ÐÓ°ÉÂÛ̳

Montenegro¡¯s small, open, and service-based economy is highly vulnerable to external shocks, and it relies on fiscal policy and structural reforms to maintain macroeconomic stability. Montenegro aspires to join the European Union (EU), but significant rule of law challenges have slowed the process and reflect a key development constraint. Since starting accession negotiations in 2012, Montenegro has greatly aligned its legislation with the EU acquis and made significant efforts to improve its living standards. 

However, Montenegro¡¯s growth strategy has so far been based largely on attracting a few large investment projects in transport, energy, or tourism. Construction booms fueled temporary growth spurts but were not accompanied by productivity growth and were followed by sharp downturns, leaving the economy even more vulnerable to shocks. If GDP per capita is to grow at pre-COVID average rates of 3%, incomes would not converge to average EU levels in the next 40 years.   

To achieve higher standards of living, Montenegro¡¯s growth strategy should be based on productivity and human capital gains while preserving natural resources to enable sustainable development. This would require enforcing competition and consistent policy implementation, better leveraging trade, improving human capital by reducing inequality of opportunity, and empowering public institutions.

Last Updated: May 06, 2025

ÐÓ°ÉÂÛ̳ Group¡¯s new will support Montenegro¡¯s sustainable economic growth and enhance climate resilience. This new strategy focuses on improving fiscal management, increasing competitiveness, and fostering better integration with European markets. The CPF also prioritizes environmental sustainability, with initiatives that range from waste and water management systems to renewable energy and energy efficiency projects, positioning Montenegro as a leader in the green transition.

In addition to these efforts, the CPF promotes sustainable natural resource management, climate adaptation, and the protection of natural areas, with the goal of improving public health, enhancing the quality of life, and strengthening Montenegro¡¯s appeal as a tourism destination. To amplify the impact of this work, the International Finance Corporation (IFC), a member of the ÐÓ°ÉÂÛ̳ Group, will leverage private sector investments in key areas such as connectivity, sustainable tourism, and renewable energy.

Last Updated: May 06, 2025

Recent Economic Developments

GDP growth slowed from 6.3% in 2023 to 3.0% in 2024. Although private consumption and investment remained robust, supporting growth, a 5% decline in tourist overnight stays and stagnant industrial production due to a decline in electricity production negatively impacted net exports and overall growth. Meanwhile, employment continued to expand across all sectors. 2024 LFS data show an employment rate of 56.4% and an activity rate of 64.3%, with unemployment falling to 11.5%. By December 2024, average net monthly wages had risen to €1,012, marking a 21.7% YoY real increase following the pension contributions cuts. Inflation dropped to 3.4% in 2024, a significant decrease from 8.6% in 2023. Poverty (income below $6.85/day in 2017 PPP) is projected to have declined to 8.9% in 2024.

The financial sector remains robustly capitalized and liquid, with strong credit growth. As of December 2024, the capital adequacy ratio stood at 19.4%, and non-performing loans dropped to 4.1% from 5.8% a year ago.

In 2024, the current account deficit (CAD) widened due to lower service exports and a decline in net income accounts. Net foreign direct investment (FDI) grew by 13%, covering just over a third of the CAD, with the remainder covered by new debt. The fiscal deficit rose to 3.1% of GDP in 2024. Despite the absence of one-off revenues that contributed to a budget surplus of 0.6% of GDP in 2023, revenues still grew strongly by 7%. The largest contributions to revenue growth came from VAT and CIT. Meanwhile, expenditures increased by 17%, primarily due to higher social spending (including higher minimum pensions) and increased capital expenditures. Public debt is estimated at 61.3% of GDP, with around 4% of GDP held in deposits.

Economic Outlook

Amid an unfavorable global outlook and trade policy uncertainties, GDP growth is projected to average 3% during 2025-27, primarily driven by private consumption and investments. Higher net real wages, credit growth, and solid employment are expected to drive a 3% growth in 2025, despite the closure of the Pljevlja thermal power plant for reconstruction, which will require increased energy imports. The CAD is projected to widen to 18.5% of GDP in 2025 due to higher energy imports, with just over a third of it financed by net FDI, the rest financed through new borrowing. Inflation is expected to soften to 2.9% in 2025 and further to 2.3% in 2026. Poverty is projected to decline to 7.5% in 2027. Most of the poor are chronically unemployed, students, or out of the labor force, mainly in the northern region. Thus, reducing poverty requires targeted policies alongside sustained economic growth.

The fiscal deficit is expected to increase in 2025 to approximately 4% of GDP before gradually declining to 3.6% in 2027. Implementing additional fiscal consolidation measures would enhance fiscal performance. Public debt is expected to rise to around 65.8% of GDP in 2027. Ensuring debt sustainability will necessitate fiscal discipline, particularly given the significant financing needs over 2025-27 and elevated external financing costs. Downside risks include extended geopolitical and trade uncertainties that could have significant additional adverse indirect effects on Montenegro¡¯s growth through its main trading partners.

Last Updated: May 06, 2025