The gross domestic product (GDP) of Montenegro is projected to grow by 3.4 percent, followed by a 3.5 percent increase, driven by enhancements in the Wage Bank (SB).

The SB’s latest regular economic report for the Western Balkans has slightly raised its forecasts for Montenegro’s economic performance next year by 0.7 percentage points compared to the previous spring report, while this year’s forecast remains unchanged.

Despite solid growth indicated in the SB report, fiscal challenges persist for Montenegro, primarily due to government actions to reduce pension contributions, which are likely to increase the expected deficit to 4.1 percent of GDP in 2025.

The report also states, “Public debt is anticipated to rise to approximately 64.5 percent of GDP by 2026. To maintain fiscal sustainability, disciplined policies are essential in the face of high external financing costs and geopolitical uncertainties.”

The SB notes that the robust growth seen in 2023 is continuing into 2024, although GDP growth has slowed from 4.4 percent in the first quarter to 2.7 percent in the second.

“While private consumption and investments have fueled growth, their heavy reliance on imports has led to increased import levels, affecting overall growth. By July, real retail growth was at 6.4 percent, and the value of construction work was up by 3.1 percent. However, tourist nights saw a decrease of four percent, and industrial production fell by 6.5 percent,” reports the SB.

Furthermore, employment growth has remained strong across all sectors in 2024. Data from the second quarter showed employment rates of 56.7 percent and activity rates of 64 percent, while the unemployment rate decreased to 11.4 percent.

As of July, annual inflation was recorded at 4.6 percent, with real wages increasing by 1.2 percent year-over-year.

“The poverty rate (defined as income below $6.85 per day based on 2017 Purchasing Power Parities – PPP) is expected to decline to 8.8 percent in 2023,” stated the SB.

The financial sector is reported to be well-capitalized and liquid, with robust loan growth. By June, the average capital adequacy ratio was 19.5 percent, and non-performing loans decreased to 5 percent from 6.1 percent of total loans the previous year. As of June 2024, banking sector lending and deposits grew by 12.5 and 2.1 percent annually, respectively.

The report indicates that the current account deficit widened in the first half of the year due to decreased export services and reductions in net income from increased dividend and interest payments.

A net inflow of foreign direct investments (FDI) declined by five percent, covering one-third of the current account deficit, with the remainder financed through new debt.

“External debt remains significant at 130 percent. In the first seven months of 2024, the Central Government achieved a fiscal surplus of 0.4 percent of GDP. Revenues increased by 8.6 percent, mainly driven by stronger collections of value-added tax (VAT) and income tax,” stated the report.

The report highlights that expenditures increased by 17.9 percent, largely due to enhanced social transfers following the rise in the minimum pension to 450 euros in January 2024. By June, public debt stood at 60.8 percent of GDP, and in September, S&P (Standard and Poor’s) upgraded Montenegro’s credit rating from B to B+.

Positive Growth Outlook, But Dependent on Global Conditions

SB states that while prospects for the Montenegrin economy are positive, challenges persist due to a challenging global environment.

“Having started from a very high baseline, growth is expected to decelerate to 3.4 percent in 2024, still propelled by private consumption and investments. Anticipated increases in minimum and net wages, as outlined in fiscal strategy, should bolster personal consumption and stimulate growth to 3.5 percent in 2025, despite the closure of a thermal power plant requiring higher energy imports,” the report concludes.

The SB predicts medium-term growth will be sustained, aided by progress towards EU membership. The current account deficit is projected to rise to 12.6 percent of GDP in 2024 and further to 13.7 percent in 2025, driven by higher energy imports, with net foreign direct investments covering only half of the deficit, raising sustainability concerns.

Inflation is forecasted to slightly ease to 3.7 percent in 2025 and further drop to 2.7 percent in 2026. The poverty rate is expected to decline by 1.8 percentage points, reaching seven percent by 2026.

“The most vulnerable groups include long-term unemployed individuals, students, or those outside the labor market, often residing in the northern regions. Consequently, targeted government policies promoting sustainable economic growth are essential for poverty reduction,” reports SB.

The fiscal deficit is projected to rise to approximately 4.1 percent of GDP in 2025 before gradually declining to 3.7 percent in 2026.

SB anticipates a shortfall in revenues despite the planned government compensatory measures.

“Implementing additional fiscal consolidation measures would improve fiscal conditions and ensure sustainability. Public debt is expected to rise to an estimated 64.5 percent of GDP by 2026. Maintaining this debt will require strong fiscal discipline, particularly in light of challenging global financial conditions and significant financial needs between 2025 and 2027,” the SB report adds.

The SB points out that economic prospects are clouded by potential risks.

“Increased geopolitical uncertainties may undermine the growth outlook for Montenegro’s trading partners, while high external financing costs present a risk given the country’s significant financial demands. Domestic political developments also pose a risk,” they caution.

Economic Growth in the Western Balkans to Accelerate Moderately

For the region, SB reports that economic growth in the Western Balkans is expected to see moderate acceleration in 2025, primarily due to rising consumption and investment.

The World Bank predicts that total economic growth in Albania, Bosnia and Herzegovina, Montenegro, Kosovo, North Macedonia, and Serbia will reach 3.7 percent in 2025, a 0.2 percentage point increase from the spring report. The expected growth rate for this year is 3.3 percent, which is 0.1 percentage points higher than initially estimated.

“Domestic factors continue to contribute to moderate growth acceleration in the Western Balkans. Furthermore, the gradual recovery of economic activities within the European Union will significantly influence export growth from this region,” commented Isola Rossi, a World Bank economist and lead author of the report.

Despite these positive developments, the region remains vulnerable to various risks, including sluggish global growth, renewed inflation, political instability, and extreme weather conditions.

The SB asserts that as economic growth strengthens, the standard of living in the Western Balkans will gradually move closer to that of citizens in more advanced EU economies. However, to maintain this growth trajectory and accelerate convergence, structural reforms are necessary, including those outlined in the EU growth plan.

“Economic integration is a vital engine of growth for small economies such as those in the Western Balkans,” stated Caoking Ju (Xiaoqing Yu), director of the World Bank for the region. “To drive this growth, it is essential to enhance trade, reduce border crossing delays, and integrate payment systems within the region and the EU.”

Moreover, he emphasized that addressing demographic and labor market challenges necessitates a focus on human capital development.

“Improving educational and health systems is crucial for transitioning from a medium to a higher income level,” he concluded.

Nearly a Quarter of Western Balkan Citizens Live Abroad

With almost a quarter of the population of Western Balkan countries currently residing abroad, better management of global labor from this region could be a significant driver of local economic development, according to the SB. While emigration presents challenges such as labor shortages, there are clear opportunities to leverage migration for economic benefits.

The report suggests that, with effective management, migration can reduce poverty, promote exports, and attract investment, ultimately leading to job creation and knowledge transfer.

“For instance, remittances from abroad can enhance the financial situations of migrant households. Moreover, the repatriation of skilled migrants can lead to a ‘brain gain,’ encouraging those who remain to invest in education and skill enhancement,” states the SB report.

The SB recommends several public policies for the Western Balkans to make the most of migration:

• Developing training programs to acquire skills and mobility agreements in collaboration with destination countries while expanding bilateral social security agreements.
• Enhancing protections for migrants throughout the migration cycle to mitigate risks and encouraging their return.
• Facilitating capital transfers, expertise, and advanced technologies through the diaspora.
• Utilizing digital tools and improving data collection to manage migration effectively and inform public policy adoption.