MONTENEGRO ECONOMIC TRENDSissp.me/wp-content/uploads/2012/10/enMonet16.pdfMontengro Economic Trends...

MONET

MONTENEGRO ECONOMIC TRENDS

February 2004

ABOUT ISSP ABOUT CEPS

The Institute for Strategic Studies and Prognoses (ISSP), established by Professor Vukotic in 1999, is the first independent economic institute in Montenegro. USAID assisted in this process and continues to support the work of the Institute. ISSP has a wide network of associates both in Montenegro (about 150) and abroad. ISSP is a member of the Balkan Network, the Global Development Network established by the World Bank and the European Integration Network. ISSP cooperates with ICER (Torino), WIIW (Vienna), CEPS (Brussels) and Chesapeake Associates (Washington).

The Institute’s mission is "to provide research that will contribute to Montenegro’s economic transformation and to change the current mindset, as well as to train today’s young people how to function successfully in the new environment."

Major projects: o Macroeconomic reform in Montenegro a) Privatization b) Monetary Reform c) Capital Markets Development d) Fiscal Reform e) Reform of the Pension System f) Introduction of the SNA system o Macroeconomic indicators in Montenegro o Economic education

President: Professor Veselin Vukotic, Ph.D. Executive Director: Petar Ivanovic, Ms. Sci. Advisory Board Chairman: Professor Miroljub Labus, Ph.D.

CONTACTS

ISSP Address: Naselje pod Ljubovic, Lamela C (1 i 2), 81000 Podgorica, Montenegro, Yugoslavia Tel/Fax: (381) 81 634 338; 634 329 Website: www.isspm.org / Email: [email protected]

CEPS Address: Place du Congres 1, 1000 Brussels, Belgium Tel: (32) 2 229 39 11, Fax: (32) 2 229 39 71 Website: www.ceps.be / Email: [email protected]

CEPS was established in 1983. It performs independent analyses and critiques on European economic policy and politics, as well as on European institutions and security. It disseminates its findings through a regular flow of publications, public events and electronic commentaries. CEPS is an independent membership-driven organization with more than 100 corporate members and a large number of central banks, diplomatic missions and international business organizations in its constituency.

ABOUT MONET

MONET (www.isspm.org) is the result of the joint work of ISSP in Podgorica and CEPS in Belgium. It is financed by the grant from the European Agency for Reconstruction.

MONET team

-ISSP- ISSP team leaders: Professor Veselin Vukotic Petar Ivanovic

Researchers: Jadranka Kaludjerovic, Maja Bacovic, Milorad Katnic, Nina Labovic, Ana Krsmanovic, Tijana Stanković, Milica Vukotic Jelena Musikic

Lay out and web site: Boris Buskovic

-CEPS- Program Director: Daniel Gros Team Leader: Vladimir Najman ([email protected]) Resident Economist: Przemyslaw Wozniak ([email protected], [email protected])

Project Associates Zeljko Brkovic, Milan Dabovic, Miloica Dakic, Mirjana Djuranovic, Danijela Vukajlovic Grba, Jovanka Knezevic, Darinka Micanovic, Draginja Milatovic, Dejan Miljkovic, Dragica Pekovic, Milan Perovic, Natasa Radunovic, Vesna Samardzic, Zdravka Savic, Ljubinka Sekulic, Marina Vukanovic, Bosa Vukicevic, Tamara Saveljic, Zoran Djikanovic, Dragana Radevic, Darko Konjevic, Jelena Jokanovic, Maja Drakic

Montengro Economic Trends

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Table of contents Events

3

Executive Summary

7

Part 1

Chapter 1. Output Chapter 2. Employment Chapter 3. Wages Chapter 4. Prices Chapter 5. Budget Chapter 6. Money Chapter 7. Capital Market Chapter 8. External Sector Chapter 9. Regional Comparison

12 22 26 30 42 60 68 76 86

Part 2

Comment 1. How far will the dollar fall? Comment 2. Trading up with neighborhoods Comment 3. The Puzzle of Montenegrin Inflation Comment 4. Liberalization in Agriculture Sector Comment 5. General Collective Agreement in Montenegro Comment 6. Indicators of Montenegrin indebtedness Comment 7. Causes of disequilibrium and key measures

of achieving a Balance of Payments equilibrium of Montenegro

90 92 94

108 120 125

128

February 2004

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Events

January 2003

06. Signed contract with three electricity providers. Electricity Company of Montenegro signed contracts with three companies to purchase approximately 1.3 billion Kwh of electricity: EFT from London, Sempra Energy Aurora from Great Britain and Montmontaza from Croatia.

19. Revenue from tourism - $ 102.7 mn. According to Ministry of Tourism announcement, in 2002, the tourism sector of Montenegro realized revenues in amount of $102.7 mn, which is approximately 22.4% higher, as compared to 2001.

January 2003

06. Signed contract with three electricity providers. Electricity Company of Montenegro signed contracts with three companies to purchase approximately 1.3 billion Kwh of electricity: EFT from London, Sempra Energy Aurora from Great Britain and Montmontaza from Croatia.

19. Revenue from tourism - $ 102.7 mn. According to Ministry of Tourism announcement, in 2002, the tourism sector of Montenegro realized revenues in amount of $102.7 mn, which is approximately 22.4% higher, as compared to 2001.

February 2003

04. Formed State Union between Serbia and Montenegro. Federation Parliament deputies adopted the Constitutional Charter and Law for its implementation. This Law abolishes the name “Yugoslavia” and introduces the name ‘State Union of Serbia and Montenegro.’

10. New failure of Presidential election in Montenegro. Elections for President in Montenegro, held on February 8, failed for the second time. Just 47.7% of Montenegrin citizens came to the polls, so the Law for Selection of President of Republic was not fulfilled. This Law requires a turnout of at least 50% plus one citizen that possesses passive electoral rights.

12. Privatization revenues € 71.4 mn. According to the Privatization Council of Montenegro data, Montenegro has earned €71.4 mn by shares and company assets purchased. The sale of shares and company’s assets on Public tender has realized 96% of last year’s revenues or €68.5 mn.

March 2003

01. Montenegroberza stock exchange introduces index MOSTE. Montenegroberza introduced the MOSTE index that is composed of share prices of the 35 most traded companies on the Montenegroberza stock exchange. Initial value of index was 1000 points.

01. NEX Montenegro stock exchange introduces two stock exchange indexes. NEX Montenegro stock exchange introduces two indexes: NEX PIF and NEX 20. NEX 20 monitors the prices of shares of 20 important companies from Montenegro and NEX PIF monitors the prices of investment units of all six Privatization Funds in Montenegro. Initial value of index was 1000 points.

25. Compulsory reserve is reduced to 23%. Council of Central Bank of Montenegro decided to reduce compulsory reserve on deposits for commercial banks from 50% to 23%.


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April 2003

01. Price of electricity increased. Price of electricity in Montenegro increased by 23.24%. The average price for 1 kWh will now be 4.6 cents while that for households will be 4.4 cents for 1 kWh.

01. Start Value Added Tax (VAT) application. In Montenegro started VAT application. VAT will be calculated with a rate of 17%.

11. Started trade of shares with foreign currency saving bonds. On the Montenegroberza stock exchange trade with shares of foreign currency saving bonds are conducted for the first time for the price of € 0.75, or 75% of nominal value.

11. Government adopts Decree on Tax Relief for New Employees. Montenegrin Government adopts Decree on Tax Relief for New Employees. This Decree provides that employers are free from paying employee taxes and part of contributions, for every new employee.

11. The Government of Montenegro adopted Decree on Employment of Nonresidents. According to this Decree, employer is obliged to pay € 2.5 of non – resident tax per day and personal income tax.

14. Ministers of Finance in Montenegro and Serbia sign Contract of Representation in International Finance Organizations. According to the agreement, Serbia will be a fiscal agent in IMF and Montenegro will be a fiscal agent in World Bank for the Union Serbia and Montenegro.

30. Adopt four decrees that regulate goods turnover between Serbia and Montenegro and its taxing. According to the adopted decrees, the goods produced in Serbia and sold in Montenegro will not be taxed twice.

May 2003

09. Sign contract on sale “Montenegrobanka”. Deputies of Montenegrobanka and “Nova Ljubljanska” bank sign contract on the sale of Montenegrobanka in the amount of € 11.1 mn.

12. Filip Vujanovic – president of Montenegro. On elections for president of Montenegro, held on May 11, Filip Vujanovic won with 63.8% of votes and became the president of Montenegro.

13. First licenses obtained for six Montenegrin banks. The Council of Central Bank of Montenegro gave licenses for payment operations to six commercial banks: Euromarket bank, Crnogorska komercijalna bank, Hipotekarna bank, Atlas Mont bank, Podgoricka bank and Montenegrobanka. These are the operations that were previously carried out by ZOP and will now be done in the banks in view of elimination of ZOP.

June 2003

02. “Merkur” to buy Hotel “Mogren”. Company “Merkur” from Budva is to buy Hotel “Mogren” for € 5.1 mn.

13. Adopt Action Plan between Serbia and Montenegro. The Government of Montenegro adopts a draft version of Action Plan on Harmonization between Serbia and Montenegro. According to the announcement of Ministry of Finance, average nominal tariff rate in Montenegro will be 6.1% and average effective rate will be 5.7%.

February 2004

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July 2003

08. The Parilament of Montenegro Adopted Law on the Protector of Human Rights and Freedom (Ombudsman), Labor Law and Law on Strike.

15. The Parliament of Montenegro adopted the Law on Action Plan of Harmonization between Serbia and Montenegro.

29. Started implementation of the Labour Law. According to the Labour Law, employer is obligated to, for every employee that is proclaimed as a surplus, pay at least six average wages in Montenegro.

August 2003

13. Abolished contingents and limitations in traffic. The Government of Montenegro adopts Regulation on Modification Decree on Assortment Goods on Import and Export Goods. This Regulation abolished all quantitative barriers on import and export for certain goods.

September 2003

09. “Irva” from Belgrade bought “Mimoza”. Privatization Funds HLT, Mimoza, and Moneta sold over one million shares in HTP “Mimoza” from Tivat to “Irva” from Belgrade. The value of this transaction amounted to € 348,000.

October 2003

13. “Bepler Jacobs ” bought “Bjelasica”. British company “Bepler Jacobs ” bought SKI center “Bjelasica” for € 5.5 million.

16. Sold Hotel “Montenegro”. “Hotel Apartments Bransvik” DOO Budva bought Hotel “Montenegro” from Becici for € 1.2 million. The buyer has to pay an additional € 1.73 million for investments.

21. Adopted new laws. The Parliament of Montenegro adopted three new laws: the Law on High Education, the Law on General Administrative Procedure and Law on Administrative Dispute. The Law on High Education allows institutions for higher education in Montenegro maximal autonomy of work, with minimum state. The Law on Administrative Procedure provides for more efficient and cost effective operations of the state bodies, local autonomy bodies and the other organizations and institutions. Third Law provides stronger judgment control of the Government acts.

29. The best season in last 13 years. According to Montenegrin Ministry of Tourism announcement, in the last 9 months of 2003 571,774 tourist visits were registered, which is approximately 13.2% higher than the same period last year.


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November 2003

01. Started census in Montenegro. Statistical Office of Montenegro started census of Montenegrin citizens.

19. Support to Montenegro in amount of € 110 mn. On Donor Conference in Brussels, € 1.1 mn was approved for Serbia and Montenegro for 2004. Total amount designed for Montenegro amounted € 110 mn.

December 2003

17. Adopted budget for 2004. Deputies of Parliament of Montenegro adopted Budget Law for 2004. According to this law total budget expenditures are planned in the amount of € 451 mn, which is nominally on the level of the rebalanced budget from the previous year.

17. Adopted new laws. The Parliament of Montenegro adopted several new laws: Law on Criminal Acts, Law on Criminal Procedure, Law on State Prosecutor, Law on Changes and Amendments of Law on Executions of Sanction on Criminal acts, Law on Labor Inspection, Law on Soldiers and Invalid Protection and Law on Evidences in the Area of Labor and Employing.

30. Electricity deficit - 1.4 billion Kwh. According to announcement of Electricity Company of Montenegro, in 2004 Montenegro would have a deficit of electricity in the amount of 1.4 billion

February 2004

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Executive Summary

First section Industrial production in 2003 increased by 2.4% compared to 2002. Production of the processing industry in 2003 was 2.1% lower compared to the previous year, while production of the electricity, gas and water sector increased by 17.5% in the same period. The third sector – mining and stone extraction, registered a production increase of 1.4% in 2003.

Cumulated over the first nine months of 2003, the total number of tourists increased by 13.5% compared to the same period in 2002, while the number of foreign tourists in this period increased by 4.9%. The share of foreign tourists in total number of tourists declined by 2.6 percentage points, or from 25.1% in the first three quarters of 2002 to 23.3% in the same period of 2003.

The level of transport services rose in the first three quarters of 2003, particularly sea transportation of goods (15.8%), road transportation of goods (5.5%) and railway transportation of passengers (8.3%) compared to the corresponding period of the previous year.

Official data records a decrease in employment in Montenegro in 2003. The average number of employed in Montenegro in 2003 was 1.7% lower as compared to 2002. In the early months (January-May), the number of employed decreased, this was followed by a slight increase from May to July, and then a continued decrease through the end of the year. On the other hand, the number of unemployed continued to decrease; so the average number of unemployed in 2003 was 11.4% lower as compared to 2002. Moreover, according to data from the Employment Office, as a result of the Decree on Tax Relief for New Employees, from April 14 to December 31, 2003, a total of 24,500 new employees have been registered, albeit this is not reflected in the official employment figure.

The average earnings in Montenegro amounted to €271.2 in 2003, while earnings without taxes and contributions came to €174.0. In the second half of 2002 (July – December) the average earning was €272.6 while the average earning without taxes and contributions was €171.4. During the period of July 2002 – December 2003, especially in the beginning of 2003, average earning levels have experienced significant fluctuations, partly due to seasonal effects.

During 2004, a further increase in earnings without taxes and contributions is expected (net earnings) due to changes in the taxable income level that were made in January and a significant increase in wage coefficients introduced by the new collective agreement.

Inflation in 2003 registered a falling trend. The consumer price index increased 6.2% in December compared to the same month last year, while average monthly inflation was 0.5% in 2003. The events that affected the price level in 2003 were mostly: unstable oil prices, the VAT introduction, electricity price increase and average custom rate rise due to harmonization with Serbia. The groups of products and services like food, tobacco and beverages, hygiene and personal care, and in particular months vehicles, transport and telecom services –had a deflationary effect on the overall price level. Inflationary pressures were registered for accommodation, clothing and footwear, and education and culture. The cost of the food consumer basket was €259, an annual increase of 8.3%. The producer


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prices registered rising inflation in 2003 reaching 10.2% in December, while at a monthly level the highest inflation was in March (1,8%), April (3,9%), June (1%) and December (0,6%). Inflation in 2004 (at year-end) is forecasted from 4% (optimistic) to 7.6% (pessimistic).

Introduction of VAT, restrictive budget expenditure policy, and tax exemptions for newly employed persons were some of the highlights of the fiscal year 2003. Regardless of the fact that the VAT revenues from were much higher than planned, with the significant fall of revenues from transit and excise duties, total budget revenues reached €337.3 million, which represents 93.4% of the plan. A restrictive budget policy impacted all expenditure categories, which were executed below the planned level. That is why cash budget expenditures, together with net lending, at the end of 2003 reached 85% of the plan (€381 million). In addition to foreign aid, cash budget deficit (€44 million) was financed by privatization revenues, increased lending and deposits transferred from the previous year.

Budget for 2004 is planned at the level of the rebalanced budget from 2003 (€450.7 million), and 90% of budget revenues are covered by the original revenues. Total public expenditures, planned at the level of €717.6 million, make almost half of the GDP.

Monetary aggregate M1, which amounted to €377 million at the end of December 2003, recorded negative annual growth rates. Total household deposits have risen throughout 2003, and they reached € 44 million at the end of 2004. The structure of household deposits shows a constant increase in the share of term deposits up to 1 year and a decrease in the share of demand deposits. Analysis of the currency structure of household deposits shows that the majority of all deposits are nominated in Euros. The value of loans provided has been increasing throughout 2002 and 2003 and reached €201 million at the end of December 2003. Loans provided to households also show an increasing trend, resulting in loans of €32 million at the end of 2003.

Total turnover realized on the Montenegrin Stock exchanges in 2003 amounted to € 43,554,345. In the same period 21,324 transactions were realized. Compared to the previous year, total turnover increased three times, while the number of transactions in 2003 was almost 5 times higher than in 2002. During 2003, the stock exchange indices reported varied trends; however, at the end of 2003 all three indices registered an increase in value of approximately 10% from their initial value.

In the first eleven months of 2003 most dominant sectors for imports to Montenegro were oil and oil derivatives, vehicles, telecommunication equipment, electrical machines and equipment, non-metal materials, other transportation equipment, ether oils, perfumes and other products, electricity, meat and meat products, vegetables and fruits. These sectors accounted for 50% of all imports in the period January-November 2003. With respect to exports, the most dominant were ferrous metals (aluminum), other transportation equipment, oil and oil derivatives, vegetables and fruits, and metal ores. These five sectors accounted for 75.8% of all exports in the first eleven months of 2003.

In the same period of 2003, the most significant trade partners in the region, with respect to imports, were Bosnia and Herzegovina, Slovenia and Croatia. Considering imports from industrialized countries, Greece, Italy, Germany and Austria were dominant on the imports side. The main destinations of exports in the period January-November 2003 were Switzerland, Italy, Greece, and Cyprus, and within the region, Bosnia and Herzegovina and Croatia.

February 2004

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The current account deficit in Montenegro in January-November of 2003 amounted to US$ 158.5 million and nominally decreased by 23% compared to the same period in 2002. The trade deficit (goods plus services) amounted to US$ 235.1 million and nominally decreased by 17.7% compared to the first 11 months in 2002. The current account deficit has been partly financed by the capital and financial account surplus, which amounted to US$ 85.3 million in the first eleven months of 2003.

Projected real GDP growth was positive in the many countries of South-Eastern Europe in 2003, the highest being in Albania (6%), Bulgaria (4.5%) and Romania (4.5%), while it was the lowest in Montenegro, Serbia and Macedonia. Average industrial production for the first 11 months of 2003 showed marked increases in Macedonia (6.5%) and Croatia (4.3%) compared to the same period in 2002. A positive growth rate of industrial production was reached in Romania (3.0% in November) and Serbia (2.0% in November). The annual inflation rate (CPI) fell in Romania (14.1% in December 2003 and 17.8% in December 2002), Serbia (8.1% in December 2003 and 11.8% in December 2002) and in Montenegro (6.1% in December 2003 and 9.2% in December 2002). However, inflation rates (CPI) in these countries are still the highest in the region. The highest unemployment rates in the region in 2003 were in Bosnia and Herzegovina, Macedonia, Serbia and Montenegro.

Second Section How far will the dollar fall? Trading up with neighborhoods We are presenting two articles by Richard W. Rahn in this issue. They were published in the Washington Times in December 2003. The first article provides the answer to the question: How much is the dollar going to fall and should there be concern due to its fall? The second article considers the importance and significance of liberal trade for one country’s economy (in this case: USA), and the negative consequences of the introduction of trade barriers (tariffs, quotas, etc.). The Puzzle of Montenegrin Inflation The goal of this article is to explain the structure of Montenegrin inflation in 2003 in absolute terms and in comparison with the euro zone. In section 2, we take a closer look at individual annual inflation rates of 365 goods and services in July and December 2003 to detect the possible effects of the tariff increase in August. To gain more insight into the effect of the tariff increase, we analyze the increase in dynamics in the 3-month period following the tariff change and compare it to the 3-month period preceding it. Section 3 compares Montenegrin inflation to inflation in the Euro-zone, which serves as a benchmark for Montenegrin price growth of tradable goods. The comparison reveals high differentials in the non-food goods sector, specifically clothing and footwear and office supplies. Finally, section 4 provides a summary and provides possible explanations for the high Montenegrin inflation and also puts forth some policy recommendations. The conclusion refers to the most likely inflation sources: Montenegrin market imperfections. However, demand pressures should also be considered and researched in detail. Liberalization in agriculture The article considers major issues related to degree and measurements of protection in domestic agricultural production. The protection cost and redistribution, as an important component of investment policies, are considered as well. A review of interventionism levels in agriculture in other regions and EU countries is also provided, as well as some specific characteristics of Montenegro as a small economy and the recent harmonization with Serbia.


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The main suggestions are related to the creation of a strategy that should consist of a decrease in domestic product prices, but no increase of prices of imports (through custom tariffs and subsidies (paid by Montenegrin citizens). The measures that provide competition of domestic production at open market have more advantages than those that are avoiding them. General Collective Agreement in Montenegro A new collective agreement in Montenegro was signed on December 19, 2003 between representatives of the Chamber of Commerce, Independent Alliance of Trade Unions and the Government of Montenegro. This paper deals with implications of the collective agreement, which was applied in January 2004. With the new collective agreement, the government directly influences wage policy, or secures higher tax revenues through an increase in wage coefficients. The new collective agreement will cause a high increase in the employer labor cost and influence the worsening of the labor market situation. Social problems and the bad situation in the labor market cannot be solved by imposing significant commitments to employers. Imposing too many commitments to employers and large increases in labor cost will, as is the case now, only stimulate employers to decrease rather than increase their number of employed. Indicators of Montenegrin indebtedness Public debt, as a fiscal position measure, presents the sum of all claims that creditors have toward a certain country at a certain date. Showed in absolute values, public debt does not represent the realistic indebtedness of a certain country. Its significance, as well as its pressure on the country and economy, can be analyzed through the ratio of absolute value of the public debt and other macroeconomic indicators. Analysis of the indebtedness of Montenegro presented in this comment shows that Montenegro, according to the World Bank and International Monetary Fund’s criteria, belongs to the group of medium-indebted countries. Causes of disequilibrium and key measures of achieving a Balance of Payments equilibrium of Montenegro The current account balance is a focal measurement of economic performance in every open economy. The current account is very closely linked to other components of national savings and investments – fiscal balance and private savings -- and it is a significant indicator of the competitiveness of the economy. This text provides some theoretical explanations of the current account deficit, which is a problem for Montenegro, as well as for other countries. In addition, there are some proposals on how to reduce this deficit in the medium and long term. If reform is conducted well, costs and social risks are lower and benefits increase – thus, a country should not give up on reforms, or postpone them, due to some difficulites and crises at the beginning. Montenegro needs to change its production structure and route its production resources toward fields where the country has competitive advantages. Since the country simply does not have the financial capability to efficiently restructure production and development of the export oriented branches, it is neccessary to stimulate the inflow of foreign capital in order to trigger this development. It is possible, through foreign direct investments (FDI) -- one of the most important means of capital inflows, to develop export oriented production and reduce the deficit in goods' trade and the current account deficit.

Montenegro Economic Trends February 2004

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PART 1

Chapter 1. Output

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Table 1.1 Major Developments in the Real Sector

GDP Industrial Output Tourism Retail trade

turnover (nominally)

Total Processing Industries

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e in

%*

1990 89.0 -11.0 194.8 1991 70.0 -21.3 169.0 102,256 2,963,675 1992 61.0 -12.9 136.0 -19.5 89,165 2,312,621 1993 39.0 -36.1 77.3 -43.2 38,104 1,694,769 1994 39.0 0.0 70.1 -9.2 10,574 1,997,483 1995 46.0 17.9 69.2 -1.4 26,071 1,504,302 1996 57.0 23.9 102.9 48.7 51,178 3,102,091 1997 61.0 7.0 104.5 1.5 80,600 2,276,868 1998 64.0 4.9 105.3 0.8 76,737 2,713,936 1999 58.0 -9.4 96.8 -8.0 80,936 2,711,929 100 2000 59.8 3.1 100.0 3.3 100.0 95,526 2,698,019 448,187 17.8 271 170.9 2001 59.7 -0.2 98.0 -2.0 101.6 2.3 108,123 2,492,993 555,040 23.8 20.8 369 36.1 2002 60.2 0.8 98.7 0.7 103.9 1.3 116,482 2,194,516 541,699 -2.4 24.7 352 -4.5 2003 60.5 0.5 100.9 2.4 101.8 -2.1 120,212 2,586,485 2000-Q1 101.8 952,727 38,745 16.0 145.0 2000-Q2 91.0 504,224 95,661 20.3 213.7 2000-Q3 97.2 403,666 277,003 16.3 357.0 2000-Q4 110.0 837,402 36,778 18.8 368.0 2001-Q1 103.6 1.8 26,060 952,441 35,067 -9.5 20.0 282.7 95.0 2001-Q2 94.5 3.8 26,610 524,536 97,744 2.2 22.3 335.3 56.9 2001-Q3 87.0 -10.4 27,778 267,701 387,023 39.7 20.1 471.9 32.2 2001-Q4 106.7 -3.0 27,675 748,315 35,206 -4.3 20.6 385.5 4.8 2002-Q1 88.0 -15.1 26,619 507,743 33,292 -5.1 20.9 305.8 8.2 2002-Q2 89.0 -5.8 29,513 265,271 118,958 21.7 25.5 334.3 -0.3 2002-Q3 101.0 16.1 30,105 501,282 352,718 -8.9 26.9 398.6 -15.5 2002-Q4 116.7 9.4 30,245 920,220 36,731 4.3 25.6 370.0 -4.0 2003-Q1 108.5 23.3 96.2 3.7 29,744 1,010,097 26,913 -19.2 21.7 366.8 19.9 2003-Q2 87.9 -1.2 101.0 -6.4 29,988 377,521 123,180 3.5 27.5 392.4 17.4 2003-Q3 98.1 -2.9 100.0 -4.5 30,176 458,240 420,910 19,3 25.0 455.1 14.2 2003-Q4 108.9 -6.7 109.2 0.1 30,304 740,627 Jan-02 77.31 -16.0 -5.6 7,949 186,203 10,450 -9.3 18.4 307.0 15.3 Feb-02 88.13 -17.2 -1.4 8,644 131,239 11,648 6.3 22.1 285.6 3.1 Mar-02 98.53 -12.8 1.3 10,026 190,301 11,194 -11.1 22.2 324.8 6.5 Apr-02 93.01 3.2 14.4 9,682 110,477 15,584 22.1 24.7 321.2 0.7 May-02 79.71 -21.6 -4.0 10,088 36,512 34,190 29.9 24.3 335.5 1.9 Jun-02 94.30 2.2 2.8 9,743 118,282 69,184 18.0 27.4 346.2 -3.1 Jul-02 104.20 24.5 9.6 10,187 171,070 151,284 -6.5 21.1 417.6 -8.3 Aug-02 92.53 5.2 -11.6 9,995 136,702 137,230 -17.2 25.2 431.9 -14.4 Sep-02 106.41 18.2 -0.6 9,923 193,510 64,204 8.0 34.2 346.2 -24.0 Oct-02 116.52 17.4 4.0 10,216 289,604 21,921 39.2 26.3 385.5 -3.5 Nov-02 114.89 10.0 7.8 9,840 284,397 6,826 -30.5 26.9 360.5 -3.0 Dec-02 118.68 1.6 -0.6 10,189 346,219 7,984 -17.2 23.5 364.1 -5.6 Jan-03 99.74 17.2 85.4 13.1 10,217 337,645 9,519 -8.9 22.3 351.9 14.7 Feb-03 113.00 27.9 96.7 -2.3 9,238 371,125 9,520 -18.3 18.7 368.1 28.9 Mar-03 112.66 14.3 106.4 0.2 10,289 301,327 7,874 -29.7 24.1 380.3 17.1 Apr-03 82.47 -11.3 94.7 -16.6 9,903 125,751 13,792 -11.5 24.8 380.3 18.4 May-03 79.91 0.4 97.6 -5.9 10,258 86,870 37,457 9.6 33.8 396.4 18.2 Jun-03 101.41 7.5 110.8 3.2 9,827 164,900 71,931 4.0 23.9 400.5 15.7 Jul-03 100.09 -3.9 104.8 -5.2 10,190 183,360 182,814 20.8 18.8 432.8 3.6 Aug-03 98.79 6.9 97.1 2.3 10,213 143,300 169,966 23.9 20.7 477.3 10.5 Sep-03 95.53 -10.1 98.0 -10.6 9,773 131,580 68,130 6.1 35.6 Oct-03 103.55 -11.1 112.3 1.7 10,135 170,262 Nov-03 102.52 -10.8 103.6 -3.6 9,881 222,064 Dec-03 120.67 1.6 111.6 2.2 10,287 348,301

Sources: Monstat-Statistical Office of Montenegro, Aluminum Combine Podgorica, Power Plant of Montenegro (EPCG). GDP in constant prices, excluding informal economy; GDP estimates up to 1998 made by ISSP and based on Social Product estimates as published by the Statistical Office of Montenegro; from 1999 - ISSP estimates using comparable methodology. GDP in 2000 and 2001 is official data published by the Monstat, while GDP in 2002 and 2003 is estimated by ISSP. Annual changes refer to growth rates of the index vis-à-vis the analogous period of the preceding year. For monthly data, these are growth rates of the index in a given month vis-à-vis the analogous month of the preceding year. For quarterly data these are growth rates of the average value of the index in a given quarter over the analogous value for the same quarter of the preceding year. For annual data, these are growth rates of the average value of the index in a given year vis-à-vis the average value of the index in the preceding year.


ISSP - CEPS

13

1. REAL SECTOR

In the following chapter we will present the most recent developments in the real economy in Montenegro in 2003 for the following sectors: industrial production, tourism, transport, trade, forestry and construction. Due to a lack of data, several sectors of the economy (health care, education, financial services, and services to firms) are not included in the analysis, so it is difficult to determine the prevailing trends in the real sector. However, the analysis in this chapter comprises the most important sectors, which account for approximately 55% of the GDP. General trends in the real sector were mostly positive in 2003, except for forestry and construction (which declined in the first three quarters). 1.1. PRODUCTION The production sector in Montenegro is composed of industrial production, forestry, and construction. Industrial production in 2003 increased, but according to the data for the first three quarters, activity in forestry and construction decreased compared to the analogous period in 2002. Given the fact that also the processing industry, as a dominant sector within total industrial production, decreased its output in 2003, we can conclude that the total production in 2003 was at nearly the same level as in 2002. 1.1.1. Industrial production

Graph. 1.1: Index of industrial production

60.00

70.00

80.00

90.00

100.00

110.00

120.00

130.00

140.00

Jan-

00

Mar

-00

Maj

-00

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00

Sep-

00

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-03

Index Dec 99=100 Annual change of the index

Source: Monstat

Chapter 1. Output

ISSP - CEPS 14

Table 1.2. Industrial production: disaggregated indices of major industries

share in the index in

2001 2002 2003 Jan 2003

Feb 2003

March2003

April2003

May2003

June 2003

July 2003

Aug 2003

Sept 2003

Oct 2003

Nov 2003

Dec 2003

2000 2000 base 2002 base INDUSTRY TOTAL 100.0 99.3 99.9 99.7 102.4 129.0 127.9 114.3 88.7 100.4 107.5 96.1 106.9 89.9 88.9 89.2 101.60 MINING AND STONE EXTRACTING 7.6 88.5 95.1 71.6 101.4 61.8 74.2 105.9 113.6 78.0 97.3 89.1 158.4 140.6 86.00 72.50 113.50 PROCESSING INDUSTRY 67.8 101.6 103.9 101.8 97.9 113.1 97.7 100.2 83.4 94.1 103.2 94.8 102.3 89.4 101.70 96.40 102.20 ELECTRICITY, GAS AND WATER PRODUCTION 24.6 93.9 87.7 106.5 117.5 186.1 289.3 164.1 113.2 232.8 135.4 103.2 95.0 70.8 60.80 78.00 100.50

MINING AND STONE EXTRACTING 7.6 88.5 95.1 71.6 101.4 61.8 74.2 105.9 113.6 78.0 97.3 89.1 158.4 140.6 86.0 72.5 113.5 MINING AND STONE EXTRACTING 2.8 78.0 119.1 89.2 85.4 70.8 78.1 101.9 109.5 18.7 117.8 79.7 101.0 79.2 87.6 70.3 85.4 OTHER RAW MATERIALS EXTRACTION 4.8 94.6 81.1 61.3 115.0 28.5 70.2 112.5 115.2 88.9 84.9 97.2 200.9 180.5 85.00 74.30 213.00 Metal ores mining 3.4 96.3 96.6 70.4 88.3 18.8 75.5 133.3 103.3 86.7 83.8 100.0 83.8 82.70 83.90 74.20 290.80 Other ores and stone extraction 1.3 90.3 41.9 38.5 217.8 87.4 49.3 74.6 161.8 101.2 90.5 76.1 1257.5 1173.10 94.90 74.00 101.80 PROCESSING INDUSTRY 67.8 101.6 103.9 99.5 97.9 113.1 97.7 100.2 83.4 94.1 103.2 94.8 102.3 89.40 101.7 96.4 102.20 MANUFACTURE OF FOOD PRODUCTS, BEVERAGES AND TOBACCO 9.0 104.6 91.8 90.7 101.40 50.2 98.7 102.7 72.6 136.8 114.8 132.2 210.1 106.30 69.6 69.80 112.80

Manufacture of food products and beverages 7.1 100.1 90.0 98.1 109.50 57.8 106.3 89.9 78.2 166.4 152.2 153.5 193.6 134.90 62.50 86.10 104.00 Manufacture of tobacco products 1.9 121.9 99.1 62.8 73.00 11.1 76.3 155.9 54.9 54.5 19.9 64.1 371.5 60.30 107.90 22.20 176.30 MANUFACTURE OF TEXTILE AND TEXTILE PRODUCTS 2.4 72.1 81.5 61.2 75.20 115.9 67.7 86.6 54.0 57.5 61.5 63.1 56.8 109.60 64.40 128.10 59.00

Manufacture of yarn and fabrics 0.6 94.1 70.5 42.9 80.70 20.3 64.6 79.3 58.6 44.0 19.4 38.7 50.9 298.20 269.30 122.50 119.90 Manufacture of apparel and fur 1.8 64.9 85.0 67.1 73.80 144.6 68.6 89.3 52.7 62.2 75.2 68.0 59.1 86.10 42.50 129.80 54.70 MANUFACTURE OF LEATHER AND LEATHER PRODUCTS 0.4 73.6 57.3 40.5 60.4 55.1 66.4 51.8 119.0 76.5 74.3 78.6 18.6 16.0 82.5 56.1 43.0

WOOD PROCESSING AND WOOD PRODUCTS 3.6 78.2 54.8 26.3 80.4 40.4 22.6 26.6 17.9 74.7 99.4 60.0 75.4 74.2 226.9 103.9 111.4

MANUFACTURE OF PAPER; ISSUING AND PRINTING 1.8 107.2 98.4 62.1 59.2 135.0 58.7 58.5 49.8 53.7 54.3 56.0 59.3 44.90 68.4 89.7 44.0

Manufacture of cellulose, paper and paper processing 1.0 89.8 99.1 27.5 26.5 246.2 17.8 28.8 13.7 17.6 26.3 36.8 31.0 16.90 34.1 95.8 20.6

Publishing, printing and reproduction 0.8 129.7 97.7 106.7 101.8 118.5 149.3 111.9 115.8 125.8 95.9 70.8 83.7 94.70 110.4 87.8 90.3 MANUFACTURE OF COKE AND OIL DERIVATES 0.1 111.1 63.8 8.5 12.5 - - - - 429.6 _ 6.1 _ - 83.1 - 150.0

MANUFACTURE OF CHEMICAL PRODUCTS AND FIBERS 1.9 99.9 105.5 71.8 78.5 96.6 35.0 112.0 44.5 47.5 129.1 113.2 105.8 77.9 163.2 111.8 56.7

MANUFACTURE OF RUBBER AND PLASTIC PRODUCTS 0.5 72.9 91.9 55.0 51.0 53.0 63.2 72.3 79.5 42.0 28.6 137.6 57.4 54.6 57.1 25.8 75.3

MANUFACTURE OF PRODUCTS OF OTHER NONMETAL MINERALS 6.5 107.2 112.9 110.6 100.3 111.1 101.8 97.5 93.9 100.7 92.9 109.8 97.9 95.8 98.6 121.4 96.8

MANUFACTURE OF BASE METALS AND METAL PRODUCTS 39.3 109.7 115.2 117.0 102.2 132.1 108.1 108.2 93.7 94.9 109.1 90.2 97.5 86.0 105.8 96.6 106.6

Manufacture of basic metals 37.6 111.2 116.8 118.5 102.1 134.2 111.2 106.5 94.7 98.1 102.2 93.7 101.2 87.10 107.2 97.6 104.6 Manufacture of metal products, except machines 1.7 75.4 97.9 102.0 104.7 6.5 58.5 178.4 66.6 63.9 417.8 51.2 42.0 62.00 78.3 68.7 177.1 MANUFACTURE OF MACHINERY AND DEVICES, OTHER

1.8 12.5 52.3 30.1 77.1 196.7 797.7 38.5 40.8 77.0 38.2 98.1 1.3 216.5 60.3 137.8 310.2

MANUFACTURE OF TRANSPORT EQUIPMENT 0.4 144.0 174.0 167.9 95.8 101.7 78.1 83.9 45.7 73.3 123.6 83.3 91.9 86.8 209.4 84.2 113.1

PROCESSING INDUSTRY, OTHER 0.1 39.6 63.3 11.6 33.1 - - 25.0 4.5 22.4 32.8 70.1 39.8 46.2 37.4 32.0 100.3 ELECTRICITY, GAS AND WATER PRODUCTION 24.6 93.9 87.7 106.5 117.5 186.1 289.3 164.1 113.2 234.2 135.4 113.4 95.0 70.8 60.8 78.0 100.5

Source: Monstat Note: In order to compare data, year 2000 is also used as the base.


ISSP - CEPS

15

The annual dynamics of industrial production have been varying from month to month. The dynamics of industrial production had been positive until September 2003 (with exceptions in April and June), and then turned negative in September, October and November. In December 2003, the annual growth rate of industrial production was again positive at 1.6%. In general, average industrial production for the 12 months of 2003 was 2.4% higher than in 2002. Three major industrial sectors The processing industry, which represents 71.2%1 of total industrial production, has registered a negative annual growth rate of –2.1% in 2003 (annual average). Annual growth rate of the processing industry was 2.2% in December 2003, while its annual growth rate in the last quarter of 2003 was 0.1%. Positive trends in the processing industries in 2003 were registered in several sectors and sub-sectors. The production of food, beverages and tobacco (which represents 8.2% of total industrial production) increased by 1.4% in 2003 compared to the previous year. Furthermore, one of the leading sub-sectors of the processing industry manufacture of base metals and metal products (45.2% of total industrial production) increased its output by 2.2% compared to 2002. Other sub-sectors of the processing industry decreased their production, contributing to the decline of the total processing industry production in 2003. The sub-sector “Manufacture of textile and textile products” (accounting for 2.0% of the total industry) fell by 24.8% in 2003 compared to the previous year as did the sub-sector “Manufacture of chemical products and fibers” (2.0% of total industry). The second industrial sector, electricity, gas and water, which accounts for 21.6% of total industrial production, increased its production in 2003 by 17.5% compared to the preceding year. Analysis of the monthly developments shows that the annual growth rate of production was positive until August 2003, and since then, has been negative until December. In December 2003, production of electricity, gas and water was 0.5% higher than in the same month in 2002. The mining and stone extracting industry, which accounts for about 7% of total industrial production, increased its production by 1.4% in 2003 compared to 2002. Annual growth rate of the output in this industry was 13.5% in December, while it was negative in October and November. Leading industrial producers The Power Company of Montenegro (Elektroprivreda Crne Gore), as one of the most important industrial producers in Montenegro, increased its electricity generation by 0.6% in December 2003 compared to the same month of the previous year. The average level of electricity production was 17.8% higher in 2003 than in 2002. The following graph (1.2) presents the aggregate actual and planned electricity production of the 3 power plants existing in Montenegro: Perucica Hydro Plant, Piva Hydro Plant, and Pljevlja Thermal Plant.

1 Data based on the share of sales in 2002, used in official statistics in 2003.

Chapter 1. Output

ISSP - CEPS 16

Graph 1.2.Total electricity production

0

50,000

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-02

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03

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-03

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-03

Dec

-03

MW

h

Planned production Actual production

Source: The Power Plant of Montenegro (EPCG) Total actual production of the three power plants in 2003 was 7.2% below the planned level. Actual production of the Thermal Plant Pljevlja was 0.3% above the planned level, exceeding its production plan. Total production of the Hydro Plant Piva was 8% under the planned level, while the production of the Hydro Plant Perućica was 15% below the planned level for 2003. Actual production of the Thermal Plant Pljevlja was 7.7% over the plan in December 2003. In the same month, the actual production of the Hydro Plant Piva was at the planned level and actual production of the Hydro Plant Perućica was 1% below the planned level.

