Public Information Notice: IMF Concludes 2001 Article IV Consultation with Greece

March 1, 2002

Public Information Notices (PINs) are issued, (i) at the request of a member country, following the conclusion of the Article IV consultation for countries seeking to make known the views of the IMF to the public. This action is intended to strengthen IMF surveillance over the economic policies of member countries by increasing the transparency of the IMF's assessment of these policies; and (ii) following policy discussions in the Executive Board at the decision of the Board.

On February 22, 2002, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with Greece.1


Strong economic growth continued in 2001, but the economy was not immune from the global slowdown. GDP increased by about 4 percent, led by robust domestic demand. Investment growth accelerated, following interest rate convergence with euro-area rates, and further easing by the ECB, while private consumption was buoyed by rapid credit growth. The strong growth performance failed, however, to stimulate overall employment gains; and the unemployment rate, while declining through the first half of 2001 (the latest period for which data are available), remained the second highest among European Union countries. The sizable external current account deficit narrowed somewhat to 6.2 percent of GDP (including capital transfers), in part also reflecting lower oil prices. In line with developments in the rest of the euro area, the manufacturing sector weakened, with industrial production almost flat since the spring.

Core inflation has remained well above the euro-area average. Falling energy prices have lowered headline inflation, as in the rest of the euro area. However, the core inflation (that is, headline inflation, excluding energy and unprocessed food prices) differential versus the euro area rebounded from tax-cut-related lows in 2000 to average 1.6 percentage points in 2001. This reflected in part relatively buoyant cyclical conditions, with the staff estimating a positive output gap of around 1½ percent.

Fiscal consolidation continued in 2001 and the general government recorded a surplus for the first time in decades—but the tightening of the fiscal stance implied by the original budget was not achieved. The fiscal surplus was smaller than budgeted (0.1 percent of GDP against a 0.5 percent target) and the shortfall principally reflected higher-than-budgeted expenditures for goods and services. The undershooting of the surplus target came despite additional receipts from universal mobile telecommunications system (UMTS) license sales, not anticipated in the budget and treated as revenues under Eurostat rules. Staff estimates that the structural primary surplus remained constant at 5.6 percent of GDP (excluding UMTS receipts, which have no demand effects) compared with a tightening to above 6 percent implied by the original budget. For 2002, the overall surplus target was revised down to 0.8 percent of GDP, from 1.5 percent in the 2000 Stability Program, reflecting lower-than-expected growth and tax reductions. The structural primary surplus would remain broadly unchanged relative to the 2001 outturn.

The near-term outlook is subject to a heightened degree of uncertainty, but growth prospects remain considerably more favorable than in most partner countries. Notwithstanding a weaker external environment and the waning of some of the euro-entry-related effects on investment, the staff expects GDP growth of around 3 percent (somewhat below the 2002 budget assumption of 3.8 percent). The growth outlook depends importantly on a recovery in external markets during the course of 2002, and on developments in the tourism sector. On inflation, prospects are subject to the outcome of the pending wage agreements, with higher-than-expected inflation in 2001 triggering a 1.1 percentage point catch-up payment in 2002.

Executive Board Assessment

Executive Directors commended the authorities for their policy strategy that had secured euro-area entry at the beginning of 2001, and had continued to underpin strong performance of the Greek economy. The economic benefits were visible in many areas: real income growth remained well above the euro-area average; the fiscal position had improved strongly; and structural reforms had progressed in a number of areas.

In order to lay the groundwork for continued rapid convergence in living standards to EU levels, Directors called for a broadening and deepening of the efforts undertaken to date. To secure durable, strong growth, steps are needed, first, to place the fiscal position on a sustainable basis, in the face of anticipated pension pressures and very high public debt levels. Second, competition and efficiency in factor and product markets should be strengthened. Third, wage settlements should, at a minimum, prevent an erosion of cost competitiveness, and contribute, over time, to a narrowing of Greece's relatively large external current account deficit.

Directors stressed the advantages of a medium-term orientation of fiscal policy, characterized by transparency as well as well-defined rules for addressing short-run developments. They supported the authorities' goal of reducing the public debt-to-GDP ratio to 60 percent by 2010, but noted, however, that the size of fiscal surpluses needed to bring about this debt reduction will depend importantly on the extent of debt-creating transactions, which do not affect the budget deficit. Many Directors therefore suggested that such transactions be curbed. In addition, some Directors considered it useful to complement the deficit and debt targets with a commitment to well-specified expenditure ceilings at the general government level. Within the framework of ambitious medium-term fiscal surplus and expenditure targets, Directors agreed that revenue stabilizers should be allowed to operate fully and symmetrically in response to cyclical developments. For 2002, Directors recommended a more ambitious fiscal target than that envisaged in the budget, resulting in additional fiscal withdrawal, in order to rebalance the policy mix, as monetary conditions remain accommodative in view of Greece's advanced cyclical position.

