Pursuant to Article 17 paragraph 1 item 3 regarding Article 11 item 7 of the Law on the Central Bank of Montenegro (“Official Gazette of the RM”, no. 52/00 and 47/01) the Council of the Central Bank of Montenegro at its session held on 28 October 2004 enacted the following
RECOMMENDATIONS FOR ECONOMIC POLICY FOR 2005
THE COUNCIL OF THE CENTRAL BANK OF MONTENEGRO
Number: 0101-213/12-5-2004
Podgorica, 28 October 2004 PRESIDENT OF THE COUNCIL
Ljubiša Krgović
INTRODUCTORY NOTES
Montenegro, which was a part of the former SFRY that used to belong to the group of the most developed countries of Eastern Europe, now belongs to the group of less developed countries. With the decisive implementation of economic reforms and a market oriented policy it is possible to bring Montenegro back on the road of accelerated economic growth and to the group of developed Eastern European countries.
Every scenario for the future development of Montenegro must be based on a high rate of investments, primarily “greenfield” investments. Bearing in mind the limited domestic resources for investment, a strategic aim has to be the enticement of foreign investors by creating optimum conditions for their business operations in Montenegro.
Being a small country, Montenegro has to continue following a policy of a highly open economy. This means that a great share of domestic products have to be traded abroad because domestic production alone cannot satisfy all needs of the Montenegrin population.
The state should withdraw from the production processes, and its main task should be to create a stimulating business environment similar to that in developed market economies. The role of the state should be the protection of the legal system, the country’s defence, and the preservation of public peace and order, and the economy should be left to market forces but with the state retaining a corrective function in case of major market disturbances.
At the same time, it is necessary to continue with the policy of admission to international organisations and institutions, primarily to the European Union and the World Trade Organization. Therefore, one of the main aims of the creators of economic policy in 2005 is the harmonization of national regulations with those of these two international institutions.
The following should be the aims of economic policy:
In order to achieve these aims it is necessary to undertake a number of reform measures alongside appropriate economic policy. Pursuant to legal authorization the Central Bank of Montenegro is under the obligation to make recommendations to the Government of the Republic of Montenegro regarding economic policy, systemized in five segments:
The aim of economic policy has to be the creation of a business environment that would boost new investments, both domestic and foreign. Therefore, a number of measures should be undertaken, of which the following should be singled out as being the most important:
1. Create a strategy of economic development that would indentify the sectors of strategic importance and enable the allocation of the current meagre resources to those sectors.
2. Conduct overall deregulation of business activities; shorten deadlines and reduce the costs of all administrative procedures, as well as to increase the transparency of regulations.
3. Implement RIA (Regulatory Impact Assesment) methodology in the enactment of new regulations, in accordance with the OECD recommendations.
4. Enable the registration of undertakings to be performed in one place, simplify the procedures thereof, and reduce the costs of closing enterprises.
5. Create a stimulating tax system (reduce taxes and contributions on income, reduce profit tax, give tax relief for the newly employed, relieve large investors from profit tax, and so on).
6. Improve the infrastructure that greatly affects the development of tourism (water supply, sewage, waste water, electricity supply, main roads, airports, and so on). Set up tourist markers in accordance with the recommendations by the World Tourist Organization.
7. Consider the option of the differentiation of tax treatment for the tourism sector.
8. Announce an international public tender for building hotels in appealing locations in order to attract quality investors who would bring a great number of tourists and employ a great number of people.
9. Intensify marketing activities on the promotion of Montenegro tourism in targeted markets, primarily in countries of the EU, Serbia, Kosovo, FYR Macedonia, Bosnia and Herzegovina, Russia, the Czech Republic, and others.
10. Accelerate the privatisation process and the restructuring of large systems, and ensure shareholders are better informed about their rights and opportunities.
11. Intensify the efforts on making the EPCG a commercially sustainable enterprise. Initiate activities on separating the production and the distribution of electricity. Intensify activities on reducing losses in the transmission of electricity, eliminating privileged users, reducing illegal connectors, and increasing the collection of revenues.
12. Grant funds for the subvention of agricultural production in accordance with available budget and the rules of the World Trade Organization, with a view to increase agricultural production by providing favourable loans.
Resolve the placement of agricultural surpluses systematically by providing the instruments for their repurchasing and funds for their financing.
13. Encourage the development of organic farming and the establishment of a certified agency.
Implement the program “Made in Montenegro”.
