According to Prof. Dr. Vasilije Kostić, President of the Montenegrin Employers’ Association (CUP) and economic analyst, the primary driver for investors is the security of their investment, followed by the profit potential determined by the business environment of the country. This perspective sheds light on the current challenges Montenegro faces with foreign direct investments (FDI) and why these investments may not align with the country’s developmental needs.
In 2023, Montenegro experienced a 45.23% drop in net inflows of FDI compared to 2022. This decline continued into the first four months of 2024, with a 9.85% reduction in net FDI compared to the same period last year.
Recent data from the Central Bank indicate a slight recovery by the end of May. The total FDI inflow for the first five months of 2024 was nearly the same as in the previous year, while the net FDI inflow during this period was 9.66% higher compared to the same timeframe in 2023.
Prof. Kostić stressed that the current trend in foreign direct investments must be reversed or halted to prevent serious negative impacts on macroeconomic stability.
“To achieve this, it is crucial to undertake substantial measures and develop a new program for promoting and managing FDI under the current circumstances. We must move away from the flawed approach of attracting investments at any cost, which has been a common practice in the past, and recent efforts to encourage investments continue in this misguided direction. It is essential to learn fundamental lessons, including that not all foreign investments are beneficial to our development,” Kostić stated.
Deteriorating trends
Kostić noted that significant damage has already been done, and it is now time to redefine and align policies with Montenegro’s developmental goals.
“Annual data show a drastic decline, which is particularly concerning and highlights serious deficiencies in FDI management policies. Even during the peak periods of FDI inflows, the policies had notable shortcomings, especially in encouraging FDI in sectors that could have driven scalable economic growth in Montenegro,” Kostić explained. He believes this significant opportunity has been lost due to a focus on the quantitative increase of FDI rather than the necessary structural quality needed for Montenegro’s economic and societal development.
The lack of a long-term development strategy has exacerbated this issue, with current conditions being even worse. Montenegro now faces a serious decline in FDI inflows along with issues in the quality of these investments.
Preliminary data from the Central Bank of Montenegro (CBCG) shows that the total FDI inflow at the end of 2023 was €856.99 million, with €428.32 million flowing out of the country.
The net FDI inflow from January to December 2023 was €428.67 million, a 45.23% decrease compared to 2022. The total FDI inflow was down by 25.59% from 2022, mainly due to declines in intercompany loans and investments in companies and banks, as well as withdrawals of foreign investments.
FDI inflows in the form of equity investments amounted to €558.44 million, making up 65.16% of the total. Of this, €463.18 million was invested in real estate, and €95.26 million in companies and banks. The inflow of FDI in the form of intercompany loans was €264.65 million, or 30.88% of the total.
By the end of April 2024, total FDI inflows were €289.89 million, with €128.05 million flowing out. The net FDI inflow at the end of April was €161.84 million, down by 9.85% compared to the same period last year. The total FDI inflow decreased by 3.89%.
In May, there was a modest recovery, with preliminary data showing that from January to May 2024, net FDI inflow was €214.35 million, a 9.66% increase compared to the same period in 2023. The total FDI inflow was €364.81 million, roughly the same as in the previous year.
Impact on economic stability
Kostić emphasized that the decline in FDI should not be underestimated, given its impact on Montenegro’s balance of payments and macroeconomic stability.
“FDI have a significant quantitative impact on macroeconomic variables and are also a major source of new knowledge and modern business practices. Their decline harms economic activity and overall development in Montenegro. The drop in FDI inflows (both total and net) should be viewed primarily from the perspective of its qualitative impact on economic development, in addition to the quantitative aspect, which is also important,” Kostić said.
To reverse the negative trend, “it is essential to take action, as improvements will not happen by themselves.”
“The existing policy and strategy should be redefined and adapted to new conditions, focusing on achieving long-term development goals, provided we understand what these goals are and have made strategic choices,” Kostić concluded. He added that it is crucial to understand the interests of foreign investors and what motivates them to invest in a country.
“It seems we have failed in this regard, as we have long mistakenly believed that tax incentives were the primary motivation for investors. In reality, investors are first motivated by the security of their investment and then by the profit potential offered by a favorable business environment. By examining this perspective, I believe we can understand why current FDI trends are occurring and why they are not meeting our developmental needs,” Kostić concluded.
