Economic Policy of Montenegro for 2005


REPUBLIC OF MONTENEGRO
GOVERNMENT OF THE REPUBLIC OF MONTENEGRO
ECONOMIC POLICY OF MONTENEGRO
FOR 2005
Podgorica, february 2005

TABLE OF CONTENTS

BASIC STARTING POINTS

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1. GOAL AND TASKS OF THE ECONOMIC POLICY FOR 2005 / 4
1.1. Economic Policy Goal in 2005 / 4
1.2. Economic Policy Tasks in 2005 / 4
2. MACROECONOMIC POLICIES / 5
2.1 Monetary Policy / 5
2.2. Cooperation with International Financial Organizations / 5
2.3. Fiscal Policy / 6
2.4. Restructuring, Privatization and Investments / 7
2.5. Prices / 8
2.6. Social Policy / 8
2.7. Employment / 8
2.8. Wage and Pension Policy / 9
2.9 Development Policy / 9
2.9.1 Regional Development / 9
2.9.2 Development of Entrepreneurship and Small and Medium Size Enterprises / 10
2.9.3 Human Resources Policy / 11
2.9.4. Development of IT Society / 11
2.10. Foreign Economic Relations / 11
2.11. European Integrations / 11
2.12 Environment Protection and Improvement / 12
2.13. Spatial Planning / 12
2.14. Statistics / 12
3. SECTORAL POLICIES
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3.1 Manufacturing Industry, Energy and Mining / 13
3.2 Tourism / 13
3.3 Agriculture, Forestry and Water Supply / 14
3.4 Construction, Housing and Public Utility Sector / 15
3.5 Maritime Industry and Transport / 16
3.6. Telecommunications and Postal Services / 17
3.7 Trade / 17

4 SOCIAL ACTIVITIES

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5. GROSS DOMESTIC PRODUCT
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BASIC STARTING POINTS

Basic goal of Montenegro is to join the European Union and euro-atlantic integrations.

In the area of reforms and institutional strengthening of the system, Montenegro has three global objectives:

  1. To achieve quick, sustainable industrial development, by increasing economic freedoms, strengthening influence of private sector and achieving higher level of macro-economic stability while gradually reducing the dependence on foreign aid;
  1. To develop institutional and legal framework compatible with international standards and norms, based on rule of law;
  1. To achieve growth of living standard of Montenegrin citizens, while establishing an adequate system of social and health protection and education system.

The Economic Reform Agenda, as well as specific agendas of administrative and educational reform in Montenegro, represent framework for the Economic Policy for 2005. The starting projection for the Economic Policy for 2005 directly relies on:

  • Results of economic reforms accomplished in 2003 and 2004;
  • Achieved level of transformation of the institutional framework in Montenegro;
  • Completed preparatory activities for integration of Montenegro in the European Union (EU) and accession to World Trade Organization (WTO);

1. GOAL AND TASKS OF THE ECONOMIC POLICY FOR 2005

1.1 Economic Policy Goal in 2005

Primary economic policy goal in 2005 is growth of the gross domestic product. It is projected that the real growth of GDP will be 4.1% (the nominal growth of 7.1%) to reach €1,580 million € in absolute terms.

1.2 Economic Policy Tasks in 2005

Basic economic policy tasks are as follows:

  • Further development of private entrepreneurship initiative;
  • Investments growth: from the present €60 million to €150 million;
  • Reduction of number of employees, in accordance with the Economic Reform Agenda, by 5,000 persons;
  • Reduction of budget deficit from the present 2.9% to 2.17% participation in gross domestic product;
  • Reduction of deficit in balance of goods and services from € 290 million to € 260 million;
  • Reduction of public expenditure from the present 48.60% of GBP to 45.95% of GDP;
  • Keeping the inflation at the level to 3%.

2. MACROECONOMIC POLICIES

2.1 Monetary Policy

Monetary policy will be targeted towards: (1) strengthening of financial discipline and budget efficiency and (2) maintenance and gradual growth of money supply.

Supervision of banking system will be continued under further improvement of international standards implementation. Active policy of mandatory reserve will be kept.

