Montenegro: Staff Concluding Statement of the 2025 Article IV Mission

Montenegro: Staff Concluding Statement of the 2025 Article IV Mission

September 26, 2025

Podgorica: An International Monetary Fund (IMF) mission, led by Srikant Seshadri, comprising Serhan Cevik, Amit Kara, and Jiaxiong Yao, visited Podgorica during September 15-26 and met with President Jakov Milatović, Minister of Finance Novica Vukovic, Central Bank Governor Irena Radovic, the Prime Minister's office, Members of Parliament, government officials, private and financial sector representatives, academia, and the diplomatic community. At the end of the visit, the mission issued the following statement.

Recent Developments and Outlook

The post-pandemic economic recovery phase has matured. The economy expanded by an average of some 9 percent during 2021-2023. This robust recovery was powered by a sharp rebound in international tourism, inflows of migrants from Russia and Ukraine, as well as fiscal stimulus measures. However, economic growth moderated to 3.2 percent in 2024, and the latest data suggests it is lingering at the same level in the first half of 2025. These trends indicate that the economy has now converged to its productive potential. As seen elsewhere in the region, inflation is now trending upwards, in part fed by rising wages. After declining sharply from a peak of 13 percent in 2022 to just 1 percent by September 2024, headline inflation rose to 4.6 percent as of August 2025, with core inflation (excluding food and energy) at 3.7 percent.

Growth is projected to remain around current levels over the medium term, while inflation gradually cools. According to our baseline forecast, economic growth is projected at 3.2 percent in 2025, largely based on preliminary indications of a moderate summer tourist season. Growth in 2026-30 is projected at this time to stay at similar levels, matching the economy's current potential growth rate. Headline inflation is expected to remain elevated this year at a monthly average of 4 percent, easing toward 2 percent over the medium-term.

Fiscal pressures are gradually increasing. We project that the general government fiscal deficit will rise from 2.9 percent of GDP in 2024 to 3.5-3.7 percent of GDP this year. Without fresh measures to restrain expenditures and raise revenues, the fiscal deficit is forecast in the baseline to continue rising gradually, exceeding 4 percent of GDP by 2030. This is mainly because long-term social expenditures (healthcare and pensions) will be pressured by population aging, while military expenditure commitments have also increased. The public debt-to-GDP ratio is projected to rise gradually to around 65 percent of GDP by 2030, with rising fiscal deficits.

External imbalances are also widening. The current account deficit is expected to widen sharply to around 18 percent of GDP in 2025. This is due to a temporary fall in electricity exports, indications of softness in tourism, as well as a notable increase in consumer demand for imported goods. Assuming electricity exports pick up once again from 2026 onwards, the current account deficit will partially moderate toward 15 percent of GDP over the medium-term (higher than the recent average of 12.6 percent of GDP). Current account deficits require commensurate capital inflows to be fully financed. To grow its productive capacity without creating more debt, Montenegro needs to draw capital inflows through higher foreign direct investment (FDI).

Fiscal Policy

Fiscal policy needs to be re-tuned, to match changing economic circumstances. As noted, the fiscal deficit is projected to widen in 2025 to 3.5-3.7 percent of GDP. The authorities have taken encouraging steps to offset the drop in social security contributions since the passage of "Europe Now 2.0" (which we project at 1.6 percent of GDP).These include changes to VAT, excise taxes, and fees from games of chance. Even if these measures fully offset the drop in social security contributions this year, it is not clear if they will be adequate in the future, as other long-term expenditures rise (as noted above). Furthermore, with the economy now pushing up against its current productive potential, continuing to inject fiscal stimulus would risk stoking inflationary pressures. Therefore, the authorities are advised to implement fresh measures to rein in expenditures and raise revenues. Doing so would also help align the fiscal position with Montenegro's fiscal responsibility law (which requires deficits not to exceed 3 percent of GDP, and public debt not to exceed 60 percent of GDP). Additionally, this would be consistent with Montenegro's aspirations to join the eurozone following targeted accession to the EU in 2028.

We recommend that the authorities target a balanced primary budget. To reach this goal, the authorities could: (i) constrain the growth rate of the public wage bill; (ii) carefully eliminate unproductive tax exemptions; and (iii) save the expected revenue gains that will accrue from granting concessions to modernize and operate the country's airports. Beyond the next three years, however, these measures will no longer be sufficient to reach a balanced primary budget. By 2035, Montenegro will need 5-6 percent of GDP in additional resources to meet spending pressures from population aging, defense-related commitments, and climate change (see below). Raising these resources will require deeper structural fiscal efforts-such as (i) civil service reforms, including a comprehensive review of its size and wage structure; (ii) more strongly linking the retirement age to life expectancy and conducting a careful review of early retirement options; (iii) increasing the efficiency of healthcare expenditures through improved drug procurement and prescription processes and exploring possibilities for cost-savings by merging healthcare facilities where feasible; (iv) better targeting of social benefits to the needy through enhanced means-testing; and (v) strengthening public investment management through a well-defined pipeline of projects, prioritized according to their economic and social returns.