Graph 1.3. Dynamics of electricity production

-100

-50

0

50

100

150

200

250

Jan-

00

Mar

-00

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-00

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00

Sep-

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Maj

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03

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03

Nov

-03

%

annual changes 12 months average of annual changes

Source: Montenegrin Statistical Office, EPCG Note: 12-month averages of annual changes are moving averages of annual changes during the past 12 months.


ISSP - CEPS

17

Production of the Aluminum Combine Podgorica (KAP) expanded by 3.2% in 2003 compared to 2002. In December 2003, aluminum production increased by 1% compared to December 2002.

Graph 1.4. Total annual production of aluminium

0

25000

50000

75000

100000

12500019

89

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

ton

Source: KAP

Graph 1.5: Aluminum production: Monthly level and export prices

7000

8000

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10000

11000

Jan-

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-03

ton

1300

1400

1500

1600

1700

$/to

n

Aluminum production Export price

Source: KAP Graph 1.5 presents the annual and monthly levels of aluminum production as well as prices at which KAP exported its aluminum since January 2002. According to the graph, aluminum production increased in 2003 compared to 2002. Furthermore, the average monthly exports price had an increasing trend since January 2002 amounting to USD 1,575.9 per ton in December 2003. .

Chapter 1. Output

ISSP - CEPS 18

Table 1.3 Indices of developments in various sectors of the economy

Index value 2000 2001 2002 1-9.2003 06/2003 07/2003 08/2003 09/2003 Base period 1999 1-9.2002 06/2002 07/2002 08/2002 09/2002

Total 102.5 101.5 101.5 100.0 103.6 105.2154 98.19198 105.278 96.39126 Industrial production

103.3 102.2 103.3 103.1 108.3 107.5 96.1 106.9 89.9

Forestry 121.5 104.5 94.0 87.1 92.0 118.9 128.0 130.9 138.4 Production

Construction 160.0 177.6 198.9 172.8 95.8 75.1 118.8 120.3 64.1 Road (goods) 84.0 100.0 97.0 76.5 105.5 129.1 105.9 111.9 140.0 Road (persons) 102.6 72.8 65.6 62.1 79.5 88.5 95.2 94.2 86.1 Sea (goods) 79.7 41.4 2.1 2.5 115.8 109.7 242.7 168.0 97.1 Railway (goods)

84.0 83.2 106.4 86.2 79.8 63.5 74.0 100.0 92.2 Transport

Railway (persons)

103.0 110.2 98.1 79.5 108.3 111.5 148.8 105.5 184.0

Current prices 131.0 144.1 136.9 136.9 116.8 115.7 103.6 110.5 130.9 Retail trade Deflated by

CPI 107.4 96.9 79.3 113.7 109.3 108.5 97.0 103.6 123.1

Current prices 124.0 186.0 221.3 292.2 127.3 157.7 128.2 142.3 112.5 Catering Deflated by

CPI 101.6 125.1 128.2 242.7 119.1 148.0 120.0 133.3 105.9

CPI 122.0 148.7 172.7 120.4 106.9 106.6 106.9 106.7 106.3

Source: Monstat Monthly Statistical Review, no. 8/2001, 4/2002, 9/2003 and 10/2003 1.1.2. Forestry and Construction Data from Monstat present the situation in forestry and construction in the first three quarters of 2003. These data represent the only available account of the activity in these sectors and have to be interpreted with highest caution since they are based on a limited sample of firms active in forestry and construction Forestry During the third quarter of 2003, production in the forestry sector exhibited annual growth rates of 28%, 31% and 38.4% in respective months of the quarter. However, cumulated over first three quarters of 2003, the average production in the forestry sector was 8% below the average production in the same period of 2002. Construction Average production in the construction sector during the first three quarters of 2003 was 4.3% lower than in the same period of 2002. The annual growth rate of construction was positive in July and August (19% and 20%, respectively) but turned negative in September 2003 when it amounted to –35.9%. 1.2. TOURISM The total number of tourists in the third quarter of 2003 increased by 19.3% compared to the corresponding period of 2002. The share of foreign tourists was 25%, a decline of two percentage points compared to the same period in 2002. The number of tourists cumulated over the period January-September 2003 increased by 13.5% compared to the corresponding period of 2002. The share of foreign tourists in total number of tourists fell by 2.6 percentage points, going from 25.1% in the first three quarters of 2002 down to 23.3% in the same period of 2003 (see graphs 1.6 and 1.7).


ISSP - CEPS

19

Graph 1.6. Tourists in Montenegro (total monthly)

0

20000

40000

60000

80000

100000

120000

140000

160000

180000

200000

Jan-

00F

eb-0

0M

ar-0

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ay-0

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0Se

p-00

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-00

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-00

Jan-

01F

eb-0

1M

ar-0

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n-01

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02F

eb-0

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Per

sons

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

50%

All tourists Share of foreign tourists in total

Source: Monstat The number of tourists cumulated over the previous 12-month period is presented in graph 1.7. As the cumulated data show, the total number of tourists has begun to increase in the second half of 2003 after declining in the third quarter of 2002 and first quarter of 2003. However, the share of foreign tourists has been decreasing since May 2003.

Graph 1.7: Cumulated annual visits of tourists in Montenegro(during past 12 months)

400,000

450,000

500,000

550,000

600,000

650,000

Dec

-00

Jan-

01

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2-D

ec

Jan-

03

Feb

-03

Mar

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Apr

-03

May

-03

Jun-

03

Jul-

03

Aug

-03

Sep-

03

15%

20%

25%

30%

35%

40%

Total number of tourists Share of foreign tourst (right scale)

Source: Monstat The cumulated growth rates of tourism, since the beginning of the respective year, are presented in graph 1.8. Data show that the total number of domestic tourists has increased by 15.8% compared to the same period of 2002, while the number of foreign tourists in this period increased by 4.9%. Tourism revenues in the first eleven months of 2003 increased by 30.4% compared to the same period of the preceding year. Revenues from domestic tourists increased by 41.3%, while revenues from foreign tourists increased by 19.3%.

Chapter 1. Output

ISSP - CEPS 20

Graph 1.8. Annual growth rates of number of tourists*

-20%

-10%

0%

10%

20%

30%

40%

50%

Jan-

01

jan-

feb

2001

jan-

mar

200

1

jan-

apr

2001

jan-

may

200

1

jan-

jun

2001

jan

- ju

l 200

1

jan

- au

g 20

01

jan

- se

p 20

01

jan

- oc

t 200

1

jan

- no

v 20

01

jan

- de

c 20

01

jan

2002

jan-

feb

2002

jan-

mar

200

2

jan-

apr

2002

jan-

may

200

2

jan-

jun

2002

jan

- ju

l 200

2

jan

- au

g 20

02

jan

- se

p 20

02

jan

- oc

t 200

2

jan

- no

v 20

02

jan

- de

c 20

02

Jan-

03

jan-

feb

03

jan-

mar

t 03

jan-

apr

03

jan-

may

03

jan-

jun

03

jan-

jul 0

3

jan-

aug

03

jan-

sept

03

Domestic tourists Foreign tourists All tourists

t

* compared to the same period of the previous year

Source: Monstat 1.3. OTHER SECTORS OF SERVICES Transport In the first three quarters of 2003, all transportation sectors, except road transportation of passengers and railway transportation of goods, registered an increase. In the period January-September 2003, sea transportation of goods increased by 15.8% and road transportation of goods increased by 5.5% compared to the same period of 2002. At the same time, railway transport of passengers increased by 8.3%. On the other hand, road transport of passengers decreased by 20.5% in the first three quarters of 2003, while services of the railway transport of goods decreased by 20.2% compared to the corresponding three quarters of 2002 (see the table 1.3). Revenues from export of transportation services increased by 35.2% in the first eleven months of 2003 compared to the corresponding period in 2002. Retail Trade In the first three quarters of 2003, the retail sales (trade) increased by 9.3% in real2 terms compared to the same period in 2002 ( or 15% in nominal terms). The real annual growth rate of retail sales in September was 23.1%, while the nominal annual growth rate was 30.9%. Catering The average level of catering services in the first three quarters of 2003 increased by 19.1% in real terms compared to the same period in 2002, while its nominal growth was 27.3%. Annual real growth of catering services has been positive since May 2003 and amounted to 12.5% in September.

2 Deflated by the CPI.


ISSP - CEPS

21

1.4 GDP

Table 1.4 shows the GDP structure in 2000 and 2001, as well as GDP in current and constant prices according to Monstat’s data. According to this data, industrial production represents a major part of the GDP (19.6%), followed by transport, storage and communication (12.6%), wholesale and retail trade (11.8%), and agriculture, hunting and forestry (11.2%). These four sectors of the economy accounted for 55.3% of the Montenegrin GDP in 2001. Table 1.5 presents the estimated Gross Domestic Product in current prices and its real growth in 2003 as well as its projections through 2008. Projections were made with the use of the macroeconomic accounting and behavioural model. The model has been designed in such a way as to involve all characteristics of the Montenegrin economic system and was prepared as part of the technical assistance from USAID/KPMG Barents Group to the Economic Reform Project in Montenegro. The Central Bank of Montenegro owns it.

The model is based on the aggregate demand components. It is based on the financial programing technique and provides information about basic macroeconomic aggregates. (see the first chapter of MONET 14).

Table 1.4 Structure of Gross Domestic Product (GDP-a) and Gross Domestic Product in current and constant prices

Sector of economy 2000 2001 Agriculture, hunting and forestry 11.8 11.2 Fishing 0 0 Mining and stone extracting 2.7 2 Processing industry 9.7 12 Electricity, gas and water supply 5.7 5.6 Construction 4.1 3.7 Wholesale and retail trade; repair of motor vehicles, motorcycles and personal and household goods

13.3 11.8

Hotels and restaurants 2.6 2.3 Transport, storage and communication 9.9 12.6 Financial intermediation 3.3 2.4 Real estate, renting and business activities 8 7.2 Public administration and defense; compulsory social security 8.5 7.3 Education 4.6 4.1 Health and social work 3.9 4 Other community, social and personal activities 2.6 3 FISIM (Financial Services indirect intermediation) -0.2 -0.2 Gross value added (basic prices) 90.4 89 Taxes on products less subsidies on products 9.6 11 GDP (market prices) 100 100 GDP (current prices in DM) 1,999,266 2,434,595 GDP real growth rate (constant prices in 2000) 3.10% -0.20%

Source: Monstat. Note: Data are the new official GDP estimates for 2000 and 2001 published by Monstat in November 2003. Therefore, the data on GDP in 2000 and 2001 published in the previous MONET issues are not comparable with the new estimates.

Table 1.5 GDP projections based on the Model for macroeconomic projections created in 2002

Variable / year 2003 2004 2005 2006 2007 2008 GDP (€ million) 1,356.6 1,484.5 1,598.0 1,718.7 1,841.0 1,974.4 Population ( in 000) 617.7 619.9 622.3 624.5 626.8 629.1 GDP per capita 2,196.2 2,394.7 2,567.9 2,752.1 2,927.8 3,138.5 Real growth of GDP 0.50% 3.72% 4.64% 4.74% 5.02% 5.14%

Source: CBM ,ISSP, Monstat. Note: GDP data for 2003 are estimated (Model for macroeconomic projections made by USAID/KPMG Barents group, as a technical assistance to the Central Bank and Government of Montenegro). Other data until 2008 are projected by the same Model as well. Data on population in 2003 are from the Monstat, while data for subsequent years are ISSP projections. .

Chapter 2. Employment

ISSP - CEPS 22

Methodological note: • Official unemployment rate was calculated from official data on number of employed and unemployed with the use of the formula:

100⋅

+=

znn

UR

where UR-unemployment rate, n-number of unemployed and z-number of employed persons. • An ISSP estimate of the unemployment rate is obtained by combining data from Monstat, Federal Labor Force Survey and ISSP Household

Survey. These data are used to estimate the number of employed persons per household, number of households, average number of households, as well as the official number of employed and unemployed. In this way we obtain the number of employed and unemployed in the economy and the rate is calculated using the standard abovementioned formula.

• ISSP Survey unemployment rate has been obtained from the ISSP Household Income Expenditures Surveys and is based on the answers to the

following questions: During the previous week, did you work, or were you involved in any gainful activity, for money or in-kind compensation (at least one hour)? Although you did not work in the previous week, do you have a job? Did you look for a job in the past 4 weeks? Then, using the standard formula the rate is calculated.

Table 2.1. Labor force and unemployment

Population (mid-year) Without

migration1

Total employed

persons (all sectors)

Number of unemployed (2)

Unemployment rate in % Unemployment

rate % (estimate)

Unemployment rate ISSP survey*

%

Official data ISSP estimate based on official data

ISSP

1991 591,269 144,045 58,144 28.8 21.6 1992 593,427 134,205 64,632 32.5 23.6 1993 595,592 130,901 62,818 32.4 22.4 1994 597,766 128,835 58,210 31.1 21.8 1995 599,947 125,090 59,045 32.1 22.2 1996 602,136 124,264 60,225 32.6 21.9 1997 604,333 120,604 63,995 34.7 23.5 1998 606,539 117,745 68,373 36.7 25.7 1999 608,752 115,349 75,303 39.5 27.3 2000 610,973 113,818 83,583 42.4 27.8 2001 613,203 114,076 81,561 41.7 24.8 2002 615,441 113,743 80,865 41.5 23.7 2003 617,740 111,852 71,679 39.0 21.4 2001-Q1 113,859 81,950 41.9 25.1 2001-Q2 113,914 82,620 42.0 24.6 2001-Q3 114,402 81,255 41.4 24.4 2001-Q4 114,130 80,723 41.4 23.9 2002-Q1 113,715 81,085 41.6 23.7 2002-Q2 113,785 81,541 41.7 23.4 2002-Q3 113,877 80,935 41.5 25.1 2002-Q4 113,593 79,898 41.3 23.4 2003-Q1 112,587 76,275 40.4 23.4 2003-Q2 112,173 72,744 39.3 21.7 2003-Q3 112,338 66,964 37.3 20.3 2003-Q4 110,312 70,732 39.1 21.1 Jan-02 113,594 80,385 41.7 23.9 Feb-02 113,597 81,360 41.7 23.9 Mar-02 113,953 81,510 41.8 23.8 19.6 Apr-02 114,180 81,961 41.8 23.8 May-02 113,461 81,622 41.6 23.7 Jun-02 113,715 81,041 41.5 23.5 Jul-02 114,422 81,166 41.6 23.5 13.7 Aug-02 113,684 80,830 41.6 23.4 Sep-02 113,526 80,809 41.4 23.4 Oct-02 113,676 80,183 41.3 23.2 20.7 Nov-02 113,679 79,894 41.2 23.5 Dec-02 113,425 79,616 41.5 23.5 Jan-03 112,673 76,584 40.3 22.6 Feb-03 112,771 76,077 40.5 22.5 Mar-03 112,317 76,165 40.4 22.6 Apr-03 112,132 74,896 40.0 22.3 May-03 111,738 73,250 39.6 22.0 Jun-03 112,648 69,735 38.2 21.0 Jul-03 112,905 66,951 37.2 20.3 17.0 Aug-03 112,647 66,277 37.0 20.2 Sep-03 111,461 67,664 37.8 20.4 Oct-03 110,911 71,023 39.0 21.2 Nov-03 110,387 72,547 39.7 21.6 Dec-03 109,639 68,625 38.5 20.6

Sources: Monstat (Statistical Office of Montenegro), Employment Office and ISSP

1 Data for 1991 and 2003 are census data. Data from 1992-2002 are ISSP estimate based on rate of average yearly growth of population between two successive censuses. Data from 2003 census are not final and total number of inhabitants is a total number of inhabitants that are in the country. This methodology respects European standards in presentation of population in one country. Comparable to it is a number 591269 from the 1991 census. So earlier used data of 616632 inhabitants in 1991 from Statistical Yearbook 2002, is shown according to methodology that is not comparable to new census, so the ISSP will in future use this new manner for presenting data.


ISSP - CEPS

23

CHAPTER 2. EMPLOYMENT 2.1 EMPLOYMENT AND UNEMPLOYMENT

Official data shows a decrease of employment in Montenegro in 2003. The average number of employed in Montenegro in 2003 is 1.7% lower than in 2002. In the period from January to May, the number of employed persons was decreasing, while in May-July this number moderately increased and then continued its decline through the end of the year (graph 2.1). Quarterly comparisons of 2003 with 2002 show that employment in all four quarters of 2003 was lower than in the respective quarters of 2002 (by 1% in Q1, 1.4% in Q2, 1.4% in Q3, and 2.9% in Q4).

Graph 2.1: Number of employed persons (2000-2003)

108000

109000

110000

111000

112000

113000

114000

115000

116000

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

2000 2001 2002 2003

Source: Statistical Office of Montenegro According to Employment Office data, as a result of the Decree on tax relief for new employees2, during the period of April 14 to December 31, a total of 24,500 new employees were registered. However, this number is not reflected in official employment statistics. On the other hand, the number of unemployed in 2003 quickly decreased in the beginning of the year, from January until August the number of unemployed decreased by approximately 10,000 or 13.5% (graph 2.2). In August, unemployment reached the lowest point in the last six years with 66,277 registered unemployed. After August, the number of unemployed increases and amounts to over 72,000 in November; this is then followed by a decline in December. However, on a yearly level, the average number of unemployed in 2003 is 11.4% lower than in 2002.

The Employment Office believes that the main reason for the increased number of unemployed in October and November is a reform of the health system and an exchange of health ID’s. Namely, according to health reform, every citizen holding a health ID was obligated to change it by the end of December 2003, and the system of control determining whether health insurance is paid was improved (as Health ID of every person a Unique

2 For details on this decree see MONET 14, chapters Wages and Labor force.

Chapter 2. Employment

ISSP - CEPS 24

identification number is used) so the number of people who have registered as unemployed in order to have health insurance has increased.

Graph 2.2: Number of unemployed persons (2000-2003)

65000

70000

75000

80000

85000

90000

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

2000 2001 2002 2003

Source: Statistical Office of Montenegro

Further, the Employment Office data shows that during the first eleven months of 2003 a total of 10,800 persons were employed (newly employed and labor contract extensions), while 8,387 persons lost their jobs (table 2.2). During the same period, the number of newly registered unemployed was 22,026, while the status of unemployed persons overall declined by 23,549 persons (not necessarily because they found a job).

Table 2.2: Changes in employment and unemployment in 2002 and 2003

Registered new employees

Employed during

the month3 Lost jobs Entering the labor force

Total Deleted from

register Employed abroad

A B C D=B+C E F Jan-03 463 775 1,540 2,315 1,747 357 Feb-03 447 669 1,435 2,104 1,948 437 Mar-03 573 652 1,679 2,331 1,738 529 Apr-03 955 633 1,620 2,253 2,328 1,018 May-03 2,074 605 1,844 2,449 1,907 1,906 Jun-03 1,840 562 1,435 1,997 3,572 1,739 Jul-03 1,522 631 1,392 2,023 2,891 1,220 Aug-03 748 559 1,448 2,007 2,023 666 Sep-03 743 1,471 2,152 3,623 1,885 617 Oct-03 750 1,146 4,470 5,616 1,718 908 Nov-03 685 684 3,011 3,695 1,792 701 Total 2002 7,764 7,510 16,435 23,945 20,762 6,733 Total Jan-Nov 2003 10,800 8,387 22,026 30,413 23,549 10,098

Source: Monthly reports by Employment Office of Montenegro Note: Data on the change in the number of unemployed do not match respective data from table 2.1 because of different methodologies applied by Monstat (table 2.1) and the Employment Office (table 2.2) in calculating unemployment.

It is apparent in the graph below that 2003 was a more dynamic year than 2002, at least with respect to changes in the number of unemployed. During the first 11 months of 2003, the number of newly registered unemployed is approximately 6,000 higher than in the full year 2002.

3 Number of employed during the month includes new job openings as well as extension of labor contracts, which in some cases have to be announced through the Employment Office.


ISSP - CEPS

25

Graph 2.3: Number of employed, unemployed and pensioners (officialy, 1994-2003)

50000

60000

70000

80000

90000

100000

110000

120000

130000

1994

-Q1

1994

-Q2

1994

-Q3

1994

-Q4

1995

-Q1

1995

-Q2

1995

-Q3

1995

-Q4

1996

-Q1

1996

-Q2

1996

-Q3

1996

-Q4

1997

-Q1

1997

-Q2

1997

-Q3

1997

-Q4

1998

-Q1

1998

-Q2

1998

-Q3

1998

-Q4

1999

-Q1

1999

-Q2

1999

-Q3

1999

-Q4

2000

-Q1

2000

-Q2

2000

-Q3

2000

-Q4

2001

-Q1

2001

-Q2

2001

-Q3

2001

-Q4

2002

-Q1

2002

-Q2

2002

-Q3

2002

-Q4

2003

-Q1

2003

-Q2

2003

-Q3

2003

-Q4

Total employed persons (officialy) Number of unemployed persons

Number of pensioners (all categories)

Source: Statistical Office, Employment Office and Fund PIO Note: data are quarterly averages

Also, according to Fund PIO data, the number of pensioners has increased, although this increase wasn’t as dramatic as expected. The number of pensioners in December 2003 was 2.8% higher than in December 2002, representing a total of 2,477 persons. According to data for previous years, the increase of pensioners in 2003 is not significant; in the last ten years the highest increase in the number of pensioners was in 1996 and 1997 (3.1% and 4% respectively4). The application of the new Law on Pension-Invalid Insurance in January 2004 is one possible source of the increased number of pensioners, although the increase could also be caused by the program of reduction of the number of public servants and rationalization in education (through the early retirement program that the government implemented in 2003). The increased number of pensioners would not be so worrying if, in the same period, the number of officially employed persons didn’t decrease. This decrease in absolute terms is higher than the increase in the number of pensioners (in December 2003, the number of employed persons is 3,786 lower than in December 2002).

In addition to the official statistics that show negative trends on the Montenegrin labor market in 2003, the ISSP Household Budget Survey (No.8) estimates the unemployment rate at 17% in July 2003 as compared to 13.7% in the same month of the previous year. Also, although we can question the rightness and effectiveness in the long run of the Decree on tax relief for new employees, it is a fact that by its application, roughly 25,000 new employees have been registered, which is a significant number bearing in mind the estimates of 60,000 employees in the shadow economy. However, true results of this decree will be visible in May 2004, when the tax relief expires. In the beginning of January 2004 the new General Collective Agreement was published (see comment in the second part of MONET); so, in 2004 we will be able to monitor the effects of new labor legislature in Montenegro. Already it seems that the new legislation will not bring any positive changes to the Montenegrin labor market.

4 Average number of pensioners in one year compared to average number of pensioners in previous year.

Chapter 3. Wages

ISSP - CEPS 26

Table 3.1:Wages and salaries

Minimum wage

Average gross wage

(official)

Total contributi

ons on gross wage

Average disposable

wage

Average pension (paid)

Ratio min.wage/ average

disposable wage (%)

Average disposable

wage*

Total labor cost**

Average tax rate (% gross wage)

Official data ISSP estimates IN DINARS IN DINARS

1994 65.0 292.7 154.1 139.0 47.0 406.0 33.0 1995 128.0 637.8 330.8 307.0 280.0 42.0 873.0 32.0 1996 243.0 1349.0 689.7 659.0 600.0 37.0 1826.0 31.0 1997 332.0 1801.4 922.5 879.0 738.0 38.0 2445.0 31.0 1998 453.0 2503.8 1276.1 1228.0 1073.0 37.0 3391.0 31.0 1999 663.0 3159.3 1227.3 1932.0 1581.0 34.0 4356.0 19.0

IN EUROS IN EUROS 2000 37.0 150.9 55.5 96.4 83.5 38.0 218.0 19.0 2001 42.0 176.2 68.5 108.0 97.0 39.0 174.0 249.0 19.0 1-6/2002 42.0 185.8 72.9 112.9 106.0 41.0 262.5 19.0 2002-Q1 46.0 178.5 69.7 108.9 103.0 42.0 254.2 19.0 2002-Q2 46.0 193.1 76.2 116.9 108.0 39.0 270.9 19.0 Jan-01 40.9 166.2 64.4 101.7 96.0 40.0 234.9 19.0 Feb-01 40.9 173.8 68.0 105.8 96.0 39.0 243.5 19.0 Mar-01 40.9 172.8 67.5 105.3 96.0 39.0 242.4 19.0 Apr-01 40.9 171.8 67.0 104.8 96.0 39.0 242.3 19.0 May-01 40.9 173.3 67.5 105.8 96.0 39.0 244.2 19.0 Jun-01 40.9 175.4 68.5 106.9 96.0 38.0 176.0 246.5 19.0 Jul-01 40.9 174.4 68.0 106.3 101.0 38.0 245.4 19.0 Aug-01 40.9 176.9 67.0 109.9 101.0 37.0 171.0 250.4 19.0 Sep-01 40.9 182.5 71.1 111.5 101.0 37.0 255.3 19.0 Oct-01 46.0 181.5 70.6 111.0 101.0 42.0 175.0 258.0 19.0 Nov-01 46.0 182.5 71.1 111.5 101.0 41.0 259.1 19.0 Dec-01 46.0 183.6 71.6 112.0 101.0 41.0 260.3 19.0 Jan-02 46.0 166.5 65.0 101.7 101.0 45.0 239.7 19.0 Feb-02 46.0 181.3 70.7 110.6 104.0 42.0 257.5 19.0 Mar-02 46.0 187.8 73.3 114.5 104.0 40.0 186.0 266.2 19.0 Apr-02 46.0 194.0 78.3 115.7 104.0 40.0 270.1 19.0 May-02 46.0 191.0 74.5 116.4 110.0 40.0 274.4 19.0 Jun-02 46.0 194.5 75.8 118.7 110.0 39.0 273.4 19.0

New personal income tax system

Minimum

wage

Average wages and salaries of employee

Total contributions and taxes

Average wages and salaries

taxes and contributio

ns

Average pension (paid )

Ratio min. wage/ Average

wages and salaries after

taxes and contributions

(%)

Average disposable

wage *

Total labor cost**

Average tax rate (%wages

and salaries)

7-12/2002 50.0 272.6 101.2 171.4 112.0 29.0 365.6 15.4 2003 50.0 271.2 97.2 174.0 113.0 29.0 364.2 14.1 2002-Q3 50.0 263.2 97.8 165.4 112.0 30.3 353.9 15.2 2002-Q4 50.0 282.0 104.6 177.5 112.0 28.2 377.4 15.6 2003-Q1 50.0 233.5 83.9 149.6 112.0 33.9 316.8 13.0 2003-Q2 50.0 274.3 99.4 174.8 112.0 28.6 366.9 14.3 2003-Q3 50.0 281.9 100.7 181.3 112.0 27.6 378.1 14.5 2003-Q4 50.0 295.0 104.7 190.3 112.0 26.4 395.1 14.8 Jul-02 50.0 251.3 94.0 157.2 112.0 31.8 208.2 338.4 14.9 Aug-02 50.0 267.6 98.7 168.9 112.0 29.6 360.1 15.3 Sep-02 50.0 270.8 100.8 170.0 112.0 29.4 363.1 15.4 Okt-02 50.0 277.5 103.0 174.5 112.0 28.7 204.2 371.7 15.5 Nov-02 50.0 278.9 103.6 175.3 112.0 28.5 373.3 15.5 Dec-02 50.0 289.6 107.0 182.6 112.0 27.4 387.2 15.7 Jan 03 50.0 242.5 88.0 154.5 112.0 32.4 327.1 13.4 Feb-03 50.0 198.9 72.2 126.7 113.0 39.5 272.7 11.8 Mar-03 50.0 259.2 91.6 167.6 113.0 29.8 350.5 13.9 Apr-03 50.0 276.4 100.4 176.0 113.0 28.4 369.4 14.4 May-03 50.0 273.3 99.3 174.0 113.0 28.7 365.5 14.3 Jun-03 50.0 273.1 98.6 174.6 113.0 28.6 365.9 14.3 Jul-03 50.0 275.5 97.8 177.7 113.0 28.1 370.5 14.3 Avg-03 50.0 280.6 100.1 180.5 112.0 27.7 376.5 14.5 Sep-03 50.0 289.8 104.2 185.6 112.0 26.9 387.2 14.7 Okt-03 50.0 288.1 102.3 185.8 112.0 26.9 386.4 14.6 Nov-03 50.0 275.8 97.3 178.5 112.0 28.0 371.5 14.3 Dec-03 50.0 321.2 114.6 206.5 112.0 24.2 427.2 15.3

Minimum wage is the lowest wage that an employer is obligated to pay. Average gross wage includes the portion that employee receives as well as employee’s portion of social contribution and taxes. Average disposable wage is the amount that employee receives. Average wages and salaries of employee includes basic wage of employee (earlier disposable wage), its share of contributions and taxes and all other benefits that employee receives (meal allowance, summer allowance, per diems, honoraria, etc). *Average wage is calculated from ISSP Household survey. First survey was conducted in June 2001, till now there have been 8 surveys. **Total labor cost includes average gross wage/average wages and salaries, employer part of contribution and taxes and other benefits.


ISSP - CEPS

27

CHAPTER 3. WAGES AND SALARIES

3.1. WAGES AND SALARIES

The Employment Office of Montenegro has published data on earnings for 18 months - from July 2002 to December 2003. Thanks to the new system of personal income tax (shift from proportional to progressive taxation and a broadening of the tax base), the definition of wage was changed in July 2002. The concept of gross and net wage, as in the previous system, does not exist; they have been replaced with wages and salaries1 and wages and salaries after taxes and contributions. The difference between gross wage and wages and salaries is in the scope - gross wage included basic wage from work and taxes and contribution that employee pays, while wages and salaries, includes not only the basic wage from job, but all other benefits and monetary transfers that employee has as well as taxes and contributions (meal allowance, summer allowance, per diems, honoraria, etc). Net wage as a concept, which was equal to the amount an employee receives in hand as a basic wage, does not exist any more and is replaced with a broader concept – wages and salaries after taxes and contributions or we might call it disposable income from employment. Data for the period of July 2002 – December 2003 are not comparable with any historical data.

Average wages and salaries in Montenegro in 2003 was 271.2€, while wages and salaries after taxes and contributions was 174.0€. In the second half of 2002 (July – December), average earnings was 272.6€ while earnings without taxes and contributions was 171.4€.

Graph 3.1: Wages and salaries, wages and salaries after taxes and contributions and minimum wage (July 2002 to December 2003)

0.0

50.0

100.0

150.0

200.0

250.0

300.0

350.0

J-02

A-0

2

S-02

O-0

2

N-0

2

D-0

2

J-03

F-0

3

M-0

3

A-0

3

M-0

3

J-03

J-03

A-0

3

S-03

O-0

3

N-0

3

D-0

3

Eur

o

Wages and salaries Wages and salaries after taxes and contributions Minimum wage

Source: Employment Office of Montenegro and ISSP calculations

The period of July 2002 – December 2003 is characterized with high oscillations in the average wages and salaries level; this is especially noticed in the beginning of 2003. In the second half of 2002, wages and salaries have increased, and in January 2003 wages and salaries fell below the December level by 15.4% and further decreased by 18% in February. This decrease in January is usually explained by decreased activities due to holidays, as well as with the methodology2 that the Statistical Office uses.

1 The concept that Monstat applied is equivalent to a SNA definition on “wages and salaries” in the SNA 1993 handbook. The details on the definition of the concept are in the Chapter VII. The primary distribution of income account, Wages and salaries (D.11) 2 Data on paid earnings are collected in the beginning of the month for the previous month. Bearing in mind that earnings paid in the beginning of the month are typically payment for the previous month, the average of paid wages in November reflects amounts earned in October. Since December is the exception, a majority of

Chapter 3. Wages

ISSP - CEPS 28

Graph 3.2. Annual growth of nominal and real average wages and salaries after taxes and contributions

-10.0%

-5.0%

0.0%

5.0%

10.0%

15.0%

Jul-

03

Aug

-03

Sep-

03

Oct

-03

Nov

-03

Dec

-03

Annual growth of real wages and salaries after taxes and contributions

Annual growth of nominal wages and salaries after taxes and contributions

Source: Employment Office of Montenegro and ISSP calculations

After the drastic decline in average wages and salaries in January and February, they increase again in March by 32% and then continue to climb, but at a much lower rate, not reaching December 2002 levels until September of 2003. If we observe semi-year periods, average wages and salaries in the first half of 2003 is 5.4% lower as compared to the second half of 2002, while average wages and salaries in the second half of 2003 is 8.4% higher than second half of 2002. Monitoring of changes on yearly level is possible only for 6 months in 2003, having in mind that for remaining moths there is no equivalent (comparable) data. Highest increase on a yearly level is achieved in 2003 (compared to July 2002) and in December 2003. Based on wages and salaries and wages and salaries after taxes and contributions, we have calculated the average tax rate for the second half of 2002 and for 2003. In the second half of 2002, the tax rate on average wages and salaries was 15.4%, while in 2003, it lowered by one percentage point to 14.1% due to the increase in the taxable income level in January 2003. 3.2. INFLUENCE OF CHANGES IN THE TAX SYSTEM ON THE LEVEL OF WAGES AND SALARIES In December 2003, social partners (GoM3, Independent Union and Chamber of Commerce) signed a new General Collective Agreement, which has been in force since January 2004. One of the collective agreement4 provisions (article 28) is that the effects of every change in tax rates or levels of taxable income must be attributed to wages and salaries. Based on experience to date, every change in the level of taxable income has been in favor of net (disposable) wage (wage and salary) of employee (see MONET 15, chapter Wages for details). This provision actually suggests that a decrease in the tax burden on wage and

employers pay earnings at the end of the month because of the holidays, and therefore, January usually shows a smaller portion of salaries paid. 3 Government of Montenegro 4 For details on collective agreement see comment in the second part.


ISSP - CEPS

29

salary, whether through a decrease in tax rates or an increase in disposable income, will not affect the cost of labor that the employer incurs. In essence, the decrease in tax burden is not meant to disburden employers; it is just one more way to dictate wage policy to employers. Provisions like this one simply inspire noncompliance. According to the Personal Income Tax Law, every year in January the levels of taxable income are adjusted to an increase in Retail Price Index changes (average 12 months compared to an average from the previous 12 months). In January 2004, levels of taxable income were increased by 7.6% (table 3.2, scenario 1). Additionally, the Ministry of Finance announced that in addition to this regular adjustment during the year, taxes will be further decreased. One option mentioned for decreasing the tax burden is that tax rates would be decreased and levels of taxable income increased, as shown in table 3.2 (scenario 2). Table 3.2: Changes in tax system, average rates and influence on earnings without taxes and contributions

Scenarios Monthly levels of income in € Change in tax system Average5 tax

rate Weighted average

tax rate

Average change in wage and salary after taxes and

contributions

0-65.4 0%

65.4-217.9 0+ 17% on amount over 65.4€

217.9-381.4 25.9€ + 21% on amount over 217.9€ Scenario 1

Over 381.4 60.3€ + 25% on amount over 381.4€

14.2% 14.6% 0.7%

0-100 0%

100-200 0+ 15% on amount over 100€

200-400 15.0€ + 20% on amount over 200€ Scenario 2

Over 400 55.0€ + 25% on amount over 400€

11.6% 11.9% 4.5%

Source: ISSP Household Budget Survey, 2002, ISSP MONET14, 2003 A 7.6% increase in the taxable income level will, on average, increase disposable earnings (wage and salary after taxes and contribution) by 0.7%, while the average weighted tax rate will be 14.6% (previously 15.1%). According to scenario 2, which is a possibility, the average increase in disposable earnings will be 4.5%, while the average weighted tax rate will be 11.9%. Another source of future growth in wage and salary after taxes and contributions is an increase in wage coefficients adopted in the new collective agreement (see details in the comment on collective agreement in the second part of MONET).

5 Average tax rate is calculated from the ISSP Household Budget Survey No.6 2002 wage data. Due to a lack of more recent data, for the purposes of this analysis we have assumed that the wage distribution in 2004 will be same as in 2002.

Chapter 4. Prices

ISSP - CEPS 30

Table 4.1. Prices

Consumer prices index (Cost of living) )1

CPI Total, official RPI Total, official Producer prices

changes

2000=

100

monthly change in %

annual change in %

Foo

d, to

bacc

o an

d be

vera

ges

annu

al c

hang

es

Goo

ds le

ss f

ood,

to

bacc

o an

d be

vera

ges

annu

al

chan

ges

Serv

ices

ann

ual

chan

ges

2000= 100

monthly change in %

annual change in %

2000= 100

annual change in %

PRICES IN DINARS

1995 9.8 6.2 83.7 206 6.5 100.1

1996 18.2 3.4 89.7 379 3.3 89.1

1997 22.9 1.4 26.5 456 1.1 20.8

1998 29.8 3.1 29.8 582 2.9 27.5

1999 47.1 6.2 56.6 931 7.1 58.0 85.9

DM (until December 2001) and EURO (from January 2002)

2000 100.0 3.4 36.1 10.9 23.2 12.2 100.0 25.0 100.0 16.5

2001 120.2 1.8 21.8 18.9 22.8 42.0 123.0 8.6 23.1 114.5 14.5

2002 142.0 0.7 16.8 15.7 18.7 19.5 147.6 3.1 17.4 119.7 4.5

2003 151.6 0.50 6.8 3.9 9.3 7.3 159.4 0.5 7.7 127.8 2.9

2001 Q1 112.0 1.6 19.9 18.2 22.4 25.9 113.7 2.0 21.5 110.30

2001 Q2 116.5 1.9 20.7 18.2 22.7 34.6 117.7 1.7 20.0 113.53

2001 Q3 122.7 1.5 23.1 19.4 22.8 53.9 126.6 2.4 24.6 116.23

2001 Q4 129.7 2.2 23.5 19.9 23.4 53.5 134.1 2.3 26.0 117.40 15.7

2002-Q1 136.6 1.1 19.6 18.5 18.9 31.2 142.1 1.1 25.0 122.17 7.1

2002-Q2 142.7 1.5 19.4 19.7 18.5 19.7 148.9 1.3 20.4 122.56 5.8

2002-Q3 143.5 0.1 16.3 15.3 20.0 13.9 151.1 0.4 15.2 120.50 4.0

2002-Q4 145.2 0.3 11.8 9.5 17.7 13.1 152.8 0.3 8.7 121.16 2.9

2003-Q1 146.7 0.1 7.3 4.5 7.5 4.8 158.2 0.4 8.9 121.61 -0.7

2003-Q2 152.4 0.5 6.7 3.1 10.4 5.1 161.1 0.2 8.2 128.15 4.5

2003-Q3 153.0 0.2 6.6 3.9 11.7 10.5 161.9 0.1 7.1 129.33 0.2

2003-Q4 154.3 0.3 6.3 4.2 7.3 9.0 162.0 0.0 6.7 132.09 7.5

Okt-02 144.9 0.2 15.1 13.0 21.5 13.0 151.1 0.4 16.1 121.2 5.1

Nov-02 145.0 0.1 11.1 7.6 20.0 13.6 151.6 0.3 13.3 121.2 3.9

Dec-02 145.7 0.5 9.2 8.0 11.5 12.6 151.7 0.1 9.5 121.0 0.7

Jan-03 146.5 0.5 8.4 7.5 11.1 6.8 152.9 0.8 8.5 120.9 0.0

Feb-03 146.6 0.1 7.2 5.9 10.7 6.9 153.8 0.6 8.1 120.9 -1.1

Mar-03 146.9 0.2 6.5 0.0 0.7 0.7 154.8 0.7 8.1 123.1 -0.3

Apr-03 151.6 3.2 7.7 2.3 5.5 0.6 159.8 3.2 9.8 127.8 3.7

May-03 151.8 0.2 6.1 3.0 13.2 7.6 160.1 0.2 8.6 127.7 3.3

Jun-03 153.7 1.3 6.6 4.0 12.6 7.0 160.7 0.3 8.1 128.9 6.8

Jul-03 152.5 -0.8 6.9 4.0 12.2 11.5 161.2 0.3 8.3 129.2 7.3

Aug-03 152.8 0.2 6.7 4.0 11.9 10.3 161.3 0.1 8.0 129.2 7.9

Sep-03 153.6 0.5 6.3 3.7 11.2 9.7 161.8 0.3 7.4 129.7 6.8

Okt-03 154.0 0.3 6.3 4.1 10.2 9.5 162.0 0.1 7.1 130.9 7.9

Nov-03 154.2 0.1 6.4 4.3 6.0 9.0 162.0 0.0 6.8 132.1 9.0

Dec-03 154.7 0.3 6.2 4.2 5.8 8.4 162.0 0.0 6.7 133.3 10.2

Sources: Price indices published by Statistical Office of Montenegro Table presents end-of-period values for monthly data and average period values for quarterly and annual data. Currencies: DIN till 1999, DM from 2000 till 2002 and € from 2002.