Conditions will be created for broadening of range of banking services and opening of new branches, particularly in those parts of the Republic where there is a real need for them as the support to the economy, particularly tourism. Crediting of small and medium size enterprises will be supported through strengthening of the present programs of 14 credit lines with mediation of commercial banks.

The implementation of the Frozen Foreign Exchange Deposit Disbursement Program will be continued by implementation of the Law on Foreign Debt and Frozen Foreign Exchange Deposits of Citizens. In 2005, the amount of €8.7 million will be repaid.

The process of privatization of Podgoricka Bank will be continued as well as the sale of state holdings in other banks.

Negotiations with the National Bank of Serbia on finding the model for establishing of direct payment operations between Serbia and Montenegro will be continued.

Adoption of new laws will ensure full institutional framework for the financial markets (Insurance Law, Law on Current and Capital International Payment Operations, Law on Bill of Exchange, amendments to Law on Securities).

Conditions for development of securities market will be created through the capital market development in order to provide additional sources for funding businesses, primarily manufacturing ones. That would be an alternative to banking loans, with impact on reduction of their price and/or interests.

Amendments to the Law on Securities will institutionally resolve the issue of money market leading to the separation of competencies regarding the regulation of capital market and money market, where the latter would be under the domain of the Central Bank of Montenegro.

The Insurance Law will enable increase of investments in this field and reduction of outflow of savings from Montenegro. Preparations for foundation of independent regulatory body for this field will be initiated.

2.2. Cooperation with International Financial Organizations

Cooperation with international financial institutions (WB, EIB, EBRD, KfW) will be strengthened. The ongoing cooperation with the World Bank concerning implementation of reform activities and obtaining of financial aid will be further enhanced. Cooperation with the World Bank, regarding the Central Bank’s authorities, arises from the function of this institution as the fiscal agent of the State Union of SCG to the World Bank. It is necessary to provide conditions for servicing of debts of the Republic of Montenegro to the World Bank. Quality implementation of these activities is significant from the aspect of improvement of Montenegro’s credit rating.

The Government of the Republic of Montenegro will reconcile monetary and fiscal instruments with international financial organizations (World Bank and International Monetary Fund).

In order to create conditions for signing of the agreement with IMF and drawing of loan funds from the WB:

  • Budget expenditure with deficit will amount to € 34.3 million (2.17 % of GDP);
  • International funding of the budget deficit will amount to €18.3 million, of which donations will amount to €3.7 million, and WB loans €14.6 million (Structural Adjustment Credit, pension, health and education reform);
  • Domestic financing of the budget deficit will amount to €16.0 million (€6.0 million from privatization proceeds and new net borrowing on the capital market of € 10.0 million);
  • Drawing of funds for program loans shall be in the interval from €17-22 million and refers to EIB loans for: roads, railway, EPCG and Directorate for Highways;
  • WB requirements for drawing of funds based on signed agreements will be met;
  • Funds of the current budget reserve in the amount of € 7.0 million will not be spent in the first two quarters as the risk insurance if revenues in 2005 are not accrued in the planned amounts;
  • Framework for new agreements and issue of guarantees will amount to US$ 32.0 million (approximately to € 24.0 million).

2.3 Fiscal Policy

In the field of fiscal policy the plan is to increase fiscal capacity for 6.85% compared to the previous year, along with strengthening of financial discipline and further eradication of gray economy.

Further implementation of incentive measures in the tax system area will be continued and that, along with the increase of the number of tax payers and strengthened control of tax and contribution collection, will contribute to efficient and continuous settlement of tax liabilities and provision of the planned budget revenues.

Further reduction of fiscal burden on labor will be accompanied with expenditure rationalization. Continuation of policy of giving tax relieves for newly employed employees will be considered in order to stimulate new employment and possibility of transition to linear income taxation. In order to have better planning and budget execution, a model of public debt and donation management will be designed.

Initial elements in preparing the Budget for 2005 are reduction of budget deficit and financing of expenditures from real sources, stable functioning of all users and participants in public expenditure and regular accomplishment of all obligations towards the international community.

Principles on which the projections of revenues and expenditures are based are: recognition of requirements of the International Monetary Fund and observance of prescribed international standards, use of experience from previous fiscal years and assessment of accomplishments for 2004.

