 PUTTING FINANCES IN ORDER |
Recognizing the need for a stable financial system in order to attract foreign dollars, Miroslav Ivanisevic, Montenegro's Minister of Finance, has led to the creation of a crucial set of laws such as the Law on the Central Bank, the Banking Law, the Budget Law and the Public Procurements Law.
Today, he is putting the country's fiscal house in order by increasing its transparency and rationalizing its budget. "On one hand, we have reduced our investments in order to decrease our expenditures. On the other hand, we are also increasing our revenues by means of our program for reduction of the grey economy" says Ivanisevic, who has worked closely with international organizations such as the IMF and the World Bank.
"Our plan is to reduce the budget deficit even further by the end of this year, and we have taken some concrete steps on this issue" announces Ivanisevic.
Government efforts towards the implementation of a sustainable budget will involve limited personal and investment expenses, keeping minimal wages and stopping the growth in civil sector. Also, an important contribution will be given through the reform of the civil service that will reduce number of employees on government paychecks.
"We want to be open and reduce our taxes; to widen the tax basis to a large number of subprojects and to take care of employment through the tax policy," said Mr. Ivanisevic. He concludes that Montenegro is on its way towards the creation, with the assistance of international advisors, of a system that will help the country become prosperous in the long term.
 The turning point: adopting the Deutsch Mark |
In 1999, Montenegro adopted the German Mark (DM) in order to protect its economic stability from the inflation produced by Belgrade.
"Macroeconomic and monetary stability was the precondition for the sustainability of all other reforms in the field of public finances, banking, foreign trade and customs regulations" said Ivanisevic.
The adoption was basically motivated by two factors; first, a dissociation of Montenegro from the policy and from the regime of Belgrade authorities personified in Slobodan Milosevic. Since then Montenegro adopted a totally different policy of democratization, of comprehensive economic reforms and pro-European orientation. It was a strong move towards the independence in relations with the Belgrade regime and policy.
Second, the adoption of the DM was a kind of defence against the pressure and measures to destabilize Montenegro, including using the monetary policy in Yugoslav Dinars to control the local economy.
Therefore, the adoption of the DM completely changed the economic and social situation in Montenegro. From the traditional 70% of economic and social standard of Serbia, Montenegro moved to the level of having two times higher average salaries and pensions than those in Serbia, only because of opting for DM, with a fixed value at the beginning and at the end of the month, unlike the Yugoslav Dinar, which was loosing value on a daily basis.
After adopting monetary independence, Montenegro strongly went into reforms in order to make out of the conditions for privatizing the economy attractive to foreign investors. The main measures were adopted in the fields of budget, fiscal and banking reform.
"Although the introduction of DM has revealed weaknesses of budgets and funds of Montenegrin economy, this was done deliberately in order to acknowledge the existence of budgetary problems, and to start solving them. In that way we demonstrated our readiness to solve it," said Mr. Ivanisevic.
| The EURO has arrived |
This year European business people will be pleasantly surprised when they arrive in Montenegro. They will not have to change money since the Euro is now the only official currency. | Who would have thought that a small country like Montenegro would join the Euro? Yet it did just that. After adopting the German Deutsch Mark in 1999, the next logical step was to embrace the European currency and harmonize its system with the European Central Bank.
Although the transition to the Euro was not an easy task, the process was a success and Euro notes have found their place in the streets of Podgorica, the capital of Montenegro.
In a country that was previously a cash economy, the Euro has obliged local citizens to exchange and deposit their savings into banks, and has also encouraged investments in real estate and business development.
"The adoption of the Euro is a good chance to bring back the savings of the people into the banks, and it could be invested into the economy of the country" suggests Ljubisa Krgovic, Governor of Central Bank of Montenegro. "It has created a stimulating ambient, that could initiate foreign and private investors to come here. We do not have a risk of inflation, which is a serious issue in every small country".
Now the promotion of a modern banking sector is perhaps the biggest challenge facing Krgovic.
Banking in Montenegro is still in its infancy. The whole sector practically collapsed in the 1990s after Yugoslavia's hyperinflation, and until recently there were hardly any personal banking services, no credit cards and no bank machines. The Central Bank has therefore had to re-build the banking infrastructure, first by adopting new legislation that establishes internationally recognized standards, then by attracting new funds to modernise the system. "With the help of USAID we have adopted laws that have created a healthy banking system in Montenegro" says Krgovic. "The European Bank for Investment also decided to invest 15 million Euros into private banks in Montenegro… It is a signal for other private investors, or state funds as well".
Mr. Krgovic says: "We will have a stable currency, we will try to create conditions to attract the foreign investments in the banking sector. We will try to further liberalize the system of foreign payments". The reform of the banking sector is going into two directions; first, is the allocation of licences to banks that fulfil strict regulations regarding the concentration of their credits and the structure of active and passive funds. Until now, six banks fulfilled these requirements. For those banks that will not be able to follow up these requirements, Krgovic says that they will "have to find another solution, or perhaps to merge with other banks. Otherwise, if they do not fulfil the regulations, their licence will be taken away".
A central clearinghouse system is being established, rigorous regulations have been enforced, and banks that do not comply with these regulations will be either merged or closed down. This system started to operate as pilot project of few banks and already gave good results. It is expected that all transactions in Montenegro will become part of the banking system in the next two years, and will represent an additional impulse into banking system.
Presently there are 11 banks in Montenegro. Some of these banks are completely funded by foreign investors, and some of them are private.
The most dynamic local banks have been taking pro-active measures by establishing international alliances and increasing their capitalization to survive. For example, Crnogorska Komercijalna Banka (the Montenegrin Commercial Bank) has attracted partnerships with institutions such as the Credit Institute for Reconstruction (KfW), the German Investment and Development Company (DEG), the European Bank for Reconstruction and Development (EBRD), and the Dutch FMO fund. Other up-and-coming banks include Hipotekarna Banka, which has forged partnerships with the World Trade Centre Association, and Euromarket Banka, which is allied to the Soros Foundation.
"We managed to reach these arrangements because we had good auditing of our balance sheets and our processes, which by itself speaks about the quality of the bank" says Drljevic of Hipotekarna Banka.
The international flavour of the banking system has also allowed these banks to play an important role in the financing of small and medium enterprises, which promises to become an engine of the Montenegrin economy.
The ultimate goal is to achieve both credibility and innovation in a financial market that is evolving rapidly. It is a balancing act, as the Montenegrin Commercial Bank tells its shareholders: "We seriously anticipate the risk of doing business in this region, but at the same time, we avoid the unnecessary conservatism that could paralyse new business ideas which appear on the Montenegrin market almost daily". |
