International Journal of

Arts , Humanities & Social Science

ISSN 2693-2547 (Print) , ISSN 2693-2555 (Online)
The Impact of Foreign Direct Investments on Balance of Payment Trends in Montenegro

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.