Following the deep recession in 2001, the economy expanded by almost 8 per cent in 2002, with the end-year inflation rate falling to just under 30 per cent, well below the target of 35 per cent. Slower growth is projected in 2003, mainly because of the continuing reluctance of domestic banks to lend, higher real interest rates, and the war in Iraq. Inflation is projected to pick up in the first half of 2003, reflecting recent currency depreciation, the lagged effects of high oil prices and a seasonal hike in agricultural prices, before falling towards, though probably not reaching, the 20 per cent target by end-year.

The establishment of a single party government with a sizeable majority after the November 2002 general elections was initially welcomed by the financial markets. Nonetheless, a significant fiscal slippage has raised concerns. Adherence to expenditure targets and steady implementation of the structural reforms in the banking sector and elsewhere remain the key to maintaining the declining trend in inflation and creating the conditions for a durable recovery.