Interview of Vice Governor Nikola Fabris for daily “Pobjeda”


Inflation was inevitable

In addition to the increased prices of many products, Fabris expects the war in Ukraine will reduce the foreign direct investments inflow and affect the tourist flows to Montenegro

The inflation we faced was inevitable in a small and highly open euroised economy like Montenegro. It is not a positive phenomenon, but it is a more benign problem when it appears as “imported” rather solely “domestic inflation”, said the Vice Governor of the Central Bank (CBCG) Nikola Fabris in an interview with Pobjeda.

He explains that inflation in Montenegro, responsible for reducing the citizens’ purchasing power, results from price spillovers from international markets.

Global inflation partly resulted from the monetary abundance created during the years of combating the global financial crisis, then the pandemic, and partly the war in Ukraine. The whole world is facing inflation, Fabris pointed out.

POBJEDA: How do you assess the effects of the war in Ukraine on the Montenegrin economy?

FABRIS: All European countries and the vast majority of countries worldwide feel the adverse effects of the war. Its adverse effects in Montenegro are most visible in the increased prices of many products, especially food and petroleum products. Higher global inflation, mainly resulting from this conflict, could lead to increased reference interest rates of the European Central Bank (ECB), increasing financing costs for both the state and the economy and the citizens. We can expect a negative effect on the foreign direct investments inflow and tourist flows. Moreover, due to the war in Ukraine, all international financial institutions reduced projected Montenegro's GDP growth rate and the global GDP growth for this year.

POBJEDA: How will the sanctions that Montenegro imposed on Russia affect us in economic terms?

FABRIS: As a country acceding to the EU, Montenegro must harmonise its foreign policy with the EU's foreign policy. Our foreign trade with Russia is not significant. Last year, the import of goods from Russia amounted to 10.6 million euros, while the export of goods amounted to 2.3 million euros. The negative effect may appear through a lower level of foreign direct investments inflow from Russia, bearing in mind that they were significant in previous years. The negative impact may also be on tourist flows because tourists from Russia and Ukraine accounted for 25% of the total overnight stays during the last year.

POBJEDA: How would the Fed's recent interest rates hike impact the ECB's policies and, consequently, Montenegro?

FABRIS: The ECB is still considering whether to raise reference interest rates this year or next. It is not a popular measure. Although it can effectively curb inflation, it harms economic growth, and the real sector has not yet fully recovered from previous crises. Also, the measure makes public debt financing more expensive, and public finances have not returned to pre-crisis conditions in most European countries. When the ECB raises the reference interest rate, the variable interest rates in Montenegro pegged to the euro will increase the reference interest rate's percentage increase. A reference interest rate increase usually leads to alignment with other financial market interest rates.

POBJEDA: What conditions can the state expect in the next borrowing?

FABRIS: The cost of borrowing on the international market results from many factors such as the country's credit rating, public debt, budget deficit, economic prospects, key interest rates of key central banks, and prevailing conditions in the international financial market. Since no Eurobonds issue is planned for this year, it is now difficult to predict how these factors will trend in 2023 and beyond. Their direction will undoubtedly determine the price of our borrowing.

POBJEDA: What domestic economy’s growth rate do you forecast this year?

FABRIS: Given high uncertainty, the CBCG prepared two scenarios. According to the lower growth scenario, the projected GDP growth rate is 3.2 percent, while the higher growth scenario projected 4.6 percent. Remember that the current environment carries a high uncertainty, and the projection will be updated throughout the year.

Earning a billion from tourism will be a challenge

POBJEDA: Is the one billion euros income from tourism, which the Government projected, realistic this year?

FABRIS: The Government’s projection was made before the war in Ukraine outbreak. It was optimistic at the time but not impossible. In recent months, the situation has changed significantly. Indeed, fewer tourists from Russia and Ukraine will surely be recorded compared to the initial projection. Some of these tourists could be compensated from other markets. A number of Russians and Ukrainians have already come to Montenegro, intending to stay longer than a classic tourist stay. Initial estimates indicate that these people have higher-than-average purchasing power. Let me conclude that it will be very challenging to generate the projected billion euros in tourist revenue. I would not be surprised if the income were slightly lower. Still, this should not be considered a bad result in current circumstances, especially if we achieve revenue growth compared to the previous year.