Public Information Notice: IMF Concludes Article IV Consultation with Greece

November 8, 1999

Public Information Notices (PINs) form part of the IMF's efforts to promote transparency of the IMF's views and analysis of economic developments and policies. With the consent of the country (or countries) concerned, PINs are issued after Executive Board discussions of Article IV consultations with member countries, of its surveillance of developments at the regional level, of post-program monitoring, and of ex post assessments of member countries with longer-term program engagements. PINs are also issued after Executive Board discussions of general policy matters, unless otherwise decided by the Executive Board in a particular case.

On October 20, 1999, the Executive Board concluded the Article IV consultation with Greece.1


Growth is relatively strong, with the economy in the sixth year of an expansion that is estimated to have brought output back to potential. GDP growth is projected at roughly 3½ percent in 1999, a rate in excess of the EU average for a fourth consecutive year. Activity is being led by high rates of investment, and consumption has been sustained by brisk consumer lending. Export performance has also strengthened, reversing a protracted decline in market shares, and contributing to a projected slight improvement in the current account deficit. The prolonged recovery has failed, however, to dent still high unemployment. The staff anticipates that growth will strengthen further, to some 3¾ percent, in 2000.

Following the drachma devaluation and ERM entry in March 1998, inflation persisted at high levels through the summer. In response, the government introduced a series of indirect tax cuts (and other administrative measures) in the fall of 1998, and again more recently. These measures are projected to succeed in containing inflation within the likely Maastricht criterion for the relevant reference period (the year to early 2000). The other reference values required for EMU membership by January 1, 2001 are also expected to be observed. But the staff projects an appreciable pickup in inflation in the latter part of 2000 and in 2001, given the end of the effects of the indirect tax cuts and the impact of the pre-EMU monetary easing.

The monetary policy stance—centered on high interest rates and a strong drachma within the ERM—has remained tight, aiding the anti-inflationary effort. Financial markets have reacted favorably, with a sharp fall in long-term interest rates and a booming equity market. But the effectiveness of monetary policy is diminishing in the run-up to EMU. In particular, lending to households has been boosted by the expected convergence of interest rates to euro area levels and by intense competition within the banking system. In this setting, the Bank of Greece introduced temporary administrative measures to restrain credit growth in mid-April 1999, tightening them further at end-July.

The 1999 fiscal deficit is set to come in under target (at some 1½-1¾ percent of GDP, compared to a budget target of 1.9 percent of GDP), thanks to strong revenue performance. On the basis of this performance, the authorities announced a tax cut and benefit package for 2000 (for a total net cost, inclusive of the indirect tax cuts, put at slightly over ½ percent of GDP), which they see as compatible with a further decline in the overall deficit (the 2000 budget is currently under preparation). However, in the absence of further offsetting measures, the staff projects a deterioration of the primary surplus. The debt-to-GDP ratio is expected to decline further in 1999-2000, dipping below 100 percent of GDP.

Progress with structural reforms has been most visible with regard to privatization, and important steps are being taken in public enterprise restructuring, but broad social security and labor market reforms remain on hold. The detailed privatization and partial flotation program announced upon ERM entry has, with a few delays, been essentially implemented. While sales in the banking system have generated intense competitive pressures, other key sectors continue to be dominated by public enterprises, with liberalization being deferred as long as possible under EU derogations. The restructuring of loss-making public enterprises has made some ground-breaking advances. Labor market measures taken in August 1998 have faced a web of implementation difficulties. Fundamental reform of the social security system has been deferred to after the 2000 elections; nonetheless, measures taken under a "mini" package hold the promise of both appreciable savings and increased efficiency.

Executive Board Assessment

Executive Directors commended the authorities for the steady pursuit of stability-oriented economic policies that had generated the virtuous circle essential to the success of Greece's drive to EMU participation by January 1, 2001. Directors noted that the achievements to date were impressive: growth was strong, nominal wage increases were moderate, fiscal developments were better than budgeted, and inflation had declined considerably. Looking ahead, the main policy challenges were to secure a low inflation performance on a sustainable basis and to enhance Greece's medium-term growth and employment prospects.

Directors recognized that EMU qualification was a demanding goal to be realized within a limited time span. They noted that the macroeconomic policy stance adopted together with indirect tax cuts and other administrative measures that had been taken appeared likely to succeed in containing headline inflation below the Maastricht criterion for the relevant reference period. Some Directors agreed that the indirect tax cuts could produce more durable effects on inflation through lower inflationary expectations and wage agreements. Several Directors, however, expressed the view that these measures were likely to have only a transitory impact on inflation, and were in any case not a substitute for more fundamental measures: they stressed the need to achieve a sustainable reduction of inflation through an appropriately tight fiscal policy, continued wage moderation, and far-reaching structural reforms that would strengthen competition and raise productivity.

Directors endorsed the tight monetary policy that had been pursued to date, and welcomed the intention of the authorities to maintain this policy stance for as long as feasible in the run-up to EMU. They felt that such a stance was well advised in light of the economy's cyclical position and other related developments, such as the boom in equity and credit markets. However, they noted that there were evident limits to this approach, and that the eventual alignment of domestic interest rates with those in the euro area and the depreciation of the drachma toward its central ERM2 parity would entail a relaxation of monetary conditions. While a number of factors that could attenuate the extent of monetary relaxation were noted by a few Directors, there was broad agreement that the monetary easing in prospect was sizable and would need to be countered by other policy instruments—fiscal, wage, and structural policies—to ensure a sustainable competitive inflation performance in monetary union. Directors welcomed the authorities' intention to remove the administrative measures to restrain credit growth as soon as feasible, given the commonly recognized drawbacks of such measures.

