Montenegro flag Montenegro: Economic and Political Overview

The economic context of Montenegro

Economic Indicators

As the smallest country in the Balkans, Montenegro has a relatively fragile economy that is transitioning to a market system and is based on financial investments, especially in the energy and tourism sectors (private investment accounts for around one-fifth of GDP). After being severely hit by the COVID-19 pandemic, the country’s economy rebounded. In the first half of 2023, there was a 6.6% year-on-year growth in real GDP, primarily fueled by robust private consumption. This surge was attributed to rising real wages, employment rates, household borrowing, and a highly successful tourism season. For the year as a whole, the Central Bank estimated growth at 6%, as tourism surpassed 2019 levels and the inflow of migrants continued to support private consumption. In January 2024, the Montenegrin government announced its aim to achieve an average annual economic growth of 3.2% from 2024 to 2026, with domestic demand being the main driving force behind this growth, while elevated inflation, tighter financing conditions, domestic political fragmentation, and weak external demand will represent headwinds.

Concerning public finances, during the first eight months of 2023, the budget execution outperformed the revised 2023 budget adopted in May, which aimed for a deficit of 3% of GDP. From January to August, there was a surplus amounting to 3% of GDP, driven by lower-than-expected spending, particularly on capital investment, and higher-than-projected revenue, notably from VAT and excise taxes. Additionally, several one-off measures such as the economic citizenship program and the EU energy support grant contributed to this surplus. Persistent robust performance in tax revenue, temporary boosts in non-tax revenue, and lower-than-budgeted spending collectively contributed to the achievement of a surplus in public finances in 2023. However, it is anticipated that a fiscal deficit of approximately 3.5% of GDP will be recorded in 2024. However, due to a narrowing budget deficit and strong nominal GDP growth, the public debt-to-GDP ratio declined to 65.8% in 2023, from 72.1% one year earlier. Without any fiscal consolidation strategy, public debt is forecasted to increase over the forecast horizon, reaching 69.5% by 2025 (IMF). In 2023, inflation began to slow down, averaging 8.3% throughout the year. Significant rises in wages and social transfers also contributed to upward price pressures. It is anticipated that inflation will ease in 2024 and 2025, dropping to 4.3% and 2.6%, respectively. This is attributed to lower imported inflation and a moderation in domestic demand. Montenegro officially submitted its application to join the EU on December 15, 2008, with membership negotiations commencing on June 29, 2012. As of now, 33 negotiating chapters have been opened, three of which have been provisionally closed. As per the IMF recommendations, enhancing infrastructure connectivity, promoting tourism in the Northern region, and expanding into niche tourism markets can diversify Montenegro's tourism sectors. Moreover, harnessing its natural resources in hydro, solar, and wind power will boost energy production and exports, supporting the country's climate objectives. Improved public investment management practices are essential to prioritize high-return investments in both physical and digital infrastructure. Additionally, implementing effective policies to curb informality will foster a favorable environment for the SME sector, allowing it to capitalize on skilled migrant labor.

The resurgence of tourism and policy initiatives implemented in late 2021, such as eliminating mandatory health contributions and raising the non-taxable portion of wages, positively influenced job creation in 2022. This trend continued into 2023, resulting in a record-low unemployment rate of 13.5% in the second quarter. However, employment growth is projected to slow down in 2024-2025, attributed to weakening domestic and external demand, according to the EU Commission. The country maintains a large informal sector, while the labor force participation rate remains low. Moreover, Montenegro is one of the poorest countries in Europe: according to the latest data available by the OECD, approximately 20.3% of the population is at risk of poverty or social exclusion. The country’s GDP per capita was estimated at USD 27,027 in 2022 by the World Bank, half of the EU average.

