SUMMARY OF THE PUBLIC DEBT ANALYSIS

Montenegro’ s public debt is on trajectory to a whopping 80% of GDP due to excessive and uncontrolled spending and capital projects which  are largely non-transparent including the construction of first highway  in Montenegro’s history. The Budget and Fiscal Responsibility Law  defines how the government and the parliament should act in case the  public debt exceeds 60% of GDP. Consequently, the government has managed  to increase the collection of revenues over recent years (due to VAT  two-fold increase from 17-21% and FDI flow) but has failed to curb  expenditures which have continued to grow. Furthermore, the increase of  revenues does not keep pace with the GDP growth which deserves  attention.

The GDP growth had a rise of 24.5% over the period of 2014-2017 which  was more than in China (17%) even though the inflation was low. This  growth is mainly driven by government borrowing and foreign direct  investments and as such, has its own natural limits- the already  achieved public debt level and the limitation of FDI to spatial  resources and the construction sector.

On the other hand the quality of life for ordinary Montenegrins  hasn’t improved despite tremendous growth of public debt since  independence in 2006.

The coverage of import by export is only 17% and since the country  gained independence in 2006 the export has even decreased. The economy  is poorly diversified, the industry is underdeveloped, while development  is mainly focused is on agriculture and tourism. It is emphasized that  tourism accounts to 20% of GDP. However, it is widely held that the  optimal share of tourism in the GDP should be around 5%. High share of  tourism in the GDP tells how bad the things are in other sectors of  economy. (For example, last year's share of tourism in Italy's GDP was  2.2 %, in France 1.9% and Spain 4.7%)

Huge chunks of the tax debt have also been written off through  government aid, whereby the budget has in this way been deprived of  potential income, which has been substituted for through borrowing. The  most notorious example of subsidies and generous government aid is the  Podgorica Aluminum Plant (KAP) which has cost the tax payers more than  €300 million since 2005 privatisation contract signed with Oleg  Deripaska’s off-shore companies. Moreover several big companies of  people close to the regime have been protected despite tax evasion and  other irregularities.

As for the public debt structure, the Eurobonds account for more than a  third of the total debt -€1,217 million. The Eurobonds are certainly  not the best way of borrowing. Moreover Montenegro did not manage to  realise all Eurobonds in 2016. That showed that the country’s rating  among investors wasn't great in terms of its creditworthiness. However,  thanks to the IMF and the World Bank support, primarily through positive  reports on the state of national economy and through the WB guarantees,  the government has continued to borrow and refinance the existing debt.  Thus the Prime Minister Dusko Markovic received wind in the back from  the US when he started his term and pledged “genuine reforms“. It  can be said that Washington's political will is crucial in maintaining  the liquidity of public finances. Figuratively speaking, Washington, in  the present geopolitical constellation, keeps Montenegro’s public  finances from drowning.

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