Montenegro’s economic future up to 2035 will largely depend on the strategic choices made in the coming years rather than immediate growth metrics. The country, characterized by a tourism-centric economy and euroization, faces limitations typical of smaller economies, including an inability to devalue its currency or implement independent monetary policies. These challenges are compounded by a reliance on imports. Therefore, the interplay between potential EU membership, access to EU funds, and domestic fiscal regulations will be critical in determining long-term debt management, budget stability, and current account health.
The current economic landscape presents both challenges and opportunities. Government debt levels are around 60 percent of GDP, with budget deficits averaging approximately 3 percent of GDP. The current account deficit is notably high, at times exceeding 15 percent of GDP, primarily driven by imports related to tourism, such as food, fuel, construction materials, and consumer goods. Any credible projections for 2035 must address how these imbalances will be managed or allowed to persist.
If Montenegro does not achieve EU membership by 2035 and relies solely on limited pre-accession support, the macroeconomic outlook improves only slightly. In this scenario, lacking significant EU transfers and a robust domestic fiscal framework results in public spending that remains politically influenced. Consequently, capital investments must compete with wages, pensions, and social transfers for available financial resources. As a result, government debt may rise to between 65 and 70 percent of GDP by 2035 despite moderate growth rates. Budget deficits are likely to remain entrenched at about 3 to 4 percent of GDP due to the absence of a sustainable primary surplus and ongoing interest obligations. While the current account may show some improvement as tourism evolves, it is expected to remain substantial and precarious at around 10 to 13 percent of GDP.
Conversely, EU membership could significantly alter this dynamic even prior to implementing structural reforms. For small new member states like Montenegro, net inflows from the EU budget typically average between 1.5 and 2.0 percent of GDP annually once the capacity for absorption is established. This financial support would play a crucial role in funding infrastructure projects and enhancing institutional capabilities while attracting private investment through reduced risk perceptions and more stable project pipelines. If Montenegro were to join the EU around 2030 without establishing a strict domestic fiscal rule, improvements in debt dynamics could still be notable. By 2035, debt levels might decrease to between 50 and 58 percent of GDP, with budget deficits narrowing to approximately 1.5 to 2.5 percent of GDP and the current account deficit reducing to between 5 and 8 percent of GDP.
An alternative path towards improvement exists even without EU membership but requires strong domestic fiscal discipline. Should Montenegro adopt a stringent fiscal rule aimed at achieving a sustained structural primary surplus of around 1 percent of GDP, it could see government debt decline toward the range of 45 to 50 percent of GDP by 2035. Budget deficits could also narrow to about 1 to 2 percent of GDP primarily due to reduced interest expenses rather than ongoing primary deficits. Although the current account would likely improve more slowly than in an EU scenario—potentially remaining between 8 and 11 percent of GDP—enhanced fiscal credibility would lower crisis risks and borrowing costs.
The most favorable outcome arises from combining EU membership with an effective fiscal rule. In this scenario, EU funds would finance a considerable portion of capital expenditures while domestic regulations would prevent these funds from being diverted into recurrent spending. This synergy would foster positive interactions among growth rates, debt reduction, and external stability. By 2035, it is plausible for Montenegro’s public debt to decrease to between 40 and 45 percent of GDP while achieving near-balanced budgets and compressing the current account deficit down to between 3 and 6 percent of GDP.
Establishing an appropriate fiscal rule for Montenegro necessitates consideration of its unique economic structure. A straightforward deficit ceiling is inadequate for an economy heavily reliant on tourism where revenues fluctuate seasonally and are susceptible to external shocks. A more suitable approach would involve implementing a debt-anchored structural primary balance rule. This framework should set an explicit debt ceiling at 60 percent of GDP with an operational target in the range of 45 to 50 percent as a buffer. Additionally, maintaining a minimum structural primary surplus around 1 percent of GDP during normal periods should be mandated along with temporary escape clauses for significant tourism or external disruptions.
Furthermore, safeguarding productive investment is essential within this fiscal framework. This can be achieved through a dual structure where recurrent spending is limited in real terms while capital expenditures are financed via EU grants alongside strictly regulated borrowing arrangements that pass rigorous cost-benefit analyses. For Montenegro’s tourism-driven economy, this form of investment discipline is not austerity; instead, it serves as a prerequisite for maintaining competitiveness and preventing infrastructure bottlenecks that could hinder growth.
A critical component involves establishing a Tourism Stabilisation Reserve. Given that Montenegro’s economic volatility stems from external demand fluctuations rather than industrial cycles, the fiscal framework should stipulate that part of any cyclical over-performance in tourism-related VAT and excise revenues be saved until liquid reserves reach between 3 and 5 percent of GDP. During downturns, these reserves can be utilized systematically to stabilize expenditure levels and avert emergency borrowing needs. This strategy effectively transforms volatility from a debt issue into a liquidity management challenge.
As Montenegro approaches the mid-2030s, its macroeconomic situation will reflect political decisions more than inevitable economic outcomes. Without EU membership coupled with sound fiscal discipline, both debt levels and external deficits are likely to remain elevated and vulnerable. While achieving EU membership alone may lead to improved conditions, risks associated with domestic political cycles persist. Conversely, adopting strict fiscal discipline may yield stability but at a slower pace. Ultimately, integrating both EU membership with tailored fiscal rules designed for a small tourism-oriented economy could enable Montenegro to advance into the next decade with reduced debt levels, balanced budgets, and an external position conducive to sustainable growth.
