Impact of COVID-19 on the Business Sector and the Growth Prospects in Montenegro

Why an impact assessment?

As the world grapples with the evolving health crisis, countries are inevitably sliding into recession that may leave deeper scars than the Great Depression. Small economies, such as Montenegro, are likely going to face the cascading effects, which threaten to wipe out the hard-won development gains and impede progress.

To gauge the magnitude and speed of the economic downturn, UNDP in Montenegro joined forces with partners to assess the ramifications. The report “Assessment of the Impact of COVID-19 on the Business Sector and the Growth Prospects of the Montenegrin Economy” analyses the impact of the coronavirus epidemic on micro, small, and medium enterprises, and entrepreneurs (MSME&Es) in Montenegro. They are in the focus, as the backbone of the economy, with 99.8% of companies falling into this category, providing a source of income for more than 70.0% of all employees.

The report provides the government, business sector and the international stakeholders, with specific recommendations on how to tackle the uncertainties and overcome the foreseeable bottlenecks. It encourages the decision makers to look beyond the crisis, and shape recovery scenarios that will strive towards 2030. This may be a unique opportunity to build forward better, in a more just, inclusive and sustainable way.

Key findings

To protect the public health, the government has reacted to the outbreak with swift and stringent measures. Inextricably, the lockdown brought the business activity almost to a standstill. While reopening was the only alternative, the rising numbers of new infections are expected to further exacerbate the situation.

To mitigate the consequences, the government quickly jumped to the rescue and has already rolled out two support packages for the affected businesses and citizens, with the third one underway. The total value of these two envelopes is estimated at € 175 million.

The report examines the state of the economy before the pandemic, and reveals the risks, as well as the opportunities brought on by the COVID-19:

• Montenegro is particularly affected by plummeting tourism, which has a multiplier effect on all the other sectors and accounts for more than 20% of GDP. The World Bank estimates an economic downturn in 2020 in the range of −5.6% to −8.9%, in the worst-case scenario.
• Businesses are pushed against the wire due to their thin capital buffers. More than a half report that, under restrictions, they can sustain their business for up to maximum 12 weeks, which suggests severe liquidity issues. These figures are more pronounced in the Southern region, which is heavily reliant on tourism, where 66% of companies state they can’t run the business for more than 3 months. The problems with illiquidity, if prolonged, will potentially trigger the subsequent insolvency of many companies.
• Depressed demand has caused falling sales and rising losses for businesses: More than half of the service-oriented businesses recorded 75% lower sales (compared to the same period a year ago).
• However, it seems that businesses are missing out on digital opportunities to compensate for the sharp decline in sales: only 8% decided to invest in new equipment, software, or digital solutions in order to successfully cope with the challenges. The vast majority (73%) do not use digital platforms, applications, or the company’s website for sales.
• The high level of informal economy, estimated in the range of 28% to 33% of GDP, adds another layer of complexity to the already grim economic landscape. Though the risks in informal economy cannot be easily captured and quantified, they will need to be factored in the recovery scenarios.

The way forward: Key recommendations

The report opens new avenues to re-think development beyond COVID-19. It argues for a shift from traditional approaches and explores new perspectives: green transition and digital transformation. If taken as the key drivers of recovery, they hold the potential to attract new investment. Key recommendations:

1. Explore the scenarios to maintain business continuity considering green initiatives and digital transformation; Conduct SDG mapping of the key value chains and programmes created to support the achievement of defined SDG business indicators; and address segments of the value chain that can be digitized or substantially improved to lessen their impact on environment.
2. Consider additional measures to support businesses run by women, youth and vulnerable social groups and ensure employment programmes that contribute to the environment protection; ensure innovation investment;
3. Align all sectoral strategies with Smart Specialization Strategy (S3) including the Economic Reform Programme 2021-2023, which should be linked to the UN Agenda 2030; and accelerate drafting of the National Energy and Climate Plan until 2035, Digital Transformation Strategy, new spatial plan of Montenegro and legislation that deals with innovation;
4. Remove administrative barriers to reduce the informal economy;
5. Extend the programme of economic passports, with investments in green transition and digital transformation;