This chapter offers an overview of Montenegro’s economic developments since the Competitiveness Outlook 2021, with a special focus on the economic impact of recent external shocks and economic convergence. The chapter also examines the progress made and challenges encountered in achieving the Sustainable Development Goals. It also recaps the progress made towards EU accession, including the financial and development support provided by the EU for Montenegro’s accession efforts. Altogether, this sets the stage for in-depth examination across 15 policy dimensions in the subsequent chapters, all necessary for sustaining economic competitiveness.
Western Balkans Competitiveness Outlook 2024: Montenegro
Competitiveness and Private Sector Development
1. Context
Abstract
Economic context
Key economic developments
Montenegro is the smallest economy of the Western Balkans, with a total gross domestic product (GDP) of EUR 6.53 billion as of 2023 (IMF, 2024[1]). Its economy is based predominantly on services, which account for 61.5% of its GDP. Industry and agriculture respectively contribute 13% and 6% to GDP (World Bank, 2024[2]). Employment is even more services-heavy: 74% of employment is concentrated in services, while industry (including construction) and agriculture respectively comprise 18% and 7% of employment (ILO, 2024[3]). The informal sector is estimated to account for one-third of the economy’s GDP and 13.8% of employment as of 2019 (EBRD, 2020[4]; ILO, 2023[5]).
Following a strong post-COVID recovery, Montenegro’s growth performance has moderated slightly. While Montenegro’s economy sustained a significant decline of 15.3% in GDP in 2020, Table 1.1 highlights a 13% rebound in 2021 and 6.4% growth in 2022 (European Commission, 2024[6]). Economic growth was strongly underpinned by consumption, owing to increased real disposable income, improved tourism, employment gains, household lending, and higher remittances (European Commission, 2024[6]). Government consumption also added to growth, while investment has slowed. Tourism, trade and other service sectors drove economic growth on the production side (World Bank, 2023[7]; EBRD, 2024[8]). As of the third quarter of 2023, GDP expanded by 6.6% year-over-year compared to growth of 6.9% over the same period in 2022 (European Commission, 2024[6]).
Montenegro’s inflation rate has increased sharply, yet it shows signs of moderation. Impacted by price rises following the Russian Federation’s war of aggression against Ukraine, inflation peaked at a record high level of 13% in 2022 (European Commission, 2024[9]) (See Box 1.1 for more). Higher wages and pensions added to rapidly rising inflation (European Commission, 2024[9]). Inflation declined to an average of 5.5% year-over-year in November 2023, owing to lower increases in prices for food and non-alcoholic beverages, housing and utilities, and furniture and household equipment (European Commission, 2024[6]). Having unilaterally adopted the euro since 2002, the economy’s inflation differential with the euro area has come down from its 2022 peak of 17.2% to 4.3% in December 2023 (IMF, 2024[10]).
Montenegro’s labour market improved though structural problems persist, including large regional disparities and gender gaps, informality, and high youth and long-term unemployment (European Commission, 2024[9]). Unemployment has declined from 18.4% in 2020 to 15.1% in 2022, and reached a historic low of 13.1% in July 2023 (European Commission, 2024[6]). Youth unemployment also fell drastically, from 37.1% in 2021 to 29.4% in 2022 (World Bank, 2023[7]). Concurrently, labour force participation rates picked up among adults aged 15 to 64, from 64.2% in 2020 to 68.2% in 2022, though still remaining below the 2019 rate of 68.8% (ILO, 2024[11]). Average net wages remained steady over 2019 to 2021, and increased by 11.2% over 2022, consistent with the rise in inflation (European Commission, 2024[6]).
