Policy solutions for fiscal and monetary puzzles

Fiscal and monetary policies during the past several years have stifled the economy. It has led to slow growth and high unemployment. Large fiscal and balance of payments current account imbalances have depleted foreign exchange reserves and restrained the ability of the central bank (BDL) to maintain a clean pegged rate.

THE PEG HAS BEEN BROKEN

The absence of a structured official response further aggregated the performance of the economy, and eroded confidence, with the creditability of sovereign risk declining rapidly with a negative outlook. The continued loss of foreign exchange reserves has prompted banks to impose voluntary capital outflow controls and to limit foreign exchange cash withdrawal. The market exchange rate depreciated by 20 percent, and interest rates reached