Strengthening public financial management in Montenegro

Executive summary

In 2024 the Ministry of Finance (MoF) of Montenegro asked the OECD to conduct a review of budgeting in the country to identify steps that would strengthen its budgeting and public financial management. The OECD conducted the review over 2024-25. Montenegro is a European Union (EU) accession country and the report focused on examining budget arrangements that would support EU accession, including the operational framework of an independent fiscal council to provide advice on the fiscal sustainability of the government’s budgets.

The OECD found that Montenegro had made some progress in aligning its budgeting practices with OECD and EU standards. The MoF has established the foundations of modern budget arrangements through budget legislation and a medium-term budget framework with top-down expenditure ceilings to support fiscal discipline and improve budget predictability. In addition, the MoF has maintained a robust framework for cash management, budget flexibility and budget execution.

Despite these advances, Montenegro placing its public finances on a sustainable path and maintaining fiscal discipline has proven challenging. While public finances have stabilised, as demonstrated by a fiscal surplus in 2023, further reform is required to maintain fiscal discipline, improve budget transparency and strengthen oversight to support long-term fiscal sustainability.  

In this context, the OECD’s recommendations in this report emphasise practical ways to improve current frameworks to produce high-quality budget information to decision makers during the budgeting process. For example, medium-term budget planning is challenging due to variations in budget forecasts and limited use of fiscal risk analysis. Within the management of fiscal risks, monitoring and mitigating potential fiscal risks remains a priority for budget purposes, notably in relation to state-owned enterprises.  

Expenditure overruns in public investment projects have contributed to budget deficits over the past decade. In response, the government has strengthened the legal framework for public investment management. It is now better placed to strengthen multi-year planning, project appraisal, and expenditure tracking. 

The government has introduced programme budgeting and has started to use performance budgeting. Further initiatives in both areas would increase the quality of the information generated to better inform decision making. Strengthening programme budgeting and integrating performance indicators into fiscal planning would improve the foundations of the budget process. 

While budget transparency is improving, issues with the timeliness of reports and information gaps, including limited disclosure of tax expenditures and contingent liabilities, help to identify priorities for further work. In this regard, the MoF could enhance  budget transparency by developing a portal on budgeting and financial reporting.  

Parliamentary oversight remains limited due to tight deadlines for budget approval, which reduce opportunities for substantive debate and scrutiny. Parliamentary oversight would be enhanced if budget deadlines, especially the deadline for submitting the draft budget to parliament, were adhered to and technical expertise on budgeting was readily available to parliamentarians, including to complete the establishment of the Fiscal Council. 

While the MoF plans to introduce spending reviews, the reviews are not yet a routine feature of the budget process. As one of the measures that would contribute to maintaining fiscal discipline, the government should launch a capacity-building initiative to systematically carry out spending reviews to support expenditure prioritisation.  

The following table summarises the OECD’s assessment of budgeting in Montenegro relative to the OECD Spending Better Framework.