14. Enact antitrust regulations in line with the EU in order to prevent the high pricing and low quality of certain products and services, thus preventing anz decrease in the living standard of consumers and the prosperity of a part of the economy.
15. Transfer the informal economy (as unfair competition to enterprises who are in legal business, and as the culprit for the reduction in fiscal revenues) to legal flows and allowing certain tax relief.
16. Increase the efficiency of the legal system in settling commercial disputes, primarily by reducing their duration.
17. Re-examine legal solutions and propose alterations with a view to a more efficient execution of bankruptcy proceedings introduced in enterprises that fulfilled the necessary conditions (forming accredited institutions to be in charge of monitoring bankruptcy proceedings, limiting the maximum duration of the proceedings, accelerating the termination of earlier proceedings, reduce the costs of the proceedings, and so on).
18. Solve the question of denationalisation, and the status of confiscated property.
19. Consider the possibility of creating conditions to provide a more favourable position for domestic bidders in local tenders within a reasonable time frame.
20. Form a special agency with a view to promoting investment opportunities for foreign investors that would operate on a “one-stop-shop” principle.
21. Carry out programs of training, retraining and additional training for unemployed people and encourage the system of informal education.
22. Form business “incubators” in order to stimulate the development of small and medium-sized enterprises.
23. Provide credit lines for the establishment of new undertakings and the development of prosperous small and medium-sized enterprises through the Development Fund, in cooperation with international organisations.
24. Follow a restrictive policy of environment protection and implement ISO 14000 standard series.
25. Find alternative solutions to moderate the energy deficit instead of carrying out the “Buk-Bijela” project that would damage the unique natural environment of the river Tara upstream.
26. Gradual withdrawal of the state from all monopoly-holding activities, as well as considering the options of performing certain public functions by the private sector, with subventions and grants.
27. Enact appropriate regulations in order to protect the intellectual property and ensure its full implementation with a view to attracting new investors and easier admission to international institutions.
RECOMMENDATIONS REGARDING FISCAL POLICY
Bearing in mind that one of the main prerequisites for the accelerated economic growth of Montenegro is the attraction of foreign and an increase in domestic investments, fiscal policy should create a stimulating business environment. This means that tax rates should be lower than those in the region, and at the same time, the state should reallocate as small a share of GDP as possible thus restricting state interference in primary allocations, which would improve the efficiency of the private sector. Taking into account that Montenegro’s economy is in transition, one of the ultimate aims of the fiscal reform, a balanced budget, cannot be achieved in 2005. Therefore, pursuant to the “Maastricht Convergence Criteria”, the fiscal deficit must not be higher than 3%, and preferably lower than that.
Therefore, we believe that the following measures should be undertaken:
1. Continuous comparative analysis of tax systems in the region, the revision of tax policies (at least once a year), undertaking corrective measures and adopting the most suitable tax rates, all that with a view to creating a stimulating business environment.
2. Gradual abolishing of progressive and implementing proportional tax rates in order to create a stimulating business environment by eliminating additional taxation of those who are ready to work harder and achieve better results.
3. Reduce various forms of hidden taxes, both republic and local.
4. Reduce profit tax to the maximum of 10% (5% would be most desirable). No significant repercussions for the budget are expected considering the very small contribution of this tax to the total budget revenues.
5. Relieve both domestic and foreign “big investors” from profit tax for a limited time frame (five to ten years) in order to make Montenegro more attractive to foreign investors. We propose that the “big investors” treatment should be allowed to all investors who invest over EUR 1 million.
6. Tax relief on reinvested profit in order to motivate foreign investors to make new investments rather than repatriating the profit.
7. Reduce taxes and contributions on earnings (since they are among the highest in the region) in accordance with the quality action plan that would include the positive effects of this measure since there could be some disapproval by international institutions.
8. Implement overall measures of savings and rationalisation that would lead to a reduction in public expenditure (that is, a continuous fall in the contribution of public expenditure in GDP), in order to prevent the possible growth of the fiscal deficit resulting from the proposed reduction in tax rates.
9. Reduce the number of employees in the state administration simultaneously increasing its efficiency.
10. Continuous analysing “the cheapest” sources for covering the fiscal deficit (domestic bank loans, bonds, international loans), and following a restrictive policy of new borrowing to prevent Montenegro becoming one of the highly indebted countries.