1 Cost of Living is official name of Consumer price index (CPI) in Montenegro


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4. PRICES This issue of MONET provides data on price dynamics in 2003 as measured by the main Consumer Price Index (CPI) as well as alternative indices: the Retail Price Index (RPI) and the Producer Price Index. In the article we refer to the main events that directly or indirectly affected inflation in Montenegro. We also analyze the cost of the food consumer basket, its comparison to the Serbian basket and its dynamic compared to the previous year. Finally, we project inflation for 2004, with an explanation of the main events that could impact prices in the next 12 months. 4.1. CONSUMER PRICE INDEX (CPI) Inflation in 2003 had a falling trend, reaching 6.2% at year-end (CPI, “December-on-December”) while the same indicator amounted to 9.2% in 2002. Using different measures of CPI inflation we obtain different figures:

Inflation in 2003

Annual change2 “December-on-December”

“Average on average”3

Average annual4 Average monthly5

Consumer price index 6.2% 6.8% 6.8% 0.5%

Source: Monstat Volatility characterized inflation in the first half of 2003, both in the case of annual (ranging from 6.5 to 8.5%) and monthly (from 0.1 to 3.2%) inflation rates. Inflation in the second half of the year was falling consistently from 6.9 to 6.3%, reaching the level of 6.2% in December. The monthly inflation rate was fluctuating between -0.8 and 0.5%. A review of quarterly inflation in 2003 follows:

Inflation rate – CPI

Quarters 2003. Annual rate6 Quarterly change

(“end of quarter7”) “Average on

average” Average annual Average monthly

Q1 6.5 0.8 1.0 7.3 0.1

Q2 6.6 4.6 3.9 6.8 0.5

Q3 6.3 -0.1 0.4 6.6 0.2

Q4 6.2 0.7 0.9 6.3 0.3

Source: Monstat

2 “Annual change” represents ratio of index in observed month and the same month in the previous year. In this case it is change of index in December 2003 compared to index in December 2002. This way of measuring inflation is also called “end-of-period-inflation” 3 “Average on average” represents ratio average of indices in observed period and average of indices for the same period of the previous year. In this case it is change of indices average for 12 months 2003 compared to indices average for the same 12 months 2002. 4 “Average annual inflation” represents arithmetic average of indices annual changes in observed period. 5 “Average monthly inflation” is calculated by applying geometric averages for 12 months of observed period. 6 “Annual changes” by quarters represents index change in last month of observed quarter compared to the same month last year. 7 “Quarterly change” or Inflation at the end of quarter represents index change in last month of observed quarter compared to index in last month of previous quarter.

Chapter 4. Prices

ISSP - CEPS 32

Prices in 2004 were shaped by the following factors, which impacted their level, either directly or indirectly: o The fluctuation of oil prices, from an increase by 7.2% in the first quarter (February),

the decrease in the second quarter by the same amount (-7.2%), a 5.2% increase in the third quarter, and a decrease of 2.6% in the fourth quarter. The oil prices in Montenegro embody two effects: oil price increase in US$ in the global market and the weakening of the US$ exchange rate, as oil is traded in US$ (see oil monthly price increases in “Real sector”).

o VAT introduction in April with a flat rate of 17%. o Electricity price increase of 24% in April. o Custom rates harmonization with Serbia in August, which led to an increase in the

average weighted custom rate from 3% to about 6%. o Abolition of quotas in August

Among all of the above mentioned events, the strongest effect on prices came from the introduction of VAT and the electricity price increase in the same month. The annual inflation rate went up from 6.5% in March to 7.7% in April, while on a monthly level, it increased to 3.2%. Although custom tariffs increased in the second half of August, this measure exerted only an insignificant upward

pressure on prices in September. Accordingly, monthly inflation slightly increased to 0.5%, while annual inflation decreased from 6.7% in August to 6.3% in September. The inflation rate in two last zears decrased significantly (see Graph 4.1). CPI was 23.8% in December 2001, while the same indicator in December 2002 was 9.2%.

Graph 4.1 CPI inflation

-2

0

2

4

6

8

10

12

14

16

18

20

22

24

Mar

-00

Jun-

00

Sep-

00

Dec

-00

Mar

-01

Jun-

01

Sep-

01

Dec

-01

Mar

-02

Jun-

02

Sep-

02

Dec

-02

Mar

-03

Jun-

03

Sep-

03

Dec

-03

%

Monthly Annual

Sourse: Monstat

Graph 4.0 CPI in 2003

-1

0

1

2

3

4

5

6

7

8

9

10

Dec Jan Feb M ar Apr M ay Jun Jul Aug Sep Oct Nov Dec

%

M o nthly c ha ng e s A nnua l c ha ng e s

Q1 Q4Q3Q2

Oil p rices +7.2%

Electricity p rices+2 4%VAT 17%

The average custom rate around 6%

Oil p rices -2 .6%

S o urc e :


ISSP - CEPS

33

The fourth quarter of 2003 brought stable annual inflation rates of 6.3% in October, 6.4% in November, and 6.2% in December. The monthly rate of CPI change was 0.3%, 0.1% and 0.3% respectively. Another inflation indicator – the Retail Price Index registered a similar trend. The annual inflation rate reached 6.7% in December, which is a significant decrease compared to the same month of the previous year (9.5%). The following table presents RPI changes:

RPI in 2003

Annual change “December-on-December”

“Average on average”

Average annual Average monthly

RPI 6.7% 8.0% 7.7% 0.6%

Source: Monstat The falling RPI trend has been especially notable from the end of 2001 when RPI reached an annual change of 28% in November, and since then, it has been mostly falling.

Graph 4.2 RPI inflation

0.0

2.0

4.0

6.0

8.0

10.0

12.0

14.0

16.0

18.0

20.0

22.0

24.0

26.0

28.0

Jan-

01

Feb

-01

Mar

-01

Apr

-01

May

-01

Jun-

01

Jul-

01

Aug

-01

Sep-

01

Oct

-01

Nov

-01

Dec

-01

Jan-

02

Feb

-02

Mar

-02

Apr

-02

May

-02

Jun-

02

Jul-

02

Aug

-02

Sep-

02

Oct

-02

Nov

-02

Dec

-02

Jan-

03

Feb

-03

Mar

-03

Apr

-03

May

-03

Jun-

03

Jul-

03

Aug

-03

Sep-

03

Oct

-03

Nov

-03

Dec

-03

%

Monthly Annual

Source: Monstat The fourth quarter of 2003 registered nearly a zero percent inflation rate on a monthly basis (0.1% in October and 0% in November and December). Annual RPI rates in the last quarter of 2003 stood at 7.1% in October, 6.8% in November and 6.7% in December.

Chapter 4. Prices

ISSP - CEPS 34

4.1.2. Disaggregated price changes Table 4.2 Annual inflation of disaggregated CPI components

Product or service group

Total index Food Tobacco and

beverages Clothing and

footwear Accommodation

Hygiene and personal

care

Education and culture

Traffic vehiclesand transport

and communication

services

Consumption Weight (until Dec 2002)

100 60.38 6.51 8.2 9.3 5.68 4 5.93

Consumption Weight (from Jan 2003)

100 58.61 7.71 8.01 10.51 5.24 4.2 5.72

2002

Jan 18.28 13.9 49.61 9.08 47.92 4.78 12.63 17.86

Feb 18 14.96 48.94 9.84 33.22 6.69 14.02 17.58

Mar 18.25 15.5 49.05 9.52 32.9 6.32 16.43 16.14

Apr 19.66 17.21 48.24 14.2 32.41 4.21 22.11 15.96

May 19.41 16.3 50.53 14.57 32.5 5.41 24.68 16.03

Jun 19.09 16.5 51.44 12.87 32.85 7.17 24.8 8.49

Jul 17.57 13.99 51.48 13.49 33.27 7.67 21.23 8.65

Aug 15.83 10.97 51.83 13.86 33.43 8.09 23.29 8.33

Sep 15.5 11.69 33.6 15.51 31.82 8.06 25.79 8.85

Oct 15.09 10.84 33.15 17.49 31.86 7.94 25.53 8.97

Nov 11.05 7.88 5.57 14.39 31.62 8.33 23.6 9.55

Dec 9.22 8.34 5.27 13.99 7.29 10.27 26.39 8.04

2003

Jan 8.4 7.8 4.88 13.8 4.09 9.99 31.6 2.2

Feb 7.17 6.4 4.62 13.83 3.5 9.08 30.07 2.86

Mar 6.46 4.71 4.54 14.39 3.38 8.59 26.9 6.08

Apr 7.69 5.02 3.23 10.59 15.66 9.07 27.62 7.18

May 6.12 3.16 1.41 9.58 15.74 8.6 25.18 5.14

Jun 6.56 4.39 0.32 10.41 15.18 5.68 24.54 4.52

Jul 6.90 4.38 0.25 9.89 17.19 5.42 23.72 7.43

Aug 6.70 4.38 -0.04 9.52 16.20 5.34 22.55 7.55

Sep 6.28 4.11 -0.08 7.91 16.24 5.69 18.29 7.64

Oct 6.33 4.60 -0.11 6.70 16.13 5.23 18.25 6.75

Nov 6.42 4.79 -0.18 6.28 16.20 5.11 18.42 6.14

Dec 6.23 4.67 -0.13 7.30 16.14 4.20 15.51 5.54

Source: Monstat The inflation measurement in Montenegro is still based on a consumer basket consisting of 365 products and services; this basket was established based on research on household consumption conducted in 1997. Since these measurements are based on the consumer basket, which likely does not represent true consumption of the average income Montenegrin citizen, the calculated rate of inflation is distorted. In many countries weights are adjusted once per year; however, this is not the case in Montenegro, therefore our consumer basket does not include the cost of rent, mobile phone services, mobile phones, catering, travel services, computers, Internet, etc. Even though some of those costs may be small in their total weight, a certain non-negligible portion of income is spent for their consumption.


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35

The annual change of Food products index has been continuously lower than the total inflation rate in 2003. Due to their high weight in the consumer basket, the price of food products has had a strong disinflationary influence on total inflation. On a monthly level, prices of this product group increased 0.4% in October and December, while in November the monthly change was 0.2%. Prices for Tobacco and Beverages also had a disinflationary effect in 2003 with an annual rate of change under 5%, and annual deflation during the second half of the year. The prices in this category were left unchanged in October and November and in December insignificantly increased by 0.1% on a monthly level. The group of products in the Clothing and Footwear category registered annual inflation levels that were constantly above the level of total inflation, thus contributing to its increase. This difference was especially significant in the first half of the year, while it narrowed during the second half, and in November it was 0.1 percentage points below the total index. Monthly changes of prices in this category are significantly higher than monthly changes of other groups of goods and services in the fourth quarter of 2003 (0.5% in October, 0.2% in November and 1.4% in December), which could be due to the seasonal holiday effect. However, the constant increase in price of those products is surprising, considering the same category reported a zero rate of change in the Euro zone. Additionally, Montenegrin textile and footwear production is marginal, and most of the products from this category are imported from Euro zone countries (Italy, Greece, Spain, etc.).

Graph 4.3 Annual inflation: Total and disaggregated CPI 2000-2003

-20

-15

-10

-5

0

5

10

15

20

25

30

35

40

45

50

55

Mar

-00

Jun-

00

Sep-

00

Dec

-00

Mar

-01

Jun-

01

Sep-

01

Dec

-01

Mar

-02

Jun-

02

Sep-

02

Dec

-02

Mar

-03

Jun-

03

Sep-

03

Dec

-03

%

Total Food Tobacco and Beverages Clothing and Footwear

Source: Monstat Since April of 2003 the annual dynamic of Accommodation prices, as a consequence of the electricity price increase, has remained fairly level at around 16%, and remained unchanged on a monthly level.

Chapter 4. Prices

ISSP - CEPS 36

Graph 4.4 Annual inflation: Total and disaggregated CPI 2000-2003

-5

0

5

10

15

20

25

30

35

40

45

50

55

Mar

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01

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-02

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02

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02

Dec

-02

Mar

-03

Jun-

03

Sep-

03

Dec

-03

%

Total AccomodationHygiene and Personal Care Education and CultureVehicles, transport and telecom services

Source: Monstat Hygiene and personal care positions were unstable on an annual basis throughout 2003. Beginning in the third quarter of 2003 this category has exerted a relative desinflationary pressure on the total index. On average, prices of those products were stable on a monthly basis. The category of Education And Culture registered high annual price changes ranging from 16-32% (books 12% and daily newspapers and magazines 31% on an annual basis in December) creating a strong inflationary influence on the total index. On a monthly level, prices in Education and culture decreased 0.05% in October and December and increased 0.2% in November. The annual change of the last category, Vehicles, Transport and Telecom Services, had a changeable effect on the total index. Its disinflationary impact was especially marked in December when the annual dynamics reached 5.4%. Monthly changes were negative in the last quarter of 2003. Summing up, by analyzing the disaggregated consumer price index, we identified groups of products and services that had either an inflationary or disinflationary impact on the total index, i.e. on the total inflation in 2003. Those categories whose product prices had a disinflationary impact on total inflation were: Food, Tobacco and Beverage, Hygiene and Personal Care and, in some months, Vehicles, Transport and Telecom Services. The prices of Accommodation and Education and Culture had an inflationary impact on overall inflation in 2003, or, in other words, these categories contributed to the slower fall of the total index.


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37

4.1.3. COST OF THE FOOD BASKET8 Table 4.2 Cost of the food basket in Montenegro (in €)

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec 2002 224.61 230.11 230.47 232.82 250.63 253.63 240.70 253.80 253.22 252.22 243.41 239.03 2003 240.06 242.10 241.72 246.01 257.92 263.57 252.86 260.00 264.15 262.06 258.73 258.74

Source: Monstat

The cost of the Food consumer basket (FCB), which consists of a group of basic food products necessary for a 4-member family, was €262 in October and €259 in November and December.

Annual inflation of the FCB was 8.3% in Dec. 2003, 4 percentage points higher than inflation of the Food category in the CPI. During the same year, after a sharp increase in the first and second quarters, the cost of the FCB stabilized. A comparison of FCB annual changes in 2003 shows that a declining dynamics was registered during the first half of the year, reaching 2.2% in July, and was then followed with faster growth through the end of the year. The dynamics of annual inflation of the FCB followed that of the Food category in CPI, as well.

As shown in Graph 4.6, the annual rate of growth of the Serbian FCB is much

higher denominated in Dinars than in Euros. The reason for this is depreciation of the Dinar against the Euro.

Graphk 4.6. FCB cost in Montenegro and serbia

170

180

190

200

210

220

230

240

250

260

270

Jan-

02

Feb

-02

Mar

-02

Apr

-02

May

-02

Jun-

02

Jul-

02

Aug

-02

Sep-

02

Oct

-02

Nov

-02

Dec

-02

Jan-

03

Feb

-03

Mar

-03

Apr

-03

May

-03

Jun-

03

Jul-

03

Aug

-03

Sep-

03

Oct

-03

Nov

-03

Dec

-03

euro

Montenegro Serbia

Source: Monstat and Federal Statistical Office 8 The food consumer basket consists of a group of basic food products in the quantities appropriate for a four-member family. The concept of the basket was developed following the guidelines of the EU to approximate the cost of basic food needs for a four-member family. Thus, it allows for easy comparisons between countries.

Graph 4.6. Food consumer basket (annual changes in 2003)

-6

-4

-2

0

2

4

6

8

10

Jan

Feb

Mar

Apr

May Jun

Jul

Aug

Sep

Oct

Nov

Dec

%

Montenegro Serbia (eur) Serbia (din)

Source: Monstat and Federal statistical Office

Chapter 4. Prices

ISSP - CEPS 38

The cost of the comparable food basket in Serbia amounted to €186 in November, which is €72 less than in Montenegro (39% cheaper). The annual rate of change of the FCB in Serbia was –0.7% in November. With exceptions in June and July, 2003 was marked by a negative annual rate of change of the FCB in Serbia. 4.2. PRODUCER PRICES 4.2.1. PPI9 inflation Wholesale and producers’ inflation, measured by the annual change of the Producer Prices Index (PPI), registered significant growth in 2003. During 2002, it fell from 14% to 0.7%, reaching negative annual inflation in February 2003. However, beginning in the second quarter and specifically due to the electricity price increase in April, annual dynamics of the PPI registered an increase to 4% in April and reached 8% in August and 10% in December. However, with the exception of some months (March 1.8%, April 3.9%, June 0.95% and December 0.6%), monthly inflation of this index was below 0.5% during the rest of the year.

Graph 4.7. PPI inflation

-2

0

2

4

6

8

10

12

14

16

Jan-

02

Feb

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Mar

-02

Apr

-02

May

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02

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02

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03

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Jun-

03

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03

Aug

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03

Oct

-03

Nov

-03

Dec

-03

%

Annual Monthly

Source: Monstat 4.2.2 PPI disaggregated changes The following two graphs refer to the annual changes of disaggregated PPI10 to show those product groups that both slowed down and accelerated the aggregate PPI dynamics.

9 Producer Prices Index 10 Production of aluminum has not been analyzed here since chapter 1 presents detailed information on the price of aluminum.


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39

Graph 4.8. Disaggreagted PPI (annual change)

-10

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%

PPI Processing Industries Mining and stone extraction

Electricity, gas and water Construction materials

Source: Monstat

Graph 4.8 provides the annual dynamic for the processing, mining and construction industries, as well as for electricity, gas and water production. Electricity, as a significant component in the total index, was constantly at a high annual level of 24% since April of 2003, while monthly inflation was insignificantly above zero. The annual change of prices in the processing industries fell by 4.1% in the last quarter of 2003, while the monthly change was a little above zero. During 2003, price changes in the mining industry were negative on an annual basis and zero on a monthly basis. The annual change in construction materials prices stood at 1% in 2003, while at the monthly level they were unchanged, with the exception of a 1.2% decrease in November.

Graph 4.9. Disaggreagted PPI (annual change)

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%

PPI Food Products, beverages and tobacco Textile and clothing Chemical products

Source: Monstat

Graph 4.9 also compares the total producer price index and its disaggregates: prices of food products, tobacco, beverages, textile and chemical products. The prices of food products vary throughout 2003. In the first quarter, the annual change of this disaggregated value was similar to the annual change of the total index. The second quarter registered an

Chapter 4. Prices

ISSP - CEPS 40

increase (8% in May), and then a fall (4% in June) compared to the total index. Beginning in July and continuing through the end of the year, the annual change in food prices increased to 17%, substantially more than the total index, thus, pushing the PPI up. The chemical and textile industry registered an insignificant increase on an annual basis (0.5% and 0.8% respectively) and zero on a monthly basis in 2003 (with the exception of chemical production in July when it fell 2% compared to June). Therefore, the prices of two very important product groups in the production and wholesale sector -- electricity and food, tobacco and beverages – had an inflationary effect on total PPI in 2003. This trend significantly affected the retail sector, as well. 4.3 INFLATION MEASURED BY DIFFERENT INDICATORS: PPI, RPI AND CPI Annual changes for consumer, retail and production prices are shown in Graph 4.10 which clearly points out some apparent trends. During 2002 and in the first quarter of 2003, those three indices registered a relatively uninterrupted decline. In the same period, the PPI was significantly lower than CPI and RPI. As mentioned in previous MONET issues, this difference, with the exception of services that are not part of PPI, highlights imperfections of the Montenegrin market for consumer goods, the actual existence of monopolies in retail and importing business. However, from the second quarter of 2003, the CPI and the RPI have been falling, (albeit at a lower rate than before), while the PPI has rapidly increased and exceeded both the CPI and PPI in the fourth quarter.

Graph 4.10. PPI, RPI and CPI - annual changes

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0

4

8

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16

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24

28

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03

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03

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%

PPI RPI CPI

Source: Monstat 4.4. FORECAST

Considering the fact that many structural and institutional changes took place in the past few years, which directly or indirectly affected the dynamic of consumer prices in Montenegro, we forecast slower price increases in 2004.

As usual, we provide inflation rate forecasts for both an optimistic and a pessimistic scenario. The different assumptions made for each of these two scenarios follow:

The optimistic scenario of inflation rate in 2004 assumes: • The Goods category changes:


ISSP - CEPS

41

o Monthly changes of consumer prices a bit lower than the same in 2003 with the exception of inflation shocks produced by electricity price increase and VAT introduction in April.

o World oil price fall of 0.1% on a monthly level during the whole year. • Customs tariff rate increase for 56 strategic agriculture products in September.

The pessimistic scenario of inflation rate in 2004 assumes: • The Goods category changes:

o The consumer prices increase faster in 2004 compared to 2003 with the exception of inflation shocks produced by electricity price increase and VAT introduction in April.

o World oil price increase of 0.2% on a monthly level during the whole year. o Electricity price increase of 15% in November.

• Custom tariff rate increase for 56 strategic agriculture products in March.

The result of projected inflation ranging from 4% to 7.6% in 2004 is shown in Graph 4.11.

According to the optimistic scenario, the inflation rate in 2004 is projected to be 4% and by quarter: 5.9% in Q1, 3.8% in Q2, 4.1% in Q3 and 4 % in Q4.

According to the pessimistic scenario, the inflation rate in 2004 is projected to be 7.6% and by quarter: 7.1% in Q1, 5.7% in Q2, 6% in Q3 and 7.6 % in Q4.

Graph 4.11. Forecast of annual inflation for the next 12 months

2

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Optimistic scenario Pesimistic scenario

Forecast

Although Montenegro has been using the Euro as its official currency, inflation is far above the average in Euro zone countries11. In 2003, inflation in the Euro zone was 2.1% while in Montenegro it was three times higher (6.2%). The ECB12 has projected inflation for 2004 to be 2%, which is also lower than the lowest projection for Montenegro (4%).

11 Euro zone consists of: Belgium, Germany, Greece, Spain, France, Ireland, Italy, Luxembourg, Netherlands, Austria, Portugal and Finland. 12 European Central Bank

Chapter 5. Budget

ISSP - CEPS 42

5. BUDGET Fiscal year 2003 was marked by the introduction of the Value Added Tax (VAT), restrictive budget expenditures and tax relief for employing on new employees. While the introduction of the VAT and restrictive expenditures had real implications on budget flows in 2003, budget effects of the Decree on Tax Relief on Newly Employed Workers1 can be expected in 2004, after the decree on tax relief comes out of force. 5.1. BUDGET EXECUTION IN 20032 It is important to note that the available data on budget execution for the entire 2003 are not necessarily final data due to the usual updates and settlements at the end of the year. However, we do believe that these data are indicative and therefore are using them in our analysis and presenting them in table 5.1 and in the comment. The eventual changes and final data will be published in the next issue of MONET.

1 See MONET 15, Box 5.1 and MONET 16, Chapter 2: Labor force. 2 Data on budget execution for September, October, November and December 2003 was not received from the Ministry of Finance. For purpose of this analysis we have used data obtained from web sites Ministry of Finance and Central Bank, as well from statements and reports published in newspapers in Montenegro. We hope that in the next issue of MONET we will present complete and final data obtained from Ministry of Finance.


ISSP - CEPS

43

Table 5.1. Central Budget Revenues and Expenditures, 2001-2004 (in mil. €)

2001 2002 2003 2004

Jan-

Dec

E

xecu

tion

Jan-

Dec

E

xecu

tion

Jan-

Dec

Pl

an

Jan

Exe

cutio

n

Feb

E

xecu

tion

Mar

E

xecu

tion

Apr

E

xecu

tion

May

E

xecu

tion

Jun

Exe

cutio

n

Jul

Exe

cutio

n

Aug

E

xecu

tion

Sep

Exe

cutio

n

Oct

E

xecu

tion

Nov

E

xecu

tion

Dec

E

xecu

tion

Jan-

Dec

E

xecu

tion

Com

posi

tion

Exe

cutio

n/Pl

an

Jan-

Dec

Pl

an

Deposits from previous year 20.000 11.000 A Total revenue and grants (1+2) 233.140 256.804 384.200 13.257 17.211 22.700 31.646 34.767 30.442 35.748 39.608 32.476 31.606 26.875 33.768 350.103 91.13% 408.567 1 Total revenue (1.1+1.2) 221.220 229.847 361.000 13.257 17.211 22.700 29.144 31.719 30.442 32.652 36.108 32.038 31.606 26.875 33.768 337.519 93.50% 402.567 1.1 Current revenue (1.1.1+1.1.2) 221.220 229.847 361.000 13.257 17.211 22.700 29.144 31.719 30.442 32.652 36.108 32.038 31.606 26.875 33.768 337.519 100.00% 93.50% 402.567

1.1.1 Tax revenue (1.1.1.1+1.1.1.2+1.1.1.3+1.1.1.4+1.1.1.5)

187.999 208.931 331.365 12.258 16.055 20.418 27.589 30.361 28.297 30.301 33.506 29.831 28.943 25.094 30.267 312.918 92.71% 94.43% 358.098

1.1.1.1 Personal income tax 56.654 57.899 76.200 3.236 4.092 5.674 6.838 4.989 4.833 5.314 5.552 5.260 5.555 4.715 7.903 63.961 18.95% 83.94% 73.211 1.1.1.2 Turnover (retail sales) tax 58.488 56.528 98.300 2.328 3.206 3.441 8.854 16.704 14.006 15.413 17.685 14.867 14.335 12.894 13.491 137.222 40.66% 139.59% 146.600 1.1.1.3 Excises 35.664 50.786 86.300 3.658 3.311 4.325 5.938 4.496 5.380 5.632 6.321 5.819 4.954 4.014 4.349 58.197 17.24% 67.44% 69.400 1.1.1.4 Tax on international trade and transactions 27.274 26.376 52.000 2.277 4.689 5.665 2.962 2.219 2.314 2.302 2.915 2.921 2.935 2.607 3.039 36.845 10.92% 70.86% 49.000 1.1.1.4.1 Custom tariffs 13.894 12.605 30.000 1.770 4.297 5.450 2.807 2.031 2.016 2.296 2.911 2.919 2.935 2.607 3.039 35.078 10.39% 116.93% 44.000 1.1.1.4.2 Custom transit fees 13.380 13.771 22.000 0.507 0.392 0.215 0.155 0.188 0.298 0.006 0.004 0.003 0.000 0.000 0.000 1.766 0.52% 8.03% 5.000 1.1.1.5 Other taxes 9.920 17.342 18.565 0.759 0.758 1.313 2.998 1.953 1.764 1.640 1.033 0.963 1.165 0.863 1.485 16.694 4.95% 89.92% 19.887 1.1.2 Non-tax revenue 33.221 20.916 29.635 0.999 1.155 2.282 1.555 1.359 2.145 2.352 2.603 2.207 2.663 1.781 3.501 24.601 7.29% 83.01% 44.469 1.2 Capital revenue 0.000 2 Grants 11.920 26.958 23.200 0.000 0.000 0.000 2.502 3.048 0.000 3.095 3.500 0.438 0.000 0.000 0.000 12.584 54.24% 6.000 B Total expenditure and net lending (1+2) 259.309 266.771 451.152 10.235 19.943 31.492 32.250 29.319 34.854 36.608 38.760 36.197 33.419 33.560 44.875 381.513 84.56% 450.739 1 Total expenditure (1.1+1.2) 252.585 247.517 431.178 9.838 18.792 29.436 31.380 26.961 33.753 33.870 37.658 34.074 30.370 30.440 42.352 358.924 94.08% 83.24% 442.239 1.1 Current expenditure (1.1.1+1.1.2) 233.287 236.697 407.983 9.666 18.384 28.695 30.119 26.002 33.001 32.036 36.717 32.531 28.326 29.290 40.469 345.235 90.49% 84.62% 416.467 1.1.1 Interest 0.622 12.880 25.500 0.189 0.338 2.898 0.257 0.264 5.593 0.370 0.479 2.643 0.585 0.319 0.201 14.136 3.71% 55.44% 17.500

1.1.2 Non-interest expenditure (1.1.2.1+1.1.2.2+1.1.2.3+1.1.2.4+1.1.2.5+1.1.2.6)

232.665 223.818 382.483 9.477 18.046 25.797 29.861 25.738 27.407 31.666 36.238 29.888 27.741 28.971 40.268 331.099 86.79% 86.57% 398.967

1.1.2.1 Wages and salaries 108.464 110.178 151.968 0.068 7.096 9.925 15.494 9.559 9.877 15.812 13.985 9.702 10.291 11.494 20.959 134.262 35.19% 88.35% 175.484 1.1.2.2 Goods and services 55.351 41.817 44.461 1.100 2.111 3.043 3.352 3.581 2.591 3.315 2.542 3.663 3.559 3.918 5.082 37.858 9.92% 85.15% 64.356

1.1.2.3 Social insurance and social security transfers

45.327 35.825 155.681 6.605 6.918 9.960 7.139 9.047 13.554 10.550 18.186 14.885 12.073 11.916 11.961 132.795 34.81% 85.30% 123.239

1.1.2.4 Subsidies to enterprises 12.249 18.169 16.767 0.682 0.965 1.342 2.507 1.947 0.767 1.174 0.948 0.841 1.076 0.933 1.448 14.631 3.83% 87.26% 10.900 1.1.2.5 Reserve 6.461 14.819 9.794 0.825 0.792 1.268 1.124 1.207 0.491 0.465 0.371 0.484 0.497 0.394 0.470 8.388 2.20% 85.64% 13.632 1.1.2.6 Other non-interest expenditure 4.813 3.010 3.813 0.197 0.165 0.260 0.245 0.396 0.127 0.350 0.206 0.313 0.245 0.315 0.347 3.165 0.83% 83.00% 11.356 1.2 Capital expenditure 19.298 10.820 23.195 0.172 0.407 0.742 1.261 0.959 0.752 1.834 0.941 1.543 2.044 1.150 1.883 13.688 3.59% 59.01% 25.772 2 Net lending 6.723 19.254 19.974 0.398 1.152 2.056 0.870 2.358 1.101 2.738 1.103 2.123 3.049 3.120 2.523 22.590 5.92% 113.10% 8.500 Lending 13.974 19.490 19.974 0.398 1.152 2.056 0.870 2.358 1.101 2.738 1.103 2.123 3.049 3.120 2.523 22.590 5.92% 113.10% 8.500 Repayment 7.250 0.236 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.00% 0.000

Overall budget balance (cash) excluding grants (A-B-C-2)

-38.089 -25.179 -90.152 3.021 -2.733 -8.792 -3.106 2.400 -4.413 -3.955 -2.652 -4.159 -1.813 -6.685 -11.108 -43.994 -48.172

Overall budget balance (cash) (A-B) -26.169 1.778 -66.952 3.021 -2.733 -8.792 -0.604 5.448 -4.413 -0.860 0.848 -3.721 -1.813 -6.685 -11.108 -31.411 -42.172 Financing ( 1+2) 26.129 38.254 46.952 -1.590 0.324 9.777 0.056 -1.077 -0.235 0.753 5.731 -10.132 -0.432 1.092 16.239 20.506 42.172 1 Domestic and foreign financing (net) 17.007 0.568 23.700 -1.590 0.324 9.777 0.054 -1.077 -0.235 0.607 -2.269 -10.630 -0.432 1.092 12.321 7.941 36.172 Borrowing 76.436 40.445 24.000 0.099 2.600 13.592 3.027 0.000 1.126 1.987 3.815 4.511 1.539 2.045 15.612 49.954 36.172 Repayment 59.430 39.877 0.300 1.689 2.276 3.815 2.973 1.077 1.361 1.380 6.084 15.141 1.971 0.953 3.291 42.012 0.000 2 Privatization receipts 9.122 37.686 23.252 0.000 0.000 0.000 0.002 0.000 0.000 0.146 8.000 0.498 0.000 0.000 3.919 12.564 6.000

Source: Ministry of Finance of Montenegro, Central Bank of Montenegro, statements by Ministry of Finance Officials and ISSP calculations Note: Category lending in 2002 and 2003 includes repayment of guarantees

Chapter 5. Budget

ISSP - CEPS 44

5.1.1. Budget revenues and grants Budget revenues are characterized by clear seasonal fluctuations. Low economic activities result in extremely low revenues in the first quarter. Revenues increase throughout the first 8 months of the year primarily due to the summer tourist season, which culminates in July and August, and after that, budget revenues show a decreasing trend until December when they increase again.

Graph 5.1. Monthly budgetary revenues

5

10

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35

40

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May Jun

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Aug Sep

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mn

eur

o

2002 2003

Source: Ministry of Finance of Montenegro, Central Bank of Montenegro, statements by Ministry of Finance Officials and ISSP calculations Note: data for 2003 includes revenues that in 2002 have been directly transferred to PIO Fund and other institutions. After executing €13.3 million in January, the budget revenues in 2003, with the exception of June, maintained an increasing trend until August, when they reached their highest level, €36.1 million. After August, budget revenues record a decreasing trend – amounting to €32 million in September, €31.6 million in October, and €26.9 million in November, while in December, revenues rose to over €33 million. Certainly, the introduction of VAT had an influence in the first months of its application (April and May), and allowed for a high level of revenues to be continued which was not the case in 2002 (see graph 5.1). Overall, revenues1 in 2003 amounted to €337.3 million, representing 93.4% of the planned amount. As further analysis shows, the reason behind revenues not reaching their planned level is primarily because of transit and excise not meeting their planned levels of revenue. A straightforward comparison of the execution of original central budget revenues in 2003 with 2002 does not give a true picture due to the centralization of individual categories, which in previous years were directly transferred to the PIO Fund and other institutions. Based on a rough calculation, which includes these accounts also, one can conclude that original revenues in 2003 were approximately 12% higher -than in 2002. 1 Grants, privatization revenues and revenues from credits and loans are not included.


ISSP - CEPS

45

Structure and execution of individual revenues o Revenues from personal income tax accounted for approximately 19% of total revenues

in 2003. This category executed €63.9 million, which is approximately 84% of the planned level. Some reasons for the underexecution are the irregular payment of wages in a number of Montenegrin companies, non-payment of taxes and contributions on one part of wages2, as well as relief given and delays in paying taxes and contributions in the case of some companies. Compared to previous years (2001 - €57 million, 2002 – €58 million), revenues from personal income tax are more than 10% higher.

o Value Added Tax, which replaced the turnover tax on April 1, 2003, has significantly

improvedthe budget liquidity, and its final execution has, in great measure, exceeded the plan. The plan anticipated that VAT revenues in 2003 would amount to €77.3 million, and the actual revenues were €117.4 million (152% of the planned level). Altogether with revenues from tax on turnover of goods and services, which was in force until April 1, the category turnover tax/VAT executed €136.8 million, and comprises over 40% of original revenues in 2003. When comparing budget revenues from turnover tax/VAT in 2003 with budget revenues from turnover tax in the previous year, one should bear in mind that in 2002, close to half of these revenues were directly transferred to other institutions (Fund PIO, Army, Railroad…). A realistic comparison requires inclusion of all revenues from turnover tax in 2002, regardless of which account they ended-up; and in that case, the nominal increase in revenues from turnover tax/VAT in 2003 compared to 2002 is approximately 22%.

o Besides VAT and personal income tax, excise tax represents one of the largest revenue

categories, which in 2002 amounted to € 51 million3 and comprised over 22% of total original budget revenues. In 2003, excise revenues were planned at a much higher level – €86.3 million. At the end of 2003, excise revenues were executed at a level of €58 million (17% of original revenues), which is €28 million lower than the planned level.

o In the last few months of 2003 (August-December), customs revenues were fairly stable

and amounted to nearly €3 million (see graph 5.2). Total customs revenues in 2003 reached €35 million, which is 5 million more than the planned level and over 40% higher than the total amount collected in 20024. As mentioned in the previous issue of MONET, Custom Office officials have stated that good collection of customs revenues is a direct consequence of the implementation of the new Customs Law, as well as a change in the management of custom branch offices. Additionally, the “harmonized” custom rates, which became effective as of August 15, may also have had an affect. In the total revenues structure, customs revenues comprised approximately 10%.

2 The most common way to avoid paying taxes and contributions is payment of wages on the lowest allowed by law level, while the other part of the agreed wage is paid outside the regular channels. 3 In 2002 about € 5 million of revenues have been directly transferred to PIO Fund. 4 Until 2002, about half of total custom revenues were transferred to the PIO Fund. In 2002, besides €12.6 million of custom revenues that were recorded in the budget, Fund PIO has collected about €12 million.

Chapter 5. Budget

ISSP - CEPS 46

Graph 5.2. Monthly revenues from custom tariffs and custom transit fees

0.0

1.0

2.0

3.0

4.0

5.0

6.0

Jan

Feb

Mar

Apr

May Jun

Jul

Aug Sep

Oct

Nov

Dec

in m

n eu

ro

Customs tariffs Custom transit fees

Source: Ministry of Finance of Montenegro, Central Bank of Montenegro, statements by Ministry of Finance Officials and ISSP calculations

o The plan anticipated that custom transit fees in 2003 would reach €22 million (around €14 million in 2002) and represent 6% of total original revenues. However, by the end of June, only €1.8 million was collected from transit fees, while in the remaining seven months, budget revenues from this category nearly vanished (see graph 5.2.). One reason for this could be the significantly lower re-export of oil, which was three-times lower compared to 2002 (see chapter 8: External Sector).

o Other tax revenues (revenues from corporate income tax and real estate tax), at the end of 2003, cumulatively amounted to €16.7 million, which is roughly 90% of the planned level and close to 5% of total original revenues. Revenues from corporate income tax reached €13.4 million (85% of plan), while revenues from real estate tax amounted to €3.3 million (120% of plan).

o Non-tax revenues (fees, fines and other revenues), at the end of December, amounted to €24.6 million, which is 83% of the planned level.

Grants Grants to the budget in 2003 were only half of what was expected. The plan anticipated €23.2 million and at the end of the year, total foreign aid amounted to €12.6 million (54% of the plan). 5.1.2. Budget expenditures and net lending

During 2003, budget expenditures in Montenegro, in great measure, depended on the revenues, whose availability has determined spending possibilities. So, lower budget revenues in the first months forced savings measures and restrictive budget expenditures. The months that show an increase in budget revenues also show increased budget expenditures (compare graphs 5.1 and 5.4). Highest monthly expenditures in 2003 (similar to 2002) occurred in August, when revenues are at the highest level, and December, when two wages are usually paid to account for the holiday (in the beginning of the month November and in the end of the month December wage).


ISSP - CEPS

47

Graph 5.3. Monthly budgetary expenditures

5

10

15

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25

30

35

40

45

50

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Feb

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May Jun

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Aug Sep

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mn

euro

2002 2003

Source: Ministry of Finance of Montenegro, Central Bank of Montenegro, statements by Ministry of Finance Officials and ISSP calculations Cash budget expenditures in 2003 cumulatively amounted to approximately €359 million. If we add net lending, which includes repayment of loans for which the guarantees were given5, we get total cash expenditures of approximately €381 million, which represents about 85% of the planned level. The restrictive budget policy in 2003 caused most expenditure categories to be executed below the planned level6. Executions of expenditure categories o In the total expenditure structure in 2003, expenditures for employees’ wages and

salaries represent about 35%. Cumulatively, at the end of 2003, wage expenditures amounted to €134 million, which represents 88% of the planned execution. Net wages and taxes on wages are executed in the planned amount, while under-execution of the overall category is related to the under-execution of commitments for contributions and other benefits, which were executed at 76% of plan. However, this situation is significantly improved as compared to 2002, when only 36% of planned contributions were paid. Compared to 2002, total wage and salary expenditures in 2003 were more than 20% higher, which is primarily due to a more regular payment of commitments for taxes and contributions.

o At the end of 2003, total expenditures for goods and services reached close to €38

million, which is about 10% of total expenditures. When compared to 2002, expenditures for goods and services in 2003 are 10% lower and 15% lower when compared to the planned amount.

5 It is likely that among repayment of loans for given guarantees there are some repayments that are more like subsidies because repayment by the “true” debtors is not expected. Due to the inability to assess, we have assigned the whole category of over €11 million to net lending. The same logic and explanation can be applied in the case where the whole category of repayment of loans for given guarantees is assigned to subsidies. 6 Only execution above planned level is linked to category lending to which we, as explained, have added amounts that are paid for given guarantees. In case these funds are not included in this category, as anticipated in the plan, this category would be executed far below the planned level.