Montenegro’s external sector has shown an improvement in its current account deficit, narrowing to 9.4% of GDP in the four quarters to September 2023, compared to a 12.1% deficit in 2022 (European Commission, 2024[6]). In the first half of 2023, the current account deficit remained unchanged from the same period in 2022 owing strong service exports, which offset higher goods imports (EBRD, 2024[8]; European Commission, 2024[6]; World Bank, 2023[7]). Exports of goods and services dropped from 43.8% of GDP in 2019 to 26% in 2020, but recovered to 42.8% of GDP in 2021 and grew further to 51.5% by 2022 (World Bank, 2024[2]). Despite a slight decrease in 2021, FDI inflows reached EUR 5.39 million in 2022 (UNCTAD, 2023[12]). Personal remittances also increased from EUR 526.4 billion in 2020 to EUR 783 million in 2022, and remained relatively consistent as a share of GDP, near 9.5% (World Bank, 2024[2]). International reserves increased by 9.5% in 2022, covering about 5.2 months of prospective imports of goods and services (European Commission, 2024[6]).
While the government’s fiscal position improved in the first 11 months of 2023, it is expected to return to its pattern of deficit (IMF, 2024[13]). By 2022, Montenegro managed to slightly reduce its growing public debt to 71.7% of GDP, which had peaked at 106.8% of GDP in 2020 (World Bank, 2023[7]). However, its improved fiscal position has been propped up by one-off factors, such as post‑pandemic recovery resulting in higher revenues, high inflation, and use of deposits from debt issuance in 2020 (IMF, 2024[10]; European Commission, 2024[6]). Meanwhile, current policies are expected to lead to a gradual increase in public debt, while high financing needs are estimated over the next few years, amounting to 14% and 17% of GDP in 2025 and 2027, respectively (IMF, 2024[10]). In order to achieve its specified debt-to-GDP ceiling of 60% by 2028, medium-term fiscal sustainability needs to be improved through increased fiscal consolidation and better targeting of social expenditures (IMF, 2024[10]; EBRD, 2024[8]). In March 2024, S&P Global Ratings revised its outlook on Montenegro’s long-term sovereign credit ratings from stable to positive. At the same time, it affirmed the “B/B” on Montenegro’s long- and short-term foreign and local currency sovereign credit ratings (S&P Global, 2024[14]).
Montenegro’s financial sector has shown increased stability, with improved capitalisation and liquidity rates, while tighter financing conditions led to decreased demand for private credit. The capital adequacy ratio of banks rose 20.1% as of June 2023, well above its regulatory minimum of 10% (Bank of Montenegro, 2023[15]; World Bank, 2023[7]). At the same time, private sector credit growth has slowed dramatically, reaching negative year-over-year rates in 2021 and 2022. The rate of nonperforming loans declined to 6.3% of total loans in 2022, from 6.8% in 2021 (IMF, 2024[10]; World Bank, 2023[7]).
Table 1.1. Montenegro: Main macroeconomic indicators (2019-23)
Notes: G&S = goods and services. “..” refers to data missing.
Sources: European Commission (2024[6]); World Bank (2021[16]; 2022[17]; 2023[7]); EBRD (2024[8]); IMF (2024[18]); UNCTAD (2024[19]).
Box 1.1. Economic impacts of Russia’s war of aggression against Ukraine on Montenegro’s economy
Russia’s ongoing large-scale aggression in Ukraine has had negative economic implications for Montenegro’s economy, mostly owing to the decline in tourism and investment and rise in inflation. Montenegro aligned itself with the EU’s sanctions on Russia, albeit with delay, while internal political divisions regarding the conflict remain tense (Konrad-Adenauer-Stiftung, 2024[20]). Among other measures, Montenegro closed its airspace to Russian airlines, imposed sanctions on the Russian central bank, and sent military aid to Ukraine (Konrad-Adenauer-Stiftung, 2024[20]).
Montenegro’s tourism sector has been negatively affected by the conflict, as the country has been highly dependent on tourists from Russia and Ukraine. While the number of overnight tourists to Montenegro increased from 1.55 million in 2021 to over 2 million in 2022, it remained significantly lower relative to 2019 when Montenegro welcomed 2.5 million tourists (UN WTO, 2023[21]). In 2022, Russians still comprised the second-largest nationality in terms of overnight stays in Montenegro, at 16.4%, though some of this is attributable to visitors who fled Russia due to opposition to the war and first registered in Montenegro as tourists (Statistical Office of Montenegro, 2023[22]).
