Montenegro strategy overview

Full strategy  (0.6Mb) Approved 18  Sep 2007

Strategija za Crnu Goru  (0.4Mb)

Montenegro is committed to and applying the principles of multiparty democracy, pluralism and market economy in accordance with the conditions specified in Article 1 of the Agreement establishing the Bank.

Independence

The country became independent on 3 June 2006, following the holding of a referendum on independence, an option envisaged by the Constitutional Charter of the State Union of Serbia and Montenegro, created in 2002 with the active involvement of the European Union. The EU Foreign Ministers on 12 June 2006 recognised the referendum result and announced that EU members would individually recognise Montenegro and establish diplomatic relations with it. Serbia recognised Montenegro as an independent state on 15 June 2006. The resolution of pending issues with Serbia has been proceeding smoothly, including succession and division of assets, as well as issues concerning citizenship rights and social security.

Montenegro was admitted to the OSCE on 21 June 2006 and became a member of the UN on 28 June 2006. It joined the EBRD on 6 September 2006, and the IMF and World Bank in January 2007. The new state has already a relatively open trade regime and the talks on WTO membership are progressing well. On 11 May 2007 Montenegro was admitted to the Council of Europe.

Economic developments

Recent economic developments have been favourable. The last two years have seen a combination of strong GDP growth – more than 6 per cent in 2006 – low inflation and a significant inflow of foreign direct investment (more than US$ 1 billion over the two years combined). Fiscal performance has also improved and the country’s level of external debt is moderate. The unilateral adoption of the DM in 2000 (and subsequently the euro in 2002) as sole legal tender has contributed to economic stability and there are no realistic prospects of the country introducing an independent currency. Montenegro has also made important advances in some dimensions of transition, notably in the areas of price and trade liberalisation, privatisation and banking sector reform.

Transition challenges

During its first year as an independent country, Montenegro has proved to be a politically stable and economically viable state, which has the potential to grow rapidly over the medium term. The country has had some success already in creating a favorable business climate and in attracting reputable foreign investors, who can play a crucial role in signalling to others that Montenegro is an attractive investment destination. At the same time, many problems and weaknesses common to the region, not least the limited capacity of public administration, are present in Montenegro. The main transition challenges ahead are in the areas of institutional reform, especially in the areas of corporate governance and competition, infrastructure and non-bank financial institutions. A number of key assets remain to be privatised, and energy sector reform is a particularly vital challenge facing the country.

EBRD activities to date

To date, the Bank’s activities in Montenegro have been rather limited, reflecting the small size of the country. The Bank’s portfolio has somewhat increased in the previous Strategy period, reaching €36.2 million by end-2006. Operating assets were €20.8 million as of end-2006 and there are no impaired assets. Infrastructure projects dominate the portfolio. The Bank’s commitments in this sector comprise two rehabilitation transport projects: one for the Montenegro Airports (signed in 2003 and largely disbursed) and the other for the roads (signed in 2005 and partially disbursed). Investments in financial institutions are at €6 million and include loans or equity investments in NLB Montenegrobanka, including a merger between Euromarket Bank and NLB Montenegrobanka, as well as strong support for micro-enterprises. Several transactions in the financial sector supported local banks through mortgage financing, TFP, and SME financing under the Western Balkans Framework SME credit line. The SME sector has also received support from Turnaround Management (TAM) and Business Advisory Services (BAS). In the corporate sector, the EBRD invested in a greenfield technical gas facility (DIF) and provided a pre-privatisation loan for KAP, an aluminium combine to finance the investment advisor. Both of these transactions have been completed.

Operational priorities

The Bank is shifting its focus to the private sector and the pipeline looks quite promising in that respect. The Bank’s priorities over the strategy period will be:

• Private Corporate Sector: Montenegro’s tourism and property sector is an area where the Bank can play an important role by providing both funding and political comfort to foreign investors. There is significant demand for good office, retail, hotel and housing (permanent and holiday home) space. Taking into account the natural beauty of the country the Bank will actively support the chosen strategy of low density, higher-end tourism property development including ensuring positive backward linkages these developments will create and the need for a balanced and environmentally friendly sustainable development. The Bank also aims to increase its operations with local private corporate clients and promote their investments in new technology and environmental improvements. The privatisation process and post-privatisation restructuring will be supported. In addition, the Bank will continue to support MSMEs through existing and new financial instruments like the EBRD-Italy Western Balkan Local Enterprise Facility (WBLEF) and the MSME Finance Framework for Western Balkans and Croatia (MSMEWBF) to local banks and specialised microfinance institutions.
  
  
• Infrastructure: The Bank will, in cooperation with the European Investment Bank (EIB), the World Bank and the EU, continue lending for key infrastructure projects where clear transition impact can be achieved and with an emphasis on involvement of a private sponsor wherever possible. Priority will be given to projects with a material impact on tourism and/or a strong regional dimension. The Bank will support corporate restructuring in the electricity, gas and oil, roads and railway sectors, and will attempt to advance commercial financing to municipalities. Future sovereign projects will be limited by the tight fiscal space. This will require a selective approach and the need to phase infrastructure projects over several years to make them viable from a sovereign borrowing point of view.
  
  
• Financial Sector: The Bank will focus on the following areas: (i) Cooperation with strong local or foreign banks looking for opportunities to increase market share by assisting in further consolidation; and (ii) Continued support to commercial banks and micro-lending institutions, especially in the field of MSME and mortgage lending through existing product and through WBLEF and MSMEWBF.

TC and official co-financing

TC and official co-financing will remain crucial for project preparation and institution building, particularly promoting smaller scale local enterprises and for public sector operations. The Bank will continue its close co-operation with the EU/EAR and bilateral donor institutions, and will coordinate its activities closely with other IFIs, including the IMF, World Bank and EIB.