impact of taxes comes from the combination of high rates and exemptions. Flat taxes eliminate such anomalities and reach principles of simplicity, transparency and low compliance costs for both, taxpayers and tax administrators. 7. REFERENCES: 1. Robert Hall and Alvin Rabushka: The Flat Tax, Second Edition. Stanford, CA: Hoover Institution Press, 1995. 2. Daniel J. Mitchell: “How to Measure the Revenue Impact of Changes in Tax Revenue”, The Heritage Foundation, August 9, 1996 3. Public finances: Juraj Nemec, Glen Wright, Magna Agenda, Belgrade, 1999 4. Public finance dictionary: Gordana Ilic-Popov, Djordjije Pavlovic, Belgrade, 2003 5. “Macroeconomic forecast of the Ministry of Finance of Estonia”, Ministry of Finance of the Republic of Estonia, July30,2004:http://www.fin.ee/failid/prognoos_in_english.pdf 6. Flat Tax -The British Case: Andrei Grecu, Adam Smith Institute, London, 2004 7. Russia’s flat tax- Anna Ivanova and Michael Keen, The Institute for Fiscal Studies, 2005 8. Demythologizing the Russian Flat Tax, Gaddy & Gale Tax Notes International, March 14, 2005 9. http://www.fin.ee 10. www.finmin.lt 11. http://www.fm.gov.lv 12. www.adamsmith.org


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TRANSACTION COSTS ON THE CAPITAL MARKET OF MONTENEGRO Author: Milica Dakovic, CARA

1. INTRODUCTION There are no free transactions on capital markets. This is reasonable for all financial subjects on the capital market; however, the client is paying the price. The capital market of Montenegro has two stock exchanges, twelve brokerage houses, two dealers, Central Depository Agency (CDA), and a Securities Commission. Clients need to pay provisions to all of these financial institutions. During the past several years, the capital market of Montenegro has been rapidly growing and developing. This is qualified through positive trends in growth, an increase in the number of transactions, and an increase in the efficiency of the capital market. Bearing in mind the fact that there is no free transaction on the capital market it is important to understand how much money is required to pay all of the subjects in one transaction: broker (buyer or seller), dealer, stock exchange, CDA? The “survey about transaction costs on the capital market of Montenegro” analyzing the level of provisions on the capital market, their objectiveness and purpose. 2. CAPITAL MARKET DEVELOPMENT The capital market is a platform where investors place their capital in order to increase their wealth through emission of shares. Based on supply (capital placed by investors) and demand (from companies), the capital price is defined. Development of the capital market of Montenegro, during the past several years, is characterized by the following results: o 2001 realized an influx of capital due to a new investment in the amount of €120 million

(not included in privatization profit); o 2004 realized turnover in the amount of €62 million; o During 2005, turnover was €198 million, which represents 11.9% of realized GDP. Table 1. Capital market efficiency indicators (regional comparison)

Country Market capitalization61 Turnover GDP

Bosnia and Herzegovina 2,038,000,000 € 154,311,274 € 6,872,000,000 € Bulgaria n/a 506,986,516 € 19,433,000,000 € Montenegro 1,597,000,000 € 198,422,863 € 1,660,000,000 € Croatia 11,737,325,653 € 3,416,388,755 € 27,627,000,000 € Ireland 83,932,650,000 € 36,253,000,000 € 126,400,000,000 € Iceland 12,999,110,000 € 30,525,064,133 € 9,373,000,000 € Cyprus 3,588,050,000 € 223,207,643 € 15,710,000,000 € Macedonia 505,000,000 € 135,494,428 € 4,314,000,000 € Malta 2,089,090,000 € 74,889,725 € 7,223,000,000 € Romania 8,818,832,158 € 598,072,158 € 58,914,000,000 € Slovenia 7,131,152,633 € 1,183,353,400 € 26,171,000,000 € Serbia 6,150,000,000 € 470,235,914 € 15,600,000,000 €

Source: Securities Commission of Montenegro

61Sources about market capitalization and turn-over: Serbija www.belex.co.yu; BIH www.blberza.com, www.sase.ba, www.sem-on.net; Croatia www.vse.hr, www.zse.hr, www.sem-on.net; Slovenia www.fese.be, www.fibv.com; Iceland www.fese.be, www.icex.is; Ireland www.fese.be, www.fibv.com; Cyprus www.fese.be, www.cse.com.cy; Malta www.fese.be, www.fibv.com; Montenegro www.scmn.cg.yu, www.sem-on.net; Macedonia www.mse.com.mk; Bulgaria www.bse-sofia.bg; Romania www.bvb.ro GDP data: www.wiiw.ac.at, www.odci.gov

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3. CAPITAL MARKET PROVISIONS IN MONTENEGRO Capital market provisions resulted as a price of mediation on the capital market. Costs of buying/selling on the capital market of Montenegro consist of: o Brokerage fees, for mediation; o CDA fees, for clearing and balancing; o Stock exchange fees, for transactions; o Bank provisions, for money transfer; o Turnover tax (VAT).

These costs, during primary trading, represent 0.4% of the share that is being traded; the costs are divided as such: o Brokerage provision 0.28% o CDA provision 0.04% o Stock exchange provision 0.08% These costs, during secondary trading, fluctuate from 0.62% to 2.12% of the total value of the share; in this case, the costs are divided as such: o Brokerage provision 0.50% - 2% o CDA provision 0.04% o Stock exchange provision 0.08% No matter what the value of the transaction, the buyer/seller must pay €3 to the broker according to the agreement for deputizing. Transaction costs during a trade consist of banking provisions for the money transfer; that provision fluctuates from 0.05% to 0.1%, depending on the bank. However, the increasing competitiveness in 2005 introduced new banks in the banking sector in Montenegro and the change brought about a decrease of banking provisions. The level of brokerage, CDA, or stock exchange fees varies and depends on the value of the transaction. The total amount of provision, if the transaction is valued at under €2,500 is €1062. That provision of €10 is divided into €6.9 for the broker, €1 to CDA, €1 to the stock exchange, and €1.07 for VAT. The total amount of provisions for transactions valued at more than €2,500 vary depending on the type of trading, the value of the transaction, and the brokerage. In addition, the amount of provision for buying or selling shares from a primary emission is the same in all brokerage houses (0.28% of the value of the share that is being bought or sold). Provisions for secondary trading vary depending on the brokerage house; they fluctuate from 0.5% to 2% of the value of the share, according to the level of transaction. In the case of buying/selling shares that are valued over €2,500, CDA has a provision of 0.04% and the stock exchange receives 0.08% of the value of the share63.

62 Depending the brokerage house. 63 On NEX Stock Exchange provision is 0.08% for each transaction over 1,250 euro.


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Table 2 Money erosion during the transaction

1 2 3 4 5

Money entry

Money transfer from personal account to

broker account

Broker buyer’s account PULL account in CDA Broker seller’s account Payment

0.4% including: - 0.08% Stock

Exchange - 0.04% CDA

- VAT

0.4% including: - 0.08% Stock

Exchange - 0.04% CDA

- VAT

Money transfer from client account to broker

buyer’s account 1,000,000 + 4,000 (0.4% of provision)

Broker keep 3,600 (for itself 2,800 + Stock

Exchange 800)

CDA keep 800 (2 x 0.04%)

Broker keep 3,600 (for itself 2,800 + Stock

Exchange 800)

Transfer to account 996,000

Transfer to PULL account in CDA

1,000,400

Transfer to broker seller’s account

999,600

Transfer to seller’s account 996,000

Source: Securities Commission of Montenegro As shown in table 2, the total amount of money transferred from a client’s account to financial institutions was reduced from €1,000,000 to €996,000 at the end of the transaction. In other words, 0.4% of the total sum of money was paid for different financial institution provisions. Regional analysis of other capital markets indicates a similar level of provisions. Montenegro, with its capital market provisions, is very similar to the capital market of Slovenia; however, there’s still room for change. 4. CONCLUSION Capital market of Montenegro represents one of the most successful areas to result from the reform of the economic system, comparing market capitalization and turnover in relation with GDP. Table 3. Market capitalization/GDP

Country Market capitalization/GDP

1 Iceland 138.69% 2 Montenegro 96.20% 3 Ireland 66.40% 4 Croatia 42.48% 5 Serbia 39.42% 6 BIH 29.66% 7 Malta 28.92% 8 Slovenia 27.25% 9 Cyprus 22.84% 10 Romania 14.97% 11 Macedonia 11.71% 12 Bulgaria n/a

