The grey economy represents a significant challenge for Montenegro, undermining fiscal revenues and distorting competition. The government has recently proposed the establishment of a national registry for craftsmen and independent service providers, aiming to integrate informal economic activities into the formal sector. This initiative, while appearing straightforward, carries substantial economic implications that extend beyond mere tax collection.
Current estimates suggest that the informal economy in Montenegro accounts for approximately 20–30% of GDP, which aligns with trends observed in other small, service-driven economies in Southeast Europe. In monetary terms, this indicates that between €1.4 billion and €2.1 billion in annual economic activity either evades taxation entirely or is underreported. Consequently, this shadow economy results in an estimated loss of €250 million to €350 million in budget revenues each year, representing 4–6% of total government revenues.
The sectors most heavily impacted include construction, tourism-related services, personal crafts, transportation, small retail, and seasonal employment. These areas are integral to Montenegro’s tourism-based growth model, creating a paradox where key growth sectors simultaneously jeopardize fiscal sustainability. Factors such as seasonal labor reliance, cash payments, and fragmented service provision further complicate enforcement and encourage non-compliance.
The proposed crafts registry seeks to rectify these issues by establishing a formal record of independent workers and micro-service providers. This initiative aims to simplify taxation, social contributions, and regulatory oversight. The policy focuses on reducing barriers to formality rather than punitive measures; the underlying premise is that lower compliance costs and increased predictability will incentivize informal operators to transition to legality.
If successful in even modest terms, the registry could have significant financial benefits. Should 25% of informal activity be formalized within three years, it could potentially expand the tax base by €350 million to €500 million. Based on Montenegro’s effective tax rates, this could yield an additional €60 million to €90 million in annual budget revenues once the system is fully operational. This figure is comparable to the fiscal implications of introducing a thirteenth salary, demonstrating how structural reforms can address social expenditure without increasing overall tax rates.
The registry also holds important implications for the labor market. Informal workers often lack access to pensions, health insurance, and unemployment benefits. Formalizing these roles would gradually broaden the contribution base, enhancing the long-term sustainability of social funds that are currently under pressure due to demographic changes. Montenegro’s pension system faces challenges as an aging population leads to a declining contributor-to-beneficiary ratio.
However, transitioning to a formalized system carries risks. Poorly executed enforcement strategies could drive activities further underground or limit service availability during peak tourism periods. Effective sequencing is crucial; international examples indicate that voluntary registration periods and simplified flat-rate contributions can significantly boost participation rates. Conversely, aggressive inspection methods may provoke resistance and political opposition.
The competitive landscape is also affected by informality. Unregistered operators can benefit from cost advantages ranging from 20% to 40% over compliant businesses due to unpaid taxes and contributions. This disparity distorts pricing structures, discourages business expansion, and penalizes companies committed to quality and compliance. Formalization efforts would help level the competitive field over time, fostering productivity improvements and consolidation within fragmented service sectors.
From a macroeconomic standpoint, enhancing formalization improves data accuracy and policy effectiveness. In an economy using the euro without independent monetary policy tools, precise fiscal and labor statistics are essential for effective governance. Underreported employment and income levels complicate analyses related to inflation and wage dynamics. A reliable crafts registry would provide better visibility into economic conditions, facilitating more accurate forecasting and policy formulation.
Additionally, there are external credibility considerations linked to Montenegro’s EU accession process. The ongoing emphasis on governance quality, tax compliance, and fair competition makes addressing grey economy dynamics increasingly critical; persistent informality undermines alignment with EU standards and diminishes investor confidence. Progress in formalization would signal that Montenegro is proactively tackling structural weaknesses rather than relying solely on cyclical tourism revenue.
Looking ahead, realistic assessments suggest that a well-executed crafts registry could reduce the grey economy’s GDP share by 5–7 percentage points within five years. While this may not completely eradicate informality, it would significantly bolster fiscal resilience and enhance labor protections. The success of this initiative hinges on institutional capacity—developing digital registration systems, establishing predictable contribution frameworks, and ensuring consistent enforcement will be vital steps forward.
