Economic Freedom
Macroeconomic Outlook
2013 Index of economic freedom - The Heritage Foundation For more than 20 years the Heritage Foundation has published an index of economic freedom, ranking economies in the World by the level of economic freedom and putting them into different categories. While the debate about this and other rankings are continuing this Foundation is trying to promote the importance of economic freedom by ranking them and providing them an opportunity to improve their overall score. It is evident that there is a strong link between the economic freedom score and the economic situation and countries are trying to be at the top of the ranking. What is important to say is that the Index is a good tool that can be used in order to improve the economic situation in the country while following examples of successful ones. In the case of Montenegro it improved its position on the list but there is plenty of space to further improve the rank. Some of the areas to improve according to the 2013 report should be Government spending, Property rights, Freedom from corruption and investment freedom. The above mentioned are the main findings on Montenegro that were taken from the report1. Montenegro’s economic freedom score is 62.6, making its economy the 70th freest in the 2013 Index. Its score is essentially the same as last year, with notable gains in the control of public spending, business freedom, and freedom from corruption balanced by declines in labor freedom, monetary freedom, and trade freedom. Montenegro ranks 33rd out of 43 countries in the Europe region and its overall score is above the world average. 1 2013 Index of Economic freedom- Heritage foundation
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Montenegro’s ongoing transition to a free-market economy has been facilitated by structural reforms and an increasingly vibrant private sector. Along with policies that open the country to global commerce and trade, competitively low flat tax rates and an evolving regulatory system have contributed to a more dynamic and broadly based economic expansion.
Although the regulatory environment is generally consistent with a market economy, bureaucracy curtails entrepreneurial dynamism. The government has pursued reform measures to curb chronically high levels of government spending and improve public-sector efficiency, but overall progress has been sluggish. Despite the relatively well-maintained rule of law, the pace of legislative and judicial reform has been slow, and corruption is still perceived as significant. Rule of Law - The constitution provides for an independent judiciary, but the system is inefficient and subject to political interference. Infringements of intellectual property rights are fairly widespread. Mistrust of government continues, particularly due to pervasive corruption in the executive and judicial branches. Parliament is investigating allegations of bribery in connection with the 2005 telecommunications privatization. Limited Government - The income and corporate tax rates are a flat 9 percent. Other taxes include a valueadded tax (VAT) and an inheritance tax. The overall tax burden equals 24.4 percent of total domestic income. Government spending is equivalent to 44.2 percent of total domestic output. The budget balance has been negative
and public debt has risen to almost 46 percent of GDP. Failing state-owned enterprises have put pressure on fiscal accounts. Regulatory Efficiency - Procedures for setting up a business have been streamlined, and the number of licensing requirements has been reduced. However, licensing costs remain burdensome, averaging more than 10 times the level of average annual income. Labor regulations lack flexibility, discouraging more dynamic job creation. Inflationary pressures have been increasing, but the overall monetary situation remains stable. Open Market - The trade-weighted average tariff rate is 3.5 percent, but cumbersome non-tariff barriers interfere with trade. Although foreign investment is officially welcome, the investment regime remains too bureaucratic to allow dynamic investment growth. The evolving financial sector has gradually become more competitive and diversified, but non-performing loans have been on the rise. ■
Macroeconomic Outlook Summary Basic characteristics of the last quarter of 2012, at a macroeconomic level, are illustrated by quarterly indices (IV 2012/III 2012): - industrial output recorded the fall of 5,5%, - CPI index rose by 1,4% - Employment fell by 2,2%, - Salaries without taxes and contributions also recorded a fall of 0,6%.
REAL SECTOR Basic sectors Industrial production: recorded a fall of 7.1 % during the period JanuaryDecember 2012 in comparison with the same period last year. Major decreases in industrial output were recorded in the mining and quarrying sectors (29%). A slight increase in output levels (1.4%), was recorded only in the electricity, gas, stream and air conditioning supply industries. Tourism: during the period September-November 2012, 270 463 tourists (of which 88.3% were foreigners) visited Montenegro. During this period, 1 222 658 nights were recorded, and Budva, and Herceg Novi were the most visited cities. Observing the period from the beginning of the year until November, a slight increase was recorded in visits and nights (4,9% and 4,3%, respectively) when compared to the corresponding period last year. Construction: last available data referring to this sector shows that during the third quarter of 2012, the total value of finished construction works was €74.15 million, while anticipated new building work projects are expected to total €3.77 million.
Inflation The annual inflation rate, measured by the Consumer Price Index (CPI), during the period January-December 2012 was recorded at a level of 4.1%. The most significant price increases during that period were recorded in alcoholic beverages and tobacco (16.7%). When compared with EU indices, the latest available international comparisons indices that Montenegro’s annual inflation rate (5.2%) was significantly above the EU 27 level (2.4%) in November 2012.
Employment and Wages The data from the Employment Agency of Montenegro shows that at the end of January 2013, there were 31 717 unemployed, indicating the unemployment rate at a level of 13.67%, higher than last year’s corresponding value (11.45%). In December 2012, the gross average salary was €741; the average salary without taxes and contributions was €497. Higher salaries, without taxes and contributions, were recorded in electricity, gas steam and air conditioning supply (€839) and finance and insurance (€886), while the lowest salaries were recorded in the trade sector (€362). At the end of January 2013, the Parliament of Montenegro adopted amendments to the Law on Personal Income Tax, which stipulates introducing an additional 15% tax rate on wages exceeding 480€, while the tax on wages below this amount will remain the same (9%). The income tax increase was suggested for the purpose of achieving fiscal stabilization and sustainability of the budget.
PUBLIC FINANCE Budget
Current budget revenue in November 2012 was €93.1 million (2.8% of the
estimated GDP), thus showing an increase of 1.9% in comparison with the planned value. Budget expenditure totaled €109 million, thus showing an increase of 5.3% (3.3% of the estimated GDP). This resulted in the Montenegrin budget showing a deficit of €15.9 million in November, whereas the deficit in the first eleven months amounted to EUR 128.6 million or 3.9% of GDP.
INTERNATIONAL ECONOMIC RELATIONS Foreign Direct Investments (FDI)
During the period January-November 2012, net FDI inflow amounted to €421.5 million, just 15.5% of its recorded value in the same period last year. - FDI inflow: € 526.4 million, mostly in the form of sale of real estate (€208 million). - FDI outflow: € 105 million, mostly in the form of withdrawal of non-residents’ investments in Montenegro (€59.3 million).
External trade
T h e t ot a l re a l i z e d t h rou g h foreign exchange during the period January-December 2012 amounted to €366.89 million. Total exports totaled €150.4 million, while total imports totaled €1 820 461 million. The export-import ratio of 20.15%. Dominant exports in terms of products were: aluminum (35.9%), while the majority of imported goods related to mineral fuels/oils/ waxes. Montenegro is the most importexport dependent country with Serbia, Bosnia and Herzegovina, Croatia and Slovenia (three fifth of export, and import to (along with Greece and Germany)). ■ (Source: The Central Bank of Montenegro, Monstat, Ministry of finance of Montenegro, Employment Agency of Montenegro)
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