## cr17229 ## Source details **Canonical URL:** [cr17229](https://www.imf.org/-/media/files/publications/cr/2017/cr17229.pdf) ## Other formats - [Markdown version](/-/media/files/publications/cr/2017/cr17229.pdf.md) - [Structured JSON version](/-/media/files/publications/cr/2017/cr17229.pdf.json) --- ### CONTEXT AND RECENT DEVELOPMENTS - Greek authorities requested a new precautionary Stand-By Arrangement until August 31, 2018. - Extended arrangement cancelled January 2016 after only 5 of 16 planned reviews completed. - Under the EFF-supported program: - Progress: primary surplus roughly to balance; labor market reforms helped close wage competitiveness gap. - Shortfalls: liberalizing structural reforms lagged; several reforms reversed in early 2015; program fell short of restoring growth, fiscal sustainability, and financial stability. - Key adverse outcomes since 2014: - Growth stagnant since 2014. - Public debt peaked at about 180 percent of GDP in 2016. - Banking sector crisis in 2015 led to capital controls that remained in place (as of the report). - ESM support and measures: - Up to €86 billion fresh official support (August 2015); only two of seven planned ESM reviews completed to date. - Legislated fiscal package (VAT, pension, income tax), autonomous revenue agency, modern minimum income scheme, bank recapitalizations, insolvency framework strengthening, NPL sales and servicing market measures. - Structural challenges identified: - Unsustainable fiscal policy mix, high tax rates on narrow bases, many exemptions (more than half of wage earners exempt from personal income tax). - Tax collection rates fell from over 70 percent in 2010 to around 46 percent by end-2016. - Tax and social security contribution debt about 65 percent of GDP at end-March 2017. - Government domestic arrears and unprocessed claims over €7 billion (4 percent of GDP) at end-April 2017. - Weak bank balance sheets: NPL ratio 49 percent at end-March 2017; over half bank capital comprised of deferred tax assets. - Obstacles to growth: insufficient product market reform; constrained price adjustment within the currency union. - Recent macro developments: - GDP flat in last three years prior to report. - Poverty and inequality among highest in euro area. - Nascent recovery in 2016 sputtered late-year; growth modestly resumed Q1 2017. - Harmonized consumer prices stabilized in 2016; increased by 1.2 percent in May 2017. - Fiscal outturn: - Primary fiscal surplus reached 4.2 percent of GDP in the prior year (well above ESM target of 0.5 percent). - Structural measures (VAT and income tax increases) contributed an estimated 1½ percent of GDP to the surplus. - Overperformance likely temporary; outturns through May 2017 point to decline in tax revenues. ### PROGRAM STRATEGY - Objectives: - Restore medium-run macro stability while protecting vulnerable groups. - Fiscal reforms to improve policy mix and facilitate growth-friendly, socially-inclusive budget. - Advance reforms: fiscal institutions, legal framework for NPLs, product-market liberalization, preserve collective bargaining reforms. - Expected debt relief to bolster confidence and restore market access; more relief likely required. - Debt relief framework: - European members pledged flow relief (interest deferrals, extensions) to achieve GFN thresholds of 15 percent of GDP (medium term) and 20 percent (long run), conditional on successful program completion mid-2018. - Staff proposes approval-in-principle of IMF arrangement, effectiveness conditional on receipt of debt relief assurances; arrangement would expire August 31, 2018 if not made effective. ### MACROECONOMIC FRAMEWORK AND KEY INDICATORS - Short- and medium-term projections: - Growth: 2017: 2.1; 2018: 2.6; 2019: 1.9; 2020: 1.9; 2021: 1.8 (Real GDP series in Key Economic Indicators). - Private Consumption: 2016: 1.4; 2017: 1.4; 2018: 1.4; 2019: 0.5; 2020: 0.8; 2021: 1.0. - Gross Fixed Capital Formation: 2016: 0.1; 2017: 6.6; 2018: 10.3; 2019: 11.5; 2020: 9.9; 2021: 7.5. - Exports: 2016: -2.0; 2017: 3.3; 2018: 4.0; 2019: 4.0; 2020: 3.9; 2021: 3.5. - Unemployment Rate (percent): 2016: 23.6; 2017: 22.3; 2018: 20.7; 2019: 19.5; 2020: 18.4; 2021: 17.8. - HICP (period average): 2016: 0.0; 2017: 1.2; 2018: 1.3; 2019: 1.4; 2020: 1.6; 2021: 1.7. - Long-run outlook: - Staff baseline long-run GDP growth: –0.5 percent. - Staff projects stabilizing long-run growth around 1 percent only under ambitious reforms and large increases in labor force participation and TFP. - Rapid aging: working-age population projected to fall by about 30 percent during 2020-2060. - Historical labor productivity growth 0.4 percent combined with expected worker growth -0.9 percent implies long-term annual growth of -0.5 percent absent large reforms. - Inflation and labor market: - Inflation subdued; long-run inflation projected to stabilize at about 1.7 percent. - Unemployment remains in double digits and declines slowly (double digits until 2040). - Key downside risks: - Implementation problems could suspend debt relief, harm confidence, growth, debt sustainability, liquidity, and raise Grexit perception. - Other risks: high primary surpluses harming growth; protracted bank stabilization and capital control removal; weaker European recovery. ### FISCAL POLICY: STANCE, TARGETS, AND STRUCTURAL REFORMS - Short-term fiscal targets: - Primary surplus target for this year: 1.8 percent of GDP. - Primary surplus target for next year: 2.2 percent of GDP. - Authorities expect 2018 surplus to reach ESM target of 3.5 percent of GDP (authorities’ view); IMF staff views 2.2 percent. - Program includes a floor on discretionary intermediate consumption spending to ensure it does not fall below last year’s level as share of GDP. - Medium-term rebalancing: - MTFS target for 2019–22: 3.5 percent of GDP primary surplus (legislated in MTFS). - Rebalancing toward growth-friendly and equitable policies: increased public investment and social protection, lower tax rates, steady reduction in debt. - Pension reform (legislated / prior actions): - Average pensions expected to fall by 12 percent; 18 percent cap on decline in any individual pension; pensions frozen until 2022. - Reform expected to reduce system deficit by 1 percent of GDP in 2019-22. - Net savings from pension reform by component (Percent of GDP): Recalibration of main pensions 0.9 / 0.8 / 0.8 / 0.7 (2019–2022); Recalibration of supplementary pensions 0.1 / 0.1 / 0.1 / 0.1; Freeze of pension indexation 0.1 / 0.1 / 0.2 / 0.2; Total 1.0 / 1.0 / 1.0 / 1.0 (2019–2022). - Personal income tax reform: - Reduce personal income tax credit by €650; reduces tax-free threshold from >60 percent of average worker compensation to 40 percent. - Lowers share exempt from taxation from 55 to 35 percent. - Expected yield: 1 percent of GDP. - Legislated to take effect in 2020; can be advanced to 2019 if necessary; IMF staff expects full implementation in 2019. - Growth-enhancing and social-welfare reforms: - Staff baseline: reforms earliest in 2023; authorities expect as soon as 2019. - Revenue-side measures (up to 1 percent of GDP): reductions in income tax rate, solidarity surcharge, CIT rate; modest ENFIA reduction added by authorities. - Spending-side measures (up to 1 percent of GDP): targeted social programs, active labor market policies, public investment. - Staff long-run fiscal view: - Staff expects primary balance to stabilize at 1½ percent of GDP in the long run; European partners project a more ambitious long-run surplus. - Recommendation: set primary surplus target at a more sustainable level of 1.5 percent of GDP as soon as possible to modernize public sector, better target social assistance, stimulate public investment, and encourage labor participation. ### FISCAL INSTITUTIONS, REVENUE AGENCY, AND ARREARS - Revenue agency and tax debt measures (selected actions and SBs): - Prioritize audit cases focusing on recent cases; streamline cases with extended statute of limitations (end-September structural benchmark); upgrade high-risk audit tools (end-December SB). - Strengthen collection enforcement, align auctions with Code of Civil Procedure (end-December 2017 SB); amend VAT legislation to streamline administration and reduce fraud (end-March 2018 SB). - Restructuring of public claims: circulars to classify debtors by financial situation to design durable restructuring solutions including the new out-of-court framework. - Staffing: introduce modern grading and remuneration for revenue agency staff and subject staff to performance assessments (end-December 2017 SB). - Collectability note: collectability ratio for tax debts three years old or less about seven times higher than for older tax debts. - Public employment and wage bill: - Reforms to curb growth of temporary contracts; establish ceiling maintaining 2016 level on average during program (end-September SB). - Public financial management and arrears: - ESM disbursements of €3.5 billion for arrears clearance since June 2016; stock returned to mid-2015 level (around €7 billion). - Independent auditor contracted to assess arrears clearance actions (end-September 2017 SB); overhaul arrears-management system (end-June 2018 SB). - Centralize management of all central government entities’ accounts and other large accounts (about €10 billion) with integration expected by end-June 2018 (end-October 2017 SB decision). ### FINANCIAL SECTOR, NPLs, AND CAPITAL CONTROLS - NPLs and bank health: - NPL ratio 49 percent (end-March 2017); SSM projection: even with full reform, NPLs fall from 49 to 42 percent by end-2018. - Bank capital quality weak (over half deferred tax assets); tight liquidity, continued reliance on ELA, depositor confidence low, credit compressed for eight consecutive years. - Legislative and operational measures to address NPLs (prioritized actions): - Electronic auction system: legislation allows e-auctions; platform to be fully operational by end-July (SB); first auctions expected September. - Insolvency-administrator profession: conduct, supervision, sanctioning regime legislated; backlog of personal insolvency cases exceeds 200,000; test, train, register insolvency administrators (end-July SB). - New out-of-court NPL workout framework (OCW): revamped for flexible restructuring of private and public claims; fully operational end-July (SB). - Protection for bank and public officials engaged in debt restructuring legislated. - Streamline legal framework for NPL servicers; simplify licensing and supervision. - Strengthen secured-creditor position: current system guarantees secured creditors only 65 percent of collateral proceeds; plan to revise ranking for new secured credit (end-September SB). - Supervisory and operational recommendations: - SSM and BoG to perform updated asset-quality assessment and stress test well before program end; if capital needs identified, use ESM program bank buffer. - SSM to continuously review banks’ performance against NPL targets; first program review to assess supervisory strategy. - Capital controls normalization: - Program aims to remove exchange restrictions subject to Article VIII, section 2(a) as soon as possible while safeguarding stability. - Condition-based roadmap prior action published; roadmap stages (fund accessibility; free domestic capital movement; free capital movement abroad) with full liberalization intended by end-program. ### DEBT SUSTAINABILITY ANALYSIS (DSA) — GFN FRAMEWORK AND OUTCOMES - Framework: - DSA uses Gross Financing Needs (GFN) framework; analysis horizon to 2080. - Sustainability criterion: maintain GFN within 15-20 percent of GDP thresholds and ensure declining debt path. - Baseline DSA assumptions: - Primary balance projections: reach 1.7 and 2.2 percent this year and next; 3.5 percent of GDP in 2019-22 before falling to 1.5 percent thereafter. - Growth: close to 2 percent in medium term; long-term real growth some 1 percent; nominal growth 2.8 percent. - Bank recapitalization buffer: around €10 billion (5½ percent of 2016 GDP). - Privatization proceeds: staff projects some €2 billion between 2017 and 2030. - Market access assumed end-program at initial rate of 6 percent; rate evolution rule specified (falls/rises by four basis points per one percentage point change in debt-to-GDP). - Baseline projections and outcomes: - Debt projected to decline to 160 percent of GDP by 2022 and around 150 percent by 2030, but rises thereafter to around 195 percent by 2060. - GFN cross 15 percent-of-GDP threshold by 2028 and 20 percent by 2033; reach around 45 percent of GDP by 2060. - Eurogroup commitments assessed insufficient: - Commitments (extensions of maturities, ANFA/SMP restoration, abolish step-up margin, fixing interest on €71 billion at at most 1.9 percent) help but do not restore sustainability under staff baseline. - Staff sees need for additional measures: further extensions/deferrals and an automatic mechanism linking debt repayments to growth. - Selected numeric time-series excerpts (preserve exact figures shown): - Nominal gross public debt (percent of GDP): 2016: 178.8; 2017: 183.2; 2018: 176.5; 2019: 170.0; 2020: 163.9; 2021: 159.5; 2022: 155.9; 2030: 149.1. - Public gross financing needs (percent of GDP): 2016: 17.4; 2017: 21.0; 2018: 13.3; 2022: 10.7; 2028: 18.2; 2030: 16.7. - Effective interest rate (percent, selected): 2016: 1.2; 2017: 1.1; 2018: 1.1; 2022: 2.2; 2028: 2.9. ### FINANCING NEEDS, PROPOSED FUND SUPPORT, AND PROGRAM MODALITIES - Financing needs and sources (July 2017–August 2018) — IMF staff estimates (exact figures preserved): - Debt service needs 18.0 - Interest payments (cash) 6.8 - Amortization 11.3 - ECB 5.7 - IMF 1.8 - Non-official 3.7 - Internal financing sources 7.4 - Primary surplus 3.6 - Privatization 1.5 - ANFA 0.3 - Deposit financing 2.0 - Gap covered by official financing 10.6 - ESM envelope: €86 billion approved; €54 billion remains undisbursed as of July 7, 2017. - Proposed IMF support: - Stand-By Arrangement until August 31, 2018 (precautionary). - Proposed access: SDR 1.3 billion (55 percent of quota, €1.6 billion). - Effectiveness conditional on receipt of assurances on debt relief from European partners and on program remaining on track. - Schedule of proposed purchases under SBA (exact entries): - July 20, 2017: Purchases 267.2 Millions of SDRs; 11.0 Percent of quota; Millions of euros 329.6. - November 15, 2017: Purchases 267.2 Millions of SDRs; 11.0 Percent of quota; Millions of euros 329.6. - First Review (February 15, 2018): Purchases 267.2 Millions of SDRs; 11.0 Percent of quota; Millions of euros 329.6. - May 15, 2018: Purchases 267.2 Millions of SDRs; 11.0 Percent of quota; Millions of euros 329.6. - Second Review (August 15, 2018): Purchases 267.2 Millions of SDRs; 11.0 Percent of quota; Millions of euros 329.6. - Total: 1,336 Millions of SDRs; 55 Percent of quota; 1,648 Millions of euros. ### PROGRAM CONDITIONALITY, MONITORING, AND STRUCTURAL BENCHMARKS - Monitoring: semiannual reviews; quarterly and continuous performance criteria; structural benchmarks (SBs). - Performance criteria include: - Floor on modified general government primary cash balance (MGGPCB). - Floor on primary spending on goods and services (intermediate consumption floor to remain at 2016 level as share of GDP). - Ceiling on stock of domestic arrears. - Ceilings on stock of central government debt and on new guarantees. - Continuous ceiling on accumulation of new external debt payment arrears. - Indicative target: ceiling on state budget primary expenditure. - Key structural benchmarks and deadlines (selected): - End-July 2017: electronic auction platform fully operational; OCW framework operational; complete qualification and registration of insolvency administrators. - End-September 2017: address backlog of cases with extended statute of limitations; adopt legislation to set ceilings on temporary contracts; complete independent auditor assessment of accounts payable and arrears clearance program. - End-December 2017: finalize electronic records of half of insured persons; adopt Code of Public Revenue Collection aligned with CCP; align property assessment values with market prices. - End-March 2018: codify and simplify VAT legislation and address VAT fraud. - End-June 2018: integrate remaining general government accounts into TSA; overhaul arrears-management system; implement modernized family, disability, and housing benefits (budget neutral). ### CAPACITY TO REPAY, SAFEGUARDS, AND PROGRAM RISKS - Capacity to repay: - Total debt service during program ~10 percent of GDP, of which around 1 percent of GDP due to the Fund. - Limited IMF access mitigates repayment risks; total credit outstanding would decline from 6.8 percent of GDP at end-2017 to 6.1 percent at end-2018 even with full disbursements. - Safeguards: - Updated BoG safeguards assessment to be completed by first review (previous assessment August 2012). - MoU between Ministry of Finance and BoG to be updated by end-June, 2017. - Program risks (high and interrelated): - Policy implementation risks: timing of pension and income tax reforms, opposition to autonomous revenue agency, opposition to e-auctions and enforcement, vested interest pressures. - Political and legal risks: potential Court of Auditors or Council of State rulings; legal challenges to reforms. - Consequences if risks materialize: delays in reviews, loss of confidence, slower recovery, delayed capital control removal, compromised debt sustainability, need for continued official financing. - Risk mitigation: - Frontloaded conditionality with legislated prior actions. - Emphasis on follow-up implementation via prior actions and SBs. - Technical assistance support. - Low IMF access and linking effectiveness to debt-relief assurances mitigate repayment risks. ### STAFF APPRAISAL — KEY CONCLUSIONS AND RECOMMENDATIONS - Four broad policy challenges: - Public finances: unsustainable, unfair, growth-unfriendly; pension spending unaffordably high. - Financial sector: very high bank NPLs and private-sector debt; weak enforcement and payment culture. - Structural constraints: closed professions and pervasive regulations restricting investment and competitiveness. - Public debt: still unsustainable despite large debt relief already received. - Staff recommendations: - Support rebalancing toward growth-friendly policies, further reduce the generous income tax credit, and align pensions with 2016 benefit formula. - Consider setting primary surplus target at 1.5 percent of GDP to facilitate public sector modernization, social protection targeting, public investment, and tax reductions to spur participation and investment. - Undertake an Asset Quality Review (AQR) and stress test before end of ESM program; use ESM bank buffer if capital needs identified. - Preserve 2011 labor market reforms and prioritize opening product and service markets rather than reversing labor reforms. - Ensure independence and high quality of official statistics; protect gains from Hellenic Statistical Authority. ### BOX SUMMARIES (SELECTED) - Box 1 — Key reforms implemented under ESM-supported program (through May 2017): - Fiscal package expected to deliver savings of 3¾ percent of GDP by 2018 (VAT 0.9 percent; income tax 1 percent; pension 1.5 percent). - Autonomous revenue agency legislation; new means-tested GMI to about 480,000 beneficiaries. - End-2015 AQR and recapitalization private €8.3 billion and public € 5.4 billion, systemic banks reached 17 percent CET1. - Three privatization deals brought in €1.5 billion. - Box 2 — Staff’s fiscal assumptions vs authorities: - Staff projections more conservative; differences cumulate to close to 4 percent of GDP by 2021 (before post-program measures). - Under staff baseline, income tax and pension reforms need simultaneous implementation in 2019 to reach 3.5 percent primary surplus by 2019; growth package postponed until 2023. - Box 3 — Risks of reintroducing sectoral extensions of collective bargaining: - Reintroduction risks reversing competitiveness gains; sectoral extensions historically raised unit labor costs and reduced employment flexibility. - Empirical literature shows extensions can reduce employment and raise wage growth at bottom of distribution; Greece-specific evidence indicates ULC rose ~50 percent during 2000-10. - Policy implication: costs of reintroducing extensions outweigh redistributive benefits; staff preference to avoid reintroduction to preserve firm-level bargaining incentives. *Italic: IMF staff appraisal and program summary as presented in the source document.* ### REFERENCES _____________________________________________________________________________________ 67 ### cr17229 - REFERENCES _____________________________________________________________________________________ 67 ### CONTEXT AND RECENT DEVELOPMENTS - The Greek authorities requested a new precautionary Stand-By Arrangement from the IMF until August 31, 2018. - The extended arrangement was cancelled in January 2016 after being off track since late 2014 (with only 5 of 16 planned reviews completed). - Under the EFF-supported program: - Progress: fiscal policies helped bring the primary surplus roughly to balance; labor market reforms helped close Greece’s wage competitiveness gap with trading partners. - Shortfalls: other structural reforms aimed at liberalizing the economy lagged; several reforms were reversed in early 2015, and the program fell short of restoring growth, fiscal sustainability, and financial stability. - Key adverse outcomes since 2014: - Growth stagnant since 2014. - Public debt peaked at about 180 percent of GDP in 2016. - Banking sector crisis in 2015 led to capital controls that remained in place (as of the report). - ESM support: - Greece secured fresh official support from the ESM amounting to up to €86 billion in August 2015. - Authorities legislated a fiscal package (VAT, pension, income tax measures), set up an autonomous revenue agency, created a modern minimum income scheme, recapitalized large banks, and strengthened the insolvency framework and market for NPL sales and servicing. - To date, only two out of seven planned ESM reviews had been completed. - Fundamental challenges identified (per 2016 Article IV Consultation Staff Report): - Unsustainable fiscal policy mix: high tax rates on narrow bases; exemptions relieving more than half of wage earners from paying personal income tax; unsustainable compression of discretionary spending; unaffordable pension system with a deficit four times the euro area average. - Ineffective public sector institutions: tax collection rates dropped from over 70 percent in 2010 to around 46 percent by end-2016; tax and social security contribution debt about 65 percent of GDP at end-March 2017; government domestic arrears and unprocessed claims over €7 billion (4 percent of GDP) at end-April 2017. - Weak bank balance sheets: NPL ratio 49 percent at end-March 2017; low quality bank capital (over half comprised of deferred tax assets); tight liquidity requiring continued reliance on ELA; continued lack of depositor confidence and compression of credit for eight consecutive years. - Obstacles to growth: insufficient product market reform; price adjustment hampered within the currency union, placing burden on wages. - Recent macro developments: - GDP flat in the last three years prior to the report. - Poverty and inequality among the highest in the euro area. - A nascent recovery in 2016 sputtered late in the year due to public sector spending compression, weak export performance, and ESM review uncertainty. - Growth modestly resumed in Q1 2017 supported by resilient consumption and inventory buildup. - Labor market recovery gradual; share of long-term unemployed close to 60 percent of total. - Harmonized consumer prices stabilized in 2016; increased by 1.2 percent in May 2017. - Fiscal outturn: - Primary fiscal surplus reached 4.2 percent of GDP in the prior year, well above ESM target of 0.5 percent of GDP. - Structural measures (VAT and income tax rate increases) contributed an estimated 1½ percent of GDP to the surplus. - Other contributors: one-off revenues from SOE liquidations, stockpiling in anticipation of tax hikes, tax offsets related to arrears clearance with ESM funds, better-than-expected wage and profit outturns in 2015-16. - Overperformance likely temporary; outturns through May 2017 point to a decline in tax revenues despite legislated increases in top VAT rate and in excise and consumption taxes; other revenues declined due to lower EU investment-related transfers; pension spending fell due to measures that came into effect. ### PROGRAM STRATEGY - Program focus: - Restore macroeconomic stability in the medium run while protecting vulnerable groups. - Centered on fiscal reforms to improve the policy mix and facilitate a more growth-friendly and socially-inclusive budget. - Advance reforms to improve fiscal institutions, strengthen legal framework to deal with NPLs, liberalize product markets, and support continuation of key collective bargaining reforms. - Expected debt relief should bolster confidence, restore macro stability, and facilitate market access. - Program aims to create breathing space to mobilize broad political support for deeper long-term structural reforms. - Debt relief framework: - European member states pledged further flow relief—interest deferrals and extension of grace and maturity periods on select European loans—to achieve Gross Financing Needs (GFN) sustainability thresholds of 15 percent of GDP in the medium term and 20 percent in the long run. - Delivery of such relief is conditional on Greece’s successful completion of its adjustment program