MONETissp.me/wp-content/uploads/2012/10/monet24.pdf · 2012. 10. 22. · Gradir” from Slovenia bought the Zinc and Steal Mine “Suplja stijena ” near Pljevlja. “Gradir” will

MONET

MONTENEGRO ECONOMIC TRENDS

September 2006

Milica

Stamp

Milica

Text Box

Project supported by the Governments of Poland and Canada, through the Polish-Canadian Development Cooperation Program, administered by the Education for Democracy Foundation.

Monet September 2006

© Institute for Strategic Studies and Prognoses 1

Montenegro Economic Trends

Dear readers, During the previous six months Montenegro has undergone tremendous changes. Both this preface and all of the articles in this edition of MONET consider these changes. So far, the reforms in Montenegro have been designed in light of achieving macroeconomic stability. Now, the time to concentrate on economic development has come. In other words, the focus of economic reforms should be switched from macroeconomic stability to economic development. Hence, creating the ambience that will aid in increasing both the GDP growth rate and the employment rate should be the primary goal of macroeconomic policy as opposed to balancing the budget and targeting a lower inflation rate. The goal of reforms should not be simply to comply with the requests of IMF and WB, but also to improve the quality of our lives. For the last twenty years Montenegro has been experiencing the process of transition. During this time we have witnessed transition as a process that significantly influences the way of thinking. Bearing with this process is very difficult, especially for older citizens. Therefore, transition can be considered as an intergenerational redistribution of power, or transmission of power from elders to the younger population. How can the life of our citizens be improved? There are three key conditions we should comply with: opening and globalization; integration into the European market; and regional integration. These three actions would shed light on Montenegro from both inside and outside; without this, we would remain closed in the darkness of the Balkans. We see globalization as a battle to eliminate the barriers to capital flow. The sooner we understand that the main part of competition today is the attraction of foreign investment, the better we will be. With Montenegro having the third highest per capita FDI in Europe in the previous year, it appears that the Montenegrin society has a good understanding of this. The geographic position of Montenegro plays a very important role in the economic development of Montenegro. On one hand, one should not forget that Montenegro is a Mediterranean country; while on the other hand, Montenegro borders seven other countries or entities. Therefore, it must be opened and turned towards the regional market. A system that will attract big companies’ interest in exporting products from Montenegro should be created. Thus, Montenegro should become a business platform in the region! Furthermore, Mediterranean connections must be fully utilized. Montenegro must rely upon the sea and the Mediterranean; it must become the “Mediterranean tiger.” A tunnel called Sozina was built last year making the northern part of the country one hour closer to the sea. In fact, by building new roads it will become even closer. The best criterion for the development of the northern part of Montenegro is its proximity to the sea. Only by connecting the northern territory to the sea will the “Mediterranean tiger” get its real image! Full economic integration of the northern part of the country into the entire Montenegrin economic ambience is necessary. This could be achieved through construction of good roads, small airports, and concessions. Once done, companies and entrepreneurs will be interested in investing in business, and farmers will enter the market as well. Furthermore, good roads would also result in a higher number of tourists. Therefore, only through economic integration of the northern territory can we have long-term development of the North, which would give an additional impulse to the development of Montenegro as a whole. By constructing and improving roads, railroads, and small airports, we will not only connect the North with the rest of Montenegro but also connect all parts of Montenegro with the region.

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© Institute for Strategic Studies and Prognoses


In order to achieve both these short-term and long-term goals, all creators of economic policy have to be cautious, while at the same time being brave and aggressive. Our generation received a life chance which must not be gambled away. As always, ISSP researchers are accurately following and analyzing all economic movements in Montenegro, as well as advocating for important policies, laws, procedures, etc. This is how this issue of MONET is structured. In the first part, ISSP researchers follow current economic movements in the Montenegrin economy. Many interesting and important findings were brought up. Here we will stress a few of them. In 2006, both the official statistics and ISSP estimates showed significant increase in

employment and an overall better situation on the labor market. Low inflation and a high annual increase in average wages, both nominal and real, have

marked the first eight months of 2006. Actual public sector revenues in the first seven months of 2006 point to the fact that public

revenues, primarily budget revenues, will be executed at a higher level than planned by the end of the year. Higher than planned revenues are envisaged for all tax categories, with the exception of the corporate income tax. This, together with the control of expenditures development and implementation of measures aimed at both their orderly development and/or steady decrease, it is possible to have a significantly lower deficit than was planned. A lower deficit at the end of this year will create the possibility of a surplus in 2007.

Industrial production in the first seven months of 2006 increased by 3.9% compared to the

first seven months of 2005. During the second quarter of 2006, the privatization process of the Bank of Pljevlja was

finally completed. Also, as a result of citizens’ increased confidence in the banking sector, many banks have opened new branch offices all over Montenegro, especially over its northern region.

The “Thousand residential loans” project provoked huge interest among Montenegrin

citizens. The main indicators of success in the banking sector (total approved loans, deposits, as well as the values of the general monetary aggregates) were characterized by stable positive growth rates during the second quarter of 2006.

Indicators of capital market development in Montenegro in the first 7 months of 2006 were

positive. Total turnover, realized number of transactions, market capitalization, and values of the stock exchange indices all increased.

In the second part, ISSP researchers elaborated on the most challenging topics currently. ISSP researchers consider whether privatization of the infrastructure is a necessity or a whim. Furthermore, we elaborated on both the information society and the energy market. ISSP has conducted the ICT Survey (Information Communication Technologies) in order to determine the level of information literacy in life and business. It showed a dominant need in 2006 to improve knowledge in the area of ICT. The research identified regional differences regarding ICT usage as well as the need for establishment of specific ICT programs.



Moreover, solutions for resolving the energy deficit were sought. In addition to advice for more efficient usage of existing resources and loss reduction techniques, wind as a potential energy source was introduced. Even though we are aware of the fact that development of this type of energy production in Montenegro cannot be expected soon, we are anticipating its great future relevance. As a logical subsequence, an article on regulation of the energy market was provided. We believe that you will find these articles very interesting and inspiring. Once again, we would like to stress that Montenegro has entered a very important phase and its future depends on all of us. Therefore, we should stop considering the state as our savior. Development of entrepreneurship in all areas of our lives is a key for success. Everyone has to believe in herself and to solve her own problems!

For the editorial team, Milica Vukotic

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TABLE OF CONTENTS

EVENTS 6

MACROECONOMIC TRENDS 7

CHAPTER 1. REAL SECTOR 8

CHAPTER 2. EMPLOYMENT 14

CHAPTER 3. WAGES 18

CHAPTER 4. PRICES 22

CHAPTER 5. BUDGET 30

CHAPTER 6. MONEY 41

CHAPTER 7. CAPITAL MARKET 51

CHAPTER 8. EXTERNAL SECTOR 59

CHAPTER 9. REGIONAL COMPARISON 61

CHAPTER 10. INFORMATION COMMUNICATION TECHNOLOGY IN MONTENEGRO 63

RESEARCH 69ELECTRONIC BUSINESS DEVELOPMENT IN MONTENEGRO - BASED ON ELECTRONIC BANKING 70

ANALYSIS 76ENERGY EFFECTIVENESS IN MONTENEGRO (SUGGESTIONS FOR RESOLVING THE PROBLEM OF ENERGY DEFICIT) 77

REGULATION OF THE MONTENEGRIN ENERGY SYSTEM 82

POWER OF WIND AS AN OPPORTUNITY FOR MONTENEGRO 87

PRIVATIZATION OF INFRASTRUCTURE 91

INFORMATION SOCIETY OF MONTENEGRO IN 2006 98

ICT REGULATION IN MONTENEGRO 103

STATISTICAL ANEX 106



EVENTS

May 2006 May was marked by the referendum on the independence of Montenegro. The majority of Montenegrin citizens (55.5%) chose independence. Montenegro recovered its independence and became an internationally accepted country. A New airport was opened in Podgorica. A total of € 22 million was invested in the new airport. The company “Vektra” from Podgorica bought the Hotel complex “Alet” in Becici, known as the International Youth Center, for € 4.8 million. In this month one new auction was announced; namely, the Privatization Council of Montenegro announced an auction for the sale of a majority share package of the Ski Center “Bjelasica”.

June 2006 One more bank in state ownership was privatized. Majority ownership of the Pljevaljska bank (78.7%) was sold to the Consortium from Atlas Group for € 20.5 million. The company “Jakic” from Pljevlja was sold to the company “Vektra”. For total ownership of “Jakic”, “Vektra” will pay € 1.6 million and it will employ 320 workers.

July 2006 Montenegro, as the 179th country in the world, became a full member of the International Labor Organization. Tender Commission for Tourism abolished Tender for sa e of 59% of the HTP “Boka” from Herceg Novi. On the tender for sale “Boka” received four offers, but none were satisfactory.

l

On the fourth Tender for sale of Hotel “Galeb” in Ulcinj two offers were received, one from the company “Roksped” from Podgorica and the other from Cape Resort International in the USA. The starting price for the Hotel is € 4.95 million.

August 2006 August was marked by the continuation of the privatization process in Montenegro. Namely, this month realized the biggest privatization transaction in the financial system of Montenegro. The Hungarian bank OTC bought 100% of the Montenegrin CKB bank for € 115 million. This transaction should be realized by the end of the year. Additionally, the company “Roksped” from Podgorica bought the Hotel “Galeb” from Ulcinj for € 5.75 million with the obligation to invest an additional € 15.4 million in the Hotel. The company “Gradir” from Slovenia bought the Zinc and Steal Mine “Suplja stijena” near Pljevlja. “Gradir” will pay € 401,000 for the Mine and will make additional investments of € 19 million.

6



MACROECONOMIC TRENDS



CHAPTER 1. REAL SECTOR

Total economic activity in the first half of 2006 was higher as compared to the same period of the previous year due to higher activity in the sector of tourism (increase in the number of tourists by 4.9%), transportation of goods (growth rate of 22.44%), transportation of passengers (growth rate of 58.45%), and construction (growth rate of 187.55%)1. Moreover, industrial production, as an important contributor to the overall economic activity in Montenegro, increased by 3.9% in the first seven months of 2006 as compared to the same period of 2005, and together with higher services production, it contributed to the growth within the real sector of the economy.

Graph 1.1. Situation in the real sector (seasonal adjusted 1998=100)2

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Source: Monstat; Index of activities in the real sector calculated by ISSP

1.1 INDUSTRIAL PRODUCTION 1.1.1. Industrial production

Industrial production in the first seven months of 2006 was 3.9% higher than in the first seven months of 2005. In July of 2006 industrial production increased by 10.4% compared to July of 2005. The main determinants of the increase in industrial production in the first seven months of 2006 were the growth in production within some sub-sectors of the processing industry, such as wood processing, food products and beverages, and in the sector of mining and stone extracting. However, the tobacco and chemical industries are losing ground, and if these two industries would have maintained their production level from the previous year, the growth rate of industrial production would be about 4%.

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1 Measured by the value of construction activities. 2 Graph 1.1 presents the seasonal adjusted data of activities in the real sector. Aggregated index, which presents activities in the real economy, consists of weighted indices of industrial production, transport of goods, transport of passengers, retail trade, forestry, tourism, catering and construction. This is due to the fact that these sectors, within the real economy, participate, on average, around 50-55% in GDP.

Industrial production in the first seven months of 2006 increased by 3.9% compared to the first seven months of 2005. Production of services, which makes more than 54% of GDP, increased in large part due to the following services:o Transport of goods and transport of

passenger; o Higher number of registered tourists; o The real growth of catering.


Three major industrial sectors

Production within the processing industry sector, which represents 70.6% of the total industrial production, was 0.4% lower in the first seven months of 2006 as compared to the first seven months of 2005. The annual growth rate of production in the processing industry was 2.4% in July 2006. The main contributors to the decreased production in the processing industry in the first seven months of 2006 compared to the same period of 2005 were a lower level of production in: manufacture of tobacco (a decrease of 67.6%), chemical products and fibers (a decrease of 37.8%), and manufacture of textile and textile production (a decrease of 5.4%). The sub-sector “Manufacture of textile and textile products” represents 1.2% of total industrial production and decreased its production by 5.4% in the first seven months of 2006 as compared to the first seven months of 2005. Production within one of the major sub-sectors of the processing industry, “basic metals and metal products manufacturing” (42.6 % of total industrial production), increased its production by 4.9% in the first seven months of 2006 compared to the same period of 2005 and by 5.5% in July 2006 compared to the same month of 2005. Production of the sub-sector “Manufacturing of products of other non-metal minerals” (6.1% of total industrial production) increased in the first seven months of 2006 by 1% compared to same months of 2005, and by 3% in July 2006 compared to the same month of 2005. The industry “food products and beverages” (7.1% of total industrial production) increased its production by 7.1% in the first seven months of 2006 compared to the same period of 2005. This production decreased by 0.8% in Jul 2006 compared to the same month of 2005. The sub-sector “Wood processing and wood products,” which accounts for 2.2% of total industrial production, increased its production in the first seven months of 2006 by 57.5% compared to the same period of 2005, and decreased by 0.5% in July 2006 compared to the same month of 2005. Production within the sector “Manufacturing of paper; issuing and printing” (1% of total industrial production) increased by 3% in the first seven months of 2006 as compared to the first seven months of 2005 and by 15.7% in July 2006 compared to the same month of 2005. The second major industrial sector, electricity, gas and water, which accounts for 23.3% of total industrial production, saw its production increase by 13% in the first seven months of 2006 compared to the same period of 2005. The annual growth rate of its production was 63.5% in July 2006. The sector of mining and stone extracting, which accounts for about 6.1% of total industrial production, increased by 17.7% in the first seven months of 2006 as compared to the same period of 2005. The annual growth rate of its production in July 2006 was -8.7%. Leading industrial producers One of the most important industrial producers - The Power Company of Montenegro (Elektroprivreda Crne Gore) produces electricity, which accounted for approximately 20% of total industrial production in Montenegro. This company increased its production by 13% in the first seven months of 2006 as compared to the same period of 2005. The annual growth rate of its production was 63.5% in July 2006. Graph 1.2 presents the aggregate planned and actual electricity production of the three power plants existing in Montenegro: Perucica Hydro Plant, Piva Hydro Plant, and Pljevlja Thermal Plant.



Graph 1.2. Total electricity production

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Total actual production of the three plants in the first seven months of 2006 was 15.7% above the planned level. Total actual production of the two hydro plants in the first seven months of 2006 was 1,853,792 MWh, or 69.7% of the total executed electricity production. The remaining production came from the thermal plant Pljevlja. Total actual production of the Perucica Hydro Plant was 12.7% above the planned level in the first seven months of 2006. Actual production of the Piva Hydro Plant also exceeded the planned level by 46.7% in the first seven months of 2006. Actual production of the Thermal Plant Pjevlja was 3.3% below the planned level in the first seven months of 2006. Despite the fact that the power company of Montenegro has been reconciling its obligation, in the coalmine, Pljevlja hasn’t provided the necessary level of liquid assets to realization production. In addition to that, the problem of accuracy of the mining equipment and plant should be emphasized. Total executed electricity production in the first seven months of 2006 was 2% higher as compared to the same period of 2005.

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Graph 1.3. Dynamics of electricity production

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Source: EPCG Note: 12-month averages of annual changes are moving averages of annual changes during the past 12 months Aluminum production in the first seven months of 2006 was at a similar level (just 1% lower) than in the first seven months of 2005. Generally, one reason for the stagnation of aluminum production in this period was the post privatization process in KAP, which characterized a lot of problems among the syndicate and management of KAP.

Graph 1.4: Aluminum producion and exports prices

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Source: KAP, London Metal Exchange Aluminum production, as graph 1.4 presents, increased in 2004, but it decreased a bit in 2005 and in the first seven months of 2006. The average monthly aluminum price has been rising quite quickly, reaching 2,377 $/ton in January 2006, while continuing to grow in May (2,860 $/ton), and declining a bit in July (2,511 $/ton).


1.2 FORESTRY AND CONSTRUCTION

Forestry

Average production in the forestry sector increased by 3.0% in the first five months of 2006 compared to the same period of 2005. However, it should be emphasized that production in the forestry sector strongly declined in the first five months of 2005 because of very bad weather conditions, and even though it appear to have increased during this same period of 2006, it is still on the low level. Construction

Average production in the sector of construction, measured by the value of construction activities, was 127.5% higher in the first five months of 2006 compared to the same period of 2005. 1.2 SERVICES

Tourism In the first six months of 2006, the total number of tourists was 196,492, which is 10.2% more than in the same period of the previous year. The number of domestic tourists was 100,834 in the first six months of 2006, a decrease of 1% compared to the same period of 2005, while the number of foreign guests was 95,658 in the first six months of 2006, which is 41% greater as compared to the first six months of 2005. In the first six months of 2006, the share of foreign tourists was 45.63%.

Graph 1.5: Number of tourists in Montenegro

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OTHER SECTORS OF SERVICES Transport Average transport of goods increased by 10.1% in the first half of 2006 compared to the same period of the previous year. Average transport of passengers increased by 22.3% in the first half of 2006 compared to same period of the previous year.

Graph 1.6: Transport of passengers and goods(seasonal adjusted 1998=100)

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Retail trade

Retail trade turnover during the first five months of 2006, based on monthly data obtained from Monstat, was higher compared to the first five months of 2005. The average retail trade turnover nominally increased by 18% in the first five months of 2006 compared to the same period of 2005. In real3 terms, retail trade turnover increased by 14.6% in the first five months of 2006 compared to the same period of the previous year.

Catering

The average level of catering turnover in the first five months of 2006 was 37.79% higher than in the same period of 2005. In real terms, catering turnover increased by 33.1% in the first five months of 2006 compared to the first five months of 2005.

1.3. FORECAST FOR 2006 Since total economic activity in the first half of 2006 significantly increased, primarily due to the strong growth of construction activities, it is forecasted by ISSP that total economic activity will be approximately 30% higher than in 2005. The forecasted growth of industrial production in 2006 is 2.1% compared to the previous year.


3 Deflated by CPI


CHAPTER 2. EMPLOYMENT

In 2006, both the official statistics as well the ISSP estimates showed significant increases in employment and an overall better situation on the labor market

2.1. EMPLOYMENT Table 2.1: Employment

Total number of employed persons 1

Unemployment rate %

(estimate)

2005 194,426 19.7 Q1-05 191,161 20.8Q2-05 192,754 20.0 Q3-05 198,123 19.0 Q4-05 195,666 18.4 Q1-06 195,861 18.3 Q2-06 202,716 15.1

Source ISSP

Employment in the second quarter, according to ISSP estimates, has increased by 3.0% as compared to the previous quarter. The second quarter’s employment amounted to 202,716 persons on average. In annual terms, employment in the second quarter is 5.1% higher relative to the second quarter of 2005. Consequently, due to the strong increase in employment, the unemployment rate was reduced to 15.1%, its lowest level in the last fifteen years. This remarkable increase in employment is mainly due to the boost in the services sector that Montenegro experienced in the second quarter. Also, major investments in the infrastructure, tourism, and banking have contributed to this increase. The tourist season was highly successful and was marked by a record number of visitors, close to the number of tourists in 1989, which was the most successful year in Montenegrin tourism. The inflow of foreign direct investments has also contributed to this employment boom.

Graph 2.1: Number of employed persons (2001-2006)

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Source: ISSP

Knowing of the planned investments that have been announced by the private sector, for example the Delta Company (Delta company, KIPS, telecommunications) and the remaining privatization, it is expected that the situation on the labor market will advance in the future. Maximum employment is expected in the third quarter, followed by a period of stabilization and resulting in a somewhat lower level over the fourth quarter. It is expected that employment will increase by 2.3% in the third quarter as compared to the previous quarter, while in the

14



fourth quarter employment will decrease by 1% relative to the previous quarter. In annual terms however, employment will be 4.6% higher in the third quarter and 4.8% higher in the fourth quarter. Overall employment levels in 2006 will exceed those from 2005 by 4.4%, as estimated by ISSP. Since the Montenegrin government decided to reduce personal income tax rates, employment growth will continue in the future because the reduction of tax rates will reduce labor costs and thus contribute to the creation of new jobs.

Graph 2.2: Projected employment in 2006

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Source ISSP estimates An additional positive outcome on the labor market is the increase in registered employment, as published by Monstat. The Monstat data does not include farmers, military, the police, or the shadow economy. The increase in formal employment in the second quarter was 3.0%, while in annual terms this increase was 4.8%. According to Monstat, the number of registered employed persons in the second quarter reached 149,915 persons.

Graph 2.3: Number of unemployed persons (2000-2006)

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On the other hand, registered unemployment, as recorded by the Employment Office of Montenegro, is declining. Compared to the first quarter, the number of registered unemployed persons has decreased by 6.7% in the second quarter of 2006. In annual terms, registered unemployment decreased by 19.3%.

Graph 2.4: The official number of employed, unemployed persons and pensioners (1994Q1-2005Q4)

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Employed persons Unemployed persons Pensioners

Source: Monstat, Employment Office o Montenegro and ISSP f

Note: data are quarterly averages However, in order to be regarded as an unemployed person, one should be looking for a job, be ready to work, and be available for work. Registered unemployment identifies only those people that receive benefits from the government programs that are provided to unemployed persons (health insurance, unemployment benefits, etc), and therefore cannot be regarded as accurate information on unemployment in the country. 2.2. EMPLOYMENT BY ACTIVITY

The services sector is the dominant employer in the structure of formal employment in 2006. Namely, in 2006 the services sector employed 69.1% of total employed persons, which is 1.3 percentage points higher as compared to the previous year. The remaining two sectors, agriculture and industry (including construction), show a slight decrease in the overall structure; employment in industry is 1.3 percentage points lower than in 2005 – at 29.0% and employment in agriculture is 0.2 percentage points lower than last year – at 1.9% of total employment. Observed by individual activities, the highest share of workers is employed in wholesale and retail trade, which accounts for 18.6% of total employment. Manufacturing is the second largest activity in terms of employment and accounts for 17.8% of the formally employed persons; however, this is slightly lower as compared to 2005 (down by 0.5%). In 2005, manufacturing was the largest activity in terms of employment, while trade activities were second largest. Employment in public services has also reduced its share in overall formal employment. Namely, the share of workers employed in public services (state administration, education, and health) was reduced by 0.3 percentage points since last year, going from 23.7% to 23.4%.

16



Table 2.2: Structure of employment by activity Structure Jan-June 2006/ Jan-

June2005 2006 2005

% Agriculture, forestry and water -7.1 1.8 2.0 Fishery 18.8 0.1 0.1 Mining 4.9 2.8 2.8 Manufacturing 1.1 17.8 18.3 Utilities 2.4 3.8 3.9 Construction -8.8 4.6 5.3 Wholesale and retail 20.4 18.6 16.0 Hotels and restaurants 7.0 7.1 6.9 Transport, traffic and communications -14.4 8.2 10.0 Financial intermediation 0.9 2.1 2.1 Mortgages, renting and business act. 17.6 3.9 3.5 Public administration and social insurance 1.6 6.6 6.7 Education -1.8 8.7 9.2 Health and social work 8.5 8.1 7.8 Other communal, social and service activities 7.9 5.8 5.6

Source: Monstat and ISSP calculations

In the first half of 2006 four activities recorded lower employment as compared to the same period last year. Employment in agriculture, construction, transport, and education is lower in the first half of 2006 as compared to the first half of 2005 by 7.1%, 8.8%, 14.4%, and 1.8% respectively. All other activities recorded an increase in employment.

The areas that had the highest increase in employment in the first half of 2006 are trade activity (20.4%), fisheries (18.8%), and real estate activities (17.6%). Hotel and restaurant activities recorded a 7% increase, while employment in health increased by 8.5%. The high increase in employment rates was also seen in other communal, social, and services activities.

The increase in formal employment in the trade sector is probably due to new investments in this sector, as well as a reduction of the shadow economy in this area. The increase in real estate employment is due to the growth that this market experienced since Montenegro became a highly interesting spot for foreign investments in real estate. The increase in other communal, social, and services activities could be explained by high investments in infrastructure within the municipalities, as well as within Montenegro overall.

With future trends and investments in mind, it is predicted that the main source of future employment growth will probably be in the services sector, especially within hotels and restaurants, as well as in the trade sector. Future growth of the banking and financial sector is also expected and could be a major source of employment growth. 2.3. LABOR PRODUCTIVITY IN INDUSTRY In the second quarter of 2006, labor productivity in the industry sector, calculated based on official statistics, has increased by 2.7% in annual terms. However, as compared to the previous quarter, labor productivity has been reduced by 1.8%. This increase in labor productivity in annual terms could be attributed to increased production. On the other hand, the decrease as compared to the previous quarter is due to somewhat lower production as compared to the first quarter, as well as to an increase in employment in mining and utilities activities, by 0.3% and 0.2%, respectively.

Graph 2.5:Industrial production and employment indices(2004=100)

40

60

80

100

120

140

j-04

a-04

j-04

o-04

j-05

a-05

j-05

o-05

j-06

a-06

Index of production Index of employment



CHAPTER 3. WAGES

3.1. WAGES AND SALARIE

Low inflation and a high annual increase in average wages, both nominal and real, have marked the first eight months of 2006

The average wage in 2006 has recorded an unexpected growth in annual terms, being 17.0% higher in the first eight months of 2006 as compared to the same period of 2005. In real terms, the average wage has grown by 14.6% in the first eight months. The average monthly increase in wages (excluding January due to its strong seasonal impact) was 3.2%. Observed by quarters, the average wage in the second quarter, relative to the previous quarter, has increased by 11.7%, which is a record increase for the past couple of years. With current trends in mind, it is likely that the average wage in the third quarter will remain at this level. Annual changes by quarter also show a record growth rate of 20.7% in the second quarter; this is expected to be 7.1% in the third quarter. In monthly terms, average wages grew by 4.0% in April, 2.7% in May, and 0.9% in August, relative to the previous month. Average wages in June were 0.6% lower as compared to May, and in July they were 1.9% lower as compared to June. The annual increase in average wage was 15.9% in April, 30.2% in May, 17.0% in June, 14.7% in July, and 12.7% in August.

Table 3.1: Average wages of employees

Min

imum

w

age

Aver

age

wag

es o

f em

ploy

ee

Aver

age

wag

es w

ithou

t ta

xes

and

cont

ribut

ions

Aver

age

pens

ion

(pa

id )

2003 50.0 271.2 174.0 113.0 2004 50.0 304.1 195.4 122.0 2005 50.0 326.5 213.1 128.2 Jan-05 50.0 283.4 185.1 124.6 Feb-05 50.0 299.2 196.4 124.6 Mar-05 50.0 309.4 203.0 128.7 Apr-05 50.0 325.6 212.2 128.6 May-05 50.0 297.8 191.6 128.7 Jun-05 50.0 329.6 214.7 128.7 Jul-05 50.0 329.8 215.8 128.7 Aug-05 50.0 338.8 220.5 128.7 Sep-05 50.0 336.5 219.4 129.1 Oct-05 50.0 336.9 219.6 129.1 Nov-05 50.0 343.3 223.6 129.1 Dec-05 50.0 378.8 253.7 129.1 Jan-06 50.0 313.2 205.2 136.8 Feb-06 50.0 354.1 230.3 136.8 Mar-06 50.0 362.9 235.6 136.8 Apr-06 50.0 377.4 245.8 136.8 May-06 50.0 387.7 252.4 136.8 Jun-06 50.0 385.4 252.1 136.8 Jul-06 50.0 378.2 246.9 145.0 Aug-06 50.0 381.77 249.22 145.0

Sources: Monstat, PIO Fund

Montenegro –a tax heaven! The Montenegrin Government has decided to introduce a proportional income tax and to reduce the personal income tax rate to the level of the corporate income tax rate. Namely, the personal income tax rate will be reduced to 9%, with a personal tax allowance of 840.0€ annually. This rate will be effective beginning in 2010, but its introduction will begin in 2007, when instead of progressive taxation with rates of 0%, 15%, 19% and 23%, a single rate of 15% will be applied. The 15% rate will also be applied in 2008, while in 2009 the rate will be reduced to 12%. This rate will be among the lowest personal income tax rates in the world and it will be thee lowest rate within the region and within Europe. Several countries, such as the United Arab Emirates, Qatar, Saudi Arabia, and Kuwait do not tax personal income, or in other words, their rate is 0%. If one day Montenegro finds oil they could afford to apply this attractive rate; however, until then, the rate of 9% seems rather satisfying. In fact, even a 15% rate is one of the lowest personal income tax rates in the world, but tax rates are never too low.

18



The dynamics in the level of average wages has exceeded the most positive projections. While the optimistic scenario, according to ISSP, predicted a 14.5% annual increase in the second quarter of 2006 as compared to the same period last year, a 20.7% increase was actually achieved. This remarkable increase could be attributed to several factors, but the positive and stable political outlook after independence and the boost in the tourism sector have probably had the greatest impact on the strong average wage growth. Additionally, the foreign direct, as well as domestic investments, have probably contributed to wage growth, since businesses now have more predictability in the political and economic environment. Besides these important factors, the decreased shadow economy and increased productivity are also probable causes of such high growth in wages. As mentioned, the annual increase in real average disposable wages is also high. Real annual growth of wages in the second quarter of 2006 was 18.9%, while the nominal growth was 20.7%. Observed by months, the annual growth in April was 13.3%, in May 28.6%, 14.7% in June, 12.2% in July, and 10.2 in August. This strong annual growth of real wages is due to high nominal growth, as well as low inflation.

Graph 3.2. Annual growth of nominal and real disposable wages

-10,0%

0,0%

10,0%

20,0%

30,0%

40,0%

50,0%

60,0%

jul.0

3

sep.

03

nov.

03

jan.

04

mar

.04

maj

.04

jul.0

4

sep.

04

nov.

04

jan.

05

mar

.05

maj

.05

jul.0

5

sep.

05

nov.

05

jan.

06

mar

.06

maj

.06

jul.0

6

Annual growth of real disposable wages Annual growth of nominal disposable wages

Sources: Monstat and ISSP calculations If average wages maintain the trend exhibited over the last four months, the average wage in 2006 will be 14.4% higher than last year. On the other hand, if average wages experience a similar trend to that of 2005, average wages will have an annual increase of 16.4% in both quarters. According to the first scenario, average wages are expected to increase by 13.9% in the third quarter and 7.1% in the fourth quarter, while according to the second scenario, a 16.4% increase is expected.



3.2. AVERAGE TAX WEDGE ON THE LABOR COST

Graph 3.3: Tax wedge on labor in Montenegro

(2001-2006)

35%

37%

39%

41%

43%

45%

47%

49%

51%

53%

55%

1998 1999 2000 2001 2002 2003 2004 2005 2006

The fiscal burden imposed on the labor cost over the second quarter of 2006 has increased. Due to progressive taxation and the high increase in wages, the tax wedge on the average wage has also increased. Namely, since people earn more they shift to higher income brackets and thus pay more taxes; the effective personal income tax rate increases as well as the fiscal burden imposed on wages. In the second quarter of 2006 the average tax wedge was 41.3%, while in the first quarter of 2006, it was 40.2%. The average tax wedge for the first eight months of 2006 was 40.9%.

The effective PIT rate in the second quarter of 2006 was 14.2% as opposed to 13.6% in the first quarter. Due to the strong wage increase and there being no changes in taxation, the average fiscal burden of wages in 2006 will be higher than those of 2005. However, in 2007 the fiscal burden will be reduced with the introduction of a new tax system whereby there will be a flat rate of 15% in 2007 and 2008, which will be reduced to 12% in 2009 and to 9% in 2010; with the new tax rate, there will also be a personal tax allowance of 840.0€ annually (or 70€) monthly. The effects of such a reduction will be important. If applied to the 2006 wage level, the average tax wedge, with an applied rate of 15%, will be reduced to 39.4%, while the effective PIT rate will be 12.1%. However, if the applied rate were 12%, the average tax wedge would be 37.4% and the effective PIT rate would amount to 9.7%.

Table 3.3. Effective PIT rate and the tax wedge

Average effective tax rate (%wages

and salaries)

Tax wedge on labor (in %)

2005 13.5 40.4 Jan-05 12.5 39.5 Feb-05 13.5 39.8 Mar-05 13.5 40.0 Apr-05 13.5 40.5 May-05 13.5 40.1 Jun-05 13.5 40.6 Jul-05 13.4 40.6 Aug-05 13.4 40.8 Sep-05 13.5 40.7 Oct-05 13.5 40.7 Nov-05 13.6 40.8 Dec-05 14.0 40.8 Jan-06 13.1 39.1 Feb-06 13.8 40.7 Mar-06 13.9 40.9 Apr-06 14.1 41.2 May-06 14.2 41.4 Jun-06 14.2 41.3 Jul-06 14.1 41.2 Aug-06 14.2 41.3

Source:ISSP calculations

Finally, with a tax rate of 9%, the effective PIT rate would be 7.3% and the overall fiscal burden imposed on wages would be 35.3%. Of course, all of these scenarios assume an unchanged level of social contributions rates. The fiscal burden imposed on labor cost will be on the EU level (current average is 35.9%) and it will approach the OECD average. This reduction will have many positive consequences. Not only will it decrease activity in the shadow economy, but it will provide more incentive for investments, both foreign and domestic, and a better living standard (due to higher net wages), and finally, it will improve the financial position of the government, since the shadow economy will be reduced, more people will earn income, etc.

