Summary: KEY ISSUES Context. The economy is recovering steadily helped by supportive macroeconomic policies and improved market sentiment. There has been a welcome decline in vulnerabilities but debt levels remain elevated, leaving the economy prone to shocks, and medium-term growth prospects appear subdued. The government took steps to address these challenges, but the overall strategy relies on measures that increase the role of the state in the economy and shift the burden of the adjustment to specific sectors. This may deter private domestic and foreign direct investment. Policy recommendations. Policies should aim at further reducing vulnerabilities and comprehensively tackling impediments to strong, private sector-led growth. ? Fiscal policy. Adopt a growth-friendly fiscal consolidation strategy to rebuild room for policy maneuver and sustainably reduce the public debt ratio. The strategy should rely on durable expenditure retrenchment, improved efficiency of spending, and a simplification of the tax system, including a gradual elimination of distortionary sectoral taxes. ? Monetary policy. Monetary policy needs to guard against building disinflationary pressures. Adequate reserves are necessary to support financial stability. ? Financial sector. Strengthen efforts (and follow up on recently-announced commitments) to repair financial intermediation by improving the operating environment for banks. Steps should include facilitating faster cleanup of bank portfolios and reducing the tax burden on banks. The Funding for Growth Scheme should remain targeted and time bound; while the role of the state in the banking sector should be contained. ? Structural reforms. Increase policy predictability and reduce state interference in the economy to help strengthen confidence and support private investment. Adopt policies to enhance labor participation, particularly among women and older workers; improve the business environment; and enhance competitiveness.

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