Source: Securities Commission of Montenegro

Table 4. Turnover/GDP Country Turnover/GDP

1 Iceland 325.67% 2 Ireland 28.68% 3 Croatia 12.37% 4 Montenegro 11.95% 5 Slovenia 4.52% 6 Macedonia 3.14% 7 Serbia 3.01% 8 Bulgaria 2.61% 9 BIH 2.25% 10 Cyprus 1.42% 11 Malta 1.04% 12 Romania 1.02%

Source: Securities Commission of Montenegro Capital market efficiency can be stimulated by the continuous increase in the number of participants. Reducing the level of provisions can strengthen capital markets and make them more efficient. A competitive market can reduce the implementation of regulation that is based on political or other pressures and create conditions for implementation that is influenced by the market. However, investors can try to avoid that type of regulation and reallocate their resources into

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other markets. Therefore, new rules of the game need to stimulate further development of the capital market. Decreasing the level of capital market provisions can be very hard, but only for those financial institutions that have up to now benefited from them. During the last six months of 2005 there were some changes in the level of capital market provisions. Firstly, the presence of new banks in the banking sector of Montenegro influenced a decrease in the provisions level as a result of increasing competitiveness. On the other hand, some brokerage houses, such as Monte Adria Broker, implemented a 0% provision when selling shares valued at under €2,000. It is important to emphasize the efforts of CDA. Precisely, in October 2005 they decided to decrease the level of provisions in order to increase capital market efficiency. That decision resulted in decreasing provisions by 20-50%, depending on the level of the transaction. With this in mind, it is clear that other financial institutions will do the same in the future in order to increase capital market efficiency and competitiveness. Decreasing the level of provisions can also encourage new subjects to participate and make transactions on the capital market. This will also increase the development effects of the capital market, encourage a saving culture, encourage investments, and change attitudes about business and profit.


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COUNTRYSIDE TOURISM, UNUSED POTENTIAL OF MONTENEGRO Authors: Natasa Masonicic, Institute for Strategic Studies and Prognoses (ISSP) Jelena Zvizdojevic, Msci, Centre for Applied research and Analysis (CARA)

I INTRODUCTION Guyer and Freuler defined tourism in 1895, stating: “Tourism in a modern sense represents the appearance of new time, which is based on an increased need for vacation and a change of air, on natural beauties, outings and an enjoyment of nature; and it is especially conditioned with a diverse social strata which arose as a result of commerce, industry and business development as well as transport facilities development”. Tourism is, without any doubt, the most powerful world’s industry and, for many states a significant export product and employment generator. It comprehends a broad mixture of aspects and relations, which develop during a tourist’s voyage and in its realization it involves not just economic but also ecological, social and cultural aspect of life. The tourist market of today is very dynamic and extremely competitive. Market survival is guaranteed by following modern trends, through which it is possible to identify changing demands, new market opportunities, possible investment areas and infrastructure needs. Currently the greater demand is for new tourism modes such as cultural, adventure, nautical, eco and countryside tourism and round trips as well. In all the above-mentioned areas Montenegro has underutilized potential especially in the countryside tourism area, which is currently a world-wide trend. II TOURISM SIGNIFICANCE FOR MONTENEGRO AND ITS DEVELOPMENT SO FAR As a whole, Montenegrin tourism has had, if not crucial then definitely one of the most significant roles in economic development. This statement especially applies to the nineteen-eighties, when this sector reached its peak according to all indicators. That period was characterized by tourism directed at low-income guests, and supply was standardized and undeveloped. A period of political and economical instability, caused by wars in nearby surrounding regions and subsequent sanctions, has as a consequence almost totally interrupted tourism development. The post-war economy stabilization has effectively improved the qualitative tourism infrastructure, which was comparable to the tourism influx in the eighties. The following graph shows the arrival trends of tourists visiting Montenegro since the seventies. Higher oscillations in these trends in 1979 are the result of the earthquake’s negative effects. However in subsequent years the number of tourist arrivals increased by 59.7% (comparing with 1979) and in that five years period (to 1984) tourist arrivals reached almost the same level as in 1978 (before the earthquake). The second decrease of tourist arrivals occurred at the beginning of the nineties as a result of economic, political and state crisis in the region which has had long term negative consequences on Montenegrin tourism development. Tourist arrivals in 1992 were only 32.2% of the arrivals in 1987.

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Tourist arrivals trend in Montenegro from 1970 – 2005

0

200,000

400,000

600,000

800,000

1,000,000

1,200,000

1,400,000

1970 1973 1976 1979 1982 1985 1988 1991 1994 1997 2000 2003

Source: Ministry of Tourism

At the beginning of this century the number of visiting tourists has increased but the level is not even close to the eighties. In 2003 only 46.85 of the total number of arrivals in 1987 was realized. This positive trend has continued and 54.8% of total 1987 arrivals have been realized in the next year (2004). According to projections, 820.000 tourists have visited Montenegro in 2005 and that represents a 16.6% increase compared to 2004 or 64.0% of the total number of tourists in 1987.

The current situation in the tourism sector still falls short of expectations, which presented results have shown. However, through tourist supply segmentation, specialization, standardization and diversification Montenegro has an opportunity to create an image as an internationally recognized tourist destination. Nevertheless, even with Montenegro’s advantages and potential, in order to create a successful tourist sector, it is very important to have in mind the fact that current tourist infrastructure is still maladjusted to the tourist market demand. The key to tourism development in Montenegro is the attraction of foreign capital in the sense of green-field investments, the modernization of outdated tourist facilities and human capital investments in order to increase the level of professionalism, efficiency and initiative. Domestic and foreign investments should facilitate decreasing administrative barriers, tax burdens and regulations that shackle developing tourism initiative. Decreasing the transaction costs will have an influence on reducing black market involvement in this area. A tourism infrastructure preferment would benefit from applying the ”strategic investor” concept, and besides which provides know-how, technologies and a market for tourism products. III FURTHER TOURISM DEVELOPMENT AND DEMAND ADJUSTMENT

The Montenegro tourism sector in the following period should try to reach its peak level from 1987 and then gradually even out to overcome domestic tourism’s “golden years”. In order to develop tourism even further, a master plan of tourism has been developed which represents the foundation of future Montenegrin tourism development till 2020. It defines a basic tourism development course in Montenegro fully respecting the current ambient limitations, potentials and the current market position. Master plan defines basic strategic goals: o Development of Montenegro as a European destination of ”quality tourism” and a summer

season continuance from 100 to 150-165 fully booked days


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o Diversification of the Montenegrin’ tourism product o Standardization and specialization of the hotel sector o Improving the marketing destination and efficient promotion activities o Entrepreneurial incentives and the creation of quality opportunities for new employment on

all levels in the tourism sector o Data base creation and international standards of implementation. Realize a better policy

creation, fiscal prognoses and economic strategy development with those qualitative data. Geographic position and climate, a small spatial distance between the sea and the mountain region, natural beauties, preserved nature and a historical heritage may position Montenegro as one of the states with the most beautiful natural comparative advantages in the region. The above stated represents a potential for development of all tourism types such as adventures, cultural, nautical and countryside tourism. Domestic tourism industry differentiation must be the key for realization of goals that have been set up by the master plan. Opportunities for significant domestic tourism infrastructure improvements and for current tourism product enrichment as well, can begin with countryside tourism, which represent only one of the numerous alternative tourism modes. Being competitive in tourism means doing business in that sector according to international standards. Montenegro isn’t the only state in the region that considers tourism as a precedent sector. Croatia, Slovenia and Bulgaria, with similar natural preconditions like Montenegro, have made impressive strides. Concretely, in Croatia entrepreneurs have developed countryside tourism and realized the possibility of its practical success in Croatia. Some information about individual countryside households and theirs activities and countryside vacation possibilities has been offered through an increasing number of tourist agencies and organizations via the Internet. Of course, making reservations on line is still not possible. A basic characteristic of domestic tourism is its fluctuating seasonal character, primarily the summer season in the seaside municipalities. Thus the largest tourism turn over from year to year is in the six seaside municipalities which hold more then 95.0% of the total realized tourist arrivals and overnight stays. According to Ministry of Tourism for the first nine months of 2005, the municipality of Budva had the highest share (39.5%) of total realized overnight stays. Herceg Novi (22.3%), Bar (14.7%), Ulcinj (9.1%), Kotor (5.9%) and Tivat (5.4%) follow Budva on this list.

