Public Information Notice: IMF Concludes 2003 Article IV Consultation with Greece

June 11, 2003

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. The staff report (use the free Adobe Acrobat Reader to view this pdf file) for the 2003 Article IV consultation with Greece is also available.

On May 16, 2003, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with Greece.1


The economic expansion that began in the mid-1990s has continued unabated, with some employment gains in 2002 for the first time in four years. Gross Domestic Product increased by 4 percent in 2002, well above the EU average, but external imbalances remained large. High capacity utilization, EU transfers, and preparations for the 2004 Olympics underpinned investment, while private consumption was supported by sizable increases in household incomes. Domestic demand was also boosted by continued rapid credit growth, driven by historically low interest rates and recent financial liberalization. The unemployment rate declined but, at 9.7 percent in the last quarter of 2002, was still higher than in most euro-area countries. With a further loss in export market shares, the external current account deficit remained above 6 percent of GDP, one of the largest deficits among industrial countries.

Divergent cyclical positions and relatively high labor cost increases kept inflation well above the euro-area average. Consumer price inflation averaged close to 4 percent in 2002, and the inflation differential vis-à-vis the euro area exceeded 1.5 percentage points. Relatively high wage increases, not fully compensated by relative gains in productivity, and the euro appreciation have led to a weakening of cost and price competitiveness since Greece joined the euro area in 2001.

Notwithstanding strong economic growth, the fiscal deficit declined only marginally to 1.2 percent of GDP in 2002. Sizable accounting revisions replaced earlier reported small surpluses with deficits. In 2002, current noninterest expenditures, including for wages, again exceeded budget targets but a larger deficit was avoided by revenues from a tax amnesty (in the context of settling tax arrears for the self employed) and lower-than-budgeted investment spending. The estimated structural deficit (net of asset sales) declined by ½ percentage point to 2 percent of GDP. The public debt-to-GDP ratio, at 105 percent of GDP in 2002, remained one of the highest in the euro area. Amid sizable revenue relief from a tax reform, the 2003 budget targeted a reduction in the fiscal deficit to 0.9 percent of GDP, reflecting lower interest payments and leaving the structural deficit broadly unchanged under the budget's GDP growth assumption (4 percent of GDP). However, the central government cash deficit widened markedly in the first quarter of 2003, amid strong primary spending growth.

The near-term outlook is subject to large external risks, but preliminary estimates of strong GDP growth in the first quarter of 2003 indicated that growth prospects remain considerably more favorable than in most partner countries. The staff expects that historically low interest rates, EU-financed projects, the 2004 Olympics preparations, and the recent tax reform would support domestic demand, leading to GDP growth of 3.6 percent in 2003. However, the growth outlook is subject to considerable risks: an extended period of global weakness in the wake of the Iraq war would adversely affect tourist arrivals, while a delayed recovery in major export markets and a further appreciation of the euro would further weaken external demand. With continued strong growth, average inflation is expected to remain broadly unchanged in 2003.

Executive Board Assessment

Executive Directors noted that earlier reforms and interest rate declines during the convergence process preceding Greece's entry into the euro area continue to underpin an extended period of strong economic growth, and that, more recently, some gains have been made on the employment front. At the same time, however, a relatively loose macroeconomic policy mix--combined with a variety of transitory and convergence-related factors--has resulted in widening macroeconomic imbalances, including a large external current account deficit and rapidly rising private sector indebtedness, and the persistence of a substantial inflation differential vis-à-vis the euro area.

Directors agreed that the challenge facing the Greek authorities is to use the opportunity provided for by the present strong economic growth, to address these emerging imbalances and accelerate the structural reforms that will help ensure sustained convergence in living standards to EU levels. This will be achieved through tightening the fiscal stance to reduce the high level of public debt; strengthening financial sector supervision; and accelerating reforms in labor and product markets.

To ensure a gradual reduction in Greece's external current account deficit and its relatively high external indebtedness, Directors stressed that, in addition to sustained fiscal consolidation, steps will need to be taken to strengthen external competitiveness. Wage moderation will have a key role to play, in this regard, and Directors called on public sector wage agreements to lead by example. They also noted that product market reforms aimed at raising productivity and fostering competition will help strengthen price competitiveness.

