GOVERNMENT OF MONTENEGRO ECONOMIC REFORM PROGRAMME FOR MONTENEGRO 2018 – 2020 PODGORICA, JANUARY 2018 P a g e | 1 CONTENTS LIST OF ABBREVIATIONS ......................................................................................................................... 4 1. OVERALL POLICY FRAMEWORK AND OBJECTIVES ............................................................................. 5 2. MACROECONOMIC FRAMEWORK .................................................................................................... 11 2.1 Recent Economic Developments ................................................................................................ 12 2.1.1 Gross Domestic Product ....................................................................................................... 12 2.1.2 Inflation ................................................................................................................................ 14 2.1.3 Employment and Wages....................................................................................................... 14 2.1.4 Lending Activity of Banks...................................................................................................... 15 2.1.5 External Sector ..................................................................................................................... 16 2.2 Medium-Term Macroeconomic Scenario .................................................................................. 17 2.2.1 Baseline Macroeconomic Scenario 2018-2020 and Related Risks ....................................... 17 2.3 Alternative Scenario ................................................................................................................... 24 2.3.1 Low-Growth Macroeconomic Scenario 2018-2020 .............................................................. 24 3. FISCAL FRAMEWORK ........................................................................................................................ 27 3.1 Policy strategy and medium-term objectives ............................................................................ 27 3.2 Budget implementation in 2017 ................................................................................................ 31 3.3 Medium-term budgetary outlook .............................................................................................. 33 3.4 Structural balance (cyclical component of the deficit, one-off and temporary measures, fiscal stance) ............................................................................................................................................... 37 3.5 Debt levels and developments, analysis of below-the-line operations and stock-flow adjustments ...................................................................................................................................... 38 3.5.1 Government and public debt in 2017 .................................................................................. 38 3.5.2 Baseline scenario of government debt trend in the period 2018–2020 .............................. 42 3.5.3 Low-growth scenario ............................................................................................................ 43 3.5.4 State guarantee stock ........................................................................................................... 44 3.6 Sensitivity analysis and comparison with the previous programme ........................................ 46 3.6.1 Sensitivity of public finance projections to alternative risk scenarios ................................. 46 3.6.2 Comparison with the previous programme ......................................................................... 47 3.7 Fiscal governance and the budget framework .......................................................................... 49 3.8 Sustainability of public finances ................................................................................................. 50 4. STRUCTURAL REFORMS IN THE PERIOD 2018–2020 ....................................................................... 52 4.1 Identifying the key constraints to competitiveness and inclusive growth ............................... 52 4.2 A brief overview of the reform measures .................................................................................. 53 4.3 Analysis by areas and structural reform measures ................................................................... 55 P a g e | 2 4.3.1 Public Financial Management .............................................................................................. 55 4.3.2 Energy market and transport market reform....................................................................... 57 4.3.3 Sector development ............................................................................................................. 60 4.3.4 Business environment and reduction of the informal economy.......................................... 69 4.3.5 Research, development and innovations (RDI) and the digital economy ............................ 76 4.3.6 Trade-related reforms .......................................................................................................... 80 4.3.7 Education and skills .............................................................................................................. 82 4.3.8 Employment and the labour market .................................................................................... 85 4.3.9 Social inclusion, reduction of poverty and equal opportunities .......................................... 86 5. BUDGETARY IMPLICATIONS OF STRUCTURAL REFORMS ................................................................ 88 6. INSTITUTIONAL ISSUES AND STAKEHOLDER INVOLVEMENT .......................................................... 89 7. SUMMARY DATA .............................................................................................................................. 91 P a g e | 3 LIST OF ABBREVIATIONS CEFTA – Central European Free Trade IRFCG – Investiciono-razvojni fond Crne Gore Agreement (Investment and Development Fund of CGES – Crnogorski elektroprenosni sistem AD Montenegro) (Montenegrin Electricity Transmission System) KfW – German Development Bank COSME – EU programme for Competitiveness MDD 2018-2021 – Montenegro Development of Enterprises and SMEs Directions 2018-2021 EBRD – European Bank for Reconstruction and NATO – North Atlantic Alliance Development NQF – National Qualifications Framework EC – European Commission OECD – Organisation for Economic EEN – Enterprise Europe Network Development and Co-operation EFP – Economic and Fiscal Programme PE – Public Enterprise EIB – European Investment Bank PEP – Pre-Accession Economic Programme EIF – European Investment Fund PPP – Public–Private Partnership EPCG – Elektroprivreda Crne Gore RCC – Regional Cooperation Council (Montenegrin Electrical Power Company) RUP – Rudnik uglja Pljevlja (Pljevlja Coal Mine) ERP – Economic Reform Programme SEE 2020 Strategy – South East Europe 2020 FDI – Foreign Direct Investments Strategy GPA – Agreement on Government SEETO – South East Europe Transport Procurement within the framework of the Observatory WTO SME – Small and Medium-Sized Enterprises GVA – Gross Value Added TEP – Termoelektrana Pljevlja (Pljevlja IPA – Instrument for Pre-Accession Assistance Thermoelectric Power Plant) IPARD – IPA in Rural Development WTO – World Trade Organization P a g e | 4 1. OVERALL POLICY FRAMEWORK AND OBJECTIVES The Economic Reform Programme is a key national strategy paper for medium-term macroeconomic and fiscal programming in Montenegro, which also contains a related agenda of structural reforms important for reducing or eliminating barriers to economic growth and strengthening the country’s overall competitiveness. At the same time, the Economic Reform Programme (hereinafter: ERP) is Montenegro’s most important document in its economic dialogue with the European Union. Similar to previous years, the topics covered by the Economic Reform Programme for the period 2018- 2020 have been the subject of a wide consultative process with the most important stakeholders in the society, as well as the work of the inter-ministerial working group established by the Government of Montenegro to prepare it. Montenegro’s economic policy and the Euro-Atlantic integration process The most important achievement of Montenegro with respect to foreign policy was that in 2017 it became the 29th member of the NATO alliance. In this way, we have ensured the security of our country, but also created the preconditions for a more accelerated economic growth and development. We are also very dedicated to the implementation of our second foreign policy priority – membership of the European Union. So far, Montenegro has opened 30 and closed three negotiating chapters. This clearly brings us closer to the proclaimed goal of the country’s 41st government to complete the negotiation process by the end of its term and prepare Montenegro for full membership of the European Union. On this path, the focus will continue to be on strengthening the rule of law and further strengthening the democratic capacities of the state and the society as a whole. In the intensive work on these two integration processes, regional cooperation has not been neglected. Montenegro’s proactive approach is reflected in the Berlin Process, which has brought significant benefits to the Western Balkan region in restoring and modernizing the outdated infrastructure. Through the Western