Share of seaside and other municipalities in total number of realized overnight stays

39.5%

22.3%

14.7%

9.1%

5.4%5.9% 3.1%

Budva Herceg Novi Bar Ulcinj Tivat Kotor Ostalo

Source: Ministry of Tourism

Monet March 2006


As shown on the graph, other Montenegrin municipalities have a share of 3.1% in total number of overnight stays. Countryside tourism development would significantly increase this municipal share in tourism revenue creation and it would make possible the promotion of lesser-known parts of Montenegro. Rural areas in the hinterlands are rich with possibilities for developing countryside tourism, which would be comprehensive, qualitative and interesting. Fertile ground, a wealth of flora and fauna – especially birds and forests within the Skadar and Plav Lake region, a tradition of agriculture and vineyards, sustainable fishing tradition, historical sights at Cetinje and Lovcen should assure the inhabitants a decent life and work in those and many other parts of Montenegro. IV COUNTRYSIDE TOURISM AND ITS DEVELOPMENT POTENTIALS IN MONTENEGRO Countryside tourism is in the beginning phase because development plans for the tourism sector in Montenegro have until now focused on its remarkable seaside tourist potential. However, guests are increasingly seeking relaxation and vacation in some of the rural areas, far away from the city noise and bustle, which is typical for any seaside centre. Montenegro has many rural destinations especially in the northern part, which has extremely prosperous conditions for countryside tourism development. Reposing in the countryside with ecological food and homemade kitchen specialties (skorup, cheese, prsuta) tourists make direct connection with nature, breathe fresh air, find peace and enjoy a wealth of landscape diversification (lakes, forests, and spacious pastures). Actually it provides comprehensive accommodations, very different and therefore more attractive than what can be experienced in urban seaside tourist centers. Tourism in the countryside plays an important role in reconstruction and sustainable development of villages. Countryside development creates conditions for local population employment and retention; people would return to the countryside to work in the tourism business. Countryside tourism is narrowing the connection with agribusiness and through this type of tourism it is possible to promote its agricultural products characteristic for the area.64 A legal basis for the registration of tourist countryside households in Montenegro was established in 2003. Namely, the Ministry of Tourism introduced a Code regarding the concept, establishing minimal conditions, conditions for categorization and a means for tourist household’s categorization and a plan for prevalence production.65 According to this Code (a countryside household which is organized as a) tourist countryside household is one in which all its members have residence and work resulting from personal agricultural production. The appearance of the tourist countryside household should be in concordance with values and heritage of Montenegrin traditional architecture and village life. Regarding state activities about countryside tourism, the Government of Montenegro and commercial banks (Montenegro bank, Montenegrin

64World-wide, countryside tourism is primarily seen as an additional activity of existing agricultural households in which all members of the household are involved. This is the way for an agricultural household to gain status of »tourist countryside household«. Basic criteria which must be fulfilled is that the household is in an attractive area, meaning a healty climate, clean air, absence of noise, preserved nature and so on. 2Code issued in Official Gazette of Republic of Montenegro no. 23/2003

Approved tourism-countryside tourism projects review by municipalities

Municipality Number of credits

Number of employees

Total credit amount in

€

Herceg Novi 1 1 12.000 Kolasin 2 2 15.000 Niksic 3 3 32.000 Pljevlja 2 3 17.000 Pluzine 2 3 16.000 Podgorica 1 1 10.000 Ulcinj 1 1 15.000 Zabljak 1 2 10.000 Total 13 16 127.000

Source: Employment Agency of Montenegro


118


Commercial Bank, Atlasmont bank, Podgoricka bank, Niksicka bank and Pljevaljska bank) have started “Fourteen credit lines designed to stimulate employment and the agriculture and tourism development project”. Within this project € 400.000 were designated for credit assignment for projects in the tourism – countryside tourism area66. Interests for these credits weren't significant and so far only 13 projects valued € 127.000 have been realized.67 How to increase the interest of countryside households in Montenegro for tourism development? One way to rapidly foster countryside tourism development in Montenegro is the education of households for doing this business. NGO’s, tourist organizations, the municipality and all other stakeholders should be given a greater role in this project. It is necessary to point out to the countryside household all the positive experiences, domestic and foreign, in countryside tourism activity and also the economic justification for doing this business. According to tourism agency information, guests are increasingly requesting rustic cottages in a natural setting, far away even from the centre. In addition to hiring countryside households to meet demand, there are some proposals to build new settlements with 20 to 30 beds, consisting of small cottages and a main building to house a restaurant, reception area, aperitif bar and kitchen. The settlement would be built from stone, in the Montenegrin style and serve domestic ecological food. CONCLUSION An intact Montenegrin ecosystem and the traditional way of life of the people who live in the north offers tourists a unique way to see and partake of the past, in a manner which can only be offered by very few villages in Europe. For a relatively low cost, foreign tourists will be able to experience an untamed ambiance; rather than spending their vacation in uniform hotels they would enjoy a cozy atmosphere reminiscent of weekend houses. An added value is the domestic folklore and gastronomy of the region. Ecological food production and its placement through restaurants should be additionally developed and promoted because that’s the tourism supply segment whose significance will rise with the time. Wild beauty and aboriginal peace, a wealth of forests, very large katuns, old villages… these are all assets that Montenegro possesses and for which people are ready to pay. Why not take advantage of it? LITERATURE: 1. »Strategic framework for sustainable tourism development in central and northern Montenegro«,

Government of Montenegro, UNDP and Rockefeller Brothers Fund, 2004 2. »Sectoral analysis of tourism in Montenegro«, Centre for Applied Research and Analysis, 2006 3. Dijana Čelik, »Tourism as integration promoter«, Papers memoir: »After transition processes«

Economist Alliance of S&M, Milocer 2003 4. »Master plan – tourism development strategy up to 2020» Ministry of Tourism of Government of

Montenegro 5. www.minturizma.vlada.cg.yu

3 Currency has been floated as a part of »Legalization of current and opening of new working places« realization program. The name of the project has been changed in 2005 in »New employment incentives program« 67 Interest rate for this credists were 5.0% on a year level with 12 montns grace period and return deadline of 3 years.

Monet March 2006


STATISTICAL ANEX


120


REAL SECTOR Table: Major developments in the Real sector

GDP Industrial production Touism Transport

Processing industry **

Transport of passengers

Transport of goods

1991

=10

0

Annu

al c

hang

e in

%

2000

=10

0

Annu

al c

hang

e in

%

2000

=10

0

Annu

al

chan

ge in

%

Alum

inum

pr

oduc

tion

(ton

)

Elec

tric

ity

gene

ratio

n (in

M

Wh)

pers

ons

Annu

al c

hang

e in

%

Shar

e of

for

eign

to

uris

ts in

tot

al in

%

1998

=10

0

Annu

al

chan

ge in

%

1998

=10

0

Annu

al

chan

ge in

%

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

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

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

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

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

2005* 93.8 4.1 100.9 -1.9 0.0 2.5 120,613 3,747,922 820,457 17.0 37.6 62.3 -3.2 79.9 3.7

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

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

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

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

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

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

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

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

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

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

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

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

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

2005-Q2 109.3 -7.0 119.3 -1.4 29,709 636,208 149,117 22.4 37.9 55.8 -7.4 77.6 9.8

2005-Q3 117.8 12.5 155.9 37.0 30346.0 451467 598182 16.7 32.8 91.3 -7.2 88.8 6.7

2005-Q4 116.9 -9.6 128.9 -7.3 30367.1 754735 44005 13.4 40.5 61.1 19.0 92.1 14.1

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

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

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

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

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

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

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

Aug-04 99.01 0.2 112.2 16.50 10,174 209,536 241,916 42.3 21.4

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

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

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

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

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

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

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

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

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

Jun-05 112.84 -3.3 128.7 3.5 9,844 208,508 90015 40.9 36.2

Jul-05 117.47 10.1 194.8 17.9 10,178 126,793 221079 24.2 29.7

Aug-05 115.70 16.5 129.4 15.3 10,186 136,047 268669 11.1 29.1

Sep-05 120.10 9.3 143.6 11.7 9,982 188,627 108434 16.8 39.6

Oct-05 109.29 -1.9 126.3 -2.7 10,274 180,744 24649 16.0 37.1

Nov-05 119.46 -2.4 138.9 -2.9 9,883 298,737 9476 17.4 44.1

Dec-05 122.08 -21.2 121.5 -13.0 10,210 275,254 9880 4.1 40.2

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

Monet March 2006


REAL SECTOR Table: Indices of development in the various sectors of the economy

2004 Jan-Okt 2005 01/2005 04/2005 05/2005 06/2005 07/2005 08/2005 09/2005 10/2005

1999 Jan-Okt 2004

01/2004=100

04/2004=100

05/2004=100

06/2004=100

07/2004=100

08/2004=100

09/2004=100

10/2004=100

Total 101.0 101.0 90.6 95.4 97.5 111.1 115.5 114.3 104.1 Industrial production 104.2 101.0 87.6 94.3 96.7 110.1 116.5 109.3 98.1