Directors welcomed the emerging consensus among social partners for much-needed pension reform. They called for early and decisive progress in this field, with simultaneous efforts in a number of areas, including incentives for a higher effective retirement age, reductions in some excessive replacement rates, and more uniform, equitable treatment of pensioners within a much less fragmented system. Fully funded supplementary pension funds could also contribute to the reform agenda.

Directors emphasized that expenditure controls would benefit from more effective multi-year budgeting. They welcomed the recent initiatives in this respect, and urged a strengthening of these efforts, combined with improved expenditure evaluation, monitoring, and control. Noting that the authorities' early plans for fundamental tax reforms are focused on simplifying the system, strengthening tax administration, and further reducing tax evasion, Directors called for progress in these areas in the coming year. A few Directors cautioned that some recent tax incentives (for mergers and employment growth) are likely to introduce new distortions and run counter to the authorities' own reform intentions.

Directors expressed concern about the labor market's continued disappointing performance, with the unemployment rate among the highest in the euro area and relatively low employment growth. They urged the authorities to implement comprehensive reforms that would facilitate labor market entry and improve training. Directors also called for the elimination of catch-up clauses in future wage agreements.

Directors welcomed the authorities' plan to reinvigorate the privatization process, and recommended that this be combined with measures to promote competition throughout the economy, including in the electricity sector, and the removal of impediments to new businesses.

Turning to the financial sector, Directors recognized that the ratio of credit to GDP is likely to continue to rise as part of the broader convergence process. They welcomed the authorities' commitment to address the ensuing risks, and supported the steps to strengthen the combination of provisions and capital. Directors also thought that prudent risk management could benefit from mandatory and timely disclosure by banks of a comprehensive set of asset quality and risk indicators. They welcomed Greece's efforts to combat money laundering and the financing of terrorism.

Directors urged the authorities to support the full liberalization of imports from the least developed countries, and to raise official development assistance to the UN target.

Directors recommended that the authorities strengthen efforts to improve Greece's statistical system—where persistent weaknesses are hampering the assessment of economic developments—and called on the authorities to take steps to meet the SDDS requirements in the near future.

Greece: Selected Economic Indicators






2002 1/

Real economy (change in percent)








Domestic demand






EU harmonized consumer inflation (period average)






Unemployment (in percent)







Public finance (general government, in percent of GDP)


Overall balance






Primary balance






Structural primary balance 2/












Of which: external debt 3/







Money and credit (end-period, percent change)


Greek contribution to euro area M3 4/






Domestic credit 5/







Interest rates (year average)


3-month treasury bill rate 6/






12-month treasury bill rate 6/







Balance of payments (settlements basis, in percent of GDP)


Trade balance






Current account balance (including capital transfers)






Foreign exchange reserves (US$ billions) 7/







Exchange rates


Exchange rate regime

Euro area member

Present rate (February 22, 2002)

US$0.88 per 1 euro

Nominal effective rate (1995=100) 8/






Real effective rate (1995=100) 8/






Sources: Data provided by the Greek authorities; and IMF staff estimates and projections.

1/ IMF staff projections, except where indicated otherwise.

2/ For 2001, excludes UMTS revenues equivalent to 0.4 percent of GDP.

3/ From 2001, foreign debt includes only liabilities in non-euro area currencies.

4/ Data prior to 2000 refer to growth of Greek liquidity measure M4N. Data for 2001 correspond to the 12-month change to end-October.

5/ Data for 2001 correspond to the 12-month change to end-October.

6/ Data for 2002 correspond to the auction of February 5, 2002.

7/ Official reserves declined in 2001 with EMU participation, due in large part to the redefinition of foreign exchange reserves and the fall in foreign exchange reserve requirements for commercial banks.

8/ Data for 2001 refer to November.

1 Under Article IV of the IMF's Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. A staff team visits the country, collects economic and financial information, and discusses with officials the country's economic developments and policies. On return to headquarters, the staff prepares a report, which forms the basis for discussion by the Executive Board. At the conclusion of the discussion, the Managing Director, as Chairman of the Board, summarizes the views of Executive Directors, and this summary is transmitted to the country's authorities.


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