Montenegro Second Fiscal and Financial Sector Resilience PBG

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The second in a series of two Fiscal and Financial Sector Resilience Policy-Based Guarantees (PBG) aims to support Montenegro’s efforts to improve the sustainability of public finances and the resilience of the financial sector. Macroeconomic uncertainty due to fiscal and financial sector vulnerabilities including elevated public debt levels has been a constraint to sustain high and inclusive growth in Montenegro. In 2020-21, the country is facing high rollover risks in the external bond market which warrant a sound debt reduction and management strategy. At the same time, Montenegro faces rising global uncertainties, including a slowdown in global and EU growth, which reinforces the need for prudent macroeconomic management to mitigate the risks for its small euroized economy. This operation supports the authorities in their efforts to increase the efficiency of public finances and maintain a well-capitalized and supervised banking sector to strengthen fiscal and financial sector resilience, a prerequisite to sustain strong and inclusive economic growth in Montenegro. The macroeconomic risk is high given the increasingly uncertain and volatile external economic environment and the upcoming refinancing needs. Risk related to stakeholders is considered substantial given the ambitious nature of the supported reform program. Political and governance risk is also substantial and is related to the general elections which are planned to take place by October 2020. The PBG2 is important for policy and institutional reform continuity and thus helps mitigating these risks. The authorities value the technical support of the World Bank’s development policy-based financing. This support is embedded in the proposed design of the PBG series, preparation, and implementation. With Parliamentary elections by October 2020 the PBG2 signals an ongoing commitment to policy reforms by supporting policy changes with medium-term impact. The reforms are part of Montenegro’s overall economic reform program beyond 2020 and anchored in the EU accession negotiations. The operation thus supports policy and implementation continuity.