 
Main Indicators 20222023 (E)2024 (E)2025 (E)2026 (E)
GDP (billions USD) 6.117.067.668.168.62
GDP (Constant Prices, Annual % Change) 6.14.53.73.23.0
GDP per Capita (USD) 9,82011,33912,29713,08813,827
General Government Gross Debt (in % of GDP) 72.165.867.669.572.0
Inflation Rate (%) n/a8.34.32.62.1
Current Account (billions USD) -0.81-0.76-0.87-0.94-1.04
Current Account (in % of GDP) -13.2-10.7-11.3-11.5-12.0

Source: IMF – World Economic Outlook Database, October 2021

Main Sectors of Industry

Montenegro has a labour force of 284,000 people out of its 619,000 population. Agriculture, which according to the latest data by the World Bank represents 6% of the GDP (roughly 60% livestock breeding and 40% cultivation) and 7% of the workforce, remains hampered by its outdated methods. Agricultural land accounts for 19% of the total land area (FAO), and the sector is dominated by small-scale family farms, with the average farm size being less than 5 hectares. In the coastal region which benefits from the Mediterranean climate, citrus and olive cultures are widespread, seasonable vegetables and tobacco can be found in the central parts, and the North benefits from the extensive sheep breeding. The main products exported are wine and beer, though the increased focus on tourism over the past decade has contributed to the waning of agriculture, increasing the country’s reliance on food imports. As Montenegro advances in the negotiations to join the EU, the country is working on the improvement of its agricultural sector as one of the EU pre-accession requirements.

Industry represents 13% of the country's GDP and employs 18% of the workforce. Its contribution to the economy has been declining in recent years. The steel and aluminium industry alone represents a good part of the country's exports and is expected to boost economic development. The manufacturing sector is still underdeveloped and accounts for only 4% of GDP. According to the national statistical institute, Montenegro's industrial output increased by 6.4%, driven by higher output in the utilities and mining sectors.

The tertiary sector contributes 61.5% to the GDP and employs almost three-quarters of the workforce (74%). Tourism is the third-largest industry and consumes around one-third of total investment. It alone provides 20% of the GDP (EU Commission). The sector has been in full expansion in recent years, especially on the Adriatic Coast: every year Montenegro welcomes three times as many visitors as its total population. In 2023, there were a total of 2,613,306 tourist arrivals and 16,389,279 overnight stays. Of the overall overnight stays, 96.3% were accounted for by foreign tourists, while domestic tourists contributed 3.7% of the total overnight stays (data Monstat). The country is seeking to improve its tourism infrastructure and develop its eco-tourism industry to exceed 30% of GDP by 2027. The government is trying to attract large foreign hotel chains that may provide hospitality standards similar to those in Europe. Montenegro's hotel infrastructure was underdeveloped, but with several huge infrastructure projects; the situation is beginning to change. On another hand, the county is also seeking to diversify its economy to be less dependent on tourism. Montenegro's banking sector is relatively small but growing rapidly and has undergone significant reform in recent years, with the government implementing a number of measures aimed at improving financial stability and increasing competition.

 
Breakdown of Economic Activity By Sector Agriculture Industry Services
Employment By Sector (in % of Total Employment) 7.4 18.8 73.8
Value Added (in % of GDP) 6.3 13.0 60.7
Value Added (Annual % Change) -0.2 -4.8 7.7

Source: World Bank, Latest Available Data. Because of rounding, the sum of the percentages may be smaller/greater than 100%.

 

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Indicator of Economic Freedom

Definition:

The Economic freedom index measure ten components of economic freedom, grouped into four broad categories or pillars of economic freedom: Rule of Law (property rights, freedom from corruption); Limited Government (fiscal freedom, government spending); Regulatory Efficiency (business freedom, labour freedom, monetary freedom); and Open Markets (trade freedom, investment freedom, financial freedom). Each of the freedoms within these four broad categories is individually scored on a scale of 0 to 100. A country’s overall economic freedom score is a simple average of its scores on the 10 individual freedoms.}}

Score:
63,4/100
World Rank:
80
Regional Rank:
39

Economic freedom in the world (interactive map)
Source: Index of Economic Freedom, Heritage Foundation

 
 

Country Risk

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Sources of General Economic Information

Ministries
Ministry of Finance
Ministry of Foreign Affairs
Ministry of Labor and Social Welfare
Statistical Office
Statistical Office of Montenegro
Central Bank
Central Bank of Montenegro
Stock Exchange
Stock Exchange of Montenegro
Economic Portals
NewBalkan.com (en anglais)
 

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Latest Update: May 2024