20



3.3. AVERAGE WAGE DYNAMICS BY ACTIVITY

The second quarter of 2006 records increased average wages in nearly all activities, both in annual terms and as compared to the previous quarter. The only exception is among fisheries, which recorded an annual decrease. However, since that time, data for this activity are somewhat unreliable and therefore, this should be observed cautiously. The highest quarterly increase was achieved in the utilities sector, with an increase of 38.4%. This sector also records high annual growth in the second quarter as compared to the same period last year. This high increase in wages in the utilities sector could be explained by higher productivity since production of electricity has increased by 13% in annual terms during the first seven months. The average wage within hotels and tourism also recorded high growth rates both in quarterly and annual terms. Namely, in the second quarter of 2006 the average wage in this activity increased by 25.1% as compared to the previous quarter and by 19.4% as compared to the same period last year. This increase could be attributed to a highly successful tourist season and a true boom in this sector.

Table 3.3. Average wages after taxes and contributions by activity

Average Q1-06 (in €

monthly)

Average Q2-06 (in €

monthly)

Change Q2/Q1 (in %)

Annual change (in %)

Agriculture, forestry and water

167.04 201.20 20.4 16.4

Fisheries4 - 79.11 0.5 -7.5 Mining 367.82 380.54 3.5 25.1 Manufacturing 200.77 238.59 18.8 26.6 Utilities 309.26 427.95 38.4 25.5 Construction 136.60 164.83 20.7 32.6 Wholesale and retail 137.44 146.21 6.4 7.8 Hotels and restaurants 131.75 164.79 25.1 19.4 Transport, traffic and communications

284.72 318.51 11.9 18.0

Banking and finance 477.41 546.73 14.5 31.9 Mortgages, renting and business act.

212.86 226.23 6.3 10.0

Public administration and social insurance

264.76 283.44 7.1 19.4

Education 243.20 252.40 3.8 7.0 Health and social work 234.36 247.08 5.4 14.7 Other communal, social and service activities

176.21 194.49 10.4 47.7

Sources: Monstat and ISSP calculations

The average wages in banking, construction, and manufacturing have also significantly increased in the second quarter relative to the first quarter of 2006. In banking, this increase is probably due to the new banks in Montenegro, which likely have higher wages than the existing banks. The increase in average construction wages could be explained by the boom in construction activity, with many big infrastructural projects underway, as well housing projects. The highest annual growth rate of wages in the second quarter of 2006 was recorded in other communal and services activities, which increased by 47.7%; this is similar to the first quarter when wages in this activity grew by 68.3% in annual terms. Also, high annual growth rates are recorded in the sector of industrial production (25.1% in mining, 26.6% in manufacturing, and 25.5% in utilities). The annual increase in the average wages in construction was 32.6% in the second quarter.


4 The Monstat has not published the average wage for February, probably due to missing data, so calculation of average wage for the first quarter does not make sense.


CHAPTER 4. PRICES

Table 4.1 Prices

CPI RPI PPI

2000=100 Monthly

change in %

Annual change in

% 2000=100

Monthly change in

%

Annual change in %

2000=100 Annual

change in %

2000 100.0 3.4 36.1 100.0 25.0 100.0 16.5 2001 120.2 1.8 21.8 123.0 8.6 23.1 114.4 14.5 2002 142.0 0.7 16.8 147.6 3.1 17.4 121.6 4.6 2003 151.6 0.50 6.8 159.4 0.5 7.7 127.8 2.9 2004 155.2 0.26 2.4 164.4 0.3 3.3 138.0 5.8 2005 161.6 0.20 104.1 173.8 0.2 5.5 140.8 2.1 2005-Q1 160.0 0.1 3.2 172.4 0.1 5.9 139.4 3.1 2005-Q2 161.9 0.5 4.1 173.7 0.28 5.2 140.3 0.9 2005-Q3 161.3 -0.1 4.8 174.0 0.05 3.6 141.4 1.6 2005-Q4 163.0 0.4 4.4 174.9 0.1 4.3 142.0 2.6 2006-Q1 164.5 0.3 2.9 175.6 0.13 2.3 144.0 0.9 2006-Q2 166.8 0.5 3.2 177.4 0.37 2.2 146.2 3.8 Jan-05 159.8 0.1 3.2 172.1 0.1 6.2 130.7 3.6 Feb-05 160.0 0.1 3.1 172.4 1.1 5.8 131.0 3.3 Mar-05 160.3 0.2 3.2 172.7 2.1 5.9 133.8 2.5 Apr-05 161.1 0.5 3.7 173.4 3.1 6.2 131.9 0.4 May-05 162.0 0.6 3.8 173.8 4.1 5.8 140.2 0.5 Jun-05 162.5 0.3 4.8 174.2 5.1 3.8 141.3 1.7 July-05 160.9 -1.0 4.6 173.8 6.1 3.5 141.3 1.5 Aug-05 161.2 0.2 4.7 173.9 7.1 3.5 141.4 1.3 Sep-05 161.8 0.4 5.2 174.4 8.1 3.7 141.6 2.1 Oct-05 162.3 0.3 5.2 174.8 0.2 3.3 141.6 2.1 Nov-05 163.3 0.6 5.7 174.9 0.1 3.4 141.7 2.2 Dec-05 163.5 0.2 2.5 175.1 0.1 1.8 143.0 3.5 Jan-06 164.1 0.3 2.9 175.5 0.2 2.6 143.1 3.1 Feb-06 164.5 0.3 2.9 175.7 0.1 2.3 143.7 -2.8 Mar-06 164.9 0.2 2.8 175.9 0.1 2.1 145.2 2.3 Apr-06 165.9 0.7 3.1 176.9 0.6 2.1 145.8 3.8 May-06 167.1 0.7 3.3 177.4 0.3 2.2 146.1 3.9 Jun-06 167.3 0.1 3.1 177.8 0.2 2.3 146.8 3.6

Source: Prices overview published by Statistical office of Montenegro, except the monthly rates for December 2004, which are ISSP calculations. • Table presents end-o period values for monthly data and average period values for quarterly and annual data.f- • One-base index is calculated as a chain index according to Monstat indices based on respective

previous years. • Monthly and annual changes are based on data taken from Monstat publications, with the exception of

December 2004 monthly rates of change, which are calculated by ISSP 4. PRICES

Annual inflation in Montenegro in the second quarter of 2006 was 3.1%. As in the previous quarter of 2006, inflation stemmed primarily from the growth in the annual rates of oil and food prices in the second quarter. With the expected continuation of increases in the price of fuel and the expected rise in energy prices through the end of the year, inflation is forecast at 3.5% to 4.4% in 2006.

4.1 CONSUMER and RETAIL PRICE INDEX (CPI and RPI) .

CPI annual inflation5 decreased to 3.1% in June 2006, compared to 3.4% in May. This is a significant drop compared to the rate one year earlier, 4.8%. The average change (year-on-year) was 3% in the second quarter of 2006, while the average annual change was 3.2%. Average monthly inflation was 0.5% in the same quarter.

22


5 End of period inflation


CPI Inflation in 2006

Annual change6 Average change7 Average annual change8 Average monthly

change 9

Q1 2.8 2.8 2.9 0.3 Q2 3.1 3.0 3.2 0.5

Source: Statistic office of Montenegro Calculation: ISSP Annual inflation in both April and May was 0.7%, and in June inflation was 0.1%. Similarly, monthly inflation of 0.7% was experienced in April and May and 0.1% in the month June.

Graph 4.1. CPI inflation

-1

0

1

2

3

4

5

6

7

8

9

jul.0

3

sep.

03

nov.

03

jan.

04

mar

.04

maj

.04

jul.0

4

sep.

04

nov.

04

jan.

05

mar

.05

maj

.05

jul.0

5

sep.

05

nov.

05

jan.

06

mar

.06

maj

.06

%

Monthly Annual

Source: Statistic office of Montenegro Calculation: ISSP

Retail prices have reached an annual inflation of 2.3% in the second quarter of 2006. This is significantly lower than the annual inflation of 6.0% in the same quarter last year. Annual inflation in the months of the second quarter of 2006 experienced an increasing trend: 2.1% in April, 2.2% in May, and 2.3% in June, while monthly inflation was decreasing: 0.6% in April, 0.3% in May, and 0.2% in June. Average inflation in the second quarter of 2006 increased at 2.1% and the average annual inflation was 2.2%, while the average monthly inflation increased to 0.4%. Analysis of the main indicators of inflation in the fourth quarter has led to the following results.


6 “Annual change” is a change of the index in the current month related to the same month of the last year. This way of measuring inflation is known as “end of period inflation.” The ISSP uses the annual change of CPI as a main indicator of inflation. CPI “December on December” is inflation in a specific year 7 “Average change” or “Average on average” represents the change of the index for a specific period of the current year related to the average of the index for the same period of the last year. 8 “Average annual change” represents an arithmetic mean of annual changes of the index in an observed period. 9 “Average monthly change” is calculated by applying a geometric mean for a month in a specific period (quartile or year). 10 www.eurostat.com (Euro-indicators, news release)

Box. 1 Annual euro zone inflation eased unexpectedly in July to 2.4 percent, down from 2.5 percent in May, while the euro area annual inflation was 2.5% in June 2006, unchanged compared to May. A year earlier, the rate was 2.1%. Monthly inflation was 0.1% in June 2006. Despite the decrease, the rate of price growth in the eurozone remains above the European Central Bank's preferred level, which is close to but less than two percent. In June 2006, the lowest annual rates were observed in Finland and Poland (both 1.5%), the and the highest rates were in Spain (4.0%).10


IMC 2006

Annual change Average change Average annual change Average monthly change

Q1 2.1 1.9 2.3 0.1 Q2 2.3 2.1 2.2 0.4


Graph 4.2. RPI Inflation

-1

0

1

2

3

4

5

6

7

8

9

10

11

jul.0

3

sep.

03

nov.

03

jan.

04

mar

.04

maj

.04

jul.0

4

sep.

04

nov.

04

jan.

05

mar

.05

maj

.05

jul.0

5

sep.

05

nov.

05

jan.

06

mar

.06

maj

.06

%

Monthly Annual


4.1.2. Disaggregated price changes

Table 4.2. Annual changes of disaggregated components of PPI

Product or service group Total index Food Tobacco and

beverages Clothing and

footwear Accommodati

on

Hygiene and personal

care

Education and culture

Traffic vehicles and

transport and communicatio

n services Weights in 2004 100 50.46 6.94 8.45 12.59 7.12 4.6 9.84

2004

Jan 3.17 -2.08 1.04 3.98 0.74 1.28 1.39 68.62 Feb 3.11 -2.13 1.19 3.60 0.71 1.36 0.26 71.05 Mar 3.22 -1.91 1.34 3.17 0.69 1.52 0.34 71.50 Apr 3.67 -1.54 4.34 2.29 0.67 1.59 0.35 72.76 May 3.85 -0.81 5.29 2.64 0.62 0.82 0.31 67.02 Jun 4.80 0.78 6.03 1.88 0.64 0.47 0.33 66.86 Jul 4.56 -0.05 6.45 1.78 0.64 0.47 0.43 69.50 Aug 4.72 0.01 6.48 1.48 0.74 0.44 0.44 68.05 Sep 5.15 0.63 6.52 1.55 0.56 0.40 0.74 67.38 Oct 5.16 0.89 6.43 1.45 0.26 0.42 0.75 65.71 Nov 5.69 2.24 6.43 0.93 0.48 0.37 0.85 63.99 Dec 2.45 2.54 6.59 0.98 0.48 0.40 0.84 4.69

2006

Jan 2.45 2.54 6.59 0.98 0.48 0.40 0.84 8.85 Feb 2.88 3.15 3.99 0.89 0.36 0.38 0.60 6.94 Mar 2.89 3.62 2.94 0.95 0.42 0.57 0.49 5.06 Apr 2.82 3.93 2.55 0.82 0.39 0.29 0.56 5.06 May 3.11 4.51 1.19 0.77 0.43 0.21 0.57 5.98 Jun 3.34 4.79 0.73 0.80 0.40 0.23 0.51 7.18


24



The average annual inflation in the second quarter of 2006 was 3.2%, which was higher than in the previous quarter. Analysis of the relative price changes of seven basic groups of the disaggregated CPI concludes that the inflationary effect came from the groups of Traffic vehicles and transport and communication services, which had an average annual inflation of 6.8%, as well as from food, with inflation of 4.6%. Average annual inflation among the other groups of the disaggregated CPI was below 1%, and therefore had a deflationary effect on the total index in the second quarter of 2006: hygiene and personal care 0.2%, accommodation 0.4%, education and culture 0.5%, tobacco and drinks 0.8%, and clothing and footwear 0.8%. A similar situation is seen with annual inflation at the end of the period. Transport and telecom services created inflation and the rest of the sub-indices had a deflationary impact on the total index. According to the detailed sub-indices in June of 2005, the most significant price changes were the following: Prices of food (50.5%11) products have continued their significant increase from an average annual rate of 3.6% in the first quarter to 4.6% in the second quarter of 2006. High average annual inflation in food was especially registered for fresh and processed vegetables (15%) and fruit (3.4%). The price of meat registered an increasing trend as well, up to 3.3%, while eggs, lard, and other food products registered 5.6%, 6.6%, and 5.9%, respectively. This increase in food product prices could possibly be a result of the increase in transport costs, as well as an increase in demand to accommodate the rising number of tourists. Prices of tobacco products and beverages (6.9%) experienced decreasing inflation. Prices of beverages, the source of inflation in the previous period, registered an annual rate of 0.6%, while tobacco was unchanged at 0.2%. Prices of clothes and footwear (8.5%) experienced an annual inflation rate of 0.4% for footwear and 1% for clothes. Low annual price changes were monitored by the index subgroup of accommodations (12.6%). Apartments registered 0% inflation, heating and lighting registered 0.5%, and apartment equipment had just 0.4% annual inflation. Accordingly, in the subgroup hygiene and personal care (7.1%), just hygiene accessories experienced annual inflation of 0.4%, while drugs and healthcare services were unchanged. In education and culture (4.6%), education service costs continued to inflate with a 1.3% annual change, while education capital registered 0.2%. Prices of traffic vehicles transport and communication services (9.8%) were impacted by the constant rise of fuel prices and continued to have a significant influence on the total index. Fuel and lubricant prices were 15% higher compared to the same month last year, as well as the cost of keeping a car. According to the three analyzed indices in June of 2006, the highest annual inflation in Montenegro was for food, tobacco, and beverages (4.1%). That is much above last year’s rate of 1.3%. Goods, without tobacco and beverages, had inflation of 1.7%, while services were at 0.6%.



BOX The high prices at the gas pumps and the cost of natural gas for heating were the largest factors pushing up inflation over the year in the euro zone, while lower prices for telecoms and clothes had a lesser, calming effect. The EU expects that high oil prices will likely continue to trigger higher consumer prices in 2007. Inflation has been driven up by oil prices, as well as increases in the services sector. The main components with the highest annual rates in June 2006 were housing (5.2%), transport (4.7%), and alcohol and tobacco (2.8%), while the lowest annual rates were observed for communications (-3.5%), recreation and culture (0.1%), and clothing (0.4%). With regards to the detailed sub-indices, fuels for transport had the largest upward impact on the headline rate (+0.38 percentage points), followed by gas (+0.20), and heating oil (+0.11), while telecommunications (-0.18) and garments (-0.13) had the greatest downward impact.

4.1.3. COST OF THE FOOD CONSUMER BASKET (FCB)12

Table 4.2 Cost of the food basket in Montenegro (in €) Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

2005 240.22 241.54 241.09 241.99 246.21 267.34 259.32 259.96 261.10 262.37 263.06 263.13

2006 264.47 266.36 266.73 267.39 269.82 275.28

Source: Monstat

Graph 4.3. Food consumer basket (annual change)

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%

The cost of the Food consumer basket has registered a significant drop of annual rate of change from 10.5% in April to 3% in June. Despite previous trends, the FCB experienced a lower annual rate than the Food category in the CPI consumer basket. Fresh fruit and vegetables had the most significant upward impact. The impact of increased tax rates for basic products in the beginning of 2006 became obvious in the second quarter, when the price of sugar increased by 25% and oil went up by 10%.

Monthly changes in April, May, and June were 0.3%, 0.9%, and 2%, respectively.

Graph 4.4. Cost of FCB in Montenegro (in euro)

240

245

250

255

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265

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275

280

jul.0

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04

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05

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euro

Source: Monstat

26


12 The food consumer basket consists of a group of basic food products in the quantities adequate for a four-member family. The concept of the basket was developed following the guidelines of the EU to approximate the cost of basic food needs for a four-member family. Thus, it allows for easy comparisons between countries.


4.2. PRODUCERS PRICE

4.2.1. PPI Inflation

The decreasing trend in the first quarter was interrupted in April 2006 when the annual rate increased from 2.3% to 3.8% and continued to grow in May to 3.9%. While the annual rate decreased slightly in June, to 3.6%, this is much above the 1.7% in Q2 of the previous year. The increase of oil and oil product prices created a growing effect on PPI, producer and wholesale prices. Rising oil prices inevitably seep into the economy, affecting the prices of many products. Montenegro’s heavy dependence on oil imports, so went the excuse, made it uniquely vulnerable to oil-driven inflation. The PPI average change was 4.2% and the average annual change was 3.8% in the second quarter of 2006. PPI monthly inflation in the second quarter was: 0.4% in April, 0.2% in May, and 0.5% in June 2006.

Graph 4.5 PPI inflation

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%

Annual Monthly

Source: Montstat

4.2.2 PPI DISAGGREGATED CHANGES

During the second quarter of 2006 only electricity production had a deflationary impact on total PPI, while other sub-indices pushed total inflation up. A review of the annual inflation of the sub-indices in the first quarter of 2006 follows. Mining and stone extraction increased to 7%, mostly due to the high annual inflation of oil, as oil product prices are one of the main costs in this type of production industry. Processing industry prices also experienced an increase in their annual rate, up to 3.9%. Analysis of the observed sub-indices found that they had a different effect on the processing industry index as they did on total PPI:



o Food, tobacco and beverage production prices jumped from -0.2% in April to 3% in June. o Chemical products production prices continued to slow their negative growth, reaching -

15% o Textile production prices were increasing at an annual basis during the second quarter,

reaching a rate of 30.5%. Construction materials prices, after experiencing negative rates in February 2006, registered high annual inflation of 10.8%. Electricity, gas and water prices have not changed on an annual basis since April 2004. 4.3 INFLATION MEASURED BY DIFFERENT INDICATORS: PPI, RPI AND CPI Graph 4.6 shows the annual rates of change of consumer, retailer, and producer price indices. After a drop of PPI in the first quarter, we saw its sharp increase above the rate of change of both CPI and RPI. This is theoretically logical, considering the share of services in CPI and RPI that is not weighted in PPI as well. Services are increasing at a higher rate, which makes the total retail prices sector index higher. As we have previously explained, the rise in PPI came from oil prices. Producer and retailer prices represent a portion of final retail prices. Thus, an increase in PPI will lag its impact on CPI and RPI due to retail stores, which means that PPI will have an upward impact on retail prices in the following period.

Graph 4.6. PPI, RPI and CPI - annual changes

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PPI RPI CPI

Source: Monstat 4.4. FORECASTS The inflation forecast for the second quarter of 2006 was 3.0% according to an optimistic scenario, and as it turns out, that was just 0.1 percentage points lower than actual inflation. For the next 12 months, we forecast an increase in the price of oil and oil products and a similar continuation of product and services prices as we have seen in the previous 12 months, excluding the effect of tax increases for basic products (sugar, oil, etc.). We forecasted an

28



electricity price increase in the previous MONET issue, but according to the Electric Company announcement, the price increase will not happen in 2006, but rather in the beginning of 2007. The optimistic scenario for inflationary developments in the next 12 months (June 2006 – May 2007) assumes:

o Continuation of the CPI dynamics as in the previous 12 months o Projected monthly increase of fuel prices of 0.20%, and according to that, a monthly

increase in the cost of owning a car of 0.04%. o Monthly increase in the price of electricity of 15% in March of 2007

The pessimistic scenario of inflationary developments in the next 12 months (June 2006 – May 2007) assumes:

o Consumer prices increase a bit faster compared to the optimistic forecast dynamic o Projected monthly increase of fuel price of 0.25%, and according to that, a monthly

increase in the cost of owning a car of 0.09%. o Increase of in the price of Electricity of 20% in March of 2007.

The resulting projected inflation in the next 12 months ranges from 3.6% to 4.6%, as shown in Graph 4.7. According to the optimistic scenario, the inflation rate is projected to be: 2.8% in Q3 2006, 2.9% in Q4 2006, 4.1% in Q1 2007, and 3.6% in Q2 2007. According to the pessimistic scenario, the inflation rate is projected to be: 2.9% in Q3 2006, 3.2% in Q4 2006, 5.0% in Q1 2007, and 4.6% in Q2 2007.

Graph 4.7 Twelve months inflation forecast

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Optimistic scenario Pesimistic scenario

forecast

Source: ISSP



CHAPTER 5. BUDGET

5.1 CENTRAL BUDGET IN PERIOD I-VII OF 2006

5.1.1 Budget balance and financing

In the first seven months of 2006, the central budget ran a deficit in the amount of €1.49 million, which represents 8.5% of the central budget deficit projection made by the ISSP at the beginning of the current year. The low volume of deficit in the budget means a lower level of borrowing, which influences better conditions for interest rates on domestic loans. Put differently, the practice of financing the deficit through non-real sources is vanishing. As a result, fiscal policy is contributing to the further development of the Montenegrin economy. Accumulated funds for deficit financing were negative and amounted to €6.12 million, for in the observed period of 2006 the GoM repaid €9.29 million of debt based on issued securities and given loans. Out of that amount, approximately 45% was paid to residents and the rest (55%) to non-residents. Although foreign loans taken amounted to just €0.81 million, they were roughly four times higher as compared with the same period of 2005. It is important to keep them at a low level, for any kind of acquisition of financial assets represents hidden subsidies. In the first seven months of 2006, income from disposal of assets (movable and financial) reached the level of €2.36 million.

Actual public sector revenues in the first seven months of 2006 point to the fact that public revenues, primarily budget revenues, will be executed at a higher level than planned by the end of the year. Higher than p anned revenues are lenv saged for all tax categories with the exception i ,of the corporate income tax. This, together with the control o expenditures development and fimplementation of measures aimed at both their orderly development and/or steady decrease, it is possible to have a significantly lower deficit than was planned. A lower deficit at the end o this yearf will create the possibility of a surplus in 2007. A fiscal deficit that is close to balance suggests that fiscal policy contr buted to the decreasing iaggregate demand in Montenegro. Positive developments in public finances influenced movements in the economy, and on the other hand, , movements in the economy had a positive impact on the public sector.

In the analyzed period, privatization of some big systems and enterprises in Montenegro did not occur. Privatization revenues are very important temporary revenues in the budget because they assist in improving the budget structure. Namely, they allowed the GoM to reduce a significant portion of its internal debt and they reduced the level of subsidies to public and state enterprises that were earlier paid from the budget. As a result, the pressure on the expenditures side of the budget was lessened, allowing for a decrease of the budget deficit. Regardless of their positive impact, the GoM should be cautious in the allocation of these revenues, for their imprudent use may lead to an increase of current consumption in the economy. The same can be applied with respect to compensation, on the basis of given concessions.

30



Table 5.1 Plan and outturn of central budget for 2006 (nominal amounts in € millions)

Plan for 2006 Jan-July (executed) % of plan

1 2 3=2/1

Deposits from previous year 21.20

A TOTAL REVENUES AND GRANTS (1+2) 485.61 292.17 60.17

1 TOTAL REVENUES (1.1+1.2) 480.11 292.15 60.85

1.1 Current revenues (1.1.1+1.1.2) 476.83 291.56 61.15

1.1.1 Tax revenues (1.1.1.1+1.1.1.2+1.1.1.3+1.1.1.4+1.1.1.5+1.1.1.6) 424.60 267.53 63.01

1.1.1.1 Personal income tax 70.38 37.44 53.20

1.1.1.2 Corporate income tax 16.04 8.56 53.36

1.1.1.3 Turnover (value added) tax 215.12 147.30 68.48

1.1.1.4 Excises 77.55 38.09 49.12

1.1.1.5 Taxes on international trade and transactions (customs) 39.72 31.12 78.34

1.1.1.6 Other taxes 5.80 5.02 86.50

1.1.2 Non tax revenues 52.23 24.04 46.02

1.2 Capital revenues 3.28 0.59 17.88

2 GRANTS 5.50 0.02 0.38

B TOTAL EXPENDITURES AND NET LENDING (1+2+3) 497.65 293.64 59.01

1 TOTAL EXPENDITURES (1.1+1.2) 367.14 222.56 60.62

1.1 Current expenditures (1.1.1+1.1.2) 50.58 208.98 413.17

1.1.1 Interest 15.50 10.23 65.97

1.1.2 Non-interest expenditures (1.1.2.1+1.1.2.2+1.1.2.3+1.1.2.4+1.1.2.5+1.1.2.6) 316.56 198.75 62.79

1.1.2.1 Wages, salaries, remunerations 171.67 91.24 53.14

1.1.2.2 Goods and services 67.85 33.24 48.98

1.1.2.3 Social Insurance and Social Security Transfers 34.61 22.26 64.32

1.1.2.4 Subsidies to enterprises 6.07 3.33 54.78

1.1.2.5 Reserves 15.50 9.37 60.48

1.1.2.6 Other non - interest expenditures 20.85 39.32 188.58

1.2 Capital expenditures 35.08 13.58 38.71

2 NET LENDING 8.32 4.06 48.83

Lending 8.32 6.37 76.55

Repayment 0.00 2.31

3. NET TRANSFERS TO THE OTHER LEVELS OF GOVERNMENT 122.19 67.02 54.85

OVERALL BUDGET BALANCE EXCLUDING GRANTS (CASH) (A-B-2) -17.54 -1.49 8.50

OVERALL BUDGET BALANCE (CASH) (A-B) -12.04 -1.47 12.21

FINANCING (1+2) 12.11 -6.12

1 DOMESTIC AND FOREIGN FINANCING (NET) 5.11 -8.48

Borrowings 5.11 0.81 15.86

Repayment 9.29

2 PRIVATIZATION REVENUES 7.00 2.36 33.69

CHANGES IN THE DEPOSIT ACCOUNT -5.43 -7.61 140.04

Source: Ministry o Finance, ISSP calculations f

f fNote: Lending is comprised of given loans and repayment on the basis of given guarantees

Privatization revenues include revenues on the basis o disposal o financial and non-financial assets Together with the negative funds aimed at deficit financing, the deficit influenced a reduction of deposits (financial assets) of the republic budget in the amount of €7.61 million.



Graph 5.1 Budget deficit in the first seven months of 2006

deficit1%

total revenues99%


According to the ISSP projection, the budget deficit is capped at 1.6% of GDP, while it will be executed in the interval between 1% and 1.6% of GDP. It is likely that it will have a lower absolute outturn than forecasted by ISSP at the beginning of the year; however, it is almost certain that its relative share in GDP will be lower due to the expectations of higher than forecasted GDP growth. Pursuit of a prudent fiscal policy is recommended for the rest of the year, which means that any revenue over-performance should be saved or used for additional investment programs or arrears reduction. 5.1.2 Total revenues and grants

In the first seven months of 2006, overall revenues of the central budget in Montenegro amounted to €292.17 million, representing 60.2% of the annual plan. From that amount, €267.53 million is related to tax revenues, while the remaining 8.4% were non-tax revenues, capital revenues, and grants. Although revenues increased by 28.7% as compared with the same period of last year, they increased at a slower rate as compared with budget expenditures; which increased 34.5%. That negative tendency implies the need to pursue tighter control of expenditures through the end of the fiscal year in an effort to keep the general state sector’s deficit under control. On the positive side, the fact that current revenues were 5.6% higher than current expenditures implies that the deficit was created primarily

because of much higher capital expenditures than revenues, which is a good shift in the structure of public finances and their sustainability.

Higher than expected growth of GDP in the first half of 2006 (about 7% in nominal terms) influenced a 29% increase of budget revenues as compared with the previous year. The increased budget revenues were additionally influenced by changes in tax legislation and improvement in the work of tax authorities. As GoM continues the process of public revenues reform, it should be noted that the change in their structure is the most important element; the structure of public revenues should provide a cushion for higher economic growth and development as well as stabilization in the area of public finances.

The significant accumulation of budget revenues during the first seven months is an indicator that the trend will continue through the end of the year.

32



Graph 5.2 Structure of budget revenues in the period I-VII of 2006

capital revenue 0%nontax revenues

8%

grants0%

tax revenues92%



.

5.1.2 1 Tax revenues

Tax revenues of the central budget were 27.7% higher as compared to the same period of last year and amounted to €267.53 million. In large part, this is due to the fact that economic activity has risen and, according to preliminary data, this tourist season was one of the best in recent period. Developments in tourism are very important to revenues in the Montenegrin budget, because this area is very much influenced by seasonal effects. The most dynamic increase to tax revenues is recorded among indirect taxes (especially VAT), which were 35.8% higher than last year, while payment of direct taxes lagged behind and amounted to 2.3% less than last year (due to the underperformance of CIT revenues).

Recent changes in the tax system were oriented towards its modernization. With respect to tax rates, tax instruments, and incentives, Montenegro has become a tax competitive area for attracting foreign capital and investments. Adopted orientation to stimulate employment and entrepreneurship found its expression in the tax legislation, providing for simplification of the tax system and a reduction in the number of tax rates. At the same time, with the aim of collecting necessary public revenues, the accent has been placed upon indirect taxes, via better payment and a greater scope of taxpayers.

During the first seven months of 2006 the tax policy remained unchanged except for the revenue neutral lowering of the VAT rate for accommodation services and the introduction of a lower VAT rate on food items and on a number of other products that were previously exempt. Changes to the Law on personal income tax have been made to introduce a single rate of 9%, which will be fully effective in 2010; it will be phased in as follows: 15% in 2007 and 2008 and 12% in 2009. It is expected that this change will increase the competitiveness of the Montenegrin economy and increase employment (especially of youth). At the same time, the lower tax rate will decrease the scope of the gray economy. Its adoption is expected at the end of the year and will be put into force in the beginning of 2007. 5.1.2.1.1 Indirect taxes The predominant share in the structure of both overall revenues and tax revenues of the

central budget was held by value added tax revenues, representing 50.4% and 55.1% of overall revenues and tax revenues, respectively. VAT revenues amounted to €147.30 million and were 44.4% higher in comparison with the corresponding period of 2005. A


Graph 5.3 Overview of monthly VAT revenues

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2004 2005 2006

34


f

significantly high proportion of VAT revenue is a direct consequence of increased economic activity, decreased involvement in the gray economy with respect to production and turnover of goods and services in Montenegro, and increased efficiency in the work of tax officers. Additionally, the increase in VAT revenue is a result of the introduction of the reduced rate, which was effective on January 1st of 2006. VAT outturn in the analyzed period represents 68.5% of the annual plan. A characteristic of 2006 as far as VAT revenues are concerned is the fact that its excellent performance started in January at a much higher level than in previous years and continued until the end of July. It is up to the GoM to decide where to spend the excess VAT revenue. One suggestion is to use it to reduce the budget arrears.

mili

ion

eu

ros

Table 5.2. Tax structure in the first seven months of 2005 and 2006 (€ millions)

Source: Ministry o Finance, ISSP calculations

I-VII of 2005 I-VII of 2006 index (%) plan for 2006 % of plan

Indirect taxes 161.30 221.53 35.75 335.73 65.98 VAT 102.00 147.30 44.43 215.12 68.47 Excises 35.00 38.09 8.83 77.55 49.12 Customs 22.33 31.12 39.33 39.72 78.34 Other taxes 1.98 5.02 24.27 3.34 150.18 Direct taxes 47.10 46.00 -2.34 88.60 51.92 Personal income tax 34.24 37.44 9.35 70.30 53.26 Corporate income tax 12.86 8.56 -33.45 16.04 53.37 TOTAL 208.40 267.53 39.4 424.33 63.05

Excises are the second largest revenue category with an outturn of €38.09 million at the end of July 2006. They are 8.8% higher than last year and represent 49.1% of the annual plan. The majority of excise payments (about 90%) are related to the payment of excises on imports.

At the end of July 2006, customs revenues13 amounted to €31.12 million, which represents 78.3% of the annual plan of customs payment and 10.7% of total revenues.

Other taxes amounted to €5.02 million, representing 1.9% of tax revenues. From this amount, €2.56 million is related to the estate tax.

5.1.2.1.2 Direct taxes

Personal income tax is the third largest revenue category in the Montenegrin budget in

the analyzed period. PIT revenues amounted to €37.44 million, which represents 53.3% of planned revenue; and at the same time, it is 9.3% higher than in the previous year. As mentioned earlier, this tax category will go through a significant change in the beginning of 2007. This will additionally ease the tax burden in the field of direct taxes.

