Macroeconomic Outlook Trends and Challenges

1. Macroeconomic OutlookTrends and Challenges Igor Luksic Minister of Finance

2. Fiscal Reform • GFS • Introduction of the Treasury • Tax System in accordance with EU Legislative • Programme Budgeting • Internal Audit • New Payment System – Revenue Model

3. Basic Economic Facts • GDP 2004 real growth 3,7% • Budgetary deficit 2,1% • Inflation rate 4,3% • External public debt 32,7% • Total public debt 44,8% • Current account deficit 9,2% • Unemployment rate 22,6% • Legal tender Euro

4. The Growth of the GDP GDP • 2002 – 1 301 mln € • 2003 – 1 433 mln € • 2004 – 1 535 mln € • 2005 – 1 644 mln € In 2004 instead of projected 2.7% the real growth reached 3.7% The goal for 2005 is 4.1%

5. The Decrease of the Budgetary Deficit • Budgetary deficit has been falling in line with the IMF program • It is expected to fall to 1.6% excluding FFPL • Including FFPLs 2.9% of the GDP

6. The RPI Inflation • Having euro as a strong and stable currency drove the inflation to single digits • In 2004 instead of projected 4.5% inflation was 4.3% • The goal for 2005 is 3.5%

7. Public Debt of Montenegro • Total public debt fell from 85.9% in 2002 to 44.8% in 2004 thanks to the rescheduled debt to the World Bank, 51% Paris Club write-off and no committments to the London Club of creditors • The external debt is 32.7% • Domestic debt consists of the banking loans, old savings and T-bills • In 2004 Montenegro received for the first time in its history the S&P credit rating BB for the long term bonds • Huge privatisation receipts will be used to repay internal debt in order to imrove credit rating and to invest in infrastructure • Reduction in the amount of the T-bills and loans will lead to the increase of the money supply and consequently to the drop of the interest rates

8. New Loans • Montenegro does not draw any SDR from the IMF • World bank – mainly structural reforms loans • EIB,EBRD, KfW – mainly infrastructure oriented loans (reconstruction of the roads, airports, municipal infrastructure)

9. Privatisation and FDI • After slow down in 2003 the FDIs increase • Goal for 2005 achieved in the I quarter following succesful privatisation of Telecom • KAP, Podgoricka Bank, Shipyard, part of the energy sector, hotels and so on to be privatised this year

10. Legal Framework and Business Barriers • Business start-up fee: • Entrepreneur (sole proprietorship) – 1 EUR • Limited Liability Company – 1 EUR • Shareholder’s Company – 25 000 EUR • Bank – 5 000 000 EUR (license from Central bank of Montenegro) • National treatment of foreign investors • Free movemnt of capital will be introduced with the new Law on Capital transactions • Free profit repatriation • Government tries to identify and eliminate various business barriers

11. Fiscal framework • VAT introduced in 2003 – 17% (basic food, books etc exempted) • In 2004 PIT (now 15, 19 ad 22%) and social contributions cut by 10% • In 2004 Corporate Income Tax cut to 9% • Challenges are further simplification of the tax system, continual reduction of the government expenditures and tax burden and compliance with eurozone Mastrichts criterion

12. THANK YOU