EUROPEAN COMMISSION Brussels, 9.11.2016 SWD(2016) 360 final COMMISSION STAFF WORKING DOCUMENT Montenegro 2016 Report Accompanying the document Communication from the Commission to the European Parliament, the Council, the European Economic and Social Committee and the Committee of the Regions 2016 Communication on EU Enlargement Policy {COM(2016) 715 final}



Table of Contents 1. INTRODUCTION 1.1. Context 1.2. Summary of the Report 2. POLITICAL CRITERIA 2.1. Democracy .2. Public administration reform2 2.3. Rule of law 2.4. Human rights and the protection of minorities 2.5. Regional issues and international obligations 3. ECONOMIC CRITERIA 3.1. The existence of a functioning market economy 3.2. The capacity to cope with competitive pressure and market forces within the Union 4. ABILITY TO ASSUME THE OBLIGATIONS OF MEMBERSHIP 4.1. Chapter 1: Free movement of goods 4.2. Chapter 2: Freedom of movement for workers 4.3. Chapter 3: Right of establishment and freedom to provide services 4.4. Chapter 4: Free movement of capital 4.5. Chapter 5: Public procurement

4.6. Chapter 6: Company law 4.7. Chapter 7: Intellectual property law 4.8. Chapter 8: Competition policy 4.9. Chapter 9: Financial services 4.10. Chapter 10: Information society and media 4.11. Chapter 11: Agriculture and rural development 4.12. Chapter 12: Food safety, veterinary and phytosanitary policy 4.13. Chapter 13: Fisheries 4.14. Chapter 14: Transport policy 4.15. Chapter 15: Energy 4.16. Chapter 16: Taxation 4.17. Chapter 17: Economic and monetary policy 4.18. Chapter 18: Statistics 4.19. Chapter 19: Social policy and employment 4.20. Chapter 20: Enterprise and industrial policy 4.21. Chapter 21: Trans-European networks 4.22. Chapter 22: Regional policy and coordination of structural instruments 4.23. Chapter 23: Judiciary and fundamental rights 4.24. Chapter 24: Justice, freedom and security 4.25. Chapter 25: Science and research

4.26. Chapter 26: Education and culture 4.27. Chapter 27: Environment and climate change 4.28. Chapter 28: Consumer and health protection 4.29. Chapter 29: Customs union 4.30. Chapter 30: External relations 4.31. Chapter 31: Foreign, security and defence policy 4.32. Chapter 32: Financial control 4.33. Chapter 33: Financial and budgetary provisions Annex I - Relations between the EU and Montenegro Annex II – Statistical Annex

1. Introduction

1.1. Context The Stabilisation and Association Agreement between Montenegro and the EU entered into force in May 2010. The European Council granted the status of candidate country to Montenegro in December 2010. Accession negotiations were opened in June 2012 . EU and NATO accession are the two key foreign policy priorities of Montenegro. In December 2015, Montenegro received an invitation to join NATO. The relevant Accession Protocol was signed in May 2016 and is currently being ratified by NATO members. Four negotiating chapters were opened during the reporting period. Holding the accession conferences was made possible also due to the progress made in the area of the rule of law, as per the requirements of the Negotiating Framework. Progress towards meeting the interim benchmarks set in the rule of law chapters will be key for further progress in the negotiations overall. 1.2. Summary of the Report Concerning the political criteria, a political agreement on the organisation of free and fair elections led to the establishment of a "government of electoral trust" in May. Despite persisting polarisation of the political environment, this has demonstrated the capacity to reach compromises between the government and parts of the opposition. The parliamentary elections of October 2016 were conducted under a substantially revised legal framework. Despite the technical delays and difficult relationships between responsible institutions, overall the election preparations were conducted in a more participatory and transparent manner. The elections were held in a competitive environment and characterised by general respect for fundamental freedoms. The relevant national authorities are expected to swiftly and transparently investigate alleged procedural irregularities, the arrests made and the temporary closure of two mobile communication platforms. There has been no political follow-up to the alleged abuse of public funds for party political purposes ("audio recordings affair"). Montenegro is moderately prepared with the reform of its public administration. Some progress has been made, notably with the adoption of the public administration reform strategy 2016-2020, the public financial management reform programme, the entry into force of the new law on salaries and the simplification of administrative procedures. However, strong political will is needed to effectively address the de-politicisation of public service and right-sizing of the state administration. The judicial system is moderately prepared. During the reporting period, Montenegro made some progress in this field. The capacity of the Judicial and Prosecutorial Council has improved. However, the new legislative framework for increasing the independence, accountability and professionalism of the judiciary, as well as the code of ethics, have not yet been fully implemented. Measures to reduce the number of pending cases and the total length of proceedings need to continue. Montenegro has achieved some level of preparation in the fight against corruption. Corruption remains prevalent in many areas and continues to be a serious problem. The Anti-Corruption Agency started its work in 2016. The process of institution building is largely complete. All institutions should demonstrate a more proactive attitude to fulfilling their mandate. Despite some further steps taken, the track record both on successful investigations and convictions, in particular in high-level corruption cases, and on prevention of corruption remains limited. Montenegro needs to increase the capacity to carry out financial investigations and establish track records of seizure and confiscation of criminal assets. Montenegro has achieved some level of preparation in the fight against organised crime. Some progress was made, notably on strengthening the legal, regulatory and institutional framework. Efforts should continue to develop the track record in organised crime cases, especially as regards trafficking in human beings and money laundering where results are limited. The number of suspicious bank transactions detected remains low. Montenegro completed several legislative reforms to further align with the EU and international human rights standards and ensure that adequate mechanisms are in place to protect vulnerable groups from discrimination. Implementation of the legislation remains weak. Amendments to the overall legislative framework, to ensure a coherent sanctioning policy for human rights violations, have not been adopted yet. Institutional capacity needs to increase further. The Roma minority remains the most vulnerable and most discriminatedagainst community in various areas of life. Montenegro has achieved some level of preparation in the area of freedom of expression, but no further progress was made in the past year. The number of defamation cases remains high, which points to weak self-regulation mechanisms, as well as to challenges in understanding the role of the media. Montenegro still needs to achieve overall alignment with the case-law of the European Court of Human Rights. The premises of one commercial media company were damaged and several journalists were physically and verbally assaulted and threatened during anti-government protests in October 2015. There has been no progress in the resolution of cases of attacks on journalists. Transparency and non-discrimination in state advertising in the media should be ensured. The revised Code of Ethics for Journalists must be effectively and uniformly applied across the media community. Montenegro continued to play a constructive role in regional cooperation. It ratified its border agreements with Bosnia and Herzegovina and with Kosovo *. As regards economic criteria, Montenegro is moderately prepared in developing a functioning market economy. Some progress was made to strengthen the functioning of the financial and labour markets, as well as on improving the business environment. Investments in infrastructure and tourism support economic activity. However, rapidly rising public debt and high fiscal deficits, together with high external imbalances and high unemployment are of concern. The combined effects of large-scale public infrastructure investments and several new expensive social expenditure programmes challenge fiscal sustainability. Immediate corrective measures are required, as called for by the ERP policy guidance. Other problems to be tackled include high external imbalances and low labour market participation and still low credit growth amid high impaired bank loans. Montenegro is moderately prepared in its capacity to cope with competitive pressure and market forces within the Union. Some progress was achieved in improving the quality of infrastructure, the energy market and the digitalisation of the economy. SMEs support is modest but developing gradually. However, substantial efforts are still required to develop human capital and a competitive export-oriented industry. Concerning its ability to assume the obligations of membership, important work on alignment and preparation for the implementation of the acquis has taken place and Montenegro is moderately prepared in many chapters, such as the free movement of goods, public procurement, statistics as well as justice, freedom and security. Montenegro has continued to align with all EU common foreign and security policy positions and declarations. Montenegro is at an early stage of preparation regarding fisheries and budgetary and financial provisions and at some level of preparation in the area of environment and climate change. Good progress has been made in the areas of free movement of goods, agriculture and rural development, food safety, veterinary and phytosanitary policy, energy, environment and climate change, customs union, external relations and financial control. Looking ahead, Montenegro should focus in particular on competition policy and economic and monetary policy. Strengthening the administrative capacity for ensuring the application of the acquis remains a substantial challenge for Montenegro. 2. Political criteria 2.1. Democracy Elections The parliamentary elections of October 2016 were conducted under a substantially revised legal framework. Despite the technical delays and difficult relationships between responsible institutions, overall the election preparations were conducted in a more participatory and transparent manner. The elections were held in a competitive environment and characterised by general respect for fundamental freedoms. The relevant national authorities are expected to swiftly and transparently investigate alleged procedural irregularities, the arrests made and the temporary closure of two mobile communication platforms.