13On May 25th of the current year the Customs Department introduced electronic data exchange, which is important to the improvement of international trade. This is important because it allows legal entities that are planning consignment the opportunity to send customs declaration in advance via the Internet. In this way, the time necessary for submission of declaration is decreased, the costs are lower, and the goods reach their final destination faster. So far, 5 subjects have been given permission for electronic submission of declarations, while an additional 5 subjects are in the process of testing.


Corporate income tax is the only tax category whose revenues in the observed period were lower as compared with the corresponding period of 2005; this is due to the implementation of the lower tax rate. Namely, CIT revenues amounted to €8.56 million, which is 33.5% lower than the same period last year. This short-term drop of CIT revenues was expected, but in the future significant growth is expected.

As already stated in previous issues of MONET, the goal of the current tax policy in Montenegro is to give incentives that promote greater entrepreneurial activity and higher employment via lower rates on direct taxes (labor, profit). As a result, each year revenues from indirect taxes have a consistently rising share in total tax revenues, while revenues from direct taxes have the reverse trend. The growth of indirect tax revenue is an indicator of declining activity in the gray economy. This tax policy approach corresponds to the structure of the Montenegrin economy, being a small country that has to be open and has to allow greater labor mobility. From 2007 onwards, PIT and CIT rates will have a synergetic effect on lowering the direct tax burden. A broader concept of the field of direct taxation, one that encompasses the whole public sector – central budget + social funds, requires reform of social contributions in the next medium term.

Graph 5.4 Share of direct and indirect taxes in tax revenues in the period I-VII of 2005 and 2006

0

20

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120

I-VII of 2005 I-VII of 2006

Indirect taxes Direct taxes

Source: Ministry o Finance, ISSP calculations f It might be concluded, as far as tax policy is concerned, that the effects of the new and improved tax system, which is mainly characterized by the introduction of simple procedures and lower rates, have resulted in higher efficiency with respect to tax payments and a declining budget deficit. 5.1.2.2. Other revenues Non-tax revenues amounted to €24.04 million and were 65.8% higher than last year. These revenues are comprised of: fees (administrative, courts, and residential) with a share of 30.9% in non-tax revenues totaling €7.42 million, compensations (for public goods usage, for natural goods usage, ecological compensation, compensation for organization of games of chance, compensation for roads, and other compensation) in the amount of €8.64 million, and other revenues (money fines and repossessed property interests, own activity revenues, and other revenues) in the amount of €7.98 million.



Capital revenues amounted to €0.59 million and were 80.7% lower than the same period of last year. In the analyzed period, the republic budget received €0.02 million of grants. Declining grant amounts each year are imposing strict budgetary discipline, which means that the Government has to rely on real sources of deficit financing. 5.1.3 Total expenditures and net lending

Total expenditures (including net lending) amounted to €293.64 million and were 34.5% higher than the same period of last year, representing 59% of the annual planned spending. The increase of expenditures was 5.8 percentage points higher than the increase of revenues. Current expenditures (non-interest spending, transfers and paid interest) amounted to €276.0 million, representing 94% of the total budget spending. Capital expenditures and net lending had shares of 4.6% and 1.4% in total expenditures, respectively. If transfers are excluded from total expenditures in the observed period, the estimation indicates that €204.36 million, or 69.6% of expenditures, were current spending and investments, while the remaining €89.28 million represented redistribution (transfers). In comparison with the same period of last year when consumption and investment represented 71.0% of total expenditures and transfers had a share of 29.0% in total expenditures, it is clear that the redistributed role of the state increased by about 1.4 percentage points. This is shown in the following graph.

Graph 5.5 Structure of budget spending in period January-July of 2005 and 2006

0%

20%

40%

60%

80%

100%

2005 2006

consumption and investment transfers


The process of consolidation of public spending has continued in 2006. Reform in this field seems to be much slower than movements made on the revenue side, making reform of public finances as a whole to be operating with lags. The lag is a drawback since a reduction of public spending would leave room to engage free resources in investments. The positive aspect is that reform is trying to alter the structure of public spending and improve the ratio between current and investment spending. Additionally, public debt, together with payment of the old foreign savings is served regularly. It is expected significant reduction of public debt after completion of s andby tarrangements with the IMF. On June 30, 2006, public debt amounted to €644.4 million, out of which €167.7 million (or 26%) is related to the domestic debt, while €476.7 million (or 74%) is related to foreign debt (according to the IMF methodology, debts of public enterprises are not included in the previous figures). While GoMs social security activities currently focus on providing resources for social programs, employment loans, and residential loans, as well as p oviding sufficient resources for wages and salaries, rgoods and services, and modernization of public administration, it is also important for their activities to focus more attention on capital investments. In addition to project loans, these activities may be financed by some of the savings made from excess payments to certain tax categories.

36



Wages, salaries and other remunerations for public sector employees, with a share of

31.1% in overall budget expenditures, is the biggest expenditures category in the observed period. It amounted to €91.24 million and was 2.3% higher than the same period of last year. Gross wages and salaries and contributions paid by employers amounted to €86.40 million, out of which 62%, or €53.58 million, was related to net salaries, while taxes on salaries, contributions and municipal surtax accounted for €10.34, €20.78, and €1.69 million, respectively. Other remunerations were 18.3% lower than the same period of 2005 and amounted to €4.84 million.

Graph 5.6 Wages, salaries and other remunerations for public sector employees in period January 2003-July 2006

0,6

8

1,2

2

22

,25

7,1

0 9,9

2 15,

49

9,5

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,88

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,81

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,70

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,29

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,55

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,77

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,39

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,24

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,47

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,33

0

5

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Janu

ary

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ary

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ptem

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rD

ecem

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ary

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2003 2004 2005 2006

mill

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eu

ros


While it is a very sensitive area, the first and foremost challenge of the expenditures policy in the future is to contain the cost of wages in the public sector and to minimize the negative impact on competitiveness in the private sector. The task is harder with the installation of new agencies as part of efforts towards EU accession and, on the other hand, continuation of pensions reform. Up until now, rationalization has relieved the public sector, but it turned out to be insufficient; as a result, a reduction in the number of employees should be continued in the future. In the first seven months of 2006, the

category of expenditures on goods and services amounted to €33.24 million and had a share of 11.32% in total expenditures. Expenditures on goods and services amounted to €22.37 million, while the remaining 32.7%, or €10.86 million, was related to current maintenance of the public infrastructure, buildings, and equipment.

Social insurance and social security

transfers cumulatively amounted to €89.28 million and had a share of 30.4% in total expenditures.

Table 5.3. Transfers from the central budget in the first seven months of 2006 (€ million) Transfers beneficiaries

I-VII of

2006

Plan for 2006

% of plan

Public institutions 12.21 24.58 49.67 NGOs, political parties and associations 1.60 3.13 51.12 Individuals 5.77 10.46 55.16 Pension Fund 39.34 69.33 56.74 Health Insurance Fund 4.11 7.05 58.30 Employment Fund 3.25 5.57 58.35 Municipalities 0.73 1.83 39.89 Public enterprises 0.00 0.24 0.00 TOTAL 67.02 122.19 54.85

Source: Ministry o Finance, ISSP calculations fThe greatest share in this category was held



by social insurance transfers in the amount of €67.02 million, or 75.1%, while social security transfers amounted to €22.26 million. The Pension Fund received the most in social insurance transfers, amounting to €39.34 million (69.3% of the annual plan of transfers to this social fund). The Health Insurance Fund and Employment Fund received transfers in the amount of €4.11 and €3.25 million respectively, which represents 58.3% and 58.4% of the annual plan, respectively. Public institutions, NGOs, political parties and associations, individuals, and municipalities received transfers in the following amounts: €12.21, €1.60, €5.77, and €0.73 million, respectively. Social security transfers for vulnerable casts cumulatively amounted to €19.59 million. Severance pay for redundant labor was at a level of €2.67 million.

Subsidies amounted to €3.32 million, or 1.1% of total expenditures in the observed period.

At the end of July 2006, rent, other expenditures14 and repayment of liabilities from previous years amounted to: €1.37, €0.98, and €36.97 million, respectively, which cumulatively amounted to €39.32 million, or 13.4% of total expenditures. Although the repayment of liabilities from previous years represents one of the highest single expenditures categories in the observed period, at the same time it is an indicator of the overall effort to continue decreasing public debt and “clean” the budget from arrears.

Reserves amounted to €9.37 million, out of which €5.28 million was related to the current budgetary reserve and €4.10 million to the permanent budgetary reserve. The latter was spent on organizing the referendum in May, which means we can expect an additional €1.00 million for the upcoming elections in September.

Interest amounted to €10.23 million and were 4.2% lower than interest payments in the same period of 2005. Interest in the amount of €9.73 million was paid to non-residents, while residents received €0.49 million.

In comparison with the same period of last year, capital expenditures were 36.9% higher and amounted to €13.58 million, which gives capital expenditures a 4.6% share in total expenditures. The greatest share of capital expenditures was related to expenditures on construction of buildings and public infrastructure, amounting to €3.59 and €2.84 million, respectively. The remaining expenditures included expenditures on local infrastructure, equipment, investment maintenance and supplies.

Net lending of the central budget amounted to €4.06 million and was 35.9% lower than the corresponding period of the previous year. Namely, in the analyzed period of 2006, the GoM gave loans totaling €5.32 million to the following subjects: non-financial institutions (€2.95 million), individuals (€0.92 million), and other subjects (€1.45 million), while at the

38


14 This category is comprised of: communal compensations, fees and other expenses.

Box 1. News in public finances o Montenegrin parliament adopted the Agreement

on regulation of membership in international institutions, which Montenegro signed with Serbia. According to the Agreement, the key that will be used in division of financial assets and debts between Serbia and Montenegro is 94.12:5.88. Namely, after getting independence in May, it is expected that Montenegro will become a member of the IMF until the end of the current year, and following that, it will become a member of the World Bank and other international institutions. The next step will be to determine Montenegrin’s ownership within IMF in the form of IMF quotas.

o Until the end of the year, the rating agency Standard and Poors will grant Montenegro a new credit rating. Its experts are expecting to see an improvement from the current grade of BB+.

o At the end of August of 2006, the municipality of Niksic issued bonds on the stock market, thus becoming the first local government in Montenegro to use instruments of the capital market to get the funds necessary for investment. This will lead to lower transfers from the central budget to this municipality and will have multiplicative positive impacts on public finances overall. It is suggested that this positive example should be followed by the other municipalities, for in this way they will rely more on their own resources and be less dependent on transfers from the central level.


same time, it repaid loans of €1.05 million based on given guarantees in the country. Additionally, at the same time, the central budget received receipts from loan repayments in the amount of €2.31 million.

5.2 SOCIAL FUNDS IN PERIOD I-VII OF 2006

In the remaining part of this chapter we will present a short analysis of budget realization within the social funds (Pension Fund, Health Insurance Fund, and Employment Fund) in the first seven months of 2006. 5.2.1 Pension Fund

In the first seven months of 2006, the Pension Fund ran a deficit in the amount of €3.15 million. As compared with the same period of last year, the deficit was 59% lower, which highlights the much improved budget management in this social fund and the improved liquidity position. Overall, funds for deficit financing amounted to €1.57 million and were mainly related to privatization. In the analyzed period, the Pension Fund repaid €0.58 million of debt and did not take new loans. The deficit was only partially covered by available funds and, hence, deposits of the Fund have decreased by €1.58 million. The lower deficit this year as compared to the

previous year is a result of the slower pace at which overall expenditures increased as compared to total revenues.

Table 5.4. Budget of the Pension Fund (€ mil) I-VII

of 2005

I-VII of

2006 index

1 2 3 = 2/1

I TOTAL REVENUES 84.31 103.18 22.39 1. Contributions 62.02 70.22 13.22 2. Transfers (from Budget) 21.73 32.34 48.79 3. Other revenues 0.55 0.63 13.02 II TOTAL EXPENDITURES 91.97 106.33 15.61 1. Gross pensions 88.75 100.54 13.29 2. Other expenditures 3.23 5.79 79.42

III DEFICIT/SURPLUS (I-II) -7.66 -3.15 -58.94

IV FINANCING 9.18 1.57 -82.88 1. Domestic financing 4.00 -0.58 -114.55 2. Privatization revenues 5.18 2.51 -51.47

V DEPOSITS CHANGES (III+IV) 1.51 -1.58 -204.10

Source: Pension Fund, ISSP calculations

Total revenues amounted to €103.18 million, and were 22.4% higher than the same period of 2005. The greatest part of revenues is related to the contributions payments, which were 13.22% higher than the same period of last year. Contributions from economic activity were the highest among overall contributions payments and accounted for €44.42 million, followed by contributions from non-economic activity (public sector) and self-employment, amounting to €10.70 and €2.13 million, respectively. Transfers from the central budget were also 48.8% higher than in the corresponding period of last year and amounted to €32.34 million.

Total expenditures of the Pension Fund were 15.6% higher in comparison with the same period of 2005 and amounted to €106.33 million. Gross pensions constituted 94.5% of the expenditures executions and amounted to €100.54 million. Net pensions were at the level of €84.91 million and were 13.4% higher than last year. The rate of coverage of net pensions with contributions was 0.83%, which shows that there is still a lack of funds necessary for the smooth functioning of the financing system of the Pension fund. Contributions paid to the Health Insurance Fund for the health care of pensioners increased by only 8.2% and amounted to €10.47 million. 5.2.2 Health Insurance Fund15 In the first six months of 2006, Health Insurance Fund run deficit in the amount of €1.00 million. This year deficit was by 12.3% lower as compared with deficit in the first half of 2005.


15 Analyze of Health Insurance Fund budget is based on the data for the first six months of the current year.


Total revenues amounted to €48.73 million and comprised of: contributions (€45.10 million), transfers from central budget (€3.43 million) and other own revenues (€0.20 million). They were 11.4% higher than in the same period of 2005. The biggest revenue category – contributions, increased 11.4% as compared with the corresponding period of last year. About half of contribution payment or €22.54 million was obtained from economic activity, while the rest is related to the contributions paid from non-economic activity, self-employment, Pension Fund, agriculture workers and Employment Fund. Improvement is noticed in the field of the transfers from the central budget, for they increased 48.5% comparing to the same period of last year. In the first two quarters of 2006, total expenditures amounted to €49.73 million and were almost 13% higher than in the corresponding period of 2005. Although both revenues and expenditures increased in comparison with the same period of last year, the rate of increase o revenues was higher that that of expenditures.

. . Table 5 5 Budget of the Health Insurance Fund (€mil)

I-VII of

2005

I-VII of

2006 index

1 2 3 = 2/1

I TOTAL REVENUES 42.89 48.73 13.62 1. Contributions 40.49 45.10 11.39 2. Transfers (from budget) 2.31 3.43 48.48 3. Other revenues 0.09 0.20 122.22 II TOTAL EXPENDITURES 44.03 49.73 12.95

III DEFICIT/SURPLUS (I-II) -1.14 -1.00 -12.28

IV FINANCING 0.00 0.00 0

V DEPOSITS CHANGES (III+IV) -1.14 -1.00 -12.28

Source: Health Insurance Fund, ISSP calculations

5.2.3 Employment Fund

Employment Fund is the only social fund that had positive financial result at the end of July of current year in the amount of €3.84 million. Besides, due to the fact that financing funds were positive as well (privatization revenues in the amount of €1.14 million), deposits of the Employment Fund increased by €4.98 million. In the analyzed period, additional borrowing did not occur.

Total revenues (including funds carried over from the previous year) of Employment Fund amounted to €19.34 million. The greatest part of revenues

(48.9%) or €9.46 million were funds from the previous year. In the first seven months, received transfers accounted for €4.95 million, while contributions were at the level of €3.15 million. Other revenues (other than funds from previous year) comprised of fees (€1.04 million) and other revenues (€0.70 million).

Table 5 6 Budget o the Employment Fund (€ mil) . . fI-VII of

2005 I-VII of

2006

1 2

I TOTAL REVENUES 5.95 19.34 1. Contributions 2.55 3.15 2. Transfers 1.83 4.95 3. Other revenues 1.57 11.24 II TOTAL EXPENDITURES 5.61 15.51 1. Current expenditures 5.17 12.57 2. Net lending 0.44 2.94

III DEFICIT/SURPLUS (I-II) 0.34 3.84 IV FINANCING 2.59 1.14 1. Domestic financing 0.00 0.00 2. Privatization revenues 2.59 1.14 V DEPOSITS CHANGES (III+IV) 2.92 4.98

Source: Employment Fund, ISSP calculations

Total expenditures accounted for €15.51 million, out of which €3.86 million was related to the non-interest current expenditures, while social security transfers (funds for redundant labor) and transfers to the individuals, Pension Fund and Health Insurance Fund amounted to €8.36 million. Capital expenditures amounted to €0.26 million. Net lending was at the level of €2.94 million, for given loans and repayment of loans amounted to €4.23 and €1.29 million, respectively.

40



CHAPTER 6. MONEY

During the second quarter of 2006, the privatization process of the Bank of Pljevlja was finally completed. Also, as a result of citizens’ increased confidence in the banking sector, many banks have opened new branch offices all over Montenegro, especially over its northern region. The already signed “Thousand residential loans“ project provoked huge interest among Montenegrin citizens. The main indicators of success in this sector (total approved loans, deposits, as well as the values of the general monetary aggregates) were characterized by stable positive growth rates during the second quarter of 2006*.

Note: * June 2006 - preliminary data

6.1. MONETARY AGGREGATES

After the first quarter of 2006, monetary aggregates began to register positive growth rates as compared to the end of last year. Also, positive annual growth rates continued to be registered.

Graph 6.1. Monetary aggregates

0

200,000

400,000

600,000

800,000

1,000,000

1,200,000

Jan-

03

Apr-

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-03

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M0 M1 M11 M2 M21

At the end of June 2006, the monetary aggregate M0 amounted to €369.8 million, which is 5.26% higher as compared to the end of 2005. Also, the annual growth rate of this monetary aggregate was 20.30%. The monetary aggregate M1 (deposits of government are excluded) amounted to €714.2 million in June 2006, which is 45.47% higher as compared to the same month in 2005 and 20.03% higher as compared to December 2005. The increase of M1 was influenced primarily by the growth of demand deposits (deposits of government are excluded), which have registered a growth rate of 87.62% as compared to June 2005 and growth of 41.30% as compared to December 2005.



The monetary aggregate M11 registered a positive annual growth rate of 44.19%, while as compared to December 2005, it increased by 20.51%. The annual increase was mainly influenced by the increase of demand deposits (deposits of government are included), which registered an annual increase of 79.94% and growth of 40.92% as compared to December 2005. At the end of June 2006, the monetary aggregate M11 amounted to €739.3 million. At the end of June 2006, the monetary aggregate M2 registered an annual growth rate of 53.30%, amounting to €954.8 million. Additionally influencing the increased value of M2 were term deposits (without government deposits), which, compared to June 2005, increased by 82.43%. As compared to December 2005, the monetary aggregate M2 registered a positive growth rate of 19.19%, while term deposits (deposits of government are excluded) increased their value by 16.79%. The monetary aggregate M21 amounted to €1,012.5 million at the end of June 2006, which is 39.4% higher as compared to the same month of 2005, as well as 16.90% higher as compared to December 2005. Growth rates reached by the monetary aggregates in June 2006 as compared to June 2005, as well as a comparison to December of 2005 are presented in the table below. Table 6.1. Monetary aggregates growth rates

2005 2006 Growth rates

VI XII VI VI 2006/XII 2005

VI 2006/ VI 2005

M0 307,376 351,276 369,762 5.26% 20.30%

Banks' deposits with CBM-Payment Operations 57,376 101,276 119,762 18.25% 108.73%

Estimate of cash in circulation 250,000 250,000 250,000 0.00% 0.00%

M1 490,980 595,064 714,240 20.03% 45.47%

M0 307,376 351,276 369,762 5.26% 20.30%

Demand deposits* 183,604 243,788 344,478 41.30% 87.62%

M11 512,757 613,518 739,326 20.51% 44.19%

M0 307,376 351,276 369,762 5.26% 20.30%

Demand deposits** 205,381 262,242 369,564 40.92% 79.94%

M2 622,851 801,053 954,811 19.19% 53.30%

M1 490,980 595,064 714,240 20.03% 45.47%

Term deposits* 131,871 205,989 240,571 16.79% 82.43%

M21 726,277 866,091 1.012,517 16.91% 39.41%

M11 512,757 613,518 739,326 20.51% 44.19%

Term deposits** 213,520 252,573 273,191 8.16% 27.95%

*without Government deposits **including Government deposits At the end of June 2006, the majority of M21 (almost three quarters) was related to the aggregate M11 (73.02%) and the rest (26.98%) were term deposits (deposits of government are included).

42



6.2. DEPOSITS Total deposits At the end of June 2006, total deposits reached €635.5 million and were 80.82% higher as compared to the same month in 2005 and 30.24% higher as compared to the end of 2005.

Graph 6.2. Total deposits (in € 000)

0

100000

200000

300000

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500000

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Observed by deposit categories, the most important growth rates are still related to physical entities, which have recorded an annual growth rate of 118.86%. As compared to December 2005, these deposits registered a 44.18% growth rate and amounted to €253.4 million at the end of June. Government deposits amounted to €100.8 million in the same period and registered an annual growth rate of 81.03%, while as compared to December 2005 the growth rate was 3.03%. Deposits of non-financial institutions amounted to €207.8 million in June and registered a positive annual growth rate of 66.71% as well as a 28.26% growth rate as compared to the end of 2005. Within the non-financial institutions category, deposits of domestic private companies registered an increase of 87.68% in June 2006 as compared to June 2005 and amounted to €172.8 million; additionally, they registered a 41.52% growth rate as compared to December 2005. Also, entrepreneurs’ deposits registered an annual growth rate of 17.68% in June 2006, as well as a growth rate of 27.08% as compared to December 2005. Total deposits of non-profit organizations, at the end of June 2006, amounted to €8.6 million, which is 6,619.49% higher as compared to the end of the previous year, and 20.35% higher than at the end of June 2005. Also, total deposits to financial institutions registered positive growth rates at the end of June 2006. This category realized an annual growth rate of 35.20%, as well as an increase of 53.03% as compared to the end of the previous year. That increase was primarily influenced by the increase of bank deposits, which were 128.26% higher at the annual level and 88.17% higher as compared to December 2005.



Graph 6.3. Trend of different categories of total deposits

0

50,000

100,000

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200,000

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300,000

Dec

-02

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Financial institutions Nonfinancial institutions GovernmentPhysical entities Nonprofit organisations Other

Growth rates of total deposits overall, as well as by category, are shown in the table below. The table shows the growth rates registered in June 2006 compared to June 2005, as well as compared to the end of 2005. Table 6.2. Total deposits’ growth rates


Description/Period

VI XII VI VI-06/XII-05 VI-06/VI-05

1 Financial institutions 45,355 40,070 61,318 53.03% 35.20% Banks 14,822 17,980 33,833 88.17% 128.26% Other financial institutions 30,533 22,090 27,485 24.42% -9.98% 2 Non financial instititions 124,615 161,971 207,750 28.26% 66.71% Public non financial corporations 18,705 24,937 22,400 -10.17% 19.75% State companies 15,672 20,345 17,415 -14.40% 11.12% Publicly owned organizations 3,033 4,592 4,985 8.56% 64.36% Other non financial corporations 105,910 137,034 185,350 35.26% 75.01% Domestic private companies 92,061 122,090 172,779 41.52% 87.68% Entrepreneurs 1,567 1,451 1,844 27.08% 17.68% Foreign companies 12,282 13,493 10,727 -20.50% -12.66% 3 Government 53,325 97,836 100,800 3.03% 89.03% Central government 18,456 20,241 18,447 -8.86% -0.05% Agencies and institutions of central government 12,275 14,434 18,754 29.93% 52.78% Local government - municipalities 2,738 4,178 8,449 102.23% 208.58% State funds 19,856 58,983 55,150 -6.50% 177.75% 4 Physical entities 115,775 175,750 253,388 44.18% 118.86% 5 Non profit organizations 7,166 9,457 8,624 6619.49% 20.35% 6 Other 5,203 2,832 3,582 26.48% -31.16% TOTAL 351,439 487,916 635,462 30.24% 80.82%

The structure of total deposits by depositors at the end of June 2006 shows that the largest depositors are still physical entities (39.88%) and non-financial institutions (32.69%). Participation of domestic private company deposits in total deposits amounted to 27.19%. A significant depositor is the Government, and its participation in total deposits amounted to 15.86% in June 2006. Deposits of financial institutions accounted for 9.65% of total deposits at the end of June 2006.

44



Graph 6.4. Structure of total deposits by clients (June 2006)

9.65%

32.69%

15.86%

39.88%

1.36%

0.56%

Financial instiutions Nonfinancial instiutions Government

Physical entities Nonprofit organisations Other

Household deposits Total household deposits amounted to €253.4 million at the end of June 2006. The annual growth rate was 118.87%, while as compared to December 2005 those deposits were 44.14% higher.

Graph 6.5. Household deposits

0.00

50.00

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Jan-

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Mar

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-05

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May

-06

in m

il. E

uro

Demand deposits Term deposits up to 1 year Term deposits over 1 year

When looking at the term structure of household deposits at the end of June 2006, 56.79% were demand deposits while the rest (43.21%) were term deposits; term deposits were as



such: 39.74% were term savings up to 1 year and the remaining 3.47% were term savings over 1 year. Demand deposits registered an annual growth rate of 155.05% in June 2006, while as compared to December 2005 these deposits were 53.90% higher. At the end of June 2006, they amounted to €143.9 million. Also, term savings up to 1 year registered a positive growth rate of 136.48% as compared to the same period last year. At the end of June 2006, their value amounted to €100.7 million.

Graph 6.6. Annual change of household deposits

-200.00%

-100.00%

0.00%

100.00%

200.00%

300.00%

400.00%

500.00%

600.00%

Dec

-02

Feb-

03

Apr-

03

Jun-

03

Avg-

03

Okt

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Dec

-03

Feb-

04

Apr-

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Jun-

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Aug-

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Oct

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Avg-

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-05

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Apr-

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Jun-

06

Demand deposits Term deposits up to 1 year Term deposits over 1 year

Term deposits over 1 year continued to register negative growth rates during the second quarter of 2006. At the end of June 2006, their value was €8.8 million, which is 47.53% lower than the same time last year. 6.3. LOANS Total loans provided by Montenegrin banks are continuously registering positive growth rates. The total loans provided in June amounted to €559.8 million; this amount is 66.31% higher as compared to the level reached in June 2005 and 48.92% higher as compared to December 2005. Compared to June 2005, loans approved to financial institutions increased by 152.09%, while as compared to December 2005 their value increased by 3,362.5%. At the end of June 2006, total loans of €4.7 million were approved for those institutions, while at the same time last year their value was just €1.9 million.

46



Graph 6.7. Loans provided by banks in Montenegro

0

50

100

150

200

250

300

350

400

Dec

-02

Jan-

04

Mar

-04

May

-04

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Sep-

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Mar

-06

May

-06

in m

il. €

Financial instiutions Nonfinancial instiutions GovernmentPhysical entities Nonprofit organisations

Loans to non-financial institutions continued to register positive growth rates, so at the end of June 2006 a total of €343.4 million in loans had been approved, 57.21% higher than in the same period last year. The growth rate as compared to December 2005 was also positive (43.29%). Loans to physical entities were 99.26% higher in June 2006 compared to the same month in 2005 and the total amount provided to physical entities was €175.4 million. The growth rate of these deposits as compared to December 2005 was 68.12%. Loans approved for the Government amounted to €35.3 million at the end of June 2006, which is 28.38% higher as compared to the same month in 2005. Non-profit organizations were approved a total of €1.1 million in loans at the end of June, which is 28.64% more than in the same period last year and 15.27% more as compared to the end of 2005. The growth rates of total loans in June 2006, as compared to the same month last year, as well as to the end of 2005 are presented in the table below.

Table 6.3. Total loans’ growth rates


Description/Period VI XII VI VI 2006/ XII 2005 VI 2006/VI 2005

1 Financial institutions 1,868 136 4,709 3362.50% 152.09% Banks 4 37 1,051 2740.54% 26175.00% Other financial institutions 1,864 99 3,658 3594.95% 96.24% 2 Non financial institutions 218,408 239,633 343,367 43.29% 57.21% Public non financial institutions 22,562 27,109 37,885 39.75% 67.92% State companies 14,905 19,646 27,301 38.96% 83.17% Publicly owned organizations 7,656 7,463 10,584 41.82% 38.24% Other non financial corporations 195,846 212,524 305,481 43.74% 55.98% Domestic private companies 189,532 206,060 297,190 44.22% 56.80% Entrepreneurs 4,448 4,386 5,633 28.43% 26.64% Foreign companies 1,867 2,078 2,659 27.96% 42.42% 3 Government 27,498 30,785 35,302 14.67% 28.38% Central government 3,382 9,864 10,211 3.52% 201.92% Agencies and institutions of central government 1,208 5,409 3,337 -38.31% 176.24% Local government - municipalities 3,027 3,809 8,653 127.17% 185.86% State funds 19,881 11,703 13,101 11.95% -34.10% 4 Physical entities 88,013 104,316 175,379 68.12% 99.26% 5 Non profit organizations 845 943 1,087 15.27% 28.64% 6 Other 0 127 0 -100.00% TOTAL 336,631 375,940 559,844 48.92% 66.31%



At the end of June 2006, domestic private enterprises were approved loans totaling €297.2 million, which represents an annual increase of 56.80% as well as an increase of 44.22% when compared to the end of the previous year. Entrepreneurs were approved a total of €5.6 million in loans at the end of June 2006, which is 26.64% higher as compared to the same time last year and 28.43% more as compared to December of 2005. Also, foreign companies were approved €2.7 million at the end of June 2006. The annual growth rate of those loans was 42.42% while as compared to December 2005 the registered growth rate was 27.96%.

Box 1. Loan/deposit ratio At the end of June 2006, the loan/deposit ratio was 88.1%. That means that, on average, €0.88 were credited for every €1.0 deposited. Since the ratio between loans and deposits should not exceed 80.0%, a large percentage of approved loans would indicate that these are mainly being financed from deposited money. A situation like this can be very risky, especially when the number of depositors that hold large deposit amounts is small. The highest loan deposit ratio is present within non-financial institutions. Namely, the loan deposit ratio is 165.3%, so that an average non-financial institution has to pay €1.65 of loans on every €1.0 deposited. Among non-financial institutions, the highest ratio is present among entrepreneurs. The total amount of taken loans is 3.05 times higher than the total amount of deposited money. Also, a high ratio is present within domestic private companies. The total amount of taken loans is almost twice as much as the total amount of deposited money. On the other hand, with regards to foreign companies, on average, €0.25 was credited for every €1.0 deposited. Total loans taken by the Government at the end of June 2006 are three times lower than the total amount of deposited money. Also the loan deposit ratio within households fulfills the request of not exceeding 80.0%. Namely, within this category, at the end of June 2006, the loan deposit ratio registered 69.2%.

Graph 6.8. Structure of provided loans (June 2006)

0.84%

61.33%6.31%

31.33%

0.19%

Financial instiutions Nonfinancial instiutions Government Physical entities Nonprofit organisati

At the end of June 2006, the majority of total loans were approved to non-financial institutions (61.33%), while the share of loans approved to physical entities accounted for 31.33%. Also, 53.08% of total approved loans were related to domestic private enterprises.

48



6.4. THE EVENTS THAT HAVE MARKED THE SECOND QUARTER OF 2006 6.4.1. Banking sector privatization process almost completed Montenegro has almost reached 100.0% completion of privatization of the banking sector. Therefore, Montenegro can enter 2007 as the first among the Balkan countries with completely privatized banking capital. Box 2. The final phase of privatization of the Bank of Pljevlja As previously mentioned, tender for the majority package of shares of the Bank of Pljevlja was closed at the end of the first quarter of 2006, after extending the deadline by three weeks. Namely, by public invitation, 78.7% of the state capital was offered, and only the Consortium of Atlas Mont Bank, Atlas Mont Fund, and Company Fin Invest from Podgorica submitted offers. The contract between the Ministry of finance and the Development Fund of Montenegro, Montenegrin Employment Agency, and Atlas Mont Bank was signed in June 2006. Atlas Mont Bank representatives are planning to invest €20.5 million in the Bank of Pljevlja. Now, when the privatization process of the Bank of Pljevlja is completed, there will be just one domestic Bank with a majority of state capital left. The privatization of the Bank of Niksic is expected to be finished at the end of 2006.

