Montenegro needs to slash its debts “significantly below” 60 percent of gross domestic product and make sure future borrowing goes to finance investments rather than pensions and wages, the World Bank said.
Fiscal consolidation is imperative because Montenegro unilaterally uses the euro as its sole legal tender, the World Bank said in report focusing on challenges such as overhauling the public administration, pension, education and health systems and the need to streamline social assistance programs.
The nation of 662,000 people, which gained independence in 2006 and wants to join the European Union by the end of the decade, adopted the euro unilaterally almost a decade ago when Europe created the common currency. Using the euro may force an “acute fiscal and or balance-of-payment crisis” if “structural reforms” are not carried out to address “the root causes of fiscal imbalances,” the World Bank said.
“Otherwise, as in any dollarized or euroized economy, without strong and sustainable fiscal policy, Montenegro could risk suffering from economic stagnation, rising rates of unemployment and increasing poverty,” the Washington-based bank said.
Using the euro has also deprived policy makers of using tools such as inflation or currency depreciation to help the country cut the public debt burden, offset wage increases and boost international competitiveness, it said.
Montenegro’s public debt rose 12 percentage points between 2008 and 2010 to 44.1 percent of GDP, according to the report. Its fiscal gap shrank to 3.9 percent of GDP in 2010 from 5.3 percent in 2009. The government ran a fiscal surplus of 6.4 percent of GDP in 2007.
The World Bank advised Montenegro to pursue fiscal policies within the limits imposed by EU’s Maastricht criteria and stick with a “golden rule” that would preclude “government borrowing for reasons other than public investments.”
The country’s small and open economy has proved vulnerable to external shocks over the past two years and Montenegro needs to “recreate the fiscal buffer and protect markets’ positive assessment of Montenegro’s creditworthiness” benefiting from “a benchmark on public debt significantly below 60 percent.”
The authorities should, therefore, define a longer-term fiscal adjustment program anchored on a debt-to-GDP ceiling of 35 percent plus or minus 5 percentage points, the lender said.
The proposed debt benchmark would allow Montenegro more near-term flexibility and require clear commitment to medium-term fiscal discipline, the World Bank said.