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26/05/2021

The Central Bank of Montenegro publishes a letter sent by Emanuel Salinas, World Bank Director for Montenegro and Bosnia and Herzegovina to the Governor of the Central Bank of Montenegro Radoje Žugić and the Minister of Finance Milojko Spajić, expressing the this institution's position oon the Law on Deferred Payment of Credit Obligations of Borrowers (lex specialis). We publish the letter integrally:

Your Excellencies,

I would like to share our views based on international experience about the Draft Law on Deferred Payment of Credit Obligations of Borrowers (lex specialis) which we understand that is in the Parliament’s agenda for voting.

We understand that the proposed draft law would impose a 6-month blanket moratorium that includes interest forgiveness which would be applied to the existing loans extended by banks and non-bank financial institutions as well as to new loans that may be extended after the effectiveness of the proposed law.

We understand that the intended objective of the draft law is to provide assistance to the private sector in Montenegro in the wake of the COVID pandemic. While this objective is commendable, we believe that the proposed instrument (blanket moratorium) is not the best way to achieve this objective and it can have significant negative consequences. Accordingly, we believe that this objective can be better achieved through other instruments and policies that can have a much higher positive impact while reducing adverse outcomes.

First, it is important to highlight that the Central Bank of Montenegro (CBM) has already implemented a relatively large set of measures to respond to the impact of the pandemic on the economy and financial sector since the introduction of the first “CBM Decision on Interim Measures to Mitigate Adverse Effects of the New Coronavirus Disease” in March 2020. We also note that CBM’s decisions have been updated since March 2020, in most cases resulting in expansion of the compulsory moratorium. According to CBM data, as of April 2021, measures apply to 2,338 companies from 111 vulnerable sectors, and, over 75,000 individuals who lost their jobs or whose earnings were reduced. Considering the already extensive use of the moratorium available to many companies and individuals, the additional value of the proposed blanket moratorium is not clear.

Second, a blanket moratorium may harm financial stability as it may result in: (i) allocating funds to firms that were not economically viable before the crisis; (ii) creating incentives for financially capable borrowers to suspending payment of their obligations; (iii) weakening the stability of the financial sector by deferring payments of interest and principal on existing loans; and (iv) reducing the willingness and ability of the financial sector to provide new loans even to stable companies.

After the financial crisis in 2008, Montenegro has invested enormous efforts in strengthening the stability of the financial sector and reducing vulnerabilities. A blanket moratorium may erode these achievements by hampering asset quality and affecting banks’ safety and soundness. Montenegro needs a stable financial sector as a foundation to build the recovery after the current crisis. Only a stable banking sector with the required capital, liquidity and asset quality can provide the financing that the private sector will need during the recovery from the pandemic.

Third, under the ongoing extraordinary circumstances, temporary measures might be needed to preserve economic activity, but it is critical that they are well-designed, in order to maintain financial stability. International best practices indicate that support measures should be a) targeted to borrowers that have been directly affected by COVID-19 to minimize distortions; b) be temporary, with clear reporting requirements for banks and closely monitored by the supervisor; and c) should not deviate from international standards for the prudential treatment of problem assets. The World Bank has prepared guidance notes to financial authorities on policies and programs to support the private sector in the wake of the crisis.

Our team is fully available to provide guidance and recommendations that can inform the design of sustainable and effective policies and programs that can support the private sector in Montenegro.

Sincerely,     

Emanuel Salinas

Country Manager

Bosnia and Herzegovina and Montenegro