Chapter 5. Budget

ISSP - CEPS 48

o Total expenditures for social insurance and social security transfers at the end of 2003 reached €132.8 million, which is 85% of the planned level. This category cannot be compared with the same category from the previous year due to the new way of transferring money to the Pension Fund (in the 2003 budget, money to social funds was transferred through this category, while in previous years these transfers went directly over a so-called 84 account) and new commitments to the State Union budget. Namely, the largest expenditures in the category of expenditures for social insurance and social security transfers are related to transfers to the PIO Fund and State Union, which amounted to €94 million (Fund PIO €62 million, State Union €32 million7).

o At the end of 2003, cumulated capital expenditures amounted to €13.7 million or below

60% of the planned level. Compared to 2002, capital expenditures were higher by approximately 25%.

o Other non-interest expenditures (rent and other expenditures), at the end of 2003, were

executed at 83% of the plan and 105% of the 2002 execution. o In 2003, the government paid interest on old foreign debt in the amount of €10.5 million,

while in the budget plan €25 million was planned for this category. Expenditures for interest paid to residents amounted to €3.7 million, which is seven times higher than planned.

o At the end of 2003, the category reserve was executed at 86% of the planned level and

under 60% of its execution in 2002. o Expenditures for subsidies to enterprises in 2003 amounted to €14.2 million, which is

87% of the planned level and 80% of its 2002 execution. In the structure of total expenditures, subsidies had a share of close to 4% in 2003.

Net lending According to budget rebalance, in 2003, the government planned to provide loans to the economy of close to €20 million (original plan anticipated €8.4 million for loans). At the end of 2003, total loans and credits amounted to €11.5 million, from which €3.5 million went to public companies, €4.6 million to other companies and €4.6 million to other loans and credits. In addition to these funds the Government had to, based on given guarantees, pay €11.1 million, which has been included, in whole, in this category (see footnote no.7.). The budget did not have any inflow of money from repayment of loans in 2003.

5.1.3. Budget balance and financing Overall budget balance With the exception of January and May, the budget balance was negative in all remaining months of 2003. Along with lower revenues, the restrictive budget policy allowed to keep the cash deficit not just at the planned level, but to cut it almost in half. Cumulatively, the cash budget deficit at the end of 2003 amounted to €44 million, and after the rebalance, it is expected to be about €90 million.

7 According to Ministry of Finance officials’ statement.


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Financing Besides grants (€12.6 million), the budget deficit was financed by privatization revenues, increased borrowings and deposit from the Jugopetrol8 sale. Revenues from privatization amounted to €12.6 million, from which €8 million came from privatization of Montenegrobank. In 2003, the government borrowed approximately €50 million (€26.5 million from domestic financial institutions), and repaid about €42 million of its liabilities, so net debt in the end of 2003 was about €7 million. The remaining portion of the deficit, amounting to €11 million, was covered through the deposit from the Jugopetrol sale9. 5.1.4. Treasury bills10 During 2003, twelve auctions of 28-day T-bills and the same number of 56-days T-bills were held. The value of issued T-bills varied from month to month, with an increasing trend, especially expressed in the last months. The value of T-bills issued at the end of 2003 was almost double as the value issued in the beginning of the year – in January €7 million 28-day and €3 million 56-day T-bills were issued, while in December the issues amounted to €13 million and €5.5 million, respectively. A higher supply of T-bills inevitably leads to a decrease in funds that potentially could have been used for private consumption and investment, as well as an increase of interest rates on commercial loans, due to the crowding out effect. Additionally, with the increased value of issued T-bills, government liabilities increase, as well as the price at which these liabilities are purchased. The weighted interest rate in the beginning of 2003 was about 8% and after April its level was constantly over 10%. The maximum interest rate on T-bills in July reached 13% (see tables 5.2. and 5.3.).

Graph 5.4: Annual weighted interest rate on 28-day T-bills and the rate of inflation

-20

-15

-10

-5

0

5

10

15

20

25

Sep-

01

Oct

-01

Nov

-01

Dec

-01

Jan-

02

Feb-

02

Mar

-02

Apr

-02

May

-02

Jun-

02

Jul-0

2

Aug

-02

Sep-

02

Oct

-02

Nov

-02

Dec

-02

Jan-

03

Feb-

03

Mar

-03

Apr

-03

May

-03

Jun-

03

Jul-0

3

Aug

-03

Sep-

03

Oct

-03

Nov

-03

Dec

-03

%

Nominal weighted interest rate Rate of inflation Real weighted interest rate

8 According to Ministry of Finance officials’ statement. 9 These funds are, in table 5.1, shown within category deposits from the previous year, as a cumulative amount in the end of the year. 10 Issue and repayment of T-bills is not evidenced in the budget. These are so called “flying positions” whose issue and repayment is done within same fiscal year, so its recording through revenues and expenditures would blow-up aggregate budget positions. This is why the Ministry of Finance does not record issue of T-bills in the budget.

Chapter 5. Budget

ISSP - CEPS 50

Graph 5.4 shows changes in the annual rate of inflation, nominal and real weighted interest rates on 28-days T-bills, in the period from their first issue until the end of 2003. From the beginning, the real interest rate has an increasing trend (with a small break in the second quarter of 2002) due to increased nominal interest rates and a falling rate of inflation. The real interest rate was negative until January, and after that has had a positive value, which in the last months of 2003 reached over 4%11. Table 5.2. Overview of 28-days T-bills auctions, held in 2003

Interest rate No. Date of auction Date of

maturity

Amount of issue in

mil. €

Total offered amount in

mil. €

Amount of sold T-bills in mil. € Lowest Highest

Weighted average

1. 22.01.2003. 20.02.2003. 7.0 5.912 5.912 7.5 9.0 7.99

2. 19.02.2003. 20.03.2003. 6.5 5.762 5.762 7.5 9.0 8.49

3. 19.03.2003. 17.04.2003. 7.0 6.065 6.065 7.5 12.0 8.94

4. 16.04.2003. 15.05.2003. 7.5 7.028 7.028 8.0 12.5 10.17

5. 14.05.2003. 12.06.2003. 8.0 6.949 6.949 7.5 12.5 10.45

6. 11.06.2003. 10.07.2003. 7.5 6.674 6.674 7.5 12.5 10.75

7. 09.07.2003. 07.08.2003. 7.0 6.682 6.682 10.0 13.0 10.71

8. 06.08.2003. 04.09.2003. 7.0 8.285 7.000 10.0 11.99 10.83

9. 03.09.2003. 02.10.2003. 8.0 8.832 8.000 10.0 11.99 10.76

10. 01.10.2003. 30.10.2003. 8.5 8.847 8.500 10.0 11.5 10.57

11. 29.10.2003. 27.11.2003. 9.5 10.760 9.500 9.5 11.0 10.25

12. 26.11.2003. 25.12.2003. 12.0 10.629 10.629 6.0 10.98 10.01

13. 24.12.2003. 22.01.2004. 13.0 12.000 12.000 6.0 11.0 10.08

14. 21.01.2004. 19.02.2004. 12.0 12.162 12.000 6.0 11.0 10.1

Source: Central Bank of Montenegro Note: Interest rates are expressed in annual terms.

11 Real weighted interest rate is calculated by subtracting yearly rate of inflation from nominal yearly interest rate.


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Table 5.3. Overview of 56-days T-bills auctions, held in 2003

Interest rate No. Date of auction Date of

maturity

Amount of issue in

mil. €

Total offered amount in

mil. €

Amount of sold T-bills in mil. € Lowest Highest

Weighted average

1. 08.01.2003. 06.03.2003. 3.0 1.670 1.670 7.5 9.0 8.13

2. 05.02.2003. 02.04.2003. 3.0 2.250 2.250 8.0 9.5 8.38

3. 05.03.2003. 30.04.2003. 4.5 1.320 1.320 7.5 9.5 9.13

4. 02.04.2003. 29.05.2003. 4.0 2.866 2.866 8.0 12.5 10.05

5. 29.04.2003. 26.06.2003. 3.0 2.100 2.100 8.5 12.0 10.06

6. 28.05.2003. 24.07.2003. 3.0 2.876 2.876 9.0 12.5 10.76

7. 24.06.2003. 21.08.2003. 2.5 2.143 2.143 9.8 13.0 11.99

8. 23.07.2003. 17.09.2003. 4.5 3.826 3.826 9.5 13.0 11.24

9. 20.08.2003. 16.10.2003. 3.0 3.443 3.000 9.8 12.0 11.12

10. 17.09.2003. 13.11.2003. 4.5 5.340 4.500 9.5 11.5 10.63

11. 15.10.2003. 11.12.2003. 4.0 3.235 3.235 9.0 11.5 10.45

12. 12.11.2003. 08.01.2004. 5.5 4.982 4.982 9.5 10.9 10.03

13. 10.12.2003. 05.02.2004. 5.5 2.743 2.743 6.0 11.0 10.08

14. 12.01.2004. 04.03.2004. 4.0 3.788 3.788 9.75 11.0 10.22

Source: Central Bank of Montenegro Note: Interest rates are expressed in annual terms.

Chapter 5. Budget

ISSP - CEPS 52

5.2. BUDGET PLAN FOR 2004 The Parliament of Montenegro, during a session held on December 17, 2003, adopted the Budget Law for 2004 (Official Gazette No. 68/03.). The adopted document is technically significantly improved compared to previous years. The budget revenues and expenditures are presented and analyzed according to economic and functional classification; medium term plan of budget consumption is presented as well as a plan of quarterly distribution of revenues and expenditures. It seems that the data and assessments are more realistic compared to previous years. The important novelty is that the program budget is produced for the Ministry of Transport and Maritime Industry and the Office for Execution of Criminal Penalties. The 2004 budget substantially represents a continuation of the previous year’s fiscal policy, with a marked social component. The budget is planned to be at the level of over 30% of estimated GDP12. The nominal budget amount of €450.7 million is at the level of the rebalanced 2003 budget, and close to 90% of budget expenditures are covered with actual revenues. Total public consumption is planned to be €717.6 million, representing almost half of gross domestic product and it is more or less at the same level as planned public consumption in the previous year. Further, in this chapter we will present and analyze revenue and expenditure categories of the 2004 budget, as well as the total public and midterm plan of budget consumption. 5.2.1. Budget revenues Although on several occasions Government officials have announced tax cuts, budget revenues are constructed based on the existing rates. The budget revenues (excluding grants, privatization revenues and loans and credits) are planned in the amount of €402.6 million, which is an increase of 11% as compared to the plan for 2003. The increase in revenues is based primarily on the positive effects of the application of the VAT.

12 According to the International Monetary Fund assessment, which was accepted in the official budget document, gross domestic product (GDP) for 2004 is projected to be €1.475 billion. This amount is very close to the estimate previously made by ISSP that was €1.484 billion.


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Graph 5.5. Composition of budget revenues, 2001-2004.

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2001

2002

2003

2004

Other revenues

Custom tariffs and fees

Turnover and excise tax

Personal income tax

Source: Ministry of Finance of Montenegro, Calculations: ISSP Note: Data for 2004 are from the Law on Budget for 2004 Taxes Total tax revenues represent 89% of original budget revenues. Taxes are planned at the level of €358.1 million, which is approximately 8% higher than the plan for 2003. o Revenues from personal income tax are planned to amount to €73.2 million, which

represents 18% of the budget revenues. The government made projections for this category based on its execution in the first nine months of 2003 and the former projections that have this category reaching €63.3 million by the end of 2003 (projection is very close to the real executed amount of €63.9 million). The estimated amount is adjusted upwards due to the number of newly registered employed persons and GDP growth.

o The most important tax, and at the same time the most significant revenue category is the

Value Added Tax (VAT). The VAT, which replaced the turnover tax, was introduced on April 1st, 2003 and its implementation brought about results that are better than expected. The plan predicted that revenues from VAT in 2003 will amount to €77.3 million, and the execution was €117.4 million. According to the average execution during the period April-September 2003, revenues from VAT for 2004 are planned at €146.6 million, which represents 36.4% of the total budget revenues.

o Excise revenues for 2004 are planned at €69.4 million, which is approximately 20%

lower than the 2003 plan. The projection is based on the under-execution of this category in 2003 (at the end of 2003 this category was executed at just 67% of the plan).

o Higher collection of revenues from custom duties in 2003 (plan was €30 million, while

execution was €35 million) had an impact on the projection of this category for 2004. This category is projected at €44 million, which accounts for approximately 11% of the total revenues. It is obvious from the projected level that the Government expects the continuation of the increasing trend of custom revenues in 2004. This expectation is partly based on the harmonization of custom tariffs (implementation started on August

Chapter 5. Budget

ISSP - CEPS 54

15, 2003), the consolidation of the customs system, as well as a change of management in a number of custom offices in 2003. However, the question is whether this category will be executed at the planned level at the end of 2004.

o A drastic decrease in revenues from transit in 2003 caused the plan for this category in

2004 to come in at €5 million (2001 – €13.4 million; 2002 – €13.8 million; 2003 – €1.8 million), which accounts for about 1% of total revenues.

o The share of revenue from corporate income tax in total original revenues is planned at

less than 4% or €15.6 million, which is €200,000 less than the 2003 plan. o Revenues from the real estate tax are planned at €4.3 million, which represents 155% of

the plan for 2003. In the structure of the original revenues, real estate revenues account for approximately 1%.

Fees Planned revenues from fees (administrative, court, residence, registration and other) represent 1.5% of the total revenues. Total planned revenues from fees amount to €6.1 million, which is more than 20% higher than the level planned for 2003. From the collection of administrative taxes €3.8 million is expected, while €1.8 million is expected from the collection of court fees. The Law on Local Government Financing prescribes that all revenues from residence fees belong to the municipality, and according to the budget plan, this category amounts to €460 million. Registration and other fees are planned at the amount lower than €100,000. Other republican revenues Other republican revenues (excluding revenues from the sold property) are planned at €38.3 million (9.5% of revenues), which is more than 50% higher than the plan for 2003. The most significant increase is connected to the category of revenues stemming from activities of government bodies (planned at €27.7 million). This category includes, among others, revenues from the following bodies: Ministry of Maritime and Agriculture (€20 million), Customs Office (€3.1 million) and Ministry of internal affairs (€2.4 million). 5.2.2. Budget expenditures and net lending With respect to budget expenditures, the most important structural change in the 2004 budget is related to the new expenditure category, payoff of old foreign currency debts (€8.1 million). In addition, expenditures for the financing of the state union, which are planned at €41 million, are classified in separate expenditure categories, which was not the case in 2003 when these expenditures were cumulatively presented as a part of the category social transfers and subsidies. As total budget expenditures are nominally at the level of the previous year’s rebalance (€450.7 million), new obligations have necessarily caused the reduction of other expenditures. Planned budget revenues represent 30.6% of the GDP. 13.

13 30.6% is the share in the GDP figure presented at the document, while if the GDP figure estimated by ISSP is used, the ratio is 30.4%.


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Graph 5.6. Composition of budget expenditures, 2001-2004.

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2001

2002

2003

2004

Net lending

Capital expenditure

Reserves and other non-interest expenditures

Social transfers andsubsidies

Goods and services

Wages and salaries

Interest

Source: Ministry of Finance of Montenegro, Calculations: ISSP Note: Data for 2004 are from the Law on Budget for 2004 o From the Montenegrin budget almost 27,000 workers are financed, and their wages in

2004 will probably remain at the same level. For the payment of gross wages, salaries, and allowances, including expenditures for wages and other allowances of the Ministry of Defense of Serbia and Montenegro employees who work on the territory of Montenegro, €175.5 million is planned, which represents approximately two-fifths of total expenditures.14 If we exclude wages of the Ministry of Defense employees, expenditures for gross wages and other allowances are planned at €147.5 million, which is nominally about 3% lower than the plan for 2003. An eventual wage increase for the state administration can be expected only after significant rationalization among Government employees.

o According to the budget plan for 2004, expenditures for goods and services are at €64.4

million, which is approximately 45% higher than the plan for 2003. The increase of this category is primarily due to a projected increase in the category of current maintenance of buildings, which is planned at €19.8 million, five times higher than the plan for 2003 (the majority of this category is related to the Ministry of maritime and transportation, according to the program budget). Expenditures for agreed services are planned at €20.7 million (€18.1 million for 2003) and expenditures for goods at €9.4 million (€6.6 million for 2003). In the structure of total expenditures, expenditures for goods and services accounts for more than 14%.

o Total expenditures for interest are planned at €17.5 million, from which €0.5 million

represents interest to residents and €17 million is interest payments for previous foreign borrowings.

14 In the budegt for 2003, the category gross wages and saleries did not include expenditures for the financing of the employees in the Minsitry of Defense of Serbia and Montengro.

Chapter 5. Budget

ISSP - CEPS 56

o Expenditures related to the rental of buildings in which government bodies are placed and the rental of business representative buildings abroad are planned at €2 million, which is 13% lower than the previous year’s plan.

o Planned transfers from the budget are the following: to the Pension Fund €51.5 million,

the Employment Fund €10.9 million and the Health Fund €3.5 million. These transfers are a part of the category social transfers and subsidies which also includes €6.6 million for transfers to individuals, €11.5 million for the financing of the University and €32.5 million for social protection. In total, the category Social Insurance and Social Security transfers is planned at €123.2 million (27% of total expenditures). A comparison of this category with the previous year is not relevant because previously this category included funds for the financing of the State Union, which is not the case for 2004.

o Subsidies are planned on a much lower level than was the case in 2003. The total sum

planned for subsidies amounts to €10.9 million (66% of the plan from 2003), from which 9.2 million are subsidies in agriculture, water supply, forestry and hunting.

o In comparison with the plan for 2003, capital expenditures for 2004 are planned to be

11% higher. Capital expenditures are planned to amount to €25.8 million, which represents 5.7% of total expenditures.

o According to the obligations prescribed by the Law on settlement of obligations and

claims under foreign debt and frozen foreign exchange savings (Official Gazette of Montenegro 55/03), on July 1st, the debt for the old currency savings amounting to €380 per one foreign currency deposit should be paid. According to the budget for 2004, 8.1 million is planned for repayment of these debts, which accounts for 1.8% of total expenditures.

o Funds for other expenditures are planned in the amount of €1.29 million, and the

majority of these (€1 million) are aimed for compensation in the cases of natural disasters.

o For permanent and current budget reserve, 13.6 million is planned, representing 3% of

total expenditures. As a part of the current budget reserve, €5 million for the financing of the State Union is included.

o According to the budget plan, funds of €8.5 million are planned for lending (according to

the plan for 2003 this category was planned at €8.4 million), from which 2.3 million is for lending to public enterprises. As in 2003, the plan for 2004 does not include repayments, and that is why this category is equal to net lending.

5.2.3. Budget deficit and its financing According to the budget plan for 2004, total expenditures exceed original revenues by approximately €48.2 million (3.3% of GDP), which is significantly lower than in 2003 (€70 million, or €90 million after rebalance) and approximately 4 million higher than the cash deficit for 2003.


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Graph 5.7. Plan of budget deficit and structure of its financing as a % GDP, 2003-2004.

1.7 %

0.40%

1.7 %

0.40%

2.44%

1.7 %

1.5 %

0%

1%

2%

3%

4%

5%

6%

7%

2003 2004

Grants Net lending Privatization receipts Deposits

Source: Ministry of Finance of Montenegro, Calculations: ISSP Unlike in previous years when the budget deficit was mainly financed by donations and privatization revenues, it is planned that the majority of the budget deficit (36.2 million) in 2004 will be covered by domestic and foreign credits. Foreign credits (World Bank and European Union) are planned in the amount of €12.1 million, while domestic credits and deposits are planned to reach €24 million. The remaining €12 million is supposed to be covered by the privatization receipts (€6 million) and by donations from the USA and EU (€6 million). 5.2.4. Expenditures according to functional classification

Table 5.4. Expenditures according to the functional classification, 2001-2004 in million €

2001 2002 2003 plan 2004 plan

Description

Mil € Structure Mil € Structure Mil € Structure Mil € Structure

01. General public bodies 41.9 16.2 % 59.3 23.2 % 155.5 36.0 % 130.8 29.0 %

03. Public order and security 58.3 22.5 % 52.5 20.6 % 67.1 15.5 % 101.3 22.5 %

04. Education 56.0 21.6 % 58.9 23.1 % 96.2 22.3 % 90.7 20.1 %

05. Health 2.3 0.9 % 2.2 0.9 % 4.5 1.0 % 4.6 1.0 %

06. Social Insurance and Social Security 39.0 15.0 % 31.1 12.2 % 40.2 9.3 % 48.5 10.8 %

07. Communal services and Housing 0.7 0.3 % 1.8 0.7 % 2.0 0.5 % 1.8 0.4 %

08. Sport, cultural and religious activities 18.0 7.0 % 15.3 6.0 % 17.3 4.0 % 12.4 2.8 %

09. Energy 2.2 0.8 % 4.6 1.8 % 1.2 0.3 % 0.7 0.2 %

10. Agriculture, forestry, hunting and fishing 11.1 4.3 % 7.4 2.9 % 11.3 2.6 % 11.1 2.5 %

11. Mining 0.3 0.1 % 0.5 0.2 % 0.4 0.1 % 0.8 0.2 %

12. Transport 8.4 3.3 % 10.3 4.0 % 7.6 1.8 % 27.5 6.1 %

13. Other economic activities 19.6 7.6 % 10.1 3.9 % 26.1 6.0 % 18.8 4.2 %

14. Other expenses 1.4 0.6 % 1.3 0.5 % 2.2 0.5 % 1.6 0.4 %

Total 259.3 100% 255.3 100% 431.6 100% 450.7 100%

Source: Ministry of Finance of Montenegro, Calculations: ISSP Note: Debt repayment is not included in expenditures Plan for 2003 does not include budget revision from June 2003. In plan for 2004, the category public order and security includes 36 million for services of defense, which are aimed to the Ministry of Defense of Serbia and Montenegro.

Chapter 5. Budget

ISSP - CEPS 58

According to the planned budget expenditures for 2004 by functional classification, the majority of funds are aimed for public bodies (29% of planned expenditures). These expenditures are primarily (90%) aimed for executive and legislative bodies, financial and fiscal businesses. Expenditures for public order and security are planned in the amount of €65.3 million, and together with the expenditures for the army and civil defense (€36 million), whose user is Ministry of Defense of Serbia and Montenegro, this category represents 22.5% of total expenditures. Funds for financing of education are planned at €92.3 million (20% of total expenditures), from which more than half of the funds are aimed towards pre-primary and primary education. These three (four) categories, together with the money for social insurance and social protection (planned to reach €48.5 million), represent more than 80% of total expenditures. 5.2.5. Midterm plan of the budget execution Table 5.5: Midterm plan of revenues, expenses and deficit 2004-2006 in million €

2004 2005 2006

Total original revenues 402.6 429.4 452.9

Total expenditures 450.7 477.0 495.8

Deficit 48.1 47.6 42.9

-Domestic financing 24.0 22.6 16.9

-Foreign financing 12.1 13.0 12.0

-Donations 6.0 5.0 4.0

-Privatization receipts 6.0 7.0 10.0

Source: Law on budget of Montenegro for 2004 For the first time, a midterm plan of the budget execution was presented in the budget for 2003. The major characteristic of that plan was a restrictive budget expenditure policy – it was planned that budget expenditures, during the period from 2003 until 2005, would not record significant increases in nominal terms and to amount 420 million annually. According to the same plan, the deficit for 2005 should be decreased to €16 million. Unlike in the plan for 2003, the midterm plan for budget spending until 2006 presented in the Budget Plan for 2004, predicts a nominal increase of budget spending from €450.7 million in 2004 to €477 million in 2005 and €496 million in 2006. The budget deficit for 2005 is planned in the amount of €47.5 million and for €43 million in 2006. The midterm plan predicts a similar structure of revenue and expenditure categories until the end of 2006.


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5.2.6. Overall public spending in 2004 If we add expenditure of social funds (Pension Fund, Health Fund and Fund for Employment) and municipalities to budget expenditures, excluding transactions between these institutions, we get the consolidated public spending. Consolidated public spending is one of the measures of the size and control of the state. Box: Recommendations and actual trends

According to the World Bank data, public spending in countries where income is above $2,000 per capita should not exceed more than 30% of GDP. Additionally, a Heritage criterion for economic freedom defines public spending above 30%, for countries with lower levels of economic development, as very high and thus gives them the lowest evaluation. Also, results of some empirical studies (Gwartneja, Holcomba i Lawsona; Vito Tanzi, Ludger Schuknecht; McDermott and Wescott...) 15 show that higher public spending does not generate improvement in socio-economic indicators and that countires with lower public spending generally have better indicators than countries with high public spending. Bearing in mind these recommendations and following good examples from Ireland, Denmark, New Zeeland and Great Britain, most of the EU countries have begun to reduce public spending in the last few years. Considering the level of economic activity and the need for the development of a competitive institutional framework, the level of public spending in Montenegro is at an alarmingly high level. According to the budget for 2004, the total level of consolidated public spending is planned at 717.6 million, which represents more than 48% of GDP. In the budget structure, public spending has a share of 62.8%, Pension Fund - 17.3%, the Health Fund -10.1%, the Fund for Employment 1.2%, and municipalities 8.6%. As the total deficit of public spending equals the budget deficit (€48.2 million), consolidated revenues are planned to reach 670 million (45.4% of GDP). This means that the “tax free day” – the day in the year that we stop working to pay state costs and start working to pay for goods and services that we personally choose in accordance to our needs and wants - in 2004 will be in the middle of June, as it was in the previous year.

15 James Gwartney, Randall Holcombe, and Rober Lawson: “The Scope of Government and the Wealth of Nations”, Cato Journal, Vol 18, No. 2, 1998; Vito Tanzi, Ludger Schuknecht: “Reconsidering the Fiscal Role of Government: The International Perspective”, The American Economic REview, Volume 87, Issue 2, 1997; C.John McDermott, Robert F. Wescott: “Fiscal Reforms That Work”, IMF, 1996.

Chapter 6. Money

ISSP - CEPS 60

Table 6.1. Monetary aggregates

2002 2003

Mar-02 Jun-02 Sep-02 Dec-02 Jan-03 Feb-03 Mar-03 Apr-03 May-03 Jun-03 Jul-03 Aug-03 Sep-03 Oct-03 Nov-03 Dec-03

1 in mn euro 310 310 310 310 250 250 250 250 250 250 250 250 250 250 250 250

Cash –estimation in % of GDP* 25.4% 25.4% 25.4% 25.4% 20.5% 20.5% 20.5% 20.5% 20.5% 20.5% 20.5% 20.5% 20.5% 20.5% 20.5% 20.5%

2 in mn euro 222 178 203 223 222 207 199 162 138 167 213 220 214 193 177 163

Demand deposits in Euros (3+4) in % of GDP* 18.2% 14.6% 16.6% 18.3% 182% 16.9% 16.3% 13.3% 11.3% 13.7% 17.4% 18.0% 17.5% 15.8% 14.5% 13.3%

3 in mn euro 144 124 144 128 117.7 110.4 110 97 77 107 133 153 147 134 126 127

Demand deposits included in M1 in % of GDP* 118% 10.2% 11.8% 10.5% 96% 9.0% 9.0% 7.9% 6.3% 8.8% 10.9% 12.5% 12.0% 11.0% 10.3% 10.4%

3.1. Deposits at the banks in mn euro 93 73 94 86 82 79 76 67 51 58 72 89 85 77 75 78 3.2. Deposits at ZOP in mn euro 51 51 50 42 36 31 34 30 26 49 61 64 62 57 51 49 4 in mn euro 78 54 59 95 104.3 96.6 89 65 61 60 80 67 67 59 51 36

Demand deposits excluded from M1 in % of GDP* 6.4% 4.4% 4.8% 7.8% 8.5% 7.9% 7.3% 5.3% 5.0% 4.9% 6.6% 5.5% 5.5% 4.8% 4.2% 2.9%

4.1. Banks in mn euro 42 24 27 31 21.3 22.6 28 23 21 21 36 30 30 20 15 15

4.2. Government and government institutions

in mn euro 36 30 32 64 83 74 61 42 40 39 44 37 37 39 36 21

5 in mn euro 454 434 454 438 367.7 360.4 360 347 327 357 383 403 397 384 376 377

M1 (1+3) in % of GDP* 37.2% 35.5% 37.2% 35.9% 30.1% 29.5% 29.5% 28.4% 26.8% 29.2% 31.4% 33.0% 32.5% 31.4% 30.8% 30.9%

in mn euro 40 49 58 54 52 54 64 64 74 72 94 77 83 79 88 92 6 Term deposits in Euros

in % of GDP* 3.3% 40% 4.7% 4.4% 4.3% 4.4% 5.2% 5.2% 6.1% 5.9% 7.7% 6.3% 6.8% 6.5% 7.2% 7.5% 6.1. Demand savings in Euros in mn euro 3 4 3 5 4 5 4 5 3 4 6 6 7 8 6 8 6.2. Term savings in Euros in mn euro 3 4 6 8 9 9 12 12 12 12 12 13 15 17 18 19 6.3. Other term deposits in Euros in mn euro 34 41 49 41 39 40 48 47 59 56 76 58 61 54 64 65

in mn euro 44 36 34 37 32 28 31 31 22 25 24 24 24 21 21 21 7 Demand deposits in other

currencies in % of GDP* 3.6% 2.9% 2.8% 3.0% 2.6% 2.3% 2.5% 2.5% 1.8% 2.0% 2.0% 20% 2.0% 1.7% 1.7% 1,7% 8 in mn euro 3 5 6 3 3 3 4 3 3 3 3 3 3 3 4 4

Term deposits in other currencies in % of GDP* 0.2% 0.4% 0.5% 0.2% 0.2% 0.2% 0.3% 0.2% 0.2% 0.2% 0.2% 0.2% 0.2% 0.2% 0.3% 0.3%

9 in mn euro 494 483 512 492 419.7 414.4 424 411 401 429 477 480 480 463 464 469

M2 narrow (5+6) in % of GDP* 40.4% 39.5% 41.9% 40.3% 34.4% 33.9% 34.7% 33.7% 32.8% 35.1% 39.1% 39.3% 39.3% 37.9% 38.0% 38.4%

10 in mn euro 541 524 552 532 454.7 445.4 459 445 426 457 504 507 507 487 489 494

M2 broad (7+8+9) Term deposits in Euros in mn euro 44.3% 42.9% 45.2% 43.6% 37.2% 36.5% 37.6% 36.4% 34.9% 37.4% 41.3% 41.5% 41.5% 39.9% 40.0% 40.4%

Source: Central Bank of Montenegro Note: Data for December 2003 are preliminary. Deposits at banks does not include deposits of the government and government organizations and deposits of other banks Demand deposits excluded from M1 includes demand deposits of banks and government at banks and at ZOP *Official GDP data for 2002, USAID/CBM, GDP estimation for 2003


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6.1. MONETARY AGGREGATES

6.1. Monetary aggregates

300

350

400

450

500

550

600M

ar-0

2

Apr

-02

Maj

-02

Jun-

02

Jul-

02

Avg

-02

Sep-

02

Okt

-02

Nov

-02

Dec

-02

Jan-

03

Feb

-03

Mar

-03

Apr

-03

Maj

-03

Jun-

03

Jul-

03

Avg

-03

Sep-

03

Okt

-03

Nov

-03

Dec

-03

in €

mill

M1 narrow M2 broad M2

Source: Central Bank of Montenegro The Central Bank cash estimation, which was based on the balance of payment deficit at the end of 2002, did not change during 2003 and amounted to €250 million. Monetary aggregate M1, which amounted to €377 million at the end of December 2002, had negative annual growth rates from March to December 2003. In September, October, November and December 2003, the annual growth rate of this monetary aggregate was -12.56%, -17.60%, -17.00% and –13.93%, respectively. As we have already mentioned, the main reason for the decline in M1 aggregate is the 19% decline in cash estimation (in 2003 vs. 2002). Nevertheless, with the exception of the third quarter (annual growth rates of 3.10%, 2.68% and 2.08% in respective months), another component of the M1 aggregate, demand deposits, also have negative annual growth rates throughout 2003. However, annual growth rates of this category in fourth quarter were lower than in previous periods : -14.10% in October, -11.89% in November and –0.78% in December 2003. Demand deposits that aren’t included in M1 had positive growth rates, with the exception of August and the last quarter of 2003. After a negative growth rate of 8% in August 2003, the annual growth rate of this category in October was 13.5%. After that, this category had high negative growth rates of -30% in October, -44% in November and -62% in December. As a result of these changes, sight deposits not included in M1 amounted to €36 million in December 2003, which is the lowest level for this category since March 2002. Term deposits in euros exhibited a continuous growth from March 2002 till December 2003 when they reached €92 million. These deposits registered annual growth rates of 36%, 44% and 70% in the individual months of the last quarter 2003.

Chapter 6. Money

ISSP - CEPS 62

As a result of the negative annual growth rates of M1 and positive growth rates of term deposits in Euros, the narrow M2 monetary aggregate had negative annual growth rates during the observed period. Narrow M2 registered annual growth rate of –12% in October, -10% in November and –5% in December 2003. Both demand and term deposits in other currencies fluctuated during 2002 and 2003. These fluctuations didn’t have a significant impact on broad M2, which –like narrow M1- also exhibited negative growth rates ranging from -7% to -18% during the observed period. As a result of these changes broad M2 reached €494 million at the end of 2003. 6.2. DEPOSITS OF HOUSEHOLDS Table 6.2: Deposits of households (in million Euros)

in mil € 1. Transaction deposits of households 2. Demand deposits 2. Term deposits up to 1

year 3. Term deposits over 1

year

Total

Giro and

current

accounts

Foreign currency accounts -inflow

from abroad

Total € Other

currencies

Total € Other

currencies

Total € Other

currencies

Total ( 1+2+ 3+4)

Dec-00 2.035 0.932 1.103 0.428 0.063 0.366 0.002 0.000 0.002 2.465

Oct-01 1.751 0.894 0.857 0.655 0.554 0.102 0.057 0.055 0.002 2.463

Nov-01 2.092 1.179 0.913 0.809 0.668 0.141 0.466 0.465 0.001 3.368

Dec-01 3.517 2.379 1.138 1.557 1.332 0.225 0.550 0.549 0.001 5.624

Jan-02 2.844 1.985 0.859 2.090 1.755 0.335 0.617 0.594 0.023 5.551

Feb-02 2.791 1.714 1.077 2.336 1.909 0.427 0.702 0.679 0.023 5.829

Mar-02 4.139 3.358 0.781 3.418 1.853 1.565 0.741 0.680 0.061 8.298

Apr-02 4.874 4.135 0.739 4.443 2.525 1.918 0.773 0.711 0.062 10.090

May-02 4.329 3.813 0.516 4.732 2.815 1.917 0.525 0.463 0.062 9.586

Jun-02 4.629 4.212 0.417 5.609 3.013 2.596 0.615 0.553 0.062 10.853

Jul-02 5.036 4.579 0.457 6.089 3.394 2.695 0.702 0.640 0.062 11.827

Aug-02 4.269 3.802 0.467 7.217 5.184 2.033 0.928 0.906 0.022 12.414

Sep-02 3.984 3.183 0.801 7.669 4.798 2.871 1.663 1.497 0.166 13.316

Oct-02 5.686 4.730 0.956 8.012 6.140 1.872 1.038 1.012 0.026 14.736

Nov-02 5.205 4.310 0.895 9.515 6.772 2.743 1.099 1.065 0.034 15.819

Dec-02 5.347 3.811 1.536 6.023 5.154 0.869 9.650 6.823 2.827 1.127 1.090 0.037 22.147

Jan-03 5.401 2.822 2.579 5.721 4.426 1.295 10.326 7.562 2.764 1.188 1.170 0.018 22.636

Feb-03 5.038 2.738 2.300 6.301 4.912 1.389 10.926 8.138 2.788 1.194 1.179 0.015 23.459

Mar-03 3.873 1.883 1.990 6.014 4.303 1.711 14.446 10.744 3.702 1.166 1.142 0.024 25.499

Apr-03 5.804 3.252 2.552 7.605 5.352 2.253 13.466 10.421 3.045 1.179 1.153 0.026 28.054

May-03 5.528 3.355 2.173 5.851 3.443 2.408 13.368 10.752 2.616 1.199 1.174 0.025 25.946

Jun-03 6.595 3.340 3.255 5.538 4.168 1.370 13.848 10.624 3.224 1.340 1.292 0.048 27.321

Jul-03 7.608 4.058 3.550 6.825 5.624 1.201 13.386 10.554 2.832 1.463 1.385 0.078 29.282

Aug-03 9.246 5.074 4.172 7.671 6.418 1.253 14.576 11.618 2.958 1.522 1.405 0.117 33.015

Sep-03 8.385 4.506 3.879 8.582 7.330 1.252 16.512 13.563 2.949 1.554 1.439 0.115 35.033

Oct-03 10.093 5.950 4.143 9.770 8.084 1.686 18.983 15.935 3.048 1.633 1.522 0.111 40.479

Nov-03 11.086 6.845 4.241 8.416 6.288 2.128 19.851 16.082 3.769 1.658 1.547 0.111 41.011

Dec-03 11.771 7.154 4.617 9.409 7.745 1.664 20.872 17.276 3.596 1.966 1.885 0.081 44.018

Source: Central Bank of Montenegro, reports of various banks Note: Data for December 2003 are preliminary


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Graph 6.2. Savings of households

0

5

10

15

20

25

30

35

40

45

Dec

-00

Okt

-01

Nov

-01

Dec

-01

Jan-

02

Feb

-02

Mar

-02

Apr

-02

Maj

-02

Jun-

02

Jul-

02

Avg

-02

Sep-

02

Okt

-02

Nov

-02

Dec

-02

Jan-

03

Feb

-03

Mar

-03

Apr

-03

Maj

-03

Jun-

03

Jul-

03

Avg

-03

Sep-

03

Okt

-03

Nov

-03

Dec

-03

in m

il €

Demand deposits Term savings over 1 year Term savings up to 1 year Transaction deposits

Graph 6.3. Annual growth of savings

0%

50%

100%

150%

200%

250%

300%

350%

400%

450%

500%

550%

Dec-02 Jan-03 Feb-03 Mar-03 Apr-03 Maj-03 Jun-03 Jul-03 Avg-03 Sep-03 Okt-03 Nov-03 Dec-03

Demand savings Term savings up to 1 year

Term savings over 1 year Total savings without transaction deposits

Note: Table 6.2. is different from the one presented in the previous MONET issue because it consists of data from transaction deposits of households, which include money on gyro and current accounts and money on foreign currency accounts of households. Central Bank of Montenegro decided to treat money in these accounts as deposits, because banks pay a certain interest rate on money in these accounts. Total household deposits increased continuously during 2003, and reached €44 million at the end of 2003. The annual growth rate of total deposits was 98.75% in December 2003. Household deposits without transaction deposits registered positive annual growth rates above 80% from October 2002 till December 2003. As Graph 6.3 presents, annual growth rates of all deposits were significantly higher in the third quarter of 2002 and in the first quarter of 2003 compared to later quarters. One of the reasons for this was certainly a very low base, i.e. low absolute value of deposits in 2001 and in early 2002. Term deposits registered the highest growth rates during the observed period. The annual growth rates of this category were above 1000% at the end of 2002 after which they gradually decreased to approximately 100% at the end of 2003. Growth of these deposits is primarily a result of

Chapter 6. Money

ISSP - CEPS 64

the increase of deposits in euros. Demand and term deposits over 1 year have also been increasing constantly, but at a lower rate, and have exhibited more significant fluctuations. Term deposits registered an annual growth rate of 120% in December 2003.

Graph 6.4.1. Structure of households savings

0%

20%

40%

60%

80%

100%Ja

n-02

Feb

-02

Mar

-02

Apr

-02

Maj

-02

Jun-

02

Jul-

02

Avg

-02

Sep-

02

Okt

-02

Nov

-02

Dec

-02

Jan-

03

Feb

-03

Mar

-03

Apr

-03

Maj

-03

Jun-

03

Jul-

03

Avg

-03

Sep-

03

Okt

-03

Nov

-03

Dec

-03

Demand savings Term savings up to 1 year Term savings over 1 year

The structure of household deposits shows an increasing share of term savings up to 1 year on one hand and a decreasing share of demand savings on the other. Share of term deposits up to 1 year in total deposits was 37.6% in January 2002, 43.6% in December 2002 and 47.4% in December 2003. Share of demand deposits was 51.2% in January 2002, 27.2% in December 2002 and 21.3% in December 2003.

