This statement provides information on macroeconomic and policy developments that has become available since the circulation of the staff report. The information does not alter the thrust of the staff appraisal.
Economic recovery and trade. The pick-up in economic activity has continued through September and is evident in the real growth of exports of garments and of key imports including cars, gasoline, and motorcycles. However, construction-related imports remain weak. Tourist arrivals through August are up 16 percent (y/y), on the back of continued strong inflows from neighboring countries and a rebound in air arrivals (up 14 percent). In line with the recovery, credit growth in September remained robust at 23 percent (y/y). Both gross official reserves and the exchange rate have remained virtually unchanged.
Inflation. Headline inflation eased in the third quarter of 2010 (to about 2 percent y/y), driven by lower food prices, in part reflecting seasonal factors.
2011 draft budget. A draft 2011 budget was approved by the Council of Ministers on October 15, 2010. Final parliamentary approval is expected in mid-December. The budget proposal is broadly in line with staff’s projection and advice, but there are some differences. In particular:
- To support fiscal consolidation, overall spending would be kept at ¼ percent of GDP below the staff projection. However, with a more conservative revenue forecast (½ percent of GDP below staff projection), the overall deficit would decline by only ¼ percent of GDP (½ percent in the staff projection).
- In spite of the compression of overall spending (relative to the staff projection), the budget contains larger-than-expected capital spending and social priority outlays (each ¼ percent of GDP above staff projection). This implies a larger compression of nonpriority current spending than staff considered likely.