The challenge in the short term is to accelerate the recovery from the severe economic downturn of 2009, while maintaining fiscal stability and continuing to rein in the current-account deficit, which ballooned in 2006-09. With credit growth having turned negative, policymakers will need to boost lending. In the medium term, measures to deal with the very large, albeit shrinking, current-account deficit could include resuming the practice of running larger than planned budget surpluses. However, in view of the tenuous recovery in 2010 and the modest economic growth forecast for 2011-which will prolong weak revenue performance-this option is not available in the short term.

The IMF has been urging Montenegro to safeguard its fiscal stability and to reduce public debt, at the same time as carrying out structural reforms to increase labour market flexibility and to boost export competitiveness. The IMF's leverage has been limited by the absence of a formal arrangement with Montenegro, and by the Montenegrin authorities' reluctance until now to seek financial assistance from the Fund. However, given the sizeable budget deficit expected in 2011, Montenegro may yet turn to the IMF for a precautionary funding arrangement, if not a stand-by loan. The pace of privatisation will be an important indicator of the authorities' willingness to carry out reforms over the forecast period. The large current-account deficit will also put the authorities under pressure to sell state assets. However, in spite of the sale to an Italian firm in 2009 of a controlling stake in the power utility, Elektroprivreda Crne Gore (EPCG), it will continue to be hard to attract foreign direct investment (FDI) during the sluggish recovery that is forecast for the EU and the Balkans in 2011. Montenegro has implemented the trade-related provisions of the stabilisation and association agreement (SAA) with the EU, which came into force in January 2008. Trade liberalisation will continue in 2011-12, alongside efforts to join the World Trade Organisation (WTO).