Montenegro has decided to terminate its agreement with Western banks, a move that showcases its confidence in its financial situation. This agreement had originally been put in place to safeguard the country from increased debt on a contentious Chinese loan, nearly amounting to $1 billion, which was used to construct the Bar to Boljare highway.
Financing
The highway, built by the China Road and Bridge Corporation (CRBC) and financed by the Export-Import Bank of China, raised long-term economic concerns by burdening Montenegro with significant debts to Beijing, accounting for over a third of the state budget.
The Montenegrin Finance Ministry cited “favorable market conditions” as the reason for ending the agreement. By doing so, it reportedly earned approximately $64 million after reverting to the recently strengthened dollar, which it intends to use for its upcoming debt payment to China in January.
Montenegro’s Finance Minister, Aleksandar Damjanović, expressed concerns about the increasing uncertainty in global markets, making it too risky to remain in the deal. He highlighted external financial market instability, the ongoing conflict in Ukraine, and the resulting instability in currency relationships.
Challenges
The Bar to Boljare highway project has faced various challenges, including construction delays, escalating costs, environmental controversies, and criticism surrounding Chinese lending practices and local corruption. The original plan, conceived in 2014, envisioned a 163-kilometer highway connecting Montenegro’s Adriatic coast to neighboring Serbia, aiming to transform the country into a regional transport hub and boost economic activity. However, questions linger regarding the completion of the remaining 122 kilometers of the road.
In April 2021, Montenegro sought assistance from the European Union to repay the significant loan when its first installment was due that summer. Concerns arose that the country, with a population of 620,000, could face a financial takeover by China. Consequently, a deal was brokered in July 2021, involving Montenegro, the EU, and four Western financial institutions—Goldman Sachs, Merrill Lynch, Societe Generale, and Deutsche Bank.
This 14-year arrangement, with an opt-out clause after two years, aimed to protect against volatility in the euro-dollar exchange rate, which directly affected the debt amount. As Montenegro uses the euro, the agreement enabled payment in euros at a lower interest rate of 0.88 percent, instead of dollars at the originally agreed-upon interest rate of 2 percent.
While the Montenegrin government justifies its decision due to gloomy market forecasts for the eurozone, not everyone within the country accepts the official explanation. Some, like former Finance Minister Milojko Spajić, believe that Montenegro exited the deal because its treasury was running low, necessitating the $64 million earned from leaving the agreement for an upcoming debt payment.
The future of the remaining sections of the highway remains uncertain, and the project has faced criticism and scrutiny over issues such as construction contracts, environmental damage, and transparency concerns.