The parliamentary elections of October 2016 were prepared by the "Government of Electoral Trust" and conducted under a substantially revised legal framework: including new provisions on voter registration and identification, gender equality and political parties and electoral campaign financing, among others. The State Electoral Commission (SEC) received and registered 17 candidate lists to contest the elections. The preparatory phase was marked by difficult relationships between institutions in charge for the preparation of the elections, most notably Ministry of Interior and SEC, disagreements around the single voters list and concerns about the capacities of SEC and the Anti-Corruption Agency to fulfil their mandate in accordance with the new electoral legislation. Despite delays and technical difficulties the preparatory phase, supervised by the "parliamentary committee for monitoring the implementation of the laws and other legislation relevant for building trust in the electoral process", has been conducted in a more transparent manner, than previous elections. The elections were observed by national and international observers, including the OSCE/ODIHR Monitoring Mission, who concluded that the conduct of the Election Day itself proceeded in a calm and orderly manner, with few cases of procedural irregularities observed. The voters' turnout was 73.2 %, almost 3 % higher than in the previous parliamentary elections. None of the political contenders won an absolute majority in the parliament. Of the 81 seats, the seat allocation, in accordance of the results released by the State Electoral Commission, is as follows: DPS 36, DF 18, Key coalition 9, Democratic Montenegro 8, SDP 4, Social Democrats 2, Bosniak Party 2, Croatian Civic Initiative 1 and Albanians Decisively Coalition 1. While the SEC has met the relevant deadlines and put in place all the necessary arrangements, deficiencies were clearly visible in terms of lack of collective leadership, efficient management and transparency, as well as politicization. The Anti-Corruption Agency focused its activities in the pre-election period on the control in the area of political party and electoral campaign. During the campaign period several proceedings have been initiated against parties for not complying with their obligations under the campaign finance legislation. However, The Agency’s capacity in this area needs to be further strengthened and the Agency needs to become more proactive in checking the data submitted by public institutions and political organisations (see also chapter 23 – Judiciary and fundamental rights). Despite the progress made in the recent years, the electoral legislative and institutional framework requires further alignments with the international standards. Local elections in the Municipality of Tivat were held in April, and the new system of electronic identification of voters applied for the first time. Four opposition parties boycotted the elections. Together with the October parliamentary elections local elections were held in Kotor, Budva, Andrijevica and Gusinje. The results of local elections in several locations have been challenged. The involvement of women in politics remains low, at all levels, including in the electoral administration. There are no women among the political party leaders in the country and very few in the parties' leaderships, as evident during the recent electoral campaigns and the earlier negotiations for the government of electoral trust. Electoral lists complied exclusively with the minimum requirements in term of gender equality. Following the preliminary election results the number of women Members of Parliament (MPs) is expected to increase to 18, from the previous 15, now accounting for 22 %. There were some developments in judicial follow-up of the alleged misuse in 2012 of public funds for party political purposes (the ‘audio recordings affair’), but it has not been completed. To date, there has been no political follow-up. Parliament The party-political scene is fragmented. Parliament was at times disrupted by partial or full boycotts before resuming normal functioning after an agreement between government and parts of the opposition. Overall, the political scene, especially the opposition, is fragmented, with a multitude of small political parties. Partial or full boycotts by parts of the opposition presented a key challenge to parliamentary work. Following intensive talks, an agreement on power sharing with a view to fostering confidence in upcoming elections was signed in April, and the law implementing the agreement was adopted in May (see under Governance). Following these positive developments, parts of the opposition returned to parliament. As part of the preparations of the October elections, a parliamentary committee for monitoring the implementation of the laws and other legislation relevant for building trust in the electoral process was set up in July. The protests organised by part of the opposition since September 2015 continued during the reporting period. Results of investigations into all incidents of violence and allegations of excessive use of force by the police during the October 2015 opposition protests are still pending. Subsequent protests were, overall, without incident. In December, parliament waived the immunity of three opposition MPs, to allow prosecution for their actions during the protests (for incitement to violence with the aim of changing the constitutional order). Legislative activity decreased over the reporting period due to boycotts by the opposition parties. The backlog of laws pending in parliament, was reduced after the return of the opposition to the parliament. The acquis alignment process requires close and structured dialogue between the government and parliament. The parliament regularly takes the initiative in presenting laws and amendments, and voting does not always correspond to government priorities. Although this reflects parliament's seriousness in discharging its democratic duties, it also raises the need for additional responsibility for and scrutiny of legislation, especially EU related legislation. In line with the law on the prevention of corruption, parliament’s integrity plan was adopted in March. One report on an alleged breach of the code of ethics was submitted to the human rights committee. The formal procedure for acting upon this complaint is pending. The right to file complaints, limited to MPs and parliamentary bodies, should be extended to the public, the media and other external stakeholders. There is also room for improvement in other areas, including MPs’ obligation to declare private interests, the statute of limitations and the range of penalties. No progress has been made on increasing parliament’s capacity to follow up on conclusions and recommendations adopted in oversight hearings. Parliament continued to exhibit a high level of transparency. It continued to reply to all access to information requests. No action was taken to establish procedures for addressing citizens’ petitions and complaints. Administrative and expert capacity needs further improvement. Additional premises should be provided for parliament’s administrative services. Parliament’s premises are now accessible to persons with disabilities. Governance The establishment of the government of electoral trust has demonstrated Montenegro's capacity to overcome a difficult domestic political situation. Transparency and stakeholder participation should be further strengthened. Local public finances remain to be consolidated and the budgetary positions, transparency, efficiency and accountability of local self-government strengthened. The government won a vote of confidence in parliament in January, following a break with the junior partner in the governing coalition. This led to intensive discussions among political parties and to the signing of an agreement on holding credible elections. The establishment of the ‘government of electoral trust’ in May, with the participation of opposition parties, was a way to bring the political stalemate to an end. In line with the agreement, several cabinet posts were allocated to candidates suggested by (former) opposition parties. In addition to EU accession, Montenegro’s key foreign-policy priority during the reporting period was securing an invitation to join NATO, which Montenegro received in December 2015. The Accession Protocol was signed in May.

The 2016-2018 programme for Montenegro’s accession to the EU sets out what the country needs to do in relation to accession negotiations in that period, and how to coordinate the various institutions involved in the process. Overall, coordination, and the transparency of the process, is satisfactory, although the inclusion of stakeholders can be further improved. In December, parliament amended the law on the territorial organisation of Montenegro, the law on local self-government, the law on the capital city and the law on local self-government financing. Local self-government units are not financially self-sufficient. Despite plans to rationalise them, two new municipalities were established. Overall, both the financial situation of local self-government and the public financial management of local self-government entities remain unsatisfactory. To date, 21 out of 23 units of local self-government have adopted action plans to combat corruption. Civil society Some progress was made in improving cooperation between the government and civil society organisations (CSOs). Civil society’s active role in the accession process is now formally acknowledged, but full participation remains to be achieved. Additional resources and transparency are needed in government structures and procedures for collaboration with and consultation of CSOs. It is a matter of concern that smear campaigns and intimidation attempts continued against certain CSO activists. Conditions conducive to voluntary work, civic activism and social entrepreneurship need to be created. An empowered civil society is a crucial component of any democratic system and should be recognised and treated as such by state institutions. Montenegro still needs to develop an overall societal approach, institutional culture and legal framework that facilitate grassroots activities by civil society, and to deal constructively with criticism of state institutions. The priorities identified in the strategy for development of non-governmental organisations (NGOs) 2014-2016 on transparent procedures for free concessions of public spaces to NGOs have not been addressed. Relations between civil society and the government have occasionally been overly adversarial and characterised by distrust, especially on the political situation, the rule of law and fundamental rights. NGOs participate in working groups, including for accession negotiations, but are dissatisfied with their level of involvement in policy-making and access to information. The government needs to find a balance between the requirements of efficient policy-making and the need for transparency and inclusiveness of civil society. In the past, some civil society activists had been targeted on a personal basis by the media through smear campaigns. There have also been instances of intimidation attempts against civil society organisations. The Council for the Development of NGOs, comprised of government and NGO representatives, needs to improve its capacity and become more proactive and effective in influencing government decisions directly related to civil society. Montenegro needs to establish a sustainable and efficient system of public funding for CSOs and an appropriate institutional and legal framework. Amendments to the law on public gatherings have been adopted, providing a clearer and more favourable framework on freedom of association, in line with European standards. Amendments to the law on NGOs are pending. The necessary by-laws, which will determine the procedure for funding, monitoring, evaluation and audit of NGO projects, also need to be adopted. Moreover, the law on gaming, currently the largest source of public financing for CSOs, is not being implemented properly and the amount allocated to CSO projects has not been in line with legal requirements. 2.2. Public administration reform Montenegro is moderately prepared with the reform of its public administration. Some progress has been made, notably with the adoption of the public administration reform strategy 2016-2020, the public financial management reform programme, the entry into force of the new law on salaries and the simplification of administrative procedures. However, strong political will is needed to effectively address the de-politicisation of public service and right-sizing of the state administration (recommended last year, and still needed). In the coming year, Montenegro should in particular: → allocate the appropriate budgetary resources to the 2016-2020 PAR strategy, and start to implement and regularly monitor it in close coordination with the 2016-2020 public financial management reform programme; → improve the quality of regulatory impact assessment and ensure public consultations are conducted in line with the existing legislation; → further amend the civil service framework in order to fully ensure merit-based recruitment, an improved career path across the public service at national and local self-government level, and objective dismissal procedures for senior managers. Policy development and coordination The legal framework and institutions are in place to ensure a coherent policy-making system, including for European integration. However, policy coordination remains weak, more focused on formal and procedural issues than substance. Medium-term policy planning is fragmented and is not given priority by the government. There are a number of overlapping strategies without fully developed budget planning; this jeopardises implementation and hinders the relevant reforms. More structured dialogue between the government and parliament on policy priorities, and on acquis alignment, is needed. Montenegro’s programme for accession to the EU for 2014-2018 is revised every year; the last update was adopted in January. Inclusive and evidence-based policy and legislative development is only partially ensured. The number of civil servants working on policy development and analysis is still limited. Public consultations on legislative proposals are regulated by law; however, in practice, they are often quite formalistic and timelines are too short for effective civil society input. Impact assessments are not systematically performed, other than budget impact assessments. The quality of regulatory impact assessments is minimal and they are often done too late in the legislative process. With regard to public scrutiny of government work, monitoring and parliamentary scrutiny are often quite weak. Public financial management A multiannual public financial management (PFM) reform programme and action plan was adopted in December 2015, designed to address the main weaknesses identified and improve the functioning of the budget system. A coordination group has been set up to manage and monitor progress in different areas. Its priorities are the development of a stronger medium-term budget framework, improved programme budgeting, better planning of capital projects and enhanced debt management, upgrading of the tax and customs administration, further alignment of public procurement with the EU acquis and development of an e-procurement system, improved public internal financial control and greater transparency in financial reporting and accounting.

