Public Information Notice: IMF Concludes Article IV Consultation with Greece

August 10, 1998

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 August 5, 1998, the Executive Board concluded the Article IV consultation with Greece1.


Real and nominal convergence of the Greek economy with those of its EU partners progressed in 1997. Economic activity accelerated to an estimated 3½ percent, led by an investment-based recovery of domestic demand. Inflation continued to decline, reaching 4.7 percent by year-end, aided in particular by lower world fuel prices. Wage increases, however, sharply outpaced inflation and economy-wide unit labor costs (ULCs) rose in excess of those in partner countries. There was thus a further loss in competitiveness. Current account data continue to be plagued by difficulties; on a settlements basis (which likely overstates the actual deficit, but is the more frequently available and closely followed measurement), the deficit widened in 1997. Unemployment remained unchanged from the peak of 10.3 percent reached in 1996.

The general government deficit declined from 7.5 percent of GDP in 1996 to 4 percent of GDP in 1997. The latter was below the 4.2 percent target. The debt-to-GDP ratio recorded its first decline in recent years (to 108.6 percent of GDP, from 111.6 percent in 1996). With respect to the budget figures for 1997, there was a shortfall in revenues and an overrun in current primary expenditure, but these were offset primarily by lower-than-anticipated interest payments (0.8 percent of GDP) and, to a lesser extent, by an increase in below-the-line operations (consistent with the European System of National Accounts) from their budgeted amounts (notably, equity participations in public enterprises and back payments due to court rulings).

The primary objective of monetary policy in 1997 was the reduction in inflation to be achieved by a continuation of the hard drachma policy. This policy, however, came under strain in the course of the year, with recurrent exchange rate pressures, especially in the wake of the Asian crisis. The conviction that an exchange rate adjustment, to correct for the continued loss of competitiveness, would be needed in good time before intended EMU accession in 2001 became increasingly embedded in market expectations. These pressures on the exchange rate were resisted, but at the cost of a sharp rise in interest rates that, if maintained for long, risked undermining official growth and fiscal targets.

Against this background, the drachma joined the ERM on March 16, 1998, at a central rate that implied a devaluation of 12.3 percent against the ECU. At the same time, the government announced a supportive package of fiscal and structural measures. On the fiscal front, the package includes measures that aim to offset the effect of higher-than-budgeted interest rates and the direct impact of the devaluation on the fiscal accounts, so as to maintain the 1998 deficit within target. Main measures consist of a reduction in the deficit of the public investment budget (partly as a result of the higher drachma value of EU transfers), cuts in various spending appropriations and transfers, and higher social security revenues accruing from the registration of illegal immigrants. On the structural front, efforts are concentrated on the restructuring of loss-making public enterprises and on privatization. In addition, a two-step reform of the social security system is under way, with a set of shorter-term measures to be succeeded by a second phase, setting key parameters to secure the system’s long-term viability. Labor market legislation is also being put forward, covering greater flexibility in working time, the possibility of part-time work in the public sector, and the introduction of private employment agencies. A revised convergence program was also presented; it aims for a fiscal deficit of 2.1 percent of GDP in 1999, moving to 0.8 percent of GDP by 2001, an objective seen to be consistent with the Stability and Growth Pact.

In its monetary policy statement for 1998, the Bank of Greece set exchange rate stability within the ERM as the main intermediate objective, with the drachma not expected to deviate by more than 2½ percent "on average" from its ERM central rate. In striking a balance between the objectives of price stability (an inflation rate not in excess of 2 percent by end-1999) and exchange rate stability, the Bank clearly assigned priority to the former; consequently "the drachma may appreciate, exceeding the envisaged narrow margins of fluctuation." Indeed, the drachma has been trading well above its central parity since ERM entry.

