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

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2 Chapter 1: The Economic and Institutional Context 1.5 The Stabilization and Association Process (SAP), which offers a prospect for EU membership to all Western Balkan countries, including Montenegro, was put in place in 1999. The SAP refers to both a Stabilization and Association Agreement (SAA) and its implementation. An SAA in turn consists of a detailed agreement on asymmetric trade liberalization where EU opens its markets faster than the country it is negotiating with, and a more general part consisting of the Copenhagen conditions supplemented with country-specific conditions. As part of an SAA, an interim agreement is signed on trade liberalization whose implementation starts immediately, while the SAA as a whole becomes operational once it is ratified by the EU Parliament. The European Commission has indicated that, in view of the outcome of the referendum, it will issue a separate mandate for Montenegro with respect to both the SAA, and an eventual EU membership. 1.6 In October 2005, Serbia and Montenegro officially started negotiations with the EU on the SAA. The EU adopted its twin-track approach in September 2004, and the decision to negotiate an SAA with Serbia and Montenegro in April 2005. The twin-track approach established that each republic—Serbia and Montenegro—would be assessed separately on tariff and customs policy, and internal markets in general. As part of the SAA, Montenegro is expected to negotiate with the EU on trade and tariff protection, and the transitional periods for convergence to EU requirements. 1.7 At the republican level, Montenegro’s own institutional and administrative efforts towards the SAA began in 2003. The Ministry for International Economic Relations and European Integration was established in 2003 to lead the institutional coordination of the SAP. Soon after, the Parliament of the Republic of Montenegro established the Council for European Integration, the highest political advisory body giving strategic direction in regards to the EU association process. Following this, the Government established a Commission for Coordination of Accession to the European Union as a technical body which would assist in legislative harmonization, and setting of priorities and action plans for the SAA. 1.8 The Government adopted the Action Plan for Implementation of the European Partnership Priorities in December 2004. Within the Government, primarily through the Commission for Coordination of the Process of Accession to the European Union, a regular SAP monitoring mechanism has now been established. To date, two regular reports have been presented to the Parliament of Montenegro and the European Commission on the implementation of the Action Plan. 1.9 One of the key challenges going forward is to create increased administrative and institutional capacity for EU accession. Although the Ministry of European Integration appears to be playing a catalytic role in coordinating the government’s preparation for EU accession, there is no question Montenegro will need to increase its administrative capacity for EU accession over the medium to long term. This report will discuss, among other things, the institutional and administrative implications of the EU accession process over the medium to long-term.
Chapter 1: The Economic and Institutional Context 3 B. MACROECONOMIC DEVELOPMENTS 1.10 Since 1997, Montenegro, with the support of the international community, 3 has been engaged in a long series of macroeconomic stabilization, and market-oriented structural reforms. It has implemented currency and fiscal policy reforms, and in parallel, a number of structural reforms, including price and trade liberalization, privatization, public administration reform, financial sector reform, and labor market and business environment reforms. The Government’s recently updated Economic Reform Program for 2005-2007, which lays out what economic reforms remain to be done over the coming years. 1.11 The macroeconomic and structural reforms have yielded modest economic recovery and transition. Over the last five years, real GDP grew by an average of about 2 percent per year; inflation dropped from 24.8 percent at the end of 2000 to 1.8 percent at the end of 2005; Montenegro’s consolidated budget deficit has been reduced; its current account deficit, although still high, is improving; and, its principal human welfare indicators such as poverty, life expectancy, and adult literacy have remained moderate and stable. Growth and Employment 1.12 In 2005, real GDP is estimated to have grown by about 4.1 percent (Table 1.1). 4 This is higher than the average annual real GDP growth witnessed over 2000-2004 (about 2 percent). On the supply side, growth in industrial production was negative (-1.9 percent) mainly on account of reduced economic activities of the coal mining company, which in turn adversely affected the thermal power plant operation, and steel production. However, tourism has shown significant growth, with tourist arrivals increasing by 16 percent in 2005 (and the number of foreign tourists 5 increasing from 25 percent to 33 percent in total tourist arrivals). On the demand side, FDI increased (mostly through Telecom and KAP privatization) and a significant credit growth fueled household consumption. 1.13 While employment recovery seems underway since 2004, unemployment still remains high. After declining by about 7 percent over 1998-2004, employment seems to be recovering. The “official” data from the Employment Bureau show that employment increased and unemployment declined in 2005 (but the more reliable labor force survey data is not yet available). Yet unemployment remains high. Long-term unemployment is widely prevalent, as more than one-fifth of the registered unemployed are on the roster for more than eight years. The persistence of high unemployment even after more than a decade of transition suggests that the new private sector, comprised of small firms, has not yet developed the critical mass to generate enough jobs to offset the job losses in the old public sector. 3 Main donors in Montenegro include USAID, EAR, World Bank, UNDP. 4 This is an agreed estimate of the Development Secretariat, the Ministry of Finance, and the Institute for Strategic Studies and Prognoses. The Republic of Montenegro lacks up to date national accounts statistics. MONSTAT, the republican statistical agency, is still working to produce national accounts statistics for 2003. The lack of national accounts data—in particular the supply and demand side breakdown of GDP--poses a significant challenge in undertaking detailed analysis the composition of growth in Montenegro. 5 Domestic tourists include those from Serbia.
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Republic of Montenegro: Public Expenditure and ... - Vlada Crne Gore

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