Struggling to convince that the peg is sustainable
Overview:
Despite the announcement of a large IMF-led bail-out package in December, doubts over the sustainability of the fixed exchange rate regime have not yet been dismissed. A change of government has complicated the process of fiscal adjustment and a delay in disbursements has seen a steady fall in the level of foreign exchange reserves as the central bank defends the currency peg. There are some signs of improvement. The current account deficit is falling sharply and inflation is moderating. The new government has done enough with the approval of its recent fiscal package to win a second disbursement from the EU. However, the economy is contracting at an alarming rate and the huge fiscal tightening and downward nominal wage adjustments necessary to regain competitiveness are only just beginning.