Montenegro: The youngest country in the SEE region

IndustrySouth-East European INDUSTRIAL Мarket - issue 1/2007

New independent country – Montenegro, appeared last year by separating from Serbia. The status of the union between Montenegro and Serbia was decided by a referendum on Montenegrin independence on May 21, 2006. A total of 419,240 votes were cast, representing 86.5% of the total electorate. 230,661 votes or 55.5% were for independence and 185,002 votes or 44.5% were against. The 45,659 difference narrowly surpassed the 55% threshold needed to validate the referendum under rules set by the European Union. Serbia, the member-states of the European Union, and the permanent members of the United Nations Security Council have all recognized Montenegro’s independence; doing so removed all remaining obstacles from Montenegro’s path towards becoming the world’s newest sovereign state.

On June 3, 2006, the Parliament of Montenegro declared the independence of Montenegro, formally confirming the result of the referendum on independence. Serbia did not obstruct the ruling, confirming its own independence and declaring the Union of Serbia and Montenegro dead shortly thereafter.

Economy of Montenegro

During the era of communism Montenegro experienced a rapid period of urbanization and industrialization. An industrial sector based on electricity generation, steel, aluminum, coal mining, forestry and wood processing, textiles and tobacco manufacture was built up, with trade, overseas shipping, and particularly tourism, increasingly important by the late 1980s.

The loss of previously guaranteed markets and suppliers after the break up of Yugoslavia left the Montenegrin industrial sector reeling as production was suspended and the privatization program, begun in 1989, was interrupted. The disintegration of the Yugoslav market, and the imposition of the UN sanctions in May 1992 were the causes of the greatest economic and financial crisis since World War II. During 1993, two thirds of the Montenegrin population lived below the poverty line, while frequent interruptions in relief supplies caused the health and environmental protection to drop below the minimum of international standards. The financial losses under the adverse effects of the UN sanctions on the overall economy of Montenegro are estimated to be approximately $6.39 billion. This period also experienced the second highest hyperinflation in history (3 million percent in January 1994).

In 1997, Milo Djukanovic took control over the ruling Democratic Party of Socialists of Montenegro (DPS) and began severing ties with Miloshevic’ Serbia. He blamed the policies of Slobodan Miloshevic for the overall decline of the Montenegrin economy, as well as Milosevic’s systematic persecution of non-Serbs. Montenegro introduced the German mark as response to again-growing inflation, and insisted on taking more control over its economic fate. This eventually resulted in creation of Serbia and Montenegro, a loose union in which Montenegro mostly took responsibility for its economic policies.

Nowadays economy

This was followed by implementation of faster and more efficient privatization, passing of reform laws, introduction of VAT and usage of Euro as Montenegro’s legal tender.

Moving to Euro as official currency of Montenegro started from January 1st, 2002 (adopted unilaterally; Montenegro is not a formal member of the Eurozone). Former currencies are German Mark-DEM (2.XI.1999-28.II.2002); Yugoslav/Serbian Dinar-YUD/CSD (1918- 1999) and the oldest - Montenegro Perper-MEP (1852-1918).

The unemployment rate is 16.40% and just 8.00% in highly educated labour (June 2006); showing obvious improvement compared to previous years - 18.90% (2005); 22.60% (2004); 25.82% (2003); 30.45% (2002); 31.50% (2001). Labor active force by occupation is as follows: Agriculture: 8.63%; Industry: 19.23%; Services: 72.14% (October 2005).

Inflation rate concerning the consumer prices is 1.60% (June 2006); 1.80% (2005); 4.30% (2004); 6.70% (2003); 9.40% (2002). Value Added Tax (VAT) is 17% and 7% and Profit Tax is 9%.

11 banks are operating in the country, according to data for 2006. The regulator is Central Bank of Montenegro since March 15, 2001.

Industry of Montenegro

Agriculture productions of the country is diversified, ranging from olive and citrus growing in the coastal region to an extensive sheep production in the mountainous part of the country

The most developed industries are electricity production, steel/aluminum/coal mining, forestry and wood processing, textiles and tobacco manufactures, and tourism.

In terms of Energy Industry: Montenegro produces 2,864 million kWh (2005 est.). Losses through distribution are 17% of overall production (2005). The electricity demand is 4,500 GhW (aluminium industry 42%; iron and steel industry 3%; Railway 5%; household 50%). Montenegro imports 34% of electricity.

The data for Montenegro import shows that in 2003 top importing countries are Greece 10.2%; Italy 12.2%; Germany 9.6%; Bosnia and Herzegovina 9.2%; and other countries 58.8%. For the previous 2002 year Greece has 5.8%; Italy - 12.5%; Germany - 9.3%; Bosnia and Herzegovina - 14.4%; and other countries 58.0%. Montenegro exports mainly to Switzerland (83.9%); Italy (6.1%); Bosnia and Herzegovina (1.3%) and to other countries 8.7% (data for 2003). In 2002 export percentage is Switzerland 78.1%; Italy 9.6%; Bosnia and Herzegovina 4.2%; Other countries 8.1%.

Investments in the country

Characteristics of FDI (Foreign Direct Investments) in Montenegro are highly compatible with the investments in the region, from the aspect of investment structure, as well as from the aspect of investors’ origin and type of investments. These are investments made mainly through the various forms of privatization, with small share of «Greenfield» investments, as well as a significant FDI influx in the sector of telecommunications (infrastructure) and the banking sector. In recent years, with the reduction of political risks and definition of clear framework for property rights, it can be noted that there has been an increase in FDI related to real estate purchase. (According to the data from the Central Bank of Montenegro only after 2003 there has been an increase in FDI in Montenegro, through real estate purchase).

FDI inflow in Montenegro took place within the framework of the adopted privatization plans, in which planned privatization of bigger companies represented most of the total FDI influx in Montenegro. Thus, for example, in 2002 the FDI influx was 73.85 mil. € (where 75% of the influx was realized through the privatization of Jugopetrol). During 2004 there has been an FDI influx of 50.51 mil €, through the privatization of Montenegro bank A.D. Podgorica (23.9 mil. €), sale of Hotel Avala - Hotel and tourist company Budvanska Rivijera (12.2 million €), Hotel Panorama – HTP Milocer (7.5 million €), etc.

In 2005 there has been an influx in FDI amounting to 382,8 mil. €, where 114,0 mil € was realized through the privatization of TELECOM, and 70,7 mil € through the privatization of Aluminum factory etc. Detailed overview of FDI influx in the period 1997-2005 by investors, type of investment and activity is given in the table.

In 2005, there was a FDI inflow of € 382,8 mil, out of which € 114,0 mil were achieved through privatisation of TELEKOM and € 70,7 mil through privatisation of the Aluminium Plant (Kombinat aluminijuma), etc. In the same year, FDI through Greenfield projects amounted 47,55% (€ 182 mil or 11,1% GDP), while 52,45% (€ 201 mil or 12,2% GDP) was the level achieved through the privatisation process. Out of total investments, fifteen percent (15%) are portfolio investments. At the same time, 18% are real estate investments.