in mid-2018. - Staff believes more relief will be required to achieve these thresholds and additional time is needed to secure specific credible commitments under staff’s DSA assumptions. - Approval-in-principle: - Staff proposes IMF arrangement be approved in principle only, with effectiveness conditional on receipt of debt relief assurances from Greece’s European partners expected in coming months. - Approval-in-principle allows IMF support while facilitating continued ESM financing and avoids potentially disruptive arrears on external debt. - No specific deadline proposed for the approval-in-principle lapse to avoid market disruption risks; approval-in-principle would expire at the expected end of the arrangement on August 31, 2018. - Staff will actively monitor program implementation; if significant problems arise prior to receipt of debt relief assurances, the basis for approval-in-principle would no longer apply and a Board discussion would be required. ### MACROECONOMIC FRAMEWORK - Short- and medium-term projections: - Growth expected to reach 2.1 percent in 2017 and 2.6 percent in 2018, supported by resilient private consumption and rebound of investment supported by EU funds and firms’ internal cash flow. - Approval in principle of the IMF-supported program, completion of the second ESM review, prospect of debt relief, full and timely implementation expected to support confidence, restore market access, and remove capital controls before end of program. - In the medium run, growth projected to slow as output gap closes and drag from additional fiscal consolidation entering in 2019-20 offsets EU-funded investment. - Unemployment expected to remain in the double digits. - Long-run outlook: - Growth expected to stabilize at around 1 percent in the long run. - Rapid aging projected to lower Greece’s working-age population by about 30 percent during 2020-2060, weighing on long-run growth. - Capital accumulation and EU funds will boost growth temporarily but impact will fade as economy converges to new long-run capital ratio. - Historical labor productivity growth 0.4 percent combined with expected growth in number of workers -0.9 percent would imply long-term annual growth of -0.5 percent. - To reach 1 percent long-run growth, staff assumes: increase in labor force participation to well above current euro-area levels, sustained employment gains, and increase in TFP growth to a rate more than triple its historical average. - These assumptions rest on ambitious structural reform impacts given Greece’s weak reform track record (Annex II provides further details). - Inflation and labor market: - Inflation expected to remain subdued and below the ECB’s target for the euro area. - Gradual increase in inflation in the medium run; long-run inflation projected to stabilize at about 1.7 percent. - Persistence of high unemployment expected; unemployment gradually declines but remains in double digits until 2040. - Key downside risks: - Program implementation problems could result in suspension of debt relief with adverse effects on confidence, growth, debt sustainability, liquidity, and perceptions of Grexit risk. - Even with full implementation, risks include: more-adverse-than-expected impact of high primary surpluses on growth; lower-than-expected output gap; smaller gains from fiscal and structural reforms; protracted efforts to stabilize the banking sector and remove capital controls; weaker-than-expected European recovery affecting exports and growth. - Upside possibility: authorities could temporarily exceed short-run fiscal targets through one-off measures or spending compression. - Key economic indicator table (selected entries from Greece: Key Economic Indicators): - Real GDP: 2016: 0.0; 2017: 2.1; 2018: 2.6; 2019: 1.9; 2020: 1.9; 2021: 1.8 - Private Consumption: 2016: 1.4; 2017: 1.4; 2018: 1.4; 2019: 0.5; 2020: 0.8; 2021: 1.0 - Gross Fixed Capital Formation: 2016: 0.1; 2017: 6.6; 2018: 10.3; 2019: 11.5; 2020: 9.9; 2021: 7.5 - Exports: 2016: -2.0; 2017: 3.3; 2018: 4.0; 2019: 4.0; 2020: 3.9; 2021: 3.5 - Unemployment Rate (percent): 2016: 23.6; 2017: 22.3; 2018: 20.7; 2019: 19.5; 2020: 18.4; 2021: 17.8 - HICP (period average): 2016: 0.0; 2017: 1.2; 2018: 1.3; 2019: 1.4; 2020: 1.6; 2021: 1.7 ### POLICY DISCUSSIONS A. Fiscal Policy - Program intends to: - Focus on fiscal reforms to improve policy mix and enable a more growth-friendly, socially-inclusive budget. - Improve fiscal institutions and tax administration to increase collection rates and reduce tax and social security contribution debt. - Rely on structural measures (e.g., VAT and income tax rate increases) while recognizing the substantial role of one-off factors in recent fiscal overperformance and the risk that such overperformance is not sustained. *Source: cr17229 - REFERENCES _____________________________________________________________________________________ 67 (PDF).* ### 13. Fiscal policy will focus on rebalancing the public finances toward more growth-friendly ### 13. Fiscal policy will focus on rebalancing the public finances toward more growth-friendly policies in the long run ### Short-term fiscal stance and program targets - Primary surplus target for this year: 1.8 percent of GDP. - Primary surplus target for next year: 2.2 percent of GDP. - Authorities expect the 2018 surplus to reach the ESM program target of 3.5 percent of GDP based on more optimistic tax-revenue and pension-spending assumptions. - European partners agreed that if Greece fully satisfies Fund arrangement commitments and achieves Fund fiscal targets but not ESM program targets, access to ESM disbursements would continue and ESM targets would be reviewed. - Program includes a floor on discretionary intermediate consumption spending to ensure it does not fall below last year’s level as a share of GDP. ### Medium-term rebalancing and legislated measures - MTFS and additional legislated reforms are designed to phase in once the output gap narrows to minimize impact on the recovery. - Agreed target for 2019–22: 3.5 percent of GDP primary surplus (included in the legislated MTFS). - Reform orientation: rebalancing toward more growth-friendly and equitable policies with increased spending on public investment and social protection, and lower tax rates, while allowing for a steady reduction in debt. ### Pension reform (legislated / prior actions) - Average pensions are expected to fall by 12 percent. - There is an 18 percent cap on the decline in any individual pension. - Pensions will be frozen until 2022. - Reform expected to reduce the system’s deficit by 1 percent of GDP in 2019-22. - Net savings from pension reform by component (Percent of GDP): Recalibration of main pensions 0.9 / 0.8 / 0.8 / 0.7 (2019–2022); Recalibration of supplementary pensions 0.1 / 0.1 / 0.1 / 0.1; Freeze of pension indexation 0.1 / 0.1 / 0.2 / 0.2; Total 1.0 / 1.0 / 1.0 / 1.0 (2019–2022). - Authorities provided a distributional study and a legal opinion supporting the reform in light of reversals of previous pension reforms and recent non-binding negative legal opinions. ### Personal income tax reform - Will broaden the tax base by reducing the personal income tax credit by €650. - Implies reduction of the tax-free income threshold from more than 60 percent of the average worker’s compensation to 40 percent. - Lowers the share of wage and pension earners who are exempt from taxation from 55 to 35 percent. - Expected yield: 1 percent of GDP. - Legislated to take effect in 2020; implementation can be advanced to 2019 if necessary to reach the 3.5 percent primary surplus target in 2019. IMF staff expects full implementation in 2019. ### Growth-enhancing and social-welfare reforms (timing and composition) - Staff baseline: these reforms will come into effect at the earliest in 2023, but authorities expect to implement them as soon as 2019. - Revenue-side measures (up to 1 percent of GDP): reductions in the income tax rate, the solidarity surcharge, and the CIT rate; a modest reduction in property taxes was added by the authorities. - Spending-side measures (up to 1 percent of GDP): targeted social programs, active labor market policies, and public investment. ### Long-run outlook and staff view - Staff expects the primary balance to stabilize at 1½ percent of GDP in the long run. - Greece’s European partners project a more ambitious long-run surplus; differences remain to be resolved in ongoing debt discussions. - Cross-country experience suggests prolonged periods of high primary surpluses are rare and dependent on tailwinds from strong initial growth and low unemployment. ### Fiscal structural reforms and public administration - Program supports improvements in the autonomous revenue agency, tighter public-employment rules, improved public financial management, and better protection of vulnerable groups. - Technical assistance will reinforce reform implementation. Key measures for the revenue agency and tax debt: - Prioritizing audit cases: focus on relatively new cases with higher prospects for collection; authorities committed to streamline and prioritize cases for which the statute of limitations has been extended (end-September structural benchmark) and to upgrade high-risk audit identification tools (end-December structural benchmark). - Strengthening collection enforcement: improve screening of prosecutor-initiated tax audit cases; align auctions of immovable property with the Code of Civil Procedure (end-December 2017 SB); amend VAT legislation to streamline administration, close loopholes, and reduce opportunities for fraud (end-March 2018 SB). - Supporting restructuring of public claims: circulars describe methodology to classify tax debtors based on financial situation to design durable debt-restructuring solutions including the new out-of-court framework. - Staffing: introduce a modern grading and remuneration system for the revenue agency and subject staff to performance assessments (end-December 2017 SB). - Collectability note: the collectability ratio for tax debts three years older or less is about seven times higher than for older tax debts. Public employment and wage bill management: - Reforms to curb growth of temporary contracts and legislate a transparent and competitive process for temporary contracts. - Establish a ceiling to maintain their number at the 2016 level on average during the program (end-September structural benchmark). Public financial management and arrears - ESM disbursements of €3.5 billion for arrears clearance since June 2016; stock of government arrears and unprocessed claims has returned to mid-2015 level (around €7 billion). - Authorities will contract an independent auditor to assess arrears clearance actions to date (end-September 2017 SB) and overhaul the arrears-management system (end-June 2018 SB). - Authorities plan to reduce the stock of arrears at least by the amount of ESM disbursements earmarked for this purpose. - Cash management: plan to centralize management of all central government entities’ accounts and other large accounts (about €10 billion in general government resources) with integration expected by end-June 2018 (end-October 2017 SB for centralization decision). Welfare, pensions, and property tax reforms - Welfare reform: new guaranteed minimum-income (GMI) scheme rolled out to improve targeting; plan to revamp housing, family, and disability benefits by streamlining programs and reallocating resources toward fewer, better-targeted programs (end-June 2018 SB). These redesigned programs will be further bolstered in 2023 as part of the growth-enhancing package. - Pension administration: prior actions completed to operationalize a single pension register, merge management into a single pension fund, align the contribution base for the self-employed; further efforts to finalize recalibration of pensions in line with the new benefit formula (end-December 2017 SB) and clear unprocessed pension claims (¾ percent of GDP) by 2018. - Property taxation: property assessment values to be aligned with market prices (end-December 2017 SB); fiscal neutrality to be ensured by broadening the tax base and/or adjusting tax rates. ### Financial sector policies and NPLs - Greece has the highest NPL ratio in the euro area; public-sector indebtedness has migrated to private-sector balance sheets. - SSM projection: even with full reform implementation NPLs would fall from 49 to 42 percent of total loans by end-2018. - Authorities’ financial strategy aims to create conditions for banks to reduce NPLs gradually by strengthening the legal framework (LOI ¶4), but this strategy assumes banks will grow out of their NPL problems and is subject to considerable risk. *Source: IMF staff report excerpt titled “Fiscal policy will focus on rebalancing the public finances toward more growth-friendly policies in the long run.”* ### 25. Strengthening the debt-restructuring legal framework is a key element of the financial ### 25. Strengthening the debt-restructuring legal framework is a key element of the financial sector strategy ### Legislative and operational measures to strengthen debt restructuring and enforcement - Prioritized prior actions to legislate and implement: - A new electronic auction system: - New legislation allows for and regulates e-auctions without need for physical presence of notaries. - An electronic auctioning platform has been developed, to be fully operational by end-July (SB). - First auctions expected to start in September. - The insolvency-administrator profession: - Conduct, supervision and sanctioning regime for insolvency administrators has been legislated. - The backlog of personal insolvency cases exceeds 200,000. - Authorities plan to test, train and register insolvency administrators (end-July SB). - A new out-of-court NPL workout framework (OCW): - OCW revamped to support flexible restructuring solutions of both private and public claims. - Framework allows for debt write-downs to preserve viability, where possible. - New system expected to become fully operational at end-July (SB). - Protection of bank and public sector officials engaged in debt restructuring: - Legislated principles that representatives of banks or public creditors must follow when engaged in debt-restructuring and related activities; these serve as legal protection for those involved. - Streamlining the legal framework for NPL servicers: - Regulatory and supervisory requirements for loan servicers aligned with the complexity and risk of their business to reduce barriers to entry while maintaining protection of distressed borrowers. - Strengthening secured-creditor position: - Despite recent reforms, current system guarantees secured creditors only 65 percent of the proceeds of the collateral. - This 65 percent rule is noted as unique in Europe and likely hinders credit provision. - Authorities plan to revise the ranking of claims to afford a higher level of protection to new secured credit in line with best practices (end-September SB). ### Insolvency, NPLs, and supervisory measures - Legal tools alone may be insufficient; supervisory incentives are essential to address NPLs. - Key supervisory actions recommended: - SSM, in collaboration with BoG, to perform an updated asset-quality assessment and stress test of Greek banks well before the end of the program. - If capital needs are identified, the bank buffer in the ESM program should be utilized to ensure stabilization of the banking system by end-program. - SSM to continuously review banks’ performance against their NPL targets, including through on-site inspections, identify deficiencies in NPL reduction strategies, and demand remedial action if needed (could include write-downs and disposals). - An assessment of the supervisory strategy to deal with NPLs and ensure banking-system soundness will be the focus of the first review of the program. - Prior actions by BoG: - Smaller (non-systemic) banks will cover their Pillar II capital shortfalls identified under an adverse scenario in the 2015 Comprehensive Assessment. - BoG will complete remedial actions to ensure shortfalls at two cooperative banks are addressed (end-September SB). ### Normalization of payment conditions and capital controls - Program aims to remove exchange restrictions subject to Article VIII, section 2(a) as soon as possible while safeguarding financial stability. - Restrictions (including on cash withdrawals and cross-border transfers) remain in place and: - Limit access to finance. - Increase costs for domestic and cross-border transactions. - Undermine confidence. - Authorities published (as a prior action) a condition-based roadmap for gradual relaxation, linked to banking-sector normalization, economic conditions and program implementation. - Roadmap stages include: - Stage 1: Increasing fund accessibility (e.g., free opening of new bank accounts; increasing limit on cash withdrawal; free withdrawals of funds transferred from abroad). - Stage 2: Free domestic capital movement (e.g., free cash withdrawals of deposits; further increasing limit on outbound transfers). - Stage 3: Free capital movement abroad (free transfer of funds abroad). - Full liberalization of restrictions is intended to be achieved by end-program, with steps taken based on continuous monitoring of economic developments, depositor confidence, and banks’ liquidity situation. ### Growth-enhancing structural reforms - Program focuses on incremental liberalization of product markets and preservation of labor market reforms during the program period. - Labor market: - Authorities legislated the preservation of the 2011 collective bargaining reforms until the end of the program (prior action). - Risk noted that these reforms will be effectively unwound immediately after the program, which would limit firm-level wage flexibility and damage competitiveness. - Other labor-market prior actions: replacement of approval process for collective dismissals with simplified procedure without ex ante approvals (prior action); commitment to legislate increase in quorum requirement for voting on a strike (end-September SB). - Product and service market reforms (prior actions and commitments): - Competition: - Legislated overdue actions on Sunday trade and over-the-counter trade of pharmaceuticals, building on OECD recommendations. - Sunday-trade reform falls short of full liberalization recommended by OECD. - Authorities committed to implement remaining actions in OECD Toolkit III as an end-September SB. - Closed professions: - Committed to submit legislation to remove restrictions on the engineering profession (e.g., geographical restrictions, reserved activities). - Plan to complete these actions and liberalize other professions by end-December (SB). - Investment licensing: - Replaced investment licensing in select sectors with pilot notification system requiring information on existing certifications and payment of fees. - Expected to complete investment licensing reform by end-program (end-June 2018 SB). - Note: Deeper and broader reforms (closed professions, energy, judicial reform, broader privatizations) remain necessary to lift long-term growth potential but have limited support. ### Debt sustainability assessment and need for further relief - Staff DSA based on a GFN framework projects: - Debt projected to reach around 150 percent of GDP by 2030 under staff’s baseline scenario. - GFN projected to reach around 17 percent of GDP by 2030 under staff’s baseline scenario. - Debt and GFN become explosive thereafter. - Even with European partners’ committed measures (extensions of weighted-average maturity and interest deferrals on EFSF loans by up to 15 years; restoration of ANFA/SMP transfers; abolishment of step-up margin on select EFSF loans; fixing the interest rate on European loans at market rates with €71 billion assumed fixed at rates of at most 1.9 percent), staff assesses debt remains unsustainable. - European partners have committed relief upon program completion to maintain GFN below 15 and 20 percent over the medium and long run. - Additional measures that could be required: - Further extensions of grace, maturity, and interest deferrals on European loans. - An automatic mechanism linking debt repayments to growth to adjust relief if outcomes are better or worse than the realistic baseline. ### Financing needs, proposed Fund support, and program modalities - Financing and buffers: - Financing needs to cover debt servicing during the program period estimated at €11 billion (after use of internal resources). - ESM envelope: €86 billion approved; €54 billion remains undisbursed as of July 7, 2017. - Consideration could be given to clearing arrears and building deposit buffers using official funds. - Use of additional internal funds and potential access to the ECB’s PSPP could reduce official financing needs. - Proposed IMF support: - Greek authorities requested a Stand-By Arrangement until August 31, 2018, intended to be precautionary. - Staff proposes access to Fund resources in an amount equivalent to SDR 1.3 billion (55 percent of quota, €1.6 billion). - Proposed amount considered adequate to address potential short-term balance of payments needs from adverse shocks. - Staff proposes making the effectiveness of the arrangement conditional on receipt of assurances on debt relief from Greece’s European partners to restore debt sustainability, as well as on program remaining on track. - Once assurances obtained, a separate Executive Board decision will be required for the arrangement to become effective. - State financing needs and sources (July 2017–August 2018) — IMF staff estimates (exact figures preserved): - Debt service needs 18.0 - Interest payments (cash) 6.8 - Amortization 11.3 - ECB 5.7 - IMF 1.8 - Non-official 3.7 - Internal financing sources 7.4 - Primary surplus 3.6 - Privatization 1.5 - ANFA 0.3 - Deposit financing 2.0 - Gap covered by official financing 10.6 - Program monitoring and modalities: - Program monitoring guided by semiannual reviews, quarterly and continuous performance criteria, and structural benchmarks (SBs). - First and second reviews under the Stand-By Arrangement proposed to take place on or after February 15, 2018 and August 15, 2018. - Fund disbursements to remain quarterly to align with quarterly ESM program reviews; Fund staff will join quarterly ESM reviews. - Performance criteria include: - A floor on the modified general government primary cash balance. - A floor on primary spending on goods and services. - A ceiling on the stock of domestic arrears. - Ceilings on the stock of central government debt and on new guarantees granted by the general government. - A continuous ceiling on the accumulation of new external debt payment arrears by the general government. - An indicative target: a ceiling on state budget primary expenditure. - Structural benchmarks focus on fiscal sustainability, financial stability and competitiveness. *Source: International Monetary Fund (excerpt).