Forestry 93.7 107.0 27.8 161.6 164.6 135.1 98.2 120.7 111.0

Production

Construction 168.2 129.0 128.8 148.6 126.5 148.1 148.3 155.8 198.7

road (goods) 88.2 92.0 122.9 95.1 85.5 111.8 95.7 106.2 91.3 road( persons) 66.9 80.0 66.8 68.3 77.0 105.0 78.2 112.3 117.1

sea (goods) 1.8 79.0 129.0 153.8 122.3 122.6 134.4 196.9 183.3 railway (goods) 178.8 138.0 108.4 136.2 184.2 189.6 103.8 115.8 150.3

Transport

railway (persons) 66.7 85.0 78.9 86.1 66.7 91.1 83.3 100.4 92.9

current prices 142.4 100.0 113 114 118 104.3 114.6 100.5 105.2 Retail

trade deflated by CPI 118.2 97.9 111.0 111.8 114.7 101.6 111.6 97.4 102.0

current prices 255.9 113.0 46.8 74.4 107.8 104.9 101.7 105.7 115.0

Catering deflated by CPI 212.6 110.6 46.01 72.94 104.72 102.2 99.0 102.4 111.4

CPI 120.4 102.2 101.8 102 102.9 102.7 102.7 103.2 103.2


122


EMPLOYMENT Table Labor force and unemployment

Population mid-year68

Total number of employed persons 69

Number of registered unemployed Unemployment rate % Unemployment rate %

(estimate)

Official data ISSP estimate based on official data

ISSP

1991 591,843 153,667 58,144 27.5 13.4 1992 594,137 145,653 64,632 30.7 17.1 1993 596,432 143,657 62,818 30.4 17.6 1994 598,727 140,684 58,210 29.3 18.6 1995 601,022 137,232 59,045 30.1 19.9 1996 603,317 137,743 60,225 30.4 19.2 1997 605,611 147,083 63,995 30.3 17.5 1998 607,906 147,233 68,373 31.7 16.7 1999 610,201 145,571 75,303 34.1 20.1 2000 612,496 140,762 83,583 37.4 20.1 2001 614,791 141,112 81,561 36.6 19.5 2002 617,085 140,778 80,865 36.5 21.6 2003 618,233 142,679 71,679 33.4 22.9 2004 620,706 143,479 65,185 31.2 22.3 2005 620,706 144,261 54,458 27.4 19.7

2004-Q1 141,850 71,123 33.4 24.5 2004-Q2 143,847 68,589 32.3 23.6 2004-Q3 145,163 61,602 29.8 21.5 2004-Q4 143,056 59,422 29.3 21.2 2005-Q1 141,838 58,655 29.4 20.8 2005-Q2 143,020 56,508 27.5 20.0 2005-Q3 147,041 52,691 26.4 19.0 2005-Q4 145,749 49,979 25.6 19.1 Jan-03 143,726 76,584 34.8 24.2 Feb-03 143,851 76,077 34.6 24.1 Mar-03 143,272 76,165 34.7 24.2 Apr-03 143,036 74,896 34.4 23.9 May-03 142,533 73,250 34.0 23.7 Jun-03 143,694 69,735 32.7 22.6 Jul-03 144,022 66,951 31.7 21.8 Aug-03 143,693 66,277 31.6 21.7 Sep-03 142,180 67,664 32.2 22.2 Oct-03 141,478 71,023 33.4 23.2 Nov-03 140,810 72,547 34.0 23.6 Dec-03 139,856 68,625 32.9 22.8 Jan-04 142,343 69,573 32.8 24.0 Feb-04 140,765 71,419 33.7 24.7 Mar-04 142,442 72,378 33.7 24.7 Apr-04 143,734 72,202 33.4 24.5 May-04 143,759 68,993 32.4 23.7 Jun-04 144,049 64,572 31.0 22.5 Jul-04 145,390 62,143 29.9 21.7 Aug-04 145,747 62,159 29.9 21.6 Sep-04 144,351 60,503 29.5 21.3 Oct-04 143,830 59,930 29.4 21.2 Nov-04 143,434 59,387 29.3 21.1 Dec-04 141,905 58,950 29.3 21.2 Jan-05 142,145 59,115 29.4 20.9 Feb-05 142,072 58,774 29.3 20.8 Mar-05 141,298 58,075 29.1 20.7 Apr-05 140,959 57,557 29.0 20.4 May-05 142,248 56,772 28.5 20.0 Jun-05 145,852 55,199 27.5 19.7 Jul-05 148,528 53,737 26.6 19.1 Aug-05 146,744 52,494 26.3 19.0 Sep-05 145,739 52,494 26.2 19.0 Oct-05 145,923 52,494 26.0 19.1

Nov-0570 145,585 52,494 25.5 19.2 Dec-05 144,033 52,494 25.3 17.0

1.

Source: Monstat, Employment Office of Montenegro and ISSP

68 Data for the period 1991-2003 are Monstat data, 2004 data are ISSP estimates. 69 Annual data are Monstat numbers, while monthly and quarterly data for 2003 and 2004 are estimated by ISSP 70 Data for November and December are ISSP estimates based on previous trends in the number of employed persons.

Monet March 2006


WAGES Table Wages

Minimum wage

Average gross wage

(official)

Total contributions on gross wage

Average disposable

wage

Average pension (paid)

Ratio min.wage/ average

disposable wage (%)

Tax wedge on labor (%)

Total labor cost**

Average tax rate (%

gross wage)

IN EUROS IN EUROS Official data ISSP estimates

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 43.3 249.0 19.0

1-6/2002 42.0 185.8 72.9 112.9 106.0 41.0 43.2 262.5 19.0 2002-Q1 46.0 178.5 69.7 108.9 103.0 42.0 42.9 254.2 19.0 2002-Q2 46.0 193.1 76.2 116.9 108.0 39.0 43.6 270.9 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 contributions

Average pension (paid )

Ratio min. wage/ average w&s without taxes

and contributions

(%)

Tax wedge on labor

Total labor cost**

Average tax rate

(%wages and salaries)

7-12/2002 50.0 272.6 101.2 171.4 112.0 29.0 42.8 365.6 15.4 2003 50.0 271.2 97.2 174.0 113.0 29.0 42.7 364.2 14.1 2004 50.0 304.1 107.8 195.4 122.0 25.6 42.1 405.2 14.0 2005 50.0 326.5 111.7 213.1 128.2 23.6 40.4 425.4 13.5