As concerns other ongoing reforms, the law on the budget was adopted in 2015 in accordance with procedures and timeframes laid down in the law on the budget and fiscal sustainability. Financial management and control capacity was strengthened and internal auditors trained. A strategy for development of public procurement was adopted (see chapter 5), the State Audit Institution (SAI) improved its capacity for performance audits (see chapter 32), and progress was made on the IT system for taxation (see chapter 16). The law on the budget and the law on final statements of accounts are published on the website of the Ministry of Finance. However, budget transparency could be improved: the budget could be made more understandable and accessible to the public by improving its presentation and readability, and that of monthly and quarterly reports. The PFM reform programme includes specific action to improve transparency, e.g. on multiannual commitments and capital projects. Parliament’s capacity for budget oversight needs to be strengthened and MPs given enough time to process budgetary information. Public service and human resources management The law on civil servants and state employees regulates the public service. Even though the law establishes merit-based recruitment and promotion as a principle, loopholes in the organisation of the selection process allow for arbitrary selection at all levels. Montenegro has made little progress in ensuring merit-based recruitment for senior civil servants, though standard guiding questions for interviews have been drafted, and a competency framework for the selection process is envisaged. In practice, non-objective criteria have been used in selections and dismissals, which have resulted in a considerable number of appeals. The efficiency of both internal and external recruitment procedures remains a matter of concern due to the low number of candidates. Dismissal of senior managers is allowed after one negative performance appraisal or if their position is abolished by an internal reorganisation, creating the risk of abusive practices. Human resources management units are in place across the state administration. However, they are generally weak and lack competent staff, and they focus more on legal compliance than management of human resources. The central personnel register is not updated regularly, but plans to link it to the salary system should prompt improved compliance levels. As concerns remuneration of civil servants, a new law on public sector pay was adopted in February. The law is based on job classifications; it establishes better control of salaries, corrects inequalities, and increases transparency and fiscal accountability. Professional development is not consistently provided or monitored for any category of civil servants. There is also no clear link between performance appraisal and career development for civil servants. Integrity in public service is promoted through the 2015 code of ethics for civil servants. In January the Anti-Corruption Agency started monitoring the preparation/implementation of the integrity plans that each service must draw up. Accountability of the administration The way the state administration is organised in Montenegro does not ensure effective lines of accountability. There has not been sufficient control over the creation of new institutions, and so there are a lot of small institutions, many with less than ten staff. Some report to ministries, some to the council of ministers and some even to parliament. The managerial autonomy and accountability of the heads of administrative bodies reporting to ministries remains weak and there is still very little delegation of powers within institutions (see chapter 32). Those bodies that are under the council of ministers and parliament are not efficiently supervised either. Citizens’ right to good administration is regulated and subject to internal and external oversight mechanisms, including the Ombudsman (see Governance). Right to access public information is regulated by the law on free access to public information. It lacks effective monitoring and supervision. The proportion of requests refused by the administration fell from 24 % in 2014 to 18 % in 2015. The 2016 budget of the Agency for the Protection of Personal Data and Access to Information was increased by 50 %. This is expected to improve the Agency’s capacity to deal with complaints received and better monitor and supervise proactive disclosure of public information, e.g. on websites. Administrative silence in the public administration is still an issue and the major cause of complaints from the public. The legal framework for the right to administrative justice will be enhanced by the newly amended law on administrative procedures (see below under service delivery). A law on administrative disputes was adopted on 30 July. The right to seek compensation is not well understood by the general public, as Montenegro does not have a specific law on public liability. Service delivery to citizens and businesses The government is committed to a more user-oriented administration, and it regularly reports on the implementation of the 2014 law on e-governance, which has set specific deadlines for development of e-services and interoperability. The main electronic registers (e.g. the central population register, the business register and the property register) are now in place, but not yet interoperable. Satisfaction surveys on government services are not yet regularly conducted. Simplification of administrative procedures is ongoing. Sectoral laws containing over 150 special procedures are being gradually brought into line with the law on administrative procedures, but a substantial workload remains. So far, amendments to 80 laws have been drafted, and they are in various stages of adoption. An amendment to the law on administrative procedures was adopted on 30 June, however the government decided to postpone its implementation until 1 July 2017. Strategic framework for public administration reform On 28 July, Montenegro adopted its 2016-2020 public administration reform strategy, by means of a consultative and transparent process. There is political support for the reform, which was also declared a priority in the government’s structural reform plan. Consistent political support will be needed to implement the strategy, e.g. for measures to rationalise and right-size the administration, while ensuring capacity for European integration. Montenegro needs to assure the financial sustainability of the strategy by allocating the appropriate budget for implementation both in the medium-term expenditure framework and in the annual budgets. 2.3. Rule of law Functioning of the judiciary Montenegro’s judicial system is moderately prepared. During the reporting period, Montenegro made some progress in this field. Last year’s recommendations have been partially met; in particular, the capacity of the Judicial and Prosecutorial Council has improved. The new legislative framework for increasing the independence, accountability and professionalism of the judiciary as well as the code of ethics, have not yet been fully implemented. Measures to improve efficiency of judiciary need to continue. In the coming year, Montenegro should in particular: strengthen the independence and professionalism of the judiciary by fully implementing the new recruitment, professional appraisal and promotion system; strengthen the accountability of the judiciary by developing a track record of implementation of codes of ethics and of the new disciplinary systems for judges and prosecutors; ensure better human resources management to rationalise the judicial network and improve capacity building.

Strategic documents Montenegro’s action plan for chapter 23 outlines comprehensive judicial reforms. It is monitored by the chapter 23 inter-institutional working group, which includes representatives of civil society. In addition, a judicial reform strategy for the period 2014-2018 and accompanying action plan are being implemented. The strategy reflects and complements the main reform priorities identified and addressed by the action plan for chapter 23. A mechanism for monitoring the implementation of the strategy is in place. Management bodies The Judicial and the Prosecutorial Councils are the key bodies in charge of managing the judicial system and the careers of judges and prosecutors. Their composition and appointment procedures are broadly in line with European standards. The capacities of both Councils and their secretariats have been strengthened, but they continue to lack strategic planning for budget and human resources. While access to decisions and information of the Judicial Council continued to improve, the operation of Prosecutorial Council still lacks transparency. Independence and impartiality Following the 2013 amendments to Montenegro’s constitution, reforms aimed at strengthening the independence of the judiciary, by formally reducing political influence on the appointment of high-level judicial and prosecutorial offices, have continued. However, concerns remain about attempts at political interference. The new misdemeanour court system became operational in November 2015. The procedure for reappointing state prosecutors was finalised in December 2015 in line with European standards. Judges and prosecutors have permanent tenure and decisions on their dismissal can only be taken by the Judicial or Prosecutorial Councils respectively. They enjoy functional immunity, except for crimes committed in the performance of official duties. Under the criminal code, undue interference in the work of judicial officials is punishable by imprisonment. So far, there has been no case where these provisions have been invoked. The principle of random allocation of cases is guaranteed by the law on courts and implemented automatically through the judicial information system, the PRIS, although for very small courts there are certain limits. In 2016, a new procedure was introduced, assigning cases to judges as soon as they are submitted. The Supreme Court practice of reallocating large numbers of cases between courts, with the aim of reducing the backlog in the most overloaded courts, risks interfering with the right to a lawful judge. Failure to seek recusal in circumstances where it is mandatory constitutes grounds for disciplinary action. Rules for withdrawing allocated cases are set out in the law on courts. Accountability Codes of ethics for judges and prosecutors are in line with the relevant European and international standards and linked to mechanisms for complaints from members of the public. Compliance is monitored by specialised bodies in the Judicial and Prosecutorial Councils. Some efforts were made to raise public awareness of the Code of Ethics. Specialised bodies in the Judicial and Prosecutorial Councils are also responsible for the system of disciplinary accountability. However, their track record of enforcing disciplinary accountability and the code of ethics is limited. The Councils’ Decisions in these fields do not give sufficient reasons. All public officials, judges and prosecutors have an obligation to declare their assets annually and to report on possible conflicts of interest. Professionalism and competence The power to recruit, appoint, transfer, promote and dismiss judges and prosecutors lies with the Judicial and Prosecutorial Councils respectively. Legislation adopted in February 2015 introduced a single, countrywide recruitment system for judges and prosecutors, and a new system of promotion based on periodic professional assessment. Necessary secondary legislation has been adopted. Both systems are designed to be transparent and merit-based, and to seek to apply objective criteria. They have not yet been fully implemented. Quality of justice The Judicial Training Centre is an independent body that provides initial and in-service training to judges, prosecutors and legal advisers. While its budget for 2016 has increased, it continues to dependent on donor support, for certain specialist training. Its administrative capacity needs to be considerably strengthened and adequate premises must be secured without delay. Montenegro has the observer status in the European Judicial Training Network.