Table 1. Montenegro and the OECD Spending Better Framework

Budget principle	Assessment	Recommendations
1. Set Clear Fiscal Objectives	There is a fiscal rule that the budget deficit may not exceed 3.0% of GDP. However, the ceiling was breached in 2024 and is projected to exceed the limit for each year in the period 2025-2027. There is a legal requirement for the Government to take corrective action when breaches occur but this is not implemented.	1. The Government in its pre-Budget Statement should confirm its commitment to the fiscal rules and explain how this commitment will be assured.
2. Objective Economic Assumptions	The MoF is responsible for macroeconomic forecasts. Fiscal risks are monitored although there is no separate fiscal risk statement. The MoF seeks to address information gaps and produce sensitivity analyses on the potential impact of macroeconomic assumptions on the budget outcomes.	2. Improve macroeconomic forecasts. 3. Introduce a fiscal risk management statement that comprehensively addresses risks, including guarantees.
3. Multi-year Expenditure Baselines	The budget process is underpinned by a sound legal framework, which includes a medium-term budget framework (MTBF). However, there are significant variations between the original forecast and the budget and actual expenditure. Multi-year expenditure baselines of existing policies on a no-policy-change basis are an area to develop.	4. Ensure that the MTBF is based on a robust methodology that includes a baseline (no-policy-change) expenditure scenario incorporating the impact of macroeconomic and demographic changes and the full-year costs of recently introduced existing policies.
4. Top-Down Expenditure Ceilings	The MTBF provides top-down expenditure ceilings, with which the annual budget law should be consistent but often is not. Furthermore, actual spending is not always in line with the expenditure ceilings.	5. Ensure that the top-down ceilings are adhered to by public bodies and that actual expenditure is in line with the ceilings. 6. Tighten the criteria surrounding the use of the current and reserve funds to ensure that they may only be used for policy proposals that comply with budget regulatory provisions.
5. Regular Spending Reviews	There are no spending reviews. The MoF is looking to introduce spending reviews to improve the efficiency of public spending by regularly assessing baseline expenditure to reprioritise and reallocate spending.	7. The MoF should secure political commitment for spending reviews and developing a framework for their implementation by formulating a methodology and defining key roles and responsibilities throughout the process.
6. Informed Spending Decisions	There is some alignment between policy objectives and the MTBF. However, including information on relevant performance indicators would better inform spending decisions by showing how the alignment is ensured when executing the budget. The MoF is in the early stages of implementing gender budgeting; green budgeting has not been implemented yet. Improvements have been made in public investment management although there should be greater emphasis on managing projects within a multi-year framework. New policies need to be costed more robustly.	8. Promote programme-based and performance budgeting for better expenditure planning and alignment with policy goals. 9. Ensure the consistent implementation of programme budgeting across all ministries by capacity building and including a timetable for performance budgeting and annual reports. 10. Enhance the quality and analysis of reports from public bodies and local government to the MoF to better inform spending decisions. 11. Provide that investment projects are planned and approved within a multi-year budget framework, which permits the carryover of unspent funds within specified limits. 12. Address the risk of understating the cost of new polices by strengthening the requirements for fiscal impact assessments.
7. Consider All Forms of Expenditure	The budget does not contain details of tax expenditures or the guarantees issued by the central government. While the Law on Budget and Fiscal Responsibility (LBFR) limits the total amount of guarantees to 15% of GDP, the monitoring process could be stronger. While arrears are reported as being relatively low, the State Audit Institution (SAI) has reported that the data is incomplete. The definition of public debt is not aligned with the ESA2010 definition.	13. Conduct more robust monitoring of loan guarantees provided by the Government and report on them annually. 14. Implement the recommendation by the SAI to improve the credibility of expenditure arrears by consolidating data on outstanding liabilities at the end of the year. 15. Adopt the ESA2010 definition of general government debt as the measure of public debt.
8. Line Ministries as Partners	The MoF engages with the line ministries through the finance function of each ministry, which usually keeps the MoF informed of spending pressures. The finance function is a key mechanism to strengthen public finance capacities and co-ordination across government. A legal framework is in place for internal controls and internal audit, but the operational framework is not of the same standard. Monitoring of state-owned enterprises (SoEs) needs to be strengthened.	16. Build capacity in the agencies responsible for budget execution, specifically through the government’s finance function. 17. Strengthen internal audit capacities across public sector entities to improve the assurance function and the use of the findings from internal audits. 18. Enhance the monitoring of SoEs by establishing financial planning and performance monitoring frameworks, and performance indicators that are part of the accountability arrangements for SoEs.
9. Budget Transparency	The documentation submitted to the Parliament for approval is generally well constructed. Areas for improvement include producing a mid-year report, and strengthening the content of budget reports by adding sensitivity analysis and information on tax expenditures. The Equalisation Fund, which redistributes revenues from wealthier municipalities to poorer ones, is not currently presented in the budget.	19. Develop a dedicated budget transparency portal, consolidating key documents to enhance accessibility. 20. Identify effective ways to increase public understanding of the budget, including through public engagement 21. Include the Equalisation Fund in budget documentation to increase transparency and improve oversight of the fund’s operations, revenues, and expenditures.
10. Effective Budget Oversight	The legislation provides the Parliament with just six weeks to consider and approve the budget but, in practice, the time provided is even less. The short timeframe limits analysis and debate on the proposed budget, including with stakeholders. Parliament relies upon the analytical resources of the PBO, which has limited capacities on public finance. Parliament should also make more use of information provided by the SAI. The fiscal council (FC) has been established but is not functional yet.	22. Enhance parliamentary oversight by ensuring sufficient time for the Parliament to consider the draft budget and the final accounts of the year. 23. Expand the capacity of the Parliamentary Budget Office (PBO) to provide better quality expertise to parliamentarians in the budget process. 24. Complete the establishment of the FC in line with the intended level of resources for it to fulfil its mandate. 25. Parliament should make better use of SAI reports and support the SAI’s efforts to ensure its recommendations for auditees are implemented.