Graph 6.4.2. Structure of households savings including transaction deposits

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Dec-02 Jan-03 Feb-03 Mar-03 Apr-03 Maj-03 Jun-03 Jul-03 Avg-03 Sep-03 Okt-03 Nov-03 Dec-03

Transaction deposits of households Demand savingsTerm savings up to 1 year Term savings over 1 year


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65

Analysis of the structure of total deposits (including transaction deposits) shows similar trends. However, this structure, presented in Graph 6.4.2, allows us to analyze changes in the share of transaction deposits in total deposits. Due to the nature of this category, the share of these deposits records more significant monthly fluctuations and exhibits a slight increasing trend.

Graph 6.5 Currency structures of household savings

Demand savings

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Jan-

02

Feb

-02

Mar

-02

Apr

-02

Maj

-02

Jun-

02

Jul-

02

Avg

-02

Sep-

02

Okt

-02

Nov

-02

Dec

-02

Jan-

03

Feb

-03

Mar

-03

Apr

-03

Maj

-03

Jun-

03

Jul-

03

Avg

-03

Sep-

03

Okt

-03

Nov

-03

Dec

-03

euro other currencies

Term savings up to 1 year

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Jan-

02

Feb

-02

Mar

-02

Apr

-02

Maj

-02

Jun-

02

Jul-

02

Avg

-02

Sep-

02

Okt

-02

Nov

-02

Dec

-02

Jan-

03

Feb

-03

Mar

-03

Apr

-03

Maj

-03

Jun-

03

Jul-

03

Avg

-03

Sep-

03

Okt

-03

Nov

-03

Dec

-03


Term savings up to 1 year

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Jan-

02

Feb

-02

Mar

-02

Apr

-02

Maj

-02

Jun-

02

Jul-

02

Avg

-02

Sep-

02

Okt

-02

Nov

-02

Dec

-02

Jan-

03

Feb

-03

Mar

-03

Apr

-03

Maj

-03

Jun-

03

Jul-

03

Avg

-03

Sep-

03

Okt

-03

Nov

-03

Dec

-03


The analysis of the currency structure of household savings shows that the majority of deposits are nominated in euros. Other currencies are most prevalent in transaction deposits, and have been fluctuating from 28% to 51% during the observed period. As these deposits represent money inflows from abroad, we can conclude that these transactions are

Chapter 6. Money

ISSP - CEPS 66

significant. The lowest share of deposits in other currencies is present in the category term savings over 1 year. Due to persistent fluctuations of the share of deposits in foreign currencies in total deposits, it is very hard to make any conclusions about their trend. However, we can note that the share of Euro-denominated term deposits up to 1 year is constantly increasing. The share of these deposits has been fluctuating during 2002 reaching 70.7% at year end, while at the end of December 2003 it was 82.8%.

6.3. LOANS Table 6.3. Loans in 2002 and 2003(in million Euros)

2. Non Financial Institutions and other clients.

Loans

1.Banks and financial

institutions 2.1 Privately owned local companies

2.2.Publicly owned

organizations

2.3. Individuals 2.4. Other Total

3. Government, Municipalitie

s and Agencies

Mar-02 82.990 1.533 59.855 8.607 3.027 3.371 74.86 6.597

Jun-02 94.078 0.314 71.36 6.687 5.098 3.562 86.707 7.057

Sep-02 99.162 0.128 67.498 5.639 11.99 3.63 88.757 10.277

Dec-02 124.663 0.788 70.305 8.448 22.032 2.559 103.344 20.531

Jan-03 134.900 1.098 78.323 10.027 23.171 2.676 114.197 19.605

Feb-03 147.152 0.872 82.178 15.155 25.461 2.357 125.151 21.129

Mar-03 144.055 0.535 84.018 13.683 25.895 2.167 125.763 17.757

Apr-03 155.119 0.525 91.327 14.24 29.014 1.989 136.57 18.024

May-03 164.737 0.771 96.381 18.342 30.352 2.177 147.252 16.714

Jun-03 168.48 1.167 100.206 17.954 30.503 2.309 150.972 16.341

Jul-03 168.295 0.832 103.911 13.761 31.358 2.385 151.415 16.048

Aug-02 165.245 0.652 104.921 12.297 32.256 1.951 151.425 13.168

Sep-03 168.306 0.93 103.699 14.353 36.362 2.494 156.908 10.468

Oct-03 178.909 0.379 108.014 15.021 42.865 2.347 168.247 10.283

Nov-03 185.865 0.577 114.677 13.328 46.778 2.29 177.073 8.215

Dec-03 200.898 1.625 116.289 12.414 47.671 2.566 178.94 20.333

Source: Central Bank of Montenegro, balance sheets of the banks Note: data for December 2003 are preliminary Data present the stock of loans at the end of the month The data on loans provided by Montenegrin banks shows an increasing trend of loans from March 2002 (when banks started to report using the new methodology) throughout 2003. Total loans provided reached approximately €210 million at the end of 2003. During the observed period, total loans registered positive annual growth rates, which were higher during the first than in the second half of the. However, annual growth rates were consistently very high and didn’t fall below 60% during the observed period. Annual growth rates of total loans were 69.73%, 60.79%, 61.16% and 61.15%, in September, October, November and December 2003, respectively.


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Graph 6.6 Loans of the banking sector

0

20

40

60

80

100

120

140

160

180

Mar

-02

Apr

-02

Maj

-02

Jun-

02

Jul-0

2

Avg

-02

Sep-

02

Okt

-02

Nov

-02

Dec

-02

Jan-

03

Feb-

03

Mar

-03

Apr

-03

Maj

-03

Jun-

03

Jul-0

3

Avg

-02

Sep-

03

Okt

-02

Nov

-03

Dec

-03

in m

illio

n eu

ros

Banks and financial institutions Non financial institutions and other clients

Govenment, Municipalities and Agencies

The analysis of annual dynamics of loans by clients shows that some categories had stable growth, while several exhibited significant fluctuations (for example, loans to banks and financial institutions and loans to government, municipalities and agencies). It is important to note that the largest category in the structure of total loans, loans to non-financial institutions and other clients, registered a stable growth trend with annual rates between 65% and 78%. The most significant portion of these loans was approved for domestic private companies. These loans have continuously grown from March 2002 until the end of 2003, when they reached €116.29 million. Loans to households have also been increasing during 2002 and 2003, and in December 2003, they amounted to €32.256 million. The decreasing trend of loans to government, municipalities and agencies, which has been present since May 2003, was halted in December when these loans suddenly increased from €8.2 million in November to €20.3 million. A similar trend for this category was registered in the same period last year when they increased from €8.4 million in November to € 20.5 million in December 2002. The structure of loans has shown no significant fluctuations from March 2002 through December 2003. However, some categories exhibited a clear trend. For example, loans to private domestic companies accounted for over 70% of total loans from March till August 2003, after which their share decreased and fluctuated between 55% and 68%. Share of loans to households in total loans have been increasing constantly with some small fluctuations (their share was 3.65% in March 2002, 25.17% in November 2003, and 23.73% in December 2003).

Chapter 7. Capital Market

ISSP - CEPS 68

7. CAPITAL MARKET Capital market is “the heart of a market economy”1. Development of a capital market and its institutions has a significant impact on the total economic development of a country. At the end of 2003, the Montenegrin capital market is still under development. However, compared to previous years, important skips are evident. The following text presents an analysis of the capital market of Montenegro in 2003. 7.1. INDICES At the beginning of March 2003, both Montenegrin Stock exchanges2 introduced indexes. The NEX Montenegro Stock exchange introduced two indexes – NEX 20 and NEX PIF. NEX 20 represents 20 important enterprises that have the greatest market capitalization, realized turnover, and number of transactions3. NEX PIF includes investment units of all 6 privatization funds. Montenegroberza introduced the index MOSTE that includes the 35 most liquid companies (including investment units). On their day of introduction, each of the three indices had an initial value of 1000 points.

Graph 7.1. Stock exchanges indices in Montenegro

900.00

1000.00

1100.00

1200.00

1300.00

1400.00

1-M

ar

16-M

ar

31-M

ar

15-A

pr

30-A

pr

15-M

ay

30-M

ay

14-J

un

29-J

un

14-J

ul

29-J

ul

13-A

vg

28-A

vg

12-S

ep

27-S

ep

12-O

ct

27-O

ct

11-N

ov

26-N

ov

11-D

ec

26-D

ec

MOSTE NEX 20 NEX PIF

Source: NEX Montenegro and Montenegroberza Graph 7.1 presents the development of all 3 indices in 2003. Each index has shown its own unique behavioral pattern during this period. Nevertheless, at the end of 2003 the values of each index increased by approximately 10% compared to the initial value. This increase in value could be interpreted as a price increase of Montenegrin companies and an improvement of the overall economic situation in Montenegro. However, it is also possible

1 Macroeconomic Accounts and models, Veselin Vukotić, CID, Podgorica, 2001. 2 Two stock exchanges operate in Montenegro: Montenegroberza and NEX Montenegro. 3 The largest weights in NEX 20 are those of Telecom (26.51%) and Jugopetrol (16.05%).


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69

that the change in share price of companies that have a greater prevalence in the index ultimately have a significant impact on the total index, whilst share prices of other companies have been stable or may even have the opposite trend. Consequently, simply viewing the total index could be misleading. The following text presents each index and attempts to identify the reason for its changes. The Montenegroberza stock exchange index – MOSTE shows a stable trend from the moment of its introduction through the end of 2003. Until April 22, MOSTE had a value between 1000 and 1040 points, and then its increase slowed, and through the end of May was between staying between 1050 and 1060 points. In June and July the value of this index reached approximately 1100 points. The index increased further in August and September (1125 points at the end of September), while in October, November and December the index continued with a slow increase. In this period, the value of the index varied between 1125 and 1132 points. During 2003, the NEX 20 index was, for the most part, under the initial value. Reaching 1015 points on March 4, 2003, the NEX 20 then had a negligible decrease through the rest of March and continued to fall in April, and on April 14, 2003 it amounted to 918 points, which is its lowest value during 2003. This fall is mainly due to the decrease of Jugopetrol’s shares by 33.33%, which overthrew the index by 50%4. At the end of May, the index reached its initial value, amounting to approximately 1000 points. With the exception of June 1st and 2nd, when the index amounted to 1000 points, June, July and August all found the index under its initial value. The value of the index increased in September through mid-October (reaching 1035 points on October, 9); this was then followed by a decline through mid-November when the value of the index was again lower than its initial value. An increase in the index value has been noted from November 18 and has continued through the end of year, resulting in its highest value on December 29, 1132 points. The largest impact for the index’s increase was the increase of Jugopetrol’s shares, by approximately 41.5%, followed by Tobacco Mill shares by 1.15% and Atlas Bank shares by 284.62%5. The NEX PIF index shows the largest number of oscillations during 2003. From its introduction through the end of May, the NEX PIF index was fairly stable, reaching 1320 points at the end of May. Of great impact on the index increase was the price increase of investment units of HLT PIF by approximately 17.14%. After this increase, the value of the index constantly decreases, amounting to 1230 points on June 1st, 1053 points on July 1st and 1029 points on August 31st. Until mid–October, the value of the index was at approximately the same level (1027 points on October 13, 2003). After that, the value of the index fell under the initial value, and on October 14th it amounted to 989 points; it remained under the initial value until November 18th. The decrease in price of Atlas Mont investment units by approximately 16.67%6 had a significant impact on the decreased value of the index. From this point through the end of 2003 the value of the index oscillated but began to rise and at the end of December it amounted to 1132 points. The price increase of Atlas Mont and HLT Funds investment units, of 4.44% and 20%7, respectively, had a significant impact on the increased index value.

4 NEX Montenegro 5 NEX Montenegro 6 NEX Montenegro 7 NEX Montenegro


ISSP - CEPS 70

Table 7.1. Stock exchange trade in Montenegro

MONTH MONTENEGROBERZA NEX MONTENEGRO TOTAL

TURNOVER (in €) TURNOVER (in €) TURNOVER (in€)

Primary Secondary Total Num

ber

of

tran

sact

ions


ber

of

tran

sact

ions


ber

of

tran

sact

ions

Total 02 4,632,993 4,092,614 8,725,607 944 3,697,296 1,989,311 5,686,607 3,349 8,330,289 6,081,925 14,412,214 4,301

Jan-03 130,123 73,770 203,893 105 0 588,673 588,673 374 130,123 662,443 792,566 479 Feb-03 1,459,751 511,390 1,971,141 351 0 175,566 175,566 782 1,459,751 686,956 2,146,707 1,133 Mar-03 2,170,818 174,930 2,345,748 414 0 298,291 298,291 1,167 2,170,818 473,221 2,644,039 1,581 Apr-03 0 496,648 496,648 236 0 603,269 603,269 1,268 0 1,099,917 1,099,917 1,504 May-03 0 204,256.8 204,257 283 989 740,889 741,878 1,955 989 945,146 946,135 2,238 Jun-03 723,937.5 951,350.97 1,675,288 685 723,938 922,216 1,646,154 1,393 1,447,876 1,873,567 3,321,442 2,078 Jul-03 0 11,244,223 11,244,223 478 0 1,568,723 1,568,723 1,298 0 12,812,946 12,812,946 1,776 Aug-03 0 259,073.63 259,074 301 0 841,434 841,434 1,258 0 1,100,508 1,100,508 1,559 Sep-03 246,895.6 959,449.6 1,206,345 364 0 3,863,012 3,863,012 1,672 246,896 4,822,462 5,069,357 2,036 Oct-03 270,983.7 149,686.2 420,670 303 0 1,449,375 1,449,375 1,610 270,984 1,599,061 1,870,045 1,913 Nov-03 300,000 1,719,988.8 2,019,989 774 0 2,405,935 2,405,935 1,044 300,000 4,125,924 4,425,924 1,818 Dec-03 3,497,227 892,158.97 4,389,386 1.699 1,265,954 1,669,419 2,935,373 1,510 4,763,181 2,561,578 7,324,759 3,209

Total 03 8,799,736 17,636,926 26,436,662 5993 1,990,881 15,126,802 17,117,683 15,331 10,790,617 32,763,728 43,554,345 21,324

Source: Montenegroberza and NEX Montenegro 7.2 TURNOVER ON STOCK EXCHANGES Total turnover on Montenegrin Stock exchanges in 2003 amounted to €43,554,345 and a total of 21,324 transactions were realized. Compared to the previous year, the figures for both turnover and transactions show significant increases. Namely, total turnover in 2003 increased three times over 2002, while the number of transactions in 2003 was 5 times higher than in 2002. Graph 7.2 presents total turnover and number of transactions realized on stock exchanges in Montenegro in 2003.

Graph 7.2 Total turnover and number of transactions on Montenegro stock exchanges

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On a monthly level, total turnover varied in 2003. The highest turnover was realized in June and it amounted to €12,812,946. The majority of turnover in this month was realized through a transaction with Montenegrobanka shares8, totaling €10.6 mn. The lowest turnover was realized in January and it amounted to €792,566. As shown in graph 7.2, the number of transactions also oscillates in 2003, with the highest number of transactions being realized in December (3,209) and the least in January (479). The majority of total turnover (75%) was realized on the secondary market, and the rest (25%) was realized on the primary market. It is important to note that in 2003 there have been legislative changes on the Montenegrin capital market. In November 2003, Security Commission of Montenegro adopted Regulations on Amendment of Regulations on Methodology for PIF Net Value Accounting. These regulations state that “values of corporations’ shares from Fund portfolios don’t include value of corporations’ shares from portfolio which are estranged by Fund or acquired by transactions with other Funds or linked legal entity”. Also, “when calculating the Fund’s annual property net value for 2003, Management Company has to exclude the value of shares that are estranged by Fund or acquired by transactions with another Fund, from the total value of corporations’ shares from the Fund portfolio.” 9 Before these Regulations were adopted, Privatization Funds realized few transactions, so one portion of the total turnover realized in 2003 is related to these transactions. 7.2.1. Trade on primary market In 2003, the primary market of Montenegro realized turnover in the amount of €10,790,617, representing approximately 25% of total turnover. Compared to 2002, total turnover on the primary market increased approximately 29.5%.

Graph 7.3 Turnover on primary and secondary market in Montenegro

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Source: Montenegroberza and NEX Montenegro

8 In July 2003, Nova Ljubljanska bank from Slovenia bought 91% of Montenegrobank shares. This transaction was done on Montenegroberza stock exchange 9 Official Gazette of Montenegro, no. 64/03


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The highest turnover was realized in December (€4,763,182), when Crnogorska komercijalna, Pljevaljska, Niksicka bank, and Swiss Insurance issued their shares in the amount of €3,239,533; €784,334; €611,490 and €127,822 respectively. In April, July and August, the primary market of Montenegro registered no trade. The majority of turnover on the primary market in 2003 was realized on Montenegroberza (€8,799,736 or 80%), and the rest on NEX Montenegro (€1,990,881 or 20%). 7.2.2. Trade on secondary market In 2003, the secondary market of Montenegro realized turnover in the amount of €32,763,728, which represents approximately 75% of total turnover. The largest turnover was realized in July (€12,812,946), and the lowest in March (€473,221).

Graph 7.4 Turnover structure on secondary market (2003.)

Old foreign exchange bonds16%

PIF investment units3%

Shares81%

Source: Montenegroberza and NEX Monetengro Compared with the previous year, total turnover in 2003 increased more than 5 times. This growth is a result of trade with MVP company shares 10 that represent the majority of trade on the secondary market in Montenegro. Namely, in 2002, the majority of turnover on the secondary market was related to trade with shares (81%). Additionally, trade with investment units of PIFs (that began in December 2002) and old foreign saving bonds shares (that began in April 2003), represent a significant part of trade in 2003 (trade with old foreign saving bonds shares – 16%, and trade with investment units of PIFs – 3%). The aforementioned transaction with Montenegrobank shares, realized in June 2003 in the amount of €10.6 mn, had a significant contribution to the increased turnover. Also, a significant part of turnover in 2003 represents trade with shares between Privatization Funds.

10 Companies on list for Mass Voucher Privatization


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Trade with shares Trade with MVP companies’ shares was dominant on the secondary market related to realized turnover. During 2003, the NEX Montenegro stock exchange traded with shares from approximately 110 companies11, but approximately 43% of total turnover was realized by trade with shares of only six companies: Budvanska rivijera, UTIP Crna Gora, Daido metal, Eko – meso, Atlasmont bank and Velepromet. The next table presents turnover and share prices realized by trade with shares of these companies. Table 7.2. Most tradable shares on the NEX Montenegro

2003 Company

Max price Min price Turnover in € Quantity

HTP BUDVANSKA RIVIJERA A.D. BUDVA 9.29 0.34 987,362 108,042

UTIP CRNA GORA A.D. PODGORICA 0.55 0.15 777,148 1,869,497

DAIDO METAL A.D. KOTOR 3.17 2.50 614,665 196,008

EKO-MESO A.D. BIJELO POLJE 6.72 3.00 544,539 91,912

ATLASMONT BANKA A.D. PODGORICA 5,500 1,300 443,300 89

VELEPROMET A.D. PODGORICA 3.00 0.30 423,721 498,254

Source: NEX Montenegro An analogous situation was found on the Montenegroberza stock exchange, where approximately 100 companies’ shares were traded and the majority of turnover (70%) was realized from shares from the following companies: Montenegrobank, PKB Herceg Novi, Eko flora, Korali, Velepromet and Telekom. Data related to this trade are presented in Table 7.3. Table 7.3. Most tradable shares on the NEX Montenegro

2003 Company

Max price Min price Turnover in € Quantity

MONTENEGROBANKA A.D. PODGORICA 16.63 15.09 10,493,547 630,838

PKB HERCEG NOVI A.D. 2.30 228 521,106 157,146

EKOFLORA A.D. PODGORICA 3.83 0.585 445,935 262,275

HTP KORALI A.D. 3.18 3.18 439,742 138,272

VELEPROMET A.D. PODGORICA 0.80 0.49 408,581 813,502

TELEKOM CRNE GORE A.D 0.60 1.15 336,371 394,720

Source: Montenegroberza

11 Excluding shares that offer Development Fund, Pension Fund and Employment Office of Montenegro.


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Trade with investment units of Privatization Investment Fund12 As we wrote in the previous issue of MONET, the adoption of necessary regulations by the Montenegrin Security Commission made it possible to trade with investment units, and on December 23, 2002 trade was initiated. On Montenegrin stock exchanges in 2003, investment units of all six Privatization Funds were traded. In this period, 15,400 transactions were realized -- 10,131 on the NEX Montenegro stock exchange and 5,269 on Montenegroberza. It is important to note that the number of transactions realized with investment units of PIFs represent approximately 63% of total transactions realized on stock exchanges in Montenegro in 2003. Total turnover amounted to €831,189 (€158,765 on Montenegroberza and €672,424 on NEX Montenegro).

Graph 7.5. Monthly turnover with PIF investment units in 2003.

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Source: NEX Montenegro and Montenegroberza As Graph 7.5 presents, monthly turnover and number of transactions realized with investment units of PIFs in 2003 varied. The highest turnover with investment units of PIF’s was realized in December (€113,514) and the lowest in January (€12,223). The number of transactions realized with investments units of PIF was the highest in December (1,969) and the lowest in January (403). Trade with shares of old foreign currency saving bonds Trade with shares of old foreign currency saving bonds is regulated by the Decree on the Purchase of Shares with the Old Foreign Currency Savings13, which was approved in May, 2002, and with the Law on regulation liabilities and claims from foreign debt and foreign savings of citizens14, which was approved in October, 2003. Citizens could buy shares of

12By transferring voucher points to privatization funds in the third phase of the MVP program, 237,316 citizens became fund shareholders (For more details see MONET 8, Comment 11). 13 Official Register number 23. /02. 14 Official Register number 55/03.


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companies whose owners are Republic of Montenegro, Development Fund, Pension Fund and Employment Office15, or they could sell them to investors. Trade of shares with old foreign currency savings bonds began in April 2003 on both Montenegrin stock exchanges. Turnover realized with old foreign currency savings bonds in 2003 amounted to €5,284,331, representing 16% of total turnover. More than 80% of total turnover with old foreign currency savings bonds was realized on NEX Montenegro and the rest (20%) on Montenegroberza stock exchange. On Montenegroberza, 1 euro of old foreign currency savings was worth, on average, 0.69 euro, while on the NEX Montenegro 1 euro of old foreign currency savings was sold for between 0.31 and 0.84 euro. 7.3 CONCLUSION The capital market of Montenegro is still undeveloped. Although the majority of citizens became owners of shares of Montenegrin companies, the insufficient flow of information and an inadequate understanding of how a capital market functions still exist. Additionally, purchase power of Montenegrin citizens is at a low level, so many people are interested in receiving liquid capital, and fewer view the capital market as an instrument for investments. Also, people would rather invest in real estate or in some other business, than in shares on the stock market. Undoubtedly, the great uncertainty that follows business operations contributes to this, and in that way, there is a weak estimation for the movement in share prices of these companies. However, the significant increase in turnover and number of transactions in 2003, as compared to 2002, indicates that the Montenegrin capital market is growing and that the number of participants is increasing. In 2003, trade with shares of MVP companies and trade with investment units of PIFs were intensified. A significant portion of trade represented trade of shares with old foreign currency savings bonds. Both stock exchanges introduced indices. The first companies were listed on list A of both stock exchanges. On the A list of Montenegroberza are four companies (Lovcen Insurance, Inpek, Dairy Podgorica and Plantaze) and one on NEX Montenegro (Telekom Montenegro). Step forward is also an informational link of NEX Montenegro and Montenegroberza with stock exchanges from South Eastern Europe (stock exchanges from Belgrade, Sarajevo, Banja Luka, Skoplje, Varazdin and Ljubljana).

15 The Development Fund, Pension Fund and Bureau for Employment offered their shares that they own in 157 companies for 0-80% lower than their nominal value.

Chapter 8. External Sector

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Table 8.1 Import and export in period January-November 2002 and 2003

Exports Imports Jan-Nov 2002 Jan-Nov 2003 Jan-Nov 2002 Jan-Nov 2003 Sector

Total in euro

As % of total

Total in euro As % of

total Total in

euro As % of

total Total in

euro As % of

total

1 Meat and meat products 191,063 0.09 78,543.49 0.04 22,674,887 4.38 13,375,725 3.90 2 Milk products and eggs 566,333 0.26 331,959.06 0.18 7,363,452 1.42 5,628,431 1.64 3 Fish and fish products 5,841 0.00 105,141.50 0.06 3,722,328 0.72 2,674,878 0.78 4 Cereals and cereal products 1,346,557 0.61 833,649.48 0.45 5,866,096 1.13 5,350,430 1.56 5 Vegetables and fruits 3,665,011 1.66 4,109,634.74 2.23 28,708,038 5.54 11,942,092 3.48 6 Sugar, sugar products and honey 490,343 0.22 184,733.30 0.10 12,008,150 2.32 5,633,564 1.64 7 Coffee, tea, cocoa and spices 663,588 0.30 377,720.11 0.20 7,031,646 1.36 6,939,357 2.02 8 Animal fodder (except cereals) 185,402 0.08 112,367.30 0.06 917,554 0.18 844,454 0.25 9 Various nutrition products 951,505 0.43 282,919.77 0.15 6,522,204 1.26 5,436,000 1.59

11 Beverages 3,307,362 1.50 3,577,676.46 1.94 5,437,409 1.05 4,061,001 1.18 12 Tobacco and tobacco products 18,698 0.01 6,085,175.50 3.30 2,378,439 0.46 2,422,738 0.71 21 Raw leather and pelt 3,370,301 1.53 1,708,982.38 0.93 35,798 0.01 36,300 0.01 22 Oil grain 6,770 0.00 7,380,339 4.00 57,979 0.01 45,290 0.01 23 Natural rubber 0 0.00 0 0.00 33,277 0.01 7,479 0.00 24 Cork and wood 3,638,877 1.65 2,453,853.16 1.33 797,724 0.15 580,416 0.17 25 Cellulose and paper pulp 72,852 0.03 69,935.87 0.04 1,210,177 0.23 466,450 0.14 26 Textile fibers and textile byproducts 7,375 0.00 42,163.50 0.02 676,575 0.13 486,737 0.14 27 Compost and minerals 366,064 0.17 1,405,258.39 0.76 766,235 0.15 383,009 0.11

28 Metal ores (nickel, aluminum and copper)

5,068,141 2.30 3,090,614.61 1.67 4,612,269 0.89 994,188 0.29

29 Animal and plant products 164,323 0.07 188,470.08 0.10 616,591 0.12 1,292,470 0.38 32 Mineral coal, coke and briquettes 12,843 0.01 6,073.04 0.00 74,575 0.01 8,454 0.00 33 Oil and oil derivates 36,389,262 16.51 12,054,030.05 6.53 98,354,799 18.99 37,230,300 10.86 34 Natural and industrial gas 0 0.00 0 0.00 273,550 0.05 363,343 0.11 35 Electricity 0 0.00 0 0.00 58,937,560 11.38 9,698,325 2.83 41 Animal oil and fats 0 0.00 0 0.00 380,540 0.07 55,910 0.02 42 Solid animal oils and fats 191,855 0.09 17,902 0.01 2,831,480 0.55 951,588 0.28 43 Animal and vegetable fats and oils 315,680 0.14 85,400.38 0.05 36,895 0.01 20,214 0.01 51 Organic chemical products 19,312 0.01 10,972.40 0.01 479,935 0.09 219,298 0.06 52 Inorganic chemical products 91,013 0.04 36,887.35 0.02 9,747,337 1.88 3,660,651 1.07 53 Products for painting 107,307 0.05 779,516.44 0.42 2,704,844 0.52 2,274,304 0.66 54 Medical and pharmaceutical products 92,901 0.04 74,261.75 0.04 6,751,725 1.30 6,518,410 1.90

55 Ether oils, perfumes and other products

1,071,514 0.49 470,238.07 0.25 12,805,345 2.47 13,264,530 3.87

56 Fertilizers (except unprocessed) 51,620 0.02 0.00 0.00 65,708 0.01 171,088 0.05 57 Unprocessed plastics 6,371 0.00 20,928.07 0.00 780,224 0.15 311,227 0.09 58 Molded plastics 186,273 0.08 21,887 0.01 3,466,473 0.67 2,609,290 0.76 59 Chemical substances and products 220,567 0.10 5,371.32 0.00 3,919,538 0.76 3,206,294 0.94 61 Leather and leather products, pelts 369,775 0.17 0 0.00 263,505 0.05 5,250 0.00 62 Rubber products 264,205 0.12 217,290.01 0.12 4,332,237 0.84 3,146,569 0.92 63 Cork and wood products 211,566 0.10 153,501.88 0.08 4,308,547 0.83 2,657,925 0.78

64 Paper, cardboard and cellulose products

611,293 0.28 180,859.07 0.10 9,623,819 1.86 9,136,826 2.67

65 Yarn, tissue and textile products 109,241 0.05 26,558.40 0.01 3,112,578 0.60 2,406,987 0.70

66 Construction materials (cement, glass, sand etc.)

269,724 0.12 115,884.07 0.06 27,246,553 5.26 15,441,175 4.50

67 Iron and steel 1,194,155 0.54 5,508,093.97 2.98 6,103,631 1.18 9,211,678 2.69 68 Ferrous metals 135,179,443 61.33 107,232,374.29 58.07 3,620,717 0.70 1,595,972 0.47 69 Metal products 898,474 0.41 3,988,067.26 2.16 11,386,795 2.20 9,320,721 2.72 71 Industrial machines and devices 27,936 0.01 2,112,375.43 1.14 1,496,230 0.29 1,746,405 0.51 72 Special purpose machinery 79200 0.59 551,801.80 0.30 10,478,606 2.02 6,278,765 1.83 73 Machines for metal processing 1,278 0.00 8,659.19 0.00 1,502,911 0.29 995,735 0.29 74 Industrial machines for general use 1,308,879 0.59 539,063.38 0.29 20,330,820 3.93 11,393,052 3.32

75 Machines for offices and data processing

119,587 0.05 88,721.90 0.05 8,027,704 1.55 7,150,792 2.09

76 Telecommunication equipment 27,325 0.01 149,970.20 0.08 11,651,345 2.25 19,343,238 5.64 77 Electrical machines and equipment 317,039 0.14 463,917.68 0.25 25,548,203 4.93 17,031,498 4.97 78 Vehicles 187,934 0.09 1,106,023.03 0.60 23,271,256 4.49 31,340,122 9.14 79 Other transportation equipment 14,328,119 6.50 13,739,481.52 7.44 1,098,249 0.21 12,694,275 3.70 81 Prefabricated buildings 54,164 0.02 30,273.45 0.02 2,401,925 0.46 2,473,171 0.72 82 Furniture and parts 333,967 0.15 390,517.76 0.21 8,806,405 1.70 7,136,867 2.08 83 Traveling equipment 2,695 0.00 3,186.10 0.00 578,171 0.11 716,877 0.21 84 Clothing 341,760 0.16 389,788.11 0.21 4,278,928 0.83 4,875,996 1.42 85 Footwear 659,611 0.30 737,604.14 0.40 2,643,262 0.51 4,140,456 1.21 87 Scientific instruments 23,100 0.01 504,865.82 0.27 3,006,774 0.58 2,256,254 0.66 88 Cameras and clocks 4,256 0.00 157,383.95 0.09 1,463,821 0.28 1,242,093 0.36 89 Other finished products 659,049 0.30 247,119.55 0.13 8,288,925 1.60 9,890,737 2.89 93 Special transactions 0 0.00 13,231.42 0.01 0 1,744 TOTAL 220,426,698 100.00 184,660,219.00 100.00 517,919,275 100.00 342,809,234 100.00

Source: Central Bank of Montenegro. Note: Data for first 11 months 2003 are preliminary


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8. EXTERNAL SECTOR 8.1. FOREIGN TRADE 8.1.1 Foreign trade structure by goods The structure of exports and imports by goods is presented for the period January-November 2003 and for the correspondent period in 2002 (table 8.1). Data was obtained from the Central Bank of Montenegro and covers foreign trade with all countries, excluding Serbia, but including Kosovo.1 With respect to imports in the first eleven months of 2003, it can be concluded that oil and oil derivates have the highest share of total imports (10.9%). This is much lower than in the same period in 2002 when they accounted for 19%. Vehicles were the second most important import (9.14% of total imports), which is more than twice as much as compared to the same period in 2002 (when it was 4.5%). Other key imports in the period January-November of 2003 were telecommunication equipment at 2.25% of total import (2.25% in 2002 as well), electrical machines and equipment at 4.97% (the same as in 2002 -- 4.97%), followed by construction materials at 4.5% (as compared to 5.26% in 2002). During this period of 2003 the category: “other transportation equipment” experienced a significant increase from 2002, going from 0.21% to 3.7% of total imports in 2003. The category “ether oils, perfumes and other products” represented 3.9% of total imports in the period January-November 2003; while its share in the corresponding period of 2002 was lower (2.47%). The share of meat and meat products declined from 4.4% of total imports in the first eleven months of 2002 to 3.9% in the corresponding period of 2003. Likewise, the share of vegetables and fruits went down from 5.54% in the period January – November 2002 to 3.5% in the same period of 2003. The share of electricity in total imports decreased significantly and amounted to 2.8% of total import in 2003, while in the same period of 2002 it was 11.4% of total imports. In total, imports of these products accounted for approximately 50% of total Montenegrin imports. Considering exports by sector, it can be concluded that its structure in the period January-November 2003 remained fairly constant to that of the corresponding period of 2002. “Ferrous metals”, the aluminium dominated export sector, represented 58% of total exports, while its share was somewhat higher (61.3%) in the same period of 2002. The second most important category of exports in the first eleven months of 2003 was “other transportation equipment,” which represented 7.44% of total exports, higher than its share (6.5%) in the same period of 2002. The third significant exports category in this period was oil and oil derivatives, which represented 6.5% of total exports, which is a significant reduction from the same period of 2002 (16.5%). The fourth dominant sector of exports in the period January-November 2003 was vegetables and fruits whose participation increased to 2.2% of total exports compared to 1.7% in 2002. The fifth significant exports sector was “metal ores,” which represented 1.7% of total exports in the first eleven months of 2003, while its participation in 2002 was a bit higher (2.3%). Combined, the sectors listed above accounted for 75.8% of all exports in the first eleven months of 2003.

1 Data on trade with Kosovo according to this clasificationa are not available since 2003.


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8.1.2 Foreign trade structure by countries of destination and origin Table 8.2. Foreign trade structure by country

Imports Exports 2002 2002 2003 2002 2002 2003 Country

Jan-Dec Jan-Nov Jan-Nov Jan-Dec Jan-Nov Jan-Nov in % of total imports in % of total exports

Bosnia and Herzegovina 10.20 3.68 8.70 3.11 2.36 8.62 Croatia 9.48 10.24 6.12 0.46 0.06 1.40 Kosovo 0.29 0.32 _ 20.48 21.44 0.00 Slovenia 9.57 9.79 12.27 0.35 0.38 1.12 Italy 10.99 11.20 13.83 5.62 5.05 10.94 Greece 6.98 6.94 11.29 0.34 0.40 3.18 Germany 5.85 5.60 7.60 0.33 0.29 0.6 Cyprus 4.37 4.47 4.62 2.53 2.71 3.35 Hungary 1.89 1.86 2.06 2.04 2.31 1.32 Virgin Islands 1.62 1.80 0.66 0.57 0.65 2.39 Albania 0.84 0.00 0.00 0.85 1.07 0.79 Austria 4.39 4.43 6.00 0.03 0.03 0.04 Gibraltar 2.67 3.00 0.06 0.19 0.00 0.00 Great Britain 8.06 9.07 4.05 0.24 0.27 0.17 Lichtenstein 0.99 1.11 0.08 0.00 0.00 Malta 0.05 0.00 0.00 1.01 0.94 0.79 Switzerland 1.85 1.64 3.00 59.39 58.00 60.13 USA 5.10 5.07 1.73 0.28 0.32 0.24 Other 14.81 19.78 17.93 22.66 25.16 5.71 Total 100.00 100.00 100.00 100.00 100.00 100.00 Total in euros 594,236,575 521,015,676.00 358,627,666.00 263,752,161 227,701,026 168,101,435

Source: Central Bank of Montenegro Note: Due to the lack of data, Kosovo is not included in 2003 structure

Graph 8.1 Import structure by countries of origin in January-November 2002 and 2003

Gibraltar3%

Austrija4%

Djevičanska ostrva2%

Velika Britanija9%

Grčka 7%

Njemačka6%

Kipar4%

Bosna i Hercegovina4%

Madjarska2%

Italija11%

Lihtenštajn1%

Kosovo0%

Ostali22%

Hrvatska10%

Slovenija10%

SAD5%

jan-nov 2002

Slovenija12%

Austrija6%

Djevičanska ostrva1%

Velika Britanija4%

Grčka 11%

Njemačka8%

Madjarska2%

Lihtenštajn0%

Bosna i Hercegovina9%

Kosovo0% Ostali

20%Gibraltar

0%

Italija14%

SAD2%Hrvatska

6%

Kipar5%

jan - nov 2003


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Graph 8.2 Exports structure by countries of destination in January-November 2002 and 2003

Bosnia i Herzegovina2.4%

Germany 0.3%

Italy5,1%

Greece 0,4%

Kosovo21,4%

Virgin Islands0.7%

Hungary2.3%

Albania1.1%

Cyprus2.7%

Malta0.9%

Switzerland 58.0%

Other4.8%

jan- nov 2002

Malta0.8%Cyprus

3.4%

Albania0.8%

Hungary1.3%

Virgin Islands2.4%

Kosovo0.0% Greece

3.2%

Italy10.9%

Germany0.6%

Bosnia i Herzegovina8.6%

Switzerland60.1%

Other7.9%

jan-nov 2003

Source: CBCG The data on export and import of goods, according to their assignment or origin in the period January-November 2002 and 2003 are from the Balance of Payments statistics and do not include Serbia2 (see table 8.2). Regarding the origin of Montenegrin imports, the former Yugoslav republics continued to make up a significant share of the total Montenegrin imports in the period January-November 2003. Imports from Bosnia and Herzegovina particularly increased to 8.7% in this period 2003, while in the first eleven months of 2002 it represented 3.7% of total imports. Share of Slovenian imports increased in the first eleven months of 2003 to 12.3% from 9.8% in the same period of 2002. Share of imports from Croatia in this period of 2003 declined to 6.1% from 10.2% in the first eleven months of 2002. Considering developed countries, which are dominant in total Montenegrin imports, several of them increased their participation in the total import structure in the period January-November 2003 as compared to the same period of 2002. The increase is especially marked with the case of Greece, but several other countries experienced the rise in import shares:

2 Data on imports and exports are not available since the second quarter 2003 and since then imports and exports from Kosovo are not included in total imports and exports.


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Greece from 6.9% in 2002 to 11.3% in 2003, Italy from 11.2% to 13.8%, Germany from 5.6% to 7.6%, Switzerland from 1.6% to 3.0%, and Austria from 4.4% to 6%. On the other hand, the US saw their share decline from 5.1% in the period January-November 2002 to 1.7% in the same period of 2003. In addition, share of imports from Great Britain in total imports fell from 9.1% in 2002 to 4.1% in the same period of 2003. Other countries whose import shares decreased in the first eleven months of 2003 compared to the same period of 2002 were Gibraltar (3.0% in 2002 and 0.06% in 2003), Virgin Islands (1.7% in 2002 and 0.7% in 2003) and Liechtenstein (1.1% in 2002 and 0.1% in 2003). Considering exports by countries of destination, exports of aluminum to Switzerland continues to be dominant. This export represented 60.1% of total Montenegrin exports in the first eleven months of 2003, while it was a bit less (58%) in the same period of 2002. However, if we compare absolute values of exports to Switzerland in the two compared periods, it can be concluded that in the period January-November 2003 exports to this country nominally decreased by 22% compared to the same period of 2002.3 The second important market for Montenegrin exports was Italy; export to this country in the first eleven months of 2003 rose to 10.9% of total exports compared to 5.5% in the same period of the previous year. The third important exports market was Bosnia and Herzegovina, which represented 8.6% of total exports in the first eleven months of 2003, while it was 2.4% in the same period in 2002. Significant share in total exports was also held by Cyprus (3.4%), Virgin Islands (2.4%) and Croatia (1.4%). In total, exports to these countries represented 90% of total Montenegrin exports in the first eleven months of 2003. 8.1.3 TERMS OF TRADE Terms of trade is defined as the ratio of the price of exports to the price of imports, and presents a measure of the profitability of foreign trade. Due to the fact that Monstat does not calculate the official Montenegrin terms of trade, the ISSP produces its own estimate of the terms of trade. It is defined as a ratio of the price level of the most important export sector and the price level of the most important import sector in Montenegro. The highest share of imports is from the oil and oil derivatives sector4 (19% in the first eleven months of 2002 and 10.9% in the first eleven months of 2003), while on the exports side, aluminum accounts for the main share of all exports (61.3% in the first eleven months of 2002 and 58.1% in the same period of 2003). Despite the fact that the ratio of these two price levels does not precisely represent terms of trade, it is a good measure of profitability of Montenegro’s foreign trade.

