Growth has slowed to about 2½ per cent in 2002, essentially reflecting a slowdown of external demand as private consumption has remained robust and public consumption increased strongly. Falling food prices and an appreciating currency have contributed to a marked decline in inflation. The big drop in tourism receipts in the aftermath of recent floods can be expected to be reversed and the pace of expansion is projected to pick up in 2003 and 2004, following a broadening recovery in western Europe.

The fiscal policy stance has loosened excessively this year and should be tightened. International competitiveness has remained weak, despite strong disinflation and even though the authorities have managed to limit exchange-rate appreciation in the face of massive foreign direct investment inflows. A determined pursuit of structural reforms is needed to improve the performance of the domestically-owned corporate sector, increase trend productivity growth and bolster international competitiveness.