Interview of Governor Radoje Žugić for the daily “Pobjeda”


“Europe Now” will have far-reaching consequences, but had to be analysed in-depth

With the denial of payment of wages “on-hand” and proper registration of all employees, possible side effects of the idea to release employers a part of their obligations to the state could be reduced number of employees or further tax evasion,” Žugić said.

The reforms envisaged by the “Europe Now” programme have far-reaching consequences. Therefore, it was essential to conduct in-depth and multi-layered analyses using their results to make decisions, said Radoje Žugić, the Governor of the Central Bank (CBCG), in an interview with Pobjeda. He believes that such reforms should be implemented gradually and with minimal disruption, to avoid possible adverse public finance effects.

POBJEDA: As a former Minister of Finance and knowing the system for a long time, how do you assess the “Europe Now” programme? Is it realistic? How dangerous can it be for the Montenegrin economy if the planned revenues are not realised?

ŽUGIĆ: The recent meeting of the CBCG Council and the Advisory Board welcomed the planned fiscal reforms idea and positively assessed the announced improvement of the citizens’ economic position, especially the poorest categories. Also, the announced wage burden reduction, which is currently high, benefits the economy, providing space to treat its key vulnerability - insufficient competitiveness. More vigorous activities in combating the non-observed economy were welcomed and announced.

However, there are some ambiguities concerning the announced “Europe Now” programme, primarily in its funding sources and precise quantification of the proposed measures’ impact. In my personal opinion, an in-depth and multi-layered analysis should precede the implementation of such major reforms. To avoid adverse effects on public finance, it is also advisable to implement such reforms in phases, i.e. gradually and with minimal disruption. The minimum wage increase carries a specific fiscal risk as it raises the issue of adjusting the coefficients between lower and higher education employees. In turn, this creates an additional budget burden, given that the public sector does not create new value and employs almost 40 percent of the total number of employees. To note, the salaries increase should always be based on increased productivity and an expanded tax base (new employment).

Furthermore, a possible side effect of the idea of releasing employers a part of their obligations to the state (health insurance contributions and non-taxable part of wages), with wages payout “on-hand” cancellation and proper registration of all employees, may be a staff reduction or further tax evasion despite the expected non-observed economy decrease. The abolition of health insurance contributions, which account for 70-75 percent of total receipts, will make the Health Insurance Fund highly dependent on the budget. The budget’s revenues must be analysed in-depth to assess whether the planned progressive wages taxation, additional excise taxes introduction, and the non-observed economy suppression will offset the planned costs. Progressive wage taxation (if progressive rates were high) and corporate tax increase may affect the investment environment adversely. Moreover, the increase in excise duties (if more extensive than in the region) may lead to the non-observed economy’s growth and the public revenues reduction, which happened in the past. Due attention should be paid to analysing the wage growth impact on pension growth from 2023, which could further increase the budget deficit. Namely, the number of pensioners and beneficiaries of Pension Fund rights to the number of employees ratio is inadequate. It already represents a significant burden and pressures the pension system. Considering the aforesaid and that the announced reforms have far-reaching consequences, I reemphasise the importance of conducting an in-depth and multi-layered analysis and using its results to make decisions.

POBJEDA: Are all banks in the market sound? Is there any requiring a recapitalisation?