6.4.2. Realization of the first phase of ”Thousand residential loans“ project The Montenegrin Government launched the project named ”Thousand residential loans“at the beginning of the current year. Realization of the project has already begun and has generated great interest among citizens. The demand for those loans went beyond all expectations. Box 3. Residential loans The first residential loans within the project “Thousand residential loans” were approved at the beginning of the second quarter. Three domestic banks were involved in this project initially (Commercial Bank of Montenegro, Bank of Podgorica, and NLB Montenegro Bank) and Hypo Alpe Adria Bank joined them in April. Additionally, the Bank of Niksic decided to sign the project shortly after Hypo Alpe Adria Bank did. Thus, currently five out of ten Montenegrin banks are involved in this very important project. These loans are approved with an interest rate of 6.4%, which is the most favorable interest rate that has been approved within the long-term loans market thus far. Also, the Montenegrin Government offered an interest subsidy of 2.4%. The offered interest rates are very attractive for citizens, and therefore they are willing to take the loan and buy or reconstruct their living space. The first ten residential loans were approved by the Commercial Bank of Montenegro in June and each of them was for €30,000, which is the highest possible amount. These ten loans were approved to citizens that are employed by State authorities. In total, 200 loans will be approved to State authority employees and 120 of them are planned to be approved by the Commercial Bank of Montenegro.

6.4.3. Domestic banks are spreading their activities over every part of Montenegro The confidence of the Montenegrin population in the domestic banking system increases every day. This is proven by the very high growth rates of household deposits as well as those of non-financial institutions. For example, total household deposits at the end of the second quarter more than doubled as compared to the same time last year. Also, deposits of non-financial institutions are almost 70.0% higher as compared to the previous year. Therefore, domestic banks are spreading their activities by opening branch offices in many Montenegrin municipalities.



Box 4. New branch offices in Ulcinj, Niksic, Zabljak and Bijelo Polje The second quarter of 2006 was marked by the opening of many branch offices, especially in the northern part of Montenegro. Hypo Alpe Adria Bank, which began its activities in April of 2006 in Podgorica, announced in June that they would very soon be opening a branch office in Niksic. Currently this Bank employs 54 employees, but by the end of next year, it is expected that there will be about 200 employees in the Hypo Alpe Adria Bank. Additionally, Hype Alpe Adria Bank and its services were presented in the municipality of Bijelo Polje in June of 2006. The branch office in Bijelo Polje should be opened during the third or fourth quarter of this year. The Commercial Bank of Montenegro, which covers over 50.0% of the overall Montenegrin banking market, should soon open a branch office in the municipality of Zabljak. That branch office will provide all services and bank activities to the population of the Zabljak municipality. Additionally, during the second quarter Atlas Mont Bank opened a new branch office. This new branch covered the municipality of Ulcinj with its services. This branch office is equipped to provide all types of banking services to its future clients.

6.4.4. Interest rates The average weighted nominal interest rate in June amounted to 10.33%, which represents a significant decrease as compared to the end of the third quarter of 2005 when it was 11.24%. The average weighted effective interest rate amounted to 11.27%, which is much lower than it was at the end of the third quarter of 2005 (12.57%).

50



CHAPTER 7. CAPITAL MARKET The positive expectations that investors held with regards to the development of the capital market of Montenegro after the positive referendum result proved to be reasonable. Namely, since the 21st of May, the date when the referendum was held, many domestic and foreign investors have become interested in buying or selling securities on the Montenegrin stock exchanges. This resulted in growth, both of turnover and the number of realized transactions in the second and third quarters of 2006. Additionally, market capitalization significantly increased. 7.1. INDICES16 Analysis of the stock exchange indices in the first 7 months of 2006 will be presented in this chapter. The trend of the indices values in 2005 and 2006 is presented on the next graphs.

Graph 7.1 Stock exchange indices NEX 20 and NEX PIF

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"NEX 20" "NEX PIF"

Source: NEX Montenegro

As shown in graph 7.1 both indices of the NEX Montenegro stock exchange have shown significant increases after the stable growth rates that were experienced in the first quarter of 2006. The following paragraphs will analyze each index separately. From among the three indices, the NEX Montenegro stock exchange index, NEX 20, had the highest registered value in 2006. NEX 20 represents shares of the twenty companies with the largest market capitalization and liquidity on the NEX Montenegro stock exchange17. The highest value in 2006 for the index was registered on July 20th in the amount of 15,691 points. Compared to the previous year, the index value increased 207%. Compared to the initial value


16 There are three stock exchange indices on the Montenegrin capital market. Montenegroberza introduced one index – MOSTE, which include prices of 35 securities, including investment units of all six Funds. NEX Montenegro introduced two indices: NEX 20 and NEX PIF. NEX 20 represents shares of the twenty companies with the largest market capitalization and liquidity on the NEX Montenegro stock exchange. NEX PIF represents the price trend of the investment units of MIFs (according to the last index revision the participation of the MIFs in the index is as follows: HLT – 23.52%, Euro Fund – 20.09%, Trend– 19.25%, Atlasmont – 17.62%, Moneta – 10.76% and MIG – 8.77%). 17 According to the last index revision (December 15, 2005), the companies with the highest participation in this index are: “Electric Company”, “Telekom”, “Port of Bar”, “Jugopetrol” and “Budvanska Rivijera.”

Indicators of capital market development in Montenegro in the first 7 months of 2006 were posit ve. Tota turnover, i lrealized number of transactions, market capitalization, and values of the stock exchange indices all increased.


of the index, its value is more than 15 times higher. The lowest value for the index this year occurred at the beginning of January (9,825 points). Shares of the the “Electric Power Company of Montenegro AD Niksic”, “Telekom”, HTP Boka, the Brewery “Trebjesa”, the “Port of Bar”, Podgoricka Bank, and “Jugopetrol” had the highest influence on the index value. The second index of the NEX Montenegro stock exchange, NEX PIF, which represents the price trend of the investment units of PIFs, also had a growing value trend during 2006. The highest index value was reached on July 31st and amounted to 13,827 points. Compared to its initial value, the value of this index increased by nearly 14 times. Additionally, compared to the same period of last year, the index value was 326% higher. The lowest index value in 2006 was registered at the beginning of the year and amounted to 7,992 points. The index value was influenced by shares of all six Mutual Investment Funds, which showed significant price increases, as well as increased turnover and increased number of transactions realized with these securities, par excellence Euro Fund, Atlas Mont, and Trend. The next graph presents the values of MOSTE, the index of Montenegroberza, in 2005 and 2006. Analysis will be focused on 2006.

Graph 7.2 Stock exchange index MOSTE

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Source: Montenegroberza In the year 2006 the Montenegroberza stock exchange index MOSTE registered its highest values since its introduction. The value of the index in 2006 was between 460 and 810 index points. The highest index value was reached on July 31st and amounted to 810 points. Compared to the same date in 2005, the value of the index increased 165%. Compared to its initial value, the value of this index has increased more than eight times. Shares of “Plantaze”, “KAP”, “Coal Mine Pljevlja”, “Lovcen Insurance Fund”, “Adriatic Shipyard”, and the Railway Company had the greatest influence on the index value, as well as shares of all six Mutual Investment Funds in Montenegro.

52



7.2 TURNOVER ON STOCK EXCHANGES Table 7.1. Stock exchange trade in Montenegro

MONTH MONTENEGROBERZA NEX MONTENEGRO TOTAL

TURNOVER (in €) TURNOVER (in €) TURNOVER (in €)

Primary Secondary Total Nu

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Total 03 8,799,736 17,636,926 26,436,662 5,993 1,990,881 15,126,802 17,117,683 15,331 10,790,617 32,763,728 43,554,345 21,324

Total-04 1,646,288 17,239,990 18,886,278 25,703 2,584 2,399,5391 23,997,975 31,654 1,648,872 41,235,381 42,884,253 57,357

Jan-05 0 605,009 605,009 1,992 0 1,886,401 1,886,401 3,007 0 2,491,410 2,491,410 4,999

Feb-05 0 1,161,632 1,161,632 2,615 0 9,708,671 9,708,671 4,719 0 10,870,303 10,870,303 7,334

Mar-05 11,964 3,430,230 3,442,194 3,919 0 39,747,684 39,747,684 6,794 11,964 43,177,914 43,189,878 10,713

Apr-05 137,219 2,794,549 2,93,768 2,971 0 17,486,055 17,486,055 6,202 137,219 20,280,604 20,417,823 9,173

May-05 0 5,783,934 5,783,934 4,241 0 7,453,604 7,453,604 4,214 0 13,237,538 13,237,538 8,455

Jun-05 0 5,531,852 5,531,852 4,225 0 1,620,456 1,620,456 3,888 0 7,152,308 7,152,308 8,113

Jul-05 0 4,797,211 4,797,211 4,453 0 1,719,889 1,719,889 4,017 0 6,517,100 6,517,100 8,470

Aug-05 1,552,912 4,447,391 6,000,303 4,655 0 4,592,919 4,592,919 4,858 1,552,912 9,040,310 10,593,222 9,513

Sep-05 115,023 4,705,463 4,820,486 5,471 0 5,737,850 5,737,850 5,271 115,023 10,443,313 10,558,336 10,742

Oct-05 0 9,962,236 9,962,236 6,342 0 8,371,492 8,371,492 5,474 0 18,333,728 18,333,728 11,816

Nov-05 0 1,6198,399 16,198,399 6,598 0 10,065,888 10,065,888 6,450 0 26,264,287 26,264,287 13,048

Dec-05 1,019,364 2,0062,965 21,082,329 4,291 14,093 7,391,471 7,405,564 4,396 1033457 27,454,436 28,487,893 8,687

Total 05 2,836,482 79,480,871 82,317,353 51,773 14,093 115,782,380

115,796,473 59,290 2,850,575 195,263,25

1 198,113,82

6 111,063

Jan-06 1,260 3,858,045 3,859,305 2,808 0 6,080,913 6,080,913 3,424 1,260 9,938,958 9,940,218 6,232

Feb-06 100 7,871,109 7,871,209 3,805 5,000 4,151,866 4,156,866 3,784 5,100 12022975 12,028,075 7,589

Mar-06 1,000 6,692,418 6,693,418 3,537 0 4,071,839 4,071,839 3,821 1,000 10,764,257 10,765,257 7,358

Apr-06 0 5,562,742 5,562,742 3,327 0 3,833,829 3,833,829 3,422 0 9,396,571 9,396,571 6,749

May-06 0 5,915,969 5,915,969 3,687 0 7,812,956 7,812,956 5,215 0 13,728,925 13,728,925 8,902

Jun-06 0 11,345,589 11,345,589 4,172 0 8,577,524 8,577,524 4,935 0 19,923,113 19,923,113 9,107

Jul-06 0 11,792,655 11,792,655 5,625 0 12,414,734 12,414,734 6,170 0 24,207,389 24,207,389 11,795

Total 06 2,360 53,038,527 53,040,887 26,961 5,000 46,943,661 46,948,661 30,771 7,360 99,982,188 99,989,548 57,732

In total, nearly € 100 million of turnover was realized on both Montenegrin stock exchanges in the first 7 months of 2006; this indicates that this year will be successful for the Montenegrin capital market. Additionally, nearly 58 thousand participants have shown interest in selling or buying securities on the stock exchanges.

Market capitalization in July amounted to more than € 1.7 billion, which is higher than the GDP of the country. If we compare capitalization in July 2006 with July 2005, the increased value of the companies on the Montenegrin stock exchanges is obvious, up more than 360%.

The next graph presents turnover and the number of transactions in 2005 and the first seven months of 2006.



Graph 7.3 Total turnover and number of transactions

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Source: NEX Montenegro and Montenegroberza The lowest monthly turnover in 2006 was realized in April (€ 9,396,571) and the highest in July (€ 24,207,389). Related to the number of transactions, the fewest were realized in January - 6,232 transactions, while the greatest number of transactions were realized in July – 11,795. Average monthly turnover in the first seven months of 2006 was approximately €14.3 million, which is almost equal to the average monthly turnover in 2005. As in previous years, in 2006, the majority of turnover was realized on the secondary market. Namely, total turnover realized on the secondary market amounted to €99,982,188, representing 99.99% of total trade. Similar to past years, there was almost no primary trade and in the analyzed year it accounts for just 0.01% of the total market. This is graphically presented in graph 7.4.

Graph 7.4 Primary and secondary market

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Source: NEX Montenegro and Montenegroberza

54



7.2.1. Trade on the secondary market In 2006, as in previous years, the structure of turnover was characterized by predominant trade on the secondary market. Namely, total turnover on the secondary market in the analyzed period amounted to € 99,982,188 and accounts for 99.99% of total trade. Additionally, 57,726 transactions occurred in secondary trade. The structure of trade on the secondary market is presented in the following graph.

Graph 7.5 Turnover structure on the secondary market

MIF shares -19%

Old foreign currency saving bonds- 7%

Shares-74%

Source: NEX Montenegro and Montenegroberza In the following text we will analyze each type of security individually. Trade with shares In the first seven months of 2006, shares of approximately 60 companies were traded on the NEX Montenegro stock exchange. Similarly, approximately 60 companies traded shares on the other stock exchange in Montenegro as well – Montenegroberza. The next two tables present the shares with the highest realized turnover and the highest number of transactions in 2006 on both stock exchanges.



Table 7.2 Ten companies with the highest realized turnover in the first 7 months of 2006

Issuer Turnover in €

“ELEKTROPRIVREDA CRNE GORE" A.D. NIKŠIĆ € 9.11 million

"PLANTAZE AD" PODGORICA” € 8.35 million

“HTP BOKA AD HERCEG NOVI” € 7.30 million

“KOMBINAT ALUMINIJUMA PODGORICA” € 7.29 million

“TELEKOM CRNE GORE A.D. PODGORICA” € 5.08 million

AD LUKA BAR € 3.68 million

“PODGORICKA BANKA AD PODGORICA” € 2.79 million

„RUDNICI BOKSITA AD NIKSIC“ €2.51 million

„HTP BUDVANSKA RIVIJERA AD BUDVA“ € 2.33 million

“SOLANA BAJO SEKULIC ULCILJ” € 2.00 million

Source: Stock exchanges in Montenegro ISSP calculations ,

i i i i

As table 7.2 shows, shares from these ten companies realized € 50.5 million in turnover and accounted for more than 50% of total turnover on the secondary market. Additionally, as presented in table 7.3, approximately one-third of the realized transactions in 2006 (34%) occurred with shares of the presented companies; in total these companies accounted for 19,306 transactions. Table 7.3 Ten companies w th the highest number of transact ons real zed in the f rst quarter of 2006

Issuer Number of transactions

“KOMBINAT ALUMINIJUMA” 3,714

“AD PLANTAŽE” 3,148

“AD LUKA BAR – BAR” 2,940

"ELEKTROPRIVREDA CRNE GORE" A.D. NIKŠIĆ 2,703

“HTP BUDVANSKA RIVIJERA” 1,624

“JADRANSKO BRODOGRADILISTE BIJELA A.D.” 1,451

“RUDNICI BOKSITA NIKSIC” 984

“DUVANSKI KOMBINAT” PODGORICA 976

“JUGOPETROL AD KOTOR” 899

“INSTUTUT SIMO MILOSEVIC” AD IGALO 867

Source: Stock exchanges in Montenegro ISSP calculations ,

Trade with shares of Mutual Investment Funds (MIF)18

In the first seven months of 2006 shares of all six Funds participated in the stock exchange trade and a total of € 19.4 million in turnover was realized (46% on Montenegroberza and 54% on NEX Montenegro). Additionally, a total of 25,278 transactions were realized (46% on Montenegroberza and 54% on NEX Montenegro). It is interesting to note that the number of transactions realized with these securities accounts for 43% of the total number of transactions.

Turnover and number of transactions with these securities are presented in the next graph.

56


18 Two of six Funds in 2005 were transformed into the Mutual Investment Funds – Euro Fund and Moneta.


Graph 7.6 Turnover with shares of MIFs

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Source: NEX Montenegro and Montenegroberza The next table presents prices and realized turnover with each MIF share. Table 7.4 Prices and turnover with MIFs shares in the first quarter of 2006

Fund Min price Max price No of transactions Turnover

"ATLAS MONT" 0.0700 0.1360 4,603 5,581,812

"EURO-FOND" 0.0604 0.1550 7,436 6,062,082

"HLT-FOND" 0.0370 0.0899 5,724 2,582,904

"MIG" 0.0616 0.1500 1,799 1,235,887

"MONETA" 0.0601 0.1250 3,215 1,770,963

"TREND" 0.1000 0.1599 3,195 2,925,852

Source: Stock exchanges in Montenegro ISSP calculations , As shown in the previous table, shares of the MIF Euro Fund had the highest turnover (€ 6.06 million), followed by Atlas Mont (€ 5.58 million) and Trend (€ 2.92 million). On the other side, the greatest growth in price was registered by shares of the MIF Euro Fund – up 156.62%, followed by shares of MIG – up 143.51%, and shares of the HLT Fund – up 142.97%. Trade with shares of old foreign currency savings bonds Data for the first 7 months of 2006 shows that old foreign currency bonds are still interesting for investors. Namely, trade with this security was intensified in 2006 and accounted for 7% of total trade. The bonds that were most interesting to investors in the analyzed period were those that matured in 2014, 2015, 2016, and 2017. Namely, trade with these bonds represents 49% of the total trade with this security.



Table7.5. Old foreign currency saving bonds on both stock exchanges

SECURITY NO OF TRANSACTION TURNOVER % OF TURNOVER

Bonds with maturity in 2006 109 136690 2.76%












TOTAL 1,970 4,953,784

Source: NEX Montenegro and Montenegroberza, ISSP calculations CONCLUSION The positive expectations held by investors, both foreign and domestic, resulted in price growth of securities in Montenegro. Namely, in just a few months - from May to July 2006, the total value of the companies on the Montenegrin capital market increased by approximately 30% on average. The reason for the growth is multi-faceted; contributing factors include the solution of the state issue, as well as precisely defined rules on the market, national treatment of foreigners, and a favorable tax environment (Montenegro has the lowest corporate income tax in the region). All of these things allow the capital Market of Montenegro to present a platform for inflow of investments, both domestic and foreign; and this, for a small country with limited capital such as Montenegro, is very important -- essential, it could be said!

58



CHAPTER 8. EXTERNAL SECTOR

8.1. CURRENT ACCOUNT BALANCE Due to a lack of official data related to the Balance of Payments, the ISSP estimated the situation within the external sector in the first half of 2006. Namely, official data on balance of payments are availab e only for lthe first quarter of 2006. According to data of the Central Bank of Montenegro, the current account deficit increased by 57.7% compared to the first quarter of 2005. The primary reason for this increase is that imports increased faster than exports and expenditures increased faster than revenues in the balance of income.

The Current Account Balance in the first quarter of 2006 amounted to €124.1 million (33.4% of GDP), which is 57.7% more than in the same period of the previous year. This was a result of the faster growth of expenditres from imports of goods, imports of services, and income of non-residents as compared to the growth of revenues from exports of goods and services and incomes of Montenegrin residents from abroad.

Goods trade

In the first quarter of 2006, the total goods trade deficit amounted to € 143.8 million, which is 33% more than in the corresponding period of the previous year. This deficit accounted for 38.7% of GDP. The total goods trade (imports plus exports) in the first quarter of 2006 amounted to € 350.3 million, which is 36.6% more than in the same period of 2005. Exports of goods amounted to € 103.2 million in the first quarter of 2006, or 39.1% more than in the same period of the previous year. Imports of goods amounted to € 247.1 milllion in the first quarter of 2006 and was 35.5% higher than in the corresponding period of 2005. Overall, the ratio of exports to imports in the first quarter of 2006 was 41.8%, or 2.7 percentage points more than in the same period of the previous year. Accoording to the ISSP estimation, total imports of goods in the first half of 2006 were € 447.1 million, or 15% more than in the same period of the previous year. Estimated exports of goods amounted to 221.4 million, or 13% more than in the first six months of 2005. The estimated total trade balance in the first six months of 2006 was € 225.7 million, which is 17% higher than the same period of the previous year. According to the projection made by the ISSP, total export of goods will amount to € 599.2 million in 2006, or 37% more than in the previous year, while total import of goods will amount to € 1.07 billion, or 13.8% more than in the corresponding period of the previous year. The projected goods trade deficit will amount to € 470.8 million in 2006, or 7.5% more than in the previous year. Services

Exports of services amounted to € 33.7 million in the first quarter of 2006, or 48.6% more than in the same period of the previous year; this is due to the increase of total tourism revenues. Imports of services amounted to € 46.2 million, or 86.3% more than in the corresponding period of the previous year. The services balance deficit in the first quarter of 2006 significantly increased due to the increase of the construction and insurance services from abroad. This deficit amounted to €12.5 million and it was 489.5% higher compared to the first quarter of 2005. ISSP’s estimation for the first half of 2006 shows that the balance of services amounted to € 26.7 million, or 40% more than in the same period of the previous year.



According to the ISSP’s forecast, total export of services will amount to € 354.9 million in 2006, or 12.8% more than in the previous year. As result, total surplus of the balance of services will amount to € 223 million, or 16.8% more than in 2005. Income

Data from the Central Bank shows that total income revenues in the first quarter of 2006 amounted to € 7.9 million, or 27.4% less than in the same period of the previous year. Income expenditures in this period amounted to € 46.2 million, or 86.3% more than in the first quarter of 2005. The surplus in the Balance of Income amounted to € 1.066 million, a decrease of 86% compared to the same period of the previous year. According to the projection of ISSP, the surplus of the balance of income in 2006 will amount to € 115 million and it will be almost on the same level as in 2005. Transfers The balance of transfers in the first quarter of 2006 was in surplus, amounting to € 31.1 million, a 30.5% increase as compared to the corresponding period of 2005. This is the result of a 13.9% increase in foreign assistance in the first quarter of 2006 as compared to the first quarter of 2005. 8.1.2. Capital and Financial Account19 Financial Account In the financial account of Montenegro, “foreign direct investments” continued to be the most significant entry, amounting to € 58.6 million; however, they were 63.6% less than in the same period of the previous year. This is due to the fact that there were no large privatizations in the country in this period. “Net portfolio investments” amounted to € -0.156 million, which is a significant decrease compared to the first quarter of 2005. 8.1.3. Net Errors and Omissions

The total balance of the current, as well as the capital and financial accounts, was € 26.2 million in the first quarter of 2006. The surplus in these accounts is exactly the same as “net errors and omissions” in order to achieve equilibrium of the balance of payments.

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19 Data on capital and financial transactions are, thus far, rather limited due to the ongoing process of adopting international standards that would allow for proper registration of these transactions. Consequently, capital account transactions have not been registered in Montenegro at all since 2001.


CHAPTER 9. REGIONAL COMPARISON

9.1 MACROECONOMIC INDICATORS

In the first half of 2006, all SEE countries achieved positive real economic growth. Total economic activity, especially industrial production was higher compared to the same period of the previous year.

Industry, as the sector with a rather important contribution to the creation of GDP in almost all SEE countries, increased its production. The physical volume of industrial production increased in the first half of 2006, as well as in the first seven months of 2006 with an average growth rate of 6.5% in Serbia, 3.9% in Montenegro, 6% in Romania, and 9% in Bosnia and Herzegovina, as compared to the period January-July 2005.

The annual CPI inflation rate was lower in all SEE countries compared to the year end 2005 except in Albania, Bosnia, Bulgaria, and Macedonia. The annual CPI inflation rate in July 2006 was 2.9% in Montenegro, 3.2% in Albania, 3.0% in Macedonia, 3.4% in Croatia, 6.2% in Romania, 6.7% in Bosnia and Herzegovina, 8.1% in Croatia, and 11.7% in Serbia. Accordingly, the highest inflation rates were registered in Serbia and Croatia; however, the annual CPI inflation rate decreased in Serbia in July 2006 while it increased in Croatia as compared to the year end 2005. One of the external factors that caused inflation in Croatia, as well as in the other countries in the region, was the further increasing of oil prices. On the other hand, the appreciation of the Euro against the US dollar supported decreasing inflation in several countires.

Unemployment rates20 in the countries of the region were lowest in Romania (5.3% in June 2006), Bulgaria (9.1% in June 2006), Albania (14.0% in June 2006), Croatia (15.7% in July 2006), and Montenegro (15.0% in July 2006). On the other hand, Bosnia and Herzegovina, Macedonia, and Serbia continued to have the highest unemployment rates in the region, which amounted to 52.5% in Bosnia and Herzegovina, 27% in Serbia, and 33% in Macedonia in June 2006. Exchange rates fluctuation in the first half of 2006 was almost the same as in the second half of 2005. The Croatian Kuna appreciated a bit against the Euro after intervention of the Central Bank at the foreign exchange market at the end of 2005, but depreciated again in the first half of 2006. The Romanian Lei also appreciated in the first half of 2006 after depreciation at the end of 2005. The Dinar, as the official currency in Serbia, stabilized somewhat in the first half of 2006; however, it is still in a negative trend vis-à-vis the euro. This is mostly a consequence of the internal factors in Serbia and represents one of the sources of inflation. The Bulgarian Lev (BGN) is pegged to the Euro at the fixed exchange rate of 1.956 BGN per EUR. However, there is some medium-term currency risk because of a new “all-time high” estimated current account gap (as a % of GDP) in 2005, the lowered FDI coverage ratio, the spike in consumer price inflation, and the rise in gross foreign debt (as % of GDP). The Convertible Mark (BAM) in Bosnia and Herzegovina is also pegged to the Euro, and while the Euro is the official currency in Montenegro, there is no currency risk in these two countries.


20 Unemployment rates within the SEE countries are calculated through the implementation of different methodologies and thus data on unemployment rates cannot be completely comparable, despite the fact that these are the only available data.

In the first half of 2006, several SEE countries increased their economic activity, reduced unemployment, and CPI inflation. However, several of them had a higher annual inflation rate in comparison to the end of 2005.


Table 9.1: Macroeconomic Indicators of SEE countries

Alb

ania

Bos

nia

an

d h

erze

govi

na

/Rep

ubl

ika

Srps

ka

Bu

lgar

ia

Cro

atia

Mac

edon

ia

Mon

ten

egro

Serb

ia

Rom

ania

2001 6.5 4.5 4.0 3.8 -4.5 4.0 5.7 5.0 2002 4.7 5.5 4.3 5.2 0.7 0.8 3.3 3.8 2003 6.0 3.5 4.3*** 4.3 2.2 1.5 2.5** 4.9*** 2004 6.0** - 5.8 3.8 - 3.1 7.0 4.5

Real annual growth rate of GDP (in

%) 2005 6.0** 5.2** 6.4 4.3 4.0** 4.1 5.9 5.2** 2001 6.5 12.2/-12.9 1.6 6.0 -23.2 -2.7 0.0 8.4 2002 2.0 9.2/-2.5 6.5 5.7 13.7 0.7 1.7 6.0

2003 2.7 2.0/-1.6 (Mar) 15.6 4.0 0.5 (Nov)

6.5 2.4 -3.1 3.1

2004 - 9.0 23.4 3.0 -12.7(Jan-Dec) 13.8 7.2 5.3

2005 3.0* 5.1 (Dec) 9.3 (Oct) 6.9 (Dec) 5.1 (Jan-

Dec)

3.7 (Dec) 7.0 (Jan-

Dec)

-21,2 (Dec)

-1.9 (Jan-Dec)

0.3 (Mar)

0.5 (Jan-Dec)

2.0 (Dec)

2.0 (Jan-Dec)

Annual change of industrial

production (in %)

2006 - 9.1 (July) 15.7 (May) 2.0 (May)

4.1 (June) 1.1 (Jan-

June)

10.4 (July) 3.9 (Jan-

July)

7.8 (July)

6.5 (Jan-July)

6.0 (Jan-July)

2001 3.5 3.2 4.8 2.6 1.2 24.0 38.7 34.5 2002 2.1 0.3 3.8 2.3 2.2 9.2 1.8 22.5

2003 3.3 0.3 4.7 1.8

-1.1 (Jul) 0.3 (Jan-

Jul)

6.1 (Dec) 9.9 15.3

2004 3.5 -1.0 (Dec) 4.0 (Dec) 2.7 (Dec) -1.9 (Dec) -0.4(Jan-

Dec)

3.2 (Dec) 2.4 (Jan-

Dec)

13.2 (Dec) 11.4 (Jan-Dec)

11.9

2005 2.0 (Dec) 4.2 (Dec) 6.5 (Dec) 3.6 (Dec) 1.2 (Dec) 2.5 (Dec) 17.2 (Dec)

8.6 (Dec)

Annual inflation rate (CPI

in %)

2006 3.2 (July) 6.7 (July) 8.1 ( July) 3.4 (July) 3.0 (July) 2.9 (July) 11.7 (July)

6.2 (July)

Currency name Lek

Konvertibilna marka;

BAM Leva Kuna Denar Euro Dinar Lei

2006 (against €)

123.0 (July)

1.956 (July)

1.958 (July)

7.26 (June)

61.0 (April) - 86.0

(June)

3.5723 (July)

National currency

(against €) Annual

change in %

-5.0 - - -0.68 -0.16 - 3.9 0.2

2001 15.4 39.9/ 40.2 17.3 22.2 30.5 24.8 27.7 8.8 2002 15.8 42.7/ 38.2 16.3 22.3 31.9 23.7 31.3 8.4

2003 15.0 43.1/36.6 (Mar) 13.5 19.1 36.7 21.6 (dec) 30.2

(dec) 7.2

2004 - - 12,6 18.7 37.0 19.5 (Dec) 31.9 (Jul) 6.2

2005 14.4 (Dec) 44.0 (Dec) 11.0 (Dec.)

18.0 (Dec) 34 (Dec) 20 (Dec) 32.6

(Dec) 5.9

(Dec)

Unemployment rate

(in %)

2006 14.0 (June)

52.5 (June) 9.1 (June) 15.7

(July) 33.0 (June) 15.0 (July) 27.0 (June)

5.3 (June)

2001 -22.6 -74.9 -11.7 -5.9 -15.3 -31.3 -28.8 -13.2 2002 -17.5 -79.7 -10.2 -11.1 - -24.9 -33.4 -8.6 2003 -21.5**** -81.3 -12.5 -8.0 -21.0 -24.2 -27.8 -8.9 2004 -23.0 -74.6 -8.5 -7.3 -21.7 -17.5 -27.0 -9.1

Trade Balance (as % of

GDP) 2005 -21.5 - -19.3 -6.7 -22.5 -19.2 -26.8 -5.5 2001 -5.3 -25.3 -7.5 -3.7 -6.9 -15.7 -9.7 -5.9 2002 -9.5 -30.5 -5.6 -8.6 -9.4 -12.6 -13.0 -4.5 2003 -8.5**** -36.4 -9.2 -7.1 -3.0 -7.1 -12.0 -4.6 2004 -7.2 -34.1 -8.5 -5.1 -7.7 -7.8 -11.0 -6.6

Current account

deficit (% of GDP)

2005 -6.0 - -14.5 -6.3 -1.7 -8.6 -10.2 -4.8

Sources: Data for Montenegro are from the ISSP database Data for other countries are from their central banks and statistical officies *Es imated by ISSPt

**www.cia.gov; ***www.inss.ro

62



CHAPTER 10. INFORMATION COMMUNICATION TECHNOLOGY IN MONTENEGRO

According to the most important ICT indicators, Montenegro’s development is typically following the trends that are seen in neighboring countries and in the EU. Analysis of mobile telephony usage finds that Montenegro is a leader in the region. Fixed telephony is overpowered by mobile telephony and other ways of communication. Even in rural areas of Montenegro this characteristic exists because of the insufficient investments in telecommunications and the infrastructure in these areas. Analysis of E-skills among the population finds that there is still a high percentage of households in Montenegro that do not use computers (56%), while within the EU, 34% of households do not use computers, in average. However, it is encouraging that almost 40% of households in Montenegro have computers and their internet penetration has been increasing over the past several years, which puts Montenegro in a dominant position as compared to Macedonia, Albania, Bosnia and Romania. However, Internet penetration of just 21.4% in 2006 continues to be lower than that found in Croatia or Slovenia, and is also lower than the EU average. While implementation of the Internet in business and banking has begun, Internet usage in public services and administration (E-government), health, and education is still not possible.. Table 1 Telecommunication market of Montenegro 2001 2002 2003 2004 2005 200621

Revenue of telecommunication market (in mill euros) 89.2 150.6 162.7 170.2 Total number of fixed lines users (in 000) 184 190 188 185 171 Total number of mobile lines users (in 000) 356 445 420 483 543 611 Total number of fixed and mobile phone users (in 000) 540 635 608 668 714 Penetration of fixed telephone lines 28.4 28.6 28 29 27.6 Digitalization 87 92.5 98 99.8 99.9 Penetration of mobile telephone lines 53.9 67.4 62.7 78 87.6 98.5 Percentage of mobile phone users in total number of users 65.9 70 69 72.5 76 Number of Internet subscribers (in 000) 18 27 37 51 68 73.9 Number of Internet users (in 000) 18 27 83 100 123 Internet penetration 2.6 4.1 12.5 16.1 19.8 21.4 Number of Internet service providers 1 2 2 2 5 5

Source: Agency for telecommunication of Montenegro Republic Secretariat for Development MONSTAT

FIXED AND MOBILE TELEPHONY Fixed telephony in Montenegro still has just one operator and has a relatively low level of penetration. The present trend of mobile telephony dominating fixed telephony is also characteristic of Montenegro, which is the reason for the lower penetration of fixed telephony. ICT Survey 2006 showed that 79.9% of households in Montenegro have fixed, while 91.8% have a mobile phone. It is important to note that while investments in the infrastructure in the rural parts of Montenegro and some of the less developed regions are insufficient, mobile


21 Observed period January-June 2006.

MONET 24 contains new analysis and trends in the field of telecommunications, in Montenegro, countries from the region and the EU as well. In this issue of Monet we are dedicated to regional comparisons. We have analyzed this industry through the aspects of: fixed and mobile telephony and PC and Internet usage. This Monet publication is trying to answer the question – How developed is Montenegro in comparison with neighboring countries and the EU in the telecommunications market? In later text we will present some data about this topic.


telephony is highly developed. With the two operators currently providing mobile telephony in Montenegro, there are 543,000 subscribers, resulting in a high level of mobile phone penetration (98.5%). This is reasonable, considering that the average household in Montenegro has more than two mobile phones, or in the developed regions of central Montenegro, they have even more. Of course, this does not indicate that the mobile phone market in Montenegro is saturated. On the contrary, this indicates a free market with great opportunity for new operators to enter and improve competitiveness and services. Fixed telephony-region Development of fixed telephony is lower than mobile telephony. The EU25 decreased the number of fixed telephony subscribers from 227 million in 2001 to 226 million in 2004. Fixed telephony in South Eastern Europe also decreased from 27.6% in 2004 to 25.8% in 2005.

