MONTENEGRO

Montenegro is a unitary state with a republican form of government and a one-tier subnational government structure, according to the 2007 constitution. Between 1992 and 2003, Montenegro was part of the Federal Republic of Yugoslavia. From 2003 to 2006, the country was part of the State Union of Serbia and Montenegro. Montenegro left the State Union in May 2006 by a popular referendum, and on 3 June 2006, the Montenegrin Parliament declared its independence, followed by the proclamation of the new Constitution of Montenegro on 22 October 2007. The President of Montenegro is elected by direct universal suffrage for a five-year period. The Prime Minister who is the head of the government is proposed by the president to the Parliament. The Parliament is a unicameral system, consisting of 81 members elected for a four-year period by direct universal suffrage.

Article 22 and chapter 4 of the Constitution guarantee the right of local self-government and specifies the intergovernmental structure. The Constitution (chapter 4) establishes the municipalities as the basic form of local self-government, enshrining their independence in carrying out their functions, drafting their own budgets and financing said functions with own-source revenues and resources provided by the state. Besides the Constitution, other legal provisions dealing with subnational government matters include the 2010 Law on Local Self-Government (amended in 2014) and the 2010 Law on Local Self-Government Financing, last amended in 2018. The Law on Local Self-Government regulates the functioning of the municipalities, whereas the law on local financing lays out the financial autonomy of the municipalities as well as fiscal regulations. The Ministry of Public Administration is in charge of the supervision of local governments.

Since 2011, the central government has launched successive Public Administration Reform Strategies aimed at strengthening and rationalising the public administration. In 2017, a Law on Spatial Planning and Construction centralised spatial planning and construction at the central government level, to the Ministry of Sustainable Development and Tourism, thus abolishing the right of the local authorities to adopt and issue spatial plans and permits. In January 2022, a new Public Administration Reform Strategy for 2022-2026 was introduced, with an Action Plan for the period 2022-2024. The objectives listed in the new strategy, drafted with the contribution of the Union of Municipalities of Montenegro, include, among others, improving the quality and efficiency of service delivery; optimising the public sector; and strengthening functional and financially independent municipalities to ensure more balanced development of all subnational governments.

The Union of Municipalities of Montenegro is a national association that promotes the interests of municipalities. It can submit proposals and amendments to the central government on draft laws and strategies for public administration reforms through the Governments Council for Public Administration Reform. Montenegro is a signatory of the European Charter of Local Self-Government since 2008. It became a candidate for EU accession at the end of 2010, and negotiations were opened in June 2012.

TERRITORIAL ORGANISATION
MUNICIPAL LEVEL	INTERMEDIATE LEVEL	REGIONAL LEVEL	TOTAL NUMBER OF SNGs (2021)
24 municipalities (opština)*
Average municipal size: 25 888 inh.
24			24

* The number of municipalities does not include the district of Golubovci

OVERALL DESCRIPTION: Montenegro has a one-tier system of local government, comprising 24 municipalities (opština). Two municipalities have a special status (i.e., the Capital City of Podgorica and the Historic Royal Capital of Cetinje), regulated by the Law on Administrative Capital (Podgorica) and the Law on Historic Capital (Cetinje).

In addition, the “Regional Development Law”, adopted in 2011, divided the country into three regions, for statistical purposes: the Coastal, Central and Northern regions. They do not have legislative or implementation power.

MUNICIPAL LEVEL: The number of municipalities in Montenegro increased recently from 21 in 2011 to 23 in 2016 and 24 as of 2021. The latest change was the transformation of Tuzi, a former district of the capital city, into a municipality of its own in 2018.

Municipalities are headed by a mayor, and legislative power is vested in the municipal assembly. The mayor is the executive body of the municipality, elected by the assembly by the majority vote of a total number of councillors for a period of 4 years (between 2006 and 2011, the mayor was directly elected). The assembly, whose members (councillors) are directly elected for four years, is the representative body of the citizens. Each municipal assembly is composed of 30 councillors, plus an additional councillor for every 5 000 voters.