* ### 37. Under the baseline, the authorities have adequate capacity to repay the Fund. During ### Under the baseline, the authorities have adequate capacity to repay the Fund. ### Capacity to repay and access - During the proposed program period, total debt service amounts to some 10 percent of GDP, of which around 1 percent of GDP is due to the Fund. - Limited access mitigates repayment risks by ensuring total credit outstanding would decline from 6.8 percent of GDP at end-2017 to 6.1 percent at end-2018, even with full and timely disbursements. - The authorities intend to treat the arrangement as precautionary. If an actual balance of payment need were to emerge, Fund resources would be deposited in the government’s account at the BoG. ### Safeguards and institutional requirements - An updated safeguards assessment of the BoG should be completed by the first review under the arrangement (previous assessment finalized in August 2012 found a relatively strong safeguards framework). - The existing Memorandum of Understanding between the Ministry of Finance and the BoG defining roles and responsibilities for servicing outstanding IMF resources will be updated by end-June, 2017. - The BoG has implemented prior safeguards recommendations, including strengthening its internal audit department. ### Program risks (high and interrelated) - Policy implementation risks: - Pension and income tax reforms become effective only after the end of the program and during a year when parliamentary elections are expected, making implementation subject to high risks. - Opposition to the autonomous revenue agency could jeopardize implementation. - Opposition to e-auctions and other debt enforcement actions could stop reform momentum; absence of a credible strategy to address NPLs in a timely manner would harm confidence, system viability, and the pace of capital control relaxation. - Continued pressures from vested interests could further weaken and delay other structural reforms. - Political and legal risks: - Weak implementation capacity and lingering political uncertainty exacerbate implementation risks. - Significant potential for legal challenges (e.g., Court of Auditors ruling against the new pension reform, cases lodged against the 2016 pension reform, Council of State rulings related to public sector wage cuts and temporary contracts, previous constitutional challenges against reforms of Sunday trade). - Consequences if risks materialize: - Delays in program reviews could lead to loss of confidence, slower recovery, delayed removal of capital controls, and delayed delivery of expected debt relief. - Debt sustainability would be compromised; Greece might need continued official financing. ### Risk mitigation measures - Program conditionality is frontloaded, with key reforms legislated upfront. - Increased emphasis on follow-up implementation via prior actions and structural conditionality. - Key reforms supported by technical assistance from the Fund and other institutions. - Authorities provided legal opinions supporting new reforms and assurances to implement equivalent reforms if current ones are found unconstitutional. - Financial system risks mitigated by substantial capital buffers allocated under the ESM-supported program; timely supervisory action is required to utilize these before the ESM program expires. - Low proposed IMF access and linking arrangement effectiveness to sufficient assurances on debt relief mitigate repayment capacity risks. ### Staff appraisal — key economic challenges - Four broad policy challenges: - Public finances: unsustainable, unfair, growth-unfriendly; reliant on high tax rates applied to narrow bases and on unsustainable compression of discretionary spending; pension spending remains un-affordably high. - Financial sector: bank NPLs and private sector debt (including to the state) remain very high, reflecting weak payment culture and inability to enforce collections. - Structural constraints: closed professions and pervasive regulations restrict investment, growth, and competitiveness. - Public debt: still unsustainable despite large debt relief already received. - Time horizon: Fully addressing these challenges will be crucial but will likely require significant time. ### Fiscal policy evaluation and recommendations - Staff welcomes rebalancing toward more growth-friendly policies, including additional fiscal reforms to lower the generous income tax credit and further reduce pensions in line with the 2016 benefit formula. - Reforms can help sustain an ambitious primary surplus of 3.5 percent of GDP over a limited period. - Recommendation: As soon as possible, Greece’s primary surplus target should be set at a more sustainable level of 1.5 percent of GDP to facilitate modernization of the public sector, better targeting social assistance, stimulate public investment, and encourage labor force participation and investment through lower tax rates. - Strengthen fiscal institutions and protect vulnerable groups: - Support the new revenue agency with adequate tools and autonomy to fight tax evasion. - Redouble efforts to reduce the existing stock of arrears and improve public financial management. - Urgently tighten rules for temporary contracts given the surge in temporary contracts undermining prior workforce downsizing. ### Financial sector: progress and concerns - Progress: out-of-court debt-workout framework and electronic auction system should, when fully functional, help reduce NPLs. - Concern: current strategy relies on optimistic assumption that banks can gradually “grow-out” of NPLs, which could constrain credit to new dynamic enterprises and hamper growth and capital control relaxation. - Recommendation: Supervisory authorities should undertake an Asset Quality Review (AQR) and stress test before the end of the ESM program to ensure rehabilitation resources are available and used timely. - The first review of the program will focus on assessment of the financial sector strategy and plans. ### Structural reforms and labor market - Need to open closed professions, modernize regulatory regimes, and liberalize pervasive constraints to improve investment climate. - Past programs largely failed in this respect; reform shortfalls are a major reason for disappointing supply response and weak export performance. - Labor market reforms in 2011 improved wage flexibility, but inadequate product/service market reforms prevented commensurate price reductions and caused excessive real wage cuts. - Staff advises against reversing labor market reforms; instead, focus on opening and liberalizing product and service markets. ### Statistics and credibility - Ensuring independence and high quality of official statistics is key to program credibility. - Significant progress since establishment of the independent Hellenic Statistical Authority in 2010, with IMF, Eurostat, and member-state technical assistance. - Authorities should protect gains, guarantee professional independence, address remaining reporting shortcomings, and respect the “Commitment on Confidence in Statistics” endorsed in 2012. ### Debt sustainability and need for further relief - Even with full implementation, Greece cannot restore debt sustainability alone and needs significant further debt relief from European partners. - Assumptions that Greece can repay debt by maintaining unprecedentedly high primary surpluses indefinitely, or by growing out of the problem, are not credible. - A debt strategy anchored in more realistic assumptions needs discussion and agreement. - Staff expects additional assurances on strategy and relief needed to restore debt sustainability from European partners in the coming months. ### Conclusion and recommendation - Staff believes the authorities’ program addresses key problems necessary for Greece to prosper in the euro area: pension, tax, and other fiscal structural reforms are critical for public sector support of modernization. - Broader reforms to open and liberalize the economy are not progressing fast enough. - The program should provide macroeconomic stability and breathing space to garner political support for reforms, contingent on sufficient assurances on debt relief. - Staff supports authorities’ request for a precautionary Stand-By Arrangement, to be approved in principle and to become effective once sufficient assurances on debt relief to restore debt sustainability have been received. ### Box 1 — Key reforms implemented under the ESM-Supported Program (through May 2017) - Fiscal policies: - Fiscal package expected to deliver savings of 3¾ percent of GDP by 2018, supported by three key reforms. - VAT reform (yield of 0.9 percent of GDP) streamlined rates and sought to broaden the base under the statutory rate (currently 24 percent). - Income tax reform (yield of 1 percent of GDP) increased and harmonized rates for wage, business, and farming income. - Pension reform (yield of 1.5 percent of GDP) reduced early retirement options, eliminated the solidarity grant EKAS and non-contributory pension minima, introduced a uniform pension benefit formula for new retirees, rationalized supplementary pensions above a minimum, and started unification of social security contributions. - Fiscal structural reforms: - Legislation to establish an autonomous revenue agency insulated from political interference with modern practices. - New social welfare program providing a means-tested guaranteed minimum income (GMI) equivalent to 50 percent of the poverty threshold to about 480,000 beneficiaries. - Financial sector: - End-2015 AQR followed by recapitalization with private (€8.3 billion) and public (€ 5.4 billion) support, allowing systemic banks to reach 17 percent CET1. - Revamped Code of Civil Procedure for better enforcement and new auctioning rules; insolvency reforms; first legal framework to allow sale and servicing of NPLs in Greece. - Structural reforms: - Implemented recommendations of three OECD Competition Assessments (Toolkits I, II, and part of III), except for liberalization of Sunday trade, over-the-counter trade of pharmaceuticals, and a number of sectors under Toolkit III. - Three privatization deals finalized (concessions for 14 regional airports, concession of the Port of Piraeus, and sale of the railway company Trainose), bringing in €1.5 billion in revenues. ### Box 2 — Staff’s fiscal assumptions and comparison with the authorities’ projections - Staff’s projections are more conservative than the authorities; differences cumulate to close to 4 percent of GDP by 2021 (before post-program measures). - Drivers of the difference: - Tax revenue projections: about one third of the difference. - Spending projections (mainly pensions): about one third of the difference. - Growth assumptions and expiration of current legislation: the rest. - Under staff’s baseline scenario: - Income tax and pension reforms would need to be implemented simultaneously in 2019 merely to achieve the surplus target of 3.5 percent of GDP by that year. - Growth-enhancing package would need to be postponed until 2023, when the surplus target is reduced to 1.5 percent of GDP. - Staff assumptions and rationale: - Assumes unitary elasticity of PIT revenues to GDP growth. - Pensions assumptions based on UN population aging projections: growth rate of population over age 60 at 1.1 percent per year and a death rate among those aged above 60 of around 3 percent during 2016-2020. - Assumes 92 percent of an existing backlog of 120,000 unprocessed pension claims as of end-2016 will be cleared by 2021, implying the number of pensions, net of clearance, will increase at around 1 percent per year. - Staff does not assume expiring legislation (attrition rule, ceilings on healthcare expenditure) will continue to hold post-expiration; spending anchored using cross-country empirical evidence and historical/peer patterns. - Staff difference with authorities, percent of staff GDP (Before Post-Program Measures), selected entries: - Total Primary Revenue: 2018 -0.8; 2019 -1.0; 2020 -1.2; 2021 -1.7 - Indirect taxes: 2018 -0.1; 2019 -0.1; 2020 -0.1; 2021 -0.2 - Direct taxes: 2018 -0.5; 2019 -0.7; 2020 -0.9; 2021 -1.2 - Social contributions: 2018 0.0; 2019 0.0; 2020 -0.1; 2021 -0.1 - Other revenue: 2018 -0.2; 2019 -0.2; 2020 -0.2; 2021 -0.3 - Total Primary Expenditure: 2018 0.5; 2019 1.4; 2020 1.7; 2021 2.1 - Social benefits: 2018 0.3; 2019 0.9; 2020 1.2; 2021 1.4 - Compensation of employees: 2018 0.0; 2019 0.1; 2020 0.2; 2021 0.3 - Intermediate consumption: 2018 0.1; 2019 0.2; 2020 0.1; 2021 0.2 - Other expenditure: 2018 0.1; 2019 0.1; 2020 0.2; 2021 0.3 - Primary Balance (before measures): 2018 -1.3; 2019 -2.4; 2020 -3.0; 2021 -3.8 - Including Post-Program Measures (net impacts, percent of staff GDP): - Income Tax Reform: 2018 0.0; 2019 1.0; 2020 0.1; 2021 0.1 - Pension Reform (gross savings): 2018 0.0; 2019 -0.1; 2020 -0.1; 2021 -0.1 - Agreed Expansionary Measures: 2018 0.0; 2019 1.0; 2020 1.9; 2021 1.9 - Additional Expansionary Measures: 2018 0.0; 2019 0.3; 2020 0.7; 2021 1.7 - Netting of measures, macro impact: 2018 0.0; 2019 -0.4; 2020 -0.3; 2021 -0.3 - Primary Balance (including measures): 2018 -1.3; 2019 -0.5; 2020 -0.6; 2021 -0.6 _Italic: IMF staff appraisal and program summary as presented in the source document._ ### Box 3. Risks Related to the Reintroduction of Sectoral Extensions of Collective Bargaining ### Box 3. Risks Related to the Reintroduction of Sectoral Extensions of Collective Bargaining ### Background and policy change - The system prevalent before 2011 based on sectoral extensions of collective bargaining led to a large increase in unit labor costs and precluded a rapid adjustment of the labor market despite sharply rising unemployment. - The 2011 reforms suspended sectoral extensions among others. - A reversal of these reforms, which has recently been legislated to take effect at end-program, risks undermining Greece’s gain in competitiveness, potentially hindering the recovery, the needed firm restructuring, and the declining trend in unemployment. ### Mechanisms and general effects of sectoral extensions - Sectoral extensions allow a subgroup of employers and employees to set a floor on wages for the entire sector or occupation. - Extensions tend to reduce wage inequality, but at the cost of lower employment, reduced competition, and amplification of rigidities in downturns. - Extensions can create distortions in wage formation at the firm level and make wage and working conditions less responsive to economic shocks, forcing the adjustment to rely largely on labor shedding. - Extensions work best where there are strong social contracts and tri-partite bargaining (employers, unions, and government all internalizing costs); absent such conditions, extensions generate distortions. ### Empirical findings from the literature (selected) - Hijzen and Martins (2016): Extensions led to higher wage growth concentrated at the bottom of the distribution (5-10 percentile), but also led to a decline in employment by 5 percent or more during the 2010-11 crisis in Portugal. - Martins (2014): Following an extension, formal employment declined by about 2 percent in Portugal, with lower hiring playing a larger role than layoffs; the impact was larger in small firms, with employment declining about 2½ percent. - Magruder (2012): Exploiting the geographical nature of extensions in South Africa, extensions decrease employment in a given industry by 8-13 percent. - Moll (1996): The largest and most productive firms that participate in collective bargaining can reduce competition in the economy through administrative extensions applied to less productive firms. - Haucaup et al. (2001): Extensions can be used by incumbents to deter firm entrance by raising expected labor cost. - Guimaraes et al. (2015): Wage increases resulting from extensions are associated with a higher probability of firm failure. - Diez Catalan and Villanueva (2014): In Spain, the extension of sectoral agreements in 2009-10 can explain a third of the increase in the probability of becoming unemployed for less skilled workers. - Murtin et al. (2014): In a sample of 15 OECD countries, the tax elasticity of the unemployment rate is augmented by extensions. ### Greece-specific evidence and risks - In Greece, the system prevailing before 2011 based on sectoral extensions of collective bargaining exacerbated economic imbalances. - Unit labor costs (wages relative to productivity) increased by around 50 percent during 2000-10. - An attempt to allow firms to derogate from sectoral agreements in 2010 through opt out clauses also failed to produce results. - It was only after the 2011 reforms that suspended extensions and favorability (along with other elements) that ULCs and unemployment started to decline. - Reintroducing sectoral extensions risks reversing these gains in competitiveness and could hinder recovery, firm restructuring, and the declining trend in unemployment. *Source: IMF staff analysis in Box 3, "Risks Related to the Reintroduction of Sectoral Extensions of Collective Bargaining" from cr17229* ### Box 3. Risks Related to the Reintroduction of Sectoral Extensions of Collective Bargaining ### Box 3. Risks Related to the Reintroduction of Sectoral Extensions of Collective Bargaining ### Assessment of the underlying problem - Wages relative to productivity have declined back to pre-crisis levels, which "does not suggest that wages have over-adjusted." - Greece’s unemployment rate "remains the highest among peers," even after having declined since the 2011 reforms. - "Unemployment appears to be the key driver of poverty in Greece, with the poverty rate for this group having risen by more than 6 percent since the onset of the crisis." - Output "declined by 25 percent since the crisis, and has been stagnating in the last few years." - Employment is concentrated in small firms with "large productivity differences" relative to larger firms. - Private sector arrears to banks and the state stand at "130 percent of GDP, the highest among peers," implying large needs for firm restructuring and maintenance of cost flexibility. ### Risks from reintroducing sectoral extension (extension principle) - Reintroducing the extension principle would "carry significant risks." - Bargaining at the firm level will likely be discouraged once the extension is reintroduced, because "employees will have little incentive to engage in firm bargaining." - Greece "ranks poorly on labor-employer relations," which "amplifies this risk." - Small firms would have to accept higher wages set at the sectoral level, which would: - Limit their possibilities to restructure and expand employment, - Potentially lead to firm closures and layoffs. - These outcomes "risk undermining Greece’s ULC-based competitiveness gains achieved so far," and could "halt and even reverse the declining trend in unemployment, with negative social consequences." ### Policy implications and priorities - Greek economic conditions call for a focus on employment creation: - Need to "attract investment and support job creation." - Preserve cost and wage flexibility to facilitate firm restructuring given high private sector arrears. - On balance, "the costs of reintroducing the extension appear to outweigh their redistributive benefits." - Implicit policy preference: avoid reintroducing the extension principle to preserve firm-level bargaining incentives, support restructuring, and sustain competitiveness and employment recovery. *Italic: Source — Box 3. Risks Related to the Reintroduction of Sectoral Extensions of Collective Bargaining (concluded).* ### 8.5 billion in Q3 2017 as approved by the Eurogroup on June 15th 2017 as well as further ### 8.5 billion in Q3 2017 as approved by the Eurogroup on June 15th 2017 as well as further ### External financing requirements and sources (Table 7: Greece, 2015–22) - Gross financing requirements (Billions of euros): 2015: 148.8; 2016: 165.7; 2017: 151.7; 2018: 142.7; 2019: 144.9; 2020: 139.9; 2021: 141.8; 2022: 141.3. - Current account deficit (Billions of euros): 2015: -0.2; 2016: 1.1; 2017: 0.5; 2018: 0.2; 2019: 0.2; 2020: 0.1; 2021: -0.2; 2022: -0.1. - Medium and long-term debt amortization (Billions of euros): 2015: 19.8; 2016: 9.1; 2017: 11.1; 2018: 7.0; 2019: 10.7; 2020: 7.2; 2021: 10.7; 2022: 11.8. - Public sector (of which GLF/EFSF/ESM/IMF) (Billions of euros): public sector 2015: 16.0; 2016: 5.9; 2017: 7.9; 2018: 3.8; 2019: 7.6; 2020: 4.2; 2021: 4.5; 2022: 5.9. Of which GLF/EFSF/ESM/IMF: 2015: 9.2; 2016: 3.3; 2017: 2.7; 2018: 1.8; 2019: 2.1; 2020: 2.8; 2021: 4.5; 2022: 4.6. - Banks (Billions of euros): 2015: 1.0; 2016: 0.5; 2017: 1.6; 2018: 1.6; 2019: 1.6; 2020: 1.6; 2021: 1.6; 2022: 1.6. - Other (Billions of euros): 2015: 2.8; 2016: 2.8; 2017: 1.6; 2018: 1.6; 2019: 1.5; 2020: 1.4; 2021: 4.6; 2022: 4.4. - Short-term debt amortization (Billions of euros): 2015: 129.2; 2016: 155.4; 2017: 140.1; 2018: 135.5; 2019: 134.0; 2020: 132.5; 2021: 131.4; 2022: 129.6. - Public sector and Bank of Greece (Billions of euros): 2015: 58.1; 2016: 115.1; 2017: 87.6; 2018: 82.4; 2019: 80.6; 2020: 78.8; 2021: 77.3; 2022: 75.2. - Bank of Greece 1/ (Billions of euros): 2015: 54.9; 2016: 114.1; 2017: 85.7; 2018: 76.0; 2019: 74.2; 2020: 73.1; 2021: 71.6; 2022: 69.5. - Public sector 3/ (Billions of euros): 2015: 3.1; 2016: 0.9; 2017: 1.9; 2018: 6.4; 2019: 6.4; 2020: 5.7; 2021: 5.7; 2022: 5.7. - Banks 2/ (Billions of euros): 2015: 62.4; 2016: 33.1; 2017: 45.3; 2018: 46.3; 2019: 46.9; 2020: 47.6; 2021: 48.2; 2022: 48.8. - Other (Billions of euros): 2015: 8.7; 2016: 7.2; 2017: 7.2; 2018: 6.9; 2019: 6.5; 2020: 6.2; 2021: 5.9; 2022: 5.6. - Source of financing (Billions of euros): 2015: 126.2; 2016: 154.3; 2017: 136.7; 2018: 127.8; 2019: 143.3; 2020: 138.3; 2021: 140.0; 2022: 139.2. - Capital account (net) (Billions of euros): 2015: 2.0; 2016: 1.0; 2017: 1.1; 2018: 1.2; 2019: 1.2; 2020: 1.2; 2021: 1.3; 2022: 1.2. - Foreign direct investment (net) (Billions of euros): 2015: -0.9; 2016: 3.4; 2017: 2.9; 2018: 2.5; 2019: 3.3; 2020: 3.5; 2021: 3.7; 2022: 3.7. - Equities (net) (Billions of euros): 2015: -1.2; 2016: -0.8; 2017: -4.3; 2018: -3.0; 2019: -1.5; 2020: -1.5; 2021: -1.5; 2022: -1.5. - Assets drawdown (- increase) (Billions of euros): 2015: -22.0; 2016: 9.7; 2017: -5.0; 2018: -6.6; 2019: -8.2; 2020: -8.5; 2021: -8.6; 2022: -8.7. - Bank of Greece (Billions of euros): -0.3 each year 2015–2022. - Government (Billions of euros): 2015: -0.5; 2016: -0.5; 2017–2022: 0.0. - Banks (Billions of euros): 2015: 0.6; 2016: 0.6; 2017: 0.1; 2018: 0.1; 2019: -1.3; 2020: -1.1; 2021: -1.3; 2022: -1.3. - Other sector (Billions of euros): 2015: 22.2; 2016: -9.5; 2017: 5.2; 2018: 6.8; 2019: 9.7; 2020: 9.9; 2021: 10.1; 2022: 10.3. - New borrowing and debt rollover (Billions of euros): 2015: 147.9; 2016: 142.1; 2017: 142.1; 2018: 133.8; 2019: 148.5; 2020: 143.6; 2021: 145.1; 2022: 144.5. - Medium and long-term borrowing (Billions of euros): 2015: -11.0; 2016: 21.4; 2017: 6.5; 2018: -0.3; 2019: 16.0; 2020: 12.2; 2021: 15.5; 2022: 16.8. - Public sector (Billions of euros): 2015–2017: 0.0; 2018: 0.0; 2019: 1.1; 2020: 9.4; 2021: 3.4; 2022: 5.1; 2022: 6.3 (note: table shows public sector row with values). - Banks (Billions of euros): 2015: 1.9; 2016: 1.8; 2017: 5.0; 2018: -2.9; 2019: 5.1; 2020: 7.5; 2021: 6.0; 2022: 6.3. - Other (Billions of euros): 2015: -12.9; 2016: 19.5; 2017: 1.5; 2018: 1.5; 2019: 1.5; 2020: 1.4; 2021: 4.4; 2022: 3.2. - Short-term borrowing (Billions of euros): 2015: 159.0; 2016: 120.7; 2017: 135.5; 2018: 134.0; 2019: 132.5; 2020: 131.4; 2021: 129.6; 2022: 127.7. - Public sector and Bank of Greece (Billions of euros): 2015: 107.4; 2016: 71.8; 2017: 82.4; 2018: 80.6; 2019: 78.8; 2020: 78.6; 2021: 75.2; 2022: 73.1. - Bank of Greece 1/ (Billions of euros): 2015: 106.5; 2016: 73.1; 2017: 76.0; 2018: 74.2; 2019: 73.1; 2020: 72.9; 2021: 69.5; 2022: 68.3. - Public sector 3/ (Billions of euros): 2015: 0.9; 2016: -1.3; 2017: 6.4; 2018: 6.4; 2019: 5.7; 2020: 5.7; 2021: 5.7; 2022: 4.7. - Banks 2/ (Billions of euros): 2015: 43.2; 2016: 42.0; 2017: 46.3; 2018: 46.3; 2019: 46.9; 2020: 47.6; 2021: 48.2; 2022: 49.3. - Other (Billions of euros): 2015: 8.3; 2016: 6.9; 2017: 6.9; 2018: 6.9; 2019: 6.5; 2020: 4.6; 2021: 5.6; 2022: 5.4. - Program financing (gross) (Billions of euros): 2015: 22.6; 2016: 11.4; 2017: 14.9; 2018: 14.9; 2019: 1.5; 2020: 1.7; 2021: 1.8; 2022: 2.1. - Of which interest deferral (Billions of euros): 2015: 1.2; 2016: 1.1; 2017: 1.4; 2018: 1.4; 2019: 1.5; 2020: 1.7; 2021: 1.8; 2022: 2.1. - Sources: Bank of Greece; and IMF staff estimates. - Notes from table: - 1/ Includes liabilities to Eurosystem related to TARGET. - 2/ Includes currency and deposits and securitized loans. - 3/ Includes government deposits' build-up (regardless of currency denomination for presentational purposes). ### Indicators of Fund credit and debt service (Table 8: Greece, 2017–26) - Prospective drawings (2017 SBA) (Millions of SDRs): 2017: 534; 2018: 802. - Percent of quota: 2017: 22; 2018: 33. - Amortization (Millions of SDRs): 2017: 592; 2018: 1,453; 2019: 1,531; 2020: 1,704; 2021: 1,737; 2022: 2,172; 2023: 2,222; 2024: 1,313; 2025: 251; 2026: 100. - Breakdown: 2012 EFF amortization path: 592; 1,453; 1,704; 1,704; 1,704; 1,587; 1,112; 251; 100 (years aligned as in table). - 2017 SBA component (Millions of SDRs): 00033468635200000 (table shows projected SBA amortization sequence). - Total charges and fees (Millions of SDRs): 168; 331; 276; 197; 112; 53; 22; 28; 55. - Total debt service (Millions of SDRs): 760; 1,784; 1,980; 1,935; 2,284; 2,276; 1,334; 259; 55. - Percent of exports of goods and services: 2017: 1.8; 2018: 4.0; 2019: 4.2; 2020: 4.0; 2021: 4.5; 2022: 4.3; 2023: 2.4; 2024: 0.5; 2025: 0.0; 2026: 0.0. - Percent of GDP: 2017: 0.5; 2018: 1.2; 2019: 1.3; 2020: 1.2; 2021: 1.3; 2022: 1.3; 2023: 0.7; 2024: 0.1; 2025: 0.0; 2026: 0.0. - Outstanding stock (Millions of SDRs): 2017: 10,050; 2018: 9,399; 2019: 7,695; 2020: 5,957; 2021: 3,786; 2022: 1,564; 2023: 251; 2024: 100; 2025: --; 2026: --. - Percent of quota: 2017: 414; 2018: 387; 2019: 317; 2020: 245; 2021: 156; 2022: 64; 2023: 41; 2024: 1000? (table shows later-year percent of quota values—preserve as shown). - Percent of GDP: 2017: 6.8; 2018: 6.1; 2019: 4.9; 2020: 3.6; 2021: 2.2; 2022: 0.9; 2023: 0.1; 2024: 0.0; 2025: 0.0; 2026: 0.0. - Memorandum items: - Exports of goods and services (billions of euros): 2017: 52; 2018: 55; 2019: 58; 2020: 60; 2021: 63; 2022: 66; 2023: 68; 2024: 69; 2025: 71; 2026: 73. - GDP (billions of euros): 2017: 182; 2018: 189; 2019: 195; 2020: 202; 2021: 209; 2022: 215; 2023: 221; 2024: 227; 2025: 233; 2026: 240. - Euro/SDR rate: 1/1.2 (program exchange rate note). - Quota (millions of SDRs): 2,428.9. ### Schedule of proposed purchases under the Stand-By Arrangement (Table 9: 2017–18) - July 20, 2017: Board approval — Purchases 267.2 Millions of SDRs; 11.0 Percent of quota; Millions of euros 329.6. - November 15, 2017: Observance of end-September 2017 performance criteria — Purchases 267.2 Millions of SDRs; 11.0 Percent of quota; Millions of euros 329.6. - First Review (February 15, 2018): Observance of end-December 2017 performance criteria, completion of first review — Purchases 267.2 Millions of SDRs; 11.0 Percent of quota; Millions of euros 329.6. - May 15, 2018: Observance of end-March 2018 performance criteria — Purchases 267.2 Millions of SDRs; 11.0 Percent of quota; Millions of euros 329.6. - Second Review (August 15, 2018): Observance of end-June 2018 performance criteria, completion of second review — Purchases 267.2 Millions of SDRs; 11.0 Percent of quota; Millions of euros 329.6. - Total: 1,336 Millions of SDRs; 55 Percent of quota; 1,648 Millions of euros. - Note: 2/ Expected to be precautionary, and conditional on the arrangement becoming effective. - Program exchange rate: see Technical Memorandum of Understanding. ### Approval in Principle: history, procedure, and application to Greece (Annex I) - History and purpose: - Approval in Principle (AIP) was used in the 1980s to allow the Fund to approve, in principle, an arrangement when policy understandings existed with the member but necessary financing assurances from creditors were not yet in place. - AIP was used 19 times between 1983 and 1988; guidelines were issued in 1984 (the “1984 Guidelines”). - Over time the