Montenegro's economy should expand by some 2.5% in 2014, easing from up to 3% expected for this year, vice central bank governor in charge of financial stability Nikola Fabris was cited as saying by TV and radio broadcaster RTCG.

According to the latest data from the statistics office, the country's GDP grew by 3.4% y/y in the second quarter of 2013, following a 1.1% y/y rise in the first three months of the year.

Reducing the public debt should be Montenegro's priority in the coming years, Fabris said. The public debt-to-GDP ratio reached nearly 53% at end-August 2013, compared to 51% a year earlier and just 29% at end-2008.

Speaking about the latest austerity measures prepared by the finance ministry, Fabris said that the proportional tax regime is better than the progressive taxation. The latter will penalize those who are earning more and could undermine the investment climate and lead to concealment of wages. Fabris added that the implementation of a progressive taxation in developing and transition economies did not bring good results in the past. Montenegro is currently considering raising the personal income tax as of January 2014 after the so-called crisis tax introduced earlier this year to help raise the budget revenue, local media reported earlier in October. The finance ministry is reportedly analysing several options to leave the tax higher, including introducing a progressive income taxation, or raising the 9% flat tax to 10-12%. The measures are expected to boost budget revenue by up to EUR 18mn, depending on the scenario to be chosen, and help finance the country’s rising budget gap.

Regarding bankrupt aluminum producer KAP, Fabris said that the government should find a strategic investor for the company acknowledging that it be hard to make the company profitable again without subsidies for electricity. The situation is aggravated by falling prices of aluminum on the international markets. Investors from India, Germany, Poland, Turkey and Croatia have already indicated they are interested in taking over KAP but none of them has yet sent a concrete offer to the government.