Montenegro has repaid the first instalment of a loan to Chinese Exim Bank extended for the construction of the first priority stretch of the key Bar-Boljare motorway, Mina news outlet reported on July 21, quoting Finance Minister Milojko Spajic.

After its tourism-dependent economy suffered the deepest contraction across the emerging Europe region in 2020, Montenegro has been struggling to repay the loan and appealed to the European Union for help. 

Podgorica signed the $944mn loan deal with Exim Bank in 2014, to pay for the construction of the first priority stretch of the Bar-Boljare motorway from Smokovac to Matesevo. The loan has a 20-year repayment period, five-year grace period and a 2% fixed interest rate, which was reduced to 0.88% earlier in July. Podgorica started drawing funds in 2015.

"Montenegro paid €27.79mn of principal and interest, and the banks from its hedging arrangement paid to the state $37.44mn in principal and interest, which we redirected to the Chinese bank," Spajic said.

Earlier in July, Montenegro signed an agreement to hedge its debt to Exim Bank. With the hedging operation, Montenegro managed to lower the interest rate on the loan to 0.88% in euro from 2% in US dollars and will be able to save around €8mn.

"If hedging had not been done, those €27.79mn would have amounted to €31.71mn. The interest alone would have amounted to €6.9mn, not the €3.06mn we paid," Spajic also said.

At the end of March, Montenegro’s Deputy Prime Minister Dritan Abazovic said the government had asked the EU to help it repay the loan to China’s Exim Bank. The response was mixed: local media quoted European Commission spokesperson Ana Pisonero as saying that the EU does not repay debts toward third countries. However, later the Enlargement Commissioner Oliver Varhelyi said the EU was exploring options to help Podgorica.

Even before the pandemic, there were concerns about the sustainability of the loan, and the huge cost of the motorway – estimated to be the most expensive road per kilometre in Europe because of Montenegro’s mountainous terrain – in comparison to the country’s tiny economy rang alarm bells among international financial institutions (IFIs) and rating agencies.

In 2018, Montenegro was listed as one of eight countries at growing risk of debt distress after taking out Chinese loans extended under the One Belt, One Road initiative (OBOR), according to a study by Washington-based think-tank the Center for Global Development.