Greece : 2017 Article IV Consultation-Press Release; Staff Report; and Statement by the Executive Director for Greece

Αrt2823 Τεταρτη 22 Φεβρουαρίου 2017

KEY ISSUES

Context. Despite the policy constraints imposed by its membership in the currency union, Greece has made significant progress in unwinding its macroeconomic imbalances.

But extensive fiscal consolidation and internal devaluation have come with substantial costs for society, which contributed to delays in reform implementation and to policy reversals since the last Article IV Consultation, culminating in a renewed crisis of confidence in 2015.


Since then, the situation has stabilized, and growth is estimated to have resumed modestly in 2016. Notwithstanding the substantial progress achieved by Greece, it still faces fundamental challenges:

 (i) a vulnerable structure of the public finances; 

(ii) significant tax evasion and an ineffective tax administration;

 (iii) impaired bank and private sector balance sheets; 

and (iv) pervasive structural obstacles to investment and growth. 

Moreover, its public debt remains highly unsustainable, despite generous official relief already provided by its European partners. 

Addressing these remaining challenges and restoring debt sustainability are essential to creating a vibrant and dynamic private sector capable of generating sustainable and equitable growth and employment. Policies.

 After major policy reversals in early 2015, the authorities commenced a new adjustment program supported by the European Stability Mechanism in August 2015, which has helped reverse the policy backtracking since then. 

The program aims to strengthen the public finances, restore the health of the banking sector, and boost potential growth. In this context, the authorities have legislated important fiscal, financial sector, and other growth-enhancing reforms, which constitute important steps forward. However, fiscal policies rely on high tax rates on narrow bases and on a compression of discretionary spending not supported by reforms.

 These policies are not growth-friendly and may prove difficult to sustain, which could lead to concerns about their credibility.

1 Moreover, structural and financial sector reforms are not sufficiently ambitious to rapidly resolve the large stock of debt to the banks and the tax authorities and to remove bottlenecks to growth and competitiveness. 

Recommendations. 

To achieve sustainable and more equitable growth and ensure that Greece can become competitive within the currency union, while providing adequate protection to vulnerable groups, the authorities must deepen and accelerate reform implementation: 

1 Staff’s assessment is that the fiscal surplus will reach around 1½ percent of GDP on the basis of current policies, compared to the authorities’ target of 3½ percent supported by the ESM program. 

January 23, 2016 GREECE 2 INTERNATIONAL MONETARY FUND 

Fiscal policy: Given its cyclical position, 

Greece does not require further fiscal consolidation at this time beyond what is currently underway. Medium-run fiscal targets should be supported by preferably fiscally-neutral high quality reforms that broaden the personal income tax base and rationalize pension spending to allow the public sector to provide adequate services and social assistance to vulnerable groups, while creating the conditions for investment and more inclusive growth. Fiscal reforms should be complemented by efforts to address tax evasion and the large tax debt owed to the state. 

 Financial sector: 

NPLs should be reduced rapidly and substantially to allow for a resumption of credit and growth. This requires additional efforts to strengthen and implement fully the debt restructuring legal framework and enhance supervisory tools. 

At the same time, bank governance needs to be further strengthened and capital controls eliminated as soon as prudently possible, while preserving financial stability. 

 Structural reforms: More ambitious labor, product and service market reforms are needed to enhance competition and support growth. A return to the previous less flexible labor market framework should be avoided, as this would put at risk the potential gains for investment and job creation. 

 Debt relief:

 Even with these ambitious policies in place, Greece cannot grow out of its debt problem. Greece requires substantial debt relief from its European partners to restore debt sustainability.


http://www.imf.org/en/Publications/CR/Issues/2017/02/07/Greece-2017-Article-IV-Consultation-Press-Release-Staff-Report-and-Statement-by-the-44630




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