Directors urged the authorities to accelerate the pace of fiscal consolidation and to aim for faster progress in reducing the high public debt, in particular given the favorable cyclical and accommodative monetary conditions. They stressed the importance of correcting any budget slippages promptly, and called for a more ambitious, front-loaded fiscal adjustment than is currently envisaged. A number of Directors recommended a strengthening of the structural balance by at least 0.5 percent of GDP per year to help ensure a steady decline in the debt-to-GDP ratio to 60 percent.

Directors stressed that public expenditure restraint and prioritization will be key to achieving fiscal consolidation, in particular, in the areas of public sector wages and employment. They welcomed steps to strengthen auditing and expenditure control procedures in the broader public sector (including on health care), and encouraged the authorities to proceed with plans for reducing Greece's relatively high military expenditures. Increased disclosure of debt-creating below-the-line transactions and limiting the amount of such transactions to future privatization receipts will also be important to support debt reduction objectives. While welcoming the recent consolidation of public pension funds and steps that will facilitate the establishment of private funds, Directors emphasized that additional steps will be needed at an early stage to address longer-term spending pressures related to population aging.

Directors supported ongoing efforts to improve public sector transparency and efficiency. They saw the planned "Code of Fiscal Stability" as a welcome step toward enhancing public sector accountability, but noted that its effectiveness would depend on tight borrowing limits and strict enforcement. Directors encouraged the authorities to consider the introduction of binding, multiyear expenditure ceilings, and to take further steps to limit the room for discretion and abuse in the civil service. The improved transparency and more equitable distribution of the tax burden that will result from the recent tax reform are welcome, but Directors cautioned that future reform steps will need to condition tax relief on commensurate expenditure savings.

Directors welcomed the Bank of Greece's recent decisions to strengthen provisioning requirements and further upgrade supervisory expertise in the face of evolving financial sector risks. While the level of private sector indebtedness remains low by international standards, they noted that its rapid increase heightens the need for vigilance and readiness to take appropriate steps, especially if banks' capital ratios, which remain well above regulatory minima, were to decline further. They also saw a need for increasing market-based discipline by expanding information disclosure requirements. To address the challenging financial situation in the insurance sector, Directors called for the establishment of a fully independent supervisory agency that would closely coordinate with other financial sector supervisors. Directors encouraged the authorities to undertake an Financial Sector Assessment Program, which would allow a broader review of financial sector issues. They welcomed Greece's efforts to combat money laundering and the financing of terrorism.

While employment has begun to increase, following several years of decline, Directors noted that additional efforts remain essential in order to achieve the employment and labor force participation targets of the Lisbon Agenda. They highlighted, in particular, the importance of steps to facilitate labor market entry by women and the young, improve labor market flexibility and job matching, and increase wage differentiation. A number of Directors encouraged the authorities to continue to work with the social partners towards the elimination of catch-up clauses in wage contracts.

Directors commended the authorities for progress on privatization amid difficult market conditions, but emphasized the need for further structural efforts to bolster competition, reduce administrative barriers and improve the business climate to strengthen the foundations for higher foreign investment and strong income growth over the medium-term. Specific priorities include the strengthening of the effectiveness of the Competition Authority and the easing of entry barriers in the electricity sector.

Directors encouraged the authorities to play an active role in liberalizing all imports from the least developed countries, and to sustain their efforts to raise official development assistance.

Directors welcomed the important statistical improvements associated with Greece's subscription to the IMF's Special Data Dissemination Standard. They looked forward to further steps to address remaining significant weaknesses including in the fiscal area.

Greece: Selected Economic Indicators






2003 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 balance 2/












Of which: external debt 3/







Money and credit (end-period, percent change)


Greek contribution to euro area M3 4/






Domestic credit







Interest rates (year average)


3-month treasury bill rate






12-month treasury bill rate







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


Trade balance






Current account balance (including capital transfers)






Foreign exchange reserves (US$ billions) 5/







Exchange rates


Exchange rate regime

Euro-area member

Present rate (May 16, 2003)

US$1.15 per 1 euro

Nominal effective rate (1995=100) 6/






Real effective rate (unit labor cost basis; 1995=100) 6/







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.

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

6/ Data for 2003 refer to January.


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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