The PRIS, the judicial information system, is used by all courts for tracking cases, for some aspects of case management and for communication with parties. However, the system still has security gaps and does not operate reliably outside Podgorica. It is also not backed by a clear institutional framework and remains under-developed with regard to the prosecution service. The system also facilitates the collection of comprehensive statistics, but their reliability continues to raise concerns. A new IT strategy for replacing the PRIS was adopted in June 2016. Its implementation needs to be backed with adequate financial and human recourses and clear allocation of responsibilities. Final court decisions are publicly accessible online. The law on courts provides for mechanisms to ensure that court rulings are consistent. The judiciary’s current budget of EUR 34.6 million represents 1.63 % of the national budget and 0.89 % of GDP. The number of judges and prosecutors in Montenegro is above the EU average in relation to the size of the population, as is the percentage of the budget spent on staff. Spending on salaries limits the scope for other expenses such as investment in ICT or free legal aid. Alternative dispute resolution is available through court settlement, arbitration and mediation, but it is not systematically used. Efficiency In general, the courts are managing to cope with the influx of cases. However, the overall length of proceedings from initiation to final judgment and the backlog of cases before some courts remain a cause for concern. Also enforcement of civil and administrative decisions remains problematic. Despite further reduction of the number of cases as a result of the introduction of the bailiff system in 2014, in particular the backlog of the old enforcement cases is still considerable. There is a need for further rationalisation of the judiciary and better human resources management. Reforms in these areas should draw on data and conclusions of a proper needs analysis, and a cost-benefit analysis of the past and planned reforms. Fight against corruption Montenegro has achieved some level of preparation in the fight against corruption. Despite some progress, corruption remains prevalent in many areas and continues to be a serious problem. Good progress was made on meeting last year’s recommendation on the establishment of the Anti-Corruption Agency, which started work on 1 January 2016. The process of institution building is in general at an advanced stage. All institutions should demonstrate a more proactive attitude to fulfilling their mandate. Some progress was made on the recommendation on establishing a track record in the area of repression of corruption, in particular high-level corruption, but the track record both on successful investigations and convictions and on prevention of corruption remains limited. In addressing the shortcomings outlined below, in the coming year Montenegro should in particular: → improve the operational capacity of the institutions, so that they are able to fulfil their mandates effectively; → increase the capacity to carry out financial investigations and establish track records of seizure and confiscation of criminal assets; → improve track records in the areas of repression and prevention of corruption, including by imposing effective sanctions. Track record As regards the development of track records in investigation, prosecution and final conviction in corruption cases some results have been reached also in high-level corruption cases. The first final and enforceable judgment in a high-level corruption case was issued in February against a former mayor of Budva. The Special Prosecutor’s Office also focused its work on high-level cases. It started investigations in several cases involving, among others, former mayors, a former President of the State Union of Serbia and Montenegro, and a high-ranking DPS party official. It concluded 18 plea bargain agreements, some of which remain to be confirmed by the court, including the two concluded with the aforementioned former President of the State Union of Serbia and Montenegro. Financial investigations have started being used in corruption cases but are still not systematic. Confiscation of assets has been ordered in two corruption cases. As regards political influence on law enforcement and judicial officials, members of the executive and the legislative branch should not interfere in the independent functioning of the judicial system. In respect of prevention of corruption, some progress has been made in detecting irregularities in the areas of incompatibility of functions and asset declarations, while the number of cases remains limited in the areas of conflict of interest, political party financing, and codes of ethics. In all areas of prevention of corruption, sanctions provided for by the law have not been applied effectively. The practice among misdemeanour bodies of imposing low penalties, in most cases below the statutory minimum, counteracts enforcement of the rules. The Anti-Corruption Agency should use its power to directly issue misdemeanour penalties. The Agency must also ensure effective investigation of potential whistle-blower cases, adequate whistle-blower protection, and demonstrate a more proactive attitude in awareness rising in this area. Institutional framework On the prevention of corruption, an independent Anti-Corruption Agency with administrative investigation powers was set up on 1 January 2016. The Agency has taken over the staff and responsibilities of the Commission for the Prevention of Conflicts of Interest and the Directorate for Anti-Corruption Initiative, which both ceased to exist. Staff recruitment remains to be fully completed. The necessary expertise for all areas of the Agency’s remit needs to be ensured, including through specialised training. On law enforcement, the institutional and operational capacity of prosecutors, judges and police to fight corruption still needs improvement. The prosecution service has the lead in criminal investigations. However, cooperation between the police and the prosecution in pre-trial investigations needs to improve in practice. The police and prosecution service lack financial investigation skills. This needs to be addressed through targeted specialised long-term training as a matter of priority. The new Special Prosecutor’s Office for the fight against corruption, organised crime, war crimes, terrorism and money laundering was set up in July 2015. By June 2016 all special prosecutors had been appointed. The formation of the Special Police Unit supporting the Special Prosecutor’s Office is ongoing, but the unit is not yet working to full capacity. To carry out its mandate effectively, the Special Prosecutor’s Office needs to be provided with all the human and material resources it requires. Since December 2015, the State Property Administration has become an independent body and includes a department in charge of confiscated assets. The authorities should ensure that law enforcement bodies are fully empowered to act effectively and impartially when investigating corruption allegations. Legal framework Passive and active corruption are punishable offences under the criminal code, which lays down sentences ranging from three months to 15 years. Montenegro is a party to all relevant international anti-corruption conventions. Illicit enrichment has not been made a criminal offence.

Secondary legislation necessary to implement the anti-corruption legislative framework is in place. In December 2015 a new law on customs service was adopted which aims to strengthen the prevention of corruption and integrity of customs officers. Strategic framework The action plan for chapter 23 outlines comprehensive reforms to prevent and combat corruption. It is monitored through the chapter 23 inter-institutional working group, which also includes representatives of civil society. Sectoral action plans for some areas particularly vulnerable to corruption, such as public procurement, privatisation, urban planning, education, health care, local government and police, have had little impact. An operational document which includes non-implemented measures contained in the expired 2010-2014 national strategy for the fight against corruption and organised crime and in the relevant 2013-2014 action plan on areas vulnerable to corruption was adopted in July 2016. Fight against organised crime Montenegro has achieved some level of preparation in the fight against organised crime. Some progress was made, notably on strengthening the legal, regulatory and institutional framework. Little progress was made on carrying out last year’s recommendations. Its track record on organised crime remains limited in the fields of anti-money laundering and trafficking in human beings. It needs to consolidate its track record on the seizure and confiscation of criminal assets, which remain very low. Inter-agency cooperation has only marginally improved. In the coming year, Montenegro should in particular: → establish a track record of investigations, prosecutions, final convictions, seizures and confiscations in organised crime cases, with strong focus on those crimes where results are still lacking, such as money-laundering and trafficking in human beings; → ensure stronger inter-agency cooperation between recently established institutions (the Special Prosecutor’s Office and the new specialised police units), the administration for the prevention of money laundering and terrorism financing, the central bank, the tax authorities and the customs administration; → complete the police reform, by ensuring a centralised recruitment process, with a transparent and merit-based entrance exam. Track record Montenegro’s initial track record of investigations, prosecutions and convictions in organised crime cases has been mostly developed in the fields of drugs, smuggling of migrants, cigarettes, weapons, and cybercrime. No progress was reported as regards cases of money laundering or trafficking in human beings, partly for the lack of consolidated case-law. The identification and protection of victims of trafficking also remains a persistent concern in the country. The lack of understanding of international human rights standards and case-law in this area continues to affect the performance of the judiciary. Financial investigations are still not systematically launched in parallel with regular investigations, especially in lower-level prosecutions. On anti-money laundering action, despite additional specialised training and other measures, no new cases were brought to court; reporting of suspicious bank transactions remains low compared to reporting of cash payments. These weaknesses related to addressing effectively various types of financial and economic crimes need to be remedied. Large quantities of cigarettes continue to be declared transiting through the Port of Bar destined to third countries, including to certain destinations considered as suspect. Institutional and operational capacity Since 2013 Montenegro has in place a system of prosecutor-led investigations but practical problems in coordinating and exchanging information between the law enforcement and judicial structures, though they have improved, have not yet entirely been resolved. This is one of the major shortcomings affecting results. Efforts are being made to gradually foster further specialisation in the Ministry of Interior and the police in particular. Changes aimed at improving cooperation between the Special Prosecution and the police by establishing a ‘double-hatted’ Special Unit. Its chief was appointed in April 2016; the unit still has various posts remaining vacant. The intelligence-led policing project has continued. Since December 2015, the State Property Administration has become an independent body and includes a department in charge of confiscated assets. An operational agreement with Europol is being implemented and a liaison officer has been posted in The Hague since November 2015. Capacity-building activities, and involvement of Montenegro in the work of Europol, need to continue. Legal framework

