Staff teams from the
The outlook remains challenging. Output is projected to contract by 4.8% in 2014, with domestic demand weighed down by the need for an adjustment of private and public sector debt from currently high levels. A return to positive but modest growth of around 1% is expected in 2015, led by non-financial services. Nonetheless, risks to the outlook are substantial.
In the financial sector, the first challenge is dealing with the high level of non-performing loans. With the two largest banks now recapitalized and the cooperative credit sector expected to be recapitalized shortly, the authorities need to ensure that banks and cooperatives effectively implement their restructuring plans. This requires putting in place adequate arrears management frameworks and carefully monitoring progress toward reducing loans in arrears. For coops, it is also important to complete planned mergers and strengthen governance. To facilitate the clean up of banks' balance sheets and the reduction of private sector indebtedness - both of which are needed to restore credit and sustainable growth - an appropriate debt-restructuring framework is necessary. In this regard, the authorities need to reform the insolvency legislation to offer balanced incentives that can prevent strategic defaults while providing solutions for voluntary debt restructuring for viable borrowers.
A second challenge is the need to normalize payment flows in the economy while safeguarding financial stability. With key milestones in the authorities' roadmap now completed, the second phase of gradual relaxations of restrictions is expected to start shortly. Finally, efforts also need to continue to strengthen implementation of banking sector regulation and supervision as well as of the anti-money laundering framework.
Building on the strong fiscal performance to date, the authorities will need to continue to implement their budget prudently. As agreed at the onset of the program, an additional adjustment will be necessary in the outer years to attain the long run objective of a sustained primary surplus of 4% of GDP, which is needed to place public debt on a sustainable downward path.
The implementation of structural reforms needs to be accelerated. A key priority is the reform of the social welfare system. This will consolidate existing welfare benefits and introduce a guaranteed minimum income scheme, so as to provide adequate social protection of vulnerable households during the current downturn. To improve the efficiency of revenue administration, the authorities need to take steps to advance the merger of the two main tax collection agencies. Moreover, efforts need to be intensified to protect revenue collections in the short term, including by fighting tax evasion. Public financial management should be strengthened by adopting without delay and implementing the fiscal responsibility and budget systems law. Finally, privatization of state-owned enterprises is essential to increase economic efficiency, attract investment and as a means to reduce public debt. In this regard, the adoption of the framework law for privatization is a key step to kick-start the process.
While the program remains on track,
Conclusion of this review is subject to the approval process of both the
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