Page 1

Business Environment Macroeconomic Outlook Capital Market Banking Sector Privatization and Investments Economic Freedom Business News In the Spotlight Coming up...

Economic Freedom Economic Freedom of the World Annual Report In the 2012 ‘Economic Freedom of the World’ report, published by the Heritage Foundation and the Wall Street Journal, Montenegro’s economic freedom score was 62.5, making its economy the 72nd freest in the 2012 index; four positions better than it was last year. Montenegro ranks as 33rd out of 43 countries in Europe, and its overall score is above average in the world.

The Index of Economic Freedom comprises results in the following components : Business Freedom (ranked 77th). The business freedom

managed to stay within the Maastricht criteria. Public debt was component quantitatively measures what is required to start, recorded as almost 45% of GDP. operate, and close a business in a given country. It represents the overall burden of regulations as well as a government’s efficiency Monetary Freedom (ranked 35th). Last year good progress was regarding regulatory processes. Business freedom actually made in this area. Montenegro’s overall result was 81.2 and the means making procedures simpler or faster with minimum world average was 78. An improvement of 5.2 points was made in capital requirements, and with a main goal of encouraging this area; overall price levels were moderated, although pressure entrepreneurship. due to inflation remained. The Montenegrin procedures required for setting up a business have been streamlined, the number of licensing requirements Investment Freedom (ranked 77th). In an economically free have been reduced, and the overall pace of reform has slowed country, there should be no constraints on the flow of investment down. The enforcement of regulations is, however, sometimes capital. Such an ideal country would receive a score of 100 in the inconsistent and non-transparent. Montenegro was ranked in 77th area of investment freedom in the Index of Economic Freedom. place in the area of business freedom, meaning that it is within the Montenegro recorded no changes in its score which showed that foreign investments are officially welcomed. However, investment area of moderately free countries. regulations remain too bureaucratic to enable a dynamic level of Trade Freedom (ranked 51st). Montenegro joined to the World growth in investment. Trade Organization in December 2011 as the 156th member. The fact that Montenegro is a member of WTO expanded the scope Financial Freedom (ranked 72nd). There was no change of Montenegro’s freedom to trade. Trade freedom is a composite in the score achieved in the area of financial freedom. Access measure of the absence of tariff and non-tariff barriers that affect to loans has gradually increased, and the banking system has the import and export of goods and services. been completely privatized. The presence of foreign banks in The trade freedom score is calculated by inputting two figures: the Montenegro is very evident and investment levels are significant. trade-weighted average tariff rate and the non-tariff barrier (NTB). Despite growing competition, credit tariffs remain fairly high. The The weighted average tariff calculates the weighting of each tariff small Montenegrin financial sector has gradually become more based on the percentages of the different categories of goods competitive and diversified, but the number of non-performing imported. Montenegro’s weighted average tariff rate is 3.2% loans has increased. and its non-tariff barriers are high. This negatively influences the cost of trade by increasing it, and has consequently resulted Property Rights (ranked 72nd). The property rights component in Montenegro being ranked in 51st place in the area of trade assesses the ability of individuals to accumulate private property, freedom. secured by clear laws that are fully enforced by the state. It measures the degree to which a country’s laws protect private Fiscal Freedom (ranked 22nd). Taxes are essential. They property rights and the degree to which its government enforces fund public amenities, the infrastructure and other services that those laws. In Montenegro, infringements of intellectual property are crucial for a properly functioning economy. But the different rights are fairly widespread, and the laws regarding trademarks levels of tax rates need to be carefully chosen, and needless need to be amended in order to achieve EU standards. complexities in tax rules should clearly be avoided wherever possible. Montenegro enjoys competitive flat tax rates. The Freedom From Corruption (ranked 70th). Corruption erodes corporate tax rate is a flat 9%; a competitive tax rate such as this economic freedom by introducing insecurity and uncertainty contributes very favorably to entrepreneurial dynamics. Other into economic relationships. The score for this component is taxes include value-added tax (VAT) and inheritance tax. This last derived primarily from the International Corruption Transparency year, the overall tax revenue as a percentage of GDP was 30%. Perception Index. In Montenegro, there is a continuing mistrust of In comparison with the previous year, Montenegrin made good the government which is particularly due to pervasive corruption progress and obtained an overall result of 91.3 points. which exists in the executive and judicial branches. Montenegro’s score in the new report is 2 points less than it was last year. Government Spending (ranked 151st). This component considers the level of government expenditure as a percentage Labor Freedom (ranked 15th). The labor freedom component of GDP. Government expenditure, including consumables quantitatively measures the various aspects of the legal and and transfers, accounted for the entire score. Total government regulatory frameworks of a country’s labor market. Last year expenditure increased to 47.7% of GDP. In recent years the Montenegro was ranked as 4th, but in the new report it is ranked budget balance has been negative. However, the budget deficit 15th. This drastic fall has been caused by a lack of flexibility in was reduced from 3.9% in 2010 to around 3.3% of GDP in 2011. labor regulations which has discouraged the dynamic creation of This put Montenegro among the few European countries that jobs.


economic freedom 39