Montenegro’s trade sector has generally continued to expand, though it has experienced decline in investments and imports from Russia. Montenegro’s reported exports to Russia declined from EUR 2.34 million in 2021 to EUR 398 078 in 2022 (United Nations, 2024[23]). Data on Russian imports have been more consistent; they declined from EUR 12.5 million in 2021 to EUR 9.3 million in 2022 (United Nations, 2024[23]). Meanwhile, Montenegro’s trade relations with Ukraine, though much smaller in scale, have grown since the start of the conflict. In 2022, exports to Ukraine totalled EUR 2.83 million, an increase from EUR 1.13 million in 2021 (United Nations, 2024[23]). Imports also rose, from EUR 6.86 million in 2021 to EUR 10.2 million in 2022. Trade relations with Ukraine are expected to develop further, as the government launched negotiations with Ukraine to amend their Free Trade Agreement (in place since 2013) concerning rules of origin and methods of administrative co-operation in November 2022 (European Commission, 2024[9]).
Investments into Montenegro have also declined. Russia, as the top foreign investor in Montenegro, has historically invested significantly in Montenegro’s real estate and tourism sectors (EBRD, 2024[8]). FDI inflows from Russia amounted to only EUR 27.4 million in 2022, a significant decline from EUR 164.5 million in 2021 (European Commission, 2024[6]; Bank of Montenegro, 2024[24]). While Montenegro’s overall FDI inflows rose to 13.5% of GDP and reached EUR 783 million in 2022, net FDI inflows shrank by 46% on the year in the first eleven months of 2023 to EUR 397 million (Bank of Montenegro, 2024[24]).
Montenegro’s energy sector has not been significantly affected by the conflict, as it is largely self‑reliant and mostly unexposed to the influence of the crisis. However, energy prices have risen in line with other economies in the region. In response to the social and economic impact of the current energy crisis generated by Russian war of aggression against Ukraine, the EU allocated EUR 30 million to Montenegro under the 2023 Energy Support Package immediate measures, 90% of which have been disbursed to assist vulnerable families and SMEs in dealing with rising energy prices (European Commission, 2024[9]).
Sustainable development
Montenegro shows a moderate level of progress towards reaching the targets of the 2030 Agenda for Sustainable Development (Sachs et al., 2023[25]). As of 2023, Montenegro has achieved or is on track to achieve 48.3% of its target indicators and has made limited progress in 31.7% of indicators, while performance is worsening across 20% of trend indicators. In December 2015, the government of Montenegro adopted the National Strategy for Sustainable Development (NSSD) until 2030. The designated lead unit responsible for the co-ordination and implementation of the SDGs across ministries is the National Council for Sustainable Development, which holds a guiding role with the support of the Office for Sustainable Development within the Secretariat-General of the government at the expert-administrative level (Government of Montenegro, 2022[26]). Montenegro conducted two Voluntary National Reviews (VNRs) on the implementation of the 2030 Agenda, in 2016 and 2022. According to the latest VNR, there is significant room to improve ownership of the SDGs and co-ordination and integration of policies, as well as monitoring of SDG indicators (Government of Montenegro, 2022[26]).
Montenegro has achieved or has maintained achievement of the SDGs in only one area: elimination of poverty (SDG 1) (see Table 1.2). It is nearing SDG achievement in the areas of climate action (SDG 13) and partnerships for the goals (SDG 17), while its performance regarding education (SDG 4) is also closer to achievement and shows a moderate level progress. Its performance regarding clean energy (SDG 7) is also nearing attainment, although progress in this area has stagnated since 2021 due to persistent levels of CO2 emissions and a low share of renewable energy as a percentage of final energy consumption (40% as of 2020, while the long-term objective is 55%).
Table 1.2. Montenegro’s progress towards achieving the SDGs (2023)
Note: The order of progress (from greatest to least) is as follows: SDG achieved; challenges remain; significant challenges; major
challenges.
