Interview of Vice Governor Nikola Fabris for the news agency Mina-business
Economic growth expected this year
The Central Bank (CBCG) scenarios indicate that the Montenegrin economy should strengthen between four and 7.5 percent this year depending on the pandemic, said the supreme monetary institution’s Vice-Governor Nikola Fabris.
Fabris said that the CBCG has developed two scenarios for this year, depending on the pandemic. These scenarios should be accepted conditionally as the projections are usually based on past experience. The pandemic is the only event for with no similar experience.
“At this moment, the pandemic’s duration is unknown. We do not know whether there will be the more massive application of the vaccine this year and its effectiveness. Moreover, we are unaware of what measures will be taken by the countries that are Montenegro’s the most important partners. Therefore, in line with developments, these projections will be revised during the year,” Fabris said in an interview with Mina-business.
As he explained, the first optimistic CBCG scenario assumes that the coronavirus pandemic will significantly weaken from this June. It will be the result of the vaccine development, the acquired immunity and improved knowledge about life and work in a pandemic.
“Under these assumptions, the projection indicates that the Montenegrin economy could achieve relatively high growth this year of about 7.5 percent, mostly due to last year’s low base. It should be noted that this is a significantly lower level of gross domestic product (GDP) than in 2019”, said Fabris.
The second scenario assumes that the coronavirus pandemic will last this year, with a similar last year’s intensity.
“This scenario assumes that there will be no lockdown of the economy, as was the case in the second quarter of last year. There would be much more liberal conditions for entering Montenegro compared to the previous tourist season. In this scenario, the GDP growth rate would be around four percent mostly due to the low last year base”, Fabris said.
He said that the coronavirus pandemic was an event that marked last year and will be a key economic topic in this one.
“Unfortunately, under the pandemic influence, GDP dropped significantly, and the unemployment rose. The social status of a large number of citizens deteriorated, while fiscal imbalances deteriorated seriously,” Fabris said.
Concerning last year, Fabrice said that the CBCG projection indicates that the GDP fall will most likely be around 17%.
“It should be noted that a large number of data for the fourth quarter was not available during the projection preparation. Thus, it should be accepted conditionally,” said Fabris.
He added that the CBCG contributed strongly to mitigating the pandemic’s consequences through five packages of measures.
“The implementation of a binding moratorium on the loans obligations repayment increased in citizens and companies’ liquidity by over 150 million euros only during March, April and May. Moreover, the reserve requirement rate reduced by two percentage points increased the banking sector’s liquidity by 70 million euros. It resulted in their increased lending potential,” said Fabris.
According to him, banks were an adequate support to the system during the nine months of the previous year. They approved 33.15 thousand new loans for 29.78 thousand clients, in the total amount of 620.2 million euros.
“Also, to mitigate the adverse crisis effects, clients continued to use the possibilities of the moratorium. At end-September, there were another 131 million euros in this category,” said Fabris. He added that they tested the measures with international financial institutions, primarily the International Monetary Fund (IMF) and the European Central Bank (ECB). They received confirmation that these are well-designed measures.
As he announced, the CBCG will continue to monitor the situation in the coming period closely. If needed, it will not hesitate to adopt new measures.
Speaking about retail and corporate lending, Fabris said that loans to the non-financial sector, i.e. to the economy amounted to 1.12 billion euros at end-November last year. They increased by 46.8 million euros or 4.4 percent compared to end-2019. They recorded a year-on-year growth of 63.9 million euros or six percent.
At end-November last year, household loans amounted to 1.4 billion euros and increased by 44.4 million euros or 3.3 percent compared to the end-2019. They recorded a year-on-year increase of 60.1 million euros or also six percent.
“Given the ongoing pandemic and all the risks and challenges we face, I see this result above all our expectations. This is a confirmation that banks have contributed significantly to mitigating the pandemic effects. Personally, I would be very satisfied if this tendency continued this year as well,” Fabris said.
Fabris commented on two crucial economic decisions of the Government – the government bonds issue on the international market and the non-adoption of the budget for 2020 and the transition to temporary financing until March. He said that it was necessary to provide funds for 2016 Eurobonds repayment as soon as possible, as they would be due this March.
“The longer we had waited, the conditions would have certainly been more unfavourable, and we would have entered a high-risk zone. This was one of the key recommendations we gave as a part of the Recommendations to the Government for conducting economic policy this year. As we have already pointed out, the CBCG supported the decision to issue Eurobonds”, said Fabris.
On the other hand, as he said, it is understandable that the Government, which is responsible for economic policy, wants to adopt the budget independently.
“Having in mind the date of establishing the Government, there was insufficient time to prepare and adopt the budget by the end of the year. I also think that the temporary financing should last as short as possible and that it is necessary to adopt a new budget as soon as possible”, added Fabris.
According to him, it is not easy to plan public revenues and expenditures in pandemic and high uncertainty conditions. Still, it would be useful to adopt a new budget as soon as possible so that economic policy can be implemented undisturbedly. If necessary, it could be rebalanced during the year.
He said that under the pandemic influence, Montenegro faced a significant public debt increase, primarily the share of public debt in GDP.
“The share is high, and the public debt level reduction will be one of the biggest challenges for conducting economic policy in the coming period,” Fabris believes.
He said that the CBCG traditionally prepared recommendations for conducting economic policy and forwarded them to the Government.
Among the key ones, Fabris mentioned the recommendation reiterated for several years - the necessity of diversifying the economic structure and focusing on several sectors in the coming period.
“We have recommended the preparation of a program for the economy’s functioning in conditions of business uncertainty under the pandemic influence, with as few restrictions on business as possible to the extent not jeopardising public and individual health. The emphasis should not be on closing businesses but on the promoting safe business protocol while checking and sanctioning non-compliance with it,” Fabris explained.
He added that the CBCG also recommended considering the possibility of returning to the working Sunday. This could increase employment and the tax base, at the same time strengthening control over the respecting of workers’ legal rights.
“Having in mind that the pandemic will continue, we recommended encouraging economic activity, especially for endangered sectors such as tourism. We recommended preparing a new support package, with an accompanying social programme for the most endangered citizens. Concerning agriculture, we suggested providing an adequate level of subsidies, so that our farmers would be competitive”, said Fabris.
The CBCG suggested increasing the digitalisation degree and the broader use of IT technologies. On the one hand, these are an export opportunity for Montenegro. On the other one, they gain additional importance in the pandemic conditions.
The largest segment of recommendations deals with fiscal policy.
“We suggested drafting a new Fiscal Strategy as soon as possible. This would be the umbrella document for creating fiscal policy guidelines for the next period. We also suggested creating and implementing a medium-term budget framework, with many binding medium-term expenditure limits. It would include a general expenditure limit and the obligation to align and explain any changes in expenditures,” Fabris said.
As he reminded, the CBCG also suggested establishing the Fiscal Council and revising fiscal rules.
“We also recommended launching an initiative with creditors to restructure public debt parts, especially those related to highway construction. An important recommendation is establishing a significant amount of fiscal reserve due to the increased uncertainty degree”, concluded Fabris.
The Supreme Monetary Institution also suggested restrictive new guarantees issuing policy and providing adequate collateral in case of approval.
“To preserve fiscal sustainability, it is necessary to avoid new large capital expenditures, until the public debt sustainability reduces and public finance improve significantly. We also find public administration reform necessary, to optimise it”, concluded Fabris.