Inflation has receded markedly in 2019, but it will pick up moderately in 2020 and 2021 to slightly above the Reserve Bank’s target of 4.5%, driven by increases in electricity, food and fuel prices. Inflation expectations should continue to moderate progressively toward the inflation target. Risks to inflation are balanced. Demand side pressures are low, as food prices and wages are expected to grow modestly. Given ample spare capacity and the anchoring of inflation expectations, there could be room for easing monetary policy, particularly in 2021.
Rising compensation of government employees and increased bailouts of state‑owned enterprises are putting pressure on public finances. Wage negotiations have systematically granted above‑inflation increases. The government has announced an early-retirement plan to reduce employment levels, but early-retirement schemes are costly in the short run, with limited benefits. The government could consider indexing public sector wages below inflation for three years. Slow reform of state-owned enterprises is weighing on the economic climate and confidence. The underperformance of these enterprises is widespread due to mismanagement, corruption, overstaffing and an uncontrolled wage bill. An effective governance framework for state-owned enterprises needs to be established, setting clear company‑specific goals in terms of profitability, capital structure and non-financial objectives.
Developing tourism and boosting transport infrastructure investments would contribute to growth in the short run and to job creation. Regulatory restrictions are still relatively high. This includes a high level of government involvement in the economy, barriers to domestic and foreign entry, complex rules for licences and permits, and protection of existing businesses from competition. Giving more independence to regulators in the energy, transport and telecom industries and accelerating the adoption and implementation of the Transport Regulation Bill are necessary.