3The reason for this was US dollar depreciation as well. 4In the first eleven months of 2003, around 32.4% of oil and oil derivatives were re-exported, which impacted export prices. This reduced net contribution of oil imports to actual terms of trade.


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Graph 8.3. Prices of crude oil and aluminum3

15

20

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200

3

USD

per

bar

rel

1300

1400

1500

1600

1700

USD

per

ton

Crude oil (left axis) Aluminum (right axis)

Source: KAP (export prices of aluminum), International Financial Statistics (IFS)-average crude oil prices, SPOT

Graph 8.3 presents the export prices of aluminum (in USD per ton), as provided by the Aluminum Plant Podgorica (KAP). The price of crude oil is the price at the international market5 (USD per barrel) taken from the International Financial Statistics database (IFS).

Graph 8.4. Terms of Trade in Montenegro (Approximation)

70

80

90

100

110

120

130

M1

2001

M2

2001

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2001

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M9

2003

M10

200

3

M11

200

3

Terms of Trade (approximation), 2000:1=100

Source :ISSP calculations based on data from KAP and IFS

Graph 8.4 presents an approximation of the Montenegrin terms of trade. The base of the series is January 2001. As shown in the graph, Montenegrin terms of trade were improved in 2001 and deteriorated in 2002. First quarter of 2003 saw an improvement of the TOT while last three quarters were marked by a relative stabilization at a below 2001 and 2002 level.

5 The average price of SPOT oil


ISSP - CEPS 82

8.2. BALANCE OF PAYMENTS The analysis of the Balance of Payments of Montenegro in the first eleven months of 2003 and the corresponding period of 2002 is given in the following text. Furthermore, due to the lack of December 2003 data, an estimation of the Balance of Payments and its sub-accounts for the entire 2003-year has been made. To calculate the December 2003 data, we used the shares of December in all-year balance of payments of 2003 for every balance of payments position. We assumed that the share of all balance of payments positions in December 2003 in all 2003 balance of payments are the same as those estimated in the previous year. Balance of payments in Montenegro consists of the current account, capital and financial account and net errors and omissions and it is expressed in US dollars. The reason that balance of payments is presented in dollars is due to the fact that most of the transactions registered in the balance of payments are in dollars. When we consider the weakening of the dollar and the strengthening of the euro (the official currency in Montenegro), it can be concluded that certain positions (especially exports and imports) of the Montenegrin balance of payments expressed in euros were much lower compared to the previous year. Thus, dollar data comparisons of 2003 with 2002 (when the dollar was much stronger and the euro weaker) can be misleading. This is a very important factor that should be considered when commenting on the balance of payments in 2003. 8.2.1 Current account The current account balance consists of: the trade balance (exports plus imports of goods), balance of services, balance of income (compensation of employees and investment income), and balance of current transfers. The current account deficit in Montenegro in the period January-November 2003 amounted to US$ 158.5 million and nominally decreased by 23% compared to the same period in 2002. Total revenues were equal to US$ 669.3 million, 26.3% higher than in the same period of 2002 when these revenues amounted to US$ 530.1 million. Total expenditures of the current account in 2003 were US$ 828.2 million, a nominal increase of 12.5% compared to the first eleven months of 2002 when these revenues amounted to US$ 736.4 million. According to the ISSP estimation, the current account deficit for the entire 2003 was US$ 160.6 million and was 0.3% lower than in 2002. Goods trade Total trade of goods (imports plus exports) amounted to US$ 930.5 million and increased by 7.4% compared to the same period of 2002. The reason for this was the strengthening of the euro rather than an increase of import and export quantity. Exports in the first eleven months increased by 15.6% compared to the corresponding period of the previous year, while imports increased by 3.1%. Overall, the ratio of exports to imports was 43.5% and was higher than in the first eleven months of 2002, when it amounted to 38.8%. The resulting trade deficit was US$ 366.2 million in the period January-November and was 4.8% lower compared to the same period of 2002. The estimated deficit of goods traded in 2003 was US$ 376.7 million, a nominal decrease of 6.2%.


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One of the causes of increased exports and imports in the analyzed period of 2003 was the higher goods trade with Serbia, especially on the imports side. Namely, imports from Serbia in the first eleven months of 2003 increased by 47.1% compared to the same period of 2002, while exports to Serbia and Kosovo increased by 15.9%. Another reason for higher imports in this period of 2003 was the increase of electricity imports by 13.8% compared to the period January-November 2002. Balance of services The surplus on services amounted to US$ 131.1 million, a nominal increase of 32.2% compared to the same period of 2002. The main reason for the surplus increase was the 35.2% increase in transportation revenue, as well as tourism revenues, which increased by 30.7%. A deficit was registered in the balance of financial services, but it did not significantly impact the total balance of services. Income The balance of income nominally increased by 11.5% in the first eleven months of 2003 compared to the same period of the previous year. The main cause of this surplus increase was the nominal increase of compensation of employees that work abroad by 127.6%. However, the increase of this revenue is the result of the way in which they are recorded. Namely, a large part of the transactions from compensations for employees who work abroad (SWIFT transactions from abroad) were previously carried out through banks that had their headquarters in Serbia and thus, the CBM could not register these transactions. However, in 2003 all international SWIFT transactions were made through the banks that received a working license from the CBM. Thus, these transactions were recorded by the CBM, which caused a nominal increase of compensations from employees abroad, but in reality, might not have increased at all. Transfers In the first eleven months of 2003, the surplus of the balance of current transfers decreased by 35.8% compared to the corresponding period of 2002. The main reason for this decline was a decrease in foreign aid by 2.1% compared to the period January-November 2002. 8.2.2 Capital and financial account Capital account Capital account transactions in Montenegro have not been registered at all since 2001 because the Central Bank of Montenegro (CBM) still has not adopted the accounting methodology of these transactions. Financial account In the financial account of Montenegro, the position “other investments” is still the most significant and amounts to US$ 31.7 million, an increase of 22.9% in the first eleven months of 2003 compared to the same period of 2002. One of the reasons for this increase is the credit received from the World Bank in the first quarter of 2003. Foreign direct investments amounted to US$ 44.7 million in the period January-November 2003 and decreased by 40.2% compared to the corresponding period of 2002.


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Net portfolio investments were positive in the first eleven months of 2003 and amounted to US$ 188 thousand, while these investments amounted to US$ -199 thousand in the same period of the previous year. Additionally, the Central Bank of Montenegro includes in the financial account of the balance of payments two items: “Change in Net Foreign Assets of commercial banks” and “Change in CBM foreign reserve assets.” The position “Change in Net Foreign Assets of commercial banks” amounted to US$ 26.6 million, while it was negative in the corresponding period of the previous year and amounted to US$ –37.5 million. Change in CBM foreign reserve assets was negative (US$-18.1 million) and lower than in the first eleven months of 2002 (US$ -16.2 million). 8.2.3 Net errors and omissions The total balance of current, as well as capital and financial accounts, was US$ -73.6 million in the first eleven months of 2003. This represents an improvement over the same period of 2002, when this balance amounted to US$–171 million. The position “net errors and omissions” is explicitly set equal to the joint current and capital and financial account. Thus, the position “net errors and omissions” in the period January-November 2003 amounted to US$ -73.6 million and was equal to the balance of the above mentioned accounts (current as well as capital and financial). Problems regarding the current, capital and financial accounts and the accounting system6 as well as other issues related to balance of payments accounting are explained in more detail in MONET 13 (chapter 8).

6 As a result of undefined foreign reserves and BoP financing item, the gap in the balance of payments (current account balance+capital and financial account balance) is explicitly ascribed to net errors and ommissions.


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Table 8.3 BALANCE OF PAYMENTS IN MONTENEGRO 2001-2003. (in 000 USD)

2001 Jan-Dec 2002 Jan-Dec 2002 Jan-Nov 2003 Jan-Nov Change in

US$ value ( in%)

CURRENT ACCOUNT BALANCE -175.016 -161,119 -206,248 -158,876 -22.97Total current account revenues 565,685 667,150 530,151 669,329 26.25Total current account expenditures 740,701 828,269 736,399 828,205 12.47

GOODS AND SERVICES BALANCE -349.9 -306,255 -285,644 -235,114 -17.69GOODS BALANCE -436,644 -401,590 -384,781 -366,185 -4.83Total exports of goods 210.8 305,065 244,158 282,200 15.58Export of goods excl. trade with Serbia and Kosovo and aluminum 46.53 51,075 37,182 67,731 82.16Export of aluminum 141,485 157,641 126,276 120,923 -4.24Export to Serbia and Kosovo 22,785 96,349 80,700 93,546 15.92Total imports of goods 647,444 706,655 628,939 648,385 3.09Import of goods excl. oil, electricity and trade with Serbia and Kosovo 358,815 390,600 350,132 329,815 -5.80Import of electricity 33,327 46,159 42,752 48,664 13.83Import of oil and oil derivatives 152,757 100,259 83,719 45,785 -45.31Import from Serbia and Kosovo 102,545 169,637 152,336 224,121 47.12SERVICES BALANCE 86,744 95,335 99,137 131,071 32.21Total revenues from services 134,549 166,392 160,327 212,985 32.84Total expenditures to services 47,805 71,057 61,190 81,914 33.87Total Transportation Revenues 25,422 33,933 29,814 40,304 35.18Transport official data about revenues corrected by 12% (estimate) 23,648 30,801 26,842 34,194 27.39Transport revenues from Serbia 1,774 3,132 2,972 6,111 105.58Total Transportation Expenditures 17,965 23,330 20,692 28,087 35.74Transport official data about expenditures corrected by 12% (estimate 16,705 18,841 17,154 21,416 24.84Transport expenditures to Serbia 1.26 4,489 3,538 6,672 88.57Balance of transportation services 7,457 10,603 2,972 6,111 105.58Total Revenues from Tourism 94.91 117,858 116,778 152,240 30.37Revenues from tourists abroad (estimate) 36,345 58,516 57,871 69,014 19.25Revenues from tourists from Serbia 58,565 59,342 58,907 83,226 41.28Total Expenditures to Tourism 4,496 7,573 6,780 10,292 51.80Expenditures for tourism abroad 4,346 6,046 5,511 8,126 47.45Expenditures for tourism in Serbia 0.15 1,527 1,269 2,166 70.69Balance of tourism 90,414 110,285 109,998 141,948 29.05Revenues from Financial Services 3,667 2.54 2,450 2,870 17.14Commission fee 3,622 2,139 2,079 1,555 -25.20Commission fee on Serbian import/export (estimate) 0.045 0.401 371 1,315 254.45Expenditures to financial services 2,858 3,151 2,821 6,579 133.22Commission fee 2,788 2,661 2,436 5,367 120.32Commission fee on Serbian import/export (estimate) 0.07 490 385 1,212 214.81Balance of financial services 0.809 -0.611 -371 -3,709 899.73Revenues from other Services 10.55 12,061 11,285 17,571 55.70Expenditures for other services 22,486 37,003 30,897 36,956 19.61Balance of other services -11,936 -24,942 -19,612 -19,385 -1.16INCOME BALANCE 41,631 62,818 53,411 59,555 11.50Income revenues 77.72 103.72 90,532 148,004 63.48Compensation of employees 36,578 52,315 46,707 106,311 127.61Revenues from Serbia for physical persons 39,702 50,329 43,676 41,141 -5.80Received dividends 0.152 0.149 0 4Interest revenues 1,288 0.927 149 548 267.79Income Expenditures 36,089 40,902 37,121 88,449 138.27Compensation of employees 30,043 31,157 27,543 67,527 145.17Expenditures for physical persons in Serbia 0.103 0.296 295 1,185 301.69Interest expenses 2,048 1,501 1,335 13,132 883.66Paid dividends 3,895 7,948 7,948 6,605 -16.90CURRENT TRANFERS BALANCE 133,253 82,318 25,985 16,683 -35.80Current transfers to Montenegro 142,616 91,973 35,134 26,140 -25.60Transfers to Montenegro from abroad 10,175 5,189 4,823 3,441 -28.65Foreign assistance 62,262 39,784 30,311 22,699 -25.11Foreign assistance financial and material (NGO, humanitarian 70,179 47Expenditures 9,363 9,655 9,149 9,457 3.37Transfers from Montenegro abroad 9,363 9,655 9,149 9,457 3.37CAPITAL AND FINANCIAL ACCOUNT BALANCE 10,658 121,078 35,218 85,308 142.23CAPITAL ACCOUNT 0 0 0 0FINANCIAL ACCOUNT 10,658 121,078 35,218 85,308 142.23Direct investment 9,522 84,329 74,720 44,677 -40.21Equity capital 4,218 73,861 74,720 44,677 -40.21Reinvested earnings and undistributed branch profits 5,304 10,468 0 0Portfolio investment-net -0,011 -201 -199 188 -194.47Other investments -5,453 4,869 14,376 31,971 122.39Loans 2.62 23,533 20,314 59,677 193.77Repaid loans 8,073 18,664 5,938 27,706 366.59Change in Net Foreign Assets 6,6 22,257 -37,481 26,554 -170.85Change in CBM foreign reserve assets (term deposits of CBM in foreign banks)

0 9,824 -16,198 -18,082 11.63

BALANCE OF CURRENT ACCOUNT AND CAPITAL AND FINANCIAL ACCOUNT

-164,358 -40,041 -171,029 -73,568 -56.85

NET ERRORS AND OMISSIONS -164,358 -40,041 -170,029 -73,568 -56.85

Source: Central Bank of Montenegro Note: Data for eleven months 2003 are preliminary

Chapter 9. Regional Comparison

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9. REGIONAL COMPARISON The first part of this chapter presents a short outlook of the macroeconomic indicators in Southeastern Europe in 2003. The second part of the text provides an overview of the impact that exchange rate changes have had on the trade balances in the region. 9.1 MACROECONOMIC INDICATORS Estimated real GDP growth in Southeastern Europe in 2003 was close to its growth rate in 2002. Estimated real GDP growth rate1 in 2003 was highest in Albania (6%), Bulgaria (4.5%) and Romania (4.5%), while in Montenegro, Serbia, and Macedonia, it was the lowest. Graph 9.1 presents the cumulative real index of GDP for most of the countries in the region, beginning in 1996.

Graph 9.1 Real GDP in Southeastern Europe (1996=100)

80

100

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180

200

1996 1997 1998 1999 2000 2001 2002 2003*

Albania Montenegro Bosnia and Herzegovina

Bulgaria Croatia Romania

Macedonia Serbia

Source: IMF, Vienna Institute for Economic Research (WIIW) and ISSP * GDP data in 2003 are preliminary Almost all countries in the region increased their industrial production in 2003. The average industrial production for the first 11 months of 2003 particularly increased in Macedonia (6.5%) and Croatia (4.3%) compared to the same period in 2002. Positive annual growth rate of industrial production was reached in Romania (3.0% in November) and Serbia (2.0% in November). Industrial production in Montenegro was 2.4% higher in 2003 than in 2002. Inflation in the Southeast European countries was at a similar level, or even slightly lower, in 2003 compared to the previous year. Although annual inflation rate (CPI) was lowered in Romania (14.1% in December 2003 versus 17.8% in December 2002), Serbia (8.1% in December 2003 as compared to 11.8% in December 2002) and Montenegro (6.1% in December 2003 versus 9.2% in December 2002), these countries still have the highest

1 ISSP;Official forecasts of the countries in the region, IMF and Vienna Institue for Economic Researches (WIIW)


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inflation rates in the region. For several countries in the region whose exchange rate is fixed to the euro (Montenegro, Bosnia and Herzegovina, Bulgaria), the lower inflation may be in part caused by the appreciation of the Euro against the US dollar, as well as the efforts that these countries have undertaken in order to reach macroeconomic stability. More favourable inflation rates, and the resulting lower inflation expectations, contributed to the decreased interest rates for Macedonia, Albania, Montenegro, and Serbia in 2003. Furthermore, almost all countries in the region, according to the central banks statements, managed to reduce their budget expenditures. As an outcome of that reduction, the fiscal pressure on the central banks to finance budget deficits was also decreased compared with previous years. Table 9.1: Macroeconomic indicators of the South-eastern European countries

Alb

ania

Bos

nia

and

Her

zego

vina

/Rep

ublik

a Sr

pska

Bul

gari

a

Cro

atia

Mac

edon

ia

Mon

tene

gro

Serb

ia

Rom

ania

2001 6.0 4.0 4.0 3.8 -4.5 -0.2 5.5 5.0 2002 4.3 2.3 4.3 5.2 0.7 0.8 4.0 3.8 Real annual

GDP change (in %) 2003

6.0 (Official forecast)


4.5** 4.0

(Official forecast)

2.2 (first

quarter)

0.5 (Prognose)

2.5** 4.5**

2001 - 12.2/-12.9 2.4 6.0 -23.2 -2.7 0.0 8.4 2002 2.0 9.2/-2.5 3.3 5.7 13.7 0.7 1.7 6.0 Annual change

in industrial production (in

%) 2003 2.0/-1.6

(Mar) -

-0.3 (Nov) 4.3

(Jan-Nov)

0.5 (Nov) 6.5

(Jan-Nov)

1.6 (Nov)

2.4 (Jan-Dec)

2.0 (Nov)

3.0

o (Nov)

2001 3.5 0.3/ 2.2 4.8 2.6 1.2 24.0 38.7 34.5 2002 2.1 -0.7/2.4 3.8 2.3 2.2 9.2 14.8 22.5 Annual

inflation rate (CPI, in %) 2003 2.9 (Okt) 1.0** 2.4**

2.8 (Nov)

1.9 (Nov)

6.1 (Dec)

8.1 (Dec)

14.1

o (Dec)

Currency name

Lek Convertible Mark; BAM

Leva Kuna Denar Euro Dinar Lei

2003 (per €)

134.43 (Dec-03)

1.956 (Dec-03)

1.962 (Dec-03)

7.65 (Dec-03)

61.29 (Nov-03)

- 68.3 (Dec-03)

40.193.1 (Nov-03)

National currency (for

€1) annual change in

% 2.3 - - 2.7 0.4 - 11.0 20.5

2001 14.6 39.9/ 40.2 19.5 22.2 30.5 24.8 27.7 8.1 2002 15.8 42.7/ 38.2 16.3 22.3 31.9 23.7 28.5 8.8 Unemployment

rate (in %) 2003


43.1/36.6 (Mar)

14.8** 21.9** 36.7 (Apr)

21.6 (Dec) 29.7 (Oct)

7.2 (Nov)

2001 -22.6 -29.1 -11.6 -18.9 -15.3 -37.8 -26.1 -13.2 Trade balance (as % of GDP) 2002 -24.6 -38.0 -16.2 -23.5 -8.8 -26.2 -34.8 -8.6

2001 -6.1 -23.1 -6.5 -3.7 -6.9 -19.1 -5.5 -5.9 Current account

balance (as % of GDP)

2002 -9.5 -22.0 -10.2 -7.1 -14.2 -13.6 -8.2 -4.5

*Data on GDP in 2003 are official projections or projections of IMF, Sources:

Data for Montenegro are from the ISSP database Data for other countries in the region are from their central banks Data for Bosnia and Herzegovina in 2003 are from IMF-a **www,dfat,gov,au/geo/fs/serb,pdf

Chapter 9. Regional Comparison

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Unemployment rates in countries of the region for 2003 were a bit lower compared to the previous year. The highest unemployment rates prevail in Bosnia and Herzegovina, Macedonia, Serbia and Montenegro. Due to methodological differences unemployment rates in the region are not directly comparable. Regardless, despite the fact that there is some reduction of the number of unemployed in the countries of the region, unemployment rates are still rather high. In 2003, Romania and Bulgaria continue to have the lowest unemployment rates in the region, at 7.2% and 14.8%, respectively. The current account balance in several countries in the region were improved, particularly in the second half of 2003. The impact of the depreciation of the US dollar on the current account deficits was particularly significant in the countries in the region whose exchange rate is tied to the Euro. Data related to 2003, the year in full, will be published in the next MONET issue. 9.2. REGIONAL FOCUS: FOREIGN EXCHANGE RATE IMPACT ON THE TRADE BALANCE OF THE COUNTIRES IN THE REGION The change in world prices of oil as well as the volatile Euro/USD exchange rate impacted foreign trade and the overall balance of payments in all countries in the region. The average USD price of crude oil (“Brent”) increased in nominal terms by 16.4% in the period of January-October 2003 compared to the same period in 2002. However, in the same period, the US dollar weakened considerably against the Euro, so the final euro price actually fell by 4.3%2. In addition, the import price of natural gas expressed in euros has registered a slight decline of 0.7% compared to the same period in 2002. Thus, changes in the prices of these goods (which account for a high share of imports) have had a positive effect on the trade balances of the countries in the region whose exchange rates are pegged to the Euro. This is particularly the case with Montenegro, with the Euro as its official currency, as well as Bosnia and Herzegovina and Bulgaria whose exchange rates are tied to the Euro. As a result of these price and exchange rate changes the overall cost of imports expressed in euros declined, particularly in countries where oil and gas imports had a significant share in total 2003 imports (11% of total imports in Montenegro and 16.2% of total imports in Bulgaria). On the other hand, exports from countries whose national currency is tied to the Euro became less competitive due to the strengthened Euro. In 2003, the leading Montenegrin exporter, Aluminium Combine Podgorica (KAP), despite the rise of export quantity (see chapter 1), registered lower revenues from exports ( see chapter 8 for more details). The net effect of all these trends was the rise in the USD value of both imports and exports in Montenegro during the 11 months of 2003 as compared to 2002. However, exports grew more than imports resulting in improvements in the current account balance expressed in USD (see chapter on foreign trade).

2 Central Bank of Bulgaria


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PART 2

Comments

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COMMENT 1

HOW FAR WILL THE DOLLAR FALL? By Richard W. Rahn How far will the dollar fall, and should we care? We should be concerned, but if the administration, the Federal Reserve and the Congress act responsibly, the dollar should be near its bottom and begin to rise against most foreign currencies. The dollar has fallen sharply, about 30 percent, against the euro during this past year. At the moment, one has to pay about $1.24 for each euro, while three years ago one only had to pay about 80 cents for a euro, but at the beginning of 1999 the euro cost about $1.15. The dollar has also fallen in recent months against the British pound, the Japanese yen and many other currencies, but as much as it fell against the euro. These wide swings in currency values increase instability in the world economy by impeding international trade and investment because of rising uncertainty. Some applaud the dollar's fall because they believe it makes U.S. exports less expensive and that higher demand will cut the trade deficit. The downside of a low-value dollar is that it makes all the imports we consume more expensive, including raw material and parts used by U.S. businesses, and makes it costlier for U.S. dollar holders to travel or invest outside the U.S. A continued drop in the dollar's value could destabilize the international economy, leading to a worldwide recession. Some argue our large trade deficit (or current account deficit) is responsible for the fall in the dollar's value. They have it backward. It is the flow of foreign investment dollars (the capital account) into the U.S. economy that drives the trade deficit. The U.S. economy's higher return on capital than Europe or Japan for the last 20 years caused private foreign investors to buy U.S. stocks and bonds and other assets. In addition, foreign governments, particularly of China, Japan and other Asian states, have steadily increased their purchases of U.S. dollars as reserve backing for their own currencies. The world now is actually on a two-currency standard -- the dollar and the euro. China in effect has fixed its currency to the dollar for the last two decades, and the Japanese central bank only allows the yen to fluctuate within a limited range against the dollar. In the fall 2003 issue of the International Economy, monetary economist Criton Zoakos noted: "Europe, Japan, China and the Asia-Pacific region are all export-driven economies whose growth depends on U.S. markets. The U.S. economy depends for its growth on internal, entrepreneurial high-tech ferment." So long as the U.S. continues to offer a higher return on capital than its foreign competitors, both foreign banks' and private investors' demand for dollars grow, and the current account deficit can be sustained. The whole world has a vested interest in exchange-rate stability. The export-driven economies of Asia and Europe cannot afford for the dollar to fall too much, both because their markets will dry up and the value of their dollar assets in their own currencies will


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decline. It appears the dollar rose too high against the euro two years ago and now has fallen too low. The current drop in the dollar's value owed primarily to a decline in private foreign investment, and not to a decline in foreign central bank demand for dollars. The decline in private foreign demand for dollars was partially fueled by a belief the dollar had become too expensive -- a normal market response. However, the U.S. government made a series of mistakes that have discouraged foreign investors. America now is viewed as unfriendly to foreign investors. Certain provisions of the Patriot Act and the Sarbanes-Oxley Act produce excessive and costly paperwork and unnecessary privacy intrusions. The president's tax bill reduced the tax on capital for U.S. taxpayers, but kept very high withholding rates on dividends for foreign investors, making them pay relatively more for helping our economy. The Treasury Department also has not withdrawn the proposed, destructive foreign interest-reporting requirement, opposed by nearly all economists, even the administration's. To grow, the world economy needs reasonable currency stability. That will return when the U.S. government reaffirms belief in a strong dollar and stops driving away foreign investors by making it very costly and difficult for them to invest. If our leaders fail to understand the problem is not "the trade deficit" but destructive taxation and regulation, they will be personally responsible for the unnecessary suffering of millions of the worlds' people. The U.S. needs foreign investment to sustain its economic growth, and foreign governments and private investors need a safe and stable haven, with reasonable rates of return, for their savings.

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COMMENT 2

TRADING UP WITH NEIGHBORHOODS By Richard W. Rahn Most people prefer to live in rich neighborhoods rather than poor ones -- why is that? Perhaps they notice rich neighbors tend to keep the environment cleaner, respect property rights of others and do not engage in criminal activities threatening lives of their neighbors. The same is true of countries. We don't fear rich countries -- such as Japan, Germany, the U.K. and Switzerland -- because they do not threaten us. In fact, because they are rich, they are able to buy a lot of goods and services we produce. The old adage that the man to fear is the man who has nothing to lose is also true of failed states. Do you think that if North Korea and Iran had the same per capita income as the Dutch, they would behave in the aggressive manner they do? Most unlikely. America has more problems with Mexico than Canada, largely because Mexico is poor. If Canada was poor and Mexico rich, most Mexicans would chose to live in Mexico rather than try to move to the U.S., and many Canadians would be sneaking across our border. Even though the above is obvious, many seem to forget this when it comes to discussions of foreign trade and outsourcing. The reason we trade -- domestically or internationally -- is that through trade we can obtain something for less money than it would cost us to do it ourselves, thus freeing us to do something we are better at or enjoy more. When I was a kid, I would mow neighbors' lawns because I found that was the best way to earn money, given my limited skills at the time. Now I hire others to mow my lawn so I can do things I am better at. Trade, domestic or foreign, is a win-win situation. When we buy Chinese T-shirts, we get a less expensive T-shirt than one made in the U.S.; hence, our real incomes are in effect higher. It is true a few T-shirt makers in the U.S. may lose their jobs, but the benefits to the rest of us from lower T-shirt prices greatly outweigh the costs of a few textile workers being forced to find other employment. If you are not sure about the above assertion, think about the following. If the Chinese offered to give us all the textiles and toys we wanted for free, would we as a nation be better or worse off? The answer clearly is better off, even though the American textile and toy workers would need to seek alternative employment. Some argue it is unfair for foreigners to sell goods or services to us at very low prices and in some cases below their own costs. But as Ben Franklin is reported to have said, sunshine is unfair to candlemakers. It makes no sense to try to prevent unfairness to a few workers through tariffs or quotas by making everyone else suffer the unfairness of having to pay higher prices for things. This is why the administration was correct to remove the steel tariffs despite the self-serving whining of a few steelworkers and steel executives and, of course, some of the Democratic


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presidential candidates who would prefer to punish hundreds of millions of steel consumers rather than cause a problem for a few thousand steelmakers. Recently, many have complained about "outsourcing," whereby U.S. companies contract with foreign companies to provide such things as computer software or call centers. India is major "outsourcing" center. India now is growing rapidly, in part, because advances in telecommunications allow Indians to compete for software and call centers. The Indians who get these jobs live better, and the Americans who lose these jobs may or may not get better jobs. But all Americans benefit from lower software prices, because it gives them more money to spend on other things. And when they spend money on other things, they create many more American jobs than were lost among software workers. We should want India, China and every other country to get rich for three reasons. The first reason is that if they are rich, they are going to buy many more American goods and services. The second reason is if they are rich, they most likely will not be a problem to us or threaten war against us. The third and most important reason is that most people have better lives if they are richer rather than poorer -- whether they be Chinese, Indian, Mexican or American. We also know that when people reach middle-income levels they start pushing for more liberty and democracy. Once South Korea and Taiwan reached reasonable levels of prosperity, they drove out the authoritarian regimes they had lived under and established democratic governments that respected individual liberties. The same thing is likely to happen to China. As we enter this holiday season, let us wish all of our neighbors around the globe well, and remember that trade helps all countries become richer. It is true for America, it is true for China, and it is true for Mexico, and that is good.

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COMMENT 3

THE PUZZLE OF MONTENEGRIN INFLATION (SPECIAL FOCUS ON 2003) by Przemyslaw Wozniak, MONET/CEPS; CASE (Center for Social and Economic Research, Warsaw) 1. INTRODUCTION While the annual inflation at 6.2% in 2003 was proclaimed a success by the Government of Montenegro, we argue that it is far from satisfactory, considering the fact that Montenegro has had stable currency for over 4 years now. Inflation differential vis-à-vis the Euro-zone has been very high during this period and stood at 4 percentage points in the end of 2003. In this article we attempt to shed some new light on the structure of Montenegrin inflation, both in absolute terms and relative to the Euro zone. This allows us to suggest possible explanations and formulate some conclusions and policy recommendations.

In section 2, we take a closer look at the annual inflation rates of 365 individual goods and services in July and December 2003 to detect possible effects of the August tariff increase. To gain more insight into the tariff increase effect, we analyze the increase in dynamics in a 3-month period following the tariff change and compare it to the 3-month period preceding it. Section 3 compares Montenegrin inflation to the Euro-zone inflation, which serves as a benchmark for Montenegrin price growth of tradable goods. The comparison reveals high differentials in the non-food goods sector, and specifically clothing and footwear and office supplies. Finally, section 4 provides a summary and possible explanation for the high Montenegrin inflation as well as puts forth some policy recommendations. 2. DISAGGREGATED PRICE CHANGES IN 2003 In order to observe the structure of Montenegrin inflation in 2003, we take a closer look at the disaggregated price changes. Because August and September mark an upward adjustment in tariff rates in line with the harmonization with Serbia, we investigate annual inflation rates in July and December 2003. Graphs 1 and 2 present the annual inflation rates for 365 products and services in July and December 2003 respectively. The set of 365 products and services is non-homogenous with respect to consumption weights (individual weights vary significantly1). Prices of these goods are monitored every month in numerous retail outlets and serve as the basis for calculating the 365 price indices that are later aggregated (using the consumption weight structure) to produce the Consumer Price Index. Thus, this group represents a cross-section of Montenegrin inflation and provides a good platform to identify those sectors of the consumer goods market that were leading the inflationary process, as well as those that were lagging behind.

1 Weights on various elements of the basket presented in the graph vary from 0.01% to 5.89%


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The graphs depict individual inflation rates (y-axis) for each of the 365 goods, ordered according to 7 broad categories: food, alcohol and tobacco, clothing and footwear, accommodation, hygiene and personal products, education and culture as well as vehicles, transport , postal and telecom services. These broad categories are divided with vertical lines in the graphs. Moreover, each of those categories is disaggregated further into more detailed subcategories identified by a number that represents the particular good that starts that subcategory. Detailed descriptions of all subcategories along with category ranges (starting and ending numbers) and consumption weights can be found in Box 1. For example, the first seven inflation rates refer to cereal products, inflation rates of goods from 77 to 86 refer to eggs and dairy products and so on. In addition, a horizontal line was marked in the graphs to indicate total CPI inflation during the period concerned. BOX 1: Descriptions of Subcategories marked on X-axes in Graphs 3-6

Category Range

2002 Basket Weight SUBCATEGORY Broad Categories

1 7 7.50% Cereals and cereal products 8 21 6.21% Fresh vegetables 22 31 0.53% Processed vegetables 32 45 3.74% Fresh fruit 46 50 1.19% Processed fruit 51 76 19.72% Meat and fish products 77 86 11.48% Dairy products and eggs 87 99 6.03% Other processed food products 100 103 3.98% Coffee, tea and spices

1. FOOD

104 115 5.61% Beverages and cigarettes 2. BEVERAGES AND TOBACCO 116 173 4.74% Clothing 174 192 3.46% Footwear

3. CLOTHING AND FOOTWEAR

193 206 1.87% Accommodation 207 219 5.67% Energy and heating 220 268 1.73% Furniture and household equipment

4. ACCOMMODATION

269 282 4.32% Hygiene and cleaning 283 288 0.47% Pharmaceuticals 289 293 0.89% Cosmetic and cleaning services

5. HYGIENE AND PERSONAL CARE

294 315 2.59% Education equipment (books, pencils...) 316 328 1.41% Education, culture and sports services

6. EDUCATION AND CULTURE

329 339 0.19% Traffic vehicles 340 343 1.85% Fuel 344 352 0.36% Car maintenance 353 358 0.86% Transport 359 365 2.61% Postal and telecommunication services

7. VEHICLES, TRANSPORT, POSTAL AND TELECOMMONICATION

SERVICES

Source: Monstat 2.1. Annual inflation in July 2003

As shown in graph 1, the aggregate inflation rate of 6.9% in July was a product of an extremely varied array of individual price changes. The most extreme variations took place in the foodstuffs sector, and specifically in the markets for fresh fruits (categories 32-45) and vegetables (8-21). However, price jumps close to 40% (on an annual basis) were also registered for frozen dough and milk powder. Tobacco and beverages registered a near-zero inflation in this period mostly as a result of constant prices of cigarettes for over a year now.

Clothing registered an aggregate inflation rate in line with the CPI with no significant inter-group variations. Footwear continues to be one of the categories with an unexpectedly high price growth. Its inflation of 14% in July is double the aggregate CPI inflation and remains a puzzle of the Montenegrin consumer goods market2.

2 We indicated this problem in the article in MONET13

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Accommodation has always been one of the categories with high inflation dispersion. The year 2003 is no exception. Annual inflation rates in July have varied as much as –50% for carpets and 78% for household gas. In line with the trend present for several years now, the subcategory of “energy and heating” registered the highest annual inflation rate of 20%. Products and services within the category “hygiene and personal care” have registered moderate inflation rates, with stunning exceptions found with the toothbrush (44%) and anti-rheumatic drugs (38%). The category “education and culture” continues to register the highest inflation rates out of all categories. Just as in 2002, this is mostly the result of extreme price increases of education equipment such as schoolbooks (30%) and copybooks (83%), as well as daily newspapers (67%). Among the last category, “vehicles, transport, postal and telecommunications,” phone services registered the highest inflation rates, along with city and railway tickets and mandatory car insurance. 2.2. Annual inflation in December 2003. August 2003 in Montenegro marks the introduction of the new, higher tariff rates in line with the harmonization of economic systems with Serbia. Instead of analyzing its effects based on August or September data, we decided to investigate the inflation rates in December 2003. December data reflect all the price developments in the months following the tariff increase, allowing us to capture the delay in tariff rise effects (e.g. due to retailers holding stock purchased before August) as well as provide a good recap of the price growth in the entire 2003 as it measures price changes that took place during the 12 months of the year 2003. Annual inflation rates in December are presented in Graph 2. Comparison of the rates at year-end (Graph 2) with the rates registered in July (Graph1) suggests that no radical changes in inflation dynamics have taken place in the period from August through December. With aggregate inflation slightly lower (6.2% vs. 6.9%), food registered a small rise in dynamics while the dynamics of all other categories dropped. The drop was most pronounced in the case of education and culture (8.2 percentage points ) and footwear (4.5 percentage points). In July, fresh fruits and vegetables registered the most extreme price variations. Fresh vegetables also registered the highest inflation rates among food subcategories. The price change of this group in 2003 amounted to 23% and was followed by dairy and cereal products (both at 13%). Due to the stable prices of cigarettes and slight deflation in alcohol prices, the dynamics of the price in the entire category: tobacco and beverages dropped below zero. Clothing registered an average inflation of 5.5% while the dynamics of footwear prices, although on a falling trend, was still very high: at 9.4%. The services related to housing (e.g. electricity, gas, sewage and garbage disposal) led the inflation rate ranking for the ‘accommodation’ category, following their 18% rise in 2003. Hygiene and personal care products registered relatively moderate inflation rates, while the dynamics of education and culture dropped considerably. However, some schoolbooks and daily newspapers led the inflation list, but, the dynamics of many other goods and services got visibly lower, with some of them registering annual deflation in December. The last category, vehicles, transport and telecom services, registered an annual rate of price growth of 5.5%. The sudden price rise in this category was registered for passenger cars in October 2003 (20%). Much car-related expenditure, such as mandatory car insurance and


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car mechanics’ services, also became visibly more expensive. Passenger transport was 7% more expensive in December 2003 than in December 2002 while telecom services registered a 5.5% increase.

2.3. Tariff increase effects

It is rather hard to detect the direct effect of the tariff increase on the price developments of particular products. Manufacturing costs are shaped by numerous factors, including electricity and transportation costs, costs of ingredients or elements, labor and administrative costs including, in particular, the level of customs tariffs, etc. All of those factors play a role in the cost of manufacturing a good or supplying a service and the final wholesale price would have to balance these costs with consumer demand and the competition coming from similar imported goods. At the end of the process, retailers add their markup, which might also be high or low depending on many factors, including the competition among retailers, store location and other issues specific to the retailing sector.

Therefore it is rather difficult to disentangle these effects and single out just one factor, i.e. tariff increase in price developments of goods. In order to approximate this, we compared the average annual dynamics from the 3-month period following the tariff increase with the 3-month period preceding it. Since the new tariff rates were introduced in mid-August, we compare the average in the period August-October with the average in the period May-July. Table 1 presents the groups of goods and services which registered the highest increase in average annual dynamics between those two periods. The table excludes fresh fruits and vegetables whose annual dynamics varies strongly due to unstable supply conditions.

The ranking is opened by postal services, whose price increases naturally had nothing to do with the new tariffs. Prices of foodstuffs such as salt cookies, milk in carton, and lamb meat cannot be linked to the tariff increase since food quotas are still in place and enable imports to Montenegro at an older, lower rate. Likewise, the price of Yugo cars that rank high in the table registered a considerable increase; however, this was not as a result of higher tariffs as harmonization left tariffs for passenger cars unchanged3. Rather, the price rise that was registered in August and September for passenger cars is more likely linked to the Serbian manufacturer’s pricing policy and has no connection with the adjusted tariff. Price increases that can be potentially linked to higher tariffs are those of car tires, children’s sportswear, and small plastic objects. Clothing and plastic household goods as aggregate categories have not, however, registered an increase in dynamics. It seems that car tires, selected clothing and plastic household objects are the only products whose significant price jumps in the third quarter can be directly linked to the tariff increase. 3. PRICES IN MONTENEGRO VS. PRICES IN THE EU

After examining in detail the structure of price increases in Montenegro throughout 2003, we now turn to comparisons with the EU and specifically with the Euro-zone. Since Montenegro’s currency is the euro, its prices of tradable goods should be shaped by the Euro-zone prices. Therefore, the Euro-zone is the perfect benchmark for price dynamic comparisons with Montenegro.

Before comparing price developments, consumer basket structures will be investigated. Graph 3 presents the structure of consumer expenditures according to the 11 main purpose categories. The most striking difference in consumption structures is related to the share of food in household expenditures: 15.5% in the Euro-zone and 58.6% in Montenegro. Another visible difference is the absence of the category ‘hotels and restaurants’ in the 3 Customs tariffs remained at a level of 3% (cars up till 1500 cm3) and 5% (cars above 1500 cm3)

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Montenegrin basket. This is the consequence of the fact that the budget survey that current Montenegrin inflation data are based on did not include this category and is not an indicator that Montenegrin spend nothing on hotels and restaurants.

