The economy has lost its earlier momentum, even though inflation remains stubbornly above the central bank's target mid-point of 4.5%. Tighter monetary policy, softer external demand and policy uncertainties due to the presidential election are likely to weigh on activity during 2014. In 2015, GDP growth is projected to rise somewhat, with persistent supply constraints, including a tight labour market, and the need for continued tight macroeconomic policies holding back domestic demand. The central bank has appropriately raised its policy rate to reduce inflation. Keeping inflation expectations anchored will require firm monetary policy action and containing officially directed credit volumes. The planned tightening of fiscal policy in 2014 needs to be implemented. With slow productivity growth, disinflation will have costs in terms of growth and unemployment, but delaying policy action would only raise those costs. Faster increase in infrastructure investment, lower trade barriers and tax reform are all needed to raise potential growth.
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