Post-devaluation growth prospects appear favorable, with output expected to grow by close to 3½ percent in 1998–99. Inflation is reflecting the direct impact of the devaluation, and the IMF projects annual average inflation of some 5 percent in 1998 and 3½ percent by end-1999 (these forecasts are based on currently implemented policies and do not incorporate possible indirect tax reductions or other measures under consideration). The recent agreement on the national minimum wage in the private sector was not unduly affected by the devaluation. The accord however includes catch-up clauses to compensate for inflation in excess of certain thresholds. Wage (and inflation) developments will hinge, among other factors, on the extent of adherence to the understanding that sectoral wage awards should be kept within the increases set at the national level.

Executive Board Assessment

Greece’s economic performance in recent years had been marked by a pickup in growth and notable progress in lowering inflation and in fiscal consolidation. At the same time, however, deteriorating competitiveness had fed mounting exchange rate pressures in the course of 1997 and early 1998. Directors supported the authorities’ response to these pressures with a strengthening of policies in several areas accompanying the drachma’s devaluation and entry into the ERM in mid-March 1998. These steps had served to restore market confidence, allowing the continuation of an investment-led upswing in economic activity and a projected decline in the fiscal deficit to below the Maastricht reference value. These were commendable results that, Directors noted, were the fruit of the authorities’ commitment to strengthened policy adjustment, which had clearly enhanced the prospects of success in the drive to EMU participation by January 1, 2001.

At the same time, Directors stressed that EMU qualification was a demanding goal to be realized within a rather limited time span, and requiring determined efforts by all economic players. In particular, they noted that achievement of the Maastricht criterion for inflation by early 2000, while feasible with policy rigor, was not yet secure. Directors welcomed the resolve demonstrated by the authorities to date and encouraged perseverance, as policies over the next 12 to 18 months would be crucial. Against this background, a number of Directors expressed reservations about the intention to limit inflation through reductions in indirect taxes, noting the need to address the root economic causes of inflationary pressures. Directors stressed that the policy stance over this period would need to be centered on effective fiscal restraint, monetary policy stringency, and wage moderation, as well as ambitious structural reforms that aided disinflation and improved Greece’s relative growth performance.

Directors welcomed the smooth exit from the previous exchange rate arrangement and the drachma’s entry into the ERM earlier this year. They viewed the drachma’s ERM central rate as appropriate and sustainable on the basis of a firm implementation of accompanying policies. Directors supported the approach to monetary policy set out in the Bank of Greece’s statement for 1998 and, in particular, the preeminence it assigned to the goal of price stability, understood as an inflation rate not in excess of 2 percent by end-1999. The current stance of monetary policy, while resulting in high real short-term interest rates, was judged to be appropriate in order to support an early resumption of a steady downward path for inflation. Several Directors, however, noted the extent of the drachma’s appreciation against its ERM parity that had taken place to date, and called for a better balanced policy mix, including a tighter stance of fiscal policy, to reduce the excessive burden on monetary policy. Directors stressed that the commitment to exchange rate stability within the ERM would not be sufficient to avoid inflation in excess of that in partner countries in the absence of fiscal restraint and wage moderation.

Directors welcomed the sizable fiscal adjustment that had been undertaken in recent years, and the prospect that the general government deficit would come in well under the Maastricht reference value in 1998. In light of the devaluation’s impact on monetary conditions and aggregate demand, Directors recommended that the authorities pursue a better-than-budgeted deficit outcome in 1998.

For the period beyond 1998, Directors generally advised a front-loaded approach toward the Stability and Growth Pact’s medium-term goal of fiscal balance, given the positive prospects for growth and the importance of countering inflationary pressures so as to secure the overriding goal of EMU participation.

With regard to wage developments, Directors cautioned that with entry into the ERM, the growth in unit labor costs would need to be contained further, to within the rate prevailing in the EU as a whole. This was not currently the case, due also to the working of catch-up clauses in the recent wage agreement. Directors urged social partners to strive to ensure that second-tier sectoral awards not add further to wage inflation. The signaling role of the public sector—through strict adherence to the 2.5 percent wage norm—was also seen to be paramount, as were reforms that improved productivity performance.

