IMF Survey: Greek Program Broadly on Track But Structural Reforms Remain
November 23, 2010
- Ambitious fiscal program being implemented
- Financial sector stabilizing
- Implementing next-stage structural reforms key
Teams from the European Commission, European Central Bank and the International Monetary Fund have concluded that Greece’s economic reform program is broadly on track, paving the way for a disbursement of €9 billion, of which €6.5 billion are provided by euro area member states, and €2.5 billion by the IMF.
“Our overall assessment of the program is that it is broadly on track,” said Servaas Deroose, a senior European Commission official. He added that Greece was making a strong effort to narrow its fiscal deficit to a targeted 7.5 percent of GDP by the end of 2011, despite a contracting economy.
The teams were in Athens to conduct the second review of Greece’s economic reform program, which is being supported by a €80 billion loan from euro area countries and a €30 billion Stand-By Arrangement with the IMF.
“The program is off to an impressive start, but it is now at a crossroads, where further progress will depend on difficult structural reforms,” said Poul Thomsen, head of the IMF’s team.
The teams pointed to significant progress, particularly in reducing the deficit. The economy is expected to begin turning around in 2011. Wage and price inflation is beginning to moderate, setting the stage for an improvement in competitiveness.
“The strength of the program so far has not only been its ambitious and front loaded adjustment effort, but above all the government’s determination―this is clearly the government’s program―and the socially well-balanced nature of the adjustment,” Thomsen said.
Fiscal adjustment on track
The ambitious fiscal adjustment is well underway, Thomsen told journalists at a November 23 press conference in Athens. The deficit is falling from 15½ percent to 9½ percent of GDP in 2010, and the government remains committed to reducing the deficit to below 3 percent of GDP by 2014.
Because of recent data revisions for 2009 and weaker-than-projected revenue collection, the government will need to make an extra effort to meet the agreed deficit target for next year.
New measures have been agreed to broaden tax bases and eliminate wasteful spending, particularly in the areas of:
• Health spending—which is inefficient relative to other euro zone countries;
• State enterprises—which are a heavy burden on the economy with perennial losses for Greek taxpayers; and
• Tax administration—which has instruments now coming into place to strengthen compliance.
“Meeting the ambitious targets for this year speaks for itself. But we have to recognize that there are serious underlying pressure points. The targets have been met because the government has underspent at the state level in order to compensate for disappointing tax collections and overspending at lower levels of government,” Thomsen said.
He cautioned that this will eventually be unsustainable unless there are deep structural reforms to deal with the root cause of the problems.
Structural reforms are needed to secure Greece’s competitiveness, reinvigorate output, and increase employment. While significant progress has been made, with some landmark reforms—including pension reform—the program has now reached a critical juncture.
Many of the reforms that are necessary to transform Greece into a dynamic and export-driven economy require skillful design and political resolve to overcome entrenched interests. The challenge now is to implement an ambitious schedule for these next-stage reforms, including:
• Aligning wages more closely with firm-level productivity, including through reform of arbitration and collective bargaining systems.
• Opening up access to services, trades, and professions.
• Unlocking the potential of Greek industries by cutting red tape and barriers to entry, and privatizing state assets.
Financial sector stability
In the financial sector, the program has been effective in supporting stability. The activation of the €25 billion expansion of the government program to guarantee bank bonds, which was adopted in August, will contribute to support the liquidity position of Greek banks.
Some private banks have had some success recently in raising funding as well as capital in the markets. While the banking system remains under some pressure, capital is adequate and, as envisaged under the program, the Financial Stability Fund is now available to provide support, if needed. The government has analyzed options for banks under its control and devised a program to address their stability and efficiency. Banking and insurance supervision are also being strengthened.
In a joint statement, the EC, ECB, and IMF said that “the reforms needed to return Greece to robust economic growth are underway, but developments to date also reveal that structural issues must be dealt with to make the adjustment sustainable.”
The mission for the next program review is scheduled for February 2011.