NewsHigh government spending and borrowing will limit economic growth

High government spending and borrowing will limit economic growth

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Previous interventions by the state in the direction of the nationalization of certain companies and significant state spending, which was based on high expenditures and borrowing, limited the possibility for the growth of the Montenegrin economy in the coming period, announced director of the Institute for Strategic Studies and Projections (ISSP), Dr. Jadranka Kaluđerović.

Montenegro, as a small open economy, relies to a large extent on the inflow of capital from abroad to stimulate economic growth, and the GDP growth rate will largely depend on this openness and the ability to attract that capital. On the other hand, the market economy does not suffer from too much state interference in the economy, because this in the long run reduces the possibilities for growth. However, previous state interventions in the direction of the nationalization of certain companies and significant state spending, which was based on high expenditures and borrowing, which is becoming increasingly difficult and unfavorable, limited the possibility for economic growth in the coming period – Kaluđerović said.

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She pointed out that the additional growth of personal consumption, on which a significant part of the growth of the economy was based during the previous two years, will also slow down. According to her, good macroeconomic indicators in the previous period reduce the need for additional borrowing.

– Also, they mean that even in the case of the need for borrowing, more favorable conditions can be expected than in the case of negative indicators. However, what is also important for the possibility and convenience of borrowing is the potential for growth in the future, meaning what is expected or what investors think can be expected in the coming period in terms of the country’s economic performance, but also overall stability – said Kaluđerović.

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Commenting on Prime Minister Dritan Abazović’s announcement that Montenegro will end this year with a GDP of more than six billion euros, she stated that it is not unrealistic to expect that.

– Bearing in mind the level of GDP in the previous year by quarter, growth rates in the first quarter and price growth, it is not unrealistic to expect a GDP level above six billion. What it will primarily depend on is the value of the GDP that will be generated in the third quarter, because it is the quarter in which at least a little less than a third of the value of the annual GDP is generated – said Kaluđerović.

However, as he explains, this is nominal GDP, and the real reflection of production growth in an economy reflects GDP in constant prices, which, he says, will hardly reach six billion euros.

– It should be noted that it is important what the real growth, i.e. the increase in the value of GDP, will be due to the increased amount of produced goods and services, and not due to inflation, which is not negligible – Kaluđerović pointed out and added that according to Monstat data, consumer prices in the first six months in an average of 11% higher compared to the same period of the previous year.

She reminded that before the pandemic, the Montenegrin economy achieved real growth rates that were at the level of four and even five percent (in 2018).

– Then in 2020, a pandemic followed and as we know, our economy was significantly shaken by that event, and in that year alone the value of produced goods and services was 15 percent lower. The next 2021 was characterized by the recovery of the economy and the increase in economic activity, which was also reflected in the real growth rate, which was 13% – announced Kaluđerović.

She stated that annual data for 2022 is not yet available, but quarterly data for that year show real growth rates of 7.1%, 12.7%, 3.2% and 3.3%.

– The real growth rate in the first quarter of this year was 6.1%. The data also show that the increase in GDP was primarily due to an increase in personal consumption and investment in fixed assets, which is much better than if the state had conditioned this growth with its own consumption. However, what we must know, and what is emphasized in the report of the World Bank, is the fact that the growth of our economy for ten years ago was conditioned primarily by the accumulation of capital, and not by an increase in productivity – stressed Kaluđerović.

She stated that in the document “Economic Memorandum for Montenegro: Towards a Sustainable Growth Strategy”, which was presented by the World Bank in June in Podgorica, it was announced that in the absence of the necessary reforms, Montenegro will reach the EU GDP level only in 2075.

– According to the memorandum of the World Bank, if we were to achieve real growth rates of four percent in the coming period, we would reach that level in 2048, while growth rates of five percent would enable us to reach that level in 2040 – said Kaluđerović and added that the level GDP per capita in 2019 was only 50 percent of the level in the EU, which, as she stated, clearly indicates that we need much higher growth rates than in the EU in order to reach that level as soon as possible.

– What this report points to is that primarily work must be done on increasing the productivity of companies in Montenegro through strengthening market mechanisms and investing in knowledge and development of people – added Kaluđerović.

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