The grey economy has long been one of Montenegro’s most persistent structural constraints, quietly eroding fiscal revenues, distorting competition, and weakening the credibility of public statistics. Recent government proposals to establish a national registry of craftsmen and independent service providers signal a renewed attempt to bring informal economic activity into the formal system. While administratively simple on paper, the economic implications of this move are substantial and extend well beyond tax collection.
Estimates of Montenegro’s informal economy vary, but most credible assessments place it in the range of 20–30% of GDP, a level broadly consistent with other small, service-oriented economies in South-East Europe. In nominal terms, this implies that between €1.4 and €2.1 billion of economic activity annually either bypasses taxation entirely or is only partially reported. The fiscal leakage from this shadow activity is material. Conservative assumptions suggest foregone budget revenues of €250–350 million per year, equivalent to 4–6% of total government revenues.
The sectors most affected are well known. Construction, tourism-related services, personal crafts, transport, small retail, and seasonal activities dominate informal employment. These are precisely the sectors that benefit most from Montenegro’s tourism-led growth model, creating a paradox in which the strongest growth drivers simultaneously undermine fiscal sustainability. Seasonal labour, cash payments, and fragmented service provision make enforcement difficult and incentivise non-compliance.
The proposed crafts registry aims to address this asymmetry by creating a formal record of independent workers and micro-service providers, enabling simplified taxation, social contributions, and regulatory oversight. From a policy perspective, the registry is less about punishment and more about lowering entry barriers into formality. The economic logic is straightforward: if compliance costs are reduced and predictability increased, a significant share of informal operators will choose legality over risk.
Quantitatively, even partial success would be meaningful. If only 25% of informal activity were formalised over a three-year period, this could expand the tax base by €350–500 million. Applying Montenegro’s effective tax and contribution rates, this would translate into €60–90 million in additional annual budget revenues once the system matures. This is comparable in magnitude to the net fiscal cost of the proposed thirteenth salary, highlighting how structural reform can offset social expenditure without raising headline tax rates.
Beyond revenue, the registry has important labour-market implications. Informal workers typically lack access to pension accrual, health insurance, and unemployment protection. Formalisation would gradually expand the contribution base, improving the long-term sustainability of social funds that are already under demographic pressure. Montenegro’s pension system, in particular, faces structural imbalance as population ageing accelerates and the contributor-to-beneficiary ratio declines.
However, the transition is not without risk. Poorly designed enforcement could push activity further underground or reduce service availability during peak tourism seasons. The key is sequencing. International experience suggests that voluntary registration periods, simplified flat-rate contributions, and temporary tax relief for newly formalised businesses dramatically improve uptake. Heavy inspection-led approaches, by contrast, tend to generate resistance and political backlash.
The competitive dimension is equally important. Informal operators enjoy cost advantages of 20–40% over compliant businesses due to unpaid taxes and contributions. This distorts pricing, discourages scale, and penalises firms that invest in quality, training, and compliance. Formalisation would gradually level the playing field, improving productivity and encouraging consolidation in fragmented service sectors.
From a macroeconomic perspective, improved formalisation enhances data quality and policy effectiveness. In a euroised economy without independent monetary policy, accurate fiscal and labour statistics are essential. Underreported employment and income complicate inflation analysis, wage dynamics, and social policy calibration. A reliable crafts registry improves visibility into real economic conditions, enabling more credible forecasting and policy design.
There are also external credibility effects. Montenegro’s EU accession process places increasing emphasis on governance quality, tax compliance, and fair competition. Persistent grey-economy dynamics undermine alignment with EU norms and weaken investor confidence. By contrast, visible progress in formalisation sends a strong signal that Montenegro is addressing structural weaknesses rather than relying solely on cyclical tourism revenues.
Looking forward, realistic projections suggest that a well-implemented registry could reduce the grey economy’s share of GDP by 5–7 percentage points over five years. This would not eliminate informality, but it would materially strengthen fiscal resilience and labour protection. The key determinant will be institutional capacity: digital registration systems, predictable contribution schemes, and consistent enforcement.Ultimately, the crafts registry is not a technical exercise but a strategic choice. Montenegro can continue tolerating a large informal sector as an implicit social buffer, or it can integrate that activity into a transparent, contributory system that supports long-term stability. In a small economy with limited macro tools, expanding the formal tax base may be the most powerful growth-neutral reform available.
