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Insolvency is growing faster than the economy

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The insolvency of the Montenegrin economy at the end of last year amounted to 1,18 billion euros, these are claims that creditors are trying to collect by blocking accounts. According to data from the Central Bank, almost 20 legal entities, or every fifth company, were blocked.

Compared to the end of 2019, when the value of compulsory collection amounted to 641 million, illiquidity increased by 84 percent. In the same period, the gross domestic product (GDP) increased from 4,95 billion to 6,6 billion, which was estimated at the end of last year, which is a growth of 34 percent.

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In economic theory, it is considered very worrisome when illiquidity grows at higher rates than GDP, because it indicates a crisis in business operations, a high risk for debt collection and a growth of mistrust among businessmen.

The Central Bank said that any increase in illiquidity is worrisome, but when you look at the structure of illiquidity, the concern is not so great because most of the claims relate to the 50 largest debtors who have been blocked for years and whose debts are only piling up. There are companies that have been blocked for 20 years.

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In four years, the economy had too many shocks

The CBCG states that the Montenegrin economy has gone through several external shocks in the last four years, all of which had a negative impact on the company’s operations.

“Decreasing income and increasing business costs due to the impact of the coronavirus pandemic, the conflict in Ukraine and the related energy crisis, then high inflation and the rise in interest rates due to the normalization of the ECB’s monetary policy, ongoing international uncertainty due to the situation in Israel and the slowdown in global growth, etc., in the previous period, they partly contributed to the growth of the illiquidity of the real sector in Montenegro. Also, the structure of the company in the blockade has a significant influence on the amount of the blockade. Namely, the high concentration of debt within a small number of debtors, as well as the long-term nature of the blockade, indicate that in the records of these statistics, the blockades of old debtors are piling up, which are unlikely to get out of the blockade without significant restructuring”, stated the CBCG.

Half of the debt was made by 50 companies

As they said, the 50 largest debtors, which is 0,3 percent of the total number of economic entities, account for 51,47 percent of the total debt.

“Any increase in illiquidity is a worrying factor. However, if we take into account the dynamics and structure of the blockade, as well as the insufficiently clear record of the actual newly added blockades in real time, then the concern on this issue can be partially relaxed. The mentioned problem accumulated over a long period of time, and its solution requires a comprehensive approach. Among other things, the engagement of the competent judicial authorities is needed, that is, a mechanism for initiating the settlement of accumulated claims, or initiating the bankruptcy of entities that cannot find a solution to re-establish work processes”, stated the CBCG.

Since October, the Central Bank has activated a system on its website that enables daily monitoring of information on the blocking of executive debtors’ transaction accounts, instead of the previous practice of publishing such data once a month. This enables businessmen to check the liquidity of potential business partners in advance.

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