Abstract
This paper examines the impact of
foreign direct investments (FDI) inflow on balance of payment trends of
Montenegro in the pre-crisis and post-crisis period. The motivation of this
paper is based on the strong effect of previous FDI inflow on current account
balance of payment trends. The balance of the current account balance of
payment is not an economic policy variable such as, for example, the amount of
money in circulation, but is the economic policy's goal, such as the inflation
rate or GDP level, i.e. an indicator that reflects the results of economic
policy implementation. The current account balance of payment trends are an
important source of information for economic policy makers. The current account
balance of payment deficit of Montenegro in the years of strong economic growth
and investment boom was the highest in Europe (in % of GDP for the period
2005-2008). The main source of funding the current account deficit of
Montenegro was FDI. In the opinion of the IMF, the current account deficit can
also be considered as a balanced response of the system to a large foreign
private capital inflow and a high rate of credit growth.
The balance of payment data of
Montenegro show that in the last years (2011-2018) there has been a gradual
decrease in the current account deficit compared to the pre-crisis period
(2005-2008). The downward trend in the current account deficit is characterized
by the period from the beginning of the crisis, and to a large extent is the
result of the crisis adjustment of the economy and decrease in aggregate
demand, i.e. with a decrease in capital inflow, a significant part of the
deficit has had a self-correcting effect. However, in spite of the decrease in
external imbalance, it is evident that the foreign trade deficit is significantly
high and permanently present. The still significant FDI inflow provides enough
foreign accumulation for its funding, but on the other hand it is one of the
factors for creating the deficit. The existence of a long-standing deficit
indicates a fundamental external imbalance for which funding is not a durable
solution in itself, but it is necessary to look for ways to gradually decrease
and adjust the deficit.
The main contribution of the paper is
reflected in the identification of effects of the foreign investment process on
the current account balance of payment trends. The results of the paper will
show that the foreign investment process has led to deterioration of the
balance of payment imbalance. The
paper also presents the necessary measures that should be undertaken in order
to gradually decrease the long-standing deficit in the goods account, as the
main cause of external imbalance.
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