11. Implement the Law on Borrowing and Public Sector Debt Management with a view to recognizing the possible options for the repayment of the existing debt and the possibilities for new borrowing. Therefore, the Ministry of Finance should take over the complete records and registration of foreign debts.
12. Intensify inspections (in order to increase fiscal revenues) to prevent the existence of privileged enterprises; intensify efforts in the collection of outstanding tax liabilities, and undertake all legal instruments, in accordance with available regulations, against enterprises that avoid paying taxes.
13. Continue following the policy of tax relief for newly employed people with a view to stimulating new employment.
14. Open a common account for all budgetary users (treasury) in order to improve the efficiency of the use of budgetary funds, and transfer all state accounts from banks in Montenegro to the account with the Central Bank of Montenegro in accordance with the planned dynamics.
15. Harmonize and consolidate mutual accounts payable to budgetary users, and the state’s accounts payable to other users.
16. Continuously re-examine the collection mechanisms and VAT refund deadlines, primarily to shorten the detention of imported goods at customs.
In accordance with the Central Bank of Montenegro recommendations and the Economic Policy for 2004, the Government of Montenegro undertook significant activities in 2004 in order to encourage the development of financial markets, and these were mainly concerned with their institutional regulating. Accordingly, the following laws were enacted: the Law on Mortgage, the Law on Investment Funds, the Law on Enforcement, the Law on the Restoration of Revoked Property Rights and Indemnification, the Amended Law on Settlement of Foreign Currency Deposits, and the Law on Gaming.
Bearing in mind legal limitations, the document Economic Policy should not contain as obligations for the Government the activities that are, pursuant to the Law, exclusively the obligation of the Central Bank of Montenegro and the Securities Commission of the Republic of Montenegro.
In cooperation with independent regulatory bodies in the Republic and with a view to improving the money market and the capital market, the Government should undertake numerous measures:
1. Continue with activities on finishing off the institutional framework by introducing laws still unenacted and adequate enabling and other regulations that would allow the creation of an efficient money market in the Republic (the Law on Insurance, the Law on Current and Capital Transactions with Abroad, the Law on the Promissory Notes, and the Amended Law on Securities).
2. Carry out the activities on forming appropriate registers, the preparation of adequate forms and instructions, the training of employees in newly formed institutions, and educating the users of their services.
3. Create the conditions for the comprehensive implementation of the laws concerning the protection of creditors` rights, which should provide the safety and legal protection of creditors, which further implies the improvement of the material status of the judicial system as the main prerequisite for its independence.
4. Reduce the CDA`s (Central Depository Agency) commission fees as part of costs that the owners of securities pay, and which are one of the main obstacles for the development of the securities market.
5. Carry out the activities on further decreasing tax rates in investment income and profit.
6. Alter the existing Law on Securities to enable the distinguishing of long-term and short-term securities, separate the authorities for regulating the money market and the capital market, and provide the necessary solutions regarding registration, clearing and balancing of transactions in the money market in the CDA.
7. Enact the Law on Promissory Notes and provide its full implementation in order to overcome the problems of short-term illiquidity and refinancing, which would consequently lead to a reduction in prices of financial assets in the Republic.
8. Enact the Law on Insurance with a view to quality institutionalising in this area and clearly define the institution that would control insurance companies. However, it should be taken into account that the most suitable policy regarding the aforementioned would be the forming of this regulatory body within the existing regulatory institutions in the Republic that already have a tradition and reputation in the quality performance of this.
9. Continue commenced activities on the privatisation of Podgoricka bank with a view to bringing in a strategic partner, and intensify the activities regarding the sale of the remaining majority state owned capital in banks.
10. Implement a new income model, that is, a new model for the collection of public income, and consider the possibilities of reducing the part of payment operations costs used for the financing of a part of pensions disbursed by the Republic Pension Fund.
11. In accordance with EU recommendations, continue negotiations with the NBS about finding a solution for establishing a direct payment system between Montenegro and Serbia in order to reduce the current costs of payment operations between these two Republics.
12. Improve cooperation with the World Bank and other financial institutions with a view to obtaining financial assistance and continue with reform activities.
RECOMMENDATIONS REGARDING INTERNATIONAL ECONOMIC RELATIONS
Regardless of numerous economic reforms and the positive results achieved in international economic relations, the main problems are still focused on the foreign trade part of the balance of payments. Therefore, it is essential to undertake a number of measures in order to make domestic products more competitive and create a stimulating business environment. The following measures could be designated as priorities:
1. Deregulate foreign trade procedures in order to reduce deadlines for certain foreign trade procedures, reduce the costs of these procedures, avoid the double customs clearance of products, shorten deadlines for VAT refund, and so on.