In recent years, Montenegro’s legal system went through several reforms to boost its response to organised crime, while at the same time aligning the national framework with EU and international standards. A specific working group is currently monitoring the broad range of changes to the system and their impact on policies and enforcement. Future amendments to the law on internal affairs should, in particular, focus on the single entry point and on transparent and merit-based recruitment to increase the professionalism of the police, including by reconsidering the role and position of the Police Academy. Strategic framework On the basis of the intelligence-led policing system, Montenegro produced a serious and organised crime threat assessment (SOCTA) in 2014, which was updated in 2015. In addition, Montenegro is implementing a series of sectoral strategies covering areas such as trafficking in human beings, trafficking in arms, anti-money laundering, and trafficking in drugs. Fight against terrorism Montenegro has not been seriously affected by the phenomenon of foreign terrorist fighters and radicalisation. The country has amended its criminal code, criminalising the phenomenon of foreign terrorist fighters in line with the relevant UN Security Council Resolution. In October 2016 Montenegro has signed the Additional Protocol to the Council of Europe’s Convention on the Prevention of Terrorism. An action plan for fighting money laundering and terrorism financing has been adopted and cooperation with international partners has intensified. Montenegro has adopted a new strategy to combat violent extremism 2016-2018, which complements the national strategy for preventing and combating terrorism, money laundering and the financing of terrorism. Institutional awareness needs to be increased to monitor possible terrorist threats, including radicalised Montenegrin nationals returning from battlefields. There is evidence of approximately 20 nationals on the battlefield in Syria since the beginning of the conflict, of which five reportedly died. Preventive activities in this area need to be strengthened and anti-radicalisation measures implemented. A track record in the area of preventing terrorism financing needs to be developed. 2.4. Human rights and the protection of minorities Overall situation Montenegro completed several legislative reforms to further align with the EU and international human rights standards and ensure that adequate mechanisms are in place to protect vulnerable groups from discrimination. Implementation of the legislation remains weak. Amendments to the overall legislative framework, to ensure a coherent sanctioning policy for human rights violations, have not been adopted yet. Institutional capacity needs to increase further. The Roma minority remains the most vulnerable and most discriminated-against community in various areas of life. Last year’s recommendations have been partially implemented. Shortcomings particularly affect the following areas: Human rights institutions, including the Ombudsman and the Ministry of Human Rights and Minorities, need to be strengthened further and their knowledge of international and European human rights law and standards increased. The Ministry’s capacity to handle and supervise the spending of funds for minorities and religious communities remains limited; Implementation of the anti-discrimination framework needs to be more effective, and awareness by the general public needs to increase; lack of a uniform approach and low levels of penalties for human rights violations continues to create legal uncertainty; Impunity is still an issue of concern in connection with abuses in prisons and by the police. Judges and law enforcement officials’ knowledge of European standards and case-law should be improved. Legislative measures to increase police accountability should be considered. In line with the new reporting methodology, a detailed analysis of freedom of expression as a pilot area follows below. For a detailed analysis of developments on other human rights and the protection of minorities, see chapter 23 — Judiciary and fundamental rights. For developments in the areas of trade union rights, anti-discrimination policy and equal opportunities, see also chapter 19 — Social policy and employment. Freedom of expression Montenegro has achieved some level of preparation in the area of freedom of expression. No progress was made in the past year and recommendations were only partially implemented. The number of defamation cases remains high, which points to weak self-regulation mechanisms, as well as to challenges in understanding the role of the media. Montenegro still needs to achieve overall alignment with the case-law of the European Court of Human Rights. The premises of one commercial media company were damaged and several journalists were physically and verbally assaulted and threatened during anti-government protests in October 2015. There has been limited progress in the resolution of cases of attacks on journalists. In addressing the shortcomings, Montenegro should in particular: → solve older cases of violence against media, including the 2004 murder case and other sensitive ones, review such cases and identify not only the perpetrators but also those who ordered the attacks; → continue to provide guidance to the judiciary on aligning decisions with the case-law of the European Court of Human Rights on freedom of expression, notably by establishing a pool of specialised first instance judges; → ensure transparency and non-discrimination in state advertising in the media, including through adequate legislative solutions; → reinforce the capacity of the self-regulatory bodies. Intimidation of journalists While attacks on journalists and media property were observed during the anti-government protests in September and October 2015, there is no systematic trend of attacks against journalists resulting in threats to life or serious injuries. However, such threats and attacks have occurred in the past, including high profile incidents targeting investigative journalists. The most serious case was the murder of an editor-in-chief in 2004; to date, while one suspect is on trial there is no information as to the instigators of the crime. An ad hoc commission was set up by the government in 2013 to monitor investigations into cases of violence against journalists. The commission failed to fulfil its tasks partly due to strong polarisation between its government and civil society components: this made it difficult even to adopt joint recommendations. In 2014, it issued recommendations on prioritising cases and accelerating the resolution of prominent cases. Some of these recommendations were followed up by the government formed in May 2016, notably as regards reinstating a reward for information on the 2004 murder case. The Commission was re-established in June 2016, with a larger representation of civil society. The parliament formed an ad-hoc committee with a similar mandate. The effectiveness of police protection granted to a journalist and to the property of one media outlet, following the request of another journalist to discontinue the service, needs to be carefully assessed with a view to improving it. Legislative environment Defamation was decriminalised in 2012, leading to a fall in the number of lawsuits against the media. However, the continuing high number of defamation cases point to weak self-regulation mechanisms, as well as at challenges in understanding the role of the media. To help judges in setting standards for penalties, the Supreme Court has issued guidelines that refer to European Court of Human Rights (ECtHR) case-law. Challenges remain in their implementation. Fines imposed on the media and journalists, although generally in line with ECtHR case-law, should reflect the local context, particularly as regards the amounts. Although not used in practice, articles on insult and damage to reputation and honour should be removed from the criminal code to create a more favourable environment for the work of investigative journalists. Amendments to the law on electronic media aimed at further alignment with the acquis have been adopted. Implementation of legislation/institutions Some media outlets continue to use occasional smear campaigns against civil society activists and politicians. Recent decisions by the competent court and regulatory bodies against one TV station that targeted civil society activists show that some progress has been made in applying the media law. However, the effectiveness of media self-regulation is hampered by the fact that it is split into different forms, reflecting divisions within the media community. The lack of a uniform approach to penalties in this area suggests that ECtHR case-law is not sufficiently known, despite the guidelines issued by the Supreme Court in 2012.