Directors commended the Greek authorities for the better than expected fiscal performance this year in providing needed macroeconomic restraint, and in supporting monetary policy in pursuing disinflation. They endorsed the strengthening of the convergence program target for the overall deficit for 2000, and the intention to do likewise for the 2001-02 targets in the update of the convergence program later this year. Most Directors recommended maintenance of the current primary surplus at around 7 percent of GDP in 2000-01, both from a cyclical perspective and in view of the concomitant monetary easing. They welcomed the authorities' intention to aim at this order of magnitude in the primary surplus next year. A number of Directors saw the tax cut and the benefit package for 2000 as entailing some risks in this respect, and they encouraged the authorities to remain vigilant and to stand ready to take offsetting measures to ensure continued progress in fiscal consolidation over the medium term.

Directors recognized the contribution that wage moderation had made to disinflation. In looking to the next round of negotiations, they stressed the importance that employers and employees appreciate fully the consequences of the regime change implied by Greece's planned participation in EMU. In this regard, Directors noted that unit labor cost developments in the euro area should be seen as a guidepost in deciding wage increases. They recommended that the authorities continue to actively promote nominal wage moderation, and some suggested elimination of wage catch-up clauses.

Directors emphasized the importance of far-reaching structural reforms, especially in liberalizing and deregulating the economy, so as to help sustain price stability, reduce structural unemployment, and allow Greece to fully realize its growth potential. They welcomed the progress that had been achieved with regard to the privatization and public enterprise restructuring programs. Directors pointed, however, to the burden imposed by inefficiencies in key state enterprises, and advocated the extension and quickening of the liberalization process. While recognizing the positive effects of privatization and liberalization in the banking system, they remarked that the heightened competition intensified the risks faced by banks, and that further efforts to reduce their high operating costs were needed. Directors welcomed the steps taken by the Bank of Greece to improve banks' risk management and internal control systems, and recommended that their effectiveness be closely monitored.

In noting the still high level of unemployment, Directors welcomed the measures taken in order to improve labor market performance, but regretted that they had remained largely unapplied and had yet to elicit the desired response. In this regard, they stressed the desirability of reducing the high effective entry wage for first-time job seekers, and recommended a greater role for the private sector in vocational training and job placement services. Directors welcomed the recent progress made in improving the efficiency of the social security system. They encouraged the authorities to proceed rapidly to the next phase of the reform process, so as to ensure the long-term viability of the system.

Directors commended Greece's completion of a self-assessment against the IMF Code of Good Practices on Fiscal Transparency—Declaration of Principles, as well as its readiness to publish the results. They also welcomed Greece's participation in the pilot project for the voluntary release of Article IV staff reports.

While noting the improvements that had been made to the statistical system and in data provision to the Fund, Directors urged the authorities to strengthen their efforts, particularly in the areas of national accounts and balance of payments data, and recommended that they seek to satisfy the requirements for subscribing to the Special Data Dissemination Standard.

Greece: Selected Economic Indicators

1995 1996 1997 1998 1999 1/

Real economy (change in percent)
GDP 2.1 2.4 3.2 3.7 3.3
Domestic demand 4.4 3.0 3.5 3.3 3.4
EU harmonized consumer inflation (period average) ... 7.9 5.4 4.5 2.3
Unemployment (in percent) 10.0 10.3 10.3 10.1 10.3
Investment 2/ 18.7 19.4 20.1 21.8 22.8
Saving 2/ 16.2 16.7 17.5 19.1 20.5
Public finance (general government, in percent of GDP)
Overall balance -10.6 -7.5 -4.0 -2.4 -1.7
Primary balance 2.3 4.5 5.7 6.7 7.0
Debt 110.1 112.2 109.5 106.1 102.1
Of which: external debt 23.5 22.9 24.3 26.5 ...
Money and credit (end-period, percent change)
Broad money (M4N) 3/ 13.0 15.3 7.8 9.8 7.9
Domestic credit 4/ 9.6 8.3 11.4 9.9 10.3
Interest rates (year average)
3-month treasury bill rate 5/ 14.3 11.9 10.1 11.9 9.8
12-month treasury bill rate 6/ 15.5 12.8 10.3 11.5 8.8
Balance of payments (national accounts, in percent of GDP)
Trade balance -12.8 -12.6 -12.3 -12.7 -12.5
Current account balance -2.4 -2.6 -2.6 -2.7 -2.3
Foreign exchange reserves (US$billions) 7/ 14.6 17.3 12.4 17.2 21.4
Exchange rates
Exchange rate regime
Member of the European monetary system
Present rate (September 21, 1999)
Dr 327.0 to 1 euro
Nominal effective rate (1990=100) 8/ 71.1 70.8 69.1 66.5 66.3
Real effective rate (1990=100) 8/ 110.2 115.0 116.1 112.9 113.1

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 1999 correspond to the 12-month change to end-July.
4/ Data for 1999 correspond to the 12-month change to end-May.
5/ Data for 1999 correspond to the auction of August 17, 1999.
6/ Data for 1999 correspond to the auction of August 31, 1999.
7/ Data for 1999 correspond to end-August.
8/ Data for 1999 correspond to June.

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. In this PIN, the main features of the Board's discussion are described.


Public Affairs    Media Relations
E-mail: E-mail:
Fax: 202-623-6278 Phone: 202-623-7100