ŽUGIĆ: Montenegro’s banking sector preserved stability during the coronavirus-caused crisis. It is, inter alia, the result of banks’ sound balance sheets before the pandemic outbreak. The ECB previously assessed that our banking sector faced a crisis with solid indicators. The temporary measures created by the CBCG to mitigate the pandemic consequences to the economy and citizens certainly contributed to preserving the banks’ stability. The IMF and the World Bank officials assessed that these measures were created and implemented quickly, adequately, and strong. During regular annual consultations, the IMF representatives recently assessed that “the CBCG’s support measures provided an important cushion. They helped to shore up company and household finances and avoid an even deeper downturn.” On that occasion, they praised the CBCG progress in strengthening the money laundering prevention framework and the successful Asset Quality Review (AQR) completion. The analysis of indicators for 11 months of this year confirms that all banks are sound, liquid and well-capitalised. Assets and deposits were constantly growing in 2021. They reached historical peak values at the end of November - bank assets amounted to 5.3 billion euros and deposits to almost 4.2 billion. During the 11 months of this year, liquid assets increased by 46 percent compared to the end of 2020. Banks’ lending activity was also dynamic, with new loans amounting to almost 970 million euros in this period, 20% more compared year-on-year. This confirms that banks have continued to give strong support to the country’s economic recovery. The CBCG will monitor trends and, i.e. if credit growth tends to overheat, take adequate macroprudential measures if necessary. Let me remind that we completed a demanding AQR project this year. Its results provide an objective picture of the banking sector’s condition. AQR’s findings confirmed the Montenegrin banking sector’s stability through an adequate capital position and satisfactory banks’ asset quality. After applying the AQR results, the aggregate solvency ratio was 18.13 percent. According to the data provided by banks, all banks operated within the statutory capital adequacy limits.

POBJEDA: How much have non-performing loans (NPLs) grown this year?

ŽUGIĆ: The share of NPLs in total loans saw a slight increase this year, which was expected given the pandemic consequences of reduced economic activity and rising unemployment. Another reason for the NPLs increase was their slight correction based on AQR findings. At the end of November, the NPL was 5.98 percent, 0.07 percentage points up compared year-on-year. The slight NPLs growth is not a concern for now. Still, we monitor and analyse the situation and banking system trends with increasing intensity and dedication, using all available tools.

POBJEDA: What is the relationship of the CBCG with the current Government?

ŽUGIĆ: Under the Central Bank of Montenegro Law, the CBCG may cooperate with the Government and other state bodies without compromising its autonomy and independence. Our cooperation mainly relates to the information exchange and participation in working bodies to prepare regulations governing achieving the CBCG goals and performing its functions. To contribute to the economic policy quality, we recently prepared and submitted the Report on the Results of the Macroeconomic Risk Analysis to the Government, which identified and discussed the macroeconomic risks Montenegro was facing. We also cooperate through the work of the Financial Stability Council, whose member is the Minister of Finance and Social Welfare. Within the Council, we monitor, identify and propose measures to prevent and mitigate potential systemic risks in the financial system.

POBJEDA: What will be the biggest challenges for our economy next year?

ŽUGIĆ: The key challenges relate to the fiscal sphere and, in particular, the further public debt trend. The high deficit at the end of 2020 led to additional borrowing. Along with a significant GDP decline, it led to a gross public debt increase to 4.4 billion euros or 105.3 percent of GDP, and government debt was 103.5 percent of GDP. The estimated GDP growth in 2021 will reduce the share of public debt in GDP. Also, completing the largest infrastructure project in the country of highway construction will lead to a gradual public debt decline. At the end of September 2021, government debt amounted to 4,076.2 million euros or 83.5 percent of GDP. External debt amounted to 3,658.9 million euros or 74.9 percent of GDP, while domestic debt amounted to 417.3 million euros or 8.6 percent of GDP. Although it is declining, public debt risk remains the most significant high-ranking systemic risk.

POBJEDA: What trend of lending and deposit interest rates do you expect next year?

ŽUGIĆ: The long-term trend of lending interest rates decrease continued in 2021. This reduction can be assessed positively, although it is not enough to treat insufficient competitiveness, the real economy’s key vulnerability. The average weighted effective lending interest rate on total loans was 5.71 percent at the end of October 2021. Compared to the end of 2020, it decreased by 0.13 percentage points. At the same time, the weighted average deposit effective interest rate was 0.34 percent and dropped 0.06 percentage points compared to the previous year-end. Moreover, the Banks Lending Survey showed that banks estimated that interest margins, commissions and fees for the economy and the population would continue to drop. Given that in mind, we expect interest rates to continue to stabilise. It is important to note that they determine the market situation. They are influenced by several factors, such as country risk, the real economy’s vulnerability, and bank operating costs, and particularly allocating funds for potential credit losses, especially after the crisis.