Montenegro's Government Fights the Grey Economy

The Goat and the Cabbage

Should a goat be left to guard the cabbage? This proverb immediately brings to mind the latest campaign launched by the Montenegrin government to curb the grey economy, a phenomenon which, according to all indicators, has been sponsored by the state all along.

AIM Podgorica, Sept. 6, 2001

The grey economy has been one of Montenegro's chief problems for some time now. Depending on whether they are official or unofficial, estimates say that 40-60 percent of all business activities in Montenegro take place in that zone. It is also assumed that one-third of Montenegro's work force -- 70-100,000 people, make their living by participating in some form of illegal activity.

This is why it came as no surprise that the public is paying a great deal of attention to the government's efforts to deal with the grey economy. This was also one of the first moves made by the new minority government of Filip Vujanovic after being elected in mid July in the wake of several weeks of negotiations between the Victory Is Montenegro's coalition and the Liberal Alliance of Montenegro.

The first concrete step in the war on the black market was thus made at the beginning of August. Owners of merchandise of unknown origin and those who did not pay duties, taxes, or excise taxes on their goods, had an opportunity to freely and anonymously declare what they had to the Public Revenues Agency, and after paying certain fees, legalize the goods. Almost 3,500 official and unofficial merchants used this chance and declared goods worth DM20 million.

>From this, the republic budget received DM2.5 in unplanned revenues. As expected, cigarettes (worth DM5 million) topped the list of smuggled goods. It turned out, however, that only a part of the illegally procured goods, stored across Montenegro and already on the market, have been reported. During initial controls by finance and business police, goods (mostly cigarettes) worth 1.3 million German marks had been impounded.

"Since Aug. 1, tax revenues have increased 31 percent compared to the same period a month ago, and sales tax revenues went up as much as 47 percent," says Predrag Markovic, director of the Public Revenues Agency, summing up the results of the government program. From that angle, everything seems to be in perfect order.

On the ground, however, the effects are far from what was promised. Those selling illegal merchandise, mostly alcoholic beverages and cigarettes, are back on the job, after briefly withdrawing to safer ground. The only noticeable change is that prices have gone up, both of legally and illegally imported goods. Which is to say of everything that is sold in local stores.

Imported cigarettes are the best example. When the government went public with its program of curbing the grey economy, it was logically assumed that the "tobacco business" would be the first to come under fire. Calculations showed that the "tobacco tax" could become one of the major sources of state revenues.

Some 200,000 packs of cigarettes are daily consumed in Montenegro. If each were to yield one German mark in tax revenues, the state treasury would get up to DM70 million annually. Instead, the government has for years been content with getting only crumbs. The Montenegrin vice premier and vice president of the Coordinating Team for curbing the grey economy, Zarko Rakcevic, stresses that during the first six months of 2001, the treasury received about DM6.5 million in tax on cigarettes, while calculations showed than the sum should have been much higher, according to Rakcevic, at least DM40 million.

The better portion of that sum went to the organizers of cigarette smuggling. And it hasn't changed. Some 20 days after the first raids, affecting mostly street vendors, the only thing the government has to show for its effort is higher prices. Scared, the street sellers, the last link in the long chain of those involved in the tobacco business, raised prices enormously. The most popular brands -- Lucky Strike and Pall Mall -- are 50 to 70 percent more expensive. Initially it was believed that the price hikes were due to fear stirred up by the government's action. The locked doors of warehouses in and around Podgorica, where all sorts of cigarettes were freely sold for years, also testified that the illegal trade was done with once and for all.

But with controls gradually laxing, it became clear that the state, or someone on its behalf, had enabled the many participants in the illegal trade to gain extra profit from the illegal cigarette trade.

"The objective of the campaign to curb the black market, what we required that state bodies actually do, was not to 'attack' the street vendors. The purpose was, and I personally insisted on that, to target wholesalers, who are the reason why the state is not getting its due share," says Rakcevic, adding that "the results have not been achieved." "In other words, I am not satisfied with the quantity of confiscated cigarettes," stresses the vice premier.

Meanwhile, the warehouses that had been systematically sealed reopened. Only the manner of "doing business" changed. According to well-informed sources, the trade cigarette trade now operates as follows: a "trusted" buyer delivers money and a "specification of goods" to the supplier. The goods are delivered later (often during the night), and to an address specified by the buyer.

Once the excise tax stamps appear, the order will be given for swift action against all those selling illegally procured cigarettes. That includes street vendors, said Rakcevic.

Until then, small distributors will be hardest hit by the government offensive. On the other hand, big distributors seem to have been granted a grace period in which they could freely sell their undeclared goods worth, according to some estimates, DM15 million. And enough time to switch to other, legal business.

Meanwhile, all those willing to legally sell goods goods subject to excise tax are waiting for the government to specify a tax rate and "settle the stamp-printing problem." Will this be enough to do away with the consequences of 11 years of business anarchy?

Zoran Radulovic

(AIM)