The average size of municipalities (close to 26 000 inhabitants) is high by international comparison (10 254 inhabitants on average in the OECD and 5 959 in the EU) even though the median size is lower (16 700). Five municipalities (20% of total) have fewer than 5 000 inhabitants. Municipalities are further subdivided into approximately 1 310 settlements, which are urban localities (around 50) and rural communities (villages). These local communities (mjesna zajednica) are bodies in which the citizens participate in decisions on matters of relevance to the local community.

The capital city of Podgorica is part of the metropolitan area of the city of Podgorica. With around 190 500 inhabitants in 2020, the capital city accounts for around 30% of the total population. It is made up of one “city municipality” or district (gradska opština), Golubovci, which has the status of a municipality according to the Capital City Law and the Podgorica City Charter (it is not included in the total of 24 municipalities). The second largest city is Nikšić with 68 736 inhabitants, followed by two cities having around 40 000 inhabitants (Bar and Bijelo Polje). Based on the development index released by the Ministry of Economy, regional disparities in terms of well-being and poverty are the most acute between the northern region - the most disadvantaged -, and the central region where the population is less exposed to poverty.

HORIZONTAL COOPERATION: Municipalities may freely enter into an association, in accordance with the law on Local Self-Government (Article 16 of the Law on Local Self-Government) and the Law on Communal Activities. In 2011, the Montenegrin government adopted the 2011-2016 development strategy for inter-municipal co-operation, along with the 2011-2013 action plan for its implementation. Inter-municipal co-operation is also addressed in the Law of Local Self-Government. Article 131 of said law stipulates that municipal assemblies may establish inter-municipal communities in order to perform, in a more economic and efficient manner, certain affairs related to public administration and public service delivery.

The 2010 Law on Local Self-Government (last amendments in 2014), in its articles 32 and 33, assigns competencies to the municipalities. Municipalities have very few responsibilities in social sectors (e.g. primary education, kindergartens, social assistance and elderly care), which are primarily handled by the central government. This is contrary to most OECD, EU and other Western Balkan countries, where these competences often fall under the responsibilities of local governments. However, the law recognises the possibility for subnational governments to contribute to these competences, and other sectors of interest for the local population, on a voluntary basis, based on their own resources and support from non-governmental organisations. In addition, the central government can devolve central responsibilities to municipalities in order to ensure “more efficient economic performance”, conditioned to the enactment of a special purpose law or government regulation, and to the devolution of corresponding resources.

Main responsibility sectors and sub-sectors
SECTORS AND SUB-SECTORS	Municipal level
1. General public services (administration)	Municipal administration
2. Public order and safety	Protection of the local population and rescue services;Prevention of natural disasters, fires, explosions, damages; local law enforcement.
3. Economic affairs / transports	Local public transport; Local economic development including entrepreneurial development; Agricultural land; Tourism; Management of construction land; Investment policy;
4. Environment protection	Environmental development and protection
5. Housing and community amenities	Urban and spatial planning at local and regional level;Land development and management, protection of buildable land; Water management
6. Health
7. Culture & Recreation	Culture; Sport; Development of libraries;Protection of monuments of local importance;Recreation for children, youth, and adults
8. Education	Provision of land for the construction and maintenance of education facilities (primary and secondary education);Provision of social care for pupils;Co-financing of investment and purchase of equipment.
9. Social Welfare	Home care; Help at home for the elderly and disabled people; Child welfare; Consumer protection

Scope of fiscal data: local government units.

Other

Availability of fiscal data: Medium

Quality/reliability of fiscal data: Medium

GENERAL INTRODUCTION: Besides the Constitution, which contains provisions relating to local finance, the 2010 Law on Local Self-Government Finance (amended in 2018) describes the different types of resources of municipalities, the financial equalisation mechanisms and the use of conditional grants. Municipalities of Montenegro finance their assigned responsibilities mainly through own-source revenue, including local taxes and user charges and fees, which makes them the most fiscally decentralised among Western Balkan countries. Other subnational government revenue include shared taxes, subsidies and grants from the state budget and other resources that fall within the legal boundaries.

