GDP growth in
Growth is projected to recover to 6dz percent in FY2014, driven mainly by a pick-up in hydropower-related construction activities and domestic services. In addition, policy measures to revive the economy, including a capital infusion as a part of an Economic Stimulus Package, are likely to exert a modest positive impact on growth. The current account deficit is projected to widen further to around 25 percent in 2013/14 due to stronger hydro-related imports but financing from
Risks stem from high debt levels and the possible surfacing of financial sector vulnerabilities following a prolonged period of rapid credit growth. There is also a risk of renewed external pressures, including pressures on rupee reserves, if macro policies remain expansionary and credit growth rebounds strongly. Additionally, risks emanate from slower growth in
Executive Board Assessment2
Executive Directors welcomed
Directors recommended tightening fiscal policy to preserve macroeconomic stability and contain public debt. They considered that revenue reforms are essential to achieve greater fiscal self-reliance over the medium term and support critical social and infrastructure spending. They noted the need for measures to widen the tax net in the near term and to consider introducing a value-added tax over the medium term. Improved fiscal management and public spending efficiency, including prioritizing expenditures to mitigate the risk of grant shortfalls, and better cash forecasting will also be crucial.
Directors considered that monetary policy should complement a tighter fiscal stance by curbing the build-up of excess liquidity and sterilizing large capital inflows. They noted that more regular and increased issuance of treasury bills would help liquidity management, deepen financial markets, and improve monetary transmission.
Directors recommended strengthening bank supervision and regulation, including by regular stress testing and closing regulatory gaps, and putting in place institutional arrangements including crisis management and deposit insurance. Directors looked forward to the preparation of
Directors took note of the staff's assessment that the real exchange rate is overvalued. They encouraged the authorities to make progress on structural reforms, including reducing skills mismatches in the labor market and increasing access to finance particularly for small and medium enterprises, to boost competitiveness, create jobs, and help diversify the economy.
Directors encouraged elimination of exchange restrictions subject to approval under Article VIII and the restrictions maintained under Article XIV as soon as macroeconomic conditions allow.
View table here (http://www.imf.org/external/np/sec/pr/2014/pr14301.htm)
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