The economy slipped back into recession in the latter part of 2015 after growing in late 2014 and the first half of 2015. Growth is projected to gain some momentum in the second half of 2016 as confidence strengthens and as structural reforms finally take hold and boost exports and investment. Inflation remains low due to the very depressed state of the economy. Unemployment will decline, but only gradually, which emphasises the importance of poverty reduction efforts.
While growth is fundamental to reducing the huge public debt burden in the medium term, meeting the fiscal targets is critical to contain debt and to ensure smooth financing for bank recapitalisation and further debt relief. Strengthening tax administration, including combating tax evasion, is a necessary component of this effort. Recapitalising the banking system, reducing non-performing loans and lifting capital controls would ease financial constraints and so open a path for growth. Product market reforms would improve competitiveness and create jobs. Public administration reforms would reduce the regulatory burden and enhance the capacity of social programmes to protect the most vulnerable.
Subsidies for renewable energy need to be reviewed. These subsidies are very generous, particularly for photovoltaic installations, and contribute to the renewable energy scheme’s deficit. Higher prices for non-renewable energy are needed to encourage CO2 emission reduction over the medium term. However, increases should be gradual to moderate short-term effects on households, who will face higher energy bills.