Confronted with a tight fiscal situation, and with the aim to increase efficiency and optimise the administration, the central government had embarked on public administration reforms in 2011, 2016 and most recently, 2022, resulting in a reduction in the number of civil servants at both local and central government level, and the merger of ministries and departments.

Subnational government expenditure by economic classification
2020	Dollars PPP / inhabitant	% GDP	% general government	% subnational government
Total expenditure	1 347	6.7%	11.5%	100%
Inc. current expenditure	940	4.7%	8.8%	69.8%
Compensation of employees	258	1.3%	9.9%	19.2%
Intermediate consumption	103	0.5%	16.8%	7.7%
Social expenditure	2	0.0%	0.1%	0.2%
Subsidies and current transfers	264	1.3%	18.1%	19.6%
Financial charges	270	1.4%	9.6%	20.0%
Others	42	0.2%	8.1%	3.2%
Incl. capital expenditure	407	2.0%	41.6%	30.2%
Capital transfers	-	-	-	-
Direct investment (or GFCF)	407	2.0%	41.6%	30.2%

EXPENDITURE: In 2020, subnational government total expenditure amounted to 6.7% of GDP and 11.5% of public expenditure, a slight increase since 2016, although this remains well below the average of OECD unitary countries (12.7% of GDP and 27.5% of public expenditure in 2020) and EU27 countries (18.3% and 34.3% respectively). Subnational government current expenditure are split between financial charges, including the repayment of interest (20% of subnational government expenditure), subsidies and transfers to institutions, individuals, NGOs and the public sector (19.6%) and compensation of employees (19.2%).

Subnational governments are not big public employers, accounting only for around 10% of total public staff expenditure (vs. 41.4% on average in OECD unitary countries). Subnational government staff expenditure have decreased since 2018, along with the implementation by the central government of a Public Administration Optimization Plan, which initially required municipalities to reduce the number of employees by 10% (and the central government by 5%) by 2020. The plan, however, has not yet fully reached its objectives as of 2022.

DIRECT INVESTMENT: The share of subnational investment (capital expenditure in the national nomenclature) in total public investment (capital expenditure) accounted for 41.6% in 2020, or 2.0% of GDP, compared with OECD averages for unitary countries of 48.9% of public investment and 1.9% of GDP in 2020. Capital expenditure, however, are a significant function of subnational governments, representing 30.2% of total subnational government expenditure, which is higher than the averages in OECD and EU27 countries (respectively 13.5% and 9.9%).

Municipalities can use PPPs, especially targeted to transport and economic infrastructure, although they represent a small share of subnational government capital expenditure. The central government is currently working jointly with the IFC, the IMF and several bilateral partner countries in preparing an appropriate PPP law. In the absence of a dedicated PPP Unit, the supervision of capital expenditure by subnational governments is currently made by the Commission on Concessions, within the Ministry of Economy.

ⓘ No detailed data available for this country

Most of subnational government spending are in housing and community amenities, economic affairs and transport, environment and municipal administration. Municipalities have very limited competencies in social sectors, such as health, social protection or education.

Subnational government revenue by category
2020	Dollars PPP / inhabitant	% GDP	% general government	% subnational government
Total revenue	1 525	7.6%	15.8%	10%
Tax revenue	604	3.0%	10.7%	39.6%
Grants and subsidies	205	1.0%	-	13.4%
Tariffs and fees	188	0.9%	-	12.3%
Income from assets	105	0.5%	-	6.9%
Other revenues	423	2.1%	-	27.8%

OVERALL DESCRIPTION: Municipalities are mainly financed through own-source revenues (i.e., taxes, tariffs and fees and other sources). Taxes, in particular, are the most important revenue source, representing close to 40% of total subnational government revenues. This share is on par with OECD and EU27 averages (42.4% and 40.1% respectively in 2020), a high ratio if compared to other countries in the South East Europe. As a result, the share of transfers from the central government is particular low, amounting to 13.4% of subnational government revenue (vs 41.2% and 46.6% in the OECD and EU respectively).

