Republic of Montenegro: Public Expenditure and ... - Vlada Crne Gore

1. THE ECONOMIC AND INSTITUTIONAL CONTEXT
1.1 This report constitutes the first phase of Montenegro Programmatic Public
Expenditure and Institutional Review (PEIR). In its March 2006, the World Bank country
management decided that, given the wide range of public expenditure and institutional issues to
be addressed in Montenegro, a programmatic PEIR would be more suitable. The management
provided further guidance that the first phase of the PEIR would focus on governance and
institutional development issues, including a broad update and assessment of the structure and
composition of public expenditure in Montenegro; how to strengthen public administration and
the administrative capacity for EU integration; how to improve public financial management and
procurement processes; how to strengthen the institutional capacity for capital investment
planning and prioritization; and how to improve coverage of fiscal accounts and monitor fiscal
risks in the broader public sector including local governments and state-owned enterprises.
Accordingly, this report focuses on these issues and offers analysis and policy recommendation
in each area. The later phases of the programmatic PEIR will focus on issues of expenditure
policy and efficiency, debt and fiscal sustainability, and possibly decentralization and service
delivery.
1.2 The rest of this chapter is organized as follows. The next section briefly discusses
European integration as a strategic goal for Montenegro. Section B reviews recent
macroeconomic developments. Section C provides the governance and institutional context for
this report. Section D outlines how the report is organized.
A. EU INTEGRATION AS A STRATEGIC ANCHOR
1.3 Following the recent referendum on independence, Montenegro is now in the
process of separating from the State Union of Serbia and Montenegro, created in 2002.
Official referendum results showed that 55.5 percent of voters chose independence with a turnout
of 86.3 percent. With the majority of Montenegrins voting for independence, the referendum has
established Montenegro as a new independent state, ending the loose federation with Serbia that
has been in place since 2002. 2
1.4 EU accession remains a major strategic goal for Montenegro. With about 620,145
inhabitants according to the 2003 population census, Montenegro’s domestic market remains
narrow. Given its small domestic market, EU and regional integration remains fundamental to
Montenegro’s growth and prosperity: it will help Montenegro increase specialization and
efficiency in the production; and increase risk diversification and reduce the high income
volatility that small states like Montenegro can often experience. From a political standpoint, EU
integration serves as a strategic anchor to foster conditions for peace and stability in the region.
2 As constituted, the State Union had limited responsibilities in the area of foreign affairs, defense, human rights,
intellectual property rights, standardization and technical regulations, meteorology and statistics. The two republics,
however, run domestic and economic policy separately and have different currencies, laws and customs borders.