Source: Sachs et al. (2023[25]).
Montenegro is progressing with several SDGs but significant challenges remain in achieving 8 of the 17 SDG areas. Montenegro’s progress in the area of clean water and sanitation (SDG 6) is on track towards SDG achievement, though significant challenges remain due to its low rate of wastewater treatment. Moderate progress has also been made in the areas of health and well-being (SDG 3); industry, innovation and infrastructure (SDG 9); and institutional integrity (SDG 16). Meanwhile, progress has stagnated in the areas of gender equality (SDG 5), decent work and economic growth (SDG 8), and sustainable urban development (SDG 11). Compared to 2021, it has stalled in its progress in the area of economic growth (SDG 8) due to persistently high unemployment rates.
The most significant gaps remain in the areas of nutrition and sustainable agriculture (SDG 2), marine resources (SDG 14) and protection of terrestrial ecosystems (SDG 15). Factors that hinder progress of SDG 2 are increasing obesity rates, high energy intensity, and low efficiency in agriculture (Sachs et al., 2023[25]). Performance in the areas of marine life (SDG 14) and protection of terrestrial ecosystems (SDG 15) remains hindered due to low rates of protected terrestrial and freshwater sites important to biodiversity. No data are available for its performance in the area of responsible production and consumption (SDG 12).
EU accession process
Montenegro applied for EU membership in December 2008, and its Stabilisation and Association Agreement, the legal foundation for relations with the EU, entered in force in December 2010. Accession negotiations began in June 2012. As of December 2023, 33 negotiating chapters have been opened, of which three have been provisionally closed (European Commission, 2024[9]). In 2017, Montenegro joined NATO, achieving a key foreign policy step in alignment with European Common Foreign and Security Policy. In 2021, Montenegro accepted the revised enlargement methodology, which emphasises credible fundamental reforms, stronger political steer, and increased dynamism and predictability of the process (European Commission, 2021[27]).
Montenegro remains moderately prepared to apply the EU acquis and European standards in the areas of public administration reform and judiciary and fundamental rights but made limited progress overall. According to the latest enlargement report, Montenegro has experienced a blockage of its political system and little progress in political criteria over the assessment period. No progress was achieved in justice reform, which remains affected by issues of accountability, and recent investigations point to corruption and organised crime in state structures, including at the top level of the judiciary and law enforcement (European Commission, 2024[9]).
On the economic criteria, Montenegro is moderately prepared and has made limited progress in developing a functioning market economy (European Commission, 2024[9]). The prior recommendations of the European Commission were addressed to a limited extent, with further efforts needed in the areas of fiscal consolidation and accountability, SOE reform, and reduction of the informal economy. Its capacity to cope with competitive pressures and market forces within the EU is also in a moderate level of preparation, with some progress made in education, attraction of private investors, green and digital transition, and performance in key sectors such as metallurgy and tourism. However, further efforts are needed to address shortcomings in its education system, infrastructure gaps, diversification of its economic base, and increase productivity and competitiveness of firms.
On 8 November 2023, the European Commission adopted a new Growth Plan for the Western Balkans to improve the level and speed of convergence between the Western Balkans and the EU (European Commission, 2023[28]; European Commission, 2023[29]). Backed by EUR 6 billion in non‑repayable support and loan support, the Growth Plan has the potential to boost socio-economic convergence and bring WB6 closer to the EU single market (Gomez Ortiz, Zarate Vasquez and Taglioni, 2023[30]). The new Growth Plan is based on four pillars, aimed at:
1. “Enhancing economic integration with the European Union’s single market, subject to the Western Balkans aligning with single market rules and opening the relevant sectors and areas to all their neighbours at the same time, in line with the Common Regional Market
2. Boosting economic integration within the Western Balkans through the Common Regional Market
3. Accelerating fundamental reforms, including on the fundamentals cluster,1 supporting the Western Balkans' path towards EU membership, and improving sustainable economic growth including through attracting foreign investments and strengthening regional stability; and
4. Increasing financial assistance to support the reforms through a Reform and Growth Facility for the Western Balkans” (European Commission, 2023[29]).
