After a slowdown over 2011 and 2012, economic activity accelerated gradually and went above +7% in FY2014-15. Private consumption has been the main growth driver so far, expanding above +6% over the past three years. Gradual improvement is underpinned by lower inflationary pressures and increasing wages. Investment started to pick up speed since FY2014-15 supported by a more accommodative monetary policy. Exports have been the main drag with lower performance. In FY2015-16, these trends have been reinforced with stronger domestic demand and declining exports. GDP growth is estimated at +7.5%. Going forward, economic growth will likely remain firm. While external demand will remain sluggish, domestic demand is expected to remain strong. Higher purchasing power, due to low commodity prices and increasing wages, will sustain private consumption growth. Investment will benefit from a more accommodative monetary policy and more FDI inflows.
Macro-imbalances have been reduced
First, public debt has decreased markedly over the past ten years (see Figure 1) but its elevated level still calls for caution. In that respect, fiscal discipline is set to be maintained in the medium term. The central government met its reduction target in FY2015-16 (-3.9% of GDP from -4.2%), and it plans a further reduction in FY2016-17 (to -3.5% of GDP). Second, the current account balance has shown strong improvement benefiting from lower commodity prices and pro-active macro-policies (for example, regulations on gold imports and tight monetary policy in 2013-2014). The external financing composition has improved with higher FDI inflows thanks to perceptions of improved credibility of domestic authorities. Third, currency risk has been reduced with a more credible monetary policy framework (inflation targeting).
Resolving micro-risks and improving the business environment are the main challenges
In the short run, micro risks still stem from state-owned banks and sectors with high leverage (including metals and machinery and equipment). In the longer term, the main challenge will remain the business environment. The country still ranks poorly in terms of Doing Business, ranked 130th out of 189 countries in the World Bank’s survey, with a poor regulatory framework for insolvency resolution (ranked 136th).