Interview with the Governor of the Central Bank of Montenegro, Mr. Radoje Žugić, to Cord Magazine Special Edition "Montenegro Business Sector 2018"


We'll continue to be an anchor of stability

Within the country there is a high consensus on the need for further fiscal consolidation, in the direction of strengthening financial stability. The way in which appropriate measures will be defined and implemented is the decision of the Government, as well as economic policymakers. For its part, the Central Bank of Montenegro will continue to work on strengthening trust in the overall financial system, with particular emphasis on fostering and maintaining the stability of the banking system.

Radoje Žugić, governor of the Central Bank of Montenegro, has rich experience in the financial sector. Here we speak to him about his institution's recommendations when it comes to preserving macroeconomic stability and achieving economic growth.

To what extent do you rely on the previous experience you gained as governor and finance minister when it comes to creating the policies of the central bank today?

The experience I gained while carrying out the duties of the governor and finance minister are really extremely useful and help me to more objectively observe all aspects of current economic issues. The tasks and objectives of both functions are interconnected and mutually conditioned. Specifically, fiscal policy, which is primarily the responsibility of the finance minister, is an important segment of the overall financial situation that impacts directly on the stability of the financial system, which is the responsibility of the governor of the Central Bank.

I see the opportunity to perform both of these extremely responsible functions as a privilege and I try, in a strategic way but also on a daily basis, to implement the experience I have gained in the decisions that are made by the institution which I head, and I do all of that in the function of achieving our primary goal – the growth and development of the economy.

How much is your own assessment in agreement with the IMF's recent assessment of the state of the Montenegrin economy?

The evaluations of the IMF and domestic institutions on the state of our economy, as expressed through basic macroeconomic and fiscal indicators, are largely harmonised.

In addition to the aforementioned, the Ministry of Finance, the Central Bank of Montenegro and the IMF have also achieved a high level of harmonisation of stances when it comes to the fiscal and broader economic challenges faced by our country. More specifically, all sides have expressed a need for further fiscal consolidation, in the direction of strengthening financial stability. The way in which appropriate measures will be defined and implemented is the decision of the Government, as well as economic policymakers.

According to the estimates of the Central Bank of Montenegro, the country's GDP will rise by 3.6% this year, instead of the planned four per cent, due – among other things – to the fact that key growth drivers, such as large capital and infrastructure projects, have failed. How much will that impact on Montenegro's overall macroeconomic position?

According to the data of MONSTAT [the Montenegrin Statistical Office], GDP growth of 2.5% was achieved in 2016. During the last year we had a significant rise in imports and a slower pace of realisation of the highway project, and these two factors have led to a slightly lower than expected growth rate. In accordance with that, it is reasonable to expect that intensification in the construction of the highway will have a positive impact on GDP growth in 2017. Furthermore, also contributing to the growth of the economy in 2017 will be the construction of tourism and energy facilities, as well as the stabilisation and restoration of industrial production, and an increase in agricultural production as a function of the reduction in imports.

What are the sources of the greatest risks to Montenegro's economic prosperity in the medium and long term?

Firstly, risks are present in the domain of the fiscal sector, which is reflected in the relatively high levels of the budget deficit and public debt. In the direction of reducing these risks, the Montenegrin Government responded by defining and implementing fiscal consolidation measures, which reduced the levels of these categories in 2016 compared to 2015. Higher budget revenues have been realised in the past year, while, on the other hand, budget expenditure has been reduced through the limiting of public spending. Although the measures taken do provide results, further fiscal adjustments are required in order to further reduce the present risks. To this end, the Government is currently working on the implementation of a credible rehabilitation plan, which is an extremely challenging task, given that it is necessary to implement measures on the revenue side of the budget, taking into account the possible risk of a spill-over effect on companies that are undergoing a quite fragile recovery phase. Simultaneously, special care should also be taken in defining measures on the expenditure side, in order for that not to jeopardise citizens' standard of living.

When it comes to the real sector, the main risk in this area is reflected in an inadequate level of competition, and that is due to poor diversification and the accumulative capacity of the economy. This makes it essential to continue activities aimed at strengthening competitiveness at the micro and macro levels, by improving the business environment, providing financial and institutional support to entrepreneurship, improving labour legislation, implementing structural reforms of the pension, social, health and education systems etc. These activities will result in increased productivity from domestic resources and strengthened competitiveness of the economy.

The third potential risk is represented by a possible slower pace in the implementation of investments. Specifically, any kinds of delays in the implementation of investment projects, be they new ones or those already started, would have a negative impact on the projected economic growth rate, and thus serve to deepen the existing problems of liquidity and solvency of the real sector as a result of the insufficient accumulation of gains.

To what extent can inflows of foreign investments and activities of the domestic private sector contribute to economic growth?

