Montenegro's High Interest Rates 'Could Cause Recession'

The Central Bank warned in its annual report issued on Monday that high interest rates are causing a decrease in liquidity which could lead to insolvency, while also contributing to last year's decline in investment activity.

"In the long run, that leads to stagnation and a recession in economic activity," the report said.

Due to high interest rates, commercial banks have approved about 50 million euro less in loans to private companies in 2014 than in the previous year.

Addressing parliament in early May, the Central Bank's governor Milojica Dakic announced that by the end of June, a draft law on the limitation of interest rates should be completed - legislation which does not have much support among Montenegrin bankers.

Dakic said that interest rates remained high but the arrival of three new banks on the Montenegrin market this year should contribute to their decline. 

The European Commission, in a report released in February, also warned of limited and expensive bank lending in Montenegro.

But the arrival of the new banks could improve credit supply gradually, in particular to businesses, the Commission's report said. 

"Still, banks' lending capacity will remain constrained so far as they do not reduce the high level of non-performing loans in their portfolios," it added.