According to the Network of Associations of Local Authorities of South-East Europe (NALAs), Montenegro’s intergovernmental finance system – characterised by a very high share of own revenues – is unique in the region. Yet, the distribution of local revenues varies significantly across municipalities: while tax revenues are significant in some municipalities, other municipalities from the Northern region (e.g. Bijelo Polje or Berane) are mainly funded from shared income from the PIT and transfers from the Equalisation Fund, that make up more than 70% of their revenue.

The government plans to change the distribution of funds from the central government, to promote the distribution of revenue according to needs and to incentivise the increase of own-source revenue where possible. In 2021, in an effort to improve efficiency, the public administration started being reformed: the Real Estate Administration and the Property Administration were merged into the new Cadastre and State Property Administration; the Tax Administration and the Gambling Administration were merged into the new Revenue Administration.

TAX REVENUE: Although tax revenues account for a large share of subnational government revenue, in line with OECD and EU averages, the weight in GDP and public tax revenue is well below the averages for EU27 and OECD unitary countries (respectively 7.2%% and 4.5% of GDP; and 27.1% and 18.7% of public tax revenue).

Tax revenues are composed of shared taxes and own-source taxes, the latter being the main source of tax revenue. Municipal own-source taxes include the property tax, and a surtax on the personal income tax (PIT). The property tax was decentralised in 2003 and constitutes the main source of municipal revenues. In 2020, it accounted for 54.4% of municipal tax revenue, 21.6% of municipal total revenue and 1.6% of GDP, a figure significantly higher than in many OECD and EU countries (the OECD average is 1.0% of GDP in 2020), and also high compared with the regional average for South-Eastern European countries (0.5% of GDP). Property tax rates are set by municipalities in direct proportion to the established market value of taxable real estate, based on data from the State Statistics Office and/or State Tax Authority, and can range from 0.25% to 1.0% of its value (vs. from 0.08% to 0.8% in 2003). In the absence of such data, the municipal governments can hire experts to define the market value.

Municipalities may also impose a PIT surtax on local individuals and legal entities at a maximum rate of 13% (or up to 15% for the Capital City of Podgorica and the Historic Royal Capital of Cetinje). The surtax on PIT is applied to the personal earnings tax, self-employment tax, tax on property and property rights, and capital gains tax. In 2020, revenue from the PIT (both the shared tax and the local surtax) accounted for 45.6% of subnational government tax revenue. However, the Law on Personal Income Tax was amended in 2021, effective since 2022 (“"Europe Now" program). It introduced more progressivity in the PIT tax rate, and a new category of non-taxable income for wages below EUR 700, which would reduce the amount of revenue that subnational governments could perceive from this tax in the future. Discussions are on-going for possible compensation measures for subnational governments.

Concerning shared taxes, municipalities receive a variable share of the PIT, based on their situation: 12% for coastal municipalities (but 20% for the ones below the average development index value), 14% for central region municipalities (and exceptionally 13% for Podgorica and 16% for Cetinje), and 50% for Northern municipalities (but up to 70% for the ones with less than 3 000 inhabitants). Municipalities also receive 80% of the real estate transfer collected within their jurisdiction by the central government.

GRANTS AND SUBSIDIES: The grant system in Montenegro comprises two categories of funds: an Equalisation Fund, and other grants related to EU-funded projects. In 2020, the Equalisation Fund constituted the bulk of intergovernmental transfers, amounting to 83.8% of total subnational government grants (versus 94.1% in 2016) and 11.3% of subnational government total revenue. Since 2018, the Old Capital of Cetinje benefits from a separate law, which established a special subsidy fund amounting to 1 % of the national annual budget, for the development of the city (the law doubled the annual budget of the municipality).

The Equalisation Fund is composed of resources coming from different budget lines: 11% of the PIT, 10% of the tax on real estate transfers, 100% of the tax collection on the use of motor vehicles, boats and planes and 40% of the revenues collected from concession fees of gambling. The allocation is formula-based and considers the fiscal capacity of the municipality (50%), total area and population (35%), and the remaining 15% are distributed in equal amounts for all municipalities eligible. The Law on Self-Government Finance defines that 60% of the Fund is distributed based on fiscal capacity, while 40% is distributed based on budgetary needs. To benefit from the Equalisation Fund, a municipality should have an average fiscal capacity (per capita) in the last three fiscal years that is lower than the average fiscal capacity of all other municipalities, also over the same three-year period. On the other hand, the budgetary needs of municipalities are assessed based on a set of rules outlined in the Rulebook on Distribution and Use of Equalization Fund. The unallocated funds, amounting to 10% of the total Equalisation Fund, can be used in the course of a year for short-term interest-free loan provision to municipalities beneficiaries, in case of liquidity issues.

