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World Bank Strategy in Montenegro: 2011-2014

In mid-December 2010, the EU granted Montenegro the status of EU candidate country. In its four and a half years since independence, Montenegro has made considerable progress towards meeting political and economic membership criteria—however, with considerable challenges still ahead. Before opening negotiations on EU membership, the European Commission has outlined a set of reforms that are required to meet the Copenhagen criteria. The EU, among other priorities, expects a more professional and de-politicized public administration and judicial sector.

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Executive Summary
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Country Context

Montenegro saw its post-independence boom-bust cycle amplified by the global financial crisis, revealing structural weaknesses and pointing to the need to adjust the underlying growth model. The implicit susceptibility of the small, open, and euroized economy to changes in the external environment—paired with the pro-cyclicality of its most important sectors and the underlying tax system—has placed an increased premium on reforms aimed at increasing (i) knowledge, productivity, and innovation; (ii) employment, professional perspective, and social inclusion; and (iii) energy efficiency and environmental protection.

A return to dynamic rates of economic growth is balanced by environmental and fiscal sustainability considerations. Montenegro’s economy is largely based on activities in the tertiary sector (especially tourism) and agriculture. The energy sector could become an important source of growth and exports—provided that environmental impacts can be adequately contained and investments do not create large negative externalities encroaching on the country’s tourism potential. Aluminum and steel production, joint with bauxite and coal mining, remain vital (albeit economically vulnerable) activities, with aluminum products comprising about 40 percent of all merchandise exports. Trade with the European Union (EU)—especially with Greece and Italy, Montenegro’s second and third-largest export markets (after Serbia)—underpin most economic activity and international commerce. EU member states and Russia account for a significant proportion of FDI inflows.

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Montenegro's Vision and Key Priorities

The objectives of European integration and higher productivity anchor policy-making. The National Program for Integration (NPI) outlines the reform agenda required for eventual EU membership and defines Montenegro’s overarching policy objectives. The 2009–12 Economic and Fiscal Program (EFP) summarizes macro-fiscal policies aimed at fostering sustainable growth and employment by improving economic management, the business climate, and labor market skills. This plan calls for prudent fiscal policies and an efficient state administration, including strategic use of public-private partnerships to reduce the state’s fiscal burden.

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The World Bank Group's Program

The Bank will support the EU integration process and provide resources to help to strengthen institutions and improve environmental management. The FY11–FY14 CPS is client driven and reflects Montenegro’s status as an upper middle-income client with well-defined development priorities. Based on the outcome of extensive consultations with the Montenegrin Government, other domestic stakeholders, and external partners, the focus of Bank interventions will fall under two main priority areas, viz., to (i) strengthen institutions and competitiveness in line with EU accession requirements; and (ii) improve environmental management, including reducing the costs of environmental problems.

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Managing Risks

The CPS has sought to identify inherent risks that could delay the achievement of development goals. In particular, (i) growth rates in Southeastern Europe and the EU could be lower than currently expected; (ii) weaknesses in the banking sector linger; and (iii) progress in strengthening institutions and governance insufficient to achieve the results foreseen in the CPS. To mitigate these, the program will provide support to strengthen (fiscal) policies and help to improve policy effectiveness, including by enhancing the World Bank’s engagement with line ministries’ implementation units to ensure the transfer of adequate knowledge on Bank standards and procedures.

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