procedure lapsed due to alternative creditor assurances (Paris Club Agreed Minutes) and the Fund’s willingness to “lend into arrears.” - How the procedure worked: - Two-step process: first Executive Board approval in principle based on policy understandings; second Board decision to make the arrangement effective once necessary financing assurances were obtained. - Second decision could be adopted on a lapse-of-time (LOT) basis; the 1984 Guidelines called for the period “normally” not to exceed 30 days, but acknowledged flexibility. - Application to Greece: - AIP would be justified to catalyze assurances on debt relief from Greece’s official creditors if policy understandings between staff and Greece are in place and debt relief is the only impediment to outright approval. - Use of procedure would be procedural and not require adoption of a general policy; underlying principles from 1980s use can be applied. ### Considerations on Greece’s long-term growth potential (Annex II) - Demographics and productivity: - EC 2015 Aging Report projects Greece’s working age population to fall by about 30 percent between 2020 and 2060. - Ceteris paribus, aging would imply an average yearly decline of 0.9 percentage points in Greece’s labor force during the next five decades. - Historical TFP growth: Greece’s total productivity (TFP) growth over the last 45 years averaged just 0.2 percent annually. - Under historical TFP, labor productivity (output per worker) would grow about 0.4 percent in the steady state (TFP adjusted for labor share). - Investment and medium-term effects: - Staff medium-term projections assume a temporary boost to growth from higher investment with real growth rates averaging over 2 percent during the investment recovery. - About €25 billion committed through 2020 in EU funds (yet undisbursed); these funds plus other investment-related support (EIB, EBRD) sum to about 4 percent of GDP per year during 2017–2020. - Staff projections assume investment sufficient to stabilize the capital-to-output ratio at historical average of about 3.5. - Long-term growth baseline and implications: - Combining historical growth in output per worker of 0.4 percent with expected growth in number of workers of -0.9 percent implies long-term annual growth of -0.5 percent. - Other literature estimates Greece’s baseline growth rate (before reforms) at -0.4 percent during 2024–2043. - Role and magnitude of structural reforms: - Empirical evidence suggests reform gains on GDP are modest and transitory: studies find output level effects of 3 to 13 percent over initial decade; WEO estimates GDP gain from product market deregulation averaging about 3 percent over eight years (~0.4 percentage points per year). - Adhikari et al. (2016) case studies find GDP effects ranging between 0 and 34 percent over 5 years; excluding Ireland, average impact ~0.6 percentage points per year over five years; in two out of six cases, no significant gains. - Permanently raising growth requires reform implementation whose ambition and duration exceed what Greece has achieved to date. - Implementation challenges in Greece: - Noted reforms since 2011 (labor market cornerstone reform, energy sector privatizations, judicial reforms, opening closed professions, investment licensing reform) have had mixed implementation success. - Labor market reform of 2011 is set to be partially reversed after the current program. - Judicial reforms have stalled since 2013; Code of Civil Procedure not yet fully implemented; court backlogs continue to rise. - State share in energy sector remains significant despite privatization attempts; key closed professions remain largely closed. - Conclusion: - Adverse demographics and historically poor productivity performance mean structural reforms must be the key driver of long-run growth. - Delivering annual growth rates of 1 percent over the next half century—as assumed in staff’s DSA—will require structural reforms that yield payoffs on employment, labor force participation, and productivity growth exceeding past experience and implemented at greater pace and scope. *Source: IMF staff estimates; Tables and annexes from the provided IMF Greece material.* ### 7. Given demographics, the impact of structural reforms will need to be substantial to ### 7. Given demographics, the impact of structural reforms will need to be substantial to ### Long-term growth projections and reform requirements - Staff baseline long-term GDP growth: –0.5 percent. - Staff target long-term GDP growth: 1 percent. - Required uplift from reforms: 1.5 percentage points to growth per year for the next five decades. - OECD (2016) estimate: full implementation of a broad menu of structural reforms could raise Greece’s output by about 7.8 percent over a 10-year horizon, translating into an increase in annual growth of some 0.8 percentage points for about a decade. - Bourles et al. (2013) estimate: gain of about 0.9 percentage points per year for a decade. - Daude (2016) estimate: reforms focused on product markets and improving the business environment could boost growth by about 1.3 percentage points per year for a decade. - Staff’s 1 percent growth projection implicitly presumes: - Greece would manage to increase labor force participation to levels that exceed the euro area average (to offset the significant projected decline in Greece’s working age population). - TFP growth rates permanently far above Greece’s historical average. ### Key assumptions underlying staff’s long-run growth projections - Structural reform areas referenced: - (i) labor, pension, and employment protection reforms; - (ii) product market reforms to reduce administrative burden, open closed professions, and liberalize investment licensing; - (iii) tax reform; - (iv) bankruptcy reforms; - (v) reforms of network industries (electricity, gas, rail road and transport). - Labor force participation in Greece over the long-run is also affected by pension system reforms, including the increase in the effective retirement age and limiting early retirement options. ### Box 1 — The slow pace of structural reforms so far: findings - General finding: Greece has struggled with reform implementation to date. - Labor market: - Previous programs reformed the collective bargaining framework by suspending the extension of collective agreements and the favorability principle. - Minimum wage framework revamped in 2012: one-off reduction in the minimum wage, a sub-minimum wage for youth, and a freeze. - Result: reduction in labor costs, narrowing Greece’s competitiveness gap relative to trading partners. - Recent legislative reversal: authorities have recently legislated a reversal of the cornerstone collective bargaining reforms, effective at the end of their adjustment program. - Closed professions: - Framework law adopted in 2011 abolished administrative licenses, minimum fees and fixed prices, but implementation was ineffective. - Some professions liberalized (auditors, accountants, and shipping agents), but many remain mostly closed (notaries, dentists, engineers). - New law on the legal profession passed in 2013, but incorporation restrictions and other barriers have persisted. - Investment licensing: - Reform legislated in 2011; implementation faltered. - Fast-track framework law adopted mid-2014 had only modest results. - Authorities reinitiated implementation (initially planned for 2014), expected to be completed by end program. - Competition: - Under the EFF-supported program, three OECD Competition Assessments (Toolkits I, II, and III) undertaken. - Completion expected end-2014; implementation started only in 2015. - With few exceptions (fresh milk, bottled water, books), impact on prices not visible yet; some prices (olive oil, flour, alcoholic beverages) have increased. - Reforms focused mainly on adjusting legislation; effectiveness in spurring competition remains to be seen. - Judicial reform: - Backlog of tax court cases: more than 165,000 cases; tax appeal processing taking up to 12 years. - Recovery in insolvency cases: more than 3½ years; recovery rate is the lowest in the Eurozone (36 cents on the dollar). - Code of Civil Procedure introduced in 2015 is still not being applied. - Privatization: - Progress slow due to social resistance. - Electricity sector: aggressive privatization strategy abandoned; only modest reduction in PPC market share. - Gas sector: privatization of the grid operator failed; new process relaunched. - Infrastructure privatizations: progress made, but revenue fell well short of expectations. - Projected annual privatization proceeds (chart context): years 2011–2016 plotted against targets and actuals (numerical series shown visually in source). ### Annex III — Considerations on the sustainable primary surplus for Greece: Historical evidence - Historical average primary balance for Greece during 1945-2015: a deficit of about 3 percent of GDP. - High water-mark: primary surplus exceeding 1 percent of GDP during eight consecutive years (1994-2001); average primary balance during this period was 1¾ percent of GDP. - Primary balance reversed to a deficit of 2 percent of GDP immediately following euro adoption (2002-07), and widened to 5-10 percent in 2008-09. - During the European and IMF supported programs, the primary deficit averaged 1½ percent of GDP, with a small surplus of less than 1 percent of GDP recorded only in 2013 and 2015. ### Annex III — Cross-country evidence on sustaining large primary surpluses - Sample: 90 countries, 1945-2015. - Cases with primary fiscal surplus above 1.5 percent of GDP maintained for ten or more consecutive years: 13 cases. - Cases with surplus above 3.5 percent of GDP maintained for ten or more consecutive years: 3 cases (only one if resource-rich countries excluded). - Ten-year averages above 3.5 percent of GDP: 7.5 percent of full sample; 4.3 percent of developed economies in the euro area not oil or resource rich. - Ten-year averages above 1.5 percent of GDP: 12.8 percent for the latter group. - Economic conditions associated with entering a period of high average primary balances (EU countries): - Strong real GDP growth before episode: 2.7 percent. - Modestly high inflation before episode: 4 percent. - Moderate unemployment before episode: 10 percent. - Low net foreign debt before episode: 24 percent of GDP. - During high primary balance periods: growth about 3.4 percent, inflation about 3 percent, unemployment about 7.2 percent. - Implication: sustained periods of high primary surpluses are driven by strong economic growth rather than sizeable fiscal consolidation. ### Reversals after large consolidations - Among 55 consolidation episodes with an improvement of the primary balance of more than 10 percentage points of GDP during a five-year period (as in Greece since 2009): - Primary balance improved further for the following five years in only 20 percent of the cases. - In the majority of episodes, the primary balance deteriorated after strong consolidation. - Average annual change of the primary balance during the five-year period following the end of adjustment across all 55 episodes: about -¾ percentage points of GDP. - For countries that reached a primary balance of more than 3.5 percent of GDP at the end of the consolidation, subsequent deterioration of the primary balance: about 1¼ percentage points of GDP. - Reversal is also rapid following a strong adjustment under IMF-supported programs: - Programs with very high primary balances at the last program year (quartile 4) tightened significantly during the program period; primary balances deteriorated rapidly the year after the program, much more so than in other programs (quartiles 1-3). - Following a strong improvement during the program, the primary surplus falls by half in about five years after the program, with the bulk of deterioration within the first two years. ### Unemployment, demographics, and monetary constraints affecting primary balance sustainability - Unemployment: - High unemployment associated with lower primary fiscal balances due to higher social expenditures and lower income-related revenue. - Greece’s unemployment is exceptionally high—only 10 countries have had unemployment higher than 20 percent in the post-war period. - Average primary balance for countries with double-digit unemployment rates: about 0 percent of GDP. - For double-digit unemployment lasting 10 years or longer: average primary balance about -½ percent of GDP. - Implication: long-term unemployment pressures on social assistance spending in Greece—such as the guaranteed minimum income—are likely to mount. - Demographics: - Aging populations constrain primary balance performance: share of taxpayers declines while share receiving health, pension and other social benefits rises. - Greece’s old-age dependency ratio is high compared to peers; EC’s Aging report projects it to increase by 10 percentage points by 2060. - Health spending has been compressed to one of the lowest levels in the Eurozone; such compression cannot be sustained and health spending is expected to increase over time. - Monetary and exchange rate policy constraints: - Countries without an independent monetary policy find it more challenging to sustain large primary fiscal surpluses because monetary and exchange rate tools are not available for aggregate demand management. - In the sample, changes in primary balance larger than 10 percentage points of GDP during five years are associated only with periods of monetary easing. - Interest rates in Greece are not expected to ease over the projection horizon (chart shows implicit rate on total debt and Euribor for 2015–2065 under baseline scenario without debt restructuring). ### Annex IV — Debt sustainability (overview) - Main conclusion: Greece’s public debt remains unsustainable. - Even with full implementation of program policies and debt relief measures specified by the Eurogroup thus far: - Public debt and financing needs will become explosive in the long run. - Greece will be unable to replace highly subsidized official sector financing with market financing at rates consistent with sustainability. - External debt: high and expected to decline only gradually over the medium term; macroeconomic shocks and policy slippages could result in adverse dynamics. *Source: IMF staff report (cr17229) — chapter: Given demographics, the impact of structural reforms will need to be substantial to* ### 1. The public sector DSA, which is based on the Gross Financing Needs (GFN) framework, ### 1. The public sector DSA, which is based on the Gross Financing Needs (GFN) framework ### Public sector DSA framework and sustainability criteria - The DSA is based on the Gross Financing Needs (GFN) framework and updates the 2016 Article IV DSA. - Rationale: the GFN framework better captures Greece’s true debt burden because the bulk of Greece’s debt is comprised of official loans provided on highly concessional terms. - Time horizon: analysis extends to 2080 to cover the maturity of official loans both under the baseline and when taking into account debt measures currently considered by the Eurogroup. - Sustainability requirements under the GFN framework: - Maintain gross financing needs well within the 15-20 percent of GDP thresholds defined in the MAC DSA for emerging-advanced economies throughout the projection period. - Ensure that debt is on a sustained downward path. - Conclusion: Solutions that provide only temporary flow relief but do not deliver a declining debt path over the projection horizon would not be consistent with sustainability. ### Baseline DSA assumptions - Macroeconomic assumptions: - Primary balance projections: reach 1.7 and 2.2 percent this year and next, respectively. - Post-program primary balance: 3.5 percent of GDP in 2019-22 before falling to a long-term level of 1.5 percent of GDP thereafter. - Growth: following growth rates of close to 2 percent and more this year and throughout the medium term, staff expects long-term growth of some 1 percent in real terms and 2.8 percent in nominal terms. - Bank recapitalization needs: - A buffer of around €10 billion (5½ percent of 2016 GDP) is set aside to cover potential additional bank support needs. - Note: this buffer may not be sufficient; completing the bank asset quality review well before the end of the program is essential. - Privatization proceeds: - Staff projects revenues from asset sales to total some €2billion between 2017 and 2030 (1.1 percent of 2016 GDP). - Staff does not expect any material proceeds from bank privatization given the state’s reduced share in the banking sector (~20 percent from ~60 percent) and past difficulties meeting privatization targets. - Official interest rates: - Current weighted average nominal official interest rates: around 1 percent. - Long-run risk-free rate assumed at 3.8 percent (based on euro area growth 1.5 percent and ECB price stability objective 1.9 percent plus a modest wedge). - Market interest rates and market access: - Assumed market access by end-program at an initial rate of 6 percent. - Rationale: prolonged absence from markets, weak track record on delivering fiscal surpluses, and substantial debt overhang. - Rate composition: consistent with a risk-free rate of 1-1½ percent in 2018 and a risk premium of 450-500 basis points. - Evolution rule: the rate is expected to fall/rise by four basis points for every one percentage point decline/increase in debt-to-GDP ratio, fluctuating between a ceiling of 6 percent and a floor of 4½ percent. ### Baseline projections and key debt/GFN outcomes - Short- to medium-term debt path: - Debt projected to decline to 160 percent of GDP by 2022. - Debt is projected to decline gradually to around 150 percent by 2030, but rises thereafter. - Debt projected to reach around 195 percent of GDP by 2060. - Gross financing needs (GFN): - GFN cross the 15 percent-of-GDP threshold by 2028 and the 20 percent threshold by 2033. - GFN reach around 45 percent of GDP by 2060. - Dynamics explanation: cost of debt rises over time as market financing replaces highly subsidized official-sector financing, more than offsetting growth and primary balance surplus effects. ### Eurogroup debt relief commitments and their assessed impact - Eurogroup commitments (May 2016 and June 2017) include: - Extensions of weighted average maturities and further deferral of non-PSI related EFSF interest and amortization by up to 15 years. - Restoration of ANFA/SMP transfers to Greece. - Abolishment of the step-up margin of EFSF loans. - Fixing of interest rates on European loans at market rates (assumption: a volume of €71 billion to be fixed at a rate not exceeding 1.9 percent). - Assessment: - These commitments help improve Greece’s long-term debt outlook but are not sufficient to fully restore debt sustainability under staff’s baseline assumptions. - Additional debt relief could include further extensions of maturity and grace periods and interest deferrals on European loans. - A suggested design feature: an automatic mechanism linking debt repayments to growth to adjust relief if outcomes are better or worse than expected relative to a realistic baseline (broadly mentioned in the June 2017 Eurogroup statement). ### External sector DSA: levels, composition, and projections - Historical external debt evolution: - External debt rose from 96 percent of GDP in 2004 to 185 percent of GDP in 2010. - Since the onset of the program in 2010, debt increased in GDP terms as activity contracted. - 2016 composition: - About 63 percent of total debt is accounted for by the general government and 20 percent by the monetary authorities. - Current levels and positions: - External debt at some 246 percent of GDP. - Net international investment position (NIIP) at -137 percent of GDP (second weakest in Europe after Ireland). - Projection: - External debt projected to decline gradually to about 215 percent of GDP in 2022, driven mostly by recovery in growth and inflation and supported by a positive non-interest current account. - Higher FDI inflows would be an important source of non-debt-creating financing. ### External shocks and stress scenarios - Interest rate shock: - A 90-bps interest rate shock would worsen the income account and result in a 2022 debt ratio 10 percentage points above the baseline. - Growth shock: - A decline in average growth by 2 percentage points would result in the debt ratio ending in 2022 some 22 percent higher than baseline. - Current account shock: - Larger current account deficits (from slow competitiveness improvements or a terms-of-trade shock) would leave the debt ratio on a downward path but 17 percentage points higher than baseline by 2022. - Combined shock: - A combined shock involving higher interest rates, lower growth and a smaller current account would yield a debt ratio reaching 240 percent of GDP in 2022, 25 percent of GDP higher than in the baseline. ### Selected numeric time-series excerpts (annual indicators shown in the source table) - Nominal gross public debt (selected years, percent of GDP): 2014: 179.4; 2015: 181.6; 2016: 178.8; 2017: 183.2; 2018: 176.5; 2019: 170.0; 2020: 163.9; 2021: 159.5; 2022: 155.9; 2023: 153.7; 2024: 152.4; 2025: 151.3; 2026: 150.4; 2027: 149.8; 2028: 149.4; 2029: 149.1; 2030: 149.1. - Public gross financing needs (percent of GDP, selected years): 2014: 23.3; 2015: 16.2; 2016: 17.4; 2017: 21.0; 2018: 13.3; 2019: 7.9; 2020: 7.9; 2021: 7.2; 2022: 10.7; 2023: 14.5; 2024: 11.0; 2025: 12.6; 2026: 13.3; 2027: 15.7; 2028: 18.2; 2029: 16.7. - Real GDP growth (percent, selected years): 2014: -0.2; 2015: 0.0; 2016: 2.1; 2017: 2.6; 2018: 1.9; 2019: 1.9; 2020: 1.8; 2021: 1.0; 2022: 2.0; 2023: 1.4; 2024–2030: 1.0 each year. - Inflation (GDP deflator, percent): 2014: -1.0; 2015: 0.1; 2016: 1.2; 2017: 1.3; 2018: 1.4; 2019: 1.6; 2020: 1.7; 2021: 1.7; 2022: 1.8; 2023–2030: 1.8 each year. - Nominal GDP growth (percent, selected years): 2014: -1.3; 2015: 0.1; 2016: 3.3; 2017: 3.9; 2018: 3.3; 2019: 3.6; 2020: 3.5; 2021: 2.8; 2022: 3.8; 2023: 3.2; 2024–2030: 2.8 each year. - Effective interest rate (percent, selected years): 2014: 2.0; 2015: 1.2; 2016: 1.2; 2017: 1.1; 2018: 1.1; 2019: 1.2; 2020: 1.3; 2021: 1.4; 2022: 2.2; 2023: 2.4; 2024: 2.5; 2025: 2.6; 2026: 2.7; 2027: 2.8; 2028: 2.9. *IMF staff estimates as presented in the source content.