A new Law on Local Self-Government Financing was passed in 2019 to support more vulnerable municipalities, in line with the regional development policy, through assisting municipalities in meeting the pre-financing requirements of the EU funded projects. Through this law, the central government budget may transfer funds to municipalities through the Support Fund for Pre-Financing Municipal Donor-Supported Projects. They account for a small percentage of total municipal revenue, and are mostly intended for co-financing of European funds for projects aimed at municipal infrastructure development. The Fund allows for borrowing for pre-financing of the implementation of the EU funded project.

Municipalities used to be entitled to conditional grants from the central government with the objective of financing investment projects that involve one or more municipalities, conditioned to the elaboration of a multi-annual investment plan. However, this mechanism only benefitted a very limited number of subnational governments (one in 2018) and was abandoned in 2019.

OTHER REVENUE: Other subnational government revenue includes revenues from tariffs and fees, property income and other revenues, altogether accounting for 47% of subnational government revenues, which is particularly high by international standards (it accounted for 13% of subnational government revenue on average in the EU27 in 2020).

In 2020, tariffs and fees represented 12.3% of subnational government total revenues, and 0.9% of GDP. They include user charges on local public administration services and utilities such as waste management and water provision; fees for utility equipment of construction land and for the use of municipal roads; fines stemming from misdemeanour convictions. There is also a land development fee, a land-value capture mechanism which is regulated by the Law on spatial planning and construction and paid by the investor before construction can begin. This fee constitutes the most substantial local capital revenue; it remains relevant to the municipal budget despite a decline due to the economic downturn in 2009.

Municipalities also receive a percentage of fees transferred from the central government, including: 70% of the revenue from concessions and other fees for using natural resources awarded by the State; and 30% of the public revenues collected on the registration of motor vehicles and their trailers.

In 2020, property income reached 6.9% of subnational government total revenue, a ratio that is much higher than the averages for EU27 (1.0% in 2020). Municipalities are entitled to resources from the sale and rental of municipal properties, income from capital (interests, stakes and shares, etc.) and from concessions.

Subnational government fiscal rules and debt
2020	Dollars PPP / inh.	% GDP	% general government debt	% SNG debt	% SNG financial debt
Total outstanding debt (consolidated?)	573	2,9%	3,4%	100%	-
Financial debt	-	-	-	-	-
Currency and deposits	-	-	-	-	-
Bonds / debt securities	-	-	-	-	-
Loans	-	-	-	-	-
Insurance pensions	-	-	-	-	-
Other accounts payable	-	-	-	-	-

FISCAL RULES: Municipalities were hit hard by, first, the 2008 economic crisis and then the COVID-19 crisis, and continue to struggle with fiscal consolidation. According to the 2014 Law on Budget and Fiscal discipline, which applied to central and subnational governments, the budget deficit of a subnational government in any given year shall not exceed 10% of its revenues in that year. If the subnational government exceeds the budget deficit ceiling in a given year without the Ministry of Finance’s approval, the Minister shall be obliged to withhold the transfer of the appropriated part of the funds from the State Budget to the subnational government. The amount withheld is equal to the size of the deficit.

In addition, municipalities are required to submit an annual activity report to the Directorate for Central Harmonization of the Ministry of Finance and Social Welfare, on the implementation and improvement of management and control functions. They are also obliged to report quarterly to the Ministry of Finance on the state of their finance, outstanding liabilities and budget indebtedness.

