Montenegro Faces New Economic Headwinds Despite Strong Post-Pandemic Recovery

PODGORICA  – The six countries of the Western Balkans region are facing a new range of economic challenges, despite a better-than-expected rebound from the recession caused by the COVID-19 pandemic, says the latest Western Balkans Regular Economic Report (#21 in the series).

Montenegro’s economy bounced back strongly in 2021 with a growth of 12.4 percent, the highest rate among the six Western Balkan countries. However, the outbreak of the war in Ukraine and the associated developments have significantly worsened the outlook for Montenegro in 2022, reducing the growth rate to 3.6 percent, down from an estimated 5.9 percent before the war. The main impact of the war on Montenegro’s economy is through tourism which will further slowdown exports, private consumption, and employment recovery.

“The economies of the Western Balkans, including Montenegro, now face an unusually uncertain outlook”, says Christopher Sheldon, World Bank Country Manager for Bosnia and Herzegovina and Montenegro. “Given global uncertainties and expected monetary tightening weighing on the cost of financing, Montenegro must accelerate structural reforms, including pension reforms, and be fiscally prudent to mitigate increasing risks of the Ukraine war on Montenegro’s service-based economy.”

GDP growth in the region reached 7.4 percent in 2021, after a contraction of 3.2 percent in 2020. This return to growth saw significant job creation, with employment demand helping to reduce poverty across all six Western Balkan economies. In 2021, the Western Balkan employment rate increased to a historical high of 45.8 percent, led primarily by employment recovery in Serbia and Kosovo. Growth was driven by an exceptionally strong rebound in consumption, helped by both fiscal stimuli, pent-up demand, as well as a relaxation in movement and travel restrictions.

However, the post-pandemic recovery has been cut short, as the war in Ukraine sends shockwaves across the region. Growth for the Western Balkans is now forecast at 3.1 percent in 2022.

“Despite a strong rebound from the pandemic, the Western Balkans now face a new set of challenges, compounded by the war in Ukraine, including rising energy and food prices, high inflation, and slowing trade and investment,” said Linda Van Gelder, World Bank Country Director for the Western Balkans. “Careful policy support will be needed to navigate the Western Balkans through these crises and protect the important gains made in 2021, including poverty reduction.”

The downside risks to the region’s economic outlook are daunting. An expanded conflict or prolonged war in Ukraine could trigger further disruptions to global trade and to energy and food prices. Refinancing risks could arise if external financial market conditions continue to tighten. Debt sustainability may become a concern if limited fiscal space is eroded by policy responses to higher energy and food prices amidst rising refinancing costs.

In the context of the energy crisis in Europe, the report also provides an assessment of the vulnerability of the Western Balkan countries to energy price shocks, measures adopted by the governments to mitigate the impacts, and how the crisis can affect the green energy transition going forward.

“In responding to the current energy crisis, and ensuring protection of the most vulnerable households and firms, the Western Balkans should also not lose sight of their long-term goals to achieve energy security and resilience as part of the green reform agenda,” adds Richard Record, World Bank Lead Economist and one of report’s the lead authors.

The report argues that sustained growth cannot happen without structural reforms to boost productivity, increase competition, invest in human capital, and strengthen governance. Measures to reduce business regulatory costs, increase market competition, support labor market participation, and strengthen the independence of public institutions would all be supportive of growth in an uncertain environment.

 

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