* ### 3.0 Fitch ### 3.0 Fitch ### Contribution to Changes in Public Debt (Baseline) - Change in gross public sector debt (annual): 8.3, 3.0, -1.6, 2.3, -2.8, 4.5, -6.8, -6.5, -6.1, -4.4, -3.6, -2.2, -1.3, -1.1, -0.9, -0.6, -0.4, -0.2, -32.5 (Cumulative) - Identified debt-creating flows (annual): 16.6, 8.8, 3.8, 0.0, -3.7, 3.4, -7.9, -7.6, -7.3, -5.7, -4.0, -2.7, -2.0, -1.8, -1.7, -1.5, -1.4, -1.3, -45.1 (Cumulative) ### Primary Balance, Revenue, and Expenditure (Percent of GDP) - Primary deficit (series as presented): 3.3 0.1 -0.5 -4.2 -1.7-2.2-3.5-3.5-3.5-3.5-1.5-1.5-1.5-1.5-1.5-1.5-1.5-1.5-30.3 (Cumulative) - Primary (noninterest) revenue and grants (annual % of GDP): 42.0, 46.7 48.2 50.0 48.4 46.8 46.7 46.1 45.2 45.0 44.0 44.0 44.0 44.0 44.0 44.0 44.0 44.0 629.9 (Cumulative) - Primary (noninterest) expenditure (annual % of GDP): 45.3, 46.8, 47.7, 45.8, 46.7, 44.6, 43.1, 42.6, 41.7, 41.4, 42.4, 42.4, 42.4, 42.4, 42.4, 42.4, 42.4, 42.4, 599.6 (Cumulative) ### Automatic Debt Dynamics and Their Components (Percent of GDP contributions) - Automatic debt dynamics (annual): 7.6, 8.4, 7.7, 2.2, -3.8, -4.7, -4.0, -4.0, -3.7, -2.1, -2.5, -1.1, -0.5, -0.3, -0.2, 0.0, 0.1, 0.3, -26.5 (Cumulative) - Interest rate/growth differential (annual): 7.6, 6.7, 5.9, 1.9, -3.7, -4.8, -4.0, -4.1, -3.7, -2.2, -2.5, -1.1, -0.5, -0.3, -0.2, 0.0, 0.1, 0.3, -26.5 (Cumulative) - Of which: real interest rate (annual): 3.5, 7.3, 5.5, 1.9, -0.1, -0.3, -0.6, -0.7, -0.7, -0.5, 0.6, 1.0, 1.0, 1.2, 1.3, 1.5, 1.6, 1.7, 6.9 (Cumulative) - Of which: real GDP growth (annual): 4.1, -0.6, 0.4, 0.0, -3.6, -4.4, -3.3, -3.3, -3.0, -1.7, -3.1, -2.1, -1.5, -1.5, -1.5, -1.5, -1.5, -1.5, -33.4 (Cumulative) - Exchange rate depreciation (annual contribution): -0.1 1.7 1.8 0.3 (series truncated in source) - Other identified debt-creating flows (annual): 5.7, 0.3, -3.4, 1.9, 1.7, 10.4, -0.3, -0.1, -0.1, -0.1, 0.0, 0.0, 0.0, 0.0, 0.0, 0.0, 0.0, 0.0, 11.7 (Cumulative) - Net privatization proceeds (annual): -0.1, -0.3, -0.1, -0.2, -0.3, -0.6, -0.2, 0.0, 0.0, 0.0, 0.0, 0.0, 0.0, 0.0, 0.0, 0.0, 0.0, 0.0, -0.9 (Cumulative) - Contingent liabilities (annual): 1.0, 0.6, -6.3, 2.2, 2.0, 5.8, -0.1, -0.1, -0.1, -0.1, 0.0, 0.0, 0.0, 0.0, 0.0, 0.0, 0.0, 0.0, 7.3 (Cumulative) - Other liabilities (bank recap. and PSI sweetener) (annual): 4.8, 0.0, 3.1, 0.0, 0.0, 5.3, 0.0, 0.0, 0.0, 0.0, 0.0, 0.0, 0.0, 0.0, 0.0, 0.0, 0.0, 0.0, 5.3 (Cumulative) ### Residual and Projection Considerations - Residual, including asset changes (annual): -8.3, -5.8, -5.3, 2.3, 0.9, 1.0, 1.1, 1.1, 1.2, 1.4, 0.4, 0.5, 0.7, 0.7, 0.8, 0.9, 1.0, 1.0, 12.7 (Cumulative) - Notes on projections (from source footnotes): - Automatic debt dynamics derived using formula in footnote; includes r = interest rate; p = growth rate of GDP deflator; g = real GDP growth; a = share of foreign-currency denominated debt; e = nominal exchange rate depreciation. - For projections, residual includes exchange rate changes, ESM capital contribution, arrears clearance, SMP and ANFA income, and effect of deferred interest. ### Baseline Scenario: Key Macroeconomic Projections and Assumptions (Selected years shown) - Baseline (example series under Baseline Scenario tables): - Real GDP growth (2016–2030 sample points shown under multiple scenarios): 0.0, 2.1, 2.6, 1.9, 1.9, 1.8, 1.0, 1.0, 1.0 - Inflation (annual %): 0.1, 1.2, 1.3, 1.4, 1.6, 1.7, 1.7, 1.8, 1.8 - Primary balance (percent of GDP) — Baseline: 4.2, 1.7, 2.2, 3.5, 3.5, 3.5, 3.5, 1.5, 1.5 - Effective interest rate (percent): 1.2, 1.2, 1.1, 1.1, 1.2, 1.3, 1.4, 2.5, 3.0 ### Alternative Scenarios Presented (Selected scenario parameters) - Restructuring scenario: - Real GDP growth: 0.0, -2.1, -2.1, -2.1, -2.1, -2.1, -2.1, -2.1, -2.1 - Primary balance: 4.2, -2.8, -2.8, -2.8, -2.8, -2.8, -2.8, -2.8, -2.8 - Effective interest rate: 1.2, 1.2, 1.4, 1.8, 2.5, 2.7, 3.0, 4.2, 4.8 - Constant primary balance scenario: - Primary balance: 4.2 across projection years shown - Effective interest rate: 1.2, 1.2, 1.1, 1.1, 1.2, 1.2, 1.4, 2.4, 2.8 ### Stress Tests and Shock Scenarios (Baseline Scenario) - Primary Balance Shock scenario: Primary balance path example: 4.2, 0.0, 0.6, 3.5, 3.5, 3.5, 3.5, 1.5, 1.5 - Real GDP Growth Shock scenario: Real GDP growth example: 0.0, -2.6, -2.1, 1.9, 1.9, 1.8, 1.0, 1.0, 1.0 - Real Interest Rate Shock scenario: Effective interest rate example: 1.2, 1.2, 1.4, 1.8, 2.6, 2.8, 3.1, 4.6, 5.8 - Real Exchange Rate Shock, Combined Shock, Contingent Liability Shock, Lower Growth Scenario: - Combined illustrative outcomes include scenarios with deeper contractions in growth and higher effective interest rates relative to baseline (specific series reported in source tables). ### External Debt Sustainability (Selected indicators and dynamics) - Baseline: External debt (percent of GDP) sample path: 237.0, 237.3, 238.5, 251.1, 245.8, 240.4, 234.5, 229.5, 224.1, 218.7, 215.9 (selected years) - Change in external debt (annual): 48.8, 0.3, 1.2, 12.6, -5.3, -5.4, -5.9, -5.0, -5.4, -5.5, -2.7 - Identified external debt-creating flows (annual): 18.6, 13.2, 0.7, -0.6, -1.6, -6.4, -7.2, -5.9, -6.0, -5.8, -4.0 - Current account deficit, excluding interest payments (annual percent of GDP): -1.7, -3.1, -2.6, -2.8, -1.7, -4.8, -3.2, -3.4, -3.7, -3.5, -3.5 - Net non-debt creating capital inflows (negative) (annual percent of GDP): -0.4, -2.8, -4.5, -3.1, -1.9, -1.6, -1.3, -1.7, -1.7, -1.7, -1.7 - Automatic debt dynamics (external) (annual): 20.7, 19.1, 7.9, 5.3, 2.1, 0.0, -2.6, -0.8, -0.5, -0.5, 1.2 - Contribution from nominal interest rate (annual): 5.5, 5.1, 4.3, 2.7, 2.4, 5.1, 3.3, 3.5, 3.5, 3.4, 3.5 - Contribution from real GDP growth (annual): 16.1, 7.9, -0.9, 0.6, 0.0, -5.1, -6.0, -4.3, -4.3, -4.0, -2.2 - Contribution from price and exchange rate changes (annual): -0.9, 6.1, 4.5, 2.0, -0.2, -3.0, -3.0, -3.3, -3.6, -3.7, -3.7 - Residual, including change in gross foreign assets (annual): 30.2, -12.9, 0.4, 13.2, -3.7, 4.0, 4.3, 4.2, 4.2, 4.1, 5.0 - External debt-to-exports ratio (percent, selected): 828.3, 780.4, 733.7, 837.1, 873.5, 833.0, 805.8, 777.3, 749.9, 724.4, 705.2 - Gross external financing need (in billions of US dollars, selected): 294.3, 256.4, 214.0, 180.7, 179.9, 160.0, 151.3, 153.4, 148.3, 150.1, 148.9 - In percent of GDP (selected): 119.7, 106.9, 90.5, 92.7, 92.4, 82.9, 75.7, 74.2, 69.2, 67.9, 65.9 ### Key Macroeconomic Assumptions Underlying Baseline (Historical averages and projections) - Real GDP growth (historical/sample projections): -7.3, -3.2, 0.4, -0.2, 0.0, -2.6, 3.9, 2.1, 2.6, 1.9, 1.9, 1.8, 1.0 - GDP deflator in US dollars (change in percent): -7.9, 0.9, -1.8, -17.4, -0.2, -0.3, 9.0, -2.8, 1.0, 1.4, 1.7, 1.4, 1.2 - Nominal external interest rate (percent): 2.5, 2.1, 1.8, 0.9, 0.9, 2.2, 1.8, 2.1, 1.4, 1.5, 1.7, 1.6, 1.6 - Growth of exports (US dollar terms, percent): -3.7, 3.8, 5.3, -23.9, -6.3, 0.6, 15.6, 1.7, 4.4, 4.9, 4.9, 4.3, 3.7 - Growth of imports (US dollar terms, percent): -12.2, 0.1, 3.1, -28.4, -4.5, -2.6, 17.1, 1.3, 3.7, 4.8, 4.7, 4.3, 3.5 - Current account balance, excluding interest payments (percent of GDP): 1.7, 3.1, 2.6, 2.8, 1.7, -2.7, 7.0, 4.8, 3.2, 3.4, 3.7, 3.5, 3.5 - Net non-debt creating capital inflows (percent of GDP): 0.4, 2.8, 4.5, 3.1, 1.9, 1.4, 1.9, 1.6, 1.3, 1.7, 1.7, 1.7, 1.7 *Source: IMF staff projections and tables in the Greece Public Sector Debt Sustainability Analysis (DSA) — Baseline Scenario, as presented in the source PDF.* ### Appendix I. Letter of Intent ### Appendix I. Letter of Intent ### Program overview and objectives - 13-month and 12 days precautionary Stand-By Arrangement in the amount of SDR 1.3 billion (55 percent of quota, about €1.6 billion). - Arrangement expected to expire on August 31, 2018, shortly after the expiration of the ESM program. - Program focus: restore macroeconomic stability, mobilize broad political support for deeper reforms and modernization, and provide a framework for European partners to provide debt relief contingent on policy implementation to help facilitate a return to markets. ### Fiscal policies and numerical targets - Fiscal strategy: rebalance policies to support growth and better social protection while reducing debt given constrained financing and an exceptionally high level of debt. - Program targets (TMU ¶31): - Commit to fully implementing already legislated reforms to achieve a primary surplus target of 1¾ percent of GDP in 2017. - 2018: authorities and European partners expect reforms plus additional measures to deliver a primary surplus of 3½ percent; IMF staff considers that the surplus will reach 2.2 percent of GDP. - If on track to achieve 2017 targets and 2018 floors (based on quarterly PCs and a forward-looking IMF assessment in consultation with European Institutions), ESM disbursements will be made on the basis of implementation of agreed policies. - If targets/floors are missed, commitment to take prompt corrective action in program reviews. - Post-program targets (TMU ¶31-41): - Commit to reach and sustain annual primary surpluses of 3.5 percent of GDP in 2019-22. - After 2022, targets will be reduced to levels that IMF staff views will equal 1.5 percent of GDP. - Prior actions legislated to underpin MTFS and targets: - Pension reform to be implemented in 2019 with net annual savings of 1 percent of GDP during 2019-22: - Applies to current retirees the benefit formula introduced by the 2016 reform by eliminating negative “personal differences” in main and supplementary pensions, while limiting reductions to 18 percent, coupled with a freeze of inflation indexation for all pensions during 2019-22. - If found unconstitutional, equivalent permanent structural measures will secure medium-term savings. - Personal income tax reform entering into effect in 2020 with net savings of 1 percent of GDP during 2020-22: - Broadens the tax base by reducing the personal income tax credit by €650. - Implementation can be advanced to 2019 if IMF staff (with European institutions and Greek authorities) deems it needed in the final program review (June 2018) to reach the agreed 3.5 percent primary surplus fiscal target in 2019 sustainably and without growth-detrimental measures. - Growth-friendly fiscal package (could enter into effect at the earliest in 2019), contingent on forward-looking assessment in final review: - Tax measures amounting to up to 1 percent of GDP, including: - reduction in CIT rates (cost of 0.1 percent of GDP); - reduction of the lower PIT rates and solidarity surcharge (cost of 0.8 percent of GDP); - reduction of ENFIA rates (cost of 0.1 percent of GDP). - Spending measures up to 1 percent of GDP, including: - increase in targeted social spending (housing allowance; child allowance; school meals; nursery/pre-school education; means-tested reduction in health co-payments) (cost of 0.7 percent of GDP); - high-quality public infrastructure investments (cost of 0.2 percent of GDP); - active labor market policies (cost of 0.1 percent of GDP). - Adopt a medium-term fiscal strategy (MTFS) for 2018-21 reflecting reforms and targets, ensuring a growth-friendly policy mix and maintaining primary spending on goods and services at current levels relative to GDP through agreed floors (TMU ¶31-32). ### Fiscal structural reforms (TMU ¶42-65) - Aim: improve fiscal institutions, complement adjustment, and support economic and social sustainability. - Immediate priorities (prior actions): - Legislation to prioritize audit cases, strengthen collection enforcement, and define criteria to establish viability and capacity to pay of tax debtors (supporting the independent revenue agency). - Issued remaining implementing legislation for pension reform, repealed conflicting provisions, operationalize a single pension register, and merge management of existing funds into the new single pension fund. - Follow-up steps: - Modernize audit and collection practices, address VAT fraud, ensure adequate staffing and risk-analysis tools for the revenue agency, and align the code of revenue collection procedures with the new Code of Civil Procedure, including e-auctions. - Finalize recalibration of pensions and electronic records of retirees and insured persons. - Reform property tax by aligning property values with market prices. - Legislate to ensure temporary contracts are not used to circumvent attrition rules, integrate general government accounts into the Single Treasury Account, and conduct an independent assessment of end-2016 government accounts payable and the arrears clearance program. - Commitment not to accumulate arrears on a net basis; implement a revamped system of arrears management and aim to fully clear arrears by end-2019. - Complete welfare reforms by implementing, in a budget neutral manner, a modern system of family, disability, and housing benefits. - Structural benchmarks referenced as detailed in Table 2. ### Financial sector reforms (TMU ¶66-80) - Objectives: complement SSM supervisory strategy, operationalize legal framework to address NPLs, ensure adequate bank capitalization, and normalize payment conditions while safeguarding financial stability. - Immediate priorities (prior actions): - Established a new out-of-court workout (OCW) framework with accompanying secondary legislation for processing of cases by public creditors to be adopted soon. - Implemented legal amendments, regulation, and infrastructure to allow for electronic on-line auctions. - Adopted legislation protecting creditors from civil and criminal liability for good-faith debt restructuring actions. - Adopted secondary legislation regulating insolvency administrators. - Amended legislation to simplify and accelerate insolvency procedures for SMEs. - Streamlined the licensing and supervision framework of NPL servicers. - Bank of Greece (BoG) will require less-systemic institutions that still need to reinforce their capital bases to do so. - Published a conditions-based roadmap outlining steps toward full relaxation of restrictions to normalize payment conditions. - Follow-up steps: - Amend legislation to strengthen the position of secured creditors, fully implement the OCW framework and e-auction system, and fully operationalize the profession of insolvency administrators. - BoG to require completion of any remedial action regarding less-systemic institutions and coverage of potential capital shortfalls by cooperative banks. - For systemic institutions, request confirmation from European partners that remaining ESM program resources for the banking sector will remain available for these purposes until end-program. - Progress on banking system soundness will be a focus of the first program review. - BoG committed to preserving sufficient banking system liquidity in line with Eurosystem rules and to closely monitor depositor confidence and cash buffers. ### Structural reforms (TMU ¶81-92) - Focus: preserve competitiveness gains from existing labor market reforms and advance product and service market reforms with technical assistance from the World Bank and OECD. - Immediate priorities (prior actions): - Labor market: - Adopted legislation to ensure 2011 collective bargaining reforms remain in force until end-program (suspension of extension of collective agreements and the favorability principle). - Replaced administrative approval of collective dismissals with a notification system (no ex ante approval). - Product markets: - Adopted legislation to liberalize Sunday trade (addressing Constitutional Court ruling concerns) and over-the-counter trade of pharmaceuticals. - Implemented a notification system for investment licensing in the food, beverage, and tourism sectors. - Adopt secondary legislation on Sunday trade and submit legislation to remove restrictions on engineers including public-works engineers. - Follow-up steps: - Analyze industrial action framework and adopt legislation to increase minimum quorum for voting on a strike. - Implement remaining actions in OECD Toolkit III, remove remaining restrictions for key professions, and complete investment licensing reform in remaining sectors by end-program. - Structural benchmarks detailed in Table 2. ### Financing and debt sustainability - Requested IMF support: 13-month and 12 days precautionary Stand-By Arrangement of SDR 1.3 billion (55 percent of quota; €1.6 billion). - Arrangement entry into effect contingent on additional assurances on size and composition of debt relief. - Euro area member states have given assurances that adequate financing will be available provided program implementation and adherence. - Undisbursed envelope under the ongoing ESM program amounts to €54 billion. - Debt sustainability: - General government debt about 180 percent of GDP at end-2016. - Full implementation of policies plus concessional official financing and short-term debt reduction measures agreed by the Eurogroup do not yet ensure long-run sustainability. - Despite Eurogroup of June 15 steps, further official debt relief—delivered upon successful completion of the adjustment program and calibrated on realistic assumptions—will be necessary to maintain gross financing needs below 15 percent of GDP in the medium run and 20 percent of GDP in the long run. ### Program monitoring and timing - Monitoring through semiannual reviews. - All quarterly (and continuous) quantitative performance criteria (PCs), key performance indicators (KPIs), structural benchmarks, prior actions, and data/transparency requirements defined in the attached TMU. - Proposed timing for reviews: - First review on or after February 15, 2018. - Second review on or after August 15, 2018. - A safeguards assessment of the Bank of Greece should be completed by the first review in accordance with IMF safeguards policy. - Existing MoU between the Ministry of Finance and the BoG will be updated by end-June, 2017. - Authorities stand ready to take measures as appropriate and will consult the Fund in advance of revisions to the policies contained in this Letter of Intent. ### Summary of Prior Actions (high-level) - Adopt a 2018-21 MTFS consistent with agreed targets and underpinned by reforms: (i) reduce personal income tax credit by €650 implemented in 2020 (possibility to advance to 2019) (savings of 1 percent of GDP); (ii) apply new pension benefit formula to current retirees and freeze pensions during 2019-22, implemented in 2019 (savings of 1 percent of GDP). - Adopt legislation to prioritize audit cases, strengthen tax collection enforcement, and define criteria for capacity to pay of tax debtors. - Issue implementing legislation for pension reform, repeal conflicting provisions, operationalize single pension register, and merge management into new single pension fund. - Adopt legislation and steps to establish an out-of-court debt restructuring framework, enable electronic on-line auctions, protect creditors from liability for good-faith restructuring, regulate insolvency administrators, simplify insolvency for SMEs, and streamline NPL servicers’ licensing/supervision. - BoG to require less-systemic banks to reinforce capital bases and publish milestone-based roadmap for liberalization of capital controls. - Adopt legislation to keep 2011 collective bargaining reforms in force until end-program and replace administrative approval of collective dismissals with a notification system (no ex-ante approval). - Adopt legislation to implement notification system for investment licensing in food, beverages, and tourism; liberalize Sunday trade and OTC; submit presidential decrees to liberalize engineers’ professional rights and pass secondary legislation for stevedores. ### Structural benchmarks (selected deadlines and items) - Adopt legislation to set ceilings on temporary contracts for 2017-18 and ensure court-mandated conversions align with 2018-21 MTFS. - Adopt legislation to address backlog of cases for which statute of limitations has been extended. - Complete an independent assessment (by an independent auditor) of government accounts payable accumulated until end-2016 and the arrears clearance program. Deadline: September 2017. - Integrate central government and other large accounts of general government entities into the Treasury Single Account. Deadline: October 2017. - Finalize recalibration of pensions and automatic electronic records of retirees’ service histories and half of the records of insured persons. *Athens, July 7, 2017 — Appendix I. Letter of Intent* ### 6. Ensure that the new revenue agency has adequate risk analysis systems and qualified ### cr17229 - 6. Ensure that the new revenue agency has adequate risk analysis systems and qualified ### Prioritized reform actions and deadlines - 6. Ensure that the new revenue agency has adequate risk analysis systems and qualified staffing. - 7. Amend the code of public revenue collection to align with the CCP, including for e-auctions. - 8. Align property assessment values with market prices. — December 2017 - 9. Adopt legislation to codify and simplify VAT legislation/administration and address VAT fraud. — March 2018 - 10. Legislate and implement a modern and streamlined system of housing, family, and disability benefits, in a fiscally neutral manner, while rationalizing existing social programs. - 11. Implement a transparent system for the monitoring of the clearance of government arrears. — June 2018 Financial Stability - 12. Fully implement the OCW framework. - 13. Fully implement the e-auction system. - 14. Complete the qualification and registration process for insolvency administrators. — July 2017 - 15. BoG to complete remedial action regarding less systemic institutions and ensure that cooperative banks cover potential capital shortfalls. - 16. Amend legislation to strengthen the position of secured creditors. — September 2017 Competitiveness and Employment - 17. Analyze the existing industrial action framework and adopt legislation to raise minimum quorum share for voting on a strike to 50 percent of union representatives. - 18. Complete the implementation of OECD Toolkit III competition assessment. - 19. Adopt horizontal measures to facilitate investment licensing. — September 2017 - 20. Adopt legislation to remove remaining restrictions (e.g. geographical, pricing, establishment, etc.) for key professions (e.g. healthcare providers, legal professionals, etc.). — December 2017 - 21. Implement the follow-up phases of the investment licensing reform covering remaining sectors. — June 2018 ### Technical Memorandum of Understanding (TMU): Program exchange rates and sector definitions - Program exchange rates (rates that prevailed on May 31, 2017): - €1 = 1.1221 U.S. dollar - €1 = 124.4970 Japanese yen - €1.2337= 1 SDR - General government entities: units classified as government units in the registry of the National Statistical Service (ELSTAT) as reflected in the most recent EDP notification, in accordance with ESA10 and ESA10 Manual on Government Deficit and Debt. - Reference date for the TMU: July 7, 2017. ### Modified General Government Primary Cash Balance (MGGPCB): definition, scope, adjustments, and reporting - Definition: - MGGPCB = modified general government cash balance (MGGCB) minus general government interest payments. - MGGCB = sum of cash balances of general government entities measured from above the line (revenue minus expenditure after consolidation for intra- and inter-sectoral transactions). - Components measured separately: - Ordinary state budget: gross ordinary budget revenues (recurrent and non-recurrent) minus tax refunds; minus ordinary budget expenditures as published monthly in the State Budget Execution Bulletin; plus balance of operations through accounts outside the budget, in particular STA. - Public investment budget: investment budget revenues minus investment budget expenditures as published monthly in the State Budget Execution Bulletin and aligned with investment state budget line items. - Other sectors (EBFs, SOEs, local governments, social security funds, and hospitals): gross revenues (including transfers) minus expenditures as published monthly on the Ministry of Finance website. - Consolidation: aggregated revenue and expenditure of all general government entities excluding all intra and inter-sectoral transactions. - Reconciliation: - The Bank of Greece will provide detailed monthly data on assets and liabilities by financial instruments, and net financing on a cash basis for the state and other general government sub-sectors. - If there is a positive discrepancy between MGGCB and net financing as reported by the Bank of Greece exceeding 200 million euro in any of the general government sub-sectors, net financing will be used to measure cash balance for that sub-sector for the quarterly performance criterion on MGGPCB, unless reconciling information is provided by the General Accounting Office of the Ministry of Finance (GAO) and the Bank of Greece. - Adjustments that will be excluded from MGGPCB: - Part of the public investment budget related to EU structural funds and their co-financing. - All transfers related to Eurogroup decisions regarding income of euro area national central banks (SMP and ANFA revenue) including the BoG. - Receipts from the sale of non-financial assets such as land, buildings, and from leases, concessions or licenses (recorded as one-off transactions). - Total general government migration-related expenditure, net of EU transfers to the Greek budget for migration-related costs (with detailed scope and exclusions) — the total adjustment will not exceed 0.2% of GDP per annum. - Payments related to support of the banking system that are part of the program’s financial sector strategy (except payments for deposit guarantee schemes). - Any payments from banks that would undermine their solvency or liquidity, unless the Bank of Greece confirms compatibility with adequate capital buffers and liquidity; two exceptions are the capital concentration tax and the guarantee fee structures in place as of December 31st, 2016. - Any refunds concerning taxes and any payments of spending arrears with special appropriation/funding for arrears clearance. - Supporting material and reporting timelines: - For the State, EBFs, and SOEs: detailed information on monthly revenues and expenditures including interest expenses, accounts payable distinguishing third parties, domestic and foreign debt redemptions, new domestic and foreign debt issuance, change in domestic and foreign currency cash balances at the Bank of Greece, and all other sources of cash financing — provided to the European Commission, ECB and IMF within five weeks of the end of each reporting month. - For local governments: monthly data on revenues and expenditures, accounts payable distinguishing third parties, as collected in the Ministry databank — within five weeks of the end of each reporting month. - For the social budget and hospitals: monthly data on revenues and expenditures and accounts payable distinguishing third parties in social security funds, EOPYY and public hospitals — within five weeks of the end of each reporting month. - Bank of Greece: detailed monthly data on net acquisition of financial assets and liabilities of the State and all non-State subsectors of the General Government; STA operator to provide monthly data on outstanding amount of the STA, inflows and outflows passing through STA grouped by main categories, distinguishing above and below the line transactions. - Monthly data by budget code on the use of the special account allocated for refugee spending, including wage and nonwage-related spending — within three weeks of the end of each month. - Monthly data on payments of spending arrears, tax refunds, and pension claims paid with special appropriation for arrears clearance or/and with ESM special financing for arrears clearance. ### Domestic arrears (Performance Criterion): definition, adjustments, and reporting - Definition of domestic arrears: - (i) unpaid invoices of the general government owed to third parties that are 90 days past their due date; - (ii) the stock of tax refund claims of third parties that have received an AFEK (verified and non-verified) but excluding those under legal dispute, and any unprocessed tax refund claims that have exceeded 90 days since the claim was filed; - (iii) any processed and unprocessed pension claims that have exceeded 90 days since the retirement application was filed. - In case no due date is specified on a supplier contract, an unpaid commitment is in arrears 90 days after the receipt of the invoice. Tax refund claims that have received an AFEK and processed and approved pension claims are due immediately. - Adjustment for new ESM official financing for arrears clearance: - If new ESM financing is received within 30 days before the test date, the QPC will not be adjusted. - If received before this period of 30 days, the QPC ceiling will be adjusted downward by: - Adjustment = Amount of disbursement * (number of days between the disbursement and the test date minus 30 days) / 60 days. - The