The new Growth Plan builds on the existing enlargement methodology and creates a package of mutually reinforcing measures, providing incentives to economies to accelerate the adoption and implementation of the EU acquis, while narrowing the gap between the Western Balkans and EU Member States. In that context, the OECD has recently released the Economic Convergence Scoreboard for the Western Balkans 2023 to track the region’s performance in achieving economic convergence towards the EU and the OECD area, and highlight policy bottlenecks that hinder faster economic growth in a sustainable and inclusive way (OECD, 2023[31]) (Box 1.2).
As part of the new Growth Plan, the Western Balkans have been asked to submit to the European Commission economy-specific Reform Agendas listing a number of structural reforms that would need to be implemented in order to access part of the Plan’s funding. All Reform Agendas are structured along the same four policy areas: 1) business environment and private sector development, 2) green and digital transformation, 3) human capital development and 4) fundamentals (of the EU accession process). They replace Economic Reform Programmes’ chapter IV on structural challenges, as, going forward, the Economic Reform Programmes will only cover macrofiscal aspects.
Box 1.2. Economic Convergence Scoreboard for the Western Balkans 2023: A spotlight on Montenegro
Montenegro’s GDP per capita grew by 70% from 2003 to 2022 in comparison to the EU’s and OECD area’s comparatively modest increases of 27% and 25%, respectively (Figure 1.1). In 2003, Montenegro's GDP per capita stood at approximately one-third that of the EU and OECD areas, and by 2022, despite nearly doubling, Montenegro's GDP per capita only narrowed the gap by roughly 12 percentage points. Moreover, Montenegro’s overall GDP per capita growth reflects adopting policies in line with EU acquis and OECD standards, fostering competitiveness within the labour market. However, a significant disparity persists, illustrated by Montenegro’s 2022 GDP per capita of USD (PPP international $) 22 108 (EUR 21 021)1 compared to the EU’s USD 45 978 (EUR 43 679) and the OECD area's USD 46 208 (EUR 43 897). This underscores the substantial progress required for Montenegro to achieve convergence with the EU and OECD area.
In this context, the OECD developed the Economic Convergence Scoreboard for the first time in 2023, marking the establishment of a recurring monitoring mechanism and dedicated tool designed to evaluate the extent of economic convergence of the Western Balkans with the EU and the OECD area. Prepared to inform discussions at the Berlin Process Western Balkans Leaders’ Summit 2023 and grounded in a decade-long series of policy assessments, the Scoreboard offers a thorough analysis of the region's progress across five key policy areas, or clusters, crucial for attaining sustainable and inclusive economic growth. These clusters are the business environment, skills, infrastructure and connectivity, greening, and digital transformation.
Since 2008, Montenegro achieved strong advancements and notable regressions across the five policy clusters, underscoring not only the adoption of policies in alignment with EU acquis and OECD standards but also the importance of effective implementation to achieve convergence with the EU and OECD area. Montenegro exhibited noteworthy progress in both the business environment and skills clusters. As for the business environment, Montenegro surpassed convergence with the EU across several indicators, including FDI net inflows, new business density and trade openness. However, trade openness has reduced consistently over the past decades, warranting attention. Montenegro also shows consistent, albeit slow, progress in control of corruption, nearing parity with the EU. The economy is also producing positive gains within the skills cluster, as the employment rate, PISA average score, tertiary education achievement and R&D expenditure are increasing, while the rate of youth not in employment, education or training (NEET) rate has been decreasing.
Figure 1.1. Montenegro’s GDP per capita convergence with the OECD area and the European Union (2003-22)
In Purchasing Power Parity 2017 USD (thousands)
Source: World Bank (2022[32]).