Graph 10.1. Penetration of fixed telephony in South Eastern Europe

0 5 10 15 20 25 30 35

A lbania

BIH

Bulgaria

Montenegro

C roatia

Romania

Serbia

Kosov o

Macedonia

Source: Cullen International, Country Comparative Report, 2006. The trend of decreasing fixed telephony is explained by the development of alternative forms of communication and mobile telephony. One reason for the decline could be the fixed price of fixed telephony, which endangers fixed telephony subscribers. Subscribers must pay relatively high prices to keep and activate their fixed lines. Mobile telephony-region In the last eight years, mobile telephony increased by 36.2% in EU25. The number of subscribers and operators has been constantly moving forward, which improves conditions for competitiveness. The number of mobile phone subscribers in the EU25 in 2005 was estimated to be 409 million. Even though the number of mobile phone users in Southern and Eastern Europe is not yet at the level present in Western Europe, its development differs by country. Some countries increased their mobile phone penetration, making their penetration equal to the highly developed countries of the EU; countries that have increased to EU comparable penetrations include Estonia (increased from 62% to 78%), Lithuania (increased from 50% to 75%), and Montenegro (increased from 78% in 2005 to 98.5% in the second quarter of 2006).

64



Graph 10.2. Mobile phone penetrations in countries from region

0

20

40

60

80

100

120

Mon

tene

gro

Croa

tia

Mac

edon

ia

Rom

ania

Slov

enia

Serb

ia


Source: Cullen International, Country Comparative Report, 2006. Agency for Telecommunications of Montenegro Countries from South Eastern Europe exhibit positive trends with respect to mobile telephony; this is evident in comparison with average level of mobile phone penetration in 2005, which was 26%. Competitiveness is again one of the most important factors in the functioning of a free market, as evidenced by the fact that each of these countries has two or three mobile phone operators. COMPUTERS Development of the information society is measured by the level of computer usage among households and enterprises within one country (E-skills). In the EU there still exists a lack of information literacy, especially among the older population. In fact, three of five people older than 55 (61%) have never used a computer. On the other hand, PC usage among the younger population is extensive with nine of ten (91%) people between the ages of 16 to 24 reporting to be PC users.

Graph 10.3. Percent of population that are not PC users

0

10

20

30

40

50

60

EU25 SI C Z PL HU ES MNE

Source: Eurostat, Community survey on ICT usage in households and by individuals, 2005 ISSP, ICT Survey, 2006.


Development of the information society in Montenegro is going through similar phases and has experienced similar problems. Less than two-fifths of households (38.3%) have computers in 2006, and while this is a step forward as compared with previous years, it is still significantly lower than in Slovenia, where three-fifths of households (61%) have computers. Differences also exist with respect to the level of information literacy among the different regions and among households and enterprises. The central region of Montenegro is the most highly developed, followed by the south and then the north. The lack of financial resources to purchase a PC still exists, especially in the poorly developed regions. E-skills are indicated through the level of knowledge and PC usage. Nearly half of the Montenegrin population (47%) was self-educated on the computer, while 4.6% attended PC usage courses during 2006. Computers in Montenegro are also used by younger generations; nearly half (45%) of children older than 16 are PC users. There is a need for additional education among households in Montenegro with regards to PC usage; in fact, more than half of the households (56.4%) indicated this need.

Graph 10.4. Percent of population with high computer skills

0

5

10

15

20

25

30

35

EU25 ES HU PL SI MNE

Source: Eurostat, Community survey on ICT usage in households and by individuals, 2005 ISSP, ICT Survey, 2006. Computers are also used for business purposes in Montenegro. According to the ICT Survey 2006, nine of ten enterprises (92.5%) use computers in business. Employees are mostly self-educated with regards to PC usage (68%). In the EU25, the average number of employees that are PC users is 51%, while in Montenegro, that percent is just 39.1%. INTERNET During the last decade, the Internet was highly developed and became a part of life. The Internet is not just connected with communication, but it is present in business, banking, trade, and public services. With the rapid development of the Internet, the EU is experiencing a problem of how to close the gap between Internet development and the level of adoption by the population. That gap is most present among the older generations (older than 55), and the unemployed.

66



Internet in households The Internet is gaining acceptance, just not at the same speed of its development. The Internet was present in 43% of EU25 households in 2004, and this percent increased to 56.5% in 2005. In Montenegro, Internet usage has increased from year to year, and in 2006, Internet penetration is at 21.4%, which is similar to other countries in the region but lower than the EU average (36.1%). In order to increase its use, it is important to develop measures and regulations regarding Internet usage.

Graph 10.5. Internet penetrations in 2005.

0

10

20

30

40

50

60

EU25 ES SI HU CR MNE FYRM BG RO BIH AL

Source: http//:www.InternetWorldStats.com Agency for Telecommunications of Montenegro

Frequency of Internet usage shows that 57% of the EU25 population did not use the Internet daily in 2005. If we add in the new EU members, the proportion of the population that does not use the Internet is higher than those who do.

When looking at the frequency of Internet usage, we find that more than two-fifths of households in both the EU25 (43%) and the EU15 (46%) use the Internet weekly. In Montenegro, just slightly fewer households (41%) use the Internet at least once a week; similar usage is seen in Slovenia.

Graph 10.6. Percent of households that use the Internet weekly

0

10

20

30

40

50

60

ES EU15 EU25 MNE SI HU PL C Z

Source: Eurostat, Community Survey on ICT usage in households and by individuals, 2005. ISSP, ICT Survey, 2006.



The Internet is used for many different purposes, including E-business and E-government. E-government services are still not available to households in Montenegro even though they are interested in regulating personal documents through the Internet. Montenegro is insufficiently informed about the services that E-government can offer to its population. However, the Internet has expanded its use in Montenegro and is used for product orders and in E-banking. In Montenegro in 2005, 8.2% of households ordered products via the Internet and most of these orders were reserved for books and magazines, while in the EU 25% of households ordered products, again typically related to book and magazine purchases. The number of Internet users within households in Europe continues to increase. The countries of Iceland and Norway have the greatest number of Internet hosts in households, while Belgium and Estonia have the most broadband connections in households. If we analyze Montenegro and future development of the Internet’s presence and usage, we find a need to remove the existing barriers, thus leading to a higher number of Internet users and a comparable standing with the EU average. Future activities that should be focused on include: increased PC purchasing and usage (especially in poorly developed regions), improved methods of education, PIAP activities and implementation. With some improvements in these areas, Internet usage would increase among households, E-business, E-banking and E-government. FUTURE MOVEMENTS Telecommunication markets in the EU during 2005 and 2006 were characterized by positive changes and market development. Broadband connection and its frequency of usage are in focus22. Increased competitiveness has enriched the European market with 50% more participators. Projections for the future development of electronic business are very optimistic. Some surveys have found that positive effects of electronic business can be expected within two to three years from its implementation. If this is so, we can expect that frequency of E-commerce will be doubled23 in the future period. Consumption of mobile telephony in the EU will be continued in the future period. For example, according to the IDC analysis, among the 11 markets from within the region, consumption increased 13.5% in 2005 and it is expected to increase 9.5% in 2006. This will increase the level of penetration in mobile telephony. The existing trend of development in the telecommunication markets is important to the overall development of the economy. The year 2000 is marked as a year of changes and importance to the telecommunication sector, and developments and improvements since that time are all the more significant. The telecommunication market can improve efficiency and provides the possibility for increased employment in every country, whether it is highly developed or still developing its economy.

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22 Level of usage of this type of connection from 2005 increased 21% and represents the possibility of new Internet service usage. 23 Source: http://www.morganstanley.com/institutional/techresearch/gsb112005.html


RESEARCH



ELECTRONIC BUSINESS DEVELOPMENT IN MONTENEGRO - BASED ON ELECTRONIC BANKING Author: Milica Dakovic, ISSP

1. INTRODUCTION ICT (information communication technologies) is not just part of our everyday life, but it qualifies as a business as well. Changes that are characteristic of IT companies influence the business environment in total. Considering the fact that the world, due to the development of ICT, is described as a ‘global village,’ it is logical that business would adjust itself to present trends. It seems impossible to do business without owning a PC and having access to the Internet; additionally, having a website with the ability to conduct electronic business is also becoming more and more commonplace. However, in order to implement this type of operation in all businesses, it is important to achieve critical developments in the information society and to ‘wake-up’ business owners, making them fully understand the importance of ICT in modern business. Efficient ICT usage can improve productiveness in companies, and their progress as well. In order to develop electronic business it is important to achieve a critical level of development within the information society and among the population and employees in enterprises, as well. Information society development is well defined by the indicators of PC ownership and Internet existence within both households and enterprises. However, this is not the only condition, nor is it the most important condition of development. It is important to develop regulatory and institutional conditions of its implementation in the area of telecommunication regulations (Electronic business Law and Electronic signature Law) and their implementation. Electronic banking, as a service in the banking sector connected with ICT, has begun its implementation in Montenegro. As of 2005, citizens and companies have had the possibility to use E-banking services. E-banking services exist in nearly all banks in the banking sector of Montenegro; this text also contains basic analysis of the survey ‘Research of E-banking in Montenegro’, which was conducted in 2006. 2. ELECTRONIC BUSINESS IN MONTENEGRO- DEVELOPMENT PERSPECTIVES Electronic business represents Internet usage in business. It does not purely focus on the purchase or sale of goods and services over the Internet, but it also provides services to potential customers and provides communication to business partners. Precisely, it targets on: o Business processes in the area of production, buying, selling, marketing; o Relations with employees, business partners and suppliers; o Business support services through banks and other institutions and agencies. The terminology of ‘Electronic business’ is not immediately recognized by households and enterprises in the various parts of Montenegro. In fact, just over one-fifth of the households in Montenegro (22%) are familiar with term ‘E-business’24. On the other side, the concept and implementation of electronic business is well known within modern companies. The Internet is recognized as a tool that can improve the level of efficiency and productivity in enterprises as well as monitor the ways of modern business. The ability to conduct electronic business, or to own a digital certificate, is available to citizens and companies in developed economies. However, this ability is still not present in developing

70


24 ‘ICT Survey ’06’, ISSP 2006.


countries, such as Montenegro. In order to implement a new way of business, it is important to have a well developed information society and ambience, as well as the conditions needed for developing electronic business and business owners that have a well developed awareness of the advantages that electronic business offers. Implementation of electronic business not only represents implementation of innovations in the area of Internet usage, but it also leads to changes within the enterprise -- organizational changes and human resources as well. Regulations as condition

Regulations are one of the most important basic factors in the area of electronic business. One of the key regulations in this area is the Electronic Business Law, which not only regulates e-business, but at the same time this law directly targets business inventiveness by increasing the efficiency level in businesses. It was adopted in December 2004 with its main goal being the development of electronic business with the aim of equalizing electronic with classical paper forms. Nevertheless, the Law was adopted in 2004, but implementation in this area still waits. On the other side, there have been some

positive changes in 2006 as compared to previous years, especially in the area of E-banking. The Electronic Business Law and activation of E-business will contribute to Montenegro’s application of modern trends in the area of electronic business.

Box 1. E-business support

The European Union has detailed programs of support in the area of electronic business and has an important role in regulations inside the WTO (World Trade Organization). There are at least 15 directives, proposals, and recommendations that are meant to regulate E-business. The EU has tried to impose regulation, hoping that every country will incorporate these parts of regulation within their local laws in that area. The EU is also interested in creating a unique EU market that would more efficiently support the usage of electronic money.

Source: ’Sector analysis of telecommunication sector in Montenegro’, CARA 2005.

Information literacy as a condition A higher level of information literacy among the population and business sphere is one of the conditions that must be achieved in order to better implement electronic business in Montenegro. The survey finds a high level of business dependence on and use of modern technologies as well as a high level of usage among employees. On average, two-fifths of employees use computers in business in Montenegro (39.1%). However, in 2006 there still exists the dominant need for additional education in regards to PC usage among the population and employees. Among all enterprises in Montenegro, approximately seven of ten (69.1%) report that their employees are self-educated with respect to PC and Internet usage. There are regional differences in the level of knowledge regarding modern technology and its usage; the central region of Montenegro is the most developed while the least developed region is the northern part of the Republic. Internet and households Survey results find that among all households that own a computer (38.3%) and have at least one household member that uses the PC, nearly three-fifths of these households (58.7%) have an Internet connection. A dial-up connection is still the most prevalent in Montenegrin households (84.2%), followed by an ISDN connection (11.8%), and an ADSL connection (4.11%). The most frequently mentioned reasons for not having Internet access at home are: the possibility to have Internet access from some other place (30.3%); high costs (12.7%); high price of impulses (12%); lack of need (8.9%). Nearly half of the Montenegrin households that report to have Internet access use the Internet daily (48%), while slightly fewer report to use it weekly (41%).



Internet and enterprises Business in Montenegro is highly dependent on ICT usage. Nine of ten enterprises in Montenegro (90%) use computers in their business process. Similar findings occurred with respect to Internet connection and usage; among all surveyed enterprises, just one of ten (10.3%) don’t have an Internet connection. Among enterprises, the dominant connection type continues to be a dial-up connection (44.9%), followed by ADLS (27%). In most cases, employees use the Internet daily (82%). The level of Internet usage in enterprises can be seen in the fact that in nearly two-fifths of enterprises in Montenegro (38.2%) more than half of the employees use the Internet, with nearly half of those using it for two hours per day.

Graph 1 Purpose of Internet usage

0 10 20 30 40 50 60 70 80 90 10

E-mail

Information

News

Education

E-commerce

Fun

0

Source: ’ICT SURVEY ’06’

Just as electronic business is used differently in various sectors of the enterprise, differences also exist with respect to Internet usage. In fact, nearly three-quarters of the enterprises (73.1%) believe that some parts of their enterprise do not have a need for the Internet, while 28.8% think it is equally important for all sectors of the enterprise. Web site as one of the conditions The modern way of business, selling products, representing a business to a global market, and overall marketing is not possible without a website. A website, the great window to the world of modern business, provides many advantages in developing a market and making new potential customers. Survey results find that there are many enterprises in Montenegro that still do not recognize the importance and advantages of a website. In fact, nearly half of the enterprises in Montenegro (48.7%) still don’t have a website; however, 14.7% do have plans to activate a website during 2006. Most of the enterprises that don’t have a website are from the northern part of Montenegro. However, it is encouraging to note that most of these enterprises (92.9%) do believe that those enterprises that do have websites have advantages because of it.

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Most of the banks in Montenegro activated their websites during 2003 and 2004. Websites were typically created by the employees of the banks (50%) or by IT companies (33%). One-third of the banks update their website once a year (33%) with fewer reporting to make monthly updates (16.7%). All banks have installed security system protection and firewalls, and bank employees are in charge of installing and updating these protections. 3. E-BANKING IN MONTENEGRO Electronic banking is a new service implemented in the banking sector and offers clients 24-hour access to the bank via the Internet. E-banking allows clients to perform various transactions such as paying bills, viewing balances, and downloading information. E-banking services began their realization in the banking sector of Montenegro in the beginning of 2005. The main reasons that motivated banks to implement this service were the need to increase competitiveness, the need to follow modern trends in the banking sector, and the desire to carry existing and attract future clients.

Graph 2 What are the main reasons for E-banking implementation?

0 20 40 60 80 100 120

C ompetitiv eness

Keep in touch w ith modern trends

Increase number of new clients

Keep existing clients

Keeping trust

Increasing of profit

Source: ISSP, ’Research of E-banking in Montenegro’, 2006 There are many services in the area of E-banking that are offered to citizens and enterprises. The most frequently used services are: overview of bills and transactions, WAP services, paying cards, and downloading forms. The one and only condition to use this service is to be a client of the bank and to have opened a bank account. SMS services are most frequently used by citizens (in 50% of banks). E-banking offers many advantages for banks and their clients, as well. Banks consider the most important advantages of E-banking to be: time savings (100%), cost reduction (66.6%), increasing number of clients (50%), and increasing level of confidence (50%).

Box 2. Starting steps In December of 2004 the service center for electronic business, E-mon, began working as a result of investment by Telekom Crna Gora and the IT company Pexim Solutions from Belgrade. The mission of this center is to support services in electronic business to citizens and enterprises on the territory of Montenegro.

Source: www.telekomcg.com



E-banking is becoming more and more accepted by citizens in Montenegro; in fact, in 2006 the number of citizens that use E-banking services has increased by 28.7%. Additionally, two-fifths of enterprises (41.1%) use E-banking services in Montenegro. Among those enterprises that don’t use E-banking services, most are from the northern part of Montenegro (81.8%), three-quarters were established before 1990 (74.2%), two-thirds have less than 10 employees (67.6%), and nearly nine of ten have turnover of less than 100,000 euro per year (87.2%). The banking sector recognizes the attractiveness and advantages of E-government and they have plans to offer new services in that area, especially in the area of electronic money, SMS banking. Banks view the main barriers to using E-banking as: a lack of information literacy (66%) and a general disinterest of citizens (50%). Similarly, enterprises also view the lack of information literacy and the lack of interest as barriers as well.

Graph 3 Barriers to using E-banking services

0 10 20 30 40 50 60 70 80 9

Lack of information literacy

Lack of interest

Lack to accept modern trends

Lack of confident in securityprotection sy stems

0

Citizens Enterprises

Source: ISSP, ’Research of E-banking in Montenegro’, 2006 It is important to remove the obstacles to E-banking services in the future. When we ask who can make better the ambience and promote E-banking in the future, the most common answers are the banks themselves (83%), the media (66%), and the Central Bank (50%). Given the fact that banks are institutions that need to promote E-banking services, they have many suggestions that they feel would increase the number of clients and promote this type of service. Some of the most frequent proposals are: o ’We need to improve communication...’ o ’We need to give more information to our clients...’ o ’We need to help our clients accept a new way of service…’ o ’We need to do more to present E-banking and the possibilities it offers...’ Research of E-banking showed again that there still exists a basic lack of information literacy in Montenegro, especially in some regions. In order to increase the level of information literacy, it is important to focus on special groups of the population, such as those from 16 to 25 and the target group of those who are older than 55. The banking sector can contribute to the future development and implementation of electronic banking by motivating and better informing clients and by promoting E-banking services as a new service, especially in those regions in which is least used.

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4. RECOMMENDATIONS Information communication technologies (ICT) are key factors of change in modern business. They offer opportunities for business, and economic development as well. There are many goals that need to be achieved in Montenegro in order to improve the development of the information society. Some of them are targeting: o o o o o o

E-commerce implementation and development; E-government implementation and development; ICT sector monitoring; Institutions that can offer programs and projects for ICT support; Implementation of standards in the area of ICT; Development programs for poorly developed regions.

Electronic business cannot just be targeted on the implementation of new technologies in enterprises. One of the important factors is the strategic vision of E-business and the completed regulations in that area. Enterprises also need to be prepared for these changes and be prepared to change their hierarchical organization to models of network. Employees are also one of the factors in future E-business development and its success will depend on their level of information literacy. As a result of all of the mentioned factors, ICT is creating opportunities to increase the productivity levels and profits within enterprises, as well as increasing education levels and transforming the traditional way of doing business. LITERATURE

1. ’ICT SURVEY ’06’, Institute for Strategic Studies and Projections (ISSP), 2006. 2. ‘ Research of E-banking in Montenegro’, (ISSP), Institute for Strategic Studies and Projections 2006. 3. ’The European e-Business Report’, European Commission, 2005. 4. ’Sector analysis of telecommunication sector in Montenegro’, Gordana Radojevic, Regulation of

telecommunication markets, Center for Applied Research and Analysis (CARA), 2005. 5. ‘What is E-commerce, What is E-business?’ Dragan Varagic, Dejan Tosic, Economist, October 2003. 6. ’Digital divide 1: Information skills for an information society : A Review of research’, Susan Hubbard,

2000.

WEB SITE

1. http://www.ebusiness-watch.org/news/2005_11_30.html 2. http://www.morganstanley.com/institutional/techresearch/gsb112005.html 3. http://ec.europa.eu/internal_market/e-commerce/index_en.htm 4. http://www.aber.ac.uk/media/Documents/tecdet/tecdet.html


http://www.ebusiness-watch.org/news/2005_11_30.html

http://www.morganstanley.com/institutional/techresearch/gsb112005.html

http://ec.europa.eu/internal_market/e-commerce/index_en.htm

http://www.aber.ac.uk/media/Documents/tecdet/tecdet.html


ANALYSIS

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ENERGY EFFECTIVENESS IN MONTENEGRO (SUGGESTIONS FOR RESOLVING THE PROBLEM OF ENERGY DEFICIT) Author: Ivana Vojinović, ISSP

INTRODUCTION

By Signing the Agreement on the establishment of an Energy Community of South-Eastern Europe (ECSEE Treaty), Montenegro has, among other things, adopted implementation of Acquis Communautaire in the field of energy, ecology, competitiveness, and the development of renewable sources of energy. Implementation of the Directive 2001/77/EC on the promotion of electricity produced from renewable energy sources in the internal electricity market requires that Montenegro defines a strategic goal that must be attained by using renewable sources of energy. According to the Strategy of Energy Effectiveness, 3-5% of total energy needs may be met by renewable sources of energy in the period 2010-2015.

There is a wide range of challenges over the years ahead for the Montenegrin energy policy. One of the main tasks is related to the identification of inefficient points within the whole energy chain, especially in the field of final consumption, for 55% of the final energy that Montenegro gets is from import. Consequently, the heated issue is to identify how we can substitute import of electric power with our own production?

ENERGY PRODUCTION AND CONSUMPTION IN MONTENEGRO Current energy supplies in Montenegro can be divided into three parts: two domestic sources (about 2/3 of total consumption) and import (about 1/3 of total consumption). The domestic energy supply potential of Montenegro is divided between the river potential of Piva and Zeta (about 1,860 GWh/per year) and the coal potential in the basin of Pljevlja (about 1,300,000 t/per year). These sources are mainly used for production of energy power25. Production is done in two hydro plants, Perucica (installed production capacity of 307 MW) and Piva (342 MW), as well as in the coalmine Pljevlja, which provides lignite for the Pljevlja thermal plant (210 MW). Inconsiderable production is connected to small hydro plants (about 9 MW26). The lignite-fuelled thermal power plant produces 1/3 of the domestic electricity supply, and the hydro plants produce the remaining 2/3.

Source: Strategy of energy effectiveness in Montenegro, ISSP calculations

Graph 1. Overview of Montenegrin energy resources

import33%

coal-domestic source22%

hydropotential-domestic source

45%


25 While 2/3 of electric power is produced in the country, Montenegro is completely import dependent with respect to the use of oil derivatives (about 300,000 t). 26 The Power Company of Montenegro (EPCG) owns seven small hydro plants: Glava Zete, “Slap Zete” “Rijeka Mušovića”, “Rijeka Crnojevića”, “Podgor”, “Šavnik”, “Lijeva Rijeka”.


Generally, consumers of electric power in Montenegro can be divided into two huge categories: direct consumers and distributive consumers. Direct consumers are those supplied at the 110 kV voltage level, and they include the Aluminum Plant, the Iron and Steel Plant, and the Railway of Montenegro. Distributive consumers are divided according to the level of voltage they receive (35 kV, 10 kV, or 0.4 kV). At the moment, the Power Company of Montenegro (EPCG) has about 273,000 consumers. The number of consumers has been increasing over recent years, mainly due to the increase of energy supplied at the voltage of 0.4 kV. Chronologically, energy consumption in Montenegro can be divided into the three following periods: o 1981-1991 – stagnation in energy consumption; o 1991-1994 – intensified decrease of consumption caused by war and sanctions; and o 1995-onwards – fast increase of consumption, especially electric power and fuel. Namely, until the 80’s, electricity production in Montenegro satisfied the needs of consumers in Montenegro. However, that period was followed by intensive construction of big industry capacities (II phase of Aluminum Plant and reconstruction and modernization of Iron and Steel Plant) and higher consumption in households and other consumption at the voltage level of 0.4 kV. These events, together with the crisis in the 90’s and the fact that no new energy source was put into function since 1982, significantly changed the ratio between production and consumption within the energy system in Montenegro and resulted in a long-term energy deficit, which in recent years accounts for about 30% of total energy consumption in Montenegro. Electricity constitutes a crucial import for Montenegro, representing an approximate 13% share of total imports. Consequently, Montenegro has gross consumption of 6,500 KWh per head annually, which indicates the importance of the production of electricity. The high consumption in Montenegro is mainly due to the Aluminum Plant production, which is a huge electricity consumer; and the importance of the production issue is further increased by the fact that the Aluminum Plant has a share of approximately 44% in overall consumption and that its factory requires reliable voltage.

Graph 4. Production and consumption of electricity in Montenegro in period 1980-2003

0

500

1000

1500

2000

2500

3000

3500

4000

4500

5000

1980

1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

2002

in G

Wh

production consumption

Source: The Electric Power Company Additional important factors that have led to the higher consumption of electric energy include demographic trends, electrification, and technological development, as well as the “low” price of electricity. Namely, for various reasons, electricity has been priced very cheaply in Montenegro and this has led customers to switch to electric heating and cooking, rather than

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alternative fuel sources such as wood or coal. The historically low cost production, and hence low tariff, has also led customers to display wasteful habits and accept poor building thermal insulation standards.

Source: Strategy of energy effectiveness in Montenegro ISSP calculations

Although total economic activity has been reduced in the last 20 years, consumption has grown by approximately 75%. The strategy of energy effectiveness in Montenegro indicates that the share of energy in GDP increased by 67% since the 90’s, thus reflecting a reverse trend as compared with what happened in developed countries. This would indicate a high risk in terms of sustainability of the energy sector in Montenegro.

With a lack of more reliable forecasts, the Strategy of energy effectiveness roughly estimates future trends showing that energy consumption will grow by an average annual rate of 3%. Thus, we can expect to see an increase of final energy up to 39,000 TJ in 2010, followed by increased import dependence. At the same time, the annual electricity deficit will grow from the current 30% to 42% (at about 2,400 GWh), which is equivalent to approximately €90 million (in current import prices). On this basis, costs related to the import of electricity (at the price of €37/MWh) will amount to €87 million on an annual basis. SUGGESTIONS FOR DECREASE OF DEFICIT

In the future, the following issues will have to be resolved in the energy sector: 1. increase coal production, 2. decrease current expenses,

4. decrease distribution losses, and 5. increase the level of security in the energy supply. In a word, the task is related to the improvement of energy effectiveness. Improvement of energy effectiveness has important environmental and macroeconomic implications. Higher effectiveness leads to a more rational use of natural resources as well as a reduction in the damaging impact on the environment. On the other hand, it cuts down energy dependence from import, thus improving the balance of payments position of the country. At the microeconomic level, final consumers benefit from lower energy costs. RENEWABLE ENERGY SOURCES

The natural environment, and especially energy resources, both terms of quality and quantity, determine the long-term strategy of the energy system’s development in Montenegro.

Graph 2. Overview of final energy consumption according to consumer type

in Montenegro in period 2000-2004

1522

5,7

1624

4,3

757,

9

523,

7

793,

8

791,

9

671,

9

7737

,8

6863

,4

5574

,8

5725

,4

6359

,6

350

313,

3

324,

5

296

304,

3

7696

,1

8178

,8

8449

,1

9308

,5

9305

,9

1695

,6

1805

,8

1834

,6

2226

,2

2500

,2

1735

8,6

1819

3,5

1787

0,1

-1000

4000

9000

14000

19000

24000

2000 2001 2002 2003 2004Industry Energy sectorTransport AgricultureHouseholds, tourism and other utility sectors Distribution losses

Graph 3. Overview of final energy consumption in Montenegro according to

the energy type in period 2000-2004

48,8

9

35,9

6

57,3

6

49,6

4

42,7

0

15,1

8

16,2

3

16,0

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14,9

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14,8

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1,68

1,97

1,99

2,46

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28,6

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24,1

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20,6

7

20,2

5

20,8

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0,22

0,28

0,42

0,49

0,70

50,2

9

53,0

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55,7

0

55,1

7

51,8

9

4,01

4,34

5,17 6,71

6,44

2000 2001 2002 2003 2004

Coal Black oil Fuel oil Petrol

Liquefied gas Electricity Fuel wood

3. decrease electricity import needs,



Increased use of renewable energy sources, besides the obvious economic effects such as decreased consumption of imported energy, would also engage domestic capital, give incentives to the activities of SMEs, and increase the domestic production of equipment necessary to use these energy sources. Use of renewable energy sources, among which hydro potential is the most important, is one of the main priorities of the Strategy of energy efficiency. Additionally, activation of renewable energy as ''green energy'' has a strong positive impact on the environment.

Small hydro-plants (sHP)

Montenegro possesses vast unused potential of renewable energy sources, especially quality hydro-energy potential. With the exclusion of hydro-energy potential related to the big hydro-plants, it is economically justified for Montenegro to double the current usage of renewable energy sources (small HP, solar energy, wind energy, and biomass). With respect to the sHP potential, 70 locations for sHP have been examined thus far at the following rivers: Morači, Zeta, Lim, Piva, and Ibar, totaling installed power of 226 MW and annual production of 660 GWh. As we have a lack of long-term measurements of water flow in the mentioned locations, it is necessary to innovate and update the current solutions.

According to the Strategy for construction of small hydro-plants, adopted by the GoM, their share of installed power in 2015 would amount to anywhere between 3.3% to 4.4%, while production of all HP will have a share of 2.5-4.2% in overall electric power production. The mentioned Strategy envisages a combination of concessions/BOT as necessary to form a contract for realization of the project of sHP. This type of public-private partnership (PPP) would enable the public and private sectors to gather resources and professional knowledge to satisfy their needs through a more balanced division of resources, risk, and awards.

The main benefits for the state from the construction of small hydro plants would be the provision of electric power and taxes paid in the budget. At the same time, the domestic economy would be assisted to participate in proposals of foreign firms investing in energy resources, thus increasing the possibility of employment of the local population from rural areas, where the greatest potentials of this energy exist.

Electricity produced by sHP is more expensive as compared to that produced by big systems. Hence, in developed countries this kind of production is assisted by subsidies from the state. The second issue that needs to be settled, and it is important to potential investors, is that the electricity produced is guaranteed to be incorporated into the whole energy system.

If private investors find a motive to invest, the role of the state would be to adopt rules that regulate private investments and the production of electric power. Hence, the state should lay down obligations of the EPCG to incorporate produced electricity within its distribution system. The state must ascertain and make clear whether it wants to charge investors with concessions, to give guarantees about the price of electricity, and to allow investors to obtain all necessary documentation as soon as possible. In a word, the state should make it possible

Box 1. Lesson to be learned - Slovenia Among the ex-Yugoslav republic, Slovenia has gone further than others with respect to the use of renewable energy sources. In that country, about 400 small hydro-plants (comprised of micro, mini and small hydro-plants, mainly up to 5 MW) are operating; out of which about 170 are in private ownership. Installed capacity of small and medium hydro plants accounts for 150 MW. Annually, they are able to produce 330 GWh of energy power, which represents about 3% of energy produced in Slovenia. The best indicator of the level of development of this business is the fact that at the moment, in Slovenia, there is no free location at which it is economically justified to construct new small hydro plants. In theoretical terms, Slovenia can annually produce 2,000 GWh in small hydro plants.

In Slovenia, the state does not subsidize the price. Namely, when small hydro-plants earn the status of “qualified,” which makes them privileged producers, the power they produce has the right to be purchased at a guaranteed price. At the moment the guaranteed price stands at €60/per MWh.

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for private capital to be engaged in construction of mHE. If that is not done on time, all efforts would be led by blind forces.