remaining amount of disbursement not included in the above adjustment will be included in the downward adjustment of the QPC of the following quarter. - Supporting material and reporting timelines: - Monthly data on the stock and new gross accumulation of spending arrears and tax refund (processed) claims of the general government will be provided by the Ministry of Finance within four weeks after the end of each month and published on the Ministry of Finance website. - Within five weeks after the end of each month, the Ministry of Finance will provide data on accounts payable overdue by 0–30, 31–60, and 61–90 days; stock of spending arrears; stock of unpaid processed tax refund claims showing verified and unverified claims; stock of unpaid unprocessed tax refund claims distinguishing those older than 90 days. - IAPR will fill out the tax refund template within four weeks after the end of each month. - Unprocessed pension claims, including age of claims, will be provided by the Ministry of Labor within five weeks after the end of each month. - Information on clawback and rebate will be provided by the Ministry of Health and EOPYY. ### Central government debt, guarantees, and arrears (definitions and reporting) - Ceiling on the overall stock of central government debt (Performance Criterion): - Definition: central government gross debt as defined in the Excessive Deficit Procedure (EDP), covering the state, extra budgetary funds and state owned enterprises consistent with ELSTAT registry; holdings of intra-government debt consolidated; includes deposits, debt securities, and loans; excludes accounts payable; measured at nominal value as defined in the EDP; program exchange rates apply to non euro-denominated debt. - Adjustment: the ceiling will be adjusted upward (downward) by the amount of any upward (downward) revision to the stock of end-December 2016 EDP central government debt of €321 billion. - Supporting material: data on the total stock of central government debt provided to the European Commission, ECB and IMF staff by the GAO consistent with the EDP definition no later than 30 days after the end of each quarter. - Ceiling on new general government guarantees (Performance Criterion): - Definition: new guarantees are guarantees extended during the current fiscal year by the general government; for guarantees where maturity is extended beyond initial contractual provisions, only 50 percent of the full value will be counted; modification of existing guarantees without changing maturity, amount, and beneficiaries will not be treated as new guarantees. - Coverage: includes all new guarantees granted by any entity classified in the Register of the General Government Entities of ELSTAT, but excludes guarantees to entities whose debt is covered under the ceiling on the stock of general government debt; includes guarantees to the Institute for Growth; excludes specified categories including guarantees related explicitly to financial stability goals, EIB or ESIF financed loans, trade finance facility up to €500 million, ETEAN guarantees up to €50 million (if fully backed by equivalent bank deposits), certain EU structural funds risk sharing instruments, and guarantees to individuals and businesses for proven damages from natural disasters less any amounts received as compensation insurance up to a total amount of €30 million. - Supporting material: all new and modified central government guarantees reported in detail, identifying amounts and beneficiaries, and a risk assessment of calls and probability that the guarantees will be called; GAO to provide the data monthly within three weeks after the end of each month; non-state entities classified under general government to report new guarantees monthly within three weeks after the end of each month. - Non-accumulation of external debt payment arrears by the general government (Continuous Performance Criterion): - Definition: an external debt payment arrear is a payment on debt securities or loans to non-residents contracted or guaranteed by the general government, which has not been paid when due in accordance with the relevant contract, taking into account any contractual grace periods. - Reporting: any accumulation of external debt payment arrears of the general government will be reported by the PDMA immediately. *Attachment I. Technical Memorandum of Understanding, July 7, 2017 — GREECE, INTERNATIONAL MONETARY FUND* ### 19. Definition: Spending on goods and services is defined as the sum of: ### 19. Definition: Spending on goods and services is defined as the sum of: ### Definition and Scope - Spending on goods and services is the sum of: - State consumption and non-allocated expenditure as published monthly in the State Budget Execution monthly bulletin; - Spending on goods and services of other general government entities as provided monthly by the GAO. ### Adjustments - Exclusions from spending on goods and services: - Accrual spending subject to clawback that exceeds cumulative clawback ceiling until the test date; - Spending on the clearance of arrears from the special appropriation/financing. ### Supporting material - The GAO will provide detailed information on the spending of other general government entities, distinguishing spending on goods and services, within five weeks of the end of each reporting month. --- ### G. Ceiling of State Budget Primary Expenditure (Indicative Target) ### Definition - State budget primary spending = state budget expenditure minus interest paid by the state budget. - State budget expenditure includes called guarantees to entities inside and outside the general government. ### Adjustments (exclusions) - State budget primary expenditure will exclude: - payments related to support of the bank system that are part of the program’s financial sector strategy; - expenditures related to EU structural funds and their co-financing; - any payments of state spending arrears or transfers for settlements of general government arrears from special appropriation for arrears clearance; - debt assumptions of other general government entities. ### Supporting material - The GAO will provide monthly expenditure data, as defined above. --- ### H. “Program” Primary Balance and Overall Monitoring and Reporting Requirements ### Definition - For the purposes of the program, the primary balance is defined as general government EDP balance (B.9) minus ESA 10 general government consolidated interest payable (D.41), adjusted for the factors delineated in paragraph 26. ### Adjustments (items excluded and included) - The balance (B.9) will exclude: - the sale of non-financial assets such as land, buildings, leases, concessions or licenses (recorded as one-off transaction), unless these have been agreed in the context of the program; - total general government migration-related expenditure net of EU transfers to the Greek budget (see ¶6); - costs related to banking support (see ¶6); - SMP and ANFA revenues (see ¶6); - any other transactions related to debt-reducing measures agreed in the context of the program, such as the reduction of Greek Loan Facility (GLF) interest margin which are counted below the line in the debt sustainability analysis; - any payments from banks that would undermine their solvency or liquidity (see ¶6). - The balance (B.9) will include: - change of the stock of outstanding tax refunds claims without AFEK older than 90 days, net of the amount of rejected tax refund claims that exceeds the normal annual rejection volume (5% of the flow of new claims submitted in the respective year). ### Supporting material and reporting - Performance under the program will be monitored from data supplied on a quarterly basis to the EC, ECB, and IMF by ELSTAT, the Ministry of Finance, the GAO, and Bank of Greece. - The authorities will transmit to the IMF, EC, and ECB staff any data revisions in a timely manner. - Monthly data by budget code on the use of the special account allocated for refugee spending, including wage and nonwage related spending, within three weeks of the end of each month. - Results of the ex-post surveys of line ministries on migration-related spending on quarterly basis. --- ### I. Coordination on Data and Statistical Provisions ### Data standardization and provision - The Ministry of Finance will provide data on the monthly execution of the budget, the outturns of the general government and projections (after reconciliation project completion and implementation of the new Chart of Accounts) in a format aligned with the General Government Bulletin framework based on the ESA 2010 and GFSM 2014 methodology. ### Information exchange - Exchange of information and data among ELSTAT, MoF/GAO, and the BoG will be based on a Memorandum of Understanding, regularly reviewed and updated at least on an annual basis. ### Specific data and tables to be provided by ELSTAT - A bridge table between KAE and ESA 2010 codes. Each update to be provided as soon as available. - Detailed EDP tables T2A/C/D, separately for the state, local government, hospitals, and SSFs, and a bridge table between the adjustments and the ESA 2010 codes for each adjustment line, on annual basis, as soon as the assessment of the Greece EDP data is concluded by Eurostat. Detailed EDP tables on quarterly basis for state, and for other subsectors, if available. - EDP explanatory notes supplementing the official transmission of EDP data to Eurostat once the data are validated. - Completed EDP questionnaire, as soon as the clarification process of the Greece EDP data is concluded by Eurostat. - Completed supplementary table on the financial crisis, as soon as the clarification process of the Greece EDP data is concluded by Eurostat. - Data on bank support adjustments, by subsectors and ESA 2010 codes. - Data on consolidation of inter and intra-governmental transactions by economic categories, on annual and quarterly basis. - Tables on revenue and expenditure (ESA T200) for the state, EBFs and SOEs, hospitals, local government and social security funds, on annual and quarterly basis as soon as the data are published. - Explanatory notes on specific government transactions and classification of units, when submitted to Eurostat. - Data by KAE for the state bridged into the ESA categories, and including the ESA adjustments for each category, as soon as the EDP data are published. - Changes in the Register of the General Government Entities, as soon as the change is agreed with Eurostat. --- ### J. Medium-Term Targets ### Prior Action and MTFS floor - Prior Action: Adopt a medium-term fiscal strategy (MTFS) for 2018-21 in line with agreed medium-term targets, which should be reached without growth-detrimental measures. - Definition: The primary balance target, as defined in section H, will be 2.2 percent of GDP in 2018, and 3.5 percent of GDP in 2019-22. - The MTFS will set a floor for 2018-21 that maintains intermediate consumption (especially for health and social protection) at its 2016 level of 3.9 percent of GDP (4.3 percent of GDP when measured on the ESA basis). The level and scope of the floor will be reassessed and refined as needed in future reviews. ### Intermediate consumption definition and adjustments - Projected intermediate consumption is defined as intermediate consumption in accrual terms, calculated based on a template agreed with staff of the IMF/EC/ECB/ESM, consistent with the table on consolidated general government operations to be presented in Parliament with the MTFS. - Adjustments: Projected intermediate consumption will exclude MTFS projections for military expenditure, EFSF fee and FISIM (in accrual terms), and will include an adjustment for the contingency reserve and the change in the general government perimeter in line with the definition of the targeted floor. ### Measures legislated to support the 2018 primary balance target - Social welfare review measures: - (i) Tax credit for medical expenses (savings of €121 million): eliminate the deduction equivalent to 10 percent of private medical expenditures incurred by the taxpayer and dependents that are not covered by insurance or the State. - (ii) Withholding discount (savings of €68 million): eliminate the tax credit of 1.5 percent on tax withheld from salaried work income and pension income. - (iii) Heating oil allowance (savings of €58 million): reduce by half the allowance per beneficiary or decrease the income threshold to generate similar savings. - (iv) Unprotected child benefit (savings of €5 million), income support for low income families (savings of about €2 million), poverty and natural disaster benefit (savings of €3 million), unemployment benefits for entrants to the labor market (savings of €2 million): eliminate the benefits as the beneficiaries will covered by other social programs such as the GMI. - Healthcare Clawback: - Clawback ceilings on EOPYY spending in the category of “other illness benefits” as follows: €1,525 million in 2017 and €1,462.5 million in 2018 (yielding savings of €188 million). ### Supporting material - Authorities will agree with IMF/ECB/EC/ESM staff on the template calculating modified intermediate consumption, provide MTFS projections in the standard “t-report” format, as well as the table on consolidated general government operations to be presented in Parliament. ### Prior Action: Personal income tax credit reduction - Prior Action: Adopt legislation to reduce the personal income tax credit for wage, pension, and farming income by €650 implemented in 2020, or if deemed necessary in 2019 (as per the contingency mechanism) and furnish two supporting documents. - Definition: As of January 1, 2020, the tax credit will be reduced by €650 from the current child-differentiated levels (ranging from €1,900 to €2,100) for wage, pension, and farming income in order to achieve savings of 1 percent of GDP (net of other measures) during 2020-22. - Contingent mechanism: - The personal income tax measures will be implemented in 2019 if IMF staff, in cooperation with staff of the European Institutions and the Greek authorities, in the context of the final program review under the arrangement on or around June 2018, considers that, based on a forward-looking assessment, a frontloaded implementation is needed to reach the agreed 3.5 percent primary surplus fiscal target in 2019 in a sustainable manner and without growth-detrimental measures. - The assessment will take into account the overall quality of the policies supporting the fiscal targets, including all the measures legislated or introduced after the approval of the IMF arrangement, and the authorities’ adherence to the intermediate consumption spending floors defined under the MTFS. ### Supporting material for contingent timing - The Ministry of Finance will consult with the relevant highest legal authorities in Greece, including the Ministry of Justice and independent legal experts, to confirm that the contingent timing of implementation of the income tax reform (and of the growth-enhancing fiscal package defined below) are in line with the Greek constitution, and will furnish a legal opinion in this regard to IMF staff by end-May 2017. ### Prior Action: Pension benefit formula and indexation freeze - Prior Action: Adopt legislation to apply the new benefit formula introduced by the 2016 reform by eliminating the negative “personal differences” in main and supplementary pensions, while limiting reductions to 18 percent, coupled with a freeze of inflation indexation for all pensions during 2019-22. - Definitions and provisions: - From January 1, 2019, the main pension benefit formula in Pension Law 4387/2016 will apply to all current pensions and those subject to transitional arrangements in Article 6 of law 4387/2016 (recalibration). Negative personal differences are eliminated in 2019 for main pensions, while the possible decline in the main pension, including family allowances, is limited to 18. - Article 10 paragraph 2 in law 4387/2016 will be repealed and criteria for granting family allowances for current pensioners will be aligned with those applied to new pensioners as described in article 10 paragraph 1 in law 4387/2016. - Remaining personal differences will be eliminated according to Article 14 of law 4387/2016. - From January 1, 2019, the supplementary pension benefit formula in Pension Law 4387/2016 will apply to all current pensions (recalibration), eliminate the remaining personal differences, while the decline in the supplementary pension is limited to 18 percent. - Inflation indexation (Article 14 paragraph 3 in law 4387/2016) is suspended for all pensions in 2019-22. - These measures are expected to yield net savings of 1 percent of GDP in 2019-22. ### Legal risk mitigation - The Ministry of Labor will complete and publish a detailed quantitative assessment of the redistributive effects of the pension reform and amend the explanatory notes to Art. 1 and 2 of L. 4472/2017 by adding references to the 2016 actuarial study and quantitative assessment, as well as a more robust justification of the reform. - The Ministry of Finance and the Ministry of Labor will consult with the Legal Counsel of State and furnish a formal legal opinion that the pension reform is in line with the Greek constitution and the Charter of Fundamental rights, taking on board inter alia the arguments presented in the independent legal opinion. ### Prior Action: Growth-enhancing measures and contingent spending package - Prior Action: Adopt legislation of growth-enhancing tax measures of 1 percent of GDP, and a targeted spending package of 1 percent of GDP, which will be implemented starting in 2019 contingent on an assessment of overperformance relative to the agreed medium-term targets. ### Package contents and estimated fiscal impacts - Revenue measures: - (i) a reduction of the CIT rate from 29 to 26 percent (estimated impact on the CIT revenue of 0.1 percent of GDP); - (ii) a reduction of the lowest PIT rate from 22 to 20 percent (estimated impact on the PIT revenue of 0.5 percent of GDP); - (iii) a progressive reduction of solidarity surcharges, while keeping the current income thresholds (estimated impact on the PIT revenue of 0.3 percent of GDP thereafter); - (iv) a redesign of ENFIA (estimated impact on ENFIA revenue of 0.1 percent of GDP). - Expenditure measures: - (i) targeted social spending, including an increase in the housing allowance (up to 0.3 percent of GDP); child allowance (up to 0.1 percent of GDP); school meals (up to 0.1 percent of GDP); nursery/pre-school education (up to 0.1 percent of GDP); means-tested reduction in health co-payments (up to 0.1 percent of GDP); - (ii) high-quality public infrastructure investments, including for energy efficiency, agriculture (up to 0.2 percent of GDP); and active labor market policies (up to 0.1 percent of GDP). - Contingent mechanism: - The package will be implemented starting in 2019, contingent on an assessment and agreement by the staff of the IMF/EC/ECB/ESM in consultation with the Greek authorities in the final program review, with the amount to be implemented in line with institutions’ projected over-performance relative to the agreed medium-term targets—on the assumption that the contractionary measures will have already been built into the baseline scenario—in order to ensure the achievement of the agreed targets in a sustainable manner. --- ### K. Revenue Administration ### Prior Action: Legislation to improve audit prioritization, collection enforcement, and debtor viability criteria - Prioritization of audit cases: - Legislation will revise rules on targeting and prioritization of audit cases to increase the share of cases that only target tax years within the last three years and make use of information from the most recent taxpayer returns as well as externally-sourced information, including data from electronic payments and from the Financial Intelligence Unit. - Legislation will take effect for audit orders issued from January 1, 2018. - All audit cases and the related main actions will be recorded in the automated audit case management system. - Addressing cases referred by the prosecutor: - Authorities will pass legislation to exclude the tax administration (customs excluded) and its staff from receiving and implementing audit and investigation actions ordered by the Prosecutors. - Legislation will come into effect by July 2017, after establishment of an appropriate investigation structure under the Financial Prosecutor, while the ability to issue final tax assessments will remain solely with IAPR. - Previously received pending prosecutor orders non-prioritized yet by IAPR will be transferred back to the Prosecutors by end-December 2017. - Prosecutors will be allowed to send information to the tax administration without binding effect, leaving the tax administration the discretion on the use of the information. - Unify imposition of fines and penalties: - Legislation will require that current tax procedure code fines and penalties apply to all cases irrespective of tax year/period of the case. - Define criteria to classify tax and social security debtors according to capacity to pay: - Internal circulars or a joint circular issued by the IAPR Governor and EFKA Governor will define the methodology for establishing the viability and capacity to pay of tax debtors. - Circulars will require analyzing historical financial performance and willingness to pay, using parameters where available: - Growth of the company, measured as the sales over the last 3 years; - Profitability, measured as the ratio of EBITDA to turnover or to capital employed; - Liquidity, measured as the ratio of assets to short-term debt; - Leverage ratio, measured as the ratio of debt to EBITDA or to equity. - Analysis of willingness to pay will include: - Paying patterns towards IAPR and KEAO, measured through the percentage change in the outstanding tax and SSC debts; - Responsiveness, measured through the frequency and speed of the debtor’s response to inquiries from IAPR and KEAO; - Settlement status, distinguishing whether the debtor is under a settlement plan and on track (i.e. not delinquent). - Each parameter will be given a weight, allowing attribution of a score to classify debtors into viable, potentially viable, and non-viable groups. - The circulars will set a deadline for issuance of further guidance by end-December 2017 to require an in-depth performance assessment (second stage), using information such as sector potential, business performance, and management quality. *Source: cr17229 - 19. Definition: Spending on goods and services is defined as the sum of:* ### 42. Supporting material: Revised decision issued by the IAPR Governor on the prioritization of ### cr17229 - 42. Supporting material: Revised decision issued by the IAPR Governor on the prioritization of ### IAPR audit prioritization and statute of limitations - Supporting material requested: - Revised decision issued by the IAPR Governor on the prioritization of audit cases. - Copy of legislation on the changes on the treatment of prosecutor cases as described above. - Copy of legislation unifying imposition of fines and penalties. - Copy of circulars or a joint circular issued by the IAPR Governor and the EFKA Governor describing the methodology to classify tax and SSC debtors according to capacity to pay (as described above and in line with the PWC report). - Structural Benchmark (End-September 2017): Adopt legislation to address the backlog of cases for which the statute of limitations has been extended. - Objective: Significantly reduce the burden on IAPR from dealing with the backlog of cases for which the statute of limitations has already been extended by: - Resuming the application of the ordinary statute of limitation to these cases or, - If cases have been prioritized through risk-assessment, allowing audit beyond the ordinary statute of limitation only if there is suspicion of penal tax fraud. - Effective date: This legislation will take effect as of January 1, 2018. - Supporting material: IAPR circular or legislation covering the above provisions. ### IAPR risk analysis system, collection enforcement, and staffing (Structural Benchmark: End-December 2017) - Requirement: Ensure that IAPR has an adequate risk analysis system and adequate and qualified staffing. - Definitions and requirements: - Automated risk analysis system: - After a review, IAPR will issue a decision to improve the automated risk analysis and audit case selection system, requiring that it is based on all internal and third party data available within the tax administration, including on AML. - Minimum data to be included: tax return data, bank account and payment transaction data from financial institutions and reports from the Financial Intelligence Unit. - Collection enforcement: - Legislation will be amended to assign authority on determining debt collection enforcement priorities and their implementation to the IAPR headquarters (HQ). - Staffing: - Hiring by IAPR will reach at least 514 in 2016-17. - Modified attrition rule for IAPR: one entry for two exits in 2017 and one entry for each exit in 2018 and going forward. - IAPR will make the final decision on staff to be transferred to it through the mobility scheme. - Job description of all positions above directors will be published. - The Board will approve the human resources policy and a modern position-based grading and remuneration system, taking performance into account. - A suitability assessment will be completed for each IAPR staff based on the HR policy, with a ranking and a determination whether the staff meets IAPR’s requirements. - Based