March 7, 2014 / 2:03 PM / 3 years ago

World Bank drops $50mln loan to Montenegro over excessive debt

* World Bank suspends loan over highway deal

* Says the deal will endanger debt sustainability

* Government in talks with China's EXIM Bank for a loan

SARAJEVO, March 7 (Reuters) - The World Bank has withdrawn its $50 million loan support to Montenegro's budget, saying a highway deal agreed with China would put too much strain on the Adriatic country's finances.

The World Bank loan was intended to help gradually reduce Montenegro's public debt, estimated at around 58 percent of the gross domestic product.

The 809 million euro ($1.12 billion) highway loan could drive Montenegro's debt up by another quarter of national output, the bank told Reuters.

"Due to the ... impact on debt sustainability, the bank dropped the budget support preparation" and shifted to investment lending for other sectors, the bank said in a statement for Reuters on Friday.

Last week, Montenegro's government sealed an agreement with the China Road and Bridge Corporation (CRBC), part of China Communications Construction Company , to build a 40-kilometre (25-mile) section of a 120-km highway connecting the south with Serbia in the north.

Transportation Minister Ivan Brajovic has said negotiations have already begun with China Export Import Bank about a loan to cover 85 percent of the total amount, while the remaining 15 percent would be covered from commercial loans.

"Expected benefits and cash flow from the highway project are very dubious, and this may bring the country into debt slavery," said economic analyst Milenko Popovic, who teaches at University Mediteran in Podgorica.

The World Bank has already disbursed $164.2 million in budget support loans to Montenegro under it 2011-2015 programme.

$1 = 0.7225 euros Reporting by Petar Komnenic and Daria Sito-Sucic; Editing by Ruth Pitchford

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