Economic Outline

Economic Indicators

As the smallest country in the Balkans, Montenegro has a relatively fragile economy that is transitioning to a market system and is based on financial investments, especially in the energy and tourism sectors (private investment accounts for around one-fifth of GDP). After being severely hit by the COVID-19 pandemic, the country’s economy rebounded. In the first half of 2023, there was a 6.6% year-on-year growth in real GDP, primarily fueled by robust private consumption. This surge was attributed to rising real wages, employment rates, household borrowing, and a highly successful tourism season. For the year as a whole, the Central Bank estimated growth at 6%, as tourism surpassed 2019 levels and the inflow of migrants continued to support private consumption. In January 2024, the Montenegrin government announced its aim to achieve an average annual economic growth of 3.2% from 2024 to 2026, with domestic demand being the main driving force behind this growth, while elevated inflation, tighter financing conditions, domestic political fragmentation, and weak external demand will represent headwinds.

Concerning public finances, during the first eight months of 2023, the budget execution outperformed the revised 2023 budget adopted in May, which aimed for a deficit of 3% of GDP. From January to August, there was a surplus amounting to 3% of GDP, driven by lower-than-expected spending, particularly on capital investment, and higher-than-projected revenue, notably from VAT and excise taxes. Additionally, several one-off measures such as the economic citizenship program and the EU energy support grant contributed to this surplus. Persistent robust performance in tax revenue, temporary boosts in non-tax revenue, and lower-than-budgeted spending collectively contributed to the achievement of a surplus in public finances in 2023. However, it is anticipated that a fiscal deficit of approximately 3.5% of GDP will be recorded in 2024. However, due to a narrowing budget deficit and strong nominal GDP growth, the public debt-to-GDP ratio declined to 65.8% in 2023, from 72.1% one year earlier. Without any fiscal consolidation strategy, public debt is forecasted to increase over the forecast horizon, reaching 69.5% by 2025 (IMF). In 2023, inflation began to slow down, averaging 8.3% throughout the year. Significant rises in wages and social transfers also contributed to upward price pressures. It is anticipated that inflation will ease in 2024 and 2025, dropping to 4.3% and 2.6%, respectively. This is attributed to lower imported inflation and a moderation in domestic demand. Montenegro officially submitted its application to join the EU on December 15, 2008, with membership negotiations commencing on June 29, 2012. As of now, 33 negotiating chapters have been opened, three of which have been provisionally closed. As per the IMF recommendations, enhancing infrastructure connectivity, promoting tourism in the Northern region, and expanding into niche tourism markets can diversify Montenegro's tourism sectors. Moreover, harnessing its natural resources in hydro, solar, and wind power will boost energy production and exports, supporting the country's climate objectives. Improved public investment management practices are essential to prioritize high-return investments in both physical and digital infrastructure. Additionally, implementing effective policies to curb informality will foster a favorable environment for the SME sector, allowing it to capitalize on skilled migrant labor.

The resurgence of tourism and policy initiatives implemented in late 2021, such as eliminating mandatory health contributions and raising the non-taxable portion of wages, positively influenced job creation in 2022. This trend continued into 2023, resulting in a record-low unemployment rate of 13.5% in the second quarter. However, employment growth is projected to slow down in 2024-2025, attributed to weakening domestic and external demand, according to the EU Commission. The country maintains a large informal sector, while the labor force participation rate remains low. Moreover, Montenegro is one of the poorest countries in Europe: according to the latest data available by the OECD, approximately 20.3% of the population is at risk of poverty or social exclusion. The country’s GDP per capita was estimated at USD 27,027 in 2022 by the World Bank, half of the EU average.

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