Summary:KEY ISSUES
Context: Weak external demand and inconsistent macroeconomic policies have
contributed to a prolonged economic recession. A combination of an effectively pegged
exchange rate, loose fiscal policy, and sizable quasi-fiscal losses in the energy sector has
pushed the fiscal and external current account deficits to very high levels. A gradual
depletion of international reserves and other buffers is making the economy particularly
vulnerable to external shocks.
Outlook and risks: A modest economic recovery should commence in late 2013.
However, a difficult business climate and impaired external competitiveness are
weighing on the medium-term outlook. The current policy mix is not sustainable as it
generates large imbalances and depresses growth. The risk of a costly market-forced
adjustment is high.
Main policy recommendations:
? Allow the exchange rate to adjust to its equilibrium level and increase its flexibility.
Accelerate preparations for the introduction of inflation targeting.
? Strengthen the financial system’s resilience to shocks, including by developing
comprehensive contingency plans to cover potential capital and liquidity shortfalls under
various scenarios.
? Curtail the fiscal deficit through a reform-based current expenditure consolidation and
the cancelation of unaffordable tax cuts.
? Reduce the quasi-fiscal losses in the energy sector by increasing the very low household
gas and heating tariffs in the context of a comprehensive energy sector reform plan,
while protecting the most vulnerable households.
? Launch broad structural and governance reforms to improve the business climate and
boost sustainable growth.
