Curbing the budget deficit and paying off the public debt, especially in conditions of high interest rates, are the biggest challenges for the Montenegrin economy not only in the next year, but in the medium term. The only solution is fiscal consolidation, which would entail reducing expenditures and increasing revenues, along with accompanying structural reforms, Governor of Centralna Banka Crne Gore, Radoje Žugić said in an interview with Pobjeda.
He pointed out that the supreme monetary institution shares the position of the IMF that it is necessary to speed up the pace of fiscal adjustment and suppress the practice of creating new spending without prior analysis of the impact on fiscal sustainability.
– Initiatives should be designed to increase budget revenues that could compensate for the negative effects of previously adopted measures that reduced the revenue side of the budget, which would contribute to the optimization of the fiscal space and the reduction of public debt – Žugić assessed.
What is the main conclusion of the recent meetings with the IMF? In the event that an arrangement is reached with that institution, do you believe that wages and pensions will inevitably be reduced?
– The CBCG believes that an arrangement with the IMF should be considered, especially in conditions of a high deficit and facing difficulties in securing funds for its financing. It is usual for the program with the IMF to include a series of measures for structural and financial adjustment of domestic policies. If an arrangement is reached, it is to be expected that the emphasis will be on structural reforms in order to heal long-term vulnerabilities, as well as on reducing unproductive spending. In the event that these measures produce results and an adequate fiscal balance is established, I believe that the reduction of salaries and pensions would not be set as a condition, Žugić says.
The year 2022 Is behind us, and so is your six-year mandate. Are you satisfied with this year’s results and what you achieved during your mandate?
– Despite the challenges that marked the previous six-year period, during which I held the position of governor, I am extremely satisfied with the results of the CBCG’s work. At the same time, I am honored to have had the opportunity to be at the head of a strong and reputable institution and to work with high-quality, professional and dedicated colleagues.
Žugić assessed that the adoption of amendments to the Law on CBCG could threaten its independence and that he is satisfied with what he has achieved in the previous six years, while rejecting criticism of the quality of supervision and his work as governor.
Thanks to the joint efforts of regulators and commercial banks, today the banking sector represents the healthiest part of the Montenegrin economy. This is confirmed by bank performance indicators, some of which record the most favorable values historically. In the first eleven months of this year, growth in key balance sheet positions was achieved in the one-year period, namely assets by 17.5 percent, capital by five percent, loans by six percent, and deposits by 21.2 percent. And in the reports of international institutions, the banking sector of Montenegro was assessed as stable, resilient and adequately capitalized.
How does the fact that your mandate expired more than two months ago affect the work of the CBCG and when do you expect the Assembly to make a statement on the President’s proposal to grant you a new mandate as governor?
– The fact that my mandate has recently expired does not change the attitude I have towards the entrusted work, and I perform it in full capacity, as prescribed by law, Žugić points out.
There has been a lot of speculation in the public about whether you have the right to a third term. Please clarify your position on this issue.
– There are no legal obstacles for me to be appointed as governor again. The Law on CBCG stipulates that the governor “can be appointed for a maximum of two consecutive terms”. I will remind you that before this mandate I held the position of adviser to the Prime Minister of Montenegro.
In what way could the adoption of the proposed changes to the CBCG Law, which remove the double veto in the election of the governor, affect the independence and stability of the supreme monetary institution?
– The existing legal solution, according to which the Assembly appoints the governor, on the proposal of the President of the State, enables a transparent institutional division of power. This procedure for electing governors is in line with international best practice, as recently stated by the head of the IMF Mission in Montenegro. Changing this solution could threaten the independence of the CBCG, which is crucial for the credibility and stability of the financial system.
What is your attitude regarding affairs and bad business decisions attributed to you?