On the way from electric plants, where electric power is produced, to the final consumer, two types of losses occur: losses in transmission and distributive losses, which are commercial losses. Transmission losses are of a technical nature and they occur when heat is released through kablove due to the voltage fluctuation and other technical reasons. Average transmission losses in developed countries account for 1.5-2%, while in Montenegro these losses are doubled. The primary reason for the high losses in transmission of electric power in Montenegro is the weak technical equipment – leads, low-quality, kablovi, etc. Distributive losses, which occur from the moment electric power is delivered in local electric companies, amounted to about 9.7% of gross consumption in 2003, which is higher than in developed countries, where the average rate of distributive losses is about 5%. Estimations indicate that the greatest part of distributive losses occurs with electricity thefts and/or with non-reported electricity consumption (illegal taps), while the rest is related to the broken numerators of electricity consumption and other problems. The solution to the problem of distributive losses is obvious: better control of numerators of electricity consumption in households in order to reveal thefts and illegal taps and replacement of numerators of electricity consumption that are older than 25 years.

By reducing the above mentioned losses, energy consumption in Montenegro would be reduced, and consequently, our use of energy resources would be more efficient. This is of huge importance considering our large deficit and the necessity to find a way of improving the energy situation in Montenegro.

CONCLUSION

Perhaps it is not widely known, but the European Union chose their energy policy to be the cornerstone in the process of integration of the Western Balkans. Permanent care about increased energy efficiency is one of the foundations of the concept of sustainable development and should be a strategic goal on the national level. Implementation of EU standards in the field of energy policy, in accordance with the Memorandum on understanding from Athens (2003), will certainly influence the integration of Montenegro in the EU. The impact of the energy sector implies long-term planning of its development, together with rational use of resources. Increased energy efficiency is considered to be the cheapest and the most productive energy alternative, with practically unprecedented opportunities. With relatively small investments, better choice of technical equipment, better organization, and improved quality in serviceability, significant energy and financial savings may be reached.

In today’s world, capital is not a problem. The problem is how to, in a very sharp competitive environment, attract the capital. This is equally applied to the energy sector. What is the problem with having independent producers? Why don’t we allow somebody to offer energy to the market? A smart decision in this field for Montenegro would be to allow private capital to provide electric power on its own. LITERATURE

1. Strategy of energy effectiveness in Montenegro, www.vlada.cg.yu2. Ana-Maria Boromisa: “Energetika u Europskoj uniji i Hrvatskoj”, www.ijf.org3. Atinski Memorandum o Razumijevanju, 2003 4. Energy Law, 2003 5. MONET, ISSP, Jul 2004. 6. www.vlada.cg.yu 7. www.europa.eu

REDUCTION OF LOSSES


http://www.vlada.cg.yu/

http://www.ijf.org/


http://www.europa.eu/


REGULATION OF THE MONTENEGRIN ENERGY SYSTEM Author: M.sc. Jelena Zvizdojević, CARA

I INTRODUCTION In terms of moving towards a market concept of economy, which includes the production and distribution of electric energy, it is absolutely necessary that a regulatory system of high quality be established. This refers also to institutions, laws, and strategies that should be established to create the conditions needed for a market economy.

Together, regulation according to international standards, regulative institutions of high quality, and the complete implementation of laws create an atmosphere that enables increased investments in this area, both domestic as well as foreign. Good regulation decreases operational risk, and this is required by investors because when the risk is low they can predict what will happen in the next period. II REGULATION OF THE MONTENEGRIN ENERGY SYSTEM – NOW

Along with overall economic reforms in Montenegro, in the previous few years, energy system reforms were also established through institutional and legislative postulates. With the Law on energy that was adopted in 2003, a period of energy system reform was established. That period continues during 2005 through the creation of the Energy policy, as well as through the establishment of the Strategy of Montenegrin energy system efficiency and the adoption of the Strategy of development of small hydro plants in Montenegro in 2006. According to the Law on energy of January 2004, a Regulatory Agency for energy was established as a functionally independent and non-profit organization.

The Law on energy is based on current international standards, including the European energy charter and relevant European Union regulations in the field of energy, other than Directive 54/03 (Directive of electric energy transfer) and Directive 55/03 (Directive of natural gas transfer). Namely, those two directives were adopted for a short-term period after adoption of the Montenegrin Law on energy. Therefore, modifications and amendments to this Law can be expected very soon, as well as the implementation of those Directives. The Southeast Europe Agreement relates to the transfer of electric energy, as well as to the transfer of natural gas, which is not included in the current Law on energy, and because of that, Directive 55/03 must be included in the Law completely. Implementation of the Law on energy implies radical structural reforms in every part of the organization and energy system performance.

The Law on energy defines the establishment, role, and responsibility of the Agency for energy as a regulatory body. According to the Law, services within the energy sector are considered to be public services, and the Agency for the energy sector regulates the energy sector in Montenegro according to objective, non-discriminative, and transparent principles. The most important tasks of the Regulatory Agency for energy are: o Supervising performance of subjects within the energy sector; o Issuing licenses for doing business within the energy sector, as well as authorizing issues

for new buildings or reconstructions of present production capacities; o Establishing prices and tariffs within the energy sector according to the Law on energy, until

a competitive electric energy market is proclaimed; o Defining the terms of establishing a competitive electric energy market.

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The Regulatory Agency for energy, in August 2005, announced Rules on tariffs, which are based on reasonable expenses.27 Defining tariffs according to the new Rules will result in an increase of electric energy prices, especially for households. However, on the other hand, higher prices will result in better financing of the electric system. According to the Rules, The Montenegrin Power Supply Plant is required by the Agency to increase its prices of electric energy. The requirement is still in the process of consideration.

In the long term, tariffs that are not established at a level that covers the real expenses of the population and the economy’s electric energy supply have been shown to result in a chronic lack of financial resources that affects the normal performance and maintenance of the energy system. Moreover, tariffs have also had an impact on macroeconomic circumstances because of significant budget and quasi-fiscal support to the sector. Additionally, low tariffs

and a low level of collection disable the inflow of capital investments in this sector. Restructuring of the Montenegrin Power Supply Plant28 – The Law on energy predicts a functional and legal separation of the Montenegrin Power Supply Plant. The functional separation is already complete, comprised of the following: account separation, management separation, and information separation. For the functional separation a deadline of 18 months from the day of the Law’s ratification was defined by the Law. On the other hand, the Law does not define a deadline for legal separation.

After the functional separation, the Montenegrin Power Supply Plant now consists of four functional parts: production, transfer, distribution, and supply.29 In cooperation with IPA Energy consulting, the Strategy of development and privatization of the Montenegrin Power Supply Plant was proposed. It contains the basic directions of development and dynamics by which the privatization process should be done.30

The Montenegrin Energy Policy was adopted in February 2005. That policy presents goals and instruments by which the Government of Montenegro should develop the energy sector in terms of: a secure and safe energy supply, environmental protection, ownership, market performance, investments, energy efficiency, new sources able to regenerate, connection to region, social protection, etc. According to the economic development of Montenegro, as well as to the energy practice and standards for the EU accessing countries, this policy strongly stresses the need for establishing an adequate legal, institutional, financial, and regulatory framework, which is necessary for the sustainable development of the energy sector.


27 The Montenegrin Power Supply Plant was required by the Regulatory Agency for energy to define tariffs and prices for electric energy, according to the new Rules on tariffs for electric energy. At present, the Agency is considering its requirement. 28 Source: Ministry of economy of Montenegro 29 Apart from those four functional parts there are also two organizational parts: Direction and Electro construction. 30 In July 2005, the board of directors of the Montenegrin Power Supply Plant adopted Rules on the vertical integration of a functionally separated Montenegrin Power Supply Plant, and on September 30th 2005, they adopted Rules on systematization of working places within the Montenegrin Power Supply Plant. Those Rules represent further elaboration of the concept of functional separation.

Box 1. Is electric energy considered to be good?

Every good has to be paid for according to its consumption. Is that the case with electric energy?

For a long time the price of electric energy has been part of a social policy; thus, it would seem that electric energy is a “special” good.

Within almost every country, developing as well as those that are developed, there are customer categories that do not have adequate income to cover all of their existential expenses, among them electric energy usage. In those cases, the Government organizes a variety of social allowances. However, those allowances cannot take the form of direct payment of overall usage. Therefore, the state sends a message to the population that electric energy cannot be produced without expenses. Like any other good, one must pay for as much as one consumes.


The Strategy of energy efficiency was adopted in October 2005 and includes actions that the Government of Montenegro and subjects in the energy sector (producers, suppliers and consumers of energy) need to achieve in order to promote and develop efficient ways of using energy and technologies. The strategy also points out the “hot spots” of energy inefficient areas, especially in the sector of final production31. Efficiency in the energy sector will create new business opportunities, increase the level of employment, and improve utilities on a regional level, as well as a global level. The strategy also provides for the formation of an Energy Efficiency Unit, whose main mission will be to promote energy efficiency on the consumption side. The strategy of small hydro plants development was adopted in April 2006 as well as an Action plan for its implementation. The strategy provides measures for removing barriers in the area of developing small hydro plants, with suggestions for regulative changes that would simplify procedures, make clear the competencies, and provide initiatives for investors. Currently, documents are in the preparation phase regarding the development of small hydro plants: o Methodology for energy price evaluation − energy from small hydro plants o Notice about assigning concessions for the construction of small hydro plants o Rules for small hydro plants connection on distribution net.

The strategy defined 70 locations for developing small hydro plants with total potential of 230MW.

III REGULATION OF THE ENERGY SYSTEM IN MONTENEGRO – FUTURE INSIGHT The strategy of energy development in Montenegro up to 2025

According to the articles of the Energy Law, and the Energy policy of Montenegro, the “Strategy of energy development in Montenegro up to 2025” is in the preparation phase. This strategy will prioritize the development of the energy sector and focus on instruments that can enable the realization of key priorities in work, business, and the development of the energy system. This document will also define the dynamics different documents and the importance of their adoption in order to achieve all of the changes in the energy sector and adjust them with the proper political, social-economic, energetic, and ecological purposes. Together with the Energy policy of Montenegro, the Strategy will indicate the role of energy subjects in this process and motivate domestic and foreign investors to invest in new objects if they estimate them to be profitable. It is expected that the Strategy will be adopted and announced very soon; five studies need to be completed before its adoption. The studies involve: I) Analysis of realized energy balances II) Predictions of final energy consumption

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31 Source: “Strategy of energy efficiency of Montenegro,” December 2005

Box 2. Small hydro plants in EU policy context In December of 1997, the European commission adopted the Strategy and action plan for regenerating sources of energy. According to that strategy, the EU formed a plan to increase their share of regenerating sources of energy in the total electricity production process from 6% to 12% by the year 2010 (in EU countries). The action plan has internal market measures in the regulative and fiscal areas, measures for strengthening the EU policy to increase regenerating sources of energy, and also measures to promote investment. Currently, EU hydro plants produce about 15 TWh per year, which is a 20% share of the total economic potential of this type of energy in the EU; by 2010, it is expected that between 60TWh to 70TWh will be produced. Source: PhD Milo Mrkic, “Small hydro plants as regenerating source of energy in Montenegro”


III) Analysis of development systems for coal, oil, and gas in Montenegro IV) Plan for electro energy system development in Montenegro V) Long range plan of energy supply of Montenegro (energy balances up to 2025)

Treaty establishing the Energy Community of Southeaster Europe Consistent with the Treaty establishing the Energy Community of Southeaster Europe, which was also ratified by Montenegro on October 25th 2005, the national electricity market will be included on the regional market, and above that, in the internal energy market of the European Union.

o from no households, from January 01st 2008 o from January 01st 2015, all consumers This Treaty also included a palette of measurements meant to maintain the development of a regional energy market. Some of those measurements are: increased electricity prices to cover production costs; improved payment discipline; restructured Montenegrin Power Supply Plant; revised methodology of price level; defined mechanism of social transfer -- since the increasing electricity price will have a negative effect on melting households. In May of 2004, the Government of Montenegro adopted a resolution to totally open the market of electricity energy in 2009. Until then, customers will gradually be let into the market, producers will prepare for the new conditions, and simultaneously competition in the sector of supply will increase.

After signing the Treaty to establish an Energy Community, the Contacting Parties must, in pre-stated terms, implement the Directive of the EU about energy, environment, competition, and regenerating sources of energy. The regional energy market and the development of energy infrastructure are very important for the future development of the Montenegrin electro energy system. Today, Montenegro imports a large part of their necessary energy from neighbouring countries. With the evolution of the market and the realization of new objects (transfer network and new power plant) more possibilities to supply electricity will open.

Because of the state's efficient regulatory role in open market economy conditions, a small country such as Montenegro will face severe international competition. The efficiency of the state is significant in contemporary market systems. The State must insure the right economic framework to perform integral market and trade competition. In that context, and in the framework of the energy system, Montenegro must: o Adopt regulation to simplify the proceeding for getting concession and licenses to build

small hydro plants. With that, the cost will be lower. o Review existing laws, and adopt and implement new laws (needed laws include: Law of

energy efficiency, Law of regenerating sources of energy, etc.) The energy regulation system also needs to have proceedings that regulate the area of buying energy from small hydro plants.

o Better coordinate between competent institutions in the energy system o Ratify tariffs and prices that are based on market conditions.

According to this Treaty, countries’ signatories obligated their countries to liberalize their energy markets, apropos each Contacting Party must insure that qualified consumers be:

IV CONCLUSION



With a sound framework of legislation, institutions, financials, and regulations, we can expect greater participation of the private sector and larger investments in all aspects of energy infrastructure. It is important to know that the road to a stable and efficient energy system is not simply an increase in the price of electricity. In addition to the increase in prices, efficiency will also require restructure and decreased costs in the energy system. The increased price will not eliminate losses in the energy network, it will not reduce big administration, and it will not replace old equipment. With that in mind, the key to a stable, efficient, and competitive energy system is in the restructure process of the energy system. Welfare regulation will provide a successful restructure process. The year 2015 is near! The question is: Will Montenegro be prepared to totally open their own energy market?

LITERATURE

2. Directive 96/92/EC about internal market of energy in EU 3. Montenegrin Power Supply Plant, “Projects of revitalization and building objects of Montenegrin

Power Supply,” internal document, 2004 4. Montenegrin Power Supply Plant “Momentary codes of network,” February 2005 5. Institute for Strategic Studies and Projections, Household Survey 6 6. Institute for Strategic Studies and Projections, MONET 20 7. Milo Mrkic, “Small hydro plants as regenerating source of energy in Montenegro” 8. Ministry of Economy of Montenegro, “Strategy of energetic efficiency of Montenegro” 9. “Regulation of infrastructure activities,” material for debate, Department for international

development, London Economics, March 2000 10. Government of Montenegro, “Montenegrin Energetic Policy,” Podgorica 2005 11. Government of Montenegro, “Agenda of economic reforms” 12. “Law of energy,” Official gazette of Montenegro, no. 39/03 13. www.energyobserver.com

1. B. Stojković, V. Stojković, “Deregulation the market of energy-technical and right,” October 2002

14. www.epcg.cg.yu 15. www.regagen.cg.yu 16. www.vlada.cg.yu

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http://www.epcg.cg.yu/

http://www.regagen.cg.yu/



POWER OF WIND AS AN OPPORTUNITY FOR MONTENEGRO Author: Nebojša Obradović, ISSP

INTRODUCTION As the global population grows, so too does the demand for power, which today is produced predominantly from coal, oil, and gas. The global demand for energy is expected to increase by more than 70 percent by the year 2020. In addition, the finite reserves of fossil fuels, the increasing costs of exploration, and the threat to the climate from greenhouse gases and carbon dioxide all impose global constraints. To supply the world's enormous energy requirement, it will require a wide mix of technologies already available today as well as new technologies over the entire energy chain, from extraction and production to distribution and consumption. The world needs solutions that are economical and environmentally benign and that save resources. The production of energy from sources that can be regenerated has many positive social impacts, most of which are unknown to all of us. The major positive impact is our decreased dependency on imports, as well as all of the benefits that are connected to this – improvement of trade and macroeconomic indicators, keeping foreign funds within the country, creation of new work places (energy production, equipment production and similar operations). Additionally, utilizing alternative energy sources would improve the safety of the energy supply and provide price stability. Currently, all of the above mentioned implications are very important facts.

Wind energy represents an energy source that can be regenerated. Along with the energy sources of sun, water, biomass, and geothermal energy, it represents unfailing potential. Use of those sources is more and more accepted as an important contribution to the protection of our climate and to the improvement of our quality of life. Fossil fuel energy sources not only impact the natural balance of the global ecological system by its combustion, but they are limited because the world reserves of those fuels are rapidly decreasing (oil 60 years, coal 250 years). Wind turbines do not issue CO2 and other greenhouse gases, and they also substitute sources from fossil fuels and therefore decrease the emissions of greenhouses. On average, a supply of 1 (MW) of wind power “saves” the world from 1,750 tons of harmful CO2 emissions per year. Conventional Thermo Power Plants that use coal as a fuel must also use huge quantities of water (from preparation to the cool process of coal). Wind Power Plants use 600 times less water than Thermo Power Plants, and 500 times less than Thermo Power Plants that use coal. When looking at the permanent environmental damages that result from the cutting of huge forest capacities or the “wounds” that are left on the earth’s surface from mining activities, we can view wind generators as simple echoes in the surroundings, they are temporary and can be laid up very quick if necessary. The area of occupancy for wind generators, and therefore the possible devastation to the area, is minimal as compared to Hydro energy.

WIND ENERGY – DEVELOPMENT

With the quick technological development of wind energy and its daily increasing participation in energy production worldwide, wind energy is becoming the leader among energy sources that can be regenerated, especially because of its importance in the field of protection. The global capacity of wind as an energy producer has increased its strength very quickly, and therefore, at the end of 2003 it had installed power of 39,294 (MW). Technological and constructional improvement is highly intensive. Twenty years ago, wind turbines had installed power of 25 (KW), and by the late 1990’s, it was 500 (KW). Thus, today’s standard solution is wind turbines with power of 1.0 to 2.5 (MW).



Energy km2/GWh: o Hydro energy 1.75 o Wind energy 0.12

Permanent research has made energy resources that can be regenerated more available today than they were 25 years ago. Wind energy expenses decreased from $0.40 to $0.05 per KWh. The global potential of wind on land locations is estimated to be between 20,000 and 50,000 TWh annually. Additionally, there is also a great potential for wind energy over the sea area (offshore Wind Power Plants). An average Wind Power Plant covers 7 hectares of land and produces one MW of electric energy, which is enough to supply 750 – 1,000 households. During its 20-year life cycle, Wind Turbines have had an “exploitation factor” of between 3,000% and 8,200%. This means that Turbines can produce 30 to 82 times more energy than needed for their production, distribution, usage, and decomposition. In good locations, amortization of spent energy can be reached in just a two-month period. The “exploitation factor” of common capacities for electric energy production is 0.3% to 0.4% because energy from sources that can be regenerated enables permanent production without additional costs. EXPERIENCE IN THE REGION Croatia Constant research during the previous years at the Ravna location determined the average annual speed of wind to be 6.4 meter per second, which is a good parameter of profitability for constructing all future Wind Power Plants. Namely, the speed of wind at 5.5 meters per second represents economical conditions for using wind. Ravna is one of the multitudinous potential locations on the Adriatic coast. A system of seven Wind Power Plants at the Ravna location on Pag Island, which was constructed by “Adria Wind Power” Croatia Company, represents the first commercial project using wind energy to produce electricity in Croatia. There are located seven Wind Power Plants of 5.96 megawatts total capacity, type Vestas V52 single intensity of 850 kilowatts. The altitude of each turbine is 49 meters and the diameter of each rotor is 52 meters. The Wind Power Plants are connected to an electricity network and produce 15 million kilowatts of electricity per year. Total consumption of electricity in Croatia is about 14-15 TWh, and 20-30% of consumption is from import. Results of the conducted research found an existing opportunity in the production of electricity; specifically, to install 500-600 MW Wind Power Plants that would produce 1600 to 1900 GW and also open 12,000 working places by the year 2010.

Bosnia and Herzegovina Research on the potential of wind energy in Bosnia and Herzegovina found 11 macro locations that represent potential spots for constructing Wind Power Plants. One potential location with evidential elements of good wind potential is at the plateau of the mountain Velez. Meteorological stations were installed on five locations of the mountain Velez to provide a measure of wind potential. The data derived from measurements taken during 2002-2003 identified existing wind potential that could be used commercially for the production of electricity.

Serbia A research study that was conducted two years ago in Serbia, the “Study of energy potential of Serbia using sun radiation and wind energy,” found the “kosavski” region to be the optimal location for wind; additionally, some of the mountain regions have good potential. Total consumption of electricity per citizen in Belgrade is about 1700 kWh per year. The annual quantity of wind energy on the 100 meters above the ground level is 4000 kWh per one square

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meter of overhead propeller movement. If we use a minimum effective coefficient of 20%, we derive 800 kWh/m2 of electricity for one year. Therefore, two square meters of overhead propeller movement would be enough for every citizen in Belgrade to have the same quantity of electricity as they are using now. ECONOMIC IMPULSE Industry of using wind energy in the EU: o 23,056 MW of wind energy is the total installed capacity, which replaced about 20 million

tons of coal. o Average growth rate of the industry is up to 30% per year. o In 2002, the EU market for wind energy was EUR 5.8 billion, and the expected amount in

2010 is EUR 25 billion.

Table 1. Forecast

Today, companies from Finland produce components for Wind Power Plants amounting to EUR 170 million and employing 1,300 workers; they have annual growth of 30-50%. By 2010, they plan to increase their installation from 41 MW to 500 MW and increase employment to 10,000 people.

Germany is the first country to have installed capacity of Wind Power Plants (12,000MW). They employ 30,000 people (equipment produce and service) and they predict to increase employment by an additional 29,000 work places.

Spain increased its installed power from 450 MW to 4,830 MW and employed approximately 20,000 people in the period from 1997 to 2002. Additionally, Spain became an exporter of wind-power equipment during this time as well. Croatia: Total consumption of electricity in Croatia is about 14-15 tWh and 20-30% of their consumption is from imports. Research has found that an opportunity in the production of electricity exists in this country – the opportunity to install 500-600 MW Wind Power Plants that could produce 1600 to 1900 GW and also create 12,000 work places by the year 2010. Montenegro There have been no large research studies in the area of wind energy usage in Montenegro. Research is mostly based on data from hydro meteorological stations, and while their results are incomplete regarding the use of wind in energy production, they can be useful in finding locations to install wind generators. According to the wind speed noted at the meteorological stations in Montenegro, potentially good areas with strong winds are those areas around Niksic, the southwest parts of Montenegro, and the mountain hills above the coastline. However, it is important to do better research in these areas to find the best locations with strong winds. Detailed research has been conducted at the locations of hill Ilino and hill Vucje, and in these locations, the wind speed is above the average criteria, but there are periods during the year when the wind speed is below the average. Measures from March 2002 showed wind speed in the Niksic area to be from 30W/m2 and in Vucje to be 225 W/m2. Hill Ilino was the first location to have a wind generator installed with power of 500 kW and planned production per year of 1.25 - 1.80 GWh. This was the first realized project in the area of wind energy

o Until the 2010, approximately 10% of electricity will come from Wind Power Plants.

Year Annual growth New built (MW/g) Cost (USD/kW) Investment (billion USD/g)

Employment (numberof people)

2000 20% 3,740 950 3,550 78,000

2005 30% 10,900 830 9,070 200,000

2010 20% 40,600 700 28,600 630,000

2020 10% 150,000 520 78,300 1,720,000



production in Montenegro, but after a short time, that generator collapsed because of a thunder storm.

According to the European atlas of winds, the location of the south Adriatic makes it a middle windy sea, which offers the possibility of building off-shore wind generators (on the sea). Potential locations for this type of generator are in the coastal area from Ulcinj to Herceg Novi, with a width of 20 km and a surface of 1,000 km2; this area has middle wind speed of Vsr= 7 m/s and power of Psr= 400-600 W/m2. Shelves and high hills around the seaside are also potential locations at which the wind could have power greater than 800 W/m2 (above Budve, Kotora, Tivta...) and over 50m. The area around Zabljak is rich with winds and needs to be researched to better estimate wind power. In order to use wind energy for energy production, research needs to be done in Montenegro. The Government of Montenegro has plans in their Agenda for 2006 to research the possibilities of using wind energy in Montenegro. CONCLUSION The facts about wind as a potential energy source shows that this type of energy could be more exploited in the future. Countries that have implemented this type of energy avoid fossil oils and nuclear energy. Several years ago, wind energy became popular in Europe and the strength of wind generators is increasing by more than 20% per year. Development of this type of energy production in Montenegro cannot be expected soon because of problems in the energy system. Because of the advantages that wind energy can offer Montenegro, they must recognize an interest and need for it. However, presently there are problems with regulation and financial instruments that are insufficiently developed by state bodies and institutions, and this it should be improved to support entrepreneurship in this area. They still don’t recognize the importance of implementing new energy sources. The existing situation is neither good for the enterprises that develop potential projects, nor for the people that are connected with these projects.

Returning from conventional sources of energy to new sources will take time to be implemented. The most important thing to understand is the fact that new sources of energy are clean, safe, and unfailing – such as wind generators.

LITERATURE:

1. «Korak» – paper of chamber of commerce Serbia, Serbia, 2006 2. «HEP Vjesnik» monthly of the Power Plant of Croatia, Zagreb, 2006 3. Strategy of energetic efficiency of Montenegro, Podgorica, 2005

5. www.hep.hr6. www.epcg.cg.yu7. www.mojaenergija.hr8. www.eihp.hr9. www.adriawindpower.hr10. www.croatianworld.net11. www.privredni-vjesnik.hr12. www.geog.pmf.hr 13. www.biznis.ba14. www.zeleni-neretva.ba15. www.awea.org16. www.telosnet.com/wind17. www.energy.sourceguides.com18. www.windpoweronline.com

4. «Competitively and European way» Milocer economic forum, Milocer, 2005

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http://www.mojaenergija.hr/

http://www.eihp.hr/

http://www.adriawindpower.hr/

http://www.croatianworld.net/

http://www.privredni-vjesnik.hr/

http://www.geog.pmf.hr/

http://www.biznis.ba/

http://www.zeleni-neretva.ba/

http://www.awea.org/

http://www.telosnet.com/wind

http://www.energy.sourceguides.com/

http://www.windpoweronline.com/


PRIVATIZATION OF INFRASTRUCTURE Author: Ivan Jovetić, ISSP

PRIVATIZATION – A NECESSITY OR A WHIM? Post-socialist states’ transitions into market economies have also demanded proprietors’ changes. Instead of collective ownership and absolute irresponsibility for bad results, privatization establishes private property as the basic precondition for a market economy. Of course, it is necessary to be very cautious when calling an economy a “market economy” because there are some that are clearly reminiscent of socialism. “Privatization” also requires a comprehensive definition. It isn’t just a sale to the highest bidder, and sometimes it isn’t a classical sale at all. In addition to or in lieu of sales, there are also long term concessions, mass (voucher) privatizations, IPO’s, and private financings of infrastructure projects. Privatization has different motivations, but in general there are two categories. The first is of a philosophic and political character and relates to a decrease of the state’s role in - and politics’ influence on - everyday life and the economy (as economy per se can be independent from politics). In past and present socialist systems, states have acquitted themselves badly and these economies’ performances were very often disastrous. The combination of these two motives led to subsidies for various sectors. That was the introduction to politically driven decisions and politicians’ pet projects, as well as the neglect of corporate continued profitability. Privatization is a very sensitive question, and it always clashes with social ownership in the political arena. Certain political interests in a large number of countries often try to obstruct the privatization process for obvious reasons of self-interest (political and/or material). But such personal political and material reasons are always hidden behind the curtain of the rhetoric of public interest, of protecting the masses. Nevertheless, we are forgetting the fact, which Ayn Rand especially points out, that private property is the only way to apply all of the rights that derive from the right of life. However, “philosophic megalomania” accentuates each individual’s private ownership quantum. Wrong! The institute of private property is the most important element in the social constitution and each individual’s ownership quantum has been determined by their own capabilities -- not by “omniscient dark offices mind.” The “concept of individual rights gave birth to the free society32.” The concept of individual rights is morally correct, and thanks to it, it is possible to restrict government’s power and protect individuals from possible collective violence. A precondition of restriction in post-socialist countries is privatization. Thanks to it, the state’s role is strengthening in areas where it is needed and disappears where market mechanisms accedes on scene. Postulated like this, does it seem like a necessity or a whim? INFRASTRUCTURE AS A MONOPOLY Infrastructure commonly encompasses transportation, telecommunication, water, and energy systems. Nevertheless, initially the term was used to define a transportation system that included roads, bridges, airports, and railroads as important functions of an industrial economy. Although the economy has faced, and is still facing its post-industrial transition, the essence and sense of infrastructure remain unchanged. The economic mindset that we are developing treats energy and telecommunications as a resource and commodity, apropos a service.

Infrastructure privatization is, by some unwritten rule, the last phase of the privatization process, mainly because other sectors and companies are more attractive. Additionally, these other sectors and companies are also undervalued and offer attractive returns on investments.


32 Ayn Rand, Capitalism as unknown ideal, Global Book, 1994


Secondly, from a political perspective, questioning the infrastructure is sensitive due to its monopoly position in the overall economy. Privately owned infrastructure doesn’t come before private property domination in certain important sectors. In its monopoly position lays one of the best reasons for the necessity of privatization of the infrastructure. A monopoly by the State is, in certain spheres, very dangerous to individual freedom and possibility of collective will impose and might be also a serious obstacle through inefficiency and price payment redistribution, even for those who don’t need it at all. The private sectors’ inclusion in the building and maintaining of the transportation infrastructure allows for increased efficiency in the infrastructure management, and it also frees the governments’ budget of these “unnecessary expenditures.” The commercialization of traffic activities -- including those mentioned before as feasibility studies, data gathering, project tasks, etc. -- would narrow the state’s role on regulatory and custodial role. Additionally, the number of administrative employees will decrease and they may find their own employment in the market subjects. The idea that in Montenegro everything (including infrastructure) can be a subject of privatization33 doesn’t mean the vanishing or weakening of the state, but on the contrary, it allows for the strengthening of the government’s focus on a number of other areas where its attention is needed.

In transition economies, the infrastructure often deteriorates because of the state’s inability to service it and to invest in it. Investments are often enormously high and their projection validity is questionable (there are numerous bad examples worldwide). Management of investments and the core project follow-up management are also very questionable when they are handled by the state. At least theoretically, the state has its own financing sources for infrastructure investments such as privatization and budget revenues and loans, but we mustn’t forget that the state also has an obligation to service some other areas as well and that privatization and budget revenues are not sufficient. In order to fulfill future infrastructure investment goals, the state would have to make new loan obligations. It tells a lot about sense of the new loan arrangements under the condition and assumption that some other financing sources exist. On the other hand, concession arrangements represent a certain form of privatization and have the least negative effect on the budget for current and future generations. Certainly, under neglecting politically hack stories about colonialism and “imperial capitalism occupation” Privately held infrastructure contracts are more liable to serious control than those that are held by state companies. Of course, it’s not about changing people, but rather changing their behavior given the consciousness of the existing market pressure that reacts on tender offers and the manner of their evaluation and control. Then there would be no hidden mechanisms, which function inside all monopolies, and space for discretionary decisions wouldn’t be created.

MONTENEGRO – INFRASTRUCTURE PRIVATIZATION POSSIBILITIES

The issue here isn’t the sale of all possible pieces of the infrastructure, especially in road transportation. It is more about getting the key infrastructure objects into private ownership through different contractual shapes. Infrastructure objects that are ready for private ownership exist in road, sea, rail, and air transportation. It is obvious that Montenegro can expect the last big brownfield investments wave to carry throughout the privatization of infrastructure. The Montenegrin Rail Company, Port of Bar, Crnagoraput (“Montenegro road” with a monopoly on road maintenance in next five years), Marina Bar, Podgorica and Tivat airports, and Montenegro Airlines are just some of the future privatization projects, and the first four already have a significant share of private capital.

