MONET MONTENEGRO ECONOMIC TRENDS September 2006 Monet September 2006 1 © Institute for Strategic Studies and Prognoses Montenegro Economic Trends Dear readers, During the previous six months Montenegro has undergone tremendous changes. Both this preface and all of the articles in this edition of MONET consider these changes. So far, the reforms in Montenegro have been designed in light of achieving macroeconomic stability. Now, the time to concentrate on economic development has come. In other words, the focus of economic reforms should be switched from macroeconomic stability to economic development. Hence, creating the ambience that will aid in increasing both the GDP growth rate and the employment rate should be the primary goal of macroeconomic policy as opposed to balancing the budget and targeting a lower inflation rate. The goal of reforms should not be simply to comply with the requests of IMF and WB, but also to improve the quality of our lives. For the last twenty years Montenegro has been experiencing the process of transition. During this time we have witnessed transition as a process that significantly influences the way of thinking. Bearing with this process is very difficult, especially for older citizens. Therefore, transition can be considered as an intergenerational redistribution of power, or transmission of power from elders to the younger population. How can the life of our citizens be improved? There are three key conditions we should comply with: opening and globalization; integration into the European market; and regional integration. These three actions would shed light on Montenegro from both inside and outside; without this, we would remain closed in the darkness of the Balkans. We see globalization as a battle to eliminate the barriers to capital flow. The sooner we understand that the main part of competition today is the attraction of foreign investment, the better we will be. With Montenegro having the third highest per capita FDI in Europe in the previous year, it appears that the Montenegrin society has a good understanding of this. The geographic position of Montenegro plays a very important role in the economic development of Montenegro. On one hand, one should not forget that Montenegro is a Mediterranean country; while on the other hand, Montenegro borders seven other countries or entities. Therefore, it must be opened and turned towards the regional market. A system that will attract big companies’ interest in exporting products from Montenegro should be created. Thus, Montenegro should become a business platform in the region! Furthermore, Mediterranean connections must be fully utilized. Montenegro must rely upon the sea and the Mediterranean; it must become the “Mediterranean tiger.” A tunnel called Sozina was built last year making the northern part of the country one hour closer to the sea. In fact, by building new roads it will become even closer. The best criterion for the development of the northern part of Montenegro is its proximity to the sea. Only by connecting the northern territory to the sea will the “Mediterranean tiger” get its real image! Full economic integration of the northern part of the country into the entire Montenegrin economic ambience is necessary. This could be achieved through construction of good roads, small airports, and concessions. Once done, companies and entrepreneurs will be interested in investing in business, and farmers will enter the market as well. Furthermore, good roads would also result in a higher number of tourists. Therefore, only through economic integration of the northern territory can we have long-term development of the North, which would give an additional impulse to the development of Montenegro as a whole. By constructing and improving roads, railroads, and small airports, we will not only connect the North with the rest of Montenegro but also connect all parts of Montenegro with the region. 2 © Institute for Strategic Studies and Prognoses Monet September 2006 In order to achieve both these short-term and long-term goals, all creators of economic policy have to be cautious, while at the same time being brave and aggressive. Our generation received a life chance which must not be gambled away. As always, ISSP researchers are accurately following and analyzing all economic movements in Montenegro, as well as advocating for important policies, laws, procedures, etc. This is how this issue of MONET is structured. In the first part, ISSP researchers follow current economic movements in the Montenegrin economy. Many interesting and important findings were brought up. Here we will stress a few of them. In 2006, both the official statistics and ISSP estimates showed significant increase in employment and an overall better situation on the labor market. Low inflation and a high annual increase in average wages, both nominal and real, have marked the first eight months of 2006. Actual public sector revenues in the first seven months of 2006 point to the fact that public revenues, primarily budget revenues, will be executed