In contrast, the greening and digitalisation clusters require further progress. As for the greening cluster, Montenegro is negatively trending in renewable energy consumption, CO2 emissions, and energy productivity. Additionally, crucial policy areas facilitating societal digitalisation and fostering a more competitive and interconnected economy in the digitalisation cluster are either stagnating or declining, including mobile cellular penetration, individuals with basic or advanced digital skills, digital payment users, and information and communications technology (ICT) specialists in total employment. In light of these negative trends, the relevance for advancing greening and digitalisation policies is emphasised as the EU and OECD shift their policy priorities in line with these areas.
In the context of aligning with OECD standards, Montenegro has demonstrated consistent progress, with particularly strong advancements in Competitiveness Outlook (CO) access to finance policy, employment policy, science, technology and innovation policy and agriculture policy. The economy, however, experienced slight setbacks in CO transport policy and digital society. Montenegro’s considerably strong development within a majority of OECD good policy practices, standards, and tools indicates a positive influence of the CO 2021 Recommendations on Montenegro’s long-term policy development.
1. The 2022 market exchange rate has been used to convert PPP constant 2017 international USD into EUR.
Source: OECD (2023[31]).
EU financial and development support
Montenegro continues to receive significant support from the European Union, helping the economy realise its reform processes and endeavours that bring it closer to the acquis. The European Union’s financial support to the economy and the region has been provided through both temporary support, such as COVID-19 assistance packages, and long-term investment programmes and funds through the Instrument for Pre-accession Assistance (IPA), European Investment Bank (EIB) loans, Western Balkans Investment Framework grants and more.
Over 2007-20, the EU has provided Montenegro with a total of EUR 504.9 million under the Instrument for Pre-accession Assistance I and II. IPA II introduced priority sectors for assistance, which included democracy and governance, the rule of law and fundamental rights, environment and climate action, transport, competitiveness and innovation, transport, education, employment and social policies, agriculture and rural development, and regional and territorial co-operation (European Commission, 2024[33]).
The European Union has been crucial in financially supporting Montenegro in the wake of COVID‑19. Montenegro received EUR 60 million of the European Commission’s EUR 3 billion Macro-Financial Assistance (MFA) package for enlargement and neighbourhood partners, and the economy has also received EUR 130 million of the European Union’s Team Europe EUR 3.3 billion COVID-19 economic recovery support package to the region (European Commission, 2021[34]). The European Investment Fund has invested EUR 100 million to support Montenegrin companies since the start of the pandemic and invested an additional EUR 50 million at the end of 2021 to support faster recovery of the local economy from COVID-19 and help accelerate the green transition and climate adaptation of SMEs (EIB, 2021[35]).
Under IPA 2021-23, Montenegro has been allocated over EUR 135 million. This includes the dedicated EUR 30 million from the 2023 Energy Support Package immediate measures which, as mentioned above, has been almost entirely disbursed towards the assistance of vulnerable families and SMEs in dealing with rising energy prices (European Commission, 2023[36]). Montenegrin SMEs will also be able to benefit from the scheme’s increased funding to the Western Balkans Guarantee Facility (European Commission, 2023[28]). Under the Economic Investment Plan (EIP) for Montenegro, the EU has already mobilised EUR 824 million in investments, of which EUR 178 million is in grants (European Commission, 2023[28]). Additionally, the new Growth Plan launched in 2020 foresees infrastructural funding for Montenegro’s rail and road routes with Serbia and Albania, as well as a Trans-Balkan Electricity Transmission Corridor that will provide electricity transmission to Montenegro and updated waste management systems for the economy. As of January 2024, the European Commission signed an agreement associating Montenegro with the EU4Health programme, thereby allowing Montenegro to benefit from open access to EU funding in the area of health (European Commission, 2021[34]).
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Note
← 1. In line with Communication on “Enhancing the accession process – A credible EU perspective for the Western Balkans” COM(2020)57, the fundamentals cluster includes: chapter 23 – Judiciary and fundamental rights, chapter 24 – Justice, Freedom and Security, the economic criteria, the functioning of democratic institutions, public administration reform, chapter 5 – Public procurement, chapter 18 – Statistics and chapter 32 – Financial control. (European Commission, 2023[28]).