Goals of the budget policy are directed towards:

  • Increase of original revenues resulting in positive effects of implementation of new tax laws and increased efficiency in VAT collection;
  • Relative reduction of participation of wages of employees in the Budget;
  • Increase of capital expenses meant for building and maintenance of infrastructure and purchase of equipment;
  • Payment of increased liabilities related to debt repayment;
  • Reduction of budget deficit below 3%, in compliance with IMF recommendations.

In addition to regular servicing of liabilities, the Budget anticipates additional support to priority development sectors. Support and inducement of development of agriculture, tourism, transportation and increase of competitiveness of domestic products will be continued through subsidy instruments.

In order to improve and develop certain areas, the contracted services will provide for implementation of development projects in the area of maritime industry and transportation, tourism and education etc.

Capital expenditures will be directed to funding of building of infrastructure, purchase of equipment and maintenance of the current infrastructure.

Foreign loans and donations will provide for the support to structural adjustment and continuation of commenced reform of the Pension Fund, Health Fund and education.

Special emphasis will be laid on the resolving of internal debts of companies, banks and the state particularly through implementation of the Law on Insolvency and launching of instruments of multilateral compensation.

2.4 Restructuring, Privatization and Investments

Implementation of the Program of Company Restructuring and Support to Institutional Development will be continued and to that end, funds will be provided according to the set timeline. Market restructuring of business organizations through Turn Around Management (TAM) and Business Advisory Service (BAS) programs will include 40 companies. Activities on establishment of a guarantee fund that will support start up of businesses and implementation of new investment ideas will also be continued.

In 2005, privatization of KAP, Coal Mine Pljevlja and Bauxite Mine will be completed. Sale of package shares will be offered for the following companies: Institute “Simo Milosevic”, Tobacco Mill, Port of Kotor, AD Marina Bar, HTP Boka, UTIP Crna Gora, »Obod« Cetinje and »Radoje Dakic«.

In order to create conditions for successful completion of privatization of companies: Aluminum Plant Podgorica, Coal Mine Pljevlja, Bauxite Mines Niksic, Steel Factory Niksic, »Obod« Cetinje and »Radoje Dakic« Podgorica, a fund for resolving of redundancies in these companies will be established.

Privatization will be accelerated and participation of private sector in the area of utility services increased. Privatization in social activities will be intensified, particularly in the sports area. Privatization proceeds will be primarily put in the function of infrastructure development and opening of new jobs.

New investments will be crucial for acceleration of economic development and economic growth. Further to this goal, improvement of the environment for business activities through adoption of legal regulations will be continued. Government of Montenegro will even more decisively work on reduction and removal of administrative and other business barriers and increase of the economic system openness. The planned investments for 2005 amount to €150 million. Budget framework for capital expenditures amounts to €27.9 million that will be partially placed through the Public Works Program.

Investment priority will be given to revitalization and development of capital infrastructure as follows:

construction of road sections Podgorica-Matasevo-Kolasin, Risan-Grahovo-Zabljak, and creation of conditions for implementation of the Adriatic-Ionic Highway Project,

maintenance and revitalization of road and railway infrastructure,

water supply in coastal municipalities,

construction of main sewer purification facility (resolution of wastewaters problem),

resolution of solid waste problem and

improvement of electricity supply (on Montenegro coast).

Montenegro Investment Promotion Agency will start operating.

In the legislative sphere, the Government of Montenegro will:

Prepare a new law on participation of private sector in carrying out public functions aimed at improvement of the procedure of concession award;

Improve legal solutions in the area of corruption prevention;

Determine solutions for tax exempting a part of profit directed to investments;

Work on creation of conditions for implementation of the Law on Restitution and Compensation of the Taken Away Property Rights.

Further strengthening of judicial function and improvement of local government activities will provide for complete protection of ownership rights and contracts and equal rights of foreign and domestic investors.

In order to improve privatization process management the plan is to centralize the managing function over the remaining state capital, restructuring and privatization. Further to this, possibility of transforming the Development Fund will be analyzed where the present managing functions over the remaining state capital in privatized enterprises and restructuring will be integrated within the Agency for Economy Restructuring and Foreign Investments.