2003-Q1 50.0 233.5 83.9 149.6 112.0 33.9 40.7 316.8 13.0 2003-Q2 50.0 274.3 99.4 174.8 112.0 28.6 42.2 366.9 14.3 2003-Q3 50.0 281.9 100.7 181.3 112.0 27.6 42.2 378.1 14.5 2003-Q4 50.0 295.0 104.7 190.3 112.0 26.4 42.4 395.1 14.8 2004-Q1 50.0 283.9 101.7 182.1 120.0 27.5 42.2 378.6 14.0 2004-Q2 50.0 301.1 108.9 192.1 122.00 26.0 42.5 399.2 14.4 2004-Q3 50.0 310.1 108.6 201.5 122.0 24.8 42.2 414.0 13.7 2004-Q4 50.0 321.5 111.9 209.6 122.0 23.9 41.6 429.1 14.0 2005-Q1 50.0 297.3 102.5 194.9 125.9 25.7 39.7 390.1 13.3 2005-Q2 50.0 317.7 111.5 206.2 128.7 24.3 40.4 413.3 13.5 2005-Q3 50.0 335.0 116.7 218.3 129.0 22.9 40.7 436.0 13.5 2005-Q4 50 353.0 118.5 232.3 129.1 21.6 40.8 462.1 13.8 Jan-04 50.0 267.0 97.4 169.6 120.0 29.6 42.0 355.9 13.6 Feb-04 50.0 292.1 104.6 187.5 120.0 26.7 42.5 389.0 14.2 Mar-04 50.0 292.4 103.2 189.3 120.0 26.4 42.3 391.1 14.2 Apr-04 50.0 301.4 108.9 192.5 122.0 26.0 42.8 399.7 14.4 May-04 50.0 297.1 107.6 189.6 122.0 26.4 42.7 394.2 14.3 Jun-04 50.0 304.7 110.4 194.4 122.0 25.7 41.9 403.6 14.5 Jul-04 50.0 307.1 106.5 200.6 122.0 24.9 41.4 408.5 13.6 Aug-04 50.0 312.8 109.6 203.1 122.0 24.6 41.6 414.4 13.7 Sep-04 50.0 310.3 109.7 200.6 123.6 24.9 41.6 410.4 13.7 Okt-04 50.0 312.8 109.7 203.1 123.6 24.6 41.6 414.4 13.7 Nov-04 50.0 306.8 107.5 199.3 124.6 25.1 41.5 407.0 13.6 Dec-04 50.0 345.0 112.9 226.4 124.6 23.9 41.8 426.1 13.9 Jan-05 50.0 283.4 98.2 185.1 124.6 27.0 39.5 377.2 12.5 Feb-05 50.0 299.2 102.8 196.4 124.6 25.5 39.8 392.8 13.5 Mar-05 50.0 309.4 106.4 203.0 128.7 24.6 40.0 405.4 13.5 Apr-05 50.0 325.6 113.4 212.2 128.6 23.6 40.5 424.0 13.5 May-05 50.0 297.8 106.2 191.6 128.7 26.1 40.1 387.1 13.5 Jun-05 50.0 329.6 114.9 214.7 128.7 23.3 40.6 428.8 13.5 Jul-05 50.0 329.8 114.7 215.8 128.7 23.2 40.6 429.3 13.4 Aug-05 50.0 338.8 118.3 220.5 128.7 22.7 40.8 440.0 13.4 Sep-05 50.0 336.5 117.1 219.4 129.1 22.8 40.7 438.6 13.5 Oct-05 50.0 336.9 117.3 219.6 129.1 22.8 40.7 440.0 13.5 Nov-05 50.0 343.3 119.7 223.6 129.1 22.4 40.8 447.8 13.6 Dec-05 50.0 378.8 125.2 253.7 129.1 19.7 40.8 498.6 14.1 Jan-06 50.0 313.2 108.0 205.2 136.8 24.4 40.3 413.5 13.1

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). *Tax wedge is a measure of tax burden on the labor cost. It is calculated as a share of paid taxes and contributions in total labor cost. **Total labor cost includes average gross wage/average earnings, employer part of contribution and taxes and other benefits.


124


PRICES Table: Annual inflation of disaggregated CPI components

Product or service group Total Index Food Tobacco and

beverages Clothing and

footwear Accommoda-

tion

Hygiene and personal

care

Education and culture

Traffic vehicles and

transport and communicatio

n services Consumption Weights in 2004 100 57.56 7.34 8.23 11.16 5.25 4.8 5.66

2004

Jan 5.20 3.90 -0.06 6.75 15.27 4.21 9.48 4.52

Feb 5.40 4.26 -0.03 6.70 15.06 3.06 11.57 3.93

Mar 5.76 4.83 -0.02 6.85 15.44 3.04 11.92 1.22

Apr 2.55 2.14 1.57 6.09 3.11 1.86 5.90 0.09 May 2.77 -0.43 0.75 5.79 0.47 2.25 4.56 2.41 Jun 0.89 -1.15 0.75 5.54 2.66 2.25 5.95 6.67 Jul 0.93 -0.22 0.88 5.47 0.49 2.22 5.48 1.97 Aug 0.81 -0.43 0.75 5.79 0.47 2.25 4.56 2.41 Sep 0.26 -1.00 0.56 5.74 0.41 1.46 1.51 2.13 Oct 0.32 -1.12 0.68 5.49 0.72 1.50 1.60 3.93 Nov 0.27 -1.38 0.76 5.94 0.74 1.54 1.38 5.04 Dec 3.17 -1.79 0.71 4.52 2.38 1.43 1.41 68.53

2005

Jan 3.17 -2.08 1.04 3.98 0.74 1.28 1.39 68.62 Feb 3.11 -2.13 1.19 3.60 0.71 1.36 0.26 71.05 Mar 3.22 -1.91 1.34 3.17 0.69 1.52 0.34 71.50 Apr 3.67 -1.54 4.34 2.29 0.67 1.59 0.35 72.76 May 3.85 -0.81 5.29 2.64 0.62 0.82 0.31 67.02 Jun 4.80 0.78 6.03 1.88 0.64 0.47 0.33 66.86 Jul 4.56 -0.05 6.45 1.78 0.64 0.47 0.43 69.50 Aug 4.72 0.01 6.48 1.48 0.74 0.44 0.44 68.05 Sep 5.15 0.63 6.52 1.55 0.56 0.40 0.74 67.38 Oct 5.16 0.89 6.43 1.45 0.26 0.42 0.75 65.71 Nov 5.69 2.24 6.43 0.93 0.48 0.37 0.85 63.99 Dec 2.45 2.54 6.59 0.98 0.48 0.40 0.84 2.98


Monet March 2006


PRICES Table: Prices

Consumer Price Index (Cost of Living) )71

CPI Total RPI Total Producer Price

Index

2000= 100

Monthly change in %

Annual change in % Fo

od, to

bacc

o an

d be

vera

ges

annu

al

chan

ges

Goo

ds le

ss foo

d,

toba

cco

and

beve

rage

s an

nual

ch

ange

s

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 2.4 0.6 3.8 9.3 164.4 0.3 3.3 138.0 5.8

2005 161.6 0.20 104.1 100.4 101.5 138.9 173.8 0.2 5.5 140.8 2.1

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

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

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

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

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

2005-Q2 161.9 0.5 4.1 0.0 1.3 41.1 173.77 0.28 5.2 140.34 0.9 2005-Q3 161.3 -0.1 4.8 0.8 1.8 45.3 174.04 0.05 3.6 141.45 1.6 2005-Q4 163.0 0.4 4.4 2.3 1.5 30.7 174.9 0.1 4.3 142.1 2.6

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

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

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

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

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

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

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

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

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

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

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

Sep-05 161.8 0.4 5.2 1.2 2.1 46.3 174.4 8.1 3.7 141.6 2.1 Oct-05 162.3 0.3 5.2 0.5 -0.1 45.3 174.8 0.2 3.3 141.6 2.1 Nov-05 163.3 0.6 5.7 1.1 -0.4 45.5 174.9 0.1 3.4 141.7 2.2 Dec-05 163.5 0.2 2.5 0.3 0.0 1.1 175.1 0.1 1.8 143.0 3.5

Sources: Price indices published by Statistical Office of Montenegro except for December 2004 monthly rates of change which were 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 to 2002 and € from 2002. • One-base index is calculated as a chain index according to Monstat indices, based on respective

previous years • Monthly and annual changes are based on data taken from Monstat publications except for December

2004 monthly rates of change which were calculated by ISSP

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


126


BUDGET Table: Central Budget Revenues and Expenditures, 2001-2004 (million €) 2001 2002 2003 2004

Jan-Dec Jan-Dec Jan-Dec Jan-Dec

Execute Execute Execute Execute

Deposits from previous year

A TOTAL REVENUE AND GRANTS (1+2) 233.140 256.804 350.103 379.730

1 TOTAL REVENUE (1.1+1.2) 221.220 229.847 337.519 372.783

1.1 Current revenue (1.1.1+1.1.2) 221.220 229.847 337.519 369.696

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) 187.999 208.931 312.918 337.513