It is important to keep these differences in mind while analyzing the aggregate CPI index since substantial differences in the weighting structure have important consequences for resultant inflation figures. Table 2 presents year-end annual inflation figures for Montenegro and the Euro-zone for 2001, 2002 and 2003. Inflation figures are disaggregated into 3 main categories: food (incl. tobacco and alcohol), non-food goods, and services, and then further divided into several other categories. The table presents absolute inflation figures as well as the difference between Montenegro and the Eurozone, expressed in percentage points. Furthermore, graphs 4-7 present annual inflation developments of selected CPI categories and aggregate CPI for the period 2002-2003 for both Montenegro and the Eurozone. The general conclusion is that we observe some convergence of Montenegrin inflation rates to those prevailing in the Eurozone. However, this process is not completed yet and 2003’s year-end inflation of 6.2% can hardly be considered a success. Montenegro has had a strong currency for several years now (DM during 2000-2001 and the euro since then), and one of the main objectives underlying the decision to adopt the DM in 2000 was to bring inflation levels quickly down to the EU levels. In theory, this process might not be very quick due to high inflation inertia and in fact, the full equalization of inflation rates may not be achieved for a long time as prices of most services and some goods are shaped entirely in the domestic markets (the so-called nontradables). However, in the Montenegrin CPI basket, nontradables make up less than 10%4, which makes it much more appropriate to expect quick and almost full convergence of Montenegrin inflation to Eurozone inflation. New customs tariff rates have not been fully introduced yet and those that have been introduced do not appear to have brought about massive price increases (see section 2.3). Thus, with stable tariffs (until August 2003) and stable currency, why were Montenegrin consumers faced with inflation rates that exceeded the Eurozone inflation several times? The positive sign is that convergence is taking place: inflation differential was 22 percentage points in 2001, 7 percentage points in 2002, and 4 percentage points in 2003. In fact, food (including alcohol and tobacco)5 prices have achieved almost full convergence in 2003. With food prices in the Eurozone rising fast in 2003 (largely due to cigarettes), the Montenegrin rate converged fully in terms of processed foods, and was close to convergence in the case of unprocessed foods. Non-food goods remain the category where convergence is far from being complete. While higher increases in energy prices can be justified to a large extent by reforms in the Montenegrin energy system (aimed at achieving cost recovery, discouraging waste and over-consumption), a very high inflation differential for non-energy goods remains a puzzle. While these goods register annual inflation rates below 1% in the Eurozone, their inflation rates in Montenegro have been in the double-digit zone during most of 2002 and 2003 and fell to single digit levels only in September 2003, and ended the year at a 7.4% rate in December 2003. A vast majority of these goods are easily tradable and, in fact, most of

4 It should be noted that the very low share of services in the CPI basket comes from an outdated household budget survey carried out in 1997 when sanctions were in place. The actual share of services in total expenditures is undoubtedly much higher now. 5 Food is understood here together with tobacco and alcohol. As can be seen in table 3, prices of food alone register a higher differential due to deflation in alcohol prices in Montenegro.


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them sold in the Montenegrin market are imports, yet, even before the tariff rise in August 2003, their price dynamics exceeded the Eurozone levels by 10-20 times.

The category of services is mostly composed of nontradable goods, i.e. those where import pressures are weakly felt or nonexistent and therefore, their prices are expected to rise faster than those of goods6. However, this is not the case in Montenegro, where 2003 found services registering lower inflation (5.3%) than both energy and non-energy goods (13.8% and 6.7%). This makes the high inflation in non-energy goods even more surprising and worth highlighting.

Table 2 and graphs 4-7 indicate that while food inflation has almost converged to the Eurozone levels and that of services remains 5 percentage points above the Eurozone level, it is the non-energy goods inflation that seems to be the key to fast and complete convergence. Table 3 provides more detail about inflation in 2003 grouped into purpose categories that include both goods and services. We can see that clothing and footwear (almost exclusively goods) and education, recreation and culture (composed of goods in 66%) have very high inflation differentials vis-à-vis the Euro-zone. Thus, once again, we conclude that bringing Montenegrin inflation levels down to the European levels will be very difficult (if not impossible) without solving the puzzle of fast price growth in the market for many consumer goods such as clothes, shoes and school supplies.

4. SUMMARY AND CONCLUSIONS

This article attempted to investigate the structure of Montenegrin inflation in 2003 and compare it to the Euro-zone levels as well as highlight possible problems and puzzles of inflationary processes in the country. In particular, it argued that achieving the year-end inflation of 6.2% cannot be considered a success in light of the fact that Montenegro has had a stable and credible currency for 4 years now. In such an environment, inflation rates of tradable goods (more than 90% of the Montenegrin basket) should converge very quickly to the levels prevailing in the country of the adopted currency; however, this has not happened in Montenegro where the easily tradable non-food goods have registered inflation of over 10% in 2003 or 9.5 percentage points higher than in the Euro-zone. Even though some customs tariff rates increased in Montenegro in August 2003, high inflation rates in goods have been present throughout 2003 (in fact they dropped to single-digit levels in October) and cannot be blamed on the increased tariffs. In the final section of this article, we offer a few possible explanations and potential remedies to such a worrying situation.

In line with our article that was published one year ago, our belief holds that the Montenegrin market for consumer goods continues to be marred by monopolistic practices exercised by a narrow group of importers and possibly retailers. This is evidenced in the fact that easily tradable goods, such as clothes, shoes and office supplies register stunning, double digit inflation rates, while at the same time they register near-zero inflation rates in the Euro-zone – a place of origin of most imported goods. Dismantling these monopolies and market imperfections is the key to the successful and complete convergence of Montenegrin inflation to the Euro-zone levels. It appears that the creation of an Anti-monopoly Agency is strongly needed in Montenegro.

On the other hand, demand side considerations also need to be taken into account. After all, retailers would not be allowed to charge more and more for shoes if the customers were not willing to pay the price. Here, we uncover another puzzle of the Montenegrin economy.

6 The so-called ‘Harrod-Balassa-Samuelson effect’ is at work here, implying, in short, that if productivity differences exist in tradable and nontradable sectors and are coupled with wage equalization across sectors this might lead to higher price growth in services than in goods.

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The official balance of payments statistics report combined current and financial account deficits in 2001-2003. Since Montenegro does not issue its own currency, these deficits directly lower the money supply. Consequently, the official money supply (cash) estimates were lowered by over €19 million in 2001, over €60 million in 2002 and will most probably be lowered by the euro equivalent of over $70 million in 20037. This drop in the money supply was accompanied by inflation rates of 24% in 2001, 9% in 2002 and 6% in 2003. Such a situation of money falling in nominal terms and prices growing at a fast pace is very hard to reconcile and close to impossible to sustain for several consecutive years. Rather, it points to the fact that money supply estimates are not correct, which brings us to the unreliability of balance of payments statistics8 (highlighted in numerous issues of MONET, see issues 13-15). A more likely situation is that in fact, the actual balance of payments, including all unregistered flows, is positive -- the money supply is growing and customers’ spending is driving prices up. If this is the case, and many signals seem to suggest it, inflation in Montenegro is high because of considerable demand pressures in line with a growing money supply. Consequently, disinflation policies should be designed to reduce the domestic demand -- for example, fiscal9 adjustments to lower the wage and benefit bill of the central budget. However, most importantly, before taking such measures, considerable efforts should be made to improve Balance of Payments and money supply statistics. Without reliable BoP balance and money supply data it seems impossible to seriously monitor developments in the Montenegrin economy and design and implement appropriate policies.

Summing up, it should be mentioned that the problem of high inflation in Montenegro seems to be the result of a combination of two factors. First, the Montenegrin consumer market lacks competition making it easy for importers and retailers to raise their prices several times faster than is the case in the Euro-zone. This is a serious problem and deserves further scrutiny (preferably by an Anti-Monopoly Agency) as well as appropriate measures taken to deregulate the Montenegrin market and encourage competition. Secondly, even though official data suggest otherwise, money supply growth might also cause the additional inflationary pressures in Montenegro. This would suggest that the narrow group of importers and retailers find little demand limitations on the part of Montenegrin consumers and are encouraged to raise their prices. The end result is inflation rates that exceed the Euro-zone. 7 As of early February, the balance of payments statistics have been only available in USD and official money supply adjustments have not been released yet. 8 Inflation data, although not perfect (see Household Budget Survey no. 7 for an article on problems with the Montenegrin CPI) are much more reliable than the Balance of Payments data as they are based on the actual price data from shops and markets. 9 Monetary policy measures are largely beyond the reach of the monetary authorities as Montenegro does not issue its own currency.


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GRAPH 1 ANNUAL INFLATION RATES FOR 365 CONSUMER GOODS AND SERVICES IN JULY 2003

50

75

100

125

150

175

200

1 8 22 32 46 51 77 87 100

104

116

174

193

207

220

269

283

289

294

316

329

340

344

353

359

food104.4 tobacco and

beverages100.3

clothing106.8

footwear 113.9

accommodation117.2

hygiene and

person care105.4

education and culture

123.7

vehicles, transport, telecom services107.4

total inflation106.9

230 230

Source: Monstat

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GRAPH 2 ANNUAL INFLATION RATES FOR 365 CONSUMER GOODS AND SERVICES IN DECEMBER 2003

50

75

100

125

150

175

200

1 8 22 32 46 51 77 87 100

104

116

174

193

207

220

269

283

289

294

316

329

340

344

353

359

food104.7 tobacco and

beverages99.87

clothing105.5

footwear 109.4

accommodation116.1

hygiene and

person care104.2

education andculture115.5

vehicles, transport, telecom services105.6

total inflation106.2

242 230 287

Source: Monstat


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Graph 3. Comparisons of consumer basket composition in the Euro-zone and Montenegro (structure acc.

To purpose of consumption; from 2003)

Housing14.9%

Health3.9%

Clothing and footwear

7.6%

Food15.5%

Alcohol and tobacco3.8%

Miscellaneous8.1%

Hotels and restaurants9.5%

Household equipment7.9%

Education, recreation and culture

10.6%

Transport15.3%

Communications2.9%

Euro-zone

Communications2.4%Transport

3.3%

Education, recreation and culture

4.2%

Household equipment1.7%

Hotels and restaurants

0.0%

Miscellaneous3.9%

Alcohol and tobacco7.7%

Food58.6%

Clothing and footwear8.0%

Housing8.9%

Health1.4%

Montenegro

source: Eurostat and own calculations based on Monstat data

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Graph 4. Annual inflation rates of processed and unprocessed food in Montenegro (M) and the Eurozone (E).

-2.5

0

2.5

5

7.5

10

12.5

15

17.5

20

22.5

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02

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-02

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-02

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-02

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-02

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-02

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-03

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Unprocessed Food (E) Processed Food (E)

Unprocessed Food (M) Processed Food (M)

Source: Eurostat and own calculations based on Monstat data

Graph 5. Annual inflation rates of energy and non-energy goods in Montenegro (M) and the Eurozone (E)

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Graph 6. Annual inflation rates of services in housing and telecommunications in Montenegro (M) and the Eurozone (E)

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Graph.7: Aggregate annual CPI inflation in Montenegro (M) and the Eurozone (E)

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Table 1. Groups of goods and services that registered the highest inflation acceleration following the tariff changes.

Average annual dynamics during August-October Group - product - service weight (in %)

Base: average annual dynamics during May-July=100

Box shipment cost (postal) 0.01% 169.93

Telegram (postal) 0.02% 160.71

Stamp for normal domestic letter (postal) 0.06% 124.44

Postcard stamp (postal) 0.02% 124.44

Plastic bucket 0.08% 118.12

Car tyres 0.01% 111.48

Milk in tetrapak 1.12% 111.33

Mounthly payment for student…… 0.47% 111.08

Plastic box 0.02% 110.98

Salt cookies (long life) 0.03% 109.10

Car (Yugo 45) 0.01% 108.60

Lamb meat 1.09% 107.93

Public tv fee 0.17% 107.86

Monthly fee for student home 0.13% 107.65

Cocoa and cocoa products 0.05% 107.41

Children's sportwear, 100% cotton 0.04% 107.14

Car (Yugo 1,1 gx) 0.02% 106.71

Telephone call 0.01% 106.45

Canned tomato puree, kg 0.03% 105.56

Fresh trout 0.40% 105.24

Veal liver 0.36% 105.19

Source: own calculations based on Monstat data Table 2: Inflation in Montenegro and the Euro zone

Montenegro Euro zone

cons. weight

Annual inflation in December

cons. weight

Annual inflation in December

End-year inflation difference between Montenegro and the Euro Zone

2003 2001 2002 2003 2003 2001 2002 2003 2001 2002 2003

% % Percentage points

total index 100.0 23.8 9.2 6.2 100.0 2.0 2.3 2.0 21.8 6.9 4.2

total 66.4 19.8 8.0 4.2 20.4 4.6 2.2 3.6 21.8 6.9 4.2

unprocessed 32.4 18.2 7.0 4.3 12.3 6.3 2.7 3.2 15.2 5.8 0.6

food, tobacco and beverages

processed 34.0 21.2 8.9 4.0 8.1 3.5 1.4 3.8 11.9 4.3 1.1

total 25.3 24.4 11.5 10.5 40.7 0.2 1.7 0.9 17.7 7.5 0.2

non-energy 17.9 17.6 14.9 7.4 32.0 1.6 1.2 0.7 24.2 9.8 9.6 non-food

goods

energy 7.4 37.2 3.3 16.0 8.7 -4.6 3.8 1.8 16.0 13.7 6.7

total 8.2 48.6 13.4 7.7 38.9 2.8 3.0 2.3 41.8 -0.5 14.2

housing 1.9 29.4 29.9 10.7 9.7 2.0 2.5 2.2 45.7 10.5 5.4

transport 1.3 21.8 14.4 7.1 6.3 4.0 2.8 2.7 27.4 27.4 8.5

communication 2.4 61.3 0.8 4.2 2.5 -1.7 -0.6 -0.7 17.8 11.6 4.4

services

other 2.6 36.8 11.7 4.2 20.4 3.4 3.7 2.6 63.0 1.4 4.9

sources: Eurostat and own calculations based on Monstat data


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Table 3. Structure of 2003 inflation in Montenegro and the Eurozone

Eurozone Montenegro

weight annual inflation in Dec. 2003 weight annual inflation in

Dec. 2003

in %

Inflation differential (in percentage points)

All CPI 100.0 2.0 100.0 6.23 4.2

Food 15.5 2.6 58.6 4.7 2.1

Alcohol and tobacco 3.8 7.7 7.7 -0.1 -7.8

Clothing and footwear 7.6 1.0 8.0 7.3 6.3

Housing 14.9 2.3 8.9 18.8 16.5

Household equipment 7.9 1.1 1.7 2.2 1.1

Health 3.9 1.8 1.4 1.1 -0.7

Transport 15.3 1.9 3.3 1.8 -0.1

Communications 2.9 -0.7 2.4 6.0 6.7

Education, recreation and culture 10.6 0.1 4.2 15.5 15.4

Hotels and restaurants 9.5 2.8 0.0 - -

Miscellaneous 8.1 2.4 3.9 5.4 3.0

Sources: Eurostat and own calculations based on Monstat data

Comments

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COMMENT 4

LIBERALIZATION IN THE AGRICULTURAL SECTOR Vladimir Kavaric, Center for Applied Research and Analysis (CARA) 1) Preface. Opening of the Montenegrin economy, participation in the international competition, and the recent tariff harmonization with Serbia have raised arguments about the level of protection of the preferred domestic production. Dealing with the international competition produces both winners and losers. The winners are the customers (whether they are buyers of final or intermediate goods) and producers (of both products and services) that have widened their market. The losers in foreign-trade liberalization are those that lose their position in the protected domestic market because of the presence of international competition (in some cases losing a monopolistic or oligopolistic position). Increased protection of domestic production occurs as a measure for amortization of producers’ losses. These demands are particularly emphasized in the agricultural sector. As this sector is relevant to a large number of people (whether on demand or supply side) the problem is made even more real.1 Further, this text will elaborate on the basic questions and repercussions that are drawn from demands of an desirable (or undesirable) level of protection of domestic production. To what degree do countries comparable to Montenegro provide protection for the domestic production? What are the tariffs? How do they influence domestic production and the well being of citizens? Who pays tariffs? How high are the subsidies and who pays them? What is the specialty of Montenegro as small economy? What impact did the harmonization with Serbia have? How does tariff protection impact the balance of payments? Discussion should aim to provide clarification to the following questions: Is the answer to international competition increased prices of foreign products (paid by Montenegrin citizens and enterprises) or decreased prices of domestic products? Additional areas of discussion should include tariff, non-tariff protection, protectionism and redistribution or creation of sound business environment, reduction of transaction costs, and the elimination of administrative and bureaucratic procedures, free and cheap transactions, and protection of property rights. 2) Protection of domestic production and stimulation measures – countries from the region and EU. The level of tariff protection (tariffs and levies) in the region varies from case to case depending on each country and product category.2 Variations in the level of protection are significant and they mirror, to a certain degree, the differences among countries3. Some of the reasons quoted for the varied levels of tariff protection include 1 Foreign trade protection in the agricultural sector is a focus of debate because there are almost no large industrial sectors in Montenegro that are seeking protection. Large industrial entities in Montenegro are export oriented (for example aluminum plant and ship construction), while in Serbia, besides agriculture, this discussion is linked with the textile industry, automobile industry and others. 2 See: Annex 1. 3 Example: Tariff rates on milk and sugar are larger in Montenegro than in other countries in the region (Montenegro - 20%, Serbia - 20%, Macedonia - 0%, B&H - 10%, Slovenia - 7-9%, Croatia 5-15%). Import of milk in Montenegro is under levies regime too, as well as in B&H, Croatia and Slovenia (Serbia and Macedonia do not have levies on milk). Effective tariff rate in the EU is between 13.8% and 182.8%. Considering meat production in Montenegro, tariff rates are between 0%, for beef and pork and 30% for lamb, mutton and chicken meat. In Serbia, import of all meat categories has the same tariff rate – 30%, in B&H – 10%, in Slovenia


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competetive advantages of the different types of and the protection of young industries. Additionally, different levels of tariff protection in the region are followed by different subsidy levels4. On the other side, analysis of protection measures for agricultural production in developed countries (especially EU) shows a very high level of interventionism5. It is particularly underlined in subsidies that are paid to producers of agricultural products. In an environment that is characterized by a high level of interventionism, such as that of the region and the EU market, the question is: how can one set up a development strategy? How can one react to intervention policies in other states6? To answer those questions, the nature of interventionist measures has to be considered. Who pays for the protection of domestic production in Montenegro: countries that are targeted by those measures (EU and others) or domestic consumers and unprotected domestic producers? If protection measures are paid by domestic citizens and unprotected producers, upon what can a competitive strategy be built? 3) Tariff increase leads to price increase. Tariffs, as a measure of domestic production protection, represent barriers for free trade of goods. Like all other barriers, they raise the cost of goods, and this price increase does not hit only the goods of foreign origin. Restricting foreign competition brings about the rise of prices of domestic products as well. The increased levies for import of agricultural products (May 2002) and the tariffs increase through harmonization with Serbia (August 2003) provided the base for empiric testing of this theoretical argument. Example 1. Levies impact on prices and value of food consumer basket (FCB) For the analyses7 needs, monitoring of the FCB8 value was conducted. Products from the food consumer basket are divided into two groups – group L (26 products from FCB that are on levies regime) and group NL (39 products that are not on levies regime). Monitoring (July 2002 - June 2003) covers prices of all products together as well as prices for the separate groups of products (FCB, L, NL). In table 1 we see that the price increase in group L was higher than the price increase in group NL (comparing values from July 2002)

between 9% and 45%, in Croatia between 8.7% and 20%. All countries in the region adopt levies on the import of meat. Effective protection of the EU in meat production is between 15.4% and 318.8%. Tariff rates for fruit, mediterenian fruits (lemons, oranges, tangerines) and vegetables are between 10% and 30% in Montenegro and Serbia. In Serbia there are higher rates for potatoes and lettuce, while in Montenegro rates are higher for mandarines and kiwi. In Macedonia tariff protection for fruits, agrumes (lemons, oranges, tangerines) and vegetables is between 15% and 60%, in Croatia 10% and 62%, in Slovenia 5% and 43%. Effective protection in the EU in this area is between 8% and 33%. Levies for fruit and vegetables are adopted in every country. In addition to the protection that is shown in Annex 1, Montenegro has seasonal tariffs for 9 product categories with a tariff rate of 20%. 4 Example: lower level of subsidies in milk production in Montenegro than in Croatia and Serbia, follows higher level of tariff protection. See: Annex 2. 5 See: Annex 3. 6 Highly subsidized products from EU represent advantages when used as production inputs and at the same time, they represent problems for direct competition. 7 CARA, Protection measures impact on prices and production of agricultural products (July 2002 – June 2003, August 2003 – December 2003) 8 Basic criteria for FCB (food consumer basket) choice as a representative sample were: (i) consumption frequency, products from FCB satisfy food monthly needs for a four-member family and include retail prices; (ii) has big influence on living standard that reflects in fact that share of food expenditures for average family in Montenegro is between 50%-60% of total monthly expenditures; (iii) data availability in time series on the base of consistent methodology; (iv) relatively big sample (65 products) enable forming an integral indicator with minimal single influences.

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in September, October, November, December, January, February, March, April and May. The price increase in group NL was higher in August 2002 and June 2003. Table 1. Value change in FCB and groups L and NL (all groups had equal bases in July 2002)9

Jul-02 Aug-02 Sep-02 Oct-02 Nov-02 Dec-02 Jan-03 Feb-03 Mar-03 Apr-03 May-03 Jun-03

d L 100.0 101.8 103.6 104.0 107.5 103.3 107.5 108.1 108.7 110.6 112.4 107.7

d NL 100.0 103.6 100.8 101.9 102.0 101.7 102.0 103.1 103.5 104.5 108.4 110.1

d FCB 100.0 102.6 102.4 103.2 104.2 102.6 104.2 105.3 105.2 107.0 110.6 108.7

d L – Change of the value in group L (26 products that are on levies regime) - all groups had equal bases in July 2002;

d NL – Change of the value in group NL (39 products that are not on levies regime) - all groups had equal bases in July 2002;

d FCB – Changes of the value in FCB (food consumer basket - 65 products) - all groups had equal bases in July 2002.

Example 2. Tariffs increase impact on prices and value of food consumer basket (FCB) Tariffs harmonization, which came into force in August 2003, resulted in an increase of tariffs for certain groups of products and represents a new base for analyses of the impact of tariffs on pricing of agricultural products. As in example 1, monitoring of the prices and values of FCB was done. For this analysis, the FCB was divided into two product groups - T (49 products that have new increased tariffs) and NT (16 products that have the same tariffs as they had before August 2003). Monitoring showed that prices increased in the first group during the whole period (September – December 2003) and were higher than the price increases that occurred in the second group, where tariffs remained the same. Actually, in September and October, the second group, that which maintained the same tariffs as before August 2003, registered a decline in prices. Table 2. Value change in FCB and groups T and NT on the (all groups had similar base and structure in August 2003)10

August 2003 September 2003 October 2003 November 2003

December 2003

d T 100.0 102.05 102.88 103.02 106.11

d NT 100.0 99.83 99.59 100.14 102.21

d FCB 100.0 101.60 102.20 102.42 105.27

d T - Change of the value in group T (49 products that have new increased tariffs) - all groups had similar base and structure in August 2003;

d NT - Change of the value in group NT (16 products that have as same tariffs as before August 2003) - all groups had similar base and structure in August 2003;

d FCB – Change of the value of FCB (food consumer basket - 65 products) on - all groups had similar base and structure in August 2003.

9 Analyses of change in value of the FCB according to seasonal changes in structure were also done. Results obtained this way are the same for single months (value increase in group L is higher for 9 out of 11 monitored months, (with the exemption of August 2002 and June 2003), with bigger fluctuations and differences between groups. 10 Because of the relatively short reporting period, accommodation of FCB structure to seasonal changes was not made.


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The empirical testing of concrete examples proves the theoretical thesis – a tariff increase leads to a price increase. Additionally, it should be noted that this analysis considered only the change in price and value of the products from the FCB. This analysis, for methodological reasons, did not include: (i) the impact on prices of domestic products that use inputs that are on the levies regime; (ii) the impact on prices in catering and tourism that use products that are subject to levies and new tariffs; (iii) the impact on the overall inflation rate (CPI) through direct and indirect impacts on prices of products (not included in FCB); (iv) indirect effects of changes in prices; (v) indirect effects of changes in prices and consumption of other products due to the effect of "limited income". Considering all of these additional factors, we can conclude that the real price increase caused by changes in the protection level was higher than shown by the price increase limited to the FCB. 4) Tariffs increase affect producers too. Many products of foreign origin are inputs for domestic production. For example, in total Montenegrin import, the import share of intermediate goods and rough materials (production inputs) in the period of 1999-2002 is greater than 50% and the share of engines and equipment is 14%. An increase of tariffs on production inputs also increases their prices. An increase of input prices leads to an increase in prices of the final product as well, and ultimately leads to a decline in domestic competetiveness of domestic producers in the international market. Therefore, measures that are officially designed to protect domestic production (tariffs increase) actually lead to the loss of its competitiveness and a decline in export opportunities. An illustrative example of the impact of tariffs on domestic production is the import of meat and meat products by domestic producers. Besides being used in final consumption, meat is also used as input for domestic producers. A tariff increase on production inputs leads to a price increase of their final products. Competition of domestic producers (those who process the food) is reduced as are opportunities for export growth, or higher import substitution in the domestic market. It should be noted that imports of dry meat products in Montenegro in 2002 amounted to 75% of the value in 2000. This decline in import is due to the activities of domestic producers that offered these products, produced from foreign ingredients (meat), to domestic consumers. Estimations show that utilization of production capacity for the most important producers is at the level of 50%. By maintaining the old level of tariffs for beef and pork during the process of harmonization, an increase in capacity utilization and import substitution was achieved, and potentially, this could result in increased export. On the other side, the increase of tariffs for mutton from 5% to 30% operates in the reverse direction. Indirectly, but on similar principles, the impact of tariffs on producers in tourism, catering and other industries can also be seen. 5) Propensity of a small economy toward monopoly – argument against high tariff protection. One of the arguments in favor of openness of a small economy is its propensity to monopolies. We provided evidence that an increase of tariff protection leads to a price increase. This mechanism functions in the same way in small and big economies - identically in Russia, Montenegro, Cyprus and China. But, the net effects are different. Internal market potentials in big countries have a higher likelihood of amortizing shocks related to increase in the tariff protection. Domestic producers raise prices, but stronger internal competition on the supply side leads to a price equilibrium at a lower level than would be the case in small economies. In this way, even at the same tariff level, the effects on prices in small and big economies are not the same. The weaker competition that characterizes small economies leads to higher prices that can often be considered monopolistic or duopolistic prices. Let’s examine the competition structure in Montenegro for certain sectors. For example, there is very limited competition in flourmill industry (Zitopromet, Montemlin, Muharem Asovic, Abonus); production of provender (ABS,

Comments

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Koprom and Fabrika Stocne Hrane from Spuz); milk industry and meat processing. In the wine, beer and brandy industries there are only single producers. In view of such limited competition, on the supply side, tariff protection represents a single limitation to price increases. On the demand side, the effect of “limited income” is reflected as a lower demand for other types of products, food products are typically not affected because the average Montenegrin household spends between 50% and 60% of its income on food expenditures.11 Because of this, the living standard is very sensitive to changes in the prices of food products. 6) Montenegro as a price taker. The concept of a price-taker is closely connected with small economies. Due to small absorption possibilities of the domesctic market the impossibility of realizing economies of scale, small economies are unable to influence prices of imported goods. 7) Low/ high tariff rates and trade deficit? The trade deficit could be reduced by increasing exports and/ or decreasing imports. It’s clear that high tariff rates discourage imports. However,at the same time high tariff rates also encourage exports. How? First, as previously mentioned, the increase in production input prices further lowers the level of international competitiveness of domestic producers who use imported inputs. Additionally, high customs protection interferes with competitive advantages and international specialization in the global market. For instance, a small economy (or very small) cannot specialize in the production of all types of goods. A small economy could be internationally competitive in the production of a limited number of goods and services. Other goods should be bought in the international market under the most preferable conditions. High customs protection allocates resources to the most protected industries, not to industries with competitive advantages. On the other side, a low level of customs protection enables the development of competitive advantages and efficient allocation of capital. Let’s take a look at foreign trade exchange (in total and agricultural products) in Montenegro in the period 2001–2003. During that period, until August 2003, foreign trade was under a low level of customs protection, with average tariff rates of 2.8%. Table 3. Import and export (in total and agricultural products) (2001-2003)

Total Share of agricultural products in total

Export, € Import, € Export, % Import, %

Export /Import (Total) in%

Export / Import (agricultural products) %

2001 203,908,695 555,773,331 4.76 17.30 36.69 10.10 2002 264,039,483 592,436,376 5.31 19.37 44.57 12.22 200312 215,161,474 385,928,042 8.12 18.26 55.75 24.81

Source: Central Bank of Montenegro In the period 2001-2003, a period of low level customs protection, the export/import ratio constantly increased for both total and agricultural products. 8) Solution for trade deficit – a favorable investment environment. We have seen that increased customs rates lead to decreased export and import and at the same time decrease

11 ISSP, Living standard and poverty - Montenegro 2002 12 First 11 months in 2003, with incorporated projection for December 2003.


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the level of foreign trade.13 By increasing customs rates it is possible to reduce the absolute level of deficit (with a questionable influence on the export/import ratio). However, long term deficit decrease is possible only with a new investment base. Therefore, if we consider the country’s balance of payments, the solution is in the capital flow. If we consider the internal structure, the solution is in creating a favorable investment environment. Low level of transaction costs, free flow of goods and services, rule of law, and a low level of regulation are the main preconditions for significant investment activities. 9) Implications of customs protection increase through harmonization with Serbia. In addition to the usual negative effects of increased customs protection (price increase, negative consequences on export competitiveness, monopoly stimulation, etc.), in the case of customs harmonization with Serbia one more drawback should be added. Particularly, in many cases protection of Serbian producers would be paid by Montenegrin consumers; this is a direct effect of customs harmonization in fields where Montenegro does not have its own production. For instance, in Montenegro customs for sugar import were increased by 20 percentage points although Montenegro does not produce sugar. Further, among the 10 most frequently imported product categories, products that are nor produced in Montenegro made up 87% in 2000, 85% in 2001and 78% in 2002. Within this group of 10 most frequently imported products in 2002, the increase in the top level of customs rates for 2 groups of products was more than 20%, for 2 groups between 1% and 9%, and for the other 2 groups (oil and their derivatives), their market is regulated by excise duties. 10) Customs protection and its impact on production. A widely accepted opinion in economic theory is that the normal reaction of producers to an increase in customs rates is a price increase rather than an increase in production. Let’s take a look at the production of certain products in Montenegro in light of changes in customs level protection14 (levies increase - May 2002; customs increase - August 2003). For the purpose of analysis, Montstat15 data of meat (3 categories of products – fresh meat, delicacy, and sausage products) and milk production (1 category of products - pasteurized milk)16 are used. Levies for meat production were implemented in May 200217. The increasing trend in production started in the first quarter of 2001 (more than a year before levies implementation) and the trend was finished at the end of 2002 (half a year after levies implementation). The aggregate level in all three categories of products in 2003 decreased as compared to 2002, although customs rates were increased for lamb and some categories of processed meat (customs rates for a number of product categories remained the same). Milk production shows a decreasing trend since the third quarter of 2001 despite the fact that levies for milk were implemented in 2000. The decreasing trend continued in 2002 and in 2003. Levies for milk fell from €0.15 to €0.10, but in August 2003 the customs increase occurred (from 0-5% to 20%).

13 Level of foreign trade exchange and its share in GDP is an important indicator of integration in the international market. 14 In Chapter 2 it’s shown that an increase in customs rate is followed by a price increase. 15 See: Montstat, Monthly statistical overview (all months of 2001, 2002, and 2003) and Montstat, Statistical Yearbook for 2001 and 2002. 16 Limitation was in significant data aggregation within categories, which did not allow for the isolation of certain impacts of customs rates changes on production of certain products. 17 In reference to type of products, prices and category new levy regime has charged April’s price of products differently from 2% to 25%.

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Based on production data, it is possible to conclude that production fluctuations in the observed period is not related to changes in the level of customs protection -- the increase in customs protection has not led to increased production. 11) Subsidies as an instrument for stimulation of domestic production. Subsidies are money amounts paid to domestic agricultural producers, by different measures (cattle pieces, per l of milk, hectare of land, etc.). Subsidies are not like customs import barriers and they do not directly influence price increases. But, there is a question? What is the source of subsidies? Where does the money come from? Like any other form of public transfers, subsidies are paid from the budget. Therefore, additional subsidies represent additional taxation or changes in the existing public consumption structure. Let’s consider the possibility of financing subsidies through an increase in governmental consumption. Projected budget consumption in Montenegro for 2004 is around 48% of GDP. At that level it is a limitation for growth. All relevant international institutions recommend a decrease in government consumption as a main precondition for growth. According to WB data, in countries with per capita income between $1,000 and $10,000 governmental consumption has to be lower than 30%. On the other side, governmental consumption is always financed by citizens and companies. Regardless of whether the subsidies are financed with the tax revenue, debts or inflation the final sources are always the same. Therefore, an increase in subsidies based on an increase in public consumption also means an increase in taxes paid by producers. However, tax rates in Montenegro should be decreased not increased; a tax decrease is a very strong tool in achieving the following objectives: (i) reduction of inflation pressure; (ii) unemployment reduction; (iii) increase in domestic and foreign private investments. Inflation, high unemployment rate and the absence of investments are some of the acute problems of the Montenegrin economy. Additionally, according to a survey based on 469 entrepreneurs sample18, high taxes are the third most important barrier for business development in Montenegro (behind unfair competition and frequent changes in legislative) with an “intensity indicator” of 61.2 (on scale ranging from 24.5 to 63.9). Besides taxation, another source for subsidies is reallocation within the existing level of public consumption. Namely, increase the agricultural portion of the budget and decrease the budget in other areas. For instance, education, security, health, culture, etc. can probably find more efficient ways to spend. Every initiative for more efficient use of money should be considered. But, given the existing social problems, it’s not likely that significant reallocation within the budget could occur, with the development component19. What is likely and more desirable is an overall reduction in budget spending. Namely, the objective should be 30% share of public consumption in GDP, and this is possible but only with significant cuts and changes in governmental functioning. Besides that, the source for subsidies should be based on reallocation within the existing Agro budget. Reducing general assignment programs should lead to increased subsidies, thus leading to less investment in the infrastructure and institutions that are important for agriculture development. Basically, what the subsidies process does is to take (through taxation) from those who produce in order to give (through subsidies) to those who produce!?! However, it’s worth reminding that the amount of money that is given in subsidy is always lower than the amount

18 CEED, Barriers to Doing Business in Montenegro, 2000 19 For instance, cumulative uncleared budget duties on day December 31, 2002 are 100.61 million €.


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of money that is taken through taxes20. The reasons for this are several - there are necessary administration costs, an economy with undeveloped institutions typically has an inefficient use of resources, changing and rerouting new priorities, and even a certain level of corruption21. Also, as with any subvention process, other elements must be addressed, including: violation of market functioning, reallocation, protectionism, arbitration and discretionary rights. 12) Customs protection from an integration perspective. The actual moment in which Montenegro is now creates a need that every public policy be considered in light of joining EU and WTO. Those memberships should be preceded by a number of free trade agreements. Signing of free trade agreements is a better answer to high protectionism than customs protection (which is, as we have seen, paid by citizens and companies). Memberships in clubs of free trade also mean absence of customs protection. How will producers from highly protected industries function on the EU market when it becomes domestic with no possibility for customs protection? In modern market conditions, one who wants to sell in the foreign market has to be able to survive international competition on the domestic market. Additionally, significant development of our producers is only possible with access to the international market. Small absorption capabilities of the domestic market and the impossibility of realizing of economies of scale generate limits. 13) Interventionism, corruption, rent-seeking and “gray” economy. With greater state redistribution through subsidies, customs protection and governmental interventionism comes a higher level of corruption, rent-seeking22 and “gray” economy. Behind this thesis is the economic motivation of market participants. For instance, the greater the barriers, the stronger the motive will be to avoid them. Higher level of or possibilities of reallocation through customs and tariffs, the stronger the motive will be to invest (time, effort and money) in order to get it. This type of stimulation actually creates the opposite of market principles; inefficient allocation of resources is in process because the government is sending the message that it is more efficient to invest in state reallocation rather than in new technology, products and markets. Discretionary rights, arbitrage and corruption are followers of government interventionism. The proposensity of our economy to those phenomena could be illustrated through a number of indicators regarding the high level of corruption23. 14) Instead of conclusions. We have seen that customs protection does not come at no cost. Protectionist’s measures are paid from the pockets of our citizens and the unprotected producers. Protection of flour producers is paid by the bakers industry and citizens. Protection of primary meat production is paid for by meat producers and citizens. The competitive ability of domestic producers who use imported inputs is violated. Customs protection helps create the monopolies. Sometimes, due to specifications of customs harmonization between Serbia and Montenegro, protection of producers in Serbia is paid by consumers in Montenegro. Subsidies are only permissible if based on reallocation. In order to pay subsidies to one category of producers, it is necessary to take from another category of producers.

20 Frederik Bastiat, What is seen and what is not seen, ISSP, 2000 21 “Gray” economy in Montenegro is estimated at 30% of GDP. 22 Rent-seeking –Phenomenon characteristic for countries with large governmental redistribution (through subvention, export/ import licenses, high customs tariffs rates etc.). Rent- seeking is naturally followed by corruption. 23 For instance, Serbia and Montenegro is on 106. place among 133 countries (1. place – Finland; 133. place – Bangladesh) on Corruption Perception Index (CPI) for 2003, Transparency International

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Non-market based reallocation is a basic characteristic of all protectionist governmental actions and is done through the reallocation of resources from unprotected producers to protected producers. The nature of subventions is no different in the case of protection from subsidized producers abroad. As much as subsidized products are problematic when competing with our products, they are useful for using as inputs in domestic production. Instead of measures that influence a rise in prices (paid by domestic citizens and producers) we should insist on measures that influence the price cutting of domestic products. The abolition of all unnecessary transaction costs, bureaucracy, procedures, tax cuts, and reduction in general country specific risk and uncertainty will lead to a higher level of competitiveness of domestic producers. Absolute protection of property rights, freedom of contracts, easy transfer of property rights, and freedom of entry and exit from businesses are the main preconditions for increased investment.


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Annex 1. Tariffs and levies in countries from the region and EU

Table 1. Tariffs (T) and levies (L) in some neighboring countries and in EU Montenegro Serbia Macedonia B & H Slovenia Croatia EU-nominal rate EU-effective rate.

Products C, % P, euro C, % P, euro C, % P, euro C, % P, euro C, %

P, euro

C, % P, euro C, % P,

euro C, %

Lamb 30 0.40 30 0.15 40 45 20 0 80.50

Beef meat 0 0.25 30 0.25 10 1.25 9 +p 8.7 max38 +1.24 12.80 154.2-316.20

Mutton meat 30 5.00 30 0.15-0.30 10 1.00 45 8.7 max36.5 +0.5 12.80 141.6-324.6

Pork meat 0 0.10 30 0.35 20 0.43 10 0.75 10.9 +p 10 max 44 +0.5 0 53.6-86.90

Chicken meat 30 0.15 30 0.35 20 0.10 10 0.70-1.00 10.9 +p 10 max 47.4 +0.6 0 32.42-107.59 Smoking and drying products.