For Montenegro, as a small and open economy, a significant impact of the international environment is achieved through capital flows, or foreign direct investments, the volume of which varies, but it is still significant, accounting for 10 per cent of GDP. Montenegro, thus, represents an attractive location for foreign investors, and this claim is supported by the continuous inflows of foreign direct investment from the country gaining independence in 2006 until today. A strong cycle of investments has currently been launched in Montenegro, primarily in the sectors of tourism, energy, transport, agriculture and infrastructure, which will generate more generous incomes in the near future and, consequently, a lower deficit, and thus more space to support new development projects. Likewise, investment spending also has numerous positive effects on employment and GDP.

On the other hand, it is known that the SME sector is an important element, sometimes even the driving force of every economy, because their operations, through direct and indirect channels, contribute to job creation and generating added value.

The Central Bank of Montenegro has offered a number of recommendations to the Montenegrin Government related to leading economic policy during this year. To what extent do the intentions of the Government concur with your recommendations?

The Central Bank has regularly, for many years, prepared and submitted recommendations to the Government regarding leading economic policy, which relate to four segments, namely: fiscal policy, the financial system and the real sector and statistics.

Our recommendations for 2017 support the incentivising of growth potential and increasing and improving the system’s overall stability, while simultaneously clearing up all the vulnerabilities of our economy in a way in which they are set as priorities of the Government's economic policy.

What will be the central bank's key objectives during this year?

The main objective of the Central Bank of Montenegro in 2017 will continue be to strengthening trust in the overall financial system. Towards the achieving of this objective, the CBM will oversee the maintaining of the stability of the financial system by monitoring the state of financial stability and carrying out activities aimed at preventing systemic risk.

With the aim of strengthening the financial system, a particular focus will be placed on promoting and preserving the stability of the banking system. In this context, we will continue to monitor and analyse the situation in the banking system and, if necessary, we will take corrective measures, promote the strengthening of corporate governance and risk management in banks, and continue with the further implementation of internationally accepted standards and principles of operations in this domain.

How have the policies of the central bank to date contributed to Montenegro's economic stability?

Financial stability is a prerequisite for the development of any economy. It makes a system stronger and more resilient to external shocks, which small and, consequently, open economies like Montenegro's are particularly exposed to.

With the aim of preserving and strengthening financial stability, the Central Bank of Montenegro is working continuously to identify potential risks and direct activities towards preserving stability in the banking sector. These activities, apart from controlling the operations of banks present on the Montenegrin market and leading the policy of mandatory reserves, also imply intensive regulatory activity, directed towards improving the existing legal solutions and overcoming problems encountered in practice, as well as working on the harmonising of banking sector regulations with the relevant EU directives and Basel standards.

How would you evaluate the state of the banking sector?

The banking system, as the dominant part of Montenegro's financial system, is relatively stable. Financial risks have been reduced, but are still present at the individual level. The financial result of banks at the aggregate level is positive, while liquidity and solvency have improved and their levels are still well above the mandatory minimum. Compared to a year ago, almost all positions in banks' balance sheets have recorded growth, and that is in terms of: total assets, deposits, loans and capital.

However, banks are still leading a cautious lending policy in the real sector, relying mostly on their own liquid assets. A significant portion of new lending in the past year focused on restructuring and refinancing existing loans, which had a positive impact on the recovery of the economy. Bank deposits exceed the level of approved loans, which is evidenced by the fact that around 85% of deposits are used for the purpose of lending to the economy. Total bank loans and claims recorded a positive trend in 2016, alongside the realisation of a slight increase of 1.27% compared to the previous year. Interest rates continue with their tendency to fall, which began in late 2014.

How would you assess the level of systemic risk in the banking sector, considering the percentage of non-performing loans?

The participation of non-performing loans in total loans has recorded a continuous decline in the last few years, and we expect this trend to continue. However, despite being in decline, this level (10.3% at year's end 2016) is still high, and this very fact is the cause of caution among banks when it comes to approving new loans.

The relatively high level of NPLs and low credit activity still pose certain risks, both for the financial and fiscal systems. I would point out, however, that from the aspect of the Central Bank this issue is more in the focus of the solutions of individual banks than at the level of the system and systemic risk, as was the case in the past.

What is the situation like in the insurance sector and what trends do you expect in this sector?

Stability has been slightly strengthened in the insurance sector, while indicators point to positive growth rates in this sector, though still with the obvious dominance of mandatory forms of insurance. It could be concluded that there is plenty of room for the further development of this sector, which would have positive effects on the stability of the system in the period ahead.


It is essential for incentives to free up the huge growth potential, in order for us to achieve the main goals of economic policy.


Our evaluation is that the growth rate in 2017 will range between 3.3 and 3.8%, with a central projection of 3.6%.


The CBM will oversee the maintaining of the stability of the financial system by monitoring the state of financial stability and carrying out activities aimed at preventing systemic risk.


The banking system, as the dominant part of Montenegro's financial system, is relatively stable.


The main risk in the real sector this area is an inadequate level of competition, and that is due to poor diversification of the economy.