1.1.1.1 Personal income tax 56.654 57.889 63.961 61.235

1.1.1.2 Turnover (sales) tax 58.488 56.528 137.222 158.096

1.1.1.3 Excises 35.664 50.786 58.197 61.527

1.1.1.4 Taxes on international trade and transactions 27.274 26.376 36.845 36.653

1.1.1.4.1 Custom tariffs 13.894 12.605 35.078 33.803

1.1.1.4.2 Custom transit fees 13.380 13.771 1.766 2.850

1.1.1.5 Other taxes 9.920 17.342 16.694 20.002

1.1.2 Non tax revenues 33.221 20.916 24.601 32.183

1.2 Capital revenue 3.087

2 GRANTS 11.920 26.958 12.584 6.947

B TOTAL EXPENDITURE AND NET LENDING (1+2) 259.309 266.771 381.090 405.487

1 TOTAL EXPENDITURE (1.1+1.2) 252.585 247.517 358.924 390.211

1.1 Current expenditure (1.1.1+1.1.2) 233.287 236.697 345.235 377.561

1.1.1 Interest 0.622 12.880 14.136 24.025

1.1.2 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) 232.665 223.818 331.099 353.536

1.1.2.1 Wages, salaries, allowances 108.464 110.178 134.262 164.389

1.1.2.2 Goods and services 55.351 41.817 37.858 46.913

1.1.2.3 Social Insurance and Social Security Transfers 45.327 35.825 132.795 103.782

1.1.2.4 Subsidies to enterprises 12.249 18.169 14.631 8.481

1.1.2.5 Reserves 6.461 14.819 8.388 16.689

1.1.2.6 Other non - interest expenditure 4.813 3.010 3.165 13.282

1.2 Capital expenditure 19.298 10.820 13.688 12.650

2 NET LENDING 6.723 19.254 22.167 15.276

Lending 13.974 19.490 22.590 17.803

Repayment 7.250 0.236 0.423 2.527

OVERALL BUDGET BALANCE EXCLUDING GRANTS (CASH) (A-B-2) -38.089 -36.925 -43.571 -32.704

OVERALL BUDGET BALANCE (CASH) (A-B) -26.169 -9.967 -30.987 -25.757

FINANCING (1+2) 26.129 38.254 18.395 23.427

1 DOMESTIC AND FOREIGN FINANCING (NET) 17.007 0.568 6.234 19.886

Borrowings 76.436 40.445 48.246 51.110

Repayment 59.430 39.877 42.012 31.224

2 PRIVATIZATION REVENUE 9.122 37.686 12.161 3.541

Monet March 2006


MONEY Table: Monetary aggregates, in € 000

2003 2004 2005

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

M0 284,909 290,935 287,562 291,512 290,848 296,909 305,784 307,376 309,627 324,364 325,768 321,932 325,239 Banks' deposits with CBM-Payment Operations

34,909 40,935 37,562 41,512 40,848 46,909 55,784 57,376 59,627 74,364 75,768 71,932 75,239

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

M1 386,121 430,659 416,111 428,064 451,793 444,089 472,717 490,980 497,616 527,268 537,926 539,169 546,275

M0 284,909 290,935 287,562 291,512 290,848 296,909 305,784 307,376 309,627 324,364 325,768 321,932 325,239

Demand deposits in EUR 83,148 130,220 118,566 124,830 148,976 135,610 155,975 168,142 171,764 191,498 201,738 202,424 204,122

Demand deposits within banks in EUR 82,688 129,813 118,413 124,793 148,963 135,570 155,913 168,107 171,742 191,481 201,602 202,415 202,999 Demand deposits within CBM-Payment Operations in EUR

460 407 153 37 13 40 44 35 22 17 136 9 1,123

Demand deposits in other currencies 18,064 9,504 9,983 11,722 11,969 11,570 10,958 15,462 16,225 11,406 10,420 14,813 16,914

M11 402,586 436,876 430,423 439,820 476,246 463,571 504,940 512,757 514,833 552,806 568,659 571,602 575,682

M0 284,909 290,935 287,562 291,512 290,848 296,909 305,784 307,376 309,627 324,364 325,768 321,932 325,239

Demand deposits in EUR 98,776 136,064 132,491 136,408 173,286 154,936 187,565 188,970 188,265 216,911 232,375 234,301 232,800

Demand deposits within banks in EUR 97,894 135,623 126,023 132,762 155,678 149,746 173,566 178,828 180,364 204,208 225,263 221,908 219,994 Demand deposits within CBM-Payment Operations in EUR

882 441 6,468 3,646 17,608 5,190 13,999 10,142 7,901 12,703 7,112 12,393 12,806

Demand deposits in other currencies 18,901 9,877 10,370 11,900 12,112 11,726 11,591 16,411 16,941 11,531 10,516 15,369 17,643

M2 460,837 535,550 522,016 537,908 565,852 561,341 597,896 622,851 641,495 676,574 692,596 699,274 748,723

M1 386,121 430,659 416,111 428,064 451,793 444,089 472,717 490,980 497,616 527,268 537,926 539,169 546,275

Term deposits in EUR 71,229 98,128 97,304 102,132 104,334 106,541 117,492 125,682 140,112 139,684 146,904 151,754 189,501

Term deposits in other currencies 3,487 6,763 8,601 7,712 9,725 10,711 7,687 6,189 3,767 9,622 7,766 8,351 12,947

M21 494,290 546,287 540,856 555,080 707,024 677,325 722,119 726,277 730,148 767,794 781,479 785,114 832,561

M11 402,586 436,876 430,423 439,820 476,246 463,571 504,940 512,757 514,833 552,806 568,659 571,602 575,682

Term deposits in EUR 88,203 102,648 101,832 107,548 221,053 203,043 209,492 207,331 211,548 205,366 205,054 205,161 243,932

Term deposits in other currencies 3,501 6,763 8,601 7,712 9,725 10,711 7,687 6,189 3,767 9,622 7,766 8,351 12,947


128


MONEY Table: a. Total deposits (in € 000)

2002 2003 2004 2005 XII XII XII I II

Description/ Period D

eman

d de

posi

ts

Term

dep

osits

Tota

l

Dem

and

depo

sits

Term

dep

osits

Tota

l

Dem

and

depo

sits

Term

dep

osits

Tota

l

Dem

and

depo

sits

Term

dep

osits

Tota

l

Dem

and

depo

sits

Term

dep

osits

Tota

l

1 Financial institutions 4,938 1,662 6,600 2,454 1,284 3,738 10,708 19,876 30,584 8,402 21,107 29,509 9,347 18,304 27,651 Banks 3,658 1,653 5,311 1,081 764 1,845 6,000 12,297 18,297 4,406 13,888 18,294 3,375 10,873 14,248 Domestic 485 992 1,477 489 364 853 4,840 368 5,208 3,156 395 3,551 2,385 380 2,765 Foreign 3,173 661 3,834 592 400 992 1,160 11,929 13,089 1,250 13,493 14,743 990 10,493 11,483

Other financial institutions 1,280 9 1,289 1,373 520 1,893 4,708 7,579 12,287 3,996 7,219 11,215 5,972 7,431 13,403

Domestic 1,262 9 1,271 1,359 520 1,879 4,577 6,679 11,256 3,865 6,319 10,184 5,941 6,531 12,472 Foreign 18 0 18 14 0 14 131 900 1,031 131 900 1,031 31 900 931 2 Non financial instititions 69,331 30,999 100,330 69,942 40,042 109,984 69,630 33,958 103,588 59,519 31,970 91,489 59,002 31,161 90,163

Public non financial corporations 22,779 7,347 30,126 12,037 9,986 22,023 11,477 13,352 24,829 6,613 13,076 19,689 6,640 11,843 18,483

State companies 3,746 3,667 7,413 4,670 4,791 9,461 4,360 9,356 13,716 4,902 9,200 14,102 4,769 8,978 13,747

Publicly owned organizations 19,033 3,680 22,713 7,367 5,195 12,562 7,117 3,996 11,113 1,711 3,876 5,587 1,871 2,865 4,736

Other non financial corporations 46,552 23,652 70,204 57,905 30,056 87,961 58,153 20,606 78,759 52,906 18,894 71,800 52,362 19,318 71,680

Domestic private companies

41,972 23,370 65,342 52,640 28,916 81,556 53,893 16,798 70,691 48,539 16,576 65,115 48,084 16,022 64,106

Entrepreneurs 0 0 1,063 2 1,065 1,227 12 1,239 1,188 12 1,200 Foreign companies 4,580 282 4,862 5,265 1,140 6,405 3,197 3,806 7,003 3,140 2,306 5,446 3,090 3,284 6,374 3 Government 58,238 11,078 69,316 19,402 25,685 45,087 18,122 28,111 46,233 24,457 29,053 53,510 21,352 29,062 50,414