2. The implementation of international standards with a view to gaining entrance to the world market, wherein the active role of the state is essential, meaning publishing and translating international standards (primarily the ISO standards and EU directives), organizing seminars on the introduction of the aforementioned standards, and field assistance to specific enterprises.
3. Form a credit potential in commercial banks with the state participating in it, which would be used for financing exports under more favourable conditions than those currently existing, and, in the long term, form a Fund for the Crediting and Insurance of Foreign Trade Transactions.
4. Implement measures of protection of the domestic market and domestic producers (the antidumping procedure, prevent the import of non-certified and products that do not satisfy quality standards, lower the level of illegal imports, and so on).
5. In accordance with the WTO rules, provide subventions, such as: financial assistance for scientific research, joint appearance at fairs, assistance in covering ecological expenses, subventions to agriculture (to the level existing in the period 1986 – 1988), subventions to export-oriented enterprises in underdeveloped regions of Montenegro, and so on.
6. Enact the Law on Capital and Current Transactions with Abroad.
7. Improve the efficiency of the Customs Office with a view to accelerating the process of registering imported goods and preventing illegal imports.
8. Implement signed agreements on free trade, that is, finish the process ofamending annexes that has already started.
9. Implement the Copenhagen criteria, observe obligations from international agreements[1], regional cooperation with neighbouring countries, harmonization of legal regulations, and accept acquis commonautaire with a view to accession tothe EU and other international economic integrations.
10. Create the conditions for becoming a member of the OECD, which is significant since it obliges its members to do some restructuring by providing various forms of support, which would intensify the process of convergence of economic performance and legal regulations with the performance of member countries of the EU.
11. Harmonise the foreign trade regime with WTO regulations with a view to non-discrimination appearance in the world market, which implies membership of the WTO. It is crucial to insist on accepting the State Union of Serbia and Montenegro (or Montenegro on its own) as a developing country because it will provide longer transitional periods for the implementation of certain agreements, technical assistance, and other benefits.
12. Adopt numerous strategic documents such as: the Strategy for Joining the EU, the Strategy for Joining the WTO, the Analysis of Costs and Benefits from Joining the EU, the Communication Strategy for Joining the EU, and so on.
13. Intensify cooperation with the diaspora with a view to creating suitable conditions for their investing in Montenegro.
RECOMMENDATIONS REGARDING OTHER AREAS
1. Improve the IT equipping of the public administration, as well as the IT education of the employees, wherein the final result should be the creation of an “e-Government”.
2. Develop a static system with the appropriate segregation of duties as follows:
· Monstat – national accounts, real sector, price movements, employment,
· Customs Administration – foreign trade statistics,
· The Ministry of Finance – statistics of public finances and foreign debt,
· The Ministry of Tourism – tourism statistics,
· The Agency for Foreign Investments – statistics of foreign direct investments,
· The Central Bank of Montenegro – the balance of payments and monetary statistics.
3. Increase the level of ability of Monstat to perform basic statistics research through the better equipping of staff with software and hardware, and more training programs for employees (offered by international institutions), as well as to adopt a statistics research plan and perform the review of the methodology that is currently applied.
4. Define the institution in charge of processing annual financial statements of enterprises.
5. Improve the existing Law on the Conflict of Interest.
6. Prepare adequate social programs for the anticipated redundancies in the process of restructuring the economy, by using possible donations for these purposes and a part of privatisation revenues (these revenues should also be used to create the prerequisites for self-employment). The social programs should be restricted only to those categories that cannot economically survive without it. The state’s paternalism diminishes the initiatives for independently resolving this problem.
7. Undertake activities to prevent the employment of more people than needed in certain enterprises, as this will reduce operating expenses and improve competitiveness in the world market.
8. Continue with retraining, additional training, and training of unemployed people, as well as encourage the work of nongovernmental institutions that are engaged in informal education.
9. Enact the Law on the Prevention of Corruption and undertake active measures to suppress corruption.
10. Continue monitoring the implementation of economic reforms set out in the “Agenda of Economic Reforms for Montenegro”.
[1] The implementation of most international agreements primarily depends on Serbia and especially on adhering to the Dayton Agreement, cooperation with the Hague Tribunal, the UN Security Council Resolution No. 1244, and so on.