Weaknesses of the media sector, notably those related to editorial independence and in-depth reporting, polarisation as well as self-regulation were evident also during the recent electoral campaign. The temporary suspension of certain social media mobile telephone communication platforms during the election day raised concerns in relation to alignment with European standards and case-law. Public service broadcaster Amendments to the law on public broadcasting services, providing more financial independence and sustainability for the public broadcaster RTCG (Radio i televizija Crne Gore), were adopted in July. The editorial independence of RTCG needs to be made a priority, since a well-functioning and truly independent public service broadcaster represents a key aspect of media pluralism. It is essential for RTCG to secure both editorial and financial independence from political influence and to ensure that all management changes are in line with the law. Economic factors Rules governing transparency of media ownership, including media concentration, are set out in the law on electronic media. Concerns about transparency and non-discrimination in state advertising persist. Some major private media outlets are at risk of bankruptcy due to high tax debts. The precarious economic situation of journalists puts them at risk of editorial interference and possible self-censorship. The fact that many media outlets are not financially sustainable has a negative impact on the quality of reporting and professionalism. Professional organisations/professional conditions Journalists are jointly represented in Montenegro’s media trade union; a professional journalists association has been established in July. However, the media community remains highly divided overall. Membership of the Media Self-Regulatory Council is not representative of the entire media community. Dialogue on improving ethical standards in reporting, facilitated by the OSCE, resulted in the adoption of a revised code of ethics for journalists in 2016. It must be effectively and uniformly applied across the media community. The media trade union denounces the poor pay and job insecurity of journalists. 2.5. Regional issues and international obligations There were no developments in Montenegro’s cooperation with the International Criminal Tribunal for the former Yugoslavia. For the handling of domestic war crimes cases, see chapter 23 — Judiciary and fundamental rights. Montenegro still maintains a bilateral immunity agreement with the United States, granting exemptions for US citizens from the jurisdiction of the International Criminal Court. In doing so, it does not comply with the EU common positions on the integrity of the Rome Statute or with the related EU guiding principles on bilateral immunity agreements. Montenegro needs to align with the EU position. Montenegro has continued to cooperate closely with Bosnia and Herzegovina, Croatia and Serbia under the Sarajevo Declaration Process, which aims at sustainable solutions for some 74 000 people who became refugees and displaced persons as a result of the armed conflicts in ex-Yugoslavia during the 1990s. Construction of 62 apartments in Niksic has been completed through the regional housing programme and the construction of 120 housing units in Konik, Podgorica, has started. The contract for the construction of a home for the elderly in Pljevlja was signed in April. The tender for the construction of 94 apartments in Berane was also published in April. The unresolved fate of missing persons resulting from the conflicts of the 1990s remains a humanitarian concern in the Western Balkans. The number of cases in Montenegro, currently at 61, is low but all efforts should be made to ensure identification as soon as possible. Regional cooperation and good neighbourly relations form an essential part of Montenegro’s process of moving towards the EU. They contribute to stability, reconciliation and a climate conducive to addressing open bilateral issues and the legacies of the past. The country continued to participate actively in regional initiatives such as: the South East Europe Cooperation Process, the Regional Cooperation Council, CEFTA, Western Balkans Six, Adriatic-Ionian Initiative, European Union Strategy for Adriatic and Ionian Region, Central European Initiative, the Regional Initiative for Migration and Asylum, the Igman Initiative and RECOM. The impetus given through the ‘Berlin process’ and the Western Balkan Six initiative, notably regarding the EU’s connectivity agenda, has continued to foster increased regional cooperation. Building on the results of previous Summits, the June 2016 Paris summit saw further advances on the connectivity agenda but also opened cooperation in new areas, notably through the establishment of the regional youth cooperation office to be established in Tirana. Montenegro needs to implement the connectivity reform measures such as the implementation of the newly signed border crossing agreement with Albania in the transport field or the implementation of the Trans-European Network Regulation with regard to licensing and permitting as well as one-stop shop procedures in the energy field. Montenegro remained constructively committed to bilateral relations with other enlargement countries and neighbouring EU Member States. Montenegro has concluded a bilateral convention on regional cooperation with Albania, the former Yugoslav Republic of Macedonia and Serbia under Article 15 of the Stabilisation and Association Agreement (SAA), and needs to do the same with other partners with an SAA in force. Relations with Albania continue to be good. In October 2015, Montenegro ratified the agreement on economic cooperation. Albania ratified in June the protocol of accession to NATO of Montenegro. The border demarcation agreement with Bosnia-Herzegovina entered into force in April. An agreement on cross-border supervision was signed in December. Negotiations with Bosnia and Herzegovina are ongoing with regard to the convention on regional cooperation, under Article 15 of the Stabilisation and Association Agreement. Relations between Montenegro and Kosovo remained good. In September 2015, the agreement on police cooperation entered into force. The agreement on cooperation between the Commissions for Missing Persons of Montenegro and Kosovo was signed in October. As a positive step, the border demarcation agreement with Kosovo was ratified by Montenegro in December. There were no developments on the constitutional recognition of the Montenegrin minority in Kosovo. A business forum on investment opportunities in the former Yugoslav Republic of Macedonia and on strengthening economic cooperation between the two countries was held in Podgorica in October 2015. Relations with Serbia remained good. A programme of cooperation between the two countries was signed in September. Regular cooperation in the defence sector has also continued. The Agreement on Cession of Submarines Class 91 was signed in April. There have been no developments on issues related to citizenship rights in the two countries. The demarcation of borders is still pending.

As regards cooperation with Turkey, in December the agreement on social security entered into force. In October, a memorandum of understanding was signed to strengthen cooperation on hydropower development in Montenegro between Montenegro, Turkey and Slovenia. Furthermore, a cooperation agreement between the Chamber of Commerce of Montenegro and the Union of Turkish Business and Chambers of Commerce (TOBB) was signed in September 2015. In April, a plan for cooperation on defence was signed by the ministries of defence of the two countries. Joint work on finding a solution for the border demarcation between Montenegro and Croatia is ongoing. In October 2015, the two countries signed a memorandum of understanding on sports. The demarcation of borders is still pending. In March, the government adopted the draft law on ratification of the Agreement on scientific and technological cooperation with Italy. In May, the two countries signed an agreement on cooperation on veterinary and food safety. 3. Economic criteria Key economic figures 2014 2015 Gross domestic product per capita (% of EU28 in PPS) 41 41 GDP growth (%) 1.8 3.4 Unemployment rate (female; male) (%) 18.0 (17.8 ; 18.2) 17.5 (17.7 ; 17.3) Economic activity rate for persons aged 20–64: proportion of the population aged 20–64 that is economically active (female; male) (%) 67.6 68.5 Current account balance (% of GDP) -15.2 -13.3 Net Foreign direct investment (FDI) (% of GDP) 10.2 17.1 Source: Eurostat In line with the conclusions of the European Council in Copenhagen in June 1993, EU accession requires the existence of a functioning market economy and the capacity to cope with competitive pressure and market forces within the Union. The monitoring of these economic criteria should be seen in the context of the central importance of economic governance in the enlargement process. Each enlargement country prepares an Economic Reform Programme (ERP) annually, which sets out a medium-term macro-fiscal policy framework and a structural reform agenda aimed at ensuring competitiveness and inclusive growth. The ERPs are the basis for country-specific policy guidance jointly adopted by the EU and the Western Balkans and Turkey at ministerial level in May each year. 3.1. The existence of a functioning market economy Montenegro is moderately prepared in developing a functioning market economy. Some progress was made to strengthen the functioning of the financial and labour markets, as well as on improving the business environment. Investments in infrastructure and tourism support economic activity. However, rapidly rising public debt and high fiscal deficits, together with high external imbalances and high unemployment are of concern. The combined effects of large-scale public infrastructure investments and several new expensive social expenditure programmes challenge fiscal sustainability. Immediate corrective measures are required, as called for by the ERP policy guidance. Other problems to be tackled include high external imbalances and low labour market participation and still low credit growth amid high impaired bank loans. In line with the 2016 ERP policy guidance and in order to support long-term growth, Montenegro should pay particular attention to: → stabilising and reducing public debt, including by adopting measures to restrain current spending and improve revenue collection; → developing a comprehensive strategy to further foster the disposal of non-performing loans; → prolonging working lives and reducing disincentives to work. Economic governance Prior to the October parliamentary elections, government and parliament lacked the commitment to adopt economic reforms. The measures presented in the 2016 ERP did not offer an appropriate policy response to cope with the economic challenges, and the ERP policy guidance agreed on 12 May 2015 has only been partially implemented. Meanwhile, important contingent reform measures and restructuring plans were postponed until a new government is formed following the parliamentary elections of October 2016. Overall, a strong political commitment to purse a stable fiscal policy and structural reforms is needed to improve the economic situation of Montenegro. Macroeconomic stability Economic growth improved on the back of investment in infrastructure and tourism. After a recession in 2012 and a slowdown in 2014, GDP expanded by 3.4 % in 2015. However, despite an overall good performance of investment, some large infrastructure projects were delayed, such as the priority section of the Bar-Boljare highway and the new thermal power plant. Growth in private and public consumption remained modest, and net exports had a negative contribution to growth in 2015. In the first half of 2016, the economy decelerated to 1.9 % y-o-y, down from 3.4 % a year before. GDP per capita (in purchasing power standards) was 41 % of the EU average in 2015. The external deficit is very high. The current account deficit narrowed to 13.3 % of GDP in 2015, down from 17.6 % in 2011. However, this trend reversed in the first half of 2016 when the current account deficit rose to 18.0 % of GDP as the tourism-driven surplus in services did not suffice to offset the deterioration in the trade and primary income accounts. In 2015 the external deficit was financed by a sustained inflow of FDI from a diversity of countries. FDI inflows have remained close to or above 10 % of GDP since 2004. However, in the first half of 2016, there was a strong outflow of FDI as a result of recording transfers abroad of retained profits from one large company. In order to balance the financial account, a sizable inflow of transfers was recorded under net errors and omissions. Inflation trends were largely driven by food and international commodity prices. The inflation rate was decelerating in the last few years, reaching negative levels in 2014. The trend reversed in 2015 and inflation increased to 1.4 % as a result of rising prices for services (in particular accommodation and restaurants) and food. Since March 2016 inflation returned into negative territory driven by a new decline in fuel and food prices. In the first seven months of 2016, the inflation rate remained flat. ERP policy guidance: Stabilise the debt-to-GDP ratio net of debt related to capital investments already underway in 2016, and then reduce it over the remainder of the programme period. The fiscal position deteriorated and poses risks to macroeconomic stability. After several years of fiscal consolidation efforts, the budget deficit was reduced to 3 % of GDP in 2014, compared with 7 % two years before. However, the deficit surged again in 2015, reaching 7.3 % of GDP, considerably exceeding the target of 6.6 %. The substantial overrun resulted from the unplanned repayment of arrears related to utilities, pension rights, and the unfavourable resolution of several court cases against the state. Consequently, public debt rose to 64.1 % of GDP at the end of 2015, exceeding the fiscal rule's mandatory ceiling of 60 % and legally compelling the government to prepare a plan to reduce the debt under this limit within five years. However, such a plan was postponed until the elections in October. The execution of the 2016 budget is marked by poor planning.