Certain individuals and the media, for reasons known to them, are using untruths to discredit the excellent work of the CBCG and me, as governor. In contrast to the flat and malicious evaluations of individuals, there are solid and irrefutable arguments that speak about our work. Here I am referring to the exceptionally positive indicators of the banks’ operations and the affirmative assessments of independent international institutions – the European Commission, the European Central Bank, the IMF… In the latest report of the IMF, it was pointed out that “the financial sector remained largely resistant to the disruptions caused by the pandemic , with strong capital and liquidity buffers at the system level”
This assessment, as well as the results of the Bank Asset Quality Assessment (AQR), which confirmed the stability of the domestic banking sector, its adequate capital position and satisfactory asset quality, confirmed my work and the work of the institution I head, Žugić adds.
How do you respond to the criticism that the quality of CBCG supervision is questionable, and that one of the proofs of failure is that you did not discover the multi-million embezzlement in CKB, but the bank’s internal control did it?
– I am not aware of any criticism of the work of supervision that came from any of the relevant domestic or international addresses. I believe that the work of the supervision is extremely high quality and that it contributed to the achieved results to a large extent.
The supervision of the CBCG, whose capacities have been significantly improved over the past years, successfully implemented the procedures for the introduction of a temporary administration in two banks whose operations were not sustainable. Supervision was also responsible for the preparation and implementation of the innovative regulatory framework, including the new Law on Credit Institutions and more than 20 by-laws for its implementation. Supervision coordinated and carried out for the first time the aforementioned process of checking the quality of assets of all banks in Montenegro, which was extremely demanding, especially in the conditions of the pandemic and the parallel process of bank mergers. A special challenge for the work of supervision was the pandemic, in terms of designing, undertaking and implementing adequate and timely measures in order to mitigate the negative effects on the population, the economy and the banks themselves.
Assessments that the CBCG did not detect the multimillion-dollar embezzlement in CKB Bank are the result of ignorance of the essence of the work of bank supervision. Namely, through the exercise of its supervisory function, the CBCG assesses the bank’s compliance with regulations, its exposure to risks and the adequacy of the established risk management system, all with the aim of ensuring that the bank has capital that corresponds to its risk profile. Among other things, the supervision assesses whether an adequate system of internal controls has been established in the bank. The control over CKB established that the aforementioned embezzlements were, to the greatest extent, a consequence of non-implementation or inadequate implementation of prescribed internal controls, which could not be observed through the reports that are the subject of the supervision review.
It is important to point out that the embezzlement did not affect the capital position of CKB Bank, which remained completely intact, which ensured the stability of the business, as well as that any established damage caused to clients was compensated.
The banking system Is resilient and stable
During this year’s controls, did you notice any vulnerability in domestic banks? If so, what is it about?
The Montenegrin banking system is resilient and stable, characterized by high liquidity and adequate capitalization. In addition, the banks continued to provide the necessary prerequisites for the further growth of the domestic economy.
The current challenge facing our economy, and thus the banks, are the direct and indirect consequences of the war in Ukraine. This conflict, in conjunction with other factors, strongly influenced the price corrections of a significant number of securities on international markets. This correction was reflected in the market values of securities in the portfolios of our banks, which had a negative impact on the capital of the holders of those securities. Adequate and timely measures of the CBCG, as well as the activities of the banks, amortized this negative impact.
At the end of November 2022, the capital of banks at the aggregate level amounts to EUR 651 million, which, compared to the end of 2021, is an increase of 7.56 percent, while the capital adequacy ratio is 18.43 percent, which is significantly above the regulatory minimum , Žugić points out.
Interest rates will rise slightly
What interest rate movements do you expect in 2023? Is the fear of increasingly expensive borrowing by citizens and businesses justified?
The global economic situation is characterized by a large number of risks that have an impact on the formation of interest rates. The war in Ukraine and the general increase in geopolitical tensions, which cause a negative macroeconomic environment, inflation and threatened supply chains, as well as an increase in interest rates by the leading central banks affect the growth of the cost of capital on the international market, which spills over into the domestic economy.
Bearing this in mind, I expect a mild and moderate increase in interest rates during 2023, which, I expect, will not threaten the financial stability and sustainability of the banking sector, as well as individual clients, Žugić concluded for local media.