Directors emphasized the importance of far-reaching structural reforms to allow Greece to realize its growth potential. Noting the influence of a large and inefficient public sector and the pervasive presence of the state in the economy, which had stifled competition, innovation, and technical progress in the past, Directors attributed particular importance to the efforts under way to restructure loss-making public enterprises and to move forward decisively with the privatization program; they welcomed the authorities’ commitment on this front. Directors stressed the importance of using privatization revenues to reduce Greece’s still very high level of public debt, and not diverting those revenues to sustain off-budget expenditure by state enterprises. Several Directors also noted the need to reduce the role of the state in the banking sector, pointing to the higher operating costs relative to other EU members.

Directors noted positively the steps being taken with respect to labor market and social security reforms; in both cases, it was remarked, further action would in due course be needed. Directors highlighted the importance of a comprehensive approach to labor market reform to foster increased efficiency and flexibility, and advised that it be undertaken before intended EMU participation. In the social security system, Directors observed that the authorities’ phased approach was allowing the early implementation of a number of positive short-term measures. At the same time, they stressed that this should not unduly delay the system’s broader reform, which would need to address its long-term viability through changes in key parameters.

Directors expressed concern about the serious shortcomings affecting Greece’s economic data, and the extent to which this complicated the assessment of economic conditions. They entreated the authorities to strengthen their commitment to early and substantive improvements in this area.

Greece: Selected Economic Indicators

  1994 1995 1996 1997 1998 1/

Real economy (change in percent)  
GDP 2.0 2.1 2.7 3.5 3.2
Domestic demand 1.2 3.2 3.3 3.9 3.2
CPI (period, average) 10.9 8.9 8.2 5.5 5.0
Unemployment (in percent) 9.6 10.0 10.3 10.3 10.2
Investment 2/ 18.7 18.6 19.8 20.7 21.7
Savings 2/ 18.0 16.5 17.2 18.3 19.4
Public finance (general government, in percent of GDP)  
Overall balance -10.0 -10.3 -7.5 -4.0 -2.5
Primary balance 4.1 2.6 4.5 5.5 7.0
Debt 109.6 110.1 111.6 108.6 107.0
Of which: external debt 28.6 26.3 24.8 26.1 ...
Money and Credit (end of year, percent change)  
Broad money (M3) 3/ 8.8 10.3 9.3 9.5 2.6
Domestic credit 4/ 8.8 7.9 5.9 9.6 6.7
Interest rates (year average)  
3-month treasury bill rate 5/ 18.2 14.3 12.0 10.4 11.5
12-month treasury bill rate 6/ 19.0 15.5 12.8 10.4 11.5
Balance of payments (national accounts, in percent of GDP)  
Trade balance -11.9 -12.3 -12.2 -11.9 -12.0
Current account balance -0.7 -2.1 -2.6 -2.4 -2.3
Foreign Exchange Reserves (US$billions) 7/ 14.3 14.6 17.3 12.4 18.5
Exchange rates  
Exchange rate regime member of the European monetary system
Present rate (August 5, 1998) Dr 327.271 to ECU 1
Nominal effective rate (1990= 100)8/ 70.3 68.2 67.1 65.7 61.1
Real effective rate (1990= 100)8/ 94.2 99.9 105.7 109.9 105.6

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

1/ IMF staff projections, except where noted.
2/ In percent of GDP.
3/ Data for 1998 correspond to the 12-month change to end-June .
4/ Data for 1998 correspond to the 12-month change to end-May .
5/ Data for 1998 correspond to the auction of July 13, 1998.
6/ Data for 1998 correspond to the auction of July 27, 1998.
7/ Data for 1998 correspond to end-June.
8/ Data for 1998 correspond to June.

1Under 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 directors, and this summary is transmitted to the country's authorities. In this PIN, the main features of the Board's discussion are described.


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