Central government 40,221 7,077 47,298 5,738 8,223 13,961 6,184 4,507 10,691 7,996 4,516 12,512 8,147 4,416 12,563

Agencies and institutions of central government

13,907 1,246 15,153 9,468 258 9,726 6,356 6,339 12,695 9,757 7,339 17,096 6,072 7,351 13,423

Local government - municipalities 339 44 383 1,324 10 1,334 1,843 186 2,029 1,958 436 2,394 1,888 396 2,284

State funds 3,771 2,711 6,482 2,872 17,194 20,066 3,739 17,079 20,818 4,746 16,762 21,508 5,245 16,899 22,144 4 Physical entities 11,469 10,743 22,212 22,206 22,864 45,070 40,064 39,211 79,275 35,620 41,465 77,085 45,877 45,104 90,981

Domestic 11,469 10,743 22,212 22,206 22,864 45,070 36,862 37,288 74,150 31,459 39,601 71,060 34,782 43,100 77,882 Foreign 0 0 3,202 1,923 5,125 4,161 1,864 6,025 11,095 2,004 13,099 5 Non profit organizations 1,315 1,229 2,544 2,452 1,285 3,737 5,089 171 5,260 5,368 194 5,562 5,086 243 5,329

Domestic 298 234 532 1,601 235 1,836 3,928 110 4,038 4,816 110 4,926 3,940 159 4,099 Foreign 1,017 995 2,012 851 1,050 1,901 1,161 61 1,222 552 84 636 1,146 84 1,230 6 Other 2,954 1,574 4,528 1,376 2,016 3,392 7,886 371 8,257 7,433 522 7,955 7,370 1,260 8,630

TOTAL 148,245 57,285 205,530 117,832 93,176 211,008 151,499 121,698 273,197 140,799 124,311 265,110 148,034 125,134 273,168

Monet March 2006


MONEY Table: b. Total deposits (in € 000)

2005 III IV V VI VII


eman

d de

posi

ts

Term

dep

osits

Tota

l

Dem

and

depo

sits

Term

dep

osits

Tota

l

Dem

and

depo

sits

Term

dep

osits

Tota

l

Dem

and

depo

sits

Term

dep

osits

Tota

l

Dem

and

depo

sits

Term

dep

osits

Tota

l

1 Financial institutions 30,486 23,632 54,118 14,168 30,670 44,838 11,282 28,694 39,976 15,054 30,301 45,355 15,223 23,136 41,359 Banks 1,765 14,244 16,009 3,511 11,922 15,433 4,119 9,436 13,555 3,113 11,709 14,822 4,292 8,066 12,358 Domestic 1,256 773 2,029 2,350 919 3,269 3,528 802 4,060 2,342 830 3,172 3,047 827 3,874 Foreign 509 13,471 13,980 1,161 11,003 12,164 861 8,634 9,495 771 10,879 11,650 1,245 7,240 8,485

Other financial institutions 28,721 9,388 38,109 10,657 18,748 29,405 7,163 19,258 26,421 11,941 18,592 30,533 10,931 18,069 29,000

Domestic 28,680 8,488 37,168 10,512 17,848 28,360 6,883 18,358 25,241 11,539 17,692 29,231 10,289 17,169 27,458 Foreign 41 900 941 145 900 1,045 280 900 1,180 402 900 1,302 642 900 1,542 2 Non financial instititions 57,282 30,981 88,263 56,655 27,979 84,634 80,217 31,206 111,423 88,501 36,114 124,615 84,372 42,441 126,813

Public non financial corporations 8,559 11,319 19,878 9,096 8,129 17,225 7,798 5,390 13,188 11,948 6,757 18,705 10,695 8,504 19,199

State companies 6,173 9,592 15,765 5,987 5,666 11,653 5,548 4,113 9,661 10,144 5,528 15,672 8,570 7,175 15,745

Publicly owned organizations 2,386 1,727 4,113 3,109 2,463 5,572 2,250 1,277 3,527 1,804 1,229 3,033 2,125 1,329 3,454

Other non financial corporations 48,723 19,662 68,385 47,559 19,850 67,409 72,419 25,816 98,235 76,553 29,357 105,910 73,677 33,936 107,614

Domestic private companies

43,274 15,630 58,904 40,544 15,828 56,372 66,312 20,794 87,106 69,462 22,599 92,061 65,984 26,348 92,332

Entrepreneurs 1,321 12 1,333 1,424 2 1,426 1,413 2 1,415 1,554 13 1,567 2,026 13 2,039 Foreign companies 4,128 4,020 8,148 5,591 4,020 9,611 4,694 5,020 9,714 5,537 6,745 12,282 5,667 7,575 13,242 3 Government 20,753 28,813 49,566 28,267 25,995 54,262 34,536 32,943 67,479 25,346 27,979 53,325 25.432 26,075 51,507

Central government 4,948 5,651 10,599 14,333 5,650 19,983 18,268 12,623 30,891 9,215 9,241 18,456 9,297 6,512 15,809

Agencies and institutions of central government

9,377 5,744 15,121 9,553 3,686 13,239 8,399 4,412 12,811 9,585 2,690 12,275 9,184 3,317 12,501

Local government - municipalities 1,498 219 1,717 1,333 316 1,649 2,826 97 2,923 2,631 107 2,738 2,943 46 2,989

State funds 4,930 17,199 22,129 3,048 16,343 19,391 5,043 15,811 20,854 3,915 15,941 19,856 4,008 16,199 20,207 4 Physical entities 43,572 49,661 93,233 51,794 49,680 101,474 49,891 53,687 103,578 56,420 59,355 115,775 64,253 63,062 127,315

Domestic 37,530 42,963 80,493 41,698 45,493 87,191 42,254 48,959 91,213 47,480 55,725 103,205 54,348 59,612 113,960 Foreign 6,042 6,698 12,740 10,096 4,187 14,283 7,637 4,728 12,365 8,940 3,630 12,570 9,905 3,450 13,355 5 Non profit organizations 5,177 243 5,420 4,227 243 4,470 6,401 303 6,704 6,808 358 7,166 7,532 370 7,903

Domestic 3,335 159 3,494 3,943 159 4,102 5,415 241 5,656 5,705 296 6,001 6,292 273 6,565 Foreign 1,842 84 1,926 284 84 368 986 62 1,048 1,103 62 1,165 1,240 97 1,337 6 Other 8,006 464 8,470 9,869 255 10,124 6,948 350 7,298 4,882 321 5,203 4,782 374 5,157

TOTAL 165,276 133,794 299,070 164,980 134,822 299,802 189,275 147,183 336,458 197,011 154,428 351,439 201,595 158,458 360,053


130


MONEY Table: c. Total deposits (in € 000)

2005 VIII IX X XI


eman

d de

posi

ts

Term

dep

osits

Tota

l

Dem

and

depo

sits

Term

dep

osits

Tota

l

Dem

and

depo

sits

Term

dep

osits

Tota

l

Dem

and

depo

sits

Term

dep

osits

Tota

l

1 Financial institutions 16,540 27,745 44,285 17,578 24,377 41,955 18,541 23,382 41,923 14,343 26,498 40,841 Banks 4,140 10,642 14,783 4,411 8,160 12,571 3,855 8,740 12,595 2,235 10,772 13,007 Domestic 3,554 821 4,375 3,726 829 4,555 3,171 412 3,583 1,544 1,424 2,968 Foreign 587 9,821 10,408 685 7,331 8,016 684 8,328 9,012 691 9,348 10,039 Other financial institutions 12,400 17,103 29,503 13,167 16,217 29,384 14,686 14,642 29,328 12,108 15,726 27,834 Domestic 11,163 16,203 27,365 11,072 15,317 26,389 10,874 13,742 24,616 10,912 12,716 23,628 Foreign 1,237 900 2,137 2,095 900 2,995 3,812 900 4,712 1,196 3,010 4,206

2 Non financial instititions 94,202 47,769 141,971 91,506 49,724 141,230 92,449 46,137 138,586 92,113 47,087 139,200

Public non financial corporations 13,627 9,538 23,165 12,363 10,701 23,064 12,218 11,390 23,608 10,800 11,625 22,425

State companies 11,348 8,067 19,415 9,851 8,900 18,751 9,166 9,281 18,447 7,909 9,154 17,063 Publicly owned organizations 2,279 1,472 3,750 2,512 1,801 4,313 3,052 2,109 5,161 2,891 2,471 5,362

