Montenegro’s budget deficit narrowed by 15.7% on the year to EUR 115.5mn in January-October 2013, as stronger revenue growth offset a milder increase in expenditures, data from the finance ministry showed. The ten-month budget deficit equalled to 3.5% of the full-year GDP projection, IntelliNews calculations based on the latest finance ministry's full-year projection showed.

Nevertheless, the January-October budget gap was by 12.4% higher than the plan for the period, already exceeding the full-year target of EUR 95mn (2.7% of GDP) due to the payment in August of EUR 103mn of state guarantees on bankrupt aluminium smelter KAP's loans. In response, the government has said the full-year gap might reach EUR 186.9mn, or 5.3% of the GDP.

Total budget revenue rose 9.7% y/y to EUR 997mn in January-October underpinned by higher tax collection. VAT revenue climbed 18.6% y/y to EUR 356mn, accounting for 36% of total budget income. The increase reflected the VAT rate hike from 17% to 19% in July. Social contributions also went up by 8.7% y/y to EUR 308mn (31% share in total).

The ten-month budget expenditures grew by 6.4% y/y to EUR 1.1bn, lifted by higher current expenses and KAP-related spending. Current expenditures increased by 7.9% y/y to EUR 1.08bn in January-October due to rising interest, social security spending and public sector transfers. On the other hand, capital expenditures continued retreating, shrinking 25.6% to EUR 36mn over the period. They accounted for just 3.3% in total budget expenses in January-October, down from 4.7% a year ago.

The Montenegrin government is expected to approve soon the 2014 budget drat which will target a budget deficit of EUR 66mn (1.89% of the full –year GDP forecast) considerably below the estimated EUR 187mn (5.3% of GDP) budget gap in 2013. The EBRD warned in its latest Transition Report issued on Nov 20 that the Montenegrin government will not be able to find a sustainable solution to the widening fiscal gap unless it resolves the liabilities of KAP.