The European commission’s staff presented its assessment on economic development and new economic reform programs (2024-2026) for the Western Balkan countries.
We separated the WB countries to three groups based on the level of their integration to the European Union:
- Advanced negotiating countries – Montenegro and Serbia;
- Started negotiations – Albania and Republic of Northern Macedonia;
- Third group – B&H and Kosovo.
PART I
The main conclusions of the European Commission’s staff for advanced negotiating countries are following:
MONTENEGRO
“The implementation of the policy guidance set out in the conclusions of the Economic and Financial Dialogue of May 2023 has been partial.
Montenegro continued to record high economic growth in 2023, which is set to slow down in 2024-2026. A successful tourism season and strong private consumption, supported by a large inflow of foreign nationals, were the key drivers of economic growth in 2023, estimated at 5.8%. The main headwind came from high albeit moderating inflation, while tighter financing conditions weighed on investment. The baseline scenario set out in Montenegro’s economic reform programme (ERP) projects real GDP growth to slow to an annual average of 3.2% in 2024-2026, driven by domestic demand on the back of rising private and public consumption and recovering investment.”
“The ERP’s fiscal scenario projects a sizeable deterioration of the budget balance in 2024 and a gradual deficit reduction in the following 2 years, which is set to lead to a modest pace of debt reduction. The 2023 budget performed much better than expected and recorded a surplus, estimated at 0.5% of GDP, driven by strong growth in indirect taxes, one-off revenues and lower-than-budgeted spending. The 2024 deficit is largely driven by strong increases in social transfers and capital spending. Budgetary adjustment in 2025-2026 is expected to rely on a sharp deceleration in public spending, which is projected to lead to a drop of 2.3 percentage points in the spending ratio and a small primary surplus in 2026” – the document said.
Main challenges facing Montenegro
Following the document: “High mandatory spending and a limited revenue base, together with upcoming large debt repayment needs call for a stronger fiscal consolidation than envisaged in the ERP. Amid external and internal risks, the economic outlook is positive with decelerating but stable growth in Montenegro. However, debt repayment needs are set to increase sharply, first in 2025 and later in 2027 and 2029, which, coupled with tight financing conditions, raise vulnerabilities. Given Montenegro’s monetary framework, fiscal policy is the main tool to manage aggregate demand and support further disinflation. This calls for a comprehensive medium-term fiscal plan with conrete consolidation measures and a commitment to bring the debt ratio below 60% of GDP as prescribed by the fiscal rule. Broadening the tax base, streamlining tax exemptions and incorporating new budget revenue initiatives would contribute to rebuilding fiscal buffers and reducing public debt. Further fiscal space could be gained by reviewing and reforming mandatory spending on the public wage bill, social and health expenditure.”
“Improving the long-term sustainability of public finances requires strenghening fiscal governance and the management of public investment. While fiscal rules are in place, they are weak and lack a strong enforcement mechanism. Major new spending initiatives have not been adequately costed, resulting in high mandatory expenditure. Large infrastructure projects need better management and prioritisation given the limited fiscal space available. Setting up an independent fiscal institution would help strengthen the costing of new initiatives and help improve fiscal discipline. Improving the oversight and risk management of state-owned enterprises (SOEs) would over time alleviate their burden to the budget” staff said.
Improving the business environment, fostering private sector development, advancing the green and digital transition, and developing human capital are the key structural challenges Montenegro is facing. There is a need to address, among others, weaknesses in the regulatory environment, informality, difficulties in access to finance and challenges in monitoring and managing State owned enterprises (SOEs).
Montenegro’s energy transition plans are in line with the European Green Deal, implying further development of the energy sector through investements in green energy and decarbonisation. Digitalisation focuses on developing digital services and improving cyber security. Structural labour market challenges, including persistently low rates of labour market activity and high unemployment, especially among women, young people and the low-skilled, continue to undermine potential growth and improvements in living standards. These challenges are expected to be addressed through key structural reforms identified in the country’s reform agenda under the new Growth Plan for the Western Balkans.
In 2023, the fiscal outcome was better than envisaged in the revised budget due to very good performance of indirect tax revenue and one-off revenue items. No new medium-term fiscal strategy has been adopted.
The government adopted a programme and action plan for 2024-2026 on supressing the informal economy. Progress was made on digitalisation, but was limited on reforms related to the green agenda and to SOEs.
SERBIA
Following the European commission’s staff document: “Implementation of the policy guidance set out in the conclusions of the May 2023 Economic and Financial Dialogue has been partial. Serbia’s economy remained resilient in 2023 and growth is forecast to accelerate slightly in 2024-2026. GDP growth picked up in the second half of 2023, reaching 2.5% for the year as a whole, helped by decelerating inflation and strong foreign direct investment (FDI) inflows. The economic reform programme (ERP) projects economic growth to gradually pick up to 3.5% in 2024 and about 4.0% in 2025-2026.”
The document conclusion is that: “Consumer price inflation was on a declining trend in the second half of 2023, averaging 12.1% for the year as a whole. Inflation is expected to return to within the central bank’s target band (3% ±1.5 percentage points (pps)) in mid-2024.
Relatively buoyant exports and lower energy import volumes and prices contributed to the substantial reduction in the current account deficit, from 6.9% of GDP in 2022 to 2.6% in 2023.
The fiscal strategy projects a gradually decreasing fiscal deficit and public debt. In 2023, according to preliminary outcome data from the Ministry of Finance, general government deficit fell by about percentage point to 2.2% of GDP, which is better than expected.
Revenue growth outperformed projections, and fiscal support to state-owned energy utilities was lower than planned. The 2024 budget targets a moderate further deficit reduction.
The main challenges that Serbia faces
Following the document: “Serbia has been able to successfully navigate the economic challenges of recent years and is well placed to go on achieving good macro-fiscal results.
Medium-term fiscal targets need to be both better anchored by a strict application of the new framework of fiscal rules and backed up by credible medium-term fiscal planning.
Serbia has made good progress on digital transformation across the economy and intends to tackle some of the remaining gaps (in areas such as digital infrastructure and cybersecurity, public sector e-services and education). These challenges are expected to be addressed through key structural reforms set out in the country’s reform agenda under the New Growth Plan for the Western Balkans.
Good governing of public support to state-owned enterprises (SOEs). In spite of recent progress linked to the new SOE management law, several actions are still to be completed in the coming years, such as adopting related by-laws, restructuring companies, ensuring sound corporate governance, and improving transparency.
A public sector wage reform is crucial to attract and retain talent in the public sector.”
Other main structural challenges lie in the areas of business environment and private sector development, the green and digital transitions, human capital, and fundamental democratic and judicial reforms. Weaknesses in the rule of law, including the fight against corruption, and inconsistent state-aid and public procurement procedures subject to exemptions impede the business environment.
Comments: The high professionalism of the economists of the European Commission and their conclusions, free from any political bias, are an excellent basis for a real assessment of the economic situation and prospects of the countries of the Western Balkans. The plans for economic reforms are fully subordinated to the preparation of these countries for integration into the European Union, which is expected to reach its peak with their accession to the Union. A careful reading of the facts shows a relatively quick recovery of these countries from the pandemic, as well as their ability to counter internal and external risk factors. The prospects for the period 2024-2026 are quite a lot realistic.
To be continued
