Summary:
EXECUTIVE
SUMMARY Extended Arrangement. On March 15, 2012, the Executive Board
approved a four-year arrangement in the amount of SDR 23.79 billion
(2,159 percent of quota; €28 billion). Purchases totaling SDR 7.2
billion (€8.1 billion) have been made so far, and a purchase in the
equivalent of SDR 3 billion (€3.5 billion) is proposed to be released on
the completion of the review. Euro area countries have so far disbursed
€139.9 billion since this program’s approval (of €144.6 billion
committed), of which €48.2 billion was for bank recapitalization.
Developments. Significant progress has been made toward rebalancing the
economy. The fiscal primary and external current account
balances are in surplus. Investor sentiment has improved, and the
government successfully placed a medium-term bond. The economy is poised
to grow in 2014, after six years of deep recession. All this bodes well
for a potentially virtuous cycle of recovery to take hold. But a number
of challenges remain to be overcome before stabilization is deemed
complete and Greece is on a sustained and balanced growth path. The real
exchange rate remains overvalued, and non-tourism exports are
relatively weak. Banks face a mountain of bad loans that will require
adequate capital and oversight to clean up, absent which the prospects
are of a prolonged deleveraging antithetical to the assumed recovery.
Fiscal gaps are projected for 2015–16, and public debt remains very
high. Policies. The authorities over-performed significantly on their
2013 fiscal primary balance target, achieving a surplus of 0.8 percent
of GDP. Although the carryover of the over- performance to 2014 is
small, the authorities are on track to achieve this year’s target. They
are implementing a number of structural reform commitments, with a
notable acceleration of product and service market liberalization, where
progress has lagged. However, in the area of labor market reforms,
where Greece has made important progress in the past, the program is now
falling short of targets. Following the Bank of Greece’s stress tests,
the HFSF buffer has been set aside to safeguard financial stability, and
ambitious steps are planned to strengthen the private debt resolution
framework. Reforms to tax codes have been legislated, aimed at
simplifying the system and making tax administration easier and, thus,
addressing longstanding weaknesses. But at the same time, the
authorities need to guard against pressure to rollback progress. On
public administration reform, progress is mixed as Greece is struggling
to introduce performance-based management and address the taboo against
mandatory dismissals.
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