30 0.90 30 0.33 10 1.25 10.9 +p 10 max 30.7 +0.5 15.40 15.40-318.80

Trout 30 15 20 0.40 10 11.70 11.31 11.31

Sea fish 1-30 5-30 13 2 -27 5 -21.7 2 -22 2-22.36

Milk 20 0.10 20 0 10 0.07-0.125 7.7 -9 +p 5 max 15 +0.17 0 13.8-182.80

Yogurt 20 0.20 20 0.13 25 10 0.15 10.9 +p 0.00 27.80

Butter 0 1.00 30 0.58 22 10 0.50 10.9 +p 0 189.60

Cheese 30 0.30 30 0.33 35 0.62 5-10 0.50 9 +p 9 max35 +1.33 0 124.8-221.20

Eggs 30 30 0.016/kom 40 5.1 +p 20.70 0 7.7-115.91

Honey 30 0.70 30 30 +0.25 5 0.50 45 10 max32.5 +0.7 17.30 17.30

Seed potatoes 5 0.20 5 2 5 5 max15 +0.06 4.50 4.50

Potato 5 0.20 30 0.083 30-50 10 0.50 15 and 45 9.65 9.65

Tomato 30 0.20 30 0.083 40-60 0.12 5 0.10 10 .20 .45 8.80 8.80

Cabbage 20 0.20 20 0.03 40-60 0.12 5 0.05 30 12 12

Lettuce 10 0.20 20 20 50 5 0.10 13. 20 .25 10.72 10.72

Cucumbers 20 0.20 20 0.083 40-60 0.12 5 0.05 10 .16 .45 15 max 62.2 +0.20 12.80 33.37

Mandarin 20 0.20 10 10 15 0.20 7 13 +0.14 +0.14 16 16

Grape 20 0.20 20 0.083 60 5 0.07 7 10 +0.13 +0.13 11.66 11.66

Watermelon 20 0.20 20 0.03 60 5 10 +0.11 +0.11 8.80 8.80

Peach 20 0.20 20 0.05 60 5 0.05 9 +p 10 +0.20 +0.20 17.60 17.60

Kiwi 20 0.20 10 30 3 18 18 8 8.40

Olive oil 30 1.00 5 10 20 10 max 33 +0.7 0 67.17 Delicatessen products

30 0.30-0.40 30 20 0.43 10 1.50-1.75 10.9; 27 30 +p 10 max 47 +0.8 8.5-16.60 8.5-29.44

Ice cream 25 0.30 30 40 0.49 5 0.35 6 .12 .27 8.7 max 22 0.5 8.06 25.57

Juices 20 30 0.05+0.07 50 0.13 27 10 max 45 +0.23 12 -33.6 12-36.08

Pop drinks 30 0.20 30 50 10-15 0.10 15 .25 10 max 44 +0.05 9.60 9.60

Beer 30 0.30 30 60 15 +0.15 45 24 3 3

Wine 30 0.40 30 60 15 +0.25 17.3 +p 28-38 0 -32 151.38 -1616.89

Source: Ministry of agriculture GOM

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Annex 2. Subventions in agricultural production

(Slovenia, Croatia, Serbia and Montenegro) Annex 3. Subsidies in agricultural production

(EU- 15 and other countries) Table 1. Different types of subventions in countries for agricultural production

Product Measure unit Slovenia Croatia Serbia Montenegro Wheat Euro/ hecta 265 218,96 Rye Euro/ hecta 265 Barley Euro/ hecta 199 204 Corn Euro/ hecta 199 136 Hop Euro/ hecta 357 0,39 White beet Euro/ hecta 265 408 201 Tobacco Euro/ hecta 0,65eur/kg 656 eur/ha Sunflower Euro/ hecta 199 306 Cow’s milk: 0,025 -from mountain areas Euro/lit 0,12 0,072 -from plain areas Euro/lit 0,07 0,066

Sheep Euro/head of

cattle 18 40,79 9,8 7,5

Goats Euro/head of

cattle 18 7,5

Cows Euro/head of

cattle 118 566,7 90 75

Bull Euro/head of

cattle 165 123

New plumb plant Euro/ hecta 370* 1.427,985 656 New vine plant Euro/ hecta 370* 4.623,955 1.640

Source: PLAC, internal documentation * if it is plants on the concept of the biological production Bosnia and Herzegovina do not pay subventions to agricultural producers, neither per hectare nor per head of cattle.

Table 1. Subventions in agriculture, EU-15 and other countries

Subsidiary per producer farmer, $ County WTO OECD

EU-15 13.402 10.240 Switzerland 20.048 27.542 Norway 17.632 22.500 USA 6.619 7.658 Canada 18.856 7.917 Australia 991 2.438 New Zeeland 1.540 822 Japan 10.278 12.019 Poland 880 500 Hungary 1.345 1.285 Czech Republic 1.349 693 Bulgaria 2.082 - Slovakia 1.487 - Croatia 967 -

Source: Ministry of agriculture, GOM


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REFERENCES: 1) CARA (2003), Protection measures impact on prices and production of agricultural products (July 2002 – June 2003, August 2003 – December 2003) 2) CARA (2003), Trade sector in Montenegro 3) CARA (2003), Agricultural sector in Montenegro 4) Central Bank of Montenegro, Data about foreign trade exchange for 2001, 2002 and 2003 (11 months) according to standard classification 5) Montstat, Monthly statistical overview (for years: 2001, 2002 and 2003) 6) Montstat, Statistical yearbook 2001 7) Montstat, Statistical yearbook 2002 8) Policy and Legal Advice Center (PLAC), Internal documentation 9) Ministry of agriculture GOM (2003), Basic policy of stimulation and protection for food production in Montenegro 10) Government of Montenegro, Law on budget for year 2004, Official gazette Republic of Montenegro 11) Veselin Vukotic (2003), Montenegro - microstate, International conference: “Economic Policies for Viable Micro State”, Podgorica 12) Robert A. Lawson, Stephen A. Baker, (2002), The Benefits of Globalization: An Economic Perspective, Journal of Lutheran Ethics 13) Petar Ivanovic (2003), Economic freedom as challenge to politics, Collection of works: “Politics and freedom”, IDN, Beograd 14) Vladimir Kavari} (2003), Economic freedom – concept, measurement and proposals, Postgraduate studies: “Entrepreneurial economy”, Volume III 15) Milorad Katnic (2003), Economic integration of Montenegro and Serbia, Collection of works: for 10) Conference in Milocer, Economists Association of Serbia and Economists Association of Montenegro.

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COMMENT 5

GENERAL COLLECTIVE (BARGAINING) AGREEMENT IN MONTENEGRO Author: Ana Krsmanović, Institute for Strategic Studies and Prognoses A new General Collective Agreement in Montenegro was signed on December 19, 2003 among representatives of Chamber of Commerce, Alliance of Independent Unions and the Government of Montenegro. Application of the new collective agreement began in January 2004, after being published in the Official Gazette of Montenegro. The Government has decided to introduce a little “social justice into the system” by applying the new collective agreement that directly influences wage policy, or more likely, ensures higher personal income tax revenues through an increase in wage coefficients. The new collective agreement will increase the cost of labor for employers, and will influence worsening conditions of the labor market. CHANGES RELATED TO EMPLOYEES EARNINGS The most important change in the General Collective Agreement (GCA) is an increase in the wage coefficients, which together with the minimum wage represent the basic parameters for wage setting in the economy. Before presenting changes in the collective agreement, the nature of the minimum wage concept will be discussed in brief. Internationally, the goal of the minimum wage is to protect the most endangered workers from exploitation in low-wage industries, as well as to protect the most vulnerable category of workers – women, children and unqualified workers1. Minimum wage, in international practice, is determined as an amount paid per hour (or weekly or monthly) below which the employers cannot pay their employees, and that is the essence of the concept. The minimum wage concept in Montenegro has much more ambitious goals. According to article 10 of the General Collective Agreement (Official Gazette, 1/04), the basic salary received by an employee cannot be lower than the amount obtained by multiplying the minimum wage by a coefficient for that employee’s level of education. So, there is a different minimum wage for each level of education, and there are 10 different levels of education and therefore 10 minimum wage levels. Another characteristic of the minimum wage concept in Montenegro is that almost all salaries in the Montenegrin economy directly depend on the level of minimum wage; for example, wages financed from the republican budget are directly linked to a minimum wage. One conclusion that could be made is that the minimum wage concept in Montenegro is general and has as its goal the protection of all workers from exploitation. As stated, the most important change in the adopted collective agreement is an increase in wage coefficients. On average, coefficients have increased by 19.3%; however, the coefficient for unqualified workers who represent , which is socially the most vulnerable category of workers, has remained the same, 1 (table 1). The highest increase is in the coefficient for highly-qualified workers (by 28.9%) and the lowest is for workers with qualification up to 6 months (by 4.2%). 1 See MONET 13, comment “Minimum wage in Montenegro – dangerous concept”


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Table 1. New wage coefficients

Qualification (education) Coefficients in old collective

agreement

New coefficients

Increase in coefficients

Increase in disposable

income

Increase in total labor

cost2

Unqualified work 1.00 1.00 0 0 0.4%

Qualification 6 months 1.20 1.25 4.2% 2.3% 3.6%

Qualification from 6 months to 2 years 1.50 1.60 6.7% 4.0% 5.8%

High school education (2 - 3 years) 1.65 1.95 18.2% 11.3% 15.2%

High school education (4 years) - qualified worker 1.85 2.20 18.9% 12.2% 16.1%

High school education (4 years) with specialization – (high-qualified worker)

1.90 2.45 28.9% 18.9% 24.5%

College education - 2 years 2.20 2.80 27.3% 18.0% 23.8%

College education - 4 years 2.70 3.30 22.2% 12.9% 17.5%

Master degree 2.95 3.60 22.0% 15.5% 20.1%

Doctorate 3.20 4.00 25.0% 18.0% 22.3%

Source: General Collective Agreement, Comments, Guidelines and Application, 1996; General Collective Agreement, Official Gazette 1/04, 2004 Calculations: ISSP

Due to the change in wage coefficients, labor cost has increased from 3.6%3 to 24.5%, depending on the level of employee’s education, and at the same time, disposable income also increased from 2.3% to 18%, also depending on the level of education. Table 2 depicts the change in cost that an employer has incurred for an employee with a university degree. Total cost of an employee with a university degree according to the new collective agreement is 371.5€ monthly, an increase of 17.5% compared with the wage implied by the previous collective agreement. Within the individual cost, the highest increase was in the “personal income tax” category, by 35.1%, while other taxes and contributions have increased by roughly 20%, on average. The only item that has been reduced is the “surtax on personal income tax”, which is municipality revenue. Previously this category was “compensation for use of goods of public interest” and amounted to 3% of gross salary.

2 Total labor cost includes net wage, all taxes and contributions paid on it and other payments to employee. 3 Labor cost of unqualified worker has increased as a consequence of introduction of housing contribution as 0.7% of gross salary.

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Table 2. Cost of employer for employee with university degree

Old collective agreement

New collective agreement

Rate of4 contributions/

taxes (in €) (u €) % change

1. Net wage 149.72 179.5 19.9 2. Gross wage 221.32 270.50 22.2 3. Employee share of contributions 71.60 91.05 27.2 3.1. Contribution for pension insurance 12% 26.56 32.46 22.2 3.2. Contribution to health insurance 7.50% 16.60 20.29 22.2 3.3. Contribution for unemployment 0.50% 1.11 1.35 21.8 3.4. Personal income tax (PIT) 0-25% 27.34 36.95 35.1 4. Employer’s part of contributions 52.33 61.61 17.7 4.1. Contribution for pension insurance 12% 26.56 32.46 22.2 4.2. Contribution to health insurance 7.50% 16.60 20.29 22.2 4.3. Contribution for unemployment 0.50% 1.11 1.35 21.8

4.4. Surtax on personal income tax (earlier “compensation for use of goods of common interest”)

15% on calculatedPIT

(earlier 3% on gross salary )

6.64 5.77 -13.2

4.5. Contribution to Montenegrin Chamber of Commerce 0.32% 0.71 0.87 21.9 4.6. Contribution to S&M Chamber of Commerce 0.125% 0.28 0.34 20.8 4.7. Contribution to the union 0.20% 0.44 0.54 23.0 5. Total taxes and contributions (3+4) 123.94 152.66 24.4 6. Total wage cost (1+3+4 or 2+4) 273.65 332.11 21.4 7. Contribution for housing fund 0.7% - 1.89 - 8. Meal allowance 25.00 25.00 0.0 9. Summer allowance 12.50 12.50 0.0 10. Disposable income from employment 192.20 216.95 12.9 12. Total labor (6+7+8+9) 316.15 371.50 17.5

Source: General Collective Agreement, Comments, Guidelines and Application, 1996; General Collective Agreement, Official Gazette 1/04, 2004 Calculations: ISSP Bearing in mind that from among all categories the highest increase occurred in “personal income tax”, it is understandable why the government, as a social partner, was strongly opposing the increase in coefficients. On one hand, the increase in wage coefficients will cause an increase in budget revenues from personal income tax, while on the other, the increase in wages of public servants and other wages financed from the budget is not compulsory. Namely, for public servants, employees in the health and education sectors, there are separate collective agreements by which the coefficients were higher than in the previous collective agreement, and these coefficients are higher than in the new collective agreement. The prospective increase in wage coefficients can be expected in health and education, which primarily depends on the negotiating powers of the industry unions. As concerned public servants, they will most probably “wait” for the announcement of the Law on salaries of public servants and regents that is being prepared within the public administration reform. Employers, especially in the private sector, will face a high increase in the tax burden. For example, for an employer who employs 10 highly-qualified workers, the annual labor cost has increased by over 6,500€, equal to the annual salary of three highly-qualified workers under the old collective agreement. In addition to the coefficients’ increase, there is one more interesting change in the new collective agreement. In article 28, it is stated: “If, through change in regulations, the tax rates on personal income are reduced, the employer is obliged to attribute effects of that increase to wages, i.e. compensations of employees according to law.” Thanks to this

4 All taxes and contributions are calculated on a gross wage (row 2) except for surtax on personal income tax (row 4.4), which is calculated as a percentage of calculated personal income tax.


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provision the employer is indifferent to the level of tax rates, effects of potential tax cuts are in any case transferred to employees. Announced decreases in the personal income tax burden will not have any influence on employers, because the level of labor cost will remain the same.At the same time this tax cut will increase employees’ disposable income.

OTHER CHANGES IN THE COLLECTIVE AGREEMENT As far as other changes in the collective agreement are concerned, they are more or less irrelevant. The following table reviews other employee benefits according to the new and old collective agreement. Table 4. Review of other benefits of employees according to new and old collective agreement

Old collective agreement New collective agreement

Summer allowance 3 minimum wages (150€) 3 minimum wages (150€)

Winter allowance 0 (can but he doesn’t have to) not regulated

Activity interruption – if worker is not responsible, employer shall pay

50% of employee wages not regulated

Transportation cost half of the cost not regulated

Meal allowance ½ minimum wage ½ minimum wage

Director’s wage at least 4 minimum wages determined in the labor contract

Insurance no commitment

employer collectively insures employees from accidents on the job and out of job and the risk of death from illness, in amount that is agreed

among employer and union

Jubilee prizes employees are entitled to receive prize after 10, 20 and 30 years of work, that is not less than 2

minimum wages

employer can but it doesn’t have to give a prize, the amount is not limited

Paid leave

-5 working days- wedding -3 working days – birth of a child

-2 working days - moving -3 working days – passing a specialist exam

-2 working days – personal and family affairs -7 working days – severe illness of family

member -3 working days – removing consequences of

natural disaster -2 working days – participation in working-

productive contests

-3 working days - birth of a child -3 working days – care for a child that has severe

psychological and physical damages -7 working days - severe illness of family

member -3 working days - removing consequences of

natural disaster -3 working days – voluntary donations of blood,

organs and tissues -1 working day – death of kin outside close

family

Hourly rate increase

-for night work – 40% -for work during state and religious holidays –

50% -for overtime work – 30%

-for work with breaks that are longer that 1 hour – 10%

- for night work – 40% - for work during state and religious holidays –

50% - for overtime work – 40%

Housing fund no commitment For housing purposes, in a two-year period, employer shall withhold and pay into special

housing fund 0.7% from employee’s gross wage

Source: General Collective Agreement, Comments, Guidelines and Application, 1996; General Collective Agreement, Official Gazette 1/04, 2004 The compensation of transportation costs as employers’ commitment is abolished, the winter allowance is not mentioned in the new CA while in the old there was a possibility for this benefit, so-called jubilee prizes are no longer the employer’s commitment. These are more or less all of the changes that have minor positive effects on employers.

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An especially interesting new provision in the collective agreement is the establishment of a so-called housing fund (article 68). According to this provision, signatories of this collective agreement have agreed to establish this fund for solving housing issues of employees, and the employer will pay an amount of 0.7% of employees’ gross wage over a two-year period to the fund’s special account. Signatories of the collective agreement will, within a three-month deadline from signing the collective agreement, establish a body that will decide how the financial resources from this fund will be used. From the Union, we received the information that it is a solidarity fund, but more details will be available when the mentioned body is established. The use of this fund and its prospective beneficiaries still remain an open issue. Why should anybody, in a two-year period, pay any portion of their salary into this fund? Does this mean that somebody can introduce a commitment to employees (or employers) to pay 1% of gross salary to, for example, hungry children in Ethiopia? CONCLUSION Measures on the labor market undertaken by the Government of Montenegro are a little contradictory. On one hand we have a labor law that was supposed to deregulate the labor market and it didn’t, and now we have the new collective agreement that only seems to worsen a bad situation. Additionally, labor inspection threatens employers with penalties ranging from 2,000 – 10,000€ as well as the possibility of closing companies if they do not pay their commitments on time and pay wages, taxes and contributions. On the other hand, we have programs aimed at the stimulation of entrepreneurship and creation of new jobs, as well as a Decree on Tax Relief for Newly Employed Person’s that have been announced earlier and are already in force. However, it is doubtful that these measures of limited duration 5 will provide the expected incentives especially in light of the apparent increase in labor costs to employers due to the increase in wage coefficients. Imposing a significant burden on employers cannot solve social problems and a bad situation. If social problems could be solved simply with the government regulation on higher wages to employees, life would be simpler for everybody, but things do not function that way. Also, the high unemployment problem cannot be solved in this way. Imposing high tax burdens for employers increases the labor cost they face, which is the case now, and this will only stimulate employers to decrease rather than increase the number of employees.

5 Decree on tax relief for new employees is in force until May 2004.


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COMMENT 6

CREDITWORTHINESS INDICATORS FOR MONTENEGRO Milorad Katnic, Institute for Strategic Studies and Prognoses Public debt is the total accumulation of debt in a particular country, or the sum of all claims by all its creditors at a certain moment in time. Along with this general definition, in theory and practice there are different well-known concepts of defining a government’s fiscal position. The most commonly used is gross public debt. According to this concept, which is used in the Maastricht Treaty, gross public debt is defined as the sum of all debts and all claims within the government sector. The second most frequently used concept is net public debt, which represents the difference between gross public debt and government claims from the private sector. In theory, net public debt is a more relevant concept of government solvency compared to gross public debt because of the presupposition that the government can collect its claims from the private sector. However, the problem of assessment is very common here. Namely, many government loans to the private sector, especially in transition countries in East Europe, represent so called soft credit, which makes them closer to subsidies. Public debt, expressed in absolute terms, doesn’t realistically indicate the indebtedness of a particular country, nor is it relevant for chronological and international comparisons. The real importance and debt burden of one country and its economy can be seen through the ratio of public debt in absolute terms and other macroeconomic indicators, such as the Gross Domestic Product, export, public revenues, etc. The next graph presents estimations of the gross public debt stock in European Union countries in relation to the GDP at the end of 2003.

Graph 1: Estimations of gross public debt as percent of GDP in EU countries at the end of 2003

0 20 40 60 80 100

Belgium

Denma rk

Ge rmany

Greece

Spain

France

Ire land

Ita ly

Luxembo urg

Nethe rlands

Aus tria

P o rtugal

F inland

Sweden

United Kingdo m

Source: Report on the European economy 2003, CES ifo As shown in the graph above, the level of public debt varies significantly in the EU from country to country. Except for Luxemburg, where public debt was below 4% of GDP, all of the other countries of the EU had public debt of more than 35% of GDP at the end of

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2003. The level of public debt in Italy, Greece and Belgium was above 100% of GDP. The average level of public debt in EU countries, at the end of 2003, was estimated at 58% of GDP, while among the ten candidate countries that will join the EU this year, the average is about 30% of GDP6. Namely, the wish to provide long term sustainability of public finances, which was questionable after the significant rise of public debt in the 1980’s and early 1990’s in most EU countries, led to the formulation of fiscal rules within the EU7. Fiscal rules are mostly defined in the Maastricht Treaty and Stability and Growth Pact - budget deficit is limited to 3% of GDP8, while the highest allowed level of public debt is 60% of GDP. If the level of public debt is higher than 60% of GDP, it is necessary for it to be reduced to the desired level. Also, the World Bank has developed standard indicators for measuring the debt burden of a country as well as classifications for severely indebted countries and moderately indebted countries. One of the two basic indicators for measuring the debt burden is the present value of debt as a share of GDP; the critical level is 80%. The second indicator is the present value of future debt service as a share of exports; the critical level is 220%. According to these indicators, severely indebted countries are those for which either of these indicators has exceeded the critical levels for over three years. Moderately indebted countries are those with either the first indicator in the range of 18 to 80% or the second indicator in the range of 132% to 220%. At this moment, the amount of Montenegrin public debt cannot be precisely determined because of unfinished negotiations over the debt restructuring with the London Club and unsolved issues with Serbia concerning a portion of the debt that belongs to Montenegro. However, available data can be used for rough estimations of Montenegrin creditworthiness indicators. Table 1: Stock of long term Montenegrin public debt according to agreed data, end of 2003

in mil.€A EXTERNAL PUBLIC DEBT (I+II) 435.5I. Old loans 409.91. - World Bank 270.02. - Paris Club 134.73. - European Union 1.24. - CEB (former Euro Fund) 4.0II. New loans 25.61. - World Bank-IDA loan 7.62. - European Investment Bank 14.03. - European Union 4.0B DOMESTIC PUBLIC DEBT 127.0III. Commitments for old foreign currency savings 127.0 TOTAL (A+B) 562.5

Source: Central Bank of Montenegro According to Montenegrin Central Bank data, total external Montenegrin debt at the end of 2003 was 433.5 million euro, while obligations for old foreign currency savings amounted to 127 million euro, totaling 562.5 million euro.

6 Source: European Commission, European Economy, No 5/200. 7 Other motives for establishing fiscal rules were related to moral hazard problem within EU and inflation control by the European Central Bank. 8 Higher deficit can be considered only if over-execution is temporary and close to the defined level.


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Increasing this amount by the unpaid budget obligations at the end of 2002 (100.6 million euro9) and obligations of treasury bills at the end of 2003 (14.7 million euro10) makes total public debt at the end of 2003 amount to approximately 678 million euro. Looking at this in relation to gross domestic product for 2003, we get an indicator level of 50%, while the level of public debt in total export for 2003 amounted to approximately 120%. Using the criteria of the World Bank and International Monetary Fund, these indicators identify Montenegro as a moderately indebted country. According to the EU fiscal rules, the level of public debt in Montenegro is not above the allowed level of 60% of gross domestic product. However, in view of the fact that in the long term the public debt is determined by the sum of accumulated annual debts, the first fiscal rule in EU (i.e. the rule of the balanced budget) implicitly forces the public debt to be close to zero. Table 2: Montenegro Creditworthiness Indicators

in mil.€Estimated gross public debt, in ml € 678.0Estimated gross public debt/GDP (%) 50.0Estimated gross public debt /export (%) 121.1Interest debt service/export (%) 2.5Estimated gross public debt per capita, in euro 1097.5

Regardless of developed indicators and rules, there is a general consensus among economists that clear benchmarks above which public debt would be inappropriate and dangerous for the economy cannot be set. Emergencies and problems vary from country to country and from case to case. Generally, limits are reached or exceeded when the economic growth and development are threatened and the country is not able to implement sound macroeconomic policies. The same is true for Montenegro, which will be faced with higher obligations for debt servicing in the next year. Further, the debt position of Montenegro will primarily depend on economic activity (long term economic growth), future export dynamic, budget revenues and expenditures and obligations related to new debts. REFERENCES: 1. World Bank Technical Paper, Number 245, External debt Management 2. The International Bank for reconstruction and Development/The World Bank, European Union

Accession: The Challenges for Public Liability Management in Central Europe 3. European Economy, No 20/ November 2003, European Commission 4. Public Finances in EMU 2003, Commission of the European Communities, Brussels, 2003.

9 For the purpose of this estimation we will assume that in 2003, the budget obligation did not raise, and that all unpaid obligations are due to citizens, economy and financial institutions (that are not obligation between budget parts: budget, social funds and municipalities). This can seem to be an as overvaluation of public debt, because probably one part of debt is related to inter-budgetary obligations, but at the end budget part have unpaid obligations (for example pensions), which are not included in our estimation. Additionally, estimation does not include budget obligations due to guaranties, and one part of guaranties is real burden, which can be seen in budget executions in 2003 and 2002 (see: MONET 16, Comment 5 – Budget). 10 Treasury bills emission started at the end of 2001, with the goal to overcome short-term budget liquidity problems. At the end of December 2003 Central Bank sold, for account of Ministry of Finance, 28-day treasury bills in amount of 12 million euro and 58-day treasury bills in amount of 2.7 million euro.

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COMMENT 7

CAUSES OF DISEQUILIBRIUM, AND KEY MEASURES FOR ACHIEVING A BALANCE OF PAYMENTS EQUILIBRIUM IN MONTENEGRO Author: Nina Labović, Institute for Startegic Studies and Prognoses 1. INTRODUCTION The current account balance is one of the key indicators of the economic performance in every open economy and there are two reasons for this. The first reason is that the current account is very closely linked to other components of national savings and investments – fiscal balance and private savings that represent a very important implication for total growth. The second reason is that the current account balance is a significant indicator of the competitiveness of the economy. The current account deficit and the balance of payments disequilibria are characteristic traits of economies in transition. However, if the deficit is too large, the external position of a country is deteriorated. In order to reduce the deficit, it is necessary to carry out structural changes in the economy and to create an appropriate institutional framework for domestic and foreign investments, and thereby increase the export-oriented production of goods and services. By doing this, domestic production would be increased on the one hand and on the other hand, the current account would be improved. The following text presents theoretical explanations of the current account deficit that can be used to explain the situation in Montenegro as well as in other countries. In addition, proposals for how to reduce this deficit in the medium and long term are also presented. 2. CAUSES OF DISEQUILIBRIUM OF THE BALANCE OF PAYMENTS OF MONTENEGRO There are many factors that have caused the deficit of the current account and the balance of payments disequilibria. They are both: a) Internal or endogenous and b) External or exogenous. The second division separates these factors into two categories: cyclical and structural. 2.1 Internal or endogenous factors The Internal or endogenous factors behind the current account deficit and disequilibrium of the balance of payments of Montenegro are related to the economic policy changes, especially the development policy. These factors are: a. Large consumption and rather low domestic production. When domestic consumption is

higher than domestic production the trade balance deficit increases, or when Y<


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(C+I+G), then X<M11. This means that increased domestic consumption causes imports to increase and savings to decline, making the current account deficit deeper. This can be seen in the following graph12 (no. 1):

Graph 1: Effects of a decrease of savings S1 S0 r1 r0 I I1 I0 S,I

b. Inadequate structure of the state sector, as the second factor, results in higher consumption and thus, an increase of aggregate demand, prices and simultaneously, the current account deficit.

c. Expansive monetary policy until 2000 that caused inflation and budget deficit growth and continued to adversely impact the Montenegrin economy even after the introduction of the Deutsch Mark and Euro.

d. Montenegrin import structure indicates a high share of raw materials and intermediate goods (equipment) that are used as further production components (fuel, construction materials, electrical machines and equipment, transportation equipment, etc.). This additionally boosts imports and makes Montenegro an extremely import-dependent economy. In actuality, the high trade deficit, or excess of imports over exports of goods triggered by the use of the above-mentioned raw materials, is one of the reasons for the high current account deficit.

e. Inefficient investments, or higher investments than domestic savings (necessitated by the need for faster growth), are also contributing to a high deficit. The surplus of investments over domestic savings is financed through borrowing abroad, contributing to the increase in the current account deficit – see graph 2:

Graph 2: Investment inefficiency r S r1

r0

I0 I1

I0 I1

11 Y= C+I+G+X-M, where Y is-Gross Domestic Product, C- Personal Consumption, G- state (public) consmption, X-exports, M-imports 12 S-saving, I-investments, r- interest rate

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f. The existence of monopolies, insufficient competition, and the incomplete or inadequate free market in Montenegro.

g. Higher inflation in the country than abroad lowers export competition and hence leads to

its decrease while contributing to the current account deficit increase. h. Inappropriate institutional framework or frequent changes of the legal framework

increase transactional costs, increase cost of exports and increase the current account deficit.

i. Insufficient openness and liberalization of the economy as well as the existence of state

protectionism creates problems for imports and exports, causing a deficit increase. 2.2 External or exogenous factors External or exogenous factors of balance of payments disequilibria are those that come from the international market and are beyond control of the country. These factors are:

a) The deterioration of trade conditions due to certain shocks on the international market. For example, political crises and wars in surrounding countries, as well as changes related to business cycles in the international market, or any other factor bringing about deteriorating trade conditions, more expensive imports, and thus contributing to the higher account account deficit.

The increase of foreign demand for certain products, especially raw materials and energy, frequently created unrealistic expectations of a steady growth of exports in the long-term, and this anticipation led to an increased consumption and higher imports. c) Other external economic and political influences. 2.3. Cyclical and structural factors of the current account deficit Cyclical factors are short-termed. Recessions abroad lead to lower exports and thus worsen current account deficits and balance of payments disequilibria. Faster price growth in the country than abroad encourages imports and discourages exports. Many seasonal factors (poor tourist season, or weather disasters, etc.) impact an increase in goods and services imports and their decrease in exports as well, or current account deficit increase. Structural factors that caused the current account deficit are long-term. Structural factors include differences in growth rates in the country and abroad, differences in the pace of technical progress, change of disposable production factors, change of consumer taste, change of the foreign trade institutional framework like customs agreements, etc. Balance of payments disequilibrium has an impact on the GDP and inflation. The change of GDP due to the marginal propensity to import affects a change in imports and this change impacts the relative prices, which then in turn impact exports and imports.


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3. FINANCING OF THE CURRENT ACCOUNT DEFICIT OF MONTENEGRO 3.1 Ways to finance the current account deficit of Montenegro The current account deficit of Montenegro is financed through foreign aid (donation), borrowing from international credit institutions and through foreign direct investments (FDI). With respect to FDI in the medium term, Montenegro has to create an appropriate institutional framework in order to meet the FDI growth target, which, according to the official projections are supposed to reach 11% of GDP in 2006. In order to invest in a country at all, foreign investors must feel secure in knowing that a this country will fulfill its duties and stand by its committments toward foreign partners. Foreign aid, or donations to Montenegro, decreased by 36% in 2002 compared to the previous year and amounted to 7.5% of GDP. In the first eleven months of 2003, foreign aid decreased by 25.1% compared to the same period of the previous year, and according to CBM projections, foreign aid is going to continue to decrease year by year and will be fall to zero in 2006. Additionally, one of the issues that must be addressed to achieve balance of payments equilibrium, or the decrease of the current account deficit, is that of Montenegrin foreign debt servicing. The share of foreign debt in GDP in Montenegro was 41% in 2002 and according to debt servicing projections, this debt burden should decrease to 38.2% of GDP in 2006. With respect to borrowing abroad, there are possibilities to receive credit under special conditions from the IMF and the World Bank. These credits are meant to finance the current account deficit, as well as to support achieveing the macroeconomic stability in the long term. However, in order to get stand-by or other financial arrangements under special conditions, each country has to present its program for structural adjustment of its economy to the above mentioned financial institutions. 3.2 Structural adjustment program A good economic program of the state is the prerequisite for the availability of financial aid or stand-by arrangements that can be received from the IMF (for developing countries like Montenegro). The first steps in structural adjustment are carried out through either reduced consumption or increased production in the country. If we consider the formula:

Y+M = C+I+G+X, we see that the aggregate supply in the country consists of domestic production measured by GDP (Y) and imports (M). On the other hand, aggregate demand consists of personal consumption (C), public consumption (G), investment consumption (I) and exports (X). Further, we can generate the following equality

Y- (C+I+G) = X-M

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According to this, the difference between domestic production and consumption should be equal to the difference between exports and imports. If domestic production is higher than consumption, exports are higher than imports, the trade balance deficit is decreasing and a surplus is reached. This is an elementary presumption of the structural adjustment program. It is always easier for a country to create a policy that promotes reduced consumption, particularly personal consumption and investments, because this can be a viable short-term solution. Reduction of the aggregate consumption in Montenegro can be realized through a policy that keeps nominal wages at the same level for employees in the state sector. Since approximately 30% of the officially employed in Montenegro work in the state sector, every change in demand of the employees in this sector significantly impacts a change in total consumption. However, reducing consumption in the long term will cause a decline in domestic production due to discouragins employees from work because of lower wages, and this can lead to a deterioration of the standard of living, which is already quite low in Montenegro, as well as increase the risk of additional social problems. Thus, reduction of aggregate demand without increase of aggregate supply, may decrease the current account deficit and create a balance of payments equilibrium, but this situation is not long-termed. Despite fiscal policy measures, a country with a high current account deficit, has to undertake monetary policy measures that increase interest rates in order to stimulate domestic savings and reduce consumption. While this is a general rule for states that issue their own currency, Montenegro does not have its own monetary policy because the Central Bank of Montenegro does not issue currency. In addition, certain foreign trade policy measures can effectively affect the BoP disequilibria. The liberalization of the foreign trade policy regime and the stable legal framework of foreign trade policy, cause imports to decrease and exports to increase, resulting in a lowered deficit. These are all important steps for long term structural adjustment. 4. REACHING THE BALANCE OF PAYMENTS EQUILIBRIUM 4.1. Ways to reach a Balance of Payments equilibrium There are situations when the current account deficit is high and it is linked to large domestic macroeconomic problems; this type of situation should be analyzed separately from situations in which the deficit is not so closely related to domestic problems, but rather to problems of other nature that can nevertheless cause external disequilibria. In the first case, macroeconomic disequilibria in the economy causes external disequilibria, so the current account deficit will be an indicator of the domestic problems in the country (e.g. high inflation rate, state sector insolvency, etc.). Such problems have a negative impact on the external position of the country. Elimination of the current account deficit is possible if conducted through the appropriate mechanisms. Mechanisms that are immediately used when a disequilibriumof the balance of payments appears are called mechanisms of the automatic stabilization of the balance of payments. The second group of balance of payments equilibrium mechanisms are economic policy measures. To reach a balance of payments equilibrium through economic policy measures, a country must first make it through the measures of fiscal, monetary and foreign trade policy.


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In order to eliminate the balance of payments disequilibrium, or to decrease the current account deficit, it is neccessary to conduct a range of changes in the economy. These changes are: 4.3.1 Institutional and economic reforms which include: a) Changes to the institutional framework and its harmonization with international

standards; b) Foreign trade liberalization and increased openess of the economy; c) Market deregulation and reduction of state protectionism; d) Price liberalization (starting with food and similar products to electricity, municipality

services, etc.). This may create rather negative short term effects on the budgets of Montenegrin households, but in the medium and long term, it is an important condition of market stability.

e) Abolishing monopolies; f) Increased economic freedoms; g) Restructuring of the state sector. 4.3.2 Macroeconomic policy: restrictive fiscal policy and liberalized foreign trade policy; 4.3.3 Introduction of new technologies has a positive influence, increasing productivity and overall production levels in the long term. 4.3.4 Domestic saving and investment increase. High investment level means higher economic growth in the future through higher production capacities growth. A high ratio of savings and investments levels, can be a signal to foreign investors that the country in question is credible, or that the country is able to reduce and service its foreign debt. This means that higher investments in the country result in higher production and lower risk. An increase in savings and investments in Montenegro can first be realized through private sector development, or through the establishment of small and medium enterprises and the hiring of new staff for these enterprises, thus leading to increased employment, real wages, domestic savings and investments. 4.3.5 Financial structure is related to the financial intermediation and the development of a banking system in developing countries. Bank deposits are the most important indicator of the existence of savings, while bank credits are the most important source of financing investment projects. 4.3.6 Economic growth, which means that a country has significant real GDP growth, can occur while keeping the current account deficit constant or reducing it as long as it does not increase its foreign debt as a percent of GDP. This means that a country, through physical capital accumulation, can increase its ability to service external debt. 4.3.7 Openness of the economy is defined as a ratio of total imports and exports over GDP. This means that in order to service its external obligations a country must increase exports as percent of GDP. Generally, if a country is more open, it is more sensitive to external shocks such as fluctuations in terms of trade or foreign demand. If a country’s sensitivity to international market shocks is higher, its ability to sustain the current account deficit or to reduce it is lowered. Thus, when the measure of exports as a percent of GDP is increased, the sensitivity of the economy to external market shocks can be reduced.

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5. RECOMMENDATIONS FOR FURTHER ECONOMIC ACTIVITY IN MONTENEGRO IMPORTANT FOR THE CURRENT ACCOUNT DEFICIT REDUCTION In 2003 Montenegro succeeded in lowering the the balance of payments disequilibrium. This was a result of its external position improvement, the depreciation of the USD versus the Euro which led to reduced import costs as well as closer trade relations with other countries. A range of economic reforms that were carried out in the last several years aim to reduce external disequilibrium in the long term. In order to realize that, it is neccessary, starting this year, to begin the following activities: a) Further institutional framework development in order to attract foreign direct investments (FDI) FDI should not only be related to privatization. The institutional framework and business environment for increasing FDI in the private sector will be improved through a reduction of procedures and the elimination of barriers for nonresidents to develop business in Montenegro. At the same time, this will contribute to a reduction of the grey economy, development of competition for nonresident businesses, and a more open economy. b)FDI increase should contribute to increased production of goods and services and their increased exports Montenegro needs to change its production structure and route its production resources toward fields where the country has competitive advantages. Since the country simply does not have the financial capability to efficiently restructure production and development of the export oriented branches, it is neccessary to encourage the inflow of foreign capital in order to stimulate this development. It is possible, through foreign direct investments (FDI) -- one of the most important means of capital inflows, to develop export oriented production and reduce the goods balance deficit (imports in the last several years have remained fairly constant and have not nominally increased, but they did decrease as a percent of GDP). Furthermore, FDI in the services sector would create a greater surplus in the balance of services. FDI here are related to the privatization of hotels and tourist companies, not only on the coast, but in the mountains as well. c) Water supply building at the coast, road reconstruction and airports' modernization This is a significant pre-condition of the future season's success as well as transportation and tourism revenue increases. An increase of transportation revenues and higher surplus in the balance of transportation services is possible if certain intrastructural issues are solved (road reconstruction and building, especially the Adriatic main road, and construction of the water supply). Furthermore, it is neccessary to improve the activities of domestic tourist agencies abroad and complete more contracts with transportation companies (air-transportation, sea transportation etc.), which will, in the long term, increase transportation and tourism revenues and total revenues of the current account. In order to realize this, it is neccessary to start with the activities in 2004.


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6. CONCLUSION Changing the production structure in a country, especially one that is less developed, like Montenegro, is a long term and difficult process. Regardless of the country, it should be noted that every reform has its costs and benefits. If a reform is conducted well, costs and social risks are lower and benefits increase – thus, a country should not give up on reforms, or postpone them, due to some difficulites and crises at the beginning. This is a very important condition for structural changes in a country like Montenegro that needs to eliminate the external disequilibrium, reduce the current account defict, and service foreign debt. Currently, Montenegro cannot do much to reduce its imports, or goods deficit with foreign countries (which, according to the projection of macroeconomic aggregates by CBM, will increase while it will decrease as a percent of GDP, spanning from 29.9% to 27.4% of GDP). Thus, it is possible, through a change in FDI at the financial account of the balance of payments (as well as through domestic investments), to increase export oriented production and services, and in this way contribute to the goods deficit reduction, or current account deficit reduction in the long term. The current account deficit in the long term should be brought to the level of 4% of GDP13 or lower, as was the case in most transtition economies. REFERENCES: 1. Babić Mate, Babić Ante (2000): «International Economy», CIP, Zagreb 2. Mrak Mojmir (2002): « International Finance», GV Zalozba, Ljubljana 3. Kovač Oskar (1994): «Balance of Payment and International Finance»CeS Mecon, Beograd 4. Axel Wieneke (2002): «Current Account balance Sustainability» 5. IMF : «Balance of payments Yearbook 2002.» , Washington, 2003. 6. Jill Holman: “Current Account Deficit Sustainability», Bank of Federal Reserves, Kansas City

2000. 7. Institute for Strategic Studies and Prognoses: «MONET 13», Podgorica, 2003. 8. Central Bank of Montenegro (2002): «Economic Policy for 2003» 9. Roubini Nouriel, Paaul Wachtel (1997): Current Account Sustainability in Transition

Economies”University of New York, Stern Business School 10. Milesi-Fereti Gian Maria (1996):»Current Account Sustainability» International Finance Studies,

Princeton

13 Current account deficit in Montenegro was 14% of GDP in 2002

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