Other non financial corporations 80,576 38,230 118,806 79,143 39,023 118,166 80,231 34,747 114,978 81,313 35,462 116,775

Domestic private companies 73,624 31,321 104,945 71,862 31,434 103,296 73,001 26,890 99,891 73,781 28,393 102,174 Entrepreneurs 2,081 13 2,094 2,050 14 2,064 1,666 12 1,678 2,107 12 2,119 Foreign companies 4,871 6,896 11,767 5,231 7,575 12,806 5,564 7,845 13,409 5,425 7,057 12,482

3 Government 30,059 25,784 55,843 43,899 25,194 69,093 37,541 27,515 65,056 35,874 67,638 103,512 Central government 12,852 4,151 17,003 23,758 3,019 26,777 20,048 4,687 24,735 17,725 10,935 28,660

Agencies and institutions of central government 1,054 4,461 14,515 12,235 4,762 16,997 10,378 4,807 15,185 10,992 4,897 15,889

Local government - municipalities 3,272 17 3,289 3,929 7 3,936 3,503 7 3,510 3,485 7 3,492 State funds 3,880 17,156 21,036 3,977 17,406 21,383 3,612 18,014 21,626 3,672 51,799 55,471

4 Physical entities 67,162 62,022 129,184 75,527 65,890 141,417 80,319 71,129 151,448 86,760 77,552 164,312 Domestic 57,647 57,727 115,374 65,467 61,671 127,138 68,502 65,580 134,082 74,498 71,473 145,971 Foreign 9,515 4,295 13,810 10,060 4,219 14,279 11,817 5,549 17,366 12,262 6,079 18,341

5 Non profit organizations 8,506 407 8,913 8,222 352 8,574 9,141 5,054 14,195 7,790 5,055 12,845 Domestic 7,113 345 7,458 7,112 254 7,366 7,224 4,991 12,215 6,540 4,992 11,532 Foreign 1,392 62 1,455 1,110 98 1,208 1,917 63 1,980 1,250 63 1,313

6 Other 3,407 372 3,780 3,462 312 3,774 3,141 315 3,456 2,994 325 3,319 TOTAL 219,877 164,099 383,976 240,194 165,849 406,043 241,132 173,532 414,664 239,874 224,155 464,029

Monet March 2006


MONEY Table: Household deposits

1.Demand deposits

2. Term savings up to 1 year

3. Term savings over 1 year

Total (1+2+3)

Dec-00 2034.942 428.46 2.05 2465.45

Oct-01 1750.663 655.48 56.75 2462.89

Nov-01 2092.206 809.38 466.30 3367.88

Dec-01 3516.666 1557.40 549.64 5623.70

Jan-02 2843.805 2089.65 617.13 5550.58

Feb-02 2791 2336 702 5829.00

Mar-02 4139 3418 741 8298.00

Apr-02 4874 4443 773 10090.00

May-02 4329 4732 525 9586.00

Jun-02 4629 5609 615 10853.00

Jul-02 5036 6089 702 11827.00

Aug-05 4269 7217 928 12414.00

Sep-02 3984 7669 1663 13316.00

Oct-05 5686 8012 1038 14736.00

Nov-02 5205 9515 1099 15819.00

Dec-02 11370 9650 1127 22147.00

Jan-03 11122 10326 1188 22636.00

Feb-03 11339 10926 1194 23459.00

Mar-03 9887 14446 1166 25499.00

Apr-03 13409 13466 1179 28054.00

May-03 11379 13368 1199 25946.00

Jun-03 12133 13848 1340 27321.00

Jul-03 14433 13386 1463 29282.00

Aug-05 16917 14576 1522 33015.00

Sep-03 16967 16512 1554 35033.00

Oct-05 19863 18983 1633 40479.00

Nov-03 19502 19851 1658 41011.00

Dec-03 22559 20258 2341 45158.00

Jan-04 18560 20639 3331 42530.00

Feb-04 18359 23115 2987 44461.00

Mar-04 20865 24108 2525 47498.00

Apr-04 22730 25102 2647 50479.00

May-04 22314 26104 2914 51332.00

Jun-04 22986 26393 3254 52633.00

Jul-04 26320 26592 3770 56682.00

Aug-04 28716 28277 3327 60320.00

Sep-04 29980 30168 3407 63555.00

Oct-04 35105 28203 6786 70094.00

Nov-04 33571 33388 3743 70702.00

Dec-04 40143 36097 4433 80673.00

Jan-05 35621 36794 4722 77283

Feb-05 45877 40828 4267 90982

Mar-05 43573 34753 14902 93234

Apr-05 51794 35366 14306 101474

May-05 49892 39112 14551 103579

Jun-05 56420 42583 16771 115776

Jul-05 64253 47323 15739 127315

Aug-05 67162 47053 14969 129184

Sep-05 75527 53238 12652 141417

Okt-05 80318 58417 12712 151447

Nov-05 86757 59042 18508 164307


132


MONEY Table: Total loans (in € 000)

2002 2003 2004 2005

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

1 Financial institutions 788 1,695 3,854 3,110 3,210 2,077 292 435 1,868 1,913 1,947 1,840 1,578 1,442

Banks 35 1,525 1,000 300 500 505 50 204 4 29 29 26 25 24

Domestic 35 1,525 1,000 300 500 505 50 204 4 29 29 26 25 24

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

Other financial institutions 753 170 2,854 2,810 2,710 1,572 242 231 1,864 1,884 1,918 1,814 1,553 1,418

Domestic 753 170 2,819 2,810 2,705 267 238 231 1,864 1,884 1,918 1,814 1,553 1,418

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

2 Non financial institutions 80,984 128,338 184,298 187,470 192,828 202,348 207,570 210,899 218,408 215,764 220,676 217,931 226,419 231,149

Public non financial institutions 10,641 14,186 18,248 17,325 18,595 21,725 24,377 21,962 22,562 21,847 22,743 20,129 23,773 25,398

State companies 8,448 12,413 10,545 9,687 10,644 12,932 15,834 14,869 14,905 14,148 15,360 14,075 16,166 17,922

Publicly owned organizations 2,193 1,773 7,703 7,638 7,951 8,793 8,543 7,093 7,656 7,699 7,383 6,054 7,607 7,476

Other non financial corporations 70,343 114,152 166,050 170,145 174,233 180,623 183,193 188,937 195,846 193,917 197,933 197,802 202,646 205,751

Domestic private companies 70,305 114,148 159,278 162,529 166,511 174,740 177,121 182,578 189,532 187,686 191,892 191,772 196,596 199,504

Entrepreneurs 5,768 5,814 5,928 4,075 4,263 4,409 4,448 4,367 4,183 4,164 4,189 4,361

Foreign companies 38 4 1,004 1,802 1,794 1,808 1,809 1,950 1,867 1,864 1,858 1,866 1,861 1,886

3 Government 20,531 20,570 18,758 18,438 20,281 22,990 27,638 24,241 27,498 23,924 28,019 26,770 25,547 31,708

Central government 16,373 16,495 9,162 6,758 6,726 6,814 5,097 5,080 3,382 3,167 3,172 3,082 3,179 7,589

Agencies and institutions of central

government 916 141 405 255 364 405 387 387 1,208 1,303 1,303 1,251 1,240 2,217

Local government - municipalities 842 910 1,735 2,116 2,199 2,018 2,743 3,163 3,027 3,797 5,017 4,993 3,756 3,958

State funds 2,400 3,024 7,456 9,309 10,992 13,753 19,411 15,611 19,881 15,657 18,530 17,444 17,372 17,944

4 Physical entities 22,290 49,959 74,393 73,154 74,377 76,268 79,014 83,688 88,013 90,043 90,377 92,154 98,444 101,869

Domestic 22,290 49,959 74,304 73,066 74,287 76,180 78,927 83,561 87,896 89,932 90,271 92,049 98,342 101,758

Foreign 89 88 90 88 87 127 117 111 106 105 102 111

5 Non profit organizations 70 63 180 114 124 178 1,301 784 845 850 822 882 5,495 5,298

Domestic 70 63 180 114 68 178 227 784 845 848 822 882 5,495 5,298

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

6 Other 0 0 0 0 0 0 0 0 0 0 31 23 8

TOTAL 124,663 200,625 281,483 282,288 290,820 303,861 315,815 320,047 336,631 332,494 341,840 339,608 357,506 371,474

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