Although the Montenegrin economy recorded strong growth in the first quarter of 2023, primarily driven by increased consumption, citizens’ purchasing power, as reflected in real wage trends, did not improve.

According to the assessment of the Center for Economic and European Studies (CEES), if a similar pattern of quarterly trends continues, real economic growth by the end of the year could be around 2.4%.

According to official data, the annual inflation rate in May 2023 amounted to 8.4%. Although reduced, it remains significantly above the euro area average. High inflation continues to be driven by increased prices of food and non-alcoholic beverages, clothing and footwear, furniture, as well as higher prices related to housing, water, electricity, gas, and other fuels. Inflation has led to a decline in real wages, which were 1.9% lower in the first four months of 2023 compared to the same period in 2022. This indicates reduced purchasing power of the average net wage in the January–April period compared to the same period in 2022.

Among the causes of inflation, in addition to influences from international markets, is increased current budget spending, primarily due to higher expenditures on gross wages, social benefits, and pensions. On the other hand, inflation, together with increased economic activity, contributed to higher budget revenues, which resulted in a central budget surplus in the first four months of 2023. However, the achievement of the surplus was also driven by a significant reduction in the capital budget, amounting to nearly EUR 40 million compared to the same period in 2022. 

The increase in current non-productive spending and the near-complete crowding out of the capital budget, which is crucial for investment, is a cause for concern. The future Government should reassess priorities and redirect funds toward the capital budget in order to stimulate a new investment cycle. Greater focus on attracting investments from developed countries with strong investment potential and know-how, such as the EU, is essential for sustainable economic growth and budget revenues. According to 2022 data, around one third of net FDI inflows into Montenegro originated from the EU, which is approximately four times more than inflows from Western Balkan countries.

Intensifying the EU accession negotiation process and further improving the business environment in line with EU standards would result in a stronger institutional framework and increased investment from the EU. Unsubstantiated insistence on regional initiatives such as the so-called Open Balkan, which are contrary to the negotiation process and the criteria for EU membership, would make the environment for attracting investments from developed countries less attractive and would slow Montenegro’s economic growth.

More information is available at the following link: https://drive.google.com/file/d/1G_ej4H-Zv6sI54FLukPK9V4nv7SsZJVr/view