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33 Veselin Vukotic, ”Conceptual basis of new economic system in Montenegro”, ISSP, Podgorica, 2001


Montenegrin Rail has already been segmented on Infrastructure and Transportation, which (the transportation part) will be privatized. However, there is also the possibility and purpose for the privatization of the core rail infrastructure (for example throughout the concession agreement). This is even more significant given the fact that the Traffic Strategy Development of Montenegro Outline predicts € 96,200,000 to be invested in the rail infrastructure in the following four years (depending on the project). Maritime projects, according to the Strategy, demand € 75,100,000; however, this amount can be reduced by € 36,000,000 which is the amount predicted to revitalize the naval fleet. Examples taken from different economic approaches and also some successful private companies (Nimont, Bar) suggest the possibility to transfer that money to other much more necessary projects. As the Port of Bar and Marina Bar already have private capital, it is expected that the amount needed for the maritime sector, according to the Strategy, can be reduced by that amount as well. The Port of Bar and the development of nautical tourism represent one of the very attractive areas from an investment perspective as well as for the overall development of the Montenegrin economy. Additionally, other ports and marinas such as Kotor, Budva, Zelenika, and Risan are also attractive. The marina in Budva has already been managed by a private company, which resulted in an increase in service quality and a growth of core infrastructure investments. The ports of Risan and Zelenika are also interesting for private capital, which currently has some participation in both. Air transportation is a very interesting piece of the infrastructure. In addition to the previously mentioned airports and air companies whose future privatization revenues can be adequately used, the Berane airport, which will be built in the near future, also represents an interesting investment. Investment of € 22,000,000 can be very attractive for numerous international investors as well as airport companies given that a relatively low investment comes with the airport’s high potential. An effective sale or at least a concession arrangement for all three airports to totally different companies would create a very interesting market game and would have a positive impact on service quality. With Montenegro’s economic growth, airports will become significant and that will attract potential investors. Of course, one could ask, ‘why should we do that when our airports have undergone reconstruction?’ Yes, but from whose money? Do we still pay airport fares despite the poor quality of service? In the case of privatization, air fares would probably remain the same but more attention would be paid to customers. The privatization of roads also has great potential. According to the Strategy, in the following two to nine years road traffic investments should be € 1,248,000,000! This amount represents almost 76% of the Montenegrin GDP! Divided equally over nine years this investment represents 8.45% of GDP annually. Despite certain GDP growth projections, we must seriously question whether Montenegro can hold to such an amount under pressure. The response of many will be the availability of favorable loan arrangements. However, loan arrangements are hardly ever favorable and even when they are, someone has to pay them back and very often it becomes the obligation of those who don’t make use of the infrastructure object. It is questionable whether or not that is fair or whether just the users should pay for an infrastructure’s usage. In any case, perhaps overall investments in road infrastructure can’t be managed by private capital. However, it is important that the largest projects be managed in that manner and that the others find different financing ways, even through local municipalities’ loan arrangements. The largest road infrastructure objects in Montenegro in the next 9 years should be: Adriatic – Ionia highway construction (€ 425,000,000), Podgorica – Matesevo highway construction (235,000,000), Risan – Zabljak road connection construction (95,000,000), Niksic – BiH border road reconstruction (€ 93,000,000) and Verige bridge construction (€ 87,000,000). If these objects can be privatized, apropos constructed by concession arrangements, the overall state’s



investment will be reduced by € 935,000,000. However, it is possible that there won’t be interest in all of them during the following period, but the first two projects stated and the Verige Bridge should certainly be considered for privatization. Such a manner of financing will reduce the overall investment by € 747,000,000. Concession fees are very important revenues that can be used for investments in non-privatized infrastructure. Numerous potential investors are attracted by a project’s feasibility apropos the length of concession arrangement, which can go up to 50-99 years. This lengthy arrangement leads to good infrastructure maintenance because it promises future revenues as well. It seems that concession arrangements are a “win-win” situation. The price of a privatized infrastructure object defrays only its users and the state is strengthening its regulatory and custodial role. Privatization of infrastructure objects would have a significant effect on the capital market. The reason is simple; for such projects it is necessary that companies or investment funds issue long term corporate bonds, and private pension funds (which are about to start in Montenegro) are perfect buyers of those bonds. One feature creates another because in an economy there is always “the what is seen and what is unseen.34“

WORLD AROUND US – ARE EPISTLES POSSIBLE?

Empirically there is some resistance to such ideas. Perhaps we easily withstand when we don’t know that we have already paid a price for the use of some infrastructure object. Does Sozina deny us? Would there be any significant negative effects if it were built by private investors? Most likely, there would be no negative effects and the state would save around € 78 million, which could be used for science or sport development. Imagine just half of this investment in these two areas! The world’s practice varies and incites many relevant examples, discussing all of which would take too much time and space.

Railroad

It is very interesting that some parts of the rail infrastructure in Japan were never under state’s ownership. Their railway is the world’s busiest and works with extreme preciseness. Although there are some subsidizes for outlaying regions, since 1987 the entire railway of Japan has been in private hands. Great Britain is another good example. Since its establishment, the British rail was in private hands and the state’s intervention was minimal. The state interfered only to impose safety regulations and third class ticketing. Under those conditions, results were great. However, after the Second World War, a lack of money and spirit of nationalization resulted in a state-owned railway; and disaster had begun. Britain is also a good example of bad privatization, apropos pseudo-privatization. The Railway Act in 1993 was the beginning of privatization, and the first private train went on the tracks on February 4th 1996. Trains were bought by Roscos (Rolling Stock Company) and track, signaling and stations were given to Rail track. The first bad sign was that Railtrack was able to own the track but others were obliged to maintain it. The state began its own intervention and began to control operator’s prices, Railtrack prices, contract lengths, and they provided subsidizes. The state’s regulations forbid track owners to operate trains and train operators to own tracks! This was odd because the essence of privatization is to keep the state out of industry! Perhaps the railway can’t handle fragmentation and various owners of the infrastructure due to the interconnection of it parts and the necessity of joint ventures, which given too many different

94


34 Frederic Bastiat, „The one that is seen and the one that is unseen“, ISSP, Podgorica, 2001


owners of the various pieces may sometimes be difficult. However, that should be decided by a free market and not by the state and its interference. Another reason for privatization is the completely new culture of organization, maintenance, punctuality and discipline, as well as the very capital intensive nature of the railroad. Only one who is surely involved in it and who knows how to manage it will undertake such an activity and would try to be the best it could be. Ports Ports owned by governments have faced several problems; among them are lack of exposure to full market pressure, reduced incentives for efficient operation, and they were very often the subject of political intervention (as overall economy in a non-market system). It is quite common that the government’s ports have losses that are covered by the budget or from different fund subsidizes. That’s a perfect engine to fuel the lack of competitive development incentives. In the last decade of the 20th century, the trend in both developed and developing countries was the privatization of ports apropos port operations and assets responsibility to private owners. The trend must continue in post-socialist countries primarily because it allows for the ability of private companies to operate efficiently in a free market economy.

Even the World Bank suggested the privatization of ports because it leads to increased productivity. In their opinion, the following are the main reasons for this 35: o more labor input into decision making o improved marketing o new feeling of “belonging” resulting in less loitering and absenteeism o incentive bonuses o new technology o work-force restructuring o work-force flexibility Additionally, they emphasized that employees gained from the overall process.

Malaysia was among the first countries to begin the process of ports privatization. They have privatized their principal port KPA (Kelang Port Authority). In 1985, they began the privatization process with KPA’s incorporating KCT (Kelang Container Terminal). The second phase had KPA selling have sold 51% of KCT to the KTK management company (Konnas Terminal Kelang), which was owned by Kontenas National and P&O Australia Ltd. By the end of the year, KTK’s shares were listed on the Kuala Lumpur Stock Exchange. One of the world’s largest ports, Shanghai, sold 50% in 1992 to Hutchinson Whampoa. Privatization even occurred in the state-oriented Sweden. In 1986, they privatized the Port of Gothenburg. During 1989, the Netherlands sold Ijmuiden Fishing Port Authority to a private company. In New Zealand the Port of Tuaranga was privatized for $18,000,000.

In addition to the above mentioned examples, one of the world’s favorite privatizations was in Britain. The British port’s privatization began in 1983. Before that, only Felixstowe, Liverpool, and Manchester were privately owned ports. Even in Britain there were government owned ports, but the majority of them had been sold years ago. Comparison between the two types determines a good approach. In February of 1983 Britain sold the Association of British Ports (ABP), which incorporated 19 ports, for £ 80 million (which was 51.5% of the company or 21 million shares). The major reasons behind the ABP privatization were36:


35 Leroy Jones and Fadil Azim Abbas, “Welfare Consequences of Selling Public Enterprises: Case Studies from Chile, Malaysia, Mexico, and the U.K.” World Bank Country Economics Department, May, 1992


o increased services cost and restricted competition o inability of new technologies adoption and, because of that, market slack o ports weren’t able to transfer themselves to more profitable commercial ventures and their

assets couldn’t be transferred into more economically valuable uses

An additional one million shares were offered free to employees and the remaining shares stayed in the hands of the government. After privatization, employees owned approximately 2.5% of ABP, and in April of 1984, the government sold the remaining part in ABP. This time, incentives were provided for employees to participate in ownership. Shares were also issued as “matching offers” so that employees received one free share for each share purchased. “The rise of ABP's share price and market capitalization provides a clear indication that the overall impact of privatization was positive.”37

The next wave of British ports’ privatization happened in 1989 and 1990 when the Tees & Hartlepool and Bristol ports were sold. Both of them increased their tonnage handling after privatization by 35% and 27%, respectively. During 1992, the ports of Tilbury, Medway, and Clyde were sold as a group for $135 million.

After privatization, diversification of port assets through property development was extensive. It has also helped to revitalize local and regional economies. Overall investments after privatization in the UK were £205 million38. According to this, the ports, the employees, the management companies, the inhabitants, and the state were all winners in the privatization process.

As in all other cases, airport privatization is about efficiency apropos making airports more efficient, accountable, and customer-oriented. It is yet another example of shifting an old and odd business model with a new commercial model. After changing ownership these airports are restructured to cut costs and to add more paying customers to its client base. According to Robert W. Poole Jr.39, airport privatization reduced airfares in real terms compared to previous fares and airports became more valuable. Greater cargo and passenger volume, lower operating costs, and higher commercial revenue are the major “offenders” in this situation. Airport privatization is maybe one of the most unknown privatization processes for a wider public. Prior to 1987 and Margaret Thatcher, this was completely an unknown issue. Her government sold BAA airports via IPO for $ 1.9 billion. It was the beginning of airport privatization worldwide. After that, different waves of privatization occurred. In the beginning of the 1990’s, Vienna and Copenhagen, as well as other British airports, became partly private airports. In the following years, major parts of the Dusseldorf, Rome, and Naples airports were sold. Europe wasn’t the only place where began to happen. In Bolivia, three main airports were given under long-term concession while a 50-year concession for the Melbourne, Perth, and Brisbane airports reached $2.6 billion. The U.S. began its infrastructure privatization with a 10-year management contract over the Indianapolis airport. Examples are many but the essence is one. A rise of efficiency, cost cuts, commercialization, and customer-oriented services were the major effects of well done infrastructure privatizations.

Airports

96


36 David Haarmeyer, Peter Yorke, ”Port Privatization – an international perspective”, Reason Foundation, Policy Study No. 156, 1993 37 David Haarmeyer, Peter Yorke, ”Port Privatization – an international perspective”, Reason Foundation, Policy Study No. 156, 1993 38 1983 Prospectus for the Privatization of Associated British Ports 39 Robert W. Poole Jr., ”Why airport privatization has come”, Reason Foundation, Airport Public/Private Sector Privatization Workshop – keynote speech, www.rppi.org


INSTEAD OF CONCLUSION

Successful examples can be a lantern for the future of the Montenegrin infrastructure privatization. Nevertheless, copies are always just pale. We have to search for our own way to make our economy much more competitive and customer oriented. With continued emphasis on the privatization effects such as efficiency, better resource allocation, and better assets usage, we don’t want to diminish other key points. On the contrary, one led to another. Freedom of private ownership and the necessity of its protection, along with the state’s disappearance from business are the cornerstones of every privatization process; and the infrastructure is, although last, just one of its phases. Montenegro has lost years in the development process, but the velocity of the current economic and social changes can recoup it in a sense. We are on a good path trying to develop a market oriented, liberal, and open society in order to increase the quality of life for all. Society’s mental transition, incorporated with strong institutions and a favorable business environment, can create a regional “business carrier.”

LITERATURE:

1. Ayn Rand, “Capitalism as unknown ideal”, Global Book, 1994 2. David Haarmeyer, Peter Yorke,”Port Privatization – an international perspective”, Reason Foundation,

Policy Study No. 156, 1993 3. Frederic Bastiat, “The one that is seen and the one that is unseen,” ISSP, Podgorica, 2001 4. Leroy Jones and Fadil Azim Abbas, “Welfare Consequences of Selling Public Enterprises: Case

Studies from Chile, Malaysia, Mexico, and the U.K.” World Bank Country Economics Department, May, 1992

5. Patrick Crozier, “Why British rail privatization has failed”, Economic Notes, No. 91, Libertarian Alliance, 2001, www.libertarian.co.uk

6. Prospectus for the Privatization of Associated British Ports, 1983 7. Robert W. Poole Jr., “Airport Privatization Flies Higher”, Privatization Watch, No. 242, 1997, Reason

Public Policy Institute, www.rppi.org8. Robert W. Poole, Jr. , “Three Lessons in Highway Privatization”, Budget & Tax News, The Heartland

Institute 2005 9. Robert W. Poole Jr., ”Why airport privatization has come”, Reason Public Policy Institute, Airport

Public/Private Sector Privatization Workshop – keynote speech, www.rppi.org 10. Traffic Strategy Development of Montenegro Outline, Government of Montenegro, 2006 11. Veselin Vukotic, “Conceptual basis of new economic system in Montenegro”, ISSP, Podgorica, 2001


http://www.libertarian.co.uk/

http://www.rppi.org/



INFORMATION SOCIETY OF MONTENEGRO IN 2006 (PART I) Author: Milica Dakovic, ISSP

Based on ICT Survey ’06 findings

1. INTRODUCTION The Institute for Strategic Studies and Projections continues to explore the level of development of the information society in Montenegro in 2006. In order to determine the level of information literacy in life and business, we conducted the ICT Survey ’06. The research was aimed at answering different questions in the area of ICT (information communication technologies), such as: PC and Internet usage; fixed and mobile telephony; E-skills; E-commerce; and E-government. The survey also identified existing barriers that are present and limiting the development of the information society in Montenegro. The ICT Survey ’06 was conducted on a representative sample of 1,000 households and 250 enterprises from all three regions of Montenegro. We also reached methodological novelty in the creation of sample; the survey included urban and rural parts of Montenegro in order to create a realistic insight into the current level of development in the information society. Additionally, this survey is just one of a series of surveys in the area of ICT that needs to be realized to give rise to the development of the information society. This project also included overall ICT market research of Montenegro40. 2. ICT IN HOUSEHOLDS

2.1. Fixed and mobile telephony Montenegro is, as is the trend in neighboring countries and the EU, characterized by a relatively low level of fixed mobile phone penetration while, at the same time, mobile telephony is expanding. Approximately eight of ten households in Montenegro have fixed telephony (79.9%) and most pay up to 25 euro monthly for fixed telephony costs (58%).

ICT is recognized as an important factor within the average Montenegrin household during the last several years and has become an irreplaceable tool in communication and business. The increase in ICT is seen in the increasing number of computers in households (38.3%), increasing Internet penetration rate (21.6%), and increasing mobile phone penetration (98%). Still, there is a dominant need for ICT education, especially among young people, in order to improve the level of information literacy. These needs are in direct conflict with the ability of households to pay for courses, as the highest levels of need are found within the poorer regions, regions that do not use ICT as much. Thus, the question of efficiency and price attractiveness of computers and courses arises. This can also be viewed as a ‘sign’ to all educational institutions that they must improve the level of information literacy among the population in Montenegro. According to this, we can conclude that ICT usage in these areas is directly connected with the level of economic development. On the other hand, mobile telephony expansion is not connected with economic development, as expansion is noted in all regions of Montenegro regardless of its citizens’ life standard or the areas economic development. The following text is based on ICT usage analysis in Montenegrin households through some of the most important ICT indicators: fixed and mobile telephony, computers and Internet, E-government, and E-commerce.

98


40 ICT Survey ’06 is a result of successfull cooperation with Republic Secretariat for Development, company Telekom CG, and IT firms: Cikom, Jugodata, TradeCom and Informatika Montenegro.


On the other hand, mobile telephony usage is expanding. Nearly half of the households (47%) think that mobile telephony partly substituted fixed telephony usage, while an additional one-quarter (24.6%) think that mobile telephony completely substituted fixed telephony usage. It is worth noting that Montenegro is a leader in the region with mobile phone penetration of 98%. This high usage puts Montenegro on the same level as Scandinavian countries41. Additionally, nine of ten households in Montenegro (91.8%) use mobile phones for communication.

Graph 1 Fixed and mobile telephony in households

72

74

76

78

80

82

84

86

88

90

92

94

F ixed phone Mobile phone

Source: ISSP, ICT Survey ’06 The number of mobile phones per household varies by region, with the average household in Montenegro reporting to have two mobile phones. This number also varies within region by municipality. In the municipality of Podgorica, more than half of households have more than three mobile phones (52%)! The territorial divide on urban and rural areas shows that mobile phones are similarly present in both areas The mobile telephony market in Montenegro is still not saturated regardless of the number of mobile phone users. It has been announced that the Montenegrin mobile phone market will soon have a third mobile phone operator, which as competition, will lower the prices and increase new services for future customers. 2.2. Computers and the Internet

Computers have become more and more present in households during the last several years. Presently, nearly two-fifths of all households from the sample have a computer (38.3%). Differences between the regions and municipalities are also present. In Podgorica, nearly three-fifths of households (58%) do have a computer, while the remaining 42% still don’t. While there is still a need for households to purchase computers, the main barrier continues to be their price; the households’ lower living standard and lack of money to spend on a computer is the most important obstacle to its purchase (61% of household report this as a main barrier). The most developed region with respect to PC usage and ICT usage is the central region42. On the other hand, the poorest developed region is the northern part of Montenegro.


41 The most developed countries regarding ICT usage. 42 Include municipalities: Podgorica, Niksic, Danilovgrad and Cetinje.


Graph 2 Does your household own a computer?

Yes38%

No62%

100


Source: ISSP, ICT SURVEY ’06 Among those households that own a computer, most use it daily (66.8%), and on average, two household members use the computer (61.1%). The most frequent program language is Microsoft Office (61%), while the most frequently used operating system is Windows XP, which is used by 70.4% of the households that have a computer. Most of these households in Montenegro purchased their computers in the period from 2002 to 2004 with approximately one-third of them (32%) purchasing it in 2004. Most households (91.6%) have just one computer in the home, while 8.4% of them do have two or more computers.

Most household members are self-educated with respect to PC usage; in all, nearly half (47%) report to be self-educated. The most frequent users are children older than 16 (43%), but those younger than 16 also report to be PC users (33%). This is very important because it shows that these generations are responsible for the future development of the information society and they need to be treated specially. The Internet, as one of the basic ICT indicators, has a special place in our analysis. Similar to the use and ownership of computers, Internet connections are varying in the different regions in Montenegro. Approximately three of five households (58.7%) that have a computer also have an Internet connection. Analysis of the urban/rural divide shows us that three of five households with an Internet connection are from urban areas (60%), while four of ten are from the rural parts of Montenegro (40%). In the municipality of Podgorica, just over one-half of the households that have a computer also have an Internet connection (52%).

Graph 3 Type of Internet connection in households

ADSL4%

Modem84%

ISDN12%

Source: ISSP, ICT SURVEY ’06


A modem connection is the most frequently used connection (81%). However, within the central region, many want to use an ADSL connection (41.7%) in future. Typically, two members of the household are using the Internet connection (33%). Since younger generations more easily accept new ICT trends, it is interesting to note their use of the Internet; specifically, among all of the households that have an Internet connection, more than two-fifths (45.1%) have one or two children under the age of 16 that use the Internet. The Internet is mostly used for communication, as reported by three-quarters of households (74.4%), while nearly half (46.5%) use it as an efficient tool for gathering information. While the Internet is used for many purposes related to public services, administration, and trade in developed countries, E-commerce is still not so popular among households in Montenegro; just 8.2% of the households in Montenegro have made a purchase via the Internet and most of those purchases were for books and magazines.

Graph 4 Why don’t you purchase goods over the Internet?

0 5 10 15 20 25 30 35 40 45 50

Speed of Internet connection

Prefer normal shopping

No pay card

Deliv ery problems

No need

Lack of know ledge

Fear regarding the pay ing

Source: ISSP, ICT SURVEY ’06

Presently, there is still a lack of knowledge about the importance of E-government and the possibilities that it can provide households in Montenegro43. Even though E-government is still not possible in Montenegro, it was very interesting to identify which administrative problems households would like to resolve via the Internet. The most frequently mentioned areas that households would like to handle over the Internet include personal documentation or identification cards (38.5%), health services (34%), and registration of vehicles (31%). Three-quarters of households (75%) think that the Government of Montenegro needs to improve its development of the information society through concrete actions and programs. 3. E-SKILLS An interesting topic of the survey is the research in the area of E-skills within households. Even though a significant number of households have computers in their homes, there still exists the need for extra education in the area of ICT. This is supported by the fact that more than half of the households (56.4%) report a need for extra education. The educational need is even more pronounced among households in the northern parts of Montenegro (61.5%) and among the


43 33% of households are not informed of that.


younger population, specifically those under 16 (77.1%). A very low percentage of individuals have attended courses in the area of computers and Internet (23.3%), and more than three-quarters of them have never attended these courses (76.7%). In order to promote the development of future information literacy, two-fifths of households (39%) think that the prices of computers need to be decreased. There are also those who think that future movements need to be more focused on education in the area of ICT. 4. INSTEAD OF CONCLUSION ICT Survey ’06 identified a dominant need in 2006 to improve knowledge in the area of ICT. The research identifies regional differences regarding ICT usage as well as the need to develop exact programs of development in Montenegro. In order to improve the level of information literacy, free courses should be implemented, prices of computers and prices for Internet access should be decreased, and a correct level of taxation in the area of ICT should be introduced. Media also represent a key factor in future development of the information society, through the organization of educational programs. One of the key factors to the implementation and use of modern technologies is knowledge -- knowledge, beginning with elementary information up to expertise levels in ICT. ICT Survey '06 identifies a need for education in the area of ICT. Only the synergetic activities of institutions such as governmental bodies, the IT sector, the private sector, media, and NGO can give positive results in the future development of the information society in Montenegro.

102



ICT REGULATION IN MONTENEGRO Author: Marko Ćalasan, CARA

ORIGIN OF REGULATORY AGENCIES During the 20th century there were many parts of the modern economy that were considered to be “natural monopolies.” The nature of this was derived from the established reasoning that some services that have a very broad user base, potentially the entire population of a country, cannot be well operated if they are privately owned. This reasoning was also rooted in the economic theory that stated if the marginal income for an added user is less than the market price, this exchange will not happen; in other words, the company would not increase its output to satisfy an added customer. In our case, this customer was a telephone subscriber. Many former and current economic theories that deal in development show that access to telecommunication services plays an important role in the development of a country. This indicator still exists today, but it has been doubled now by the existence of several other indicators, such as access to the internet, mobile phone usage, etc. Therefore, if the income strategy of a privately owned company does not allow a telecommunication expansion of huge proportions, the state will come in and nationalize most of the utilities companies. This has happened in most developed countries, expect for the US, which has always had a large share of privately owned utilities companies. Prior to the war, Montenegro, and ex-Yugoslavia did not have a strong telecommunication infrastructure, as compared to the then existing telecommunication infrastructure, and their primary telecommunication companies were created and run by the state as national companies. In the 1980’s, a strong flow of de-regulation and privatization swept through Europe and the USA in an economic and theoretic movement called Thatcherism and Reaganomics, named after its two key members, the Prime Minister of the UK and the President of the USA. The state has relinquished power of this sector, but not all of it. While legislation regarding this sector did exist, it was not necessarily examined and written in code of laws. Since a company was already state owned, the “will of the government” certainly ruled the company, whether a law existed or not. However, this certainly is not the case with privately owned companies. To regulate these companies, since simple legislation was not enough, the state needed hands-on management in some areas. As it would be unconstitutional for the government to directly manage these companies, as they are de jure independent, a special regulatory agency was founded to regulate and manage certain activities within the sector. Montenegro was not an exception, and the Agency for Telecommunication was founded in 2001, by the decision of the Government of Montenegro. The agency is an independent regulatory body that functions independent of all the subjects that exploit the telecommunication networks, provide the equipment, or render services. The agency itself is considered a legal entity by statute condoned by the Government.


The introduction of competition in the marketplace does not mean regulation is unnecessary. Quite the contrary, the role of the regulator actually increases once governments authorize competition. This is particularly true during the early stages of transition from the former model of monopoly provision to one of effective competition. In order to transition to an effective competitive environment, regulators must establish a regulatory framework that can resolve disputes, address anticompetitive abuses, protect consumers, and attain national goals such as universal access, industrial competitiveness, or economic productivity and growth.


This also must be considered cun granum soli, because one of the cancers of the modern government, especially for one aspiring to the EU, is the extreme growth of regulation agencies and the overregulation issues. As this article will show, a surprisingly contrary trend exists in Montenegro, where there is a gap between the market needs and existing legislation. The jurisdiction of the Agency and its primary role is the supply of necessary legislation, its design and implementation, and the provision of activities that would lead the telecommunication sector of Montenegro through the transition process, thereby integrating it with regional telecommunication networks and stimulating private investments, which is one of the goals of the economic development of the state of Montenegro44. LICENSING, THE ORIGINAL PURPOSE OF THE AGENCY FOR TELECOMMUNICATION Traditionally, in many parts of the world, a license was issued to authorize a person to provide telecommunications services or to operate telecommunications facilities. Formally, this is also in effect in Montenegro; however, the telecommunication companies are older than the agency that issues licenses. Such licenses generally describe key rights and obligations of licensees and often define the conditions related to the provision of services. A wide range of approaches to licensing have been adopted in the EU practice and worldwide. Today, the practice of issuing detailed individual licenses to specific telecommunications service providers is gradually being replaced by more general authorization approaches. This trend is especially being pushed by the current EU regulatory agencies, and the Montenegrin agency has declared their intention to also transition to this mode of functioning. Under this approach, few, if any, conditions are included in the license document that is issued to a specific service provider. Instead, regulatory conditions are generally established in rules or regulations that apply equally to all service providers of the same class (mobile providers) or across the whole telecommunications industry. With increased liberalization, some regulators are also removing all authorization requirements for some telecommunications services. These service markets are then open to entry by any new service providers, without restriction. Historically, many countries developed authorization policies on an ad hoc basis. This was very true for the EU countries in the 1990’s. Frequently, policies were only developed when specific decisions were made to authorize additional service providers. However, as the global regulatory experience evolved, an increasing number of countries adopted explicit authorization policies. This means, not just an application for a license, commonly known as licensing, but an approached set of rules that speed up the entire process, the authorization. Many countries developed policies based on the experience of regulatory reform and telecom market liberalization in other countries. In developing and transitional markets, authorization policies often provide for (1) immediate opening of peripheral telecom markets to competition, and (2) phased opening of voice telephony and related ‘core’ markets . 45

This trend must be spurred on by the agency for telecommunication of Montenegro. As many of the required issues for a fast growing ICT society are already in place, the only thing that might bottleneck us is the gap between the existing legislation and the needed legislation. The regulation on Montenegro seriously gaps the EU trend, especially in the field of electronic commerce, a very important future field of operations of the Agency. This is not unexpected

104


44 Source: Agency for Telecommunication of Montenegro www.agentel.cg.yu 45 Source: InfoDev, Telecommunication Regulation Toolkit www.ictregulationtoolkit.org


since little or no e-commerce exists in Montenegro and this fact is the explanation for the lack of regulation. Key legislation is laws such as the Law on electronic signature, and others, which have not been passed yet. The “lobby” group for such activities and a rightful representative of the Montenegrin ICT community is the Agency, and it should be more active in its effort to pass such laws in the parliament of Montenegro. An obvious Catch 22 exists in this sector given the fact that while there is a need for legislation as one of the final items on the agenda, there is no legislation currently because there is no actual need for this type of legislation. This situation must be jump-started if any viable e-commerce trend is to catch on in Montenegro. As usually occurs in deregulation issues, the first to catch up are not the large existing entities, but rather the small transition countries. The liberation of telecommunication services was first successful in countries such as Morocco, East Asia, and sub-Saharan Africa. These countries now have a two fold increase in their sectors. Montenegro was much more advanced than these countries to begin with, and is still in a similar position when viewed from the position of political compromise within the country for reforms. Such a position will not last long, but major liberalization has occurred. One needs only to boost up the existing legislation in order to balance the need of the private sector.

This publication has examined Internet use for reserving rooms in the tourism sector of Montenegro and finds the main barrier to this service to be the inability to process payments in Montenegro via the Internet. This situation has not changed. The lack of the SSL verified servers for this processing is certainly not the fault of the regulatory agency, but of the private sector. However, if and when such technology is constructed here, it would operate without any legislation for some time, and its possible penetration would be very low because of the lack of institutional support. FUTURE PROSPECTS On the other hand, banks such as CKB, Montenegro bank, or Opportunity bank have begun a system of e-banking, which is done through the use of chip cards and verification software issued by a private IT company in Montenegro, or done completely in-house, like the CKB bank. Montenegro has a good opportunity to become a very important hub for payment processing in the future, whether credit card payments or inter-bank payments. Montenegro’s position and the current fiscal trend make it a desirable location for many bank related businesses. If such a position is coupled with a good and stable ICT infrastructure, the possibilities can be very positive for the Montenegrin banking sector.

The modern trend for the banking sector is very closely tied to the parallel evolution of the technological and regulatory framework surrounding it, and surely this has been so for the past twenty years; the only difference now is that the pace has picked up substantially in the past 10-15 years so the spotlight is much more focused on legislation nowadays. Montenegro must not lose its current position and the telecommunication sector must not be something to be dealt with. When looking at modern trends, the telecommunication sector must be our most northeast star in the path of joining modern developed countries. Not everything lies on the shoulders of the regulatory agency, but they have the lion’s share of the job.



