1. This statement reports on information that has become available since the staff report was issued. It does not alter the thrust of the staff appraisal, in particular the need for renewed fiscal reform effort.
2. Economic developments since the Article IV mission have been mixed. The Central Bank reported that growth in the first six months of 2016 was 1.3 percent and lowered its projection for the year to 1.5 percent, reflecting the first half-year performance, a delay of a large tourism investment project, slower growth of tourism arrivals, and concerns about Brexit. Notwithstanding, the unemployment rate declined sharply from 10.2 percent in 2015Q4 to 9.3 percent for the 2016Q1. Growth in tourism arrivals slowed to 5.3 percent compared to 14.7 in the first half of 2015. Producer prices are down 3 percent from May 2015 while the CPI fell by 1.4 percent by end-March.
3. External developments generally remain positive, but international reserves have fallen further. Lower fuel prices, a recovery in merchandise exports, and continued growth in tourism receipts have further improved the current account position relative to the first half of 2015. In addition, long-term private capital inflows have increased. However, as a result of official debt service and short-term outflows, reserves fell by US$21.5 million to US$441.9 million, compared with Staff’s revised end-2016 estimate of US$ 458 million, or about 3 months of imports).
4. Regarding fiscal developments, government finances are deteriorating and funding challenges have intensified. The Central Bank reported the deficit in the first quarter of FY2016/17 (April to June) increased by about 0.25 percent of GDP, mainly on account of lower revenues. Non-interest expenditures declined broadly offsetting the lower revenues, but interest cost were higher. The Central Bank has had to significantly increase its funding of the government as commercial banks reduced their lending, including by reducing the amount they rolled over. About two-thirds of this funding came from the CBB on-lending commercial banks’ excess reserves, and a third reflected the creation of new money.
5. The authorities presented new budgetary proposals on August 16th. These measures are intended to reduce the cash deficit by about 1.8 percent this year and to continue the consolidation in the coming years, to bring the deficit to about 2.5 percent in 2018—the government’s medium-term real growth target. The main measures include a new social responsibility levy on imports, to help pay for medical costs and support an improved sanitation program, an increase in the bank asset tax from 0.2 percent to 0.35 percent, and a tax amnesty. On the expenditure side, the budget targets reducing spending by about 0.6 percent of GDP through increased efficiencies and continued reduction in transfers to public enterprises. The budget also noted that there would be no new capital controls. Privatization, new tourist projects, and accelerated drawdown from development banks are expected to increase international reserves to over US$500 million in the coming months. The budget reiterated the government’s commitment to meet its debt service obligations but noted that it will develop a refinancing plan for the state enterprises to better manage the government’s contingent liabilities. The budget also provided for increased tax exemptions for certain tourist developments.
6. The staff appraisal remains appropriate. The staff welcomes the government’s commitment to continue fiscal consolidation although the further increase in tax exemptions could erode the revenue performance. Developments in the first half of the year, mainly delayed investment, slower tourism arrivals, and Brexit, are likely to reduce growth to below 2.0 percent in 2016 and 2017. Nevertheless, the budgetary measures should more than offset the effect of weaker growth on the debt profile—assuming full implementation on a timely basis. However, more may need to be done to stabilize the debt over the medium term, particularly if growth fails to pick up as envisaged by the authorities. Staff’s key points on the need to support the economic recovery, renew the reform effort, and reduce the fiscal deficit and bring down public debt remain valid.