ERP policy guidance: Take immediate measures to restrain current spending, including on pensions and the public sector wage bill. To generate budgetary savings and improve revenue collection, conduct a comprehensive review of tax expenditure as well as exemptions, and implement tax increase in a growth-friendly manner. The 2016 budget originally planned for a deficit of 7.15 % of GDP, projecting the financing needs for the Bar-Boljare highway and increases in pensions and public sector wages. However, the budget plan was rapidly obsolete due to the unplanned deficit of the healthcare fund, the postponement of capital investments, and the introduction of life-long benefits for mothers with three or more children. In the first half of 2016, budget revenues increased by 7.7 % y-o-y. However, current expenditure rose faster (by 9.6 % y-o-y), resulting in a central government deficit of 2.9 % of GDP. Nonetheless, the cash-basis budget fails to reflect all budget commitments on time, and therefore remains subject to revision. In June 2016, the public debt -including municipalities- totalled 64.3 % of GDP. In light of the country's monetary regime, the fiscal stance has not been appropriate. Fiscal policy has been loosened since 2015, when public current spending increased significantly while revenues underperformed. High budget deficits and a fast growing public debt would have required urgent fiscal consolidation measures and a credible public debt management plan. However, such measures have not been taken so far. Functioning of product markets Business environment The business environment recorded some improvement, but there is room for further progress. Efforts were made to enhance the protection of property rights, streamline legal and administrative procedures, and reduce backlogs at government offices. In 2015, the number of new companies registered was 4 113, similar to the previous two years. Companies can be partially registered online, although payments still need to be done in person. Cadastral records are available online, covering most of the country, but information is still problematic for some 7 % of rural area's territory. Users complain that the cadastre is not always updated, in particular with respect to encumbrances. In 2015, the average registration time of property transaction was 8 days, compared to 25 days in 2008, and the average time to issue a construction permit was reduced to 33 days at municipal level or 49 days at central level, down from 6 months in 2008. The number of enforcement cases in the courts has been reduced since the introduction of the bailiff system, but is still considerable. In 2015, the collection rate of bailiffs was 21 %, solving 30 % of received cases. This represents good annual progress. However, predicting the outcome of judicial proceedings can be difficult due to the variability in speed and problems of consistency in case-law. Court orders are not always enforced or followed up. However, most bankruptcy liquidation proceedings – unless disputes arise – are completed in less than a year, compared to 18 to 30 months in the past. The informal economy remains large. In 2014, its size was estimated at 24.5 % of GDP, and it is considered as a major obstacle for conducting business. Corruption continues to be a serious concern, negatively affecting the business environment. Intensified efforts are needed to strengthen the rule of law to ensure that regulatory improvements translate into an improved investment climate. State influence on product markets The level of subsidies remains modest, but most of the state aid was allocated to one company (Montenegro Airlines). In 2015, the general government budget provided for a modest allocation of state aid of 0.6 % of GDP for subsidies (down from 0.8 % of GDP a year before), plus an additional 0.3 % of GDP for new state guarantees. However, overall state subsidies and recapitalisation of the national airways represented 1.6 % of GDP. The government expressed its commitment to stop providing state aid to the company as of 2016. Following the introduction in 2015 of tax exemptions to attract new investments in priority sectors, the number of construction permits for 4-star hotels is estimated to have increased by 140 %. However, this kind of incentive requires a comprehensive review to make sure it does neither hinder competition nor public finances. Privatisation and restructuring The privatisation process is quite advanced. State ownership in the economy is basically reduced to public utilities, some transport companies (i.e. the railways, one airline and four merchant ships), the postal services and some other companies. Overall, state-owned enterprises represent a small part of total employment. After being liquidated and sold to new owners, state support to the metal industry ended. The new aluminium and steel companies are currently going through a process of restructuring. In April 2016, the aluminium company terminated its dependence on the public local power supply, and started importing its electricity instead. The restructuring of the formerly state-owned Adriatic Shipyard in Bijela advanced slowly through the concession or sales of its different parts. In September 2016, the construction contract for replacing the state-owned old thermal power plant by a new one was signed, but it would not be operational before 2020. The difficult financial situation of the state-run Montenegro Airlines requires a comprehensive restructuring of the company. As a first step the company concluded a cooperation agreement with Air Serbia in August 2016, while continuing the negotiations to also establish a strategic partnership programme with the Arab Emirates national airline. Management of the bankrupt Ulcinj saltworks was taken for a second year in a row by the National Parks of Montenegro with the objective of revitalizing salt production. Functioning of the financial market Financial stability Although stable, the banking system suffers from low profitability. Three new banks have started operating since mid-2015, raising the total number of banks in the country to 15. There is a significant degree of concentration, with the five largest banks accounting for almost two-thirds of total assets. The sector is largely dominated by foreign banks (80 % of share capital). In June 2016, the aggregated capital adequacy ratio was 16.6 %, clearly above the minimum requirement of 10 %. However, the large dependence on foreign financing makes banks vulnerable to funding cost volatility. The share of non-performing loans (NPLs) dropped to 11.7 % in 2015 from 16.5 % a year earlier, with a provision coverage ratio of 72.6 %. Overall, although the crisis preparedness and management framework of the financial system appear well developed, low bank profitability remains a source of vulnerability for some domestic banks, requiring further development of the macroprudential framework (See chapter 9 - Financial services). Access to finance ERP policy guidance: Develop a comprehensive strategy to further foster the disposal of non-performing loans by banks, including participation by all relevant stakeholders, while establishing a bank lending survey to better gauge underlying credit dynamics. Lending to the private sector has not yet recovered to the pre-crisis level. The low credit growth is the result of risk aversion among banks due to the high level of NPLs but also poor investment readiness and financial literacy among SMEs. In the first half of 2016, corporate lending recorded some improvement, growing by 3 % y-o-y (compared to 0.7 % a year before), while household loans grew by 5.4 % y-o-y. The reduction of non-performing loans allowed some reduction of financing costs for domestic companies. In June 2016, the average effective interest rate on new loans was 6.72 %, and 6.35 % for business loans, the latter down from 7.82 % a year before. The non-bank financial sector is small. In 2015, the market capitalisation of Montenegro Stock Exchange was significant, totalling 82 % of GDP, but its turnover was very low, at just 1.8 % of GDP. The insurance market is also modest, accounting for 2 % of GDP; a similar size as domestic micro-credit institutions. Leasing accounts for less than 1 % of GDP. Corporate lending of the state-run Investment Development Fund (IDF) represents 3 % of GDP, compared to 28 % of GDP from commercial banks. Functioning of the labour market

