2009 Index of Economic Freedom

Quick Facts

Population:

• 0.6 million

GDP (PPP):

• $5.4 billion
• 6.5% growth
• $9034 per capita

Unemployment:

• 14.7%

Inflation (CPI):

• 3.4%

FDI Inflow:

• $1.0 billion

The 2009 Index is the first to assess Montenegro's level of economic freedom. The country's economic freedom score is 58.2, making its economy the 94th freest in the Index. Montenegro ranks 36th out of 43 countries in the Europe region, and its overall score is just below the world average.

Montenegro scores above the world average in trade freedom, fiscal freedom, monetary freedom, and business freedom. The economy has been relatively stable despite high fiscal deficits. The average economic growth rate during the past five years has been over 3 percent, but unemployment remains high at over 10 percent. The average tariff rate is moderate, but non-tariff barriers limit overall trade freedom. Monetary stability is relatively well maintained, and the flat income and corporate tax rates are competitively low.

Montenegro needs a stronger commitment to reform. External debt has been growing in recent years, and the institutional capacity to protect property rights and deal with corruption remains weak. Better budgetary control at all levels of government is necessary to target spending more effectively.

Background Back to the top

Following a public referendum, the Republic of Montenegro officially declared its independence from Serbia on June 3, 2006, and became independent for the first time in nearly a century. It has since become a member of the Organisation for Security and Co-operation in Europe, the United Nations, the International Monetary Fund, the World Bank Group, and the Council of Europe and is currently pursuing membership in the World Trade Organization, the European Union, and NATO. Milo Djukanovic became prime minister for a fifth time in February 2008. Having gradually pulled away from Serbia in the past decade, Montenegro introduced significant privatization and started using the German mark and then (despite not being a member of the euro zone) the euro as its legal tender. Ongoing problems include unemployment and the black market.

Business Freedom 68.7 Back to the top

Starting a business takes an average of 21 days, compared to the world average of 38 days. Obtaining a business license takes more than the world average of 18 procedures and 225 days. Regulations are inconsistent and non-transparent, and fees related to completing relevant procedures are high.

Trade Freedom 80.2 Back to the top

Montenegro's simple average tariff rate was 4.9 percent in 2006. Progress has been made toward liberalizing the trade regime, but some high tariffs, some import restrictions, weak implementation of non-transparent standards and regulations, weak enforcement of intellectual property rights, and corruption still add to the cost of trade. Ten points were deducted from Montenegro's trade freedom score to account for non-tariff barriers.

Fiscal Freedom 89.1 Back to the top

Montenegro enjoys competitive flat tax rates. The flat 15 percent rate on individual income passed by the parliament in 2006 is to be reduced to 12 percent as of 2009. The corporate tax rate is a flat 9 percent, levied at the state level. Other taxes include a value-added tax (VAT) and a property tax. In the most recent year, overall tax revenue as a percentage of GDP was 28 percent.

Government Size 45.3 Back to the top

Total government expenditures, including consumption and transfer payments, are high. In the most recent year, government spending was estimated to be about 42.7 percent of GDP. Privatization has stalled, and necessary reforms have not been undertaken in energy and labor.

Monetary Freedom78.9 Back to the top

Inflation is relatively low, averaging 3.1 percent between 2005 and 2007. State subsidies and price supports have been eliminated for most goods, and most prices are determined by market forces. However, the government influences a few prices through state-owned enterprises; retains the right to control the prices of certain basic products; and regulates utility, energy, and transportation prices. Ten points were deducted from Montenegro's monetary freedom score to account for policies that distort domestic prices.

Investment Freedom40.0 Back to the top

Foreign and domestic capital are treated equally. Montenegro's Foreign Investment Law incorporates such protections as profit repatriation and guarantees against expropriation. However, the business, legal, and regulatory environment is new or still in transition, and bureaucracy can be non-transparent and burdensome. The implementation and enforcement of regulations and laws can be problematic. Residents and non-residents may hold foreign exchange accounts, subject to central bank permission. Payments, capital transactions, and transfers are subject to certain restrictions.

Financial Freedom50.0 Back to the top

Montenegro's financial sector, though small and underdeveloped, is becoming more competitive. Access to financing has gradually increased in recent years in line with the improved banking sector. More than 10 commercial banks are operating, almost all with private ownership. The government privatized the last bank with direct majority state ownership in 2005, selling its majority stake in Podgorica, the country's third-largest bank, to a French investor. Foreign banks' participation and investment are significant. Growing competition has not yet significantly pushed down credit prices, which remain fairly high. The non-banking financial sector, including insurance and reinsurance, remains underdeveloped. Montenegro's securities sector is small, and its two stock exchanges play only a small role.

Property Rights40.0 Back to the top

The constitution serves as the foundation of the legal system and creates an independent judiciary. Historically, the judicial system has been inefficient; judges are poorly trained. Sales of pirated optical media (DVDs, CDs, and software) and counterfeit trademarked goods (particularly sneakers and clothing) are fairly widespread. Procedures for enforcement of intellectual property rights are governed by recently enacted Laws on Civil Procedures.

Freedom From Corruption33.0 Back to the top

Corruption is perceived as significant. Montenegro ranks 84th out of 179 countries in Transparency International's Corruption Perceptions Index for 2007. There is a widespread perception of government corruption, particularly in the executive and judicial branches and especially with regard to the privatization of state-owned firms. Conflict-of-interest legislation requiring the disclosure of government officials' salaries and property has not been fully implemented, and many officials refuse to comply. Organized crime, especially the smuggling of gasoline and cigarettes, has long been present in Montenegro.

Labor Freedom57.2 Back to the top

Montenegro's rigid labor regulations hinder overall employment and productivity growth, contributing to a persistently high level of unemployment. The non-salary cost of employing a worker is relatively high, and regulations related to the number of work hours remain rigid.