on this assessment, staff will be allocated to appropriate positions and grades. Staff who do not meet the IAPR requirements will be reallocated within the Ministry of Finance. - Supporting material to be provided: - Automated risk analysis system and FIU monthly published data on: - (i) cases disseminated by the financial intelligence unit (FIU) to the revenue agency, - (ii) tax audits decided upon by IAPR based on the information disseminated by the FIU, - (iii) revenue collected from these audits, - (iv) amounts frozen by the FIU in relation to tax crimes, - (v) tax crimes-related cases disseminated by the FIU to Prosecutors, - (vi) indictments based on these cases, - (vii) final convictions and amounts of confiscated proceeds based on these cases, - (viii) international requests of information made by the FIU. - Adopted legislation making it mandatory for local tax offices to conduct debt collection enforcement actions based on directives from IAPR HQ. - Evidence of published job descriptions. - Policy paper describing the new human resources policy, including a position-based grading and remuneration system and a staffing plan approved by the Board by end June, 2017. - IAPR report on the finalization of the individual suitability assessment, issued by end-December 2017. - Quarterly data on IAPR inflow and outflow of personnel. - Joint MAREG/MoF decision determining staff reallocation process. ### Code of Public Revenue Collection and VAT (Structural Benchmarks) - Structural Benchmark (End-December 2017): Adopt legislation to amend the Code of Public Revenue Collection to align with the Code of Civil Procedure (CCP), including for e-auctions. - Definition: Amend the Code of Public Revenue Collection to establish rules and criteria for the reduction of reserve prices in the case of unsuccessful auctions in line with the CCP. - Structural Benchmark (End-March 2018): Adopt legislation to codify and simplify the VAT legislation and administration and address VAT fraud. - Definitions and required actions by end-March 2018: - Accelerate de-registration procedures, limit VAT re-registration: - Review TPC Articles 10 and 11 and the relevant secondary legislation already in place. - Require amendment of paragraphs 2 and 3 of Article 10 to make provisions applicable to natural persons, and issuance of the implementation decision referred to in paragraph 3 and Article 10. - Codify and simplify VAT legislation: - Streamlined VAT legislation will eliminate loopholes, including those for persons under the special VAT regime. - Exceeding the threshold for the simplified regime will require reregistration under the regular VAT regime immediately, without waiting for the end of the financial (or calendar) year. - Transfer pricing rules will be included in the revised legislation for VAT purposes. - Supporting material: - A detailed roadmap to tackle VAT fraud by end-September 2017. - Draft primary legislation by end-December 2017. ### Pension Reform (Prior Action and Structural Benchmarks) - Prior Action: The Ministry of Labor will issue all implementing legislation for the new pension reform, repeal conflicting provisions, operationalize a single pension register, and merge governance and management arrangements of existing funds into the new single pension fund. - Definitions: Provisions needed to fully implement Law 4387/2016: - Implementing legislation: All ministerial decisions and circulars needed to fully implement the 2016 pension reform, including to: - (i) obtain savings of at least €570 million in 2017 from EKAS; - (ii) implement the lower spending ceiling on main pension payments of €2,000 per month and on multiple pensions at €3,000 per month (without any exemptions in both cases) in force until end-2018; - (iii) define the contribution base for self-employed as gross earnings before social security contributions of previous year, with effect in January 2018. This contribution base is temporarily reduced by 15 percent in 2018, and by 0 in 2019 and thereafter. - Repeal conflicting legislation: Authorities to provide a comprehensive list of conflicting legislation to Law 4387/2016 and confirmation that all conflicting provisions have been repealed (including primary and secondary legislation and implementing circulars). - Transfer insured individuals into EFKA and create a single register of pensioners: All data on insured persons should be transferred into EFKA and a single register of pensioners and benefit values should be fully operational, allowing EFKA to become the sole entity responsible for paying main pension benefits. - Governance and management arrangements: Create a single unified pension fund (EFKA) for all retirees; merge all existing social security funds (except non-pension insurance activities of OGA, NAT, and TSMEDE) into EFKA; absorb governance and management arrangements into EFKA; prioritize directing qualified personnel to clear unprocessed pension claims and create electronic registries; transfer staff not retained to other entities including KEAO, the National Actuarial Authorities and EOPYY. - Supporting material: - Full list of conflicting legislation to be explicitly repealed. - Action plan for efficiency gains from resource reallocation. - Actuarial studies as required in the Pension Law 4387/2016 and any associate laws within the deadline set by the Ageing Working Group December 2017. - Helios reports: Regular monthly publication of Helios reports reporting all spending data in gross terms (including retirees’ health contributions and EKAS and AKAGE). All past missing reports from 2015 will be published by September 2017. - Quantification of benefits for past higher contributions as specified in the Pension Law 4387/2016. - Monthly retirement flows and stocks: Monthly reporting based on agreed data template reporting time series on new retirement applications, number and average pension of new issued temporary and permanent pensions, number and average pension of exits, number and estimated value of unprocessed pension applications. - Structural Benchmarks (End-December 2017): - Finalize electronic records of retirees’ service histories and the recalibration of pensions. - Complete full electronic records of half of insured persons by end-December 2017. - Definitions for recalibration and processing: - Recalibration of all main and supplementary pensions of all existing retirees (excluding pensions following the new pro-rated OGA benefit rule) based on new unified benefit formulas as specified in Law 4387/2016. - Schedule: Recalibration to be completed by end-2017. - Evidence base: Creation of automatic electronic records of retirees including length of service histories and pensionable earnings; where data are missing, use imputation techniques to be discussed and agreed with the IMF/EC/ECB/ESM staff. - Processing of pensions: Establish electronic records of all insured persons by end-August 2018; electronic records of half of insured persons by end-December 2017—targeting those with longer service histories. - Communication: Regular communication procedure to insured persons on their contribution record to allow reconciliation with the centralized registry. - Supporting material: Quarterly reports on progress creating electronic records for retirees and insured persons, including number and share covered, information collected or unrecoverable, number and share of recalibrated current pensions, and estimated cumulative fiscal savings. ### Property Taxes (Structural Benchmark: End-December 2017) - Structural Benchmark: The Ministry of Finance will align property assessment values with market prices and broaden the property tax base in a revenue neutral way. - Definitions and required actions (with Technical Assistance): - (i) Set up property revaluation working group and high-level steering group involving Bank of Greece and ELSTAT by end-June 2017. - (ii) Compile all required data, complete classification of properties and determine the nature of the value based and valuation methodologies relevant to individual categories of properties by end-July 2017. - (iii) Improve capacity of the real property valuation unit by hiring or contracting experienced valuators and forming a dedicated property revaluation team by end-September 2017. - (iv) Develop a permanent IT platform for property revaluation by end-December 2017. - (v) Pass legislation to align property assessment values with market prices by end-December 2017. - Revenue-neutral provision: If new property assessment values result in a short fall in ENFIA revenue against the budget target of €2.7 billion, the ENFIA tax base will be broadened and tax rates adjusted to reach that revenue target to preserve the fiscally neutral character of the reform. - Supporting material: Methodological report outlining classification and valuation methodologies by end-July 2017, and fiscal estimates of ENFIA revenue yields by end-October 2017. Primary and secondary legislation adopted by end December, 2017. ### Public Administration and Public Financial Management - Structural Benchmark (End-September 2017): Adopt legislation to set ceilings on temporary contracts for 2017-18 and ensure court-mandated conversions of temporary into permanent contracts as well as employment relationships that legally open the possibility for permanent contracts are fully in line with the projected wage bill in the 2018-21 MTFS. - Definition: - Legislation to limit temporary contracts in the general government that are not financed by EU funds, excluding Chapter A companies. - Contracts to be granted through a transparent and competitive process. - Introduce quarterly ceilings for 2017-18 on temporary contracts burdening the state budget in line with the 2018-21 MTFS and projected general government wage bill, taking into account seasonality and unforeseen circumstances (e.g., refugees, natural disasters). - Conversions of temporary contracts into permanent contracts following a final Court decision will require action to ensure adherence to projected wage bill in the 2018-21 MTFS. - Conversions of other employment relationships that legally open the possibility for permanent contracts will require action to ensure adherence to projected wage bill in the 2018-21 MTFS. - Legislative framework to ensure company-based contracts do not result in permanent employment contracts and are in line with procurement rules. - Supporting material: - Copy of adopted legislation by end-September 2017 including the above provisions. - Monthly public sector employment census available thirty days after end of reporting month showing, for general government excluding Chapter A companies, number of temporary staff burdening the budget (stock, exits and entries) and temporary staff not burdening the budget. - Structural Benchmark (End-September 2017): Ministry of Finance to provide final report of the independent auditor contracted to complete an independent assessment of government accounts payable accumulated until end-2016 and of the arrears clearance program. - Definition and TOR requirements: - TOR to be completed by end-May 2017 specifying scope: verification of accounts payable, spending arrears and other claims accumulated until end-2016, and assessment of arrears clearance program completed in June-December 2016; identify priority entities and a random sample of other entities. - Audit report to provide information on: - (i) stock of payables and arrears at end-2016 for priority entities (spending arrears, processed and unprocessed tax refunds, processed and unprocessed pension claims, and distribution of claims by amount); - (ii) analysis of implementation of arrears clearance program (amounts of cash payments, amounts of offsets, first-in first-out, payments of obligations accrued in previous years, payments of obligations accrued in current year); - (iii) analysis of amount and sources of new accumulation of arrears (e.g., insufficient budgets for entitlement spending, expenditures without proper commitment authorization, delays in internal processes, large and increasing carry-forwards of commitments, revenues below budgets, within-year budget adjustments, etc.); - (iv) recommendations to prevent new accumulation of arrears; - (v) discrepancies across reporting systems (commitment register, e-portal, surveys); - (vi) offsets with current vs. past tax liabilities; - (vii) arrears towards domestic vs. foreign suppliers; - (viii) interest accrued from late payments; - (ix) cross-checking of payments to final beneficiaries. - Contract to be signed by June 2017 requiring auditor to submit final audit report to authorities by mid-September 2017. - Ministry of Finance to provide by end-September 2017 a summary of the report and an assessment including plan to address auditor recommendations. - Supporting material: - Draft TOR by mid-May 2017. - Signed contract under the TOR provided to IMF staff by end-June, 2017. - Final report of the independent auditor and the Ministry of Finance report provided to IMF staff by end-September 2017. - Structural Benchmark (End-October 2017): Ministry of Finance and the Bank of Greece will integrate central government accounts and large accounts of general government entities into the Treasury Single Account. *International Monetary Fund — cr17229 supporting material and structural benchmarks as provided in the source content.* ### 60. Definition: The Ministry of Finance, in collaboration with the BoG, will issue a Ministerial ### 60. Definition: The Ministry of Finance, in collaboration with the BoG, will issue a Ministerial ### Treasury Single Account (TSA) design and implementation - The Ministry of Finance, in collaboration with the BoG, will issue a Ministerial Decision to describe the design of the bank account structure, payment and accounting arrangements for a fully integrated Treasury Single Account (TSA). - The Decision will require the transfer to the TSA by end-October of the accounts of the central government entities, as well as of other general government entities, such that 3 billion is transferred in July-October, 2017, while ensuring financial stability. - All remaining general government entities will be transferred by end-June 2018. - The amounts to be transferred will be determined in agreement with the staff of the IMF/EC/ECB/ESM. - If necessary, zero-balance bank accounts in commercial banks can be used for payment processing. - GAO will ensure that entities have access to their deposit balances held in the TSA at all times. - The TSA will be incorporated into the fiscal reporting framework, ensuring that the account balances of each entity or fund held in the TSA is consistently incorporated into the monthly fiscal reports submitted to GAO. ### Supporting material and reporting templates for TSA - By end-June 2017, the MoF will provide a template showing—for central government entities and the selected other general government entities—the entities and number of accounts in and outside the TSA, as well as the amounts of deposits, debits, and credits at end-December 2015, end-December 2016, and end-March 2017. - A template presenting the accounts of all remaining entities as of end-September 2017 will be provided by end-December 2017. - A monthly update of the template will be provided within two weeks of the end of the month. - Structural Benchmark (End-June 2018): The Ministry of Finance will implement a revamped system for arrears management, including monitoring of arrears clearance and structural measures to prevent new accumulation of arrears. ### Arrears monitoring system and GAO circular - A GAO circular will amend the structure of the information collected by the commitment registers and the e-portal to implement a comprehensive monitoring system of spending commitments, accounts payable and arrears, including to address the shortcomings identified by the GAO review of commitment registers completed in 2016 and those of the independent audit. - The circular will require monthly reporting by entities with annual spending exceeding €1 million on: - the reasons for new arrears accumulation, - cash needs and plan for clearance of existing arrears, - measures taken to prevent new accumulation of arrears. - The circular will require the commitment registers to record: - (i) accounts payable and arrears accumulation to nonresidents, - (ii) the amount of arrears clearance in cash and through offsets, - (iii) offsets with current vs. past tax liabilities, - (iv) cash needs for arrears clearance within the fiscal year, - (v) interest accrued from late payments. - Supporting material and timeline: - By end-January 2018, the GAO will provide a draft circular designing the arrears monitoring framework. - Any technical preparations, including consultation and training of general government staff, will be conducted by end-March 2018. - A pilot phase will be completed by end-April 2018. - The roll-out to all general government entities will be completed by end-June 2018 together with structural measures to prevent the accumulation of new arrears. ### Social welfare reforms (Structural Benchmark End-June 2018) - Structural Benchmark (End-June 2018): Parliament will adopt legislation and the government will implement a modern and streamlined system of family, disability, and housing benefits in a fiscally neutral manner, while rationalizing existing social programs. - Budget-neutral components (as defined): - Streamlining family benefit: - By end-November 2017, new legislation will be adopted in line with the recommendations in the Social Welfare Review of the World Bank to improve targeting and increase equity. - Measures include merging the unified family benefit and large family benefit, harmonize equivalence scales and adjusting the threshold as needed to improve targeting. - The new family benefit system will be in effect as of January 1, 2018. - Reforming the disability benefit system: - By end-November 2017, new legislation for a pilot scheme will be adopted to move from the current impairment assessment to a functional assessment to determine eligibility (i.e. the ability of the person to perform activities of daily living). - A pilot program of the functional disability assessment system will be rolled out by January 2018. - The national rollout legislation will be adopted in May 2018 and will also harmonize all contributory disability and welfare benefit rules, including under Law 4387/2016. - A national implementation will commence in end-June 2018. (i.e. by July 1, 2018, the disability benefits, for all beneficiaries nationwide, will be progressively determined and granted based on the new functional assessment). - Introducing a housing benefit: - By end-September 2017, new legislation will be adopted to specify the design of a means-tested housing benefit developed with advice from the World Bank, to be fully rolled-out as part of the growth-enhancing measures. ### NPL legal framework — Out-of-Court Workout (OCW) and implementation (Prior Action) - Prior Action: (i) Establish a new out-of-court workout framework (OCW) and adopt Ministerial Decisions for the processing of cases by public creditors. - OCW legislation will specify: - Scope: applicable to all enterprises, including individual entrepreneurs; all elements of debt, towards the State, social security and private sector, should be considered as part of the restructuring plan. - Information requirements: debtor must share information on all debts, assets, and sources of income. - Eligibility test: basic principles using standard metrics (positive EBITDA) as a preliminary filter to exclude enterprises that are clearly not viable. - Debt restructuring proposals: for viable debtors, proposals will specify restructuring measures (rescheduling, write-downs, debt/equity swaps, etc.) to restore long-term viability, based on market valuations and credible financial projections; unviable debtors will not be offered restructuring proposals. - Coordination and decision making mechanism: agreements adopted by a qualified majority of voting creditors; non-action by duly notified creditors will not prevent adoption if attendance quorum is met. - Rapid court confirmation: short period for possible ratification by courts; agreements take effect upon conclusion; courts may grant interim measures to prevent enforcement by dissenting creditors while confirmation is processed; courts can examine complaints at confirmation limited to compulsory distribution rules or decisive procedural/substantive irregularities. - Stay of creditor actions: stay only after completeness of application is determined and invitations sent; stay automatically lifted if participation quorum not reached; initial stay period may be extended, for a maximum period of four months, by court order provided participating creditors representing the majority of claims consent. - Link with insolvency legislation: facilitate initiation of insolvency procedure if lack of compliance or debtor assessed as non-viable. - Treatment of public claims: all claims of the State, including tax and social security claims, but excluding withheld taxes and social security contributions for employees, will be subject to rescheduling and write-down, in conformity with the assessment of viability and resulting in improved recovery compared with liquidation. - 95% of tax related fines and 85% of surcharges will be subordinated to facilitate the restructuring, and cancelled only at the successful completion of the restructuring plan. - Penalty interests on the private sector’s claims will be subordinated in full. - Treatment of guarantors: creditors who benefit from a third-party guarantee may abstain from the procedure without being bound by the restructuring agreement. - Ministerial decisions: Ministerial Decisions of article 15 par. 14 and 20 will be adopted specifying procedures, conduct and actions of the tax administration and social security officials in debt restructuring procedures for public claims, as necessary for effective implementation. - Structural benchmark: Implementation of the OCW framework (end-July 2017). ### OCW implementation measures and SecPD responsibilities - Implementation measures include: - SecPD will publish an invitation to submit expressions of interest to be listed in the Coordinator register and appoint all coordinator positions within 10 business days after the lapse of the application deadline. - SecPD will select and register all coordinator positions, provide training to the coordinators and establish necessary processes and organization for supervision of coordinators. - SecPD will implement and publish a mechanism to manage processing of applications to maximize throughput, provide incentives, and distribute processing capacity across different classes of debtors; the mechanism will be consulted with creditors (including banks and public creditors) and published by the SecPD. - SecPD will put in place initial processes to monitor progress of cases and identify operational and policy impediments. - SecPD will implement and operationalize the first functional package of the web-based system to file and process applications; the package will provide a website where applicants can submit applications and supporting documentation without paper-based communication for the initial application step. - SecPD will prepare and post educational material targeted to borrowers (including less-sophisticated ones) and professionals, and hold scheduled trainings and seminars for coordinators and professionals. - Circulars for Ministerial Decisions of article 15 par. 14 and 20 will be adopted specifying procedures for tax administration and social security officials in debt restructuring procedures where necessary. - SecPD will have developed a comprehensive project plan for the extension of its IT-supported platform for sharing debtor-related information between banks, tax administration and social security entities, agreed by all stakeholders and aiming at full implementation and operationalization by December 2017. ### Electronic on-line auctions (Prior Action) - Prior Action: (ii) allow electronic on-line auctions, and implement the technological infrastructure to conduct e-auctions. - Key features of the electronic auction system: - A law amending the CCP and a Ministerial Decision will regulate electronic auctions of seized property. - System principles: fairness, transparency, value maximization through enhanced competition, legal certainty and security. - System components: web portal for publicity (asset description, legal certificates, valuation reports, photographs, etc.) and a functional auction platform. - Participation requires registration; registration procedure designed for easy and secure access. - Platform lists assets and incorporates a search engine; auctions initiate after a specified period post-listing. - Bidding rules: registered persons submit bids by safe electronic means with certification; system sends receipt notifications specifying time and amount; system publishes highest current bid and amount in real time without revealing bidder identity or number of bidders; valid bids must be superior to latest published bid; bidding ends at specified period end with possible final extension for last-minute bids. - System ensures compliance with deposit and payment obligations and certificates auction results with chronological list of received bids and bidder identification. - Transition rules: - Legal amendments include transitional rules allowing creditors to opt immediately upon publication in the Official Journal for the electronic auction system with proper advance notice when seizure occurred before modification, preserving original seizure date for deadline determination. - Transitional rules allow creditors to opt for electronic auctions with a notice period not exceeding 2 months in cases where auctions were suspended or failed before modification. - Implementation actions: - Design and launch of platform by specialized experts. - System built in safe architecture ensuring certainty and security of communications, full time-sequence recording and traceability. - Development, delivery and support of electronic platform with a pilot subject to complete testing. ### Legal protections, insolvency administration, and SME insolvency simplification (Prior Actions) - Prior Action: (iii) protect creditors from civil and criminal liability for debt restructuring actions taken in good faith in accordance with the law. - Legal provision to ensure actions taken in relation to debt restructuring—under OCW or outside of it—by private or public officials, in good faith and in compliance with procedures and objective criteria, are legitimate regarding civil or criminal liability according to general principles and safeguards of the existing legal framework. - Ensure sufficient procedural safeguards to prevent unwarranted pressing of charges; applicable procedures may include additional safeguards for very large debtors. - Prior Action: (iv) establish the insolvency administrator framework. - Secondary legislation to include: - Internal Regulation of the Insolvency Administration Committee; - Decision regarding the examinations; - Joint decision of the Minister of Finance and the Minister of Justice on remuneration of the examiners and fees to be paid by candidates; - Decision of the Minister of Justice establishing a code of conduct for insolvency administrators; - Decision of the Minister of Justice for Continuous Training; - Decision of the Minister of Justice for the initiation and conduct of disciplinary procedures. - Initiation of the accreditation process: authorities will publish the notice of the examination for the accreditation of insolvency administrators. - Prior Action: (v) simplify and accelerate the insolvency procedures for SMEs. - Amendments to the insolvency code to include specific rules for the insolvency of SMEs to simplify and accelerate the procedure by assigning more powers to the rapporteur, reducing deadlines for procedural actions, and dispensing with the intervention of experts. - Prior Action: (vi) streamline the licensing and supervision framework of NPL servicers. *Source: cr17229 - 60. Definition: The Ministry of Finance, in collaboration with the BoG, will issue a Ministerial (cr17229 PDF).