STATISTICAL ANEX

106



REAL SECTOR Table 1: Major developments in the Real sector

GDP Industrial production Touism Transport

Processing industry Transport of passengers

Transport of goods

1991

=10

0

Annu

al c

hang

e in

%

2000

=10

0

Annu

al c

hang

e in

%

2000

=10

0

Annu

al

chan

ge in

%

Alum

inum

pr

oduc

tion

(ton

)

Elec

tric

ity

gene

ratio

n (in

M

Wh)

pers

ons

Annu

al c

hang

e in

%

Shar

e of

for

eign

to

uris

ts in

tot

al in

%

1998

=10

0

Annu

al

chan

ge in

%

1998

=10

0

Annu

al

chan

ge in

%

2000 84,1 3,1 100,0 3,3 100,0 95.526 2.698.019 448.187 99,3 18,7 66,2 -18,2

2001 83,9 -0,2 98,0 -2,0 101,6 1,6 108.123 2.492.993 555.040 23,8 82,0 -17,4 69,1 4,5

2002 85,3 1,7 98,7 0,7 103,9 2,3 116.482 2.194.516 541.699 -2,4 25,1 65,2 -20,6 83,1 20,2

2003 86,6 1,5 100,9 2,2 104,6 0,6 120.212 2.586.420 598.539 10,5 23,6 67,3 3,3 81,2 -2,4

2004 89,8 3,7 114,6 13,8 120,8 15,6 120.796 3.246.608 703.484 17,5 27,0 64,4 -4,4 76,8 -5,4

2005 93,8 4,5 112,4 -1,9 123,8 2,5 120.373 3.231.331 820.457 17,0 37,6 62,3 -3,2 79,9 3,7

2002-Q1 88,0 -24,7 26.619 507.743 33.292 50,9 -14,7 84,5 80,3

2002-Q2 89,0 -23,7 29.513 265.271 118.958 61,4 -14,0 67,1 -18,1

2002-Q3 101,0 -13,2 30.105 501.282 352.718 88,4 -27,5 72,1 14,6

2002-Q4 116,7 2,6 30.245 920.220 36.731 59,9 -20,0 108,8 28,3

2003-Q1 108,5 23,3 104,4 29.744 1.010.097 26.913 -19,2 21,7 45,7 -10,2 63,8 -24,5

2003-Q2 87,9 -1,2 105,9 29.988 377.521 123.180 3,5 27,5 62,3 1,4 81,8 21,9

2003-Q3 98,1 -2,9 99,2 30.176 458.240 420.910 19,3 25,0 104,5 18,2 85,5 18,6

2003-Q4 106,8 -8,5 108,7 30.304 740.562 27.536 -25,0 29,5 56,8 -5,1 93,5 -14,0

2004-Q1 106,6 -1,7 111,3 6,6 30.168 840.947 26.265 -2,4 42,1 47,4 3,8 72,5 13,7

2004-Q2 117,5 33,6 121,0 14,3 29.783 981.060 121.790 -1,1 34,0 60,3 -3,3 70,7 -13,7

2004-Q3 104,7 6,7 113,8 14,7 30.335 518.626 512.740 21,8 26,0 98,3 -5,9 83,3 -2,6

2004-Q4 129,4 21,2 139,0 27,9 30.510 905.975 38.809 40,9 38,2 51,4 -9,6 80,7 -13,7

2005-Q1 110,94 4,0 115,5 3,8 29.951 1.388.921 29.154 11,0 34,4 41,0 -13,6 61,1 -15,7

2005-Q2 109,26 -7,0 119,3 -1,4 29.709 636.208 149.116 22,4 37,9 55,83 -7,4 77,56 9,8

2005-Q3 117,76 12,5 155,9 37,0 30.346 451.467 598.182 16,7 32,8 91,3 -7,2 88,8 6,7

2005-Q4 116,94 -9,6 128,9 -7,3 30.367 754.735 44.005 13,4 40,5 61,1 19,0 92,1 14,1

2006-Q1 116,02 4,4 112,4 -2,7 29.949 1.004.210 40.003 37,2 39,0 46,5 13,5 64,6 5,6

2006-Q2 110,73 2,9 119,9 0,5 30.109 647.970 156.489 4,9 52,2 67,2 20,4 56,8 -26,8

Jan-04 99,67 -0,1 80,2 10.274 275.727 6.578 -30,9 23,7

Feb-04 109,04 -3,5 115,5 -1,8 9.588 340.680 14.318 50,4 47,6

Mar-04 111,55 -1,1 131,0 14,9 10.305 224.540 5.369 -31,8 55,0

Apr-04 119,35 44,6 113,3 22,4 9.846 327.487 14.198 2,9 33,5

May-04 116,73 46,0 123,4 15,2 10.091 382.956 43.697 16,7 36,1

Jun-04 116,38 16,5 124,3 5,30 9.846 270.617 63.895 -11,2 32,5

Jul-04 105,56 6,1 108,8 13,00 10.291 158.113 177.957 -2,7 22,7

Aug-04 99,01 0,2 112,2 16,50 10.174 209.536 241.916 42,3 21,4

Sep-04 109,51 14,6 128,6 14,6 9.870 150.977 92.867 36,3 33,9

Oct-04 111,04 7,3 129,8 9,0 10.321 188.282 21.242 54,8 40,7

Nov-04 122,25 19,4 143,0 49,1 9.934 296.330 8.074 8,6 39,1

Dec-04 154,77 28,3 139,7 25,7 10.256 421.363 9.493 48,9 34,7

Jan-05 112,98 13,3 95,4 19,0 10.296 350.921 7.999 21,6 30,3

Feb-05 103,16 -5,5 126,1 9,2 9.384 766.800 9.840 -31,3 30,4

Mar-05 116,67 4,5 125 -4,6 10.271 271.200 11.315 110,7 42,6

Apr-05 104,65 -12,4 99,5 -12,2 9.856 205.200 18.423 29,8 40,8

May-05 110,30 -5,7 129,8 5,2 10.009 222.500 40.678 -6,9 43,4

Jun-05 112,84 -3,3 128,7 3,5 9.844 208.508 90.015 40,9 36,2

Jul-05 117,47 10,1 194,8 17,9 10.178 126.793 221.079 24,2 29,7

Aug-05 115,70 16,5 129,4 15,3 10.186 136.047 268.669 11,1 29,1

Sep-05 120,10 9,3 143,6 11,7 9.982 188.627 108.434 16,8 39,6

Oct-05 109,29 -1,9 126,3 -2,7 10.274 180.744 24.649 16,0 37,1

Nov-05 119,46 -2,4 138,9 -2,9 9.883 298.737 9.476 17,4 44,1

Dec-05 122,08 -21,2 121,5 -13,0 10.210 275.254 9.880 4,1 40,2

Jan-06 119,52 5,7 94,8 -0,6 10.330 393.562 11.988 49,9 32,2

Feb-06 108,17 4,7 116,1 -7,9 9.360 319.027 13.884 41,1 42,8

Mar-06 120,39 3,0 126,3 1,0 10.259 291.621 14.131 24,9 42,1

Apr-06 103,90 -0,8 99,2 -0,3 9.979 190.681 22.535 22,3 50,1

May-06 113,25 2,6 129,3 -0,4 10.353 237.224 43.796 7,7 59,3

Jun-06 115,06 1,9 131,3 2,0 9.777 220.065 90.158 0,2 47,3



PRICES Table 1: Prices

Consumer Prices Index (Cost of Living)46

Total CPI Total RPI Total PPI

2000= 100

Montly change in %

Annual change in % An

nual

cha

nges

of

food

, tob

aco

and

beve

rage

s (%

)

Annu

al c

hang

es o

f go

ods

with

out

food

, tob

aco

and

beve

rage

s (%

)

Annu

al c

hang

es o

f se

rvic

es (

%)

2000= 100

Montly change in %

Annual change in %

2000= 100

Annual change in %

PRICES IN DINARS

1995 9,8 6,2 83,7 206 6,5 100,1

1996 18,2 3,4 89,7 379 3,3 89,1

1997 22,9 1,4 26,5 456 1,1 20,8

1998 29,8 3,1 29,8 582 2,9 27,5

1999 47,1 6,2 56,6 931 7,1 58,0 85,9

DM (until December 2001) and EURO (from January 2002)

2000 100,0 3,4 36,1 10,9 23,2 12,2 100,0 25,0 100,0 16,5

2001 120,2 1,8 21,8 18,9 22,8 42,0 123,0 8,6 23,1 114,4 14,5

2002 142,0 0,7 16,8 15,7 18,7 19,5 147,6 3,1 17,4 121,6 4,6

2003 151,6 0,50 6,8 3,9 9,3 7,3 159,4 0,5 7,7 127,8 2,9

2004 155,2 0,26 2,4 0,6 3,8 9,3 164,4 0,3 3,3 138,0 5,8

2005 161,6 0,20 104,1 100,4 101,5 138,9 173,8 0,2 5,5 140,8 2,1

2004-Q1 155,0 0,1 5,5 3,9 8,1 7,7 161,9 0,1 7,1 130,9 7,6

2004-Q2 154 0,2 6,3 4,2 7,3 9,0 161,7 0,2 7,5 129,9 7,2

2004-Q3 155 0,1 5,5 3,9 8,1 7,7 161,9 0,1 7,1 130,9 7,6

2004-Q4 156,1 1,2 1,3 -1,2 2,3 20,2 166,7 0,8 3,1 138,5 4,3

2005-Q1 160,0 0,1 3,2 -1.7 1,6 42,2 172,4 0,1 5,9 139,5 3,1

2005-Q2 161,9 0,5 4,1 0,0 1,3 41,1 173,8 0,3 5,2 140,3 0,9

2005-Q3 161,3 -0,1 4,8 0,8 1,8 45,3 174,0 0,1 3,6 141,4 1,6

2005-Q4 163,0 0,4 4,4 2,3 1,5 30,7 174,9 0,1 4,3 142,1 2,6

2006-Q1 164,5 0,3 2,9 3,5 1,5 1,0 175,7 0,1 2,3 144,0 0,9

2006-Q2 166.8 0.5 3.2 4.2 1.6 0.6 177.48 0.4 2.2 146.2 3.8

May-05 0,6 3,8 -1,0 1,8 57,8 173,8 4,1 5,8 140,2 0,5

Jun-05 162,5 0,3 4,8 1,3 0,9 38,7 174,2 5,1 3,8 141,3

July-05 160,9 -1,0 4,6 0,6 1,6 44,7 173,8 6,1 3,5 141,3 1,5

Aug-05 161,2 0,2 4,7 0,6 1,6 44,8 173,9 7,1 3,5 141,4 1,3

Sep-05 161,8 0,4 5,2 1,2 46,3 174,4 8,1 3,7 141,6 2,1

Oct-05 162,3

162,0

1,7

108


2,1

0,3 5,2 0,5 -0,1 45,3 174,8 0,2 3,3 141,6 2,1

Nov-05 163,3 0,6 5,7 1,1 -0,4 45,5 174,9 0,1 3,4 141,7 2,2

Dec-05 163,5 0,2 2,5 0,3 0,0 1,1 175,1 0,1 143,0 3,5

Jan-06 164,1 0,3 2,9 3,2 1,8 1,1 175,5 0,2 2,6 143,1 3,1

Feb-06 164,5 0,3 2,9 3,6 1,6 1,0 175,7 0,1 2,3 143,7 -2,8

Mar-06 164,9 0,2 2,8 3,8 1,2 0,9 175,9 0,1 2,1 145,2 2,3

Apr-06 165.9 0.7 3.1 4.2 1.4 0.6 176.9 0.6 2.1 145.8 3.8

May-06 167.1 0.7 3.3 4.4 1.7 0.6 177.4 0.3 2.2 146.1 3.9

Jun-06 167.3 2.3 146.8 0.1 3.1 4.1 1.7 0.6 177.8 0.2 3.6

Source: Prices overview published by Statistical office of Montenegro, except the monthly rates for December 2004, which are ISSP calculations. • Table presents end-o period values for monthly data and average period values for quarterly and annual data.f-

• Monthly and annual changes are based on data taken from Monstat publications except December 2004 monthly rates of change are calculated by ISSP

• One-base index is calculated as a chain index according to Monstat indices based on respective previous years.

46 Cost of living Index is official name of Consumer Prices Index

1,8


BUDGET Table 1: Central budget revenues and expenditures, 2001-2006 (Jan-July), (million €)

2001 2002 2003 2004 2005 2006

Jan-Dec Jan-Dec Jan-Dec Jan-Dec Jan-Dec Jan-July

Execute Execute Execute Execute Execute Execute

Deposits from previous year

A TOTAL REVENUE AND GRANTS (1+2) 233.140 256.804 350.103 379.730 431.79 292.17

1 TOTAL REVENUE (1.1+1.2) 221.220 229.847 337.519 372.783 416.86 292.15

1.1 Current revenue (1.1.1+1.1.2) 221.220 229.847 337.519 369.696 411.89 291.56

1.1.1 Tax revenue (1.1.1.1+1.1.1.2+1.1.1.3+1.1.1.4+1.1.1.5) 187.999 208.931 312.918 337.513 382.33 267.53

1.1.1.1 Personal income tax 56.654 57.889 63.961 61.235 67.09 37.44

1.1.1.2 Turnover (sales) tax 58.488 56.528 137.222 158.096 193.38 147.30

1.1.1.3 Excises 35.664 50.786 58.197 61.527 65.60 38.09

1.1.1.4 Taxes on international trade and transactions 27.274 26.376 36.845 36.653 41.09 31.12

13.894 12.605 35.078 33.803 37.10 31.12

1.1.1.4.2 Custom transit fees 13.380 13.771 1.766 2.850 2.850 0.00

1.1.1.5 Other taxes 9.920 17.342 16.694 25.03 13.58

1.1.2 Non tax revenues 33.221 20.916 24.601 32.183 29.56 24.04

1.2 Capital revenue 3.087 4.97 0.59

11.920 26.958 12.584 6.947 2.50 0.02

B TOTAL EXPENDITURE AND NET LENDING (1+2) 259.309 266.771 293.64381.090 405.487 459.71

1 TOTAL EXPENDITURE (1.1+1.2) 252.585 247.517 358.924 390.211 429.99 289.58

1.1 Current expenditure (1.1.1+1.1.2) 236.697 377.561 276.00

1.1.1 Interest 0.622 12.880 14.136 24.025 20.36 10.23

232.665 223.818 331.099 379.00 265.77

1.1.2.1 Wages, salaries, allowances 108.464 110.178 134.262 164.389 155.93 91.24

1.1.2.2 Goods and services 41.817 46.913 33.24

1.1.2.3 Social Insurance and Social Security Transfers 45.327 35.825 132.795 103.782 117.22 89.28

1.1.2.4 Subsidies to enterprises 12.249 18.169 14.631 8.481 6.33 3.33

1.1.2.5 Reserves 6.461 14.819 8.388 16.689 29.16 9.37

1.1.2.6 Other non - interest expenditure 4.813 3.165 13.282 1.81 39.32

1.2 Capital expenditure 19.298 10.820 13.688 12.650 30.63 13.58

6.723 19.254 22.167 15.276 7.46 4.06

Lending 13.974 19.490 22.590 17.803 6.37

Repayment 7.250 0.236 0.423 2.527 2.31

OVERALL BUDGET BALANCE EXCLUDING GRANTS (CASH) (A-B-2) -38.089 -36.925 -43.571 -32.704 -27.91 -1.49

OVERALL BUDGET BALANCE (CASH) (A-B) -26.169 -9.967 -30.987 -25.757 -30.41 -1.47

FINANCING (1+2) 26.129 38.254 18.395 23.427 62.2 -6.12

1 DOMESTIC AND FOREIGN FINANCING (NET) 17.007 0.568 6.234 19.886 -71.88 -8.48

Borrowings 76.436 40.445 48.246 51.110 0.81

Repayment 59.430 42.012 9.29 39.877 31.224

9.122 37.686 12.161 2.36

1.1.1.4.1 Custom tariffs

20.002

2 GRANTS

233.287 345.235 399.36

1.1.2 Non-interest expenditure (1.1.2.1+1.1.2.2+1.1.2.3+1.1.2.4+1.1.2.5+1.1.2.6) 353.536

55.351 37.858 57.39

3.010

2 NET LENDING

2 PRIVATIZATION REVENUE 3.541 136.31

Source: Ministry o Finance, ISSP calculations fNote: Lending is comprised of given loans and repayment on the basis of given guarantees

f fPrivatization revenues include revenues on the basis o disposal o financial and non-financial assets



MONEY Table 1. Monetary aggregates, in € 000

2003 2004 2005 2006

XII VIII X XII I II III IV V VI

M0 290.935 324.364 325.768 321.932 325.239 351.276 336.478 328.717 335.283 356.947 359.621 369.762

40.935 74.364 75.768 71.932 101.276 86.478 78.717 85.283 106.947 109.621 119.762

Estimate of cash in circulation 250.000 250.000 250.000 250.000 250.000 250.000 250.000 250.000 250.000 250.000 250.000 250.000

M1 386.121 595.064 592.292 588.959 666.747 714.240

M0 284.909 290.935 324.364 325.768 321.932 325.239 351.276 336.478 328.717 335.283 356.947 359.621 369.762

Demand deposits* 101.212 139.724 202.904 212.158 217.237 221.036 243.788 255.814 252.444 253.676 270.684 307.126 344.478

M11 402.586 436.876 552.806 568.659 571.602 575.682 613.883 616.725 617.790 656.835 695.100 739.326

M0 196.670 271.687 324.364 325.768 321.932 325.239 351.276 336.478 328.717 335.283 356.947

242.891 249.670 250.443 277.405 288.008 282.507 299.888 335.479

M2 460.837 535.550 676.574 699.274 748.723

M1 386.121 430.659 527.268 537.926 539.169 546.275 592.292 588.959 627.631 666.747 714.240

Term deposits* 74.716 104.891 149.306 154.670 48.574 48.574 205.989 216.974 220.133 223.492 223.957

M21 494.290 546.287 767.794 781.479 785.114 832.561 866.091 874.050 874.123 914.095 953.205 1.012.517

M11 402.586 436.876 552.806 568.659 571.602 575.682 613.518 613.883 616.725 617.790 695.100 739.326

Term deposits** 91.704 109.411 214.988 212.820 74.983 74.983 252.573 249.852 257.325 256.333 257.260 258.105 273.191

XII IX XI

284.909

Banks' deposits with CBM-Payment Operations 34.909 75.239

250.000

430.659 527.268 537.926 539.169 546.275 581.161 627.631

613.518

359.621 369.762

Demand deposits** 205.916 165.189 228.442 262.242 369.564

692.596 801.053 799.347 798.135 851.123 890.704 954.811 809.092

595.064 581.161

207.055 240.571

863.735

656.835

* without Government deposits ** including Government deposits

110



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MONEY Table 2.a. Total deposits (in € 000)

2002 2003 2004 2005 XII XII XII II

Description/Period

Term

dep

osits

Tota

l

Dem

and

depo

sits

Term

dep

osits

Tota

l

Dem

and

depo

sits

Term

dep

osits

Tota

l

Dem

and

depo

sits

Term

dep

osits

Tota

l

Dem

and

depo

sits

Term

dep

osits

Tota

l

1 Financial institutions 4.938 1.662 2.454 1.284 3.738 10.708 19.876 30.584 9.347 18.304 27.651 30.486 23.632 54.118

Banks 6.000 14.244

1.289 5.972

2 Non financial instititions 69.331 100.330 40.042 109.984 69.630 33.958 103.588 59.002 31.161 90.163 30.981 88.263

Public non financial corporations 22.779 7.347 30.126 12.037 9.986 22.023 11.477 24.829 11.843 18.483 8.559 11.319 19.878

State companies 3.746 3.667 7.413 4.670 4.791 9.461 4.360 9.356 13.716 4.769 8.978 13.747 6.173 9.592 15.765

Publicly owned organizations 19.033 3.680 22.713 7.367 5.195 12.562 7.117 3.996 11.113 1.871 2.865 4.736 2.386 1.727 4.113

Other non financial corporations 46.552 23.652 70.204 57.905 30.056 87.961 58.153 20.606 52.362 19.318 71.680 48.723 19.662 68.385

Domestic private companies 41.972 23.370 65.342 52.640 28.916 81.556 53.893 16.798 70.691 48.084 64.106 16.022 43.274 15.630 58.904

Entrepreneurs 0 0 1.063 2 1.065 1.188 12 1.200 1.321 12 1.333

Foreign companies 4.580 282 4.862 5.265 1.140 6.405 3.197 3.806 7.003 3.090 3.284 6.374 4.128 4.020 8.148

3 Government 58.238 11.078 69.316 19.402 25.685 45.087 18.122 28.111 46.233 21.352 29.062 50.414 20.753 28.813 49.566

Central government 40.221 7.077 47.298 5.738 13.961 8.223 6.184 4.507 10.691 8.147 4.416 12.563 4.948 5.651

Agencies and institutions of central government 13.907 1.246 15.153 9.468 258 9.726 6.356 6.339 12.695 6.072 7.351 13.423 9.377 5.744 15.121

Local government - municipalities 339 44 383 1.324 10 1.334 1.843 186 2.029 1.888 396 2.284 1.498 219 1.717

State funds 3.771 2.711 6.482 2.872 17.194 20.066 3.739 17.079 20.818 5.245 16.899 22.144 4.930 17.199

4 Physical entities 11.469 10.743 22.212 22.206 22.864 45.070 40.064 39.211 79.275 45.877 45.104 90.981 49.661 93.233

5 Non profit organizations 1.315 1.229 2.544 2.452 1.285 3.737 5.089 171 5.260 5.086 243 5.329 5.177 243 5.420

6 Other 1.574 4.528 1.376 2.016 3.392 7.886 371 8.257 7.370 1.260 8.630 8.006 464 8.470

TOTAL 148.245 57.285 205.530 117.832 93.176 211.008 151.499 121.698 273.197 148.034 125.134 273.168 165.276 133.794 299.070

III

Dem

and

depo

sits

6.600

3.658 1.653 5.311 1.081 764 1.845 12.297 18.297 3.375 10.873 14.248 1.765 16.009

Other financial institutions 1.280 9 1.373 520 1.893 4.708 7.579 12.287 7.431 13.403 28.721 9.388 38.109

30.999 69.942 57.282

13.352 6.640

78.759

10.599

22.129

43.572

2.954


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MONEY Table 2.b. Total deposits (in € 000)

2005 IV V VI VII VIII

Description/Period

Dem

and

depo

sits

Term

dep

osits

Tota

l

Dem

and

depo

sits

Term

dep

osits

Tota

l

Dem

and

depo

sits

Term

dep

osits

Tota

l

Dem

and

depo

sits

Term

dep

osits

Tota

l

Dem

and

depo

sits

Tota

l

1 Financial institutions 14.168 30.670 44.838 11.282 2 694 8. 39.976 054 30.301 45.355 41.359 27.745 44.285

Banks 3.511 15.433 4.119 436 13.555 9. 3.113 4.292 066 8. 12.358 10.642 14.783

Other financial institutions 10.657 18.748 29.405 7.163 19.258 26.421 11.941 18.592 30.533 10.931 18.069 29.000 12.400 17.103 29.503

2 Non financial instititions 56.655 27.979 84.634 80217 31.206 111.423 88501 36114 124.615 84.372 42441 126.813 94202 47769 141971

Public non financial corporations 9.096 8.129 17.225 7798 5.390 13.188 11948 6757 10.695 8504 19.199 13627 9538 23165

State companies 5.987 5.666 11.653 5.548 4.113 9.661 10.144 5.528 15.672 8.570 7.175 15.745 11,348 8.067 19,415

Publicly owned organizations 3.109 2.463 5.572 2.250 1.277 3.527 1.804 1.229 3.033 2.125 1.329 3.454 2,279 1.472 3,750

Other non financial corporations 47.559 19.850 67.409 72.419 25.816 98.235 76.553 29.357 105.910 73.677 33.936 107.614 80576 38.230 118806


Entrepreneurs 1.424 2 1.426 1.413 2 1.415 1.554 13 1.567 2.026 13 2.039 2.081 13 2.094

Foreign companies 5.591 4.020 9.611 4.694 5.020 9.714 5.537 6.745 12.282 5.667 7.575 13.242 4.871 6.896 11.767

3 Government 28.267 25.995 54.262 34.536 32.943 67.479 25.346 27.979 53.325 25 26.075 51.507 30.059 25.784 55.843

Central government 5.650 19.983 18.268 12.623 30.891 9.215 9.241 18.456 9.297 15.809 6.512 12.852 4.151

Agencies and institutions of central government 3.686 13.239 8.399 4.412 12.811 9.585 2.690 12.275 9.184 3.317 12.501 4.461 14.515

Local government - municipalities 1.333 316 1.649 2.826 97 2.923 2.631 107 2.738 2.943 46 2.989 3.272 17 3.289

State funds 3.048 16.343 19.391 5.043 15.811 20.854 3.915 15.941 19.856 4.008 20.207 16.199 3.880 17.156 21.036

4 Physical entities 51.794 49.680 101.474 49.891 53.687 103.578 56.420 59.355 115.775 64.253 63.062 127.315 67.162 62.022 129.184

5 Non profit organizations 4.227 243 4.470 6.401 303 6.704 358 7.166 7.532 370 7.903 8.506 407 8.913

6 Other 9.869 255 10.124 6948 350 7.298 4.882 321 5.203 4.782 374 5.157 3407 372 3780

TOTAL 164.980 134.822 299.802 189.275 147.183 336.458 197.011 154.428 351.439 201.595 158.458 360.053 219.877 164.099 383.976

Term

dep

osits

15.223 23.136 16.540 15.

11.922 11.709 14.822 4.140

18.705

14.333 17.003

9.553 1.054

6.808

112



MONEY Table 2.c. Total deposits (in € 000)

2005 2006 IX X XI XII I

Description/Period

Dem

and

depo

sits

Term

dep

osits

Tota

l

Dem

and

depo

sits

Term

dep

osits

Tota

l

Dem

and

depo

sits

Term

dep

osits

Tota

l

Dem

and

depo

sits

Term

dep

osits

Tota

l

Dem

and

depo

sits

Term

dep

osits

Tota

l

1 Financial institutions 17.578 24.377 41.955 18.541 23.382 41.923 14.343 26.498 40.841 12.593 27.477 40.070 16.054 18.372 34.426

Banks 4.411 8.160 12.571 3.855 8.740 12.595 2.235 10.772 13.007 2.732 15.248 17.980 4.715 5.728 10.443

Other financial institutions 13.167 16.217 29.384 14.686 14.642 29.328 12.108 15.726 27.834 9.861 12.229 22.090 11.339 12.644 23.983

2 Non financial instititions 91.506 49.724 141.230 92.449 46.137 138.586 92.113 47.087 139.200 112.700 49.271 161.971 113.429 42.096 155.525

Public non financial corporations 12.363 10.701 23.064 12.218 11.390 23.608 10.800 11.625 22.425 14.573 10.364 24.937 14.594 10.423 25.017

State companies 9.851 8.900 18.751 9.166 9.281 18.447 7.909 9.154 17.063 12.189 8.156 20.345 11.998 8.210 20.208

Publicly owned organizations 2.512 1.801 4.313 3.052 2.109 5.161 2.891 2.471 5.362 2.384 2.208 4.592 2.596 2.213 4.809

Other non financial corporations 79.143 39.023 118.166 80.231 34.747 114.978 81.313 35.462 116.775 38.907 137.034 98.835 31.673 130.508


Entrepreneurs 2.050 14 2.064 1.666 12 1.678 2.107 12 2.119 1.438 13 1.451 1.655 3 1.658

Foreign companies 5.231 7.575 12.806 5.564 7.845 13.409 5.425 7.057 12.482 5.431 8.062 13.493 5.518 7.643 13.161

3 Government 43.899 25.194 69.093 37.541 27.515 65.056 35.874 103.512 30.586 67.250 97.836 32.149 71.345 103.494

Central government 23.758 3.019 26.777 20.048 4.687 24.735 17.725 10.935 28.660 14.289 5.952 20.241 13.084 6.515 19.599

Agencies and institutions of central government 12.235 4.762 16.997 10.378 4.807 15.185 10.992 4.897 15.889 7.874 6.560 14.434 8.559 6.651 15.210

Local government - municipalities 3.929 7 3.936 3.503 7 3.510 3.485 7 3.492 3.191 987 4.178 6.524 1.755 8.279

State funds 3.977 17.406 21.383 3.612 18.014 21.626 3.672 55.471 5.232 53.751 58.983 3.982 56.424 60.406

4 Physical entities 75.527 65.890 141.417 80.319 71.129 151.448 86.760 77.552 164.312 93.502 82.248 175.750 99.692 86.419 186.111

5 Non profit organizations 8.222 352 8.574 9.141 5.054 14.195 7.790 5.055 12.845 8.940 517 9.457 8.120 750 8.870

6 Other 3.462 312 3.774 3.141 315 3.456 2.994 325 3.319 2.407 425 2.832 2.676 313 2.989

TOTAL 240.194 165.849 406.043 241.132 173.532 414.664 239.874 224.155 464.029 260.728 227.188 487.916 272.120 219.295 491.415

98.127

67.638

51.799



MONEY Table 2.d. Total deposits (in € 000)

2006 II III IV V VI

Description/Period

Dem

and

depo

sits

Term

dep

osits

Tota

l

Term

dep

osits

Tota

l

Dem

and

depo

sits

Term

dep

osits

Tota

l

Dem

and

depo

sits

Term

dep

osits

Tota

l

Dem

and

depo

sits

Term

dep

osits

Tota

l

1 Financial institutions 15.333 19.553 34.886 39.085 52.916 61.576 61.318

Banks 2.561 7.744 10.305 15.166 27.469 33.039 33.833

Other financial institutions 12.772 11.809 24.581 23.919 25.447 28.537 27.485

2 Non financial instititions 121.971 44.827 166.798 154.499 162.989 176.775 207.750

Public non financial corporations 13.817 10.471 24.288 22.051 23.778 21.402 22.400

State companies 11.274 8.665 19.939 18.049 19.057 16.662 17.415

Publicly owned organizations 2.543 1.806 4.349 4.002 4.721 4.740 4.985

Other non financial corporations 108.154 34.356 142.510 132.448 139.211 155.373 185.350

Domestic private companies 100.832 128.523 119.662 125.501 172.779

Entrepreneurs 1.680 3 1.683 1.377 1.493 1.791 1.844

Foreign companies 5.642 6.662 12.304 11.409 12.217 12.286 10.727

3 Government 34.527 76.169 110.696 108.545 107.544 109.712 100.800

Central government 21.474 6.403 27.877 26.458 24.870 23.776 18.447

Agencies and institutions of central government 7.307 7.432 14.739 16.978 17.409 19.833 18.754

Local government - municipalities 2.837 4.954 7.791 7.156 7.579 7.794 8.449

State funds 2.909 57.380 57.953 57.686 58.309 55.150

4 Physical entities 91.576 89.571 181.147 198.265 207.840 224.744 253.388

5 Non profit organizations 8.827 705 9.532 10.401 10.670 10.254 8.624

6 Other 2.759 296 3.055 3.142 2.749 3.022 3.582

TOTAL 274.993 231.121 503.114 513.937 544.709 586.082 635.462

Dem

and

depo

sits

27.691 141.296

60.289

114


Monet Jun 2006

MONEY Table 3. Household deposits

1.Demand deposits 2. Term savings up to 1 year

3. Term savings over 1 year Total (1+2+3)

Dec-00 2034,941687 428,46 2,05 2465,45

Oct-05 1750,663401 655,48 56,75 2462,89

Nov-01 2092,206378 809,38 466,30 3367,88

Dec-01 3516,665559 1557,40 549,64 5623,70

Jan-02 2843,805443 2089,65 617,13 5550,58

Feb-02 2791 2336 702 5829,00

Mar-02 4139 3418 741 8298,00

Apr-02 4874 4443 773 10090,00

May-02 4329 4732 525 9586,00

Jun-02 4629 5609 615 10853,00

Jul-02 5036 6089 702 11827,00

Aug-05 4269 7217 928 12414,00

Sep-02 3984 7669 1663 13316,00

Oct-05 5686 8012 1038 14736,00

Nov-02 5205 9515 1099 15819,00

Dec-02 11370 9650 1127 22147,00

Jan-03 11122 10326 1188 22636,00

Feb-03 11339 10926 1194 23459,00

Mar-03 9887 14446 1166 25499,00

Apr-03 13409 13466 1179 28054,00

May-03 11379 13368 1199 25946,00

Jun-03 12133 13848 1340 27321,00

Jul-03 14433 13386 1463 29282,00

Aug-05 16917 14576 1522 33015,00

Sep-03 16967 16512 1554 35033,00

Oct-05 19863 18983 1633

Nov-03 19502 19851 1658 41011,00

Dec-03 22559 20258 2341

Jan-04 18560 20639 3331 42530,00

Feb-04 18359 23115 2987 44461,00

Mar-04 20865 24108 2525 47498,00

Apr-04 22730 25102 2647 50479,00

May-04 22314 26104 2914 51332,00

Jun-04 22986 26393 3254 52633,00

Jul-04 26320 26592 3770 56682,00

Aug-04 28716 28277 3327 60320,00

Sep-04 29980 30168 3407 63555,00

Oct-04 35105 28203 6786 70094,00

Nov-04 33571 33388 3743 70702,00

Dec-04 40143 36097 4433 80673,00

Jan-05 35621 4722 77283

Feb-05 45877 40828 4267 90982

Mar-05 43573 14902 93234

Apr-05 51794 35366 14306 101474

May-05 49892 39112 14551 103579

jun.05 56420 42583 16771

jul.05 64253 47323 15739 127315

avg.05 67162 47053 14969 129184

sep.05 75527 53238 12652 141417

58417 12712 151447

nov.05 86757 59042 18508

dec.05 93500 62600 19700 175800

83300 3200 186200

feb.06 91600 87000 2400 181100

mar.06 105500 91600 2100 198200

apr.06 115400 90200 2100 207800

maj.06 129500 91200 4000 224700

jun.06 143900 100700 8800 253400

Okt-05 80318

164307

jan.06 99700

115776

34753

36794

45158,00

40479,00

© Institut za strateške studije i prognoze 115


MONEY Table 4. Total loans (in € 000)

2002 2003 2004 2005 2006

XII XII XII VIII X XI XII I II III IV V VI

1 Financial institutions 788 1.695 3.854 1.947 1.840 1.578 1.442 136 132 428 1.424 2.610 4.709

Banks 35 1.525 1.000 29 26 24 37 36 34 1.042 2.040 1.051

Other financial institutions 753 170 2.854 1.918 1.814 1.553 1.418 99 96 394 891 1.568 3.091

2 Non financial institutions 80.984 128.338 184.298 220.676 217.931 226.419 231.149 239.633 247.192 268.159 288.751 308.863 327.783 343.367

Public non financial institutions 10.641 14.186 18.248 22.743 23.773 25.398 27.109 28.714 31.401 35.043 36.878 36.232

State companies 8.448 12.413 15.360 14.075 16.166 17.922 19.646 21.245 23.457 26.621 26.856 27.301

1.773 7.703 7.383 7.476 7.463 7.469 7.944 10.022 10.584

Other non financial corporations 70.343 114.152 166.050 197.802 202.646 205.751 212.524 236.758 253.708 271.985 305.481

Domestic private companies 70.305 114.148 159.278 191.892 191.772 196.596 199.504 206.060 229.068 264.078 297.190

Entrepreneurs 5.768 4.183 4.164 4.189 4.361 4.386 4.481 4.678 4.771 5.073 5.829

Foreign companies 38 4 1.004 1.858 1.866 1.861 1.886 1.995 3.012 2.994 2.834 2.288 2.659

3 Government 20.531 20.570 18.758 28.019 25.547 31.708 30.785 32.393 35.839 36.511 33.728 36.018 35.302

Central government 16.373 9.162 3.172 3.082 3.179 7.589 9.864 12.416 13.530 11.635 8.115 9.185 10.211

Agencies and institutions of central government 916 141 405 1.303 1.251 1.240 2.217 5.409 5.290 5.218 5.229 4.701 3.337

Local government - municipalities 842 910 5.017 4.993 3.756 3.958 3.809 3.709 3.978 4.169 5.284 5.392 8.653

State funds 2.400 7.456 17.444 17.372 11.703 13.113 15.478 15.628

Physical entities 49.959 90.377 92.154 101.869 107.229 110.731 128.755 140.160 156.866 175.379

Non profit organizations 63 822 882 5.495 5.298 943 922 969 1.005 986 1.087

6 Other 0 0 0 31 23 8 127 127 125 0 0 0 0

TOTAL 124.663 200.625 281.483 341.840 339.608 357.506 371.474 375.940 387.995 416.251 456.448 486.347 526.844

IX

5.131

25 533

3.658

20.129 37.885

10.545 26.161

Publicly owned organizations 2.193 6.054 7.607 8.422 10.071

197.933 218.478 291.551

212.002 245.943 283.434

5.633

2.078

26.770

16.495

4.649

1.735

3.024 18.530 17.944 10.978 16.792 13.101

4 22.290 74.393 98.444 104.316

5 70 180 1.045

559.844

116