The unemployment rate is high, hindered by poor labour mobility, labour market rigidities and a skills mismatch. The strong demand for foreign labour contrasts with the low mobility of the local workforce. The working population (15-64) activity rate in Montenegro still is 12 percentage points lower than the average in the EU, even if it has increased over the past five years from 57.3 % in 2011 to 62.6 % in 2015, and to 63.6 % in the first half of 2016. Meanwhile, the unemployment rate declined modestly, from 19.7 % in 2011 down to 17.7 % in June 2016. However, the unemployment and participation rates of women (17.3 % and 56.6 %) remain lower than for men (18.0 % and 70.6 %). The gender imbalance worsened as regulatory changes in the social care system, like the life-long benefits for mothers of at least three children, provided disincentives for women participation. More than 15 000 women have already applied for these lifelong benefits, effectively pushing many of them out of the labour market. In the second quarter of 2016, women labour force declined by 2.6 % y-o-y, while men's participation increased by 1.2 %. The unemployment rate of young people (15-24 years old) is also very high at around 35.5 % in the second quarter of 2016. ERP policy guidance: Prolong working lives and reduce disincentives to work through strengthening the link between activation measures and social assistance, in order to improve the labour market participation of the long-term unemployed, women and youth. Implement strategies to align education and skills policies with labour market needs. Active labour market policies continue to be under-funded, with the focus on young graduates and seasonal workers. Long-term unemployed women and young people in particular could benefit from reductions in work disincentives, like the benefits for mothers mentioned above or the introduction of active labour market policy instruments. 3.2. The capacity to cope with competitive pressure and market forces within the Union Montenegro is moderately prepared in its capacity to cope with competitive pressure and market forces within the Union. Some progress was achieved in improving the quality of infrastructure, the energy market and the digitalisation of the economy. SMEs support is modest but gradually developing. However, substantial efforts are still required to develop human capital and a competitive export-oriented industry. In line with the ERP policy guidance and in order to support long-term growth, Montenegro should pay particular attention to: → ensuring effective, efficient and independent regulatory and safety authorities to implement the full opening of rail and energy markets; → facilitating provision and range of financial and non-financial support services for SMEs with a view to fostering participation in global value chains; → implementing strategies to align education and skills policies with labour market needs by improving the quality of education and equipping students with better basic and transversal skills. Education and innovation The school-to-work transition is not efficient for most youth. It takes nearly two years on average to attain a first job deemed to be either stable or satisfactory. Public spending on education represents 4.2 % of GDP, compared to 5.3 % average in the EU. Early childcare and pre-schooling (0-5 years) enrolment rates are low (at 38 %, and well below the EU target of 95 % by 2020) in contrast with the high enrolment rates in education at primary and secondary levels at 98 % and 85 %, respectively. Enrolment at tertiary level is relatively high at 35 %. However, Montenegrin students' poor average score of 31/100 in the last OECD's PISA tests for reading, science and mathematics underlines the need for improving the quality of basic education. The stagnation since 2011 of the unemployment rate of secondary VET graduates (at around 18 %), suggests that the effectiveness of the VET system could also be further improved and the enrolment rates in VET reduced. Meanwhile, the provision of in-company practical training in real work environment is still at an initial stage, with less than 2 % of employees participating in some sort of training or skills development. In 2013, only 23.7 % of companies offered formal training to their employees. Overall, although educational attainment has increased significantly in a generation, the number of graduates from higher education is not easily absorbed into the limited number of available jobs. In addition, as pointed out in a recent EU funded study, both employers and graduates believe that the education institutions do not equip students with key soft skills, such as problem solving, organisational, decision-making, foreign languages, etc., which are important for employability. The educational provision in VET and higher education sectors should reflect and reinforce the country's economic development strategies. Considerable efforts are also required to increase the level of investment in research and innovation, particularly from the private sector. Investment in research is modest. In 2014, total investment on research and development amounted to 0.36 % of GDP, and of this, only 0.14 % came from private sector. The construction of the multi-purpose innovation and entrepreneurship centre 'Tehnopolis' was completed and public tenders for selection of 14 entrepreneur tenants finalised. The centre officially opened on 17 September. Physical capital and quality of infrastructure ERP policy guidance: Ensure effective, efficient and independent regulatory and safety authorities to implement the full opening of rail and energy markets. Some progress was made in developing transport and energy infrastructure. Ground transport suffers from bottlenecks and a lack of cross-border roads is hindering trade and tourism. After one year of preparatory works, the highway priority section to connect the port of Bar with the Serbian border started in 2016. The main rail line Bar-Belgrade is being overhauled to increase the average speed of trains by 60 %. Meanwhile, there has been a steady progress in liberalizing the railway sector in Montenegro. The rail market was legally opened in 2014 and capacity allocation process implemented, but further efforts are needed to improve railway safety and interoperability, including ensuring sufficient capacity for and the independence of the rail regulatory body and rail safety authority. Air fares are rather high and low-cost carriers offer relatively few routes to Montenegro. In October 2015 a digital system (VTMIS) for maritime traffic control was established. The electric power system is being upgraded with new transmission lines, several small hydropower plants and the construction of the first wind-farms. However, the construction of the new thermal plant was delayed. Improved regional cooperation is supported by the construction of a submarine cable (to become operational in 2019), connecting Montenegro and Italy, with extensions towards Serbia and Bosnia and Herzegovina. In 2016, the unbundling of the power utility EPCG enabled new suppliers to compete in the local electricity market. Development of an offshore oil and gas industry is at an incipient stage. However, infrastructure investments can be better embedded in wider sector policies, including regulatory measures. The digitalisation of the economy continues. The penetration rate of fixed broadband internet expands gradually, reaching 60.3 % in June 2016 compared to 50 % five years before. In 2015, 94.3 % of surveyed enterprises reported on the use of computers and the internet in their activities. At 170 %, Montenegro has one of the highest mobile phone penetration rates in Europe as well as world-wide. Montenegro's e-government portal is quite advanced. Online banking and e-commerce are rising and have a large potential for further expansion. Sectoral and enterprise structures Services are the main engine of growth and employment. Services account for 72.6 % of total gross value added, compared with 12.9 % for the industrial sector, 9.8 % for agriculture and 4.6 % for construction. The trend in the last years reflects a continuous growth of services' gross value added. The development of services is also reflected in the share of jobs occupied by young people. The large majority of youth (88 %) work in services, and in the case of female youth this percentage reaches 95 %. By contrast, young workers in industry and agriculture represent 4 % and 1 %, respectively. ERP policy guidance: Continue to facilitate the provision and range of financial and non-financial support services for SMEs with a view to foster participation in global value chains. Support the development of the private consultancy market.

Government support to SMEs aims to facilitate access to finance and to foster investment. SMEs represent 99 % of total firms and generate 75 % of value added as well as 82 % of employment. Access to finance is one of the major challenges for SMEs. The IDF channels the largest portion of public sector support for SMEs through credit lines for start-ups and financing programmes. However, the IDF discontinued funding for credit guarantee schemes. The government is implementing a pilot project to support the modernisation of industry by offering favourable financing conditions. Economic integration with the EU and price competitiveness The EU and CEFTA are Montenegro’s main trading partners. Total trade with the EU has gradually deepened in the last five years. In the first half of 2016, trade with the EU accounted for 44.8 % of Montenegro's exports and 49.2 % of its imports, followed by trade with CEFTA, representing 40.7 % of exports and 29.3 % of imports. In March 2016, Montenegro ratified the new WTO Trade Facilitation Agreement to facilitate the movement of goods and customs clearance procedures. Financial integration with the EU is also high, accounting for 74 % of foreign assets in local banks and 63 % of the FDI in 2015. Montenegro needs to improve its export performance. Montenegro is a small and open economy. In 2015, the total value of exports of goods and services totalled 103.4 % of GDP. Yet, the country has a small manufacturing base largely concentrated on commodities. Products are predominantly of low technological and value added content. Moreover, the geographical location – distant from major international transit routes and Europe's industrial centres – excludes Montenegro from international transport and production networks. The competitiveness of domestic companies is poor, with a value added per employee of around EUR 11 000, compared to EUR 42 000 on average in the EU. 4. Ability to assume the obligations of membership 4.1. Chapter 1: Free movement of goods The free movement of goods ensures that many products can be traded freely across the EU based on common rules and procedures. Where products are governed by national rules the principle of the free movement of goods prevents these creating unjustified barriers to trade. Montenegro is moderately prepared for the free movement of goods. Good progress was made in this area over the past year, including further alignment with the acquis and the adoption of a strategy to ensure compliance with Articles 34-36 of the Treaty on Functioning of the European Union. It needs to strengthen its capacity and resources to ensure implementation, particularly on quality infrastructures, and also to implement REACH. In the coming year, Montenegro should in particular: → ensure that sufficient human and financial resources are allocated to carry out the necessary strengthening of its market surveillance, standardisation and accreditation bodies; → comply with the planning for alignment laid down in the amended 2014-2018 strategy and action plan for alignment with the acquis in this chapter. General principles Regarding general principles, the framework for the free movement of good is largely in place. There are legal measures that restrict the distribution and marketing of medical products and tobacco, but the 2015-2018 action plan for compliance with Articles 34-36 of the TFEU provides for their elimination by the end of 2018. Montenegro is implementing its 2014-2018 strategy and action plan for alignment (the ‘alignment strategy’) to the acquis in this chapter. This involves alignment with all the acquis in the chapter by the end of 2018. However, Montenegro had to amend the alignment strategy in June 2016 due to changes to the acquis and delays in alignment. Non-harmonised area In December 2015 Montenegro adopted a 2015-2018 action plan for compliance with Articles 34-36 of the TFEU. This action plan provides for eliminating legal measures that have a negative impact on the production, distribution and marketing of industrial products, including the adoption of mutual recognition clauses. The Ministry of Economy is empowered ensure the obligation to notify legislation. Harmonised area: quality infrastructure The legal basis and administrative structure are partly in place for technical regulations, standards, conformity assessment, accreditation, metrology, market surveillance; plans for full alignment are laid down in the ‘alignment strategy’. ISME, the national standardisation body is independent and able to implement full European and international standards, but it does not have adequate staff resources and financing. ISME has adopted 13 818 Montenegrin standards (MEST), 3,064 of which are harmonised MESTs, which are aligned with international and European standards. (Some MEST are issued in Montenegrin while others were adopted by the 'cover page' method (where the the text of the standard is in another language, such as English)). Montenegro is an affiliate member of CEN, CENELEC and it has one member of ETSI; full membership of CEN & CENELEC is foreseen by the end of 2018. In 2016 Montenegro fully aligned to Regulation (EU) 1025/2012 on standardisation. There are 29 conformity assessment bodies in Montenegro. Two more are in the process of being accredited, but their overall number remains low. A 2015-2018 strategy and action plan for accreditation have been adopted, but the limited resources of the Accreditation Body of Montenegro put the implementation of the strategy at risk. The Metrology Bureau is the official metrology body. A 2016-2018 strategy for development of metrology in Montenegro was adopted by the government in December 2015.

On market surveillance, the law on general product safety is party aligned to the acquis. The market surveillance bodies monitor domestic and imported products and take preventive and restrictive measures, including prohibiting the placing of certain products on the market or withdrawing them for health or safety reasons. Amendments to the law on inspections were adopted in February, while in April the government adopted a Decree determining which product groups would be subject to market supervision and another Decree establishing the coordination body for market surveillance. On product safety, 1 884 inspections were performed during the reporting period. These identified 236 dangerous products types (7 725 items, some of which were permanently taken off the market). However, the administration’s budget remains insufficient. Harmonised area: sectoral legislation For the ‘New and Global Approach’ product legislation Montenegrin legislation is aligned to the acquis on personal protective equipment and outdoor noise equipment. However, the quality infrastructure capacity issues mentioned above also mean that the implementation of aligned legislation is not always fully assured. In the reporting period, new legislation was also adopted that was partly aligned to the acquis on aerosol dispensers, cableways, explosives traceability, pyrotechnic articles traceability, the setting of maximum prices of medicines, pharmacovigilance, traditional herbal medicines and homeopathic medicines. On ‘Old Approach’ product legislation, in January the government adopted a national strategy and a related action plan for managing chemicals. Montenegrin legislation on Pre-packaged Products and Bottles used as Measuring Containers are aligned with the acquis, while that on drug precursors and several sub-sectors of fertilisers is partly aligned. Some preparatory steps have been taken with the aim to move towards alignment with REACH. In addition, national legislation on chemicals clas