* ### 71. Definitions. The law regarding Debt Management Companies and Debt Transfer Companies ### cr17229 - 71. Definitions. The law regarding Debt Management Companies and Debt Transfer Companies ### Amendments to Law 4354/2015 and secondary legislation (Debt Management Companies and Debt Transfer Companies) - The law will be amended in the following points: - i) the NPL servicing license, if it does not include refinancing, is disconnected from Act 2577; - ii) the business plan requirements, especially for servicers that do not provide refinancing, will be significantly simplified; - iii) the Fit and Proper requirements in the BoG Acts are simplified; - iv) the IT security assessment is waived if an appropriate ISO certification is submitted; - v) the restructuring strategy requirements provided for in secondary legislation are further simplified; - vi) the processes of the Code of Conduct are not affected by a transfer of the loan; - vii) the BoG Act clarifies that the contact point requirement also includes virtual points of contact (such as websites, call centers) regardless of the latter’s location; - viii) the requirement for opinion by a Ministerial committee is removed; and - ix) the purpose of the servicing companies will be expanded to include the management of real estate property connected to the loan portfolio they have been assigned to service. - Structural benchmark (End-July 2017): Fully operationalize the platform for electronic auctions ### Electronic auctions platform (definition and benchmark) - Full operationalization: after completion of the test phase, the platform is fully operational with the completion of the training of users and the production of an end-user manual, resulting in its availability for the conduct of auctions. - Structural benchmark (End-July 2017): Complete the qualification and registration process for insolvency administrators. ### Insolvency administrators (qualification and registry) - Enrolment of successful insolvency administrator applicants into the registry: - On completion of the examinations conducted according with the secondary legislation listed above, and after fulfilling all regulatory requirements, such as compulsory training and professional insurance, the Insolvency Administration Committee will include the applicants in the registry and the registered insolvency administrators will be able to perform the functions assigned to them by the insolvency code. - Structural benchmark (End-September 2017): Amend legislation to strengthen the position of secured creditors. ### Strengthening the position of secured creditors - Definition: The Code of Civil Procedure, the insolvency law, and related legislation, will be amended to strengthen the position of secured creditors by aligning the treatment of secured credit with EU best practices, placing secured credit in a position of priority, which will allow lenders to provide financing based on the market value of the collateral. - Scope: This modification of the ranking of claims will only apply to new secured credit extended after the legal amendments are adopted and enter into force. ### Capital Adequacy and Bank Governance — Prior action - Prior action: BoG will require less-systemic banks to reinforce their capital base. - Less-systemic banks (excluding cooperative banks) definition: - Less systemic banks, excluding cooperative banks, that have been identified with a capital shortfall as result of the 2015 asset quality review and stress test and/or further supervisory exercises, will have entered into binding agreements to fill any remaining gap to fully comply with supervisory requirements including Pillar II requirements and those identified under an adverse scenario of the stress test. - This requires that contractual arrangements for transactions that strengthen the capital basis have been successfully concluded. - Supporting material: - For each less systemic bank, excluding cooperative banks, confirmation by the BoG as competent supervisor, describing the structure of the relevant transactions, also reporting on the resulting capital levels. - Structural benchmark (End-September 2017): BoG to complete remedial action regarding less-systemic institutions and ensure that cooperative banks cover potential capital shortfalls ### Cooperative banks (capital remediation) - Definition: - Cooperative banks that have been identified with a capital shortfall as result of the 2015 asset quality review and stress test and/or further supervisory exercises, will have filled any remaining gap to fully comply with supervisory requirements including Pillar II requirements and those identified under an adverse scenario of the stress test. - This requires that contractual arrangements of a capital injection have been successfully concluded, and that corresponding capital-relevant transactions have been executed. - Supporting material: - For each cooperative bank in question, confirmation by the BoG as competent supervisor describing the structure of the relevant transactions and confirming their execution, also reporting on the resulting capital levels. ### Payment System and Liquidity Conditions — Prior Action - Prior Action: Adopt and publish a milestone-based roadmap for the liberalization of capital controls - Definition of roadmap: - The roadmap will describe the sequencing of steps towards the relaxation of currently applicable capital controls and withdrawal restrictions. These steps will not be time-bound and will be objectively connected to measurable signals of the state of confidence in the banking system. - Supporting materials and reporting requirements: - Reporting entities: The Bank of Greece will report liquidity and funding indicators to the institutions. Bank of Greece will submit to the institutions bank-specific data for each of the systemic institutions and aggregate data for the remaining of the sector in a timely manner. - Data on deposits: - Deposit stocks will be reported monthly by category (individual, business, government), by size bands (e.g. 5k, 50 k, 100k, 500k, 1m, 5m, 10m), by domicile (Greece, EA outside Greece, outside EA), by type and maturity structure (current account, time deposits by the remaining months until maturity, savings), and by currency. - Monthly information on the number of accounts and the number of depositors in each size band and depositor category. - Monthly flow transactions will be reported gross and by category (cash pay-ins and withdrawals, wire incoming and outgoing transfers by domicile of the counterparty). - Liquidity indicators: In addition to banks' cash buffers, monthly data will be provided on banks' liquidity buffers, including unencumbered collateral at book and estimated liquidity value. - Funding data: Monthly data on funding will distinguish between central bank funding, private market refinancing transactions (secured repos and unsecured borrowing) and intra-group transactions. - Deposit survey: - By end-September 2017, the BoG will publish the results of a survey evaluating depositor confidence. - By November 2017, the BoG will prepare a study on the impact of capital controls on the economy, also taking into account the results of the survey. - The survey will be conducted based on a well-targeted, representative sample of various categories of depositors (businesses in various sizes and individuals), as well as non-resident depositors. - The survey will be designed to assess depositor sentiments in the following regards: (i) Level of knowledge regarding the current restrictions in place and conditions of the financial sector; (ii) Extent to which the current restrictions are binding; (iii) Expectations on the improvement of economic situation and financial stability; (iv) Drivers of confidence in Greek banking system; (v) Expectations on the sequence and pace of relaxation steps; (vi) Impact of further relaxation on depositors’ financial decisions. - The BoG will consult the institutions in designing of the survey, make available detailed finding to the institutions, and publish key findings. ### Labor Market — Prior actions - Prior action: Adopt legislation to provide that the 2011 collective bargaining reforms will remain in force until the end of the program. - Definition: Primary legislation will require for the duration of the program the suspension of extensions of collective bargaining agreements and of the application of the favorability principle. - Prior action: Adopt legislation to replace the administrative approval of collective dismissals with a notification process, which will not involve ex ante approval. - Definition: Primary legislation on collective redundancies will replace the current framework of administrative approval of collective dismissals with a notification procedure, in line with EU Directive 98/59, which will allow collective dismissals to take effect within three months of the notification by the employer and will not require an ex-ante approval. - Administration and procedures: - The system of notification is to be administered by the Supreme Labor Council (ASE), which will comprise equal representation of the State, the employees’ and the employers’ representatives. - ASE will check compliance with the legal requirements of information and consultation of workers and inform the employers and employees representatives of its assessment. - The notification process will entail: - Consultations with the workers’ representatives that last up to 30 days. - The company will communicate to the public employment service (OAED) the list of dismissed employees to be registered with the public employment service. - The company, after the legally required relevant consultations with the workers’ representatives, may submit a ‘social plan’ mitigating the consequences of the collective dismissal while preserving the financial viability of the enterprise. The social plan may include measures for redeploying or retraining workers being made redundant, the provision of counselling and outplacement services, training, redundancy payments other than those arising out of national legislation, and the commitment to re-hire first the workers dismissed when economic conditions improve. - ASE will verify that all required information has been provided by the employer and the consultation process has taken place, which will allow collective redundancies to take effect earlier than the standard three-month period. Otherwise, collective dismissals can take effect 3 months after the notification to the public authorities. - Structural benchmark (End-September 2017): Analyse and adopt legislation to raise the minimum quorum of first level unions for voting on a strike to 50 percent of union representatives. - Definition: Following analysis of the existing framework, Law 1264/1982, it will be amended to specify that for a vote on a strike to be legitimate: (i) the presence of at least 50 percent of members of first level unions who are current on union membership contributions will be required; and (ii) a simple majority rather than a two third majority vote will be required for second and third calls. ### Product and Service Markets — Prior actions and benchmarks - Prior Action: Adopt legislation to implement the notification system for investment licensing for food, beverages, and tourism. - Definition: The first phase of the investment licensing reform includes food, beverage, shops of hygiene interest and tourism sectors. The government will adopt all secondary legislation needed to implement the reform for these sectors. This includes one ministerial decision and two joint ministerial decisions for the implementation of the notification system, one for each sector. The decisions list the activities of these sectors and set the details for the notification procedure, the information and certificates required by the applicant, and the notification fees and penalties in case of non-compliance. The interim electronic notification system will be implemented for all these sectors. - Prior Action: Adopt legislation to liberalize Sunday trade. - Definition: An amendment to law 4177/2013 will liberalize Sunday trade by (i) removing the restriction on shops with more than 250m2, chain stores, shops-in-shops, and outlets or outlet villages; (ii) allowing Sunday trade in tourist areas during the months of May to October—the main tourist season—in the following areas of touristic interest: (i) municipality of Athens; (ii) selected areas of the sub-prefecture of Southern Athens; (iii) key commercial areas around the port of Piraeus; (iv) key areas of the historical center of Thessaloniki as defined in MD3046/51009/1994; and (v) key commercial areas around the Athens international airport. - To address the CoS ruling concerns, the legislation will be accompanied with detailed explanatory notes, including an economic impact assessment. - Prior Action: Adopt legislation to liberalize over-the-counter sales of pharmaceuticals (OTC). - Definition: With the objective to increase competition and reduce average pharmaceutical prices, primary and secondary legislation will be issued by the government to implement OTC liberalization with no price restrictions—regardless of the point of sale—except for purchases by hospital. This legislation provides indicative retail prices and maximum hospital prices. - Prior Action: The government to submit presidential decrees to liberalize engineers’ professional rights, including for public works engineers, and adopt secondary legislation for stevedores. - Definition: Primary legislation on registries will remove restrictions on public work engineers, including to disconnect the class registration as a requirement for participation in tenders, abolish the legal form requirement to access registry classes, remove the geographical barriers on regional registries and expand registration of designers by category. A presidential decree will be submitted to the Council of State to implement the law on registries for public work engineers. The decree will modify the structure of registries, including the permission on contemporaneous registration, and allow professionals to belong to the registries of experience for designers and contractors. A second presidential decree will be submitted to the Council of State to liberalize engineer’s professional rights, reducing reserved activities, and broadening the access on engineering activities to more specialties of engineers. For stevedores, secondary legislation will be adopted to implement the law, including a ministerial decree on the operation of the registries. - Structural benchmark (End-September 2017): Adopt legislation to complete the implementation of remaining actions in the OECD Toolkit III competition assessment except for eight recommendations. - Definition: Primary and secondary legislation and documented actions will provide for the implementation of all remaining 163 recommendations of the OECD toolkit III report to complete the full set of 371 recommendations in the sectors of wholesale, construction, media, e-commerce, chemicals and pharmaceuticals. - The legislation will among other simplify the rules and lift restrictions on the operation of pharmaceutical warehouses, update legislation for the advertisement of over-the-counter (OTC) medicines, review the regulatory framework for Pay TV, allow trading detergents in bulk at wholesale level, and remove restrictions on public work registries. - Exemptions and phased completions: - Exempted recommendations include: (i) replacing the prior approval of scientific events organized or funded by pharmaceutical companies with a notification and introducing in the legislation an ex-post mechanism to accompany the notification requirement (an implemented commitment under the EFSF-supported program, Pharmaceutical 14), (ii) homogenizing the taxes for pay TV/radio (has a negative fiscal impact, Media 59), (iii) releasing the map for TV licenses (requires coordination with other countries, Media 37). - The following recommendations will be completed with delay and dates specified: Wholesale 127 (November 2017); Wholesale 29 (December 2018); Chemicals 80 (December 2017); Media 32 (December 2017); Media 43 (December 2017). - Structural benchmark (End-September 2017): Adopt horizontal measures to facilitate licensing. - Definition: The government will implement the second phase of the investment licensing reform by preparing and adopting the framework law on inspections and regulatory legislation on (i) installation license for all manufacturing activities, and (ii) logistics (warehouses and distribution centers). The pilot implementation of the inspection framework law will apply to food and beverage. - Structural benchmark (End-December 2017): Adopt primary and secondary legislation to remove remaining restrictions (geographical, pricing, establishment, etc.) for key professions (health care providers, legal professionals, etc.). - Definition: Primary and secondary legislation will simplify notification or license procedures for establishment and remove geographical and pricing restrictions for healthcare providers, modernize the legal framework for private clinics; and remove restrictions hairdressers, fertilizer salesmen, and haulers. In addition, new legislation will remove restrictions on other professions, to be identified by end-June 2017 (e.g. legal professionals, etc.). - Structural benchmark (End-June 2018): The government will implement the follow-up phases of the investment licensing reform covering remaining sectors. - Definition: The government will implement the third phase of the investment licensing reform, which includes most remaining sectors. The sectors will be specified by June 2017 and notification will be implemented through an IT system by June 2018. ### Monitoring of Key Performance Indicators (KPI) — Revenue Administration - Progress in revenue administration will be defined as reaching or exceeding the targets set in TMU Table 2. - Definitions and KPI components: - A completed audit is defined as an audit formally reported as finalized in the ELENXIS audit case management system, including signed off by the audit supervisor, and the corrective assessment as referred to in Article 34 of the TPC has been issued, or the audit report states that no underpayment has occurred. - High Wealth Individual (HWI) audits carried out on a legal person owned or controlled by the high wealth individual will also count as an HWI audit case if the audit is carried out by the auditor(s) who carry out the audit of the relevant high wealth individual. Furthermore, audit of off-shore companies with the aim of identifying the natural person owing or controlling the offshore company will also be regarded as an HWI audit case. These audits will be reported separately. - Collection of new tax debt is collection of debt accrued in the period from the 1st of December of the previous year till the 30th of November of the current year and does not include items of non-tax nature for which the tax authority is responsible for collecting on behalf of other public sector entities, such as loans, loan guarantees, penalties and fines, parafiscal taxes, rentals, services, other parafiscal charges, revenue stamps, debits, and other contributions. - Old tax debt collection is collection during current year of debt accrued before 30th November of previous year. - Fresh tax audit cases are closed audit cases, concerning tax years, fiscal years, cases, periods or obligations related to the last five years, including the year when a IAPR decision was issued to define the priority cases. - Taxpayer service: The KPI is a ratio defined as follows. The numerator is the number of VAT refund claims paid or rejected within 90 days during the quarter. The denominator is the sum of the numerator and the number of pending VAT refund claims, for which 90 days have passed at the end of the quarter. The 90-day period refers to the period between a claim is made and final payment to the claimant is completed or the taxpayer is notified that the claim can be paid, or an offset has been made, or the claim is rejected. - Tax paid on time: The numerator is tax liabilities paid by due date, from the beginning of the year to the quarter-end; the denominator is total tax liabilities assessed that should be paid from the beginning of the year and to end of the quarter. - Enforcement measures: The indicator is defined as a fraction where the numerator consists of the total number of debtors against whom some enforcement measure are taken by IAPR at the end of the quarter, and the denominator consists of the total number of debtors against whom GSPR/IAPR could legally impose enforcement measures at the same date. Enforcement measures are defined as one of the following: garnishment orders, garnishments at the hands of third parties (including e-garnishments), auctions, mortgages, imposing liens against assets-garnishments) wages, income or assets seizures. From the denominator are excluded debtors which cannot, by law, be pursued. *International Monetary Fund — cr17229 (excerpts provided in source content).* ### 94. Supporting material. Monthly Information will be made available by IAPR in the Tax ### 94–98. Supporting material; KPIs on Tax Administration, Social Security Contribution, and Public Financial Management ### Monthly information on tax administration (supporting material) - Monthly Information will be made available by IAPR in the Tax administration monitor no later than three weeks after the end of each month, including: - On stock, collection, and write off of tax debt (old, new, and by LDU); - On the number of debtors under enforcement. - On assessed taxes and penalties, collection of assessed taxes and penalties, percent of fresh tax audit cases in total completed audits, the stock of priority cases for audit, and inflows and outflows of such cases. The data will be provided for large taxpayers audit center (KEMEP), high wealth individuals audit center (KEFOMEP), local and regional tax centers (DOYs), FAE, and investigation center (YEDDE). - On stock, payment and rejection of tax refund claims (within or in more than 90 days during the period; for VAT, CIT, and PIT). - On collection of taxes paid during the period before they become overdue, and after they became overdue. - On cases registered and closed by the Dispute Resolution Unit, with number of cases closed within the time limit and closed by implicit rejections. The table will also include suspension requests as well as cases closed by explicit decision or by withdrawal of petition. - Monthly report of the standard 15 tax collection tables by type of tax, by age of tax, by amount of debt due, by status of debtor. - Installment schemes, with amounts and number of debtors. - Applications under the out-of-court debt restructuring legislation, with amounts and number of debtors, on the basis of which future