Montenegro : Beyond the Peak, Growth Policies and Fiscal Constraints, Public Expenditure and Institutional Review

In 2007, Montenegro was one of the
world's fastest growing non-oil economies. The country
reaped the benefits from its comprehensive, pre-independence
reform program. After the international recognition of
statehood had removed the lingering uncertainty over
Montenegro's political status, investors reassessed the
country's relative attractiveness as a site for
business, responding positively to (i) the implementation of
the privatization and structural-reform agenda; (ii) the
provision of a low-tax, pro-business environment; and (iii)
a clearly defined European perspective. In response,
investment surged. Capital inflows from foreign direct
investment (FDI), largely absent during the first half of
this decade, reached a level of 30 percent of Gross Domestic
Product (GDP) in 2006 and 40 percent in 2007, fueling
domestic demand and stimulating economic growth. Real GDP
grew at double-digit rates in 2007, an outcome that stands
in stark contrast to the period of economic anemia
characterizing Montenegro's pre-independence years. In
this buoyant environment, commercial banks supported
private-sector activities with very large increases in
credit to the economy. These helped to finance higher
imports of goods and services, leading to a rapid widening
in the current-account deficit from 8.5 percent of GDP in
2005 to 40 percent in 2007. The economic dynamism, exceeding
all (published) projections, resulted in an unexpected
abundance of fiscal revenues and with generally effective
control over public expenditures in 2007, a very substantial
overall surplus.