Improvements to the fiscal responsibility law and operationalization of the independent fiscal council are immediate priorities. Stronger compliance with the fiscal responsibility law will require amendments to clearly and narrowly define the highly exceptional circumstances under which it can be temporarily suspended. The law should also include well-specified timelines for corrective actions in such exceptional cases. Operationalizing the long-delayed independent fiscal council by finalizing its members promptly, would improve the monitoring of fiscal performance and support fiscal sustainability by creating a mechanism for transparent advice and early warnings if fiscal outcomes risk going off-track.

Climate change has significant economic implications for Montenegro. The country is committed to accelerating its transition to a low-carbon economy and reducing greenhouse gas emissions (by 55 percent by 2030 and 60 percent by 2035, relative to 1990 levels), alongside elimination of coal-based power generation by 2041. The national carbon price (the price polluters pay for greenhouse gas emissions) is expected to rise to EU levels. While the precise timeline for the convergence of carbon prices is still under consideration, this is eventually likely to result in higher domestic electricity costs. Montenegro is also highly exposed to climate-related risks-including droughts, wildfires, and floods-while population growth in the capital and coastal regions is intensifying pressures on water resources. Adapting to these risks will require investment in climate-resilient infrastructure.

Financial Sector

Montenegro's banking sector remains broadly healthy. Capital, liquidity, and asset quality indicators are strong. Bank lending to the private sector has expanded rapidly and real estate prices have surged, particularly over the last two years. This has prompted the Central Bank of Montenegro (CBCG) to raise bank capital levels as an appropriate precautionary measure. The CBCG should continue to watch for early signs of stress-particularly in the cash loan and real estate segments-and maintain strong supervisory capacity and enforcement in anti-money laundering. We welcome Montenegro's integration into SEPA and TIPS Clone, as it will lower transaction costs and strengthen financial integration.

In our view, the Development Bank of Montenegro (RBCG) would best serve society by keeping its focus to its historical mandate. The RBCG has historically performed the function of enhancing access to credit in specific sectors and regions which the commercial banking sector has not adequately covered. This is a particularly useful social endeavor and should remain at the core of the RBCG's focus. To avoid potential fiscal and financial stability risks, we urge extreme caution regarding the proposed expansion of the RBCG's activities (such as deposit taking and participating in the payments system).

To fulfill its responsibility of safeguarding financial stability, the CBCG must remain operationally independent and appropriately staffed. The CBCG is not only responsible for banking regulation and supervision, but is also in charge of macroprudential policies, contingency planning, and keeping the financial sector protected from malign influences such as money laundering. As and when Montenegro joins the eurozone, the CBCG will also assume responsibilities relating to monetary policy. This requires the CBCG to remain operationally independent and to be staffed by individuals with specialized skills and relevant experience. We urge all stakeholders to ensure that vacant senior positions are appropriately filled at the earliest, in accordance with central bank law.

Structural Policies

Structural policies should aim to enhance economic resilience and deliver higher quality economic growth. Tourism offerings can be broadened in areas such as eco-friendly and adventure segments, whilst also making the country more attractive for "digital nomads." This would help to address the widening external imbalances. At the same time, the overall economic reliance on tourism needs to be reduced by diversifying into areas such as renewable energy (given its natural endowments), and by creating an attractive and predictable business environment for small and medium enterprises (SMEs) and foreign direct investors alike. Economic growth is becoming increasingly consumption-driven and must be rebalanced toward investment. Not only does this require higher investment in physical and digital infrastructure, but the workforce must also adapt to ongoing technological innovations to attract more FDI. Currently, FDI in Montenegro is highly concentrated in real estate and construction, underscoring the need to make the country a more attractive destination for investment in other sectors, as well. Economic integration with the EU can help to increase and diversify the sources of FDI, if accompanied by the implementation of structural reforms.

A tight link between productivity growth and wage growth should be firmly re-established. The Europe Now programs made important progress in formalizing "envelope wages" (undeclared cash payments to workers). These programs are estimated to have generated up to one-third of the formal employment gains between 2021-2024. Financial inclusion has also improved, as the reduction in "envelope wages" has increased access to consumer credit. It is important to ensure that future wage growth is matched by productivity growth. Otherwise, there is a risk that stronger wage demands could take hold across the wage distribution, possibly resulting in an undermining of competitiveness as well as wage-price spirals. Employers are also understandably concerned that material changes to working hours could further weaken the link between wages and productivity and raise their costs.

Statistical Data

The compilation methods of primary tourism data should respond to changing conditions. Currently, the CBCG calculates tourism revenues for the purpose of producing balance-of-payments data. It does so in a manner that is fully consistent with IMF's BPM6 statistical methodology. However, this involves the transformation of underlying primary data provided by other agencies (such as the Ministry of Tourism, MONSTAT, and local tourism offices) regarding the number of visitors, as well as the duration and accommodation types of their stays. Recent developments call for more granular data and detailed methods to accurately discern tourists from migrants and their respective expenditures. The improvements needed will take some time and coordination to put into effect. We urge the relevant agencies in charge of producing the primary data to strongly prioritize the implementation of these changes and to eventually take charge of producing tourism data. In the meantime, the publication of detailed balance-of-payments data should be resumed.

The IMF team thanks the authorities and other counterparts for their warm hospitality and for the constructive and insightful discussions.