2.5. Prices

Inflation is projected to be up to 3.0%. The level of inflation will also be affected by decisions of regulatory bodies from energy and telecommunications sectors on gradual increase of tariffs in order to make them closer to market prices as well as by changes in oil prices on the world market.

Incentives to competition, reduction and elimination of business barriers and conditions for monopoly behavior will affect the price flow. Adoption of the Law on Trade, Law on Competition Protection and the Law on Consumer Protection will contribute to recognition of market environment in compliance with EU standards.

2.6. Social Policy

One of priority tasks in 2005 is implementation and monitoring of the Strategy of Development and Reduction of Poverty in Montenegro with the objective to reduce the poverty rate from the present 12% to 11%.

Special attention will be paid to implementation of the Strategy for permanent resolving of the issue of refugees and internally displaced persons in Montenegro with the objective to reduce the number of refugees for minimum 1,500 and a number of internally displaced persons for 2,000 in 2005.

Significant attention will be paid to protection of jeopardized categories. Timeline for payment of family financial aid, children allowance, attendant aid and care allowance, maternity leave allowance, war veterans’ financial aid and personal and family disability allowance will be kept. Time gap between the month in which payment is made and the month to which the payment refers to will be reduced, in average for 3 months.

Law on Certification System, Law on Training and Employment of Persons With Disabilities, new Labor Law and new Law on Social and Child Protection will be adopted.

Decade of Roma Action Plan will be prepared and continuous activities carried out for the implementation of the National Plan of Action for Children, National Program of Prevention of Unacceptable Behavior of Youth in Montenegro etc.

2.7. Employment

Number of the unemployed will be reduced from the present 59,671 for 5,000 persons in accordance with the Economic Reform Agenda.

Implementation of the Program of legalization and prevention of work “in informal sector” and Program of employment of interns and support to employers to employ interns for indefinite period of time following the completion of internship service will be continued.

Implementation of the Program of preparations for employment (training, additional training, retraining and specialization) will be intensified and the quality of labor force offer appropriate for market requirements will be improved, with the objective to reduce the number of seasonal and increase the number of permanent jobs.

Incentives will be provided for employment of so-called “marginal groups” through co-financing in wage payments or fiscal liabilities on wages for a certain period of employment of those persons.

More useful and more efficient role of the Employment Fund will be accomplished on the labor market through the improvement of its operational, expert and technical capacities, which will make it able to provide advisory and educational services to a higher extent than before.

The updating of labor-related and other regulations having direct or indirect impact on employment will be continued.

2.8 Wage and Pension Policy

Wage policy in public sector will continue to be based on the concept of minimum wage. The minimum wage will be set according to the General Bargaining Collective Agreement. Rationalization of the number of employees and reduction of tax levies will create a room for wage increase.

In the area of pension and disability insurance, pensions will be indexed in a manner set by the Pension Law according to so-called Swiss formula.

Regularity of payment of pensions will be provided as well as the funds for complementary indexation. Reform of pension and disability insurance will be continued through adoption of the required legal regulation for introduction of voluntary pension funds (Pillar III).

2.9. Development Policy

In accordance with the Economic Reform Agenda, development policy will be implemented through programs and projects for investments in infrastructure and business expansion through different forms of cooperation with international institutions and realization of contracts with strategic corporations in the area in which multiplication effects on overall development are certain. Further to this, through Investment Promotion Agency, possibilities and conditions for investments in Montenegro will be promoted. Partnership relations with private sector will be developed in financing infrastructure, services and utility services. New legal solutions will improve the procedure of concession award. Implementation of commenced infrastructural projects on the Republic level and projects of improvement of infrastructure on the local level will be continued through the Program of Directorate for Public Works.

Spatial Plan of the Republic of Montenegro, as the most significant strategic document, will be adopted in 2005 setting up the national development strategy by the year 2020.

In order to eliminate energy deficit and set development priorities, the strategy of development of energy and creation of conditions for construction of new power generation facilities will start being prepared.

Master plans of renewable energy sources will be adopted and pilot projects of building mini-hydro power plants and use of wind power will be implemented.

Telecommunication strategy, agriculture development strategy, transportation development strategy as well as master plans in utility sector and water supply area will also be adopted.