The Montenegrin economy is set to experience a boost next year, driven by new economic policy measures that are likely to stimulate personal consumption and investment. However, the rising public debt and significant refinancing needs pose fiscal risks, according to an assessment by the European Commission (EC).

In its latest autumn forecast, the EC anticipates that Montenegro’s gross domestic product (GDP) will grow by 3.9 percent this year, followed by a 4.2 percent increase next year. This is an improvement from the spring report, which projected a growth rate of 3.8 percent for this year and 3 percent for the next.

Looking ahead to 2026, the EC forecasts a GDP growth of around 3 percent for Montenegro.

The EC report notes, “Montenegro’s economic growth has continued, albeit at a slower pace in the first half of 2024, primarily led by personal consumption and a resurgence in investment. The recently adopted Europe USA 2 program aims to boost disposable income by raising the minimum wage and decreasing pension contributions, measures that are expected to enhance GDP growth in 2025 while also contributing to inflation.”

For 2024, good fiscal outcomes are anticipated due to robust income growth; however, new measures that lower budget revenues while increasing expenditures are likely to lead to a considerable rise in the budget deficit for 2025-2026.

“In the long term, the growth of public debt alongside the substantial refinancing needs will represent fiscal risks.”

New Measures and Growth Acceleration

The real GDP growth estimate for 2023 has been adjusted to 6.3 percent annually, up from the previous expectation of 6 percent.

“Economic growth decelerated to an annual rate of 3.6 percent in the first half of 2024, influenced by investments (growing at 9.6 percent annually) and strong personal consumption (up 8.2 percent annually), aided by increases in minimum pensions, salaries, and employment. Meanwhile, poor electricity exports and a slow start in tourism saw real exports decline by 10.7 percent annually, while imports experienced modest growth of 2.1 percent, leading to a negative contribution from net exports to overall growth. Government consumption saw a moderate rise.”

The EC highlights the adoption of the European Sad Program by the Assembly in September, which significantly raised the average minimum wage from 450 euros to 700 euros starting in October. Furthermore, employee contributions to pension and disability insurance decreased from 15% to 10%, and employers’ contributions (5.5%) were eliminated.

“Economic growth is expected to accelerate in 2025, as the newly implemented voluntary measures may stimulate personal consumption and investments. This uplifting effect might be less pronounced in 2026. Export growth between 2025 and 2026 is also likely to support ongoing tourism growth. An increase in imports is anticipated during this period, aligning with domestic demand,” according to the EC.

The payment deficit is projected to rise in 2024, but with robust tourism sector performances anticipated to yield solid results in the 2025-2026 period. “The impact of increased imports is expected to be mitigated by strong domestic demand.”

Employment growth across all sectors is set to continue in 2024, with the unemployment rate dropping to a historic low of 11.5% in the second quarter of that year.

“Job growth is expected to further accelerate in 2025 due to reduced pension contributions. However, this beneficial effect may diminish in 2026 as increased wages could limit job creation in the service sector,” states the EC report.

Anticipated Rise in Inflation

It is noted that inflation exhibited a downward trend throughout 2024, with a monthly decline reaching 2% annually by August.

“Consumer prices are projected to rise in 2025 due to considerable increases in salaries and social transfers. Inflation may slow in 2026, assuming policy stasis.”

The EC asserts that forecast risks are balanced.

The key risk “to the downside” pertains to inflation exceeding targets, which could negate the positive effects of new government policy measures on real disposable income and household consumption.

“Additionally, Montenegro’s narrow export base makes it susceptible to fluctuations in international demand, and increased wages could compromise tourism export competitiveness. Conversely, a positive risk is the swifter-than-anticipated execution of investment projects along with Montenegro’s participation in the EU’s reform and growth programs, which could bolster investment and productivity,” the EC report concludes.