Deep fiscal consolidation, bank deleveraging and weak external demand will leave the economy in recession until mid-2013, and the unemployment rate is set to rise to around 16%. As global conditions improve and exports accelerate, growth should resume. As the impact of indirect taxes hikes and more expensive oil wanes, inflation is expected to decrease markedly owing to the persistent slack. The current account deficit narrowed substantially in 2011, and will continue to shrink as economic adjustment continues.
Strictly implementing announced budget consolidation measures and improving fiscal governance must remain priorities to ensure that structural fiscal targets are met. Credit is contracting, and measures to strengthen the banking system, such as reductions in loan-to-deposit ratios, should not be rushed. However, problematic loans need to continue to be recognised and adequately provisioned. To foster employment and productivity growth, shift resources to traded goods production and ensure international competitiveness, it is critical that the authorities persevere with structural reforms in labour and product markets.
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