DEBT: According to the law on local self-government financing, municipalities are legally enabled to issue debt securities and take out long-term loans, provided they obtain the consent of the central government. Long-term loans are only approved for the financing of capital infrastructure projects or for the purchase of capital assets, in compliance with approved Perennial Capital Investment Plan (“golden rule”). Municipalities may also take out short-term loans in order to meet short-term liquidity needs. There is, however, a debt ceiling. To receive an approval for any further borrowing, the total payments of principal and interest, the payments under a leasing contract, repayment of obligations for the prior period and any other debt obligations may not exceed 10% of the actual current income of the municipality of the previous year.

In 2020, total outstanding debt (unconsolidated) for subnational governments reached 2.9% of GDP and 3.4% of total public debt, which is below the OECD average for unitary countries (14.5% of GDP and 10.5% of public debt in 202020) and the EU27 average (13.9% of GDP and 15.4% of public debt in 2020), but higher than the figure for most countries within the South-Eastern European region.

TERRITORIAL MANAGEMENT OF THE CRISIS: Given than most social functions in Montenegro are centralised, including health, education and social protection, the response to the crisis was mostly handled by the central government for the whole territory. A National Coordination Body for Communicable Diseases was created, composed of government members and health officials, which was responsible for coordinating the response to the pandemic. However, unsuccessful coordination and failure to implement measures on the ground led to social unrest and political resistance. The COVID-19 crisis highlighted the need to improve fiscal coordination and management and to strengthen institutions at all levels. It also highlighted the need for a greater involvement of municipalities and multi-level coordination in social and health sectors to improve the implementation of policies and support measures.

In December 2020, the new government created a new body, the Council for the Fight Against COVID-19, composed of government members and health officials. A Commission for the Protection of the Population from Coronavirus was established at the Ministry of Health and additional measures were adopted, including a national strategy for vaccination.

EMERGENCY MEASURES TO COPE WITH THE CRISIS AT THE DIFFERENT LEVELS OF GOVERNMENT: To limit the negative impacts of the coronavirus pandemic, the central government adopted three successive packages of measures to support the economy and households in 2020 and 2021. Support measures included financial assistance to the most vulnerable groups, and measures for preserving jobs and faster economic recovery, such as delays in tax filling and loan repayments, and expansion of social benefits.

Although the responsibilities of municipalities in Montenegro are limited due to the low degree of decentralisation in the social sector, they have taken actions by implementing several types of measures to help cope with the crisis (according to the Union of Municipalities, municipal support packages amounted to close to EUR 20 million). For instance, the capital city of Podgorica has addressed the shortage of medical supplies. The municipality gathered local civil society and business stakeholders to organise the production of protective equipment for health workers, thanks to funding provided in the framework of a cross-border project “competenceNET”, between Croatia, Bosnia and Herzegovina and Montenegro, funded within EU INTERREG programme. Other example includes the municipality of Kolasin that provided daily psychosocial support to its citizens, through the creation of dedicated offices.

IMPACTS OF THE CRISIS ON SUBNATIONAL GOVERNMENT FINANCE: The COVID-19 crisis confronted the Montenegrin government to a difficult economic situation, in a context of already high fiscal deficit. The budget for 2021 was not adopted within the set deadline, and the central government opted to use temporary financing until March 2021. At the municipal level, subnational government expenditure increased over the period, driven by capital expenditure (+28%), whereas municipal current expenditure have been on a downward trend.

Municipal revenue decreased by 6% over the period. with a decrease in municipal own-revenue, such as tariffs and fees (-35%), driven by losses in municipal roads utilisation fees, but also tax revenue, with a decrease of -11% of subnational revenue from the property tax, whereas revenue from the PIT have remained stable thanks to support measures to businesses and households. Overall, grants and subsidies to subnational governments also decreased (-6%), due to a reduction of the Fiscal Equalisation Fund. Municipalities were able to offset the decrease in revenue by using their reserve funds from the previous year.

ECONOMIC AND SOCIAL STIMULUS PLANS: In the framework of the COVID-19 recovery, the central government adopted four packages of measures, encompassing short-term and long-term measures aimed at recovering Montenegro’s economy through economic diversification and increasing domestic production. Montenegro received in particular EUR 130 million from the European Union in grants and financing. Among the key priorities that are listed for the recovery throughout the country, are the development of a more resilient and sustainable healthcare system, and sustained investment in transport infrastructure (railways and motorways).