at a higher level than planned by the end of the year. Higher than planned revenues are envisaged for all tax categories, with the exception of the corporate income tax. This, together with the control of expenditures development and implementation of measures aimed at both their orderly development and/or steady decrease, it is possible to have a significantly lower deficit than was planned. A lower deficit at the end of this year will create the possibility of a surplus in 2007. Industrial production in the first seven months of 2006 increased by 3.9% compared to the first seven months of 2005. During the second quarter of 2006, the privatization process of the Bank of Pljevlja was finally completed. Also, as a result of citizens’ increased confidence in the banking sector, many banks have opened new branch offices all over Montenegro, especially over its northern region. The “Thousand residential loans” project provoked huge interest among Montenegrin citizens. The main indicators of success in the banking sector (total approved loans, deposits, as well as the values of the general monetary aggregates) were characterized by stable positive growth rates during the second quarter of 2006. Indicators of capital market development in Montenegro in the first 7 months of 2006 were positive. Total turnover, realized number of transactions, market capitalization, and values of the stock exchange indices all increased. In the second part, ISSP researchers elaborated on the most challenging topics currently. ISSP researchers consider whether privatization of the infrastructure is a necessity or a whim. Furthermore, we elaborated on both the information society and the energy market. ISSP has conducted the ICT Survey (Information Communication Technologies) in order to determine the level of information literacy in life and business. It showed a dominant need in 2006 to improve knowledge in the area of ICT. The research identified regional differences regarding ICT usage as well as the need for establishment of specific ICT programs. 3 © Institute for Strategic Studies and Prognoses Montenegro Economic Trends Moreover, solutions for resolving the energy deficit were sought. In addition to advice for more efficient usage of existing resources and loss reduction techniques, wind as a potential energy source was introduced. Even though we are aware of the fact that development of this type of energy production in Montenegro cannot be expected soon, we are anticipating its great future relevance. As a logical subsequence, an article on regulation of the energy market was provided. We believe that you will find these articles very interesting and inspiring. Once again, we would like to stress that Montenegro has entered a very important phase and its future depends on all of us. Therefore, we should stop considering the state as our savior. Development of entrepreneurship in all areas of our lives is a key for success. Everyone has to believe in herself and to solve her own problems! For the editorial team, Milica Vukotic 4 © Institute for Strategic Studies and Prognoses Monet September 2006 TABLE OF CONTENTS EVENTS 6 MACROECONOMIC TRENDS 7 CHAPTER 1. REAL SECTOR 8 CHAPTER 2. EMPLOYMENT 14 CHAPTER 3. WAGES 18 CHAPTER 4. PRICES 22 CHAPTER 5. BUDGET 30 CHAPTER 6. MONEY 41 CHAPTER 7. CAPITAL MARKET 51 CHAPTER 8. EXTERNAL SECTOR 59 CHAPTER 9. REGIONAL COMPARISON 61 CHAPTER 10. INFORMATION COMMUNICATION TECHNOLOGY IN MONTENEGRO 63 RESEARCH 69 ELECTRONIC BUSINESS DEVELOPMENT IN MONTENEGRO - BASED ON ELECTRONIC BANKING 70 ANALYSIS 76 ENERGY EFFECTIVENESS IN MONTENEGRO (SUGGESTIONS FOR RESOLVING THE PROBLEM OF ENERGY DEFICIT) 77 REGULATION OF THE MONTENEGRIN ENERGY SYSTEM 82 POWER OF WIND AS AN OPPORTUNITY FOR MONTENEGRO 87 PRIVATIZATION OF INFRASTRUCTURE 91 INFORMATION SOCIETY OF MONTENEGRO IN 2006 98 ICT REGULATION IN MONTENEGRO 103 STATISTICAL ANEX 106 5 © Institute for Strategic Studies and Prognoses Montenegro Economic Trends EVENTS May 2006 May was marked by the referendum on the independence of Montenegro. The majority of Montenegrin citizens (55.5%) chose independence. Montenegro recovered its independence and became an internationally accepted country. A New airport was opened in Podgorica. A total of € 22 million was invested in the new airport. The company “Vektra” from Podgorica bought the Hotel complex “Alet” in Becici, known as the International Youth Center, for € 4.8 million. In this month one new auction was announced; namely, the Privatization Council of Montenegro announced an auction for the sale of a majority share package of the Ski Center “Bjelasica”. June 2006 One more bank in state ownership was privatized. Majority ownership of the Pljevaljska bank (78.7%) was sold to the Consortium from Atlas Group for € 20.5 million. The company “Jakic” from Pljevlja was sold to the company “Vektra”. For total ownership of “Jakic”, “Vektra” will pay € 1.6 million and it will employ 320 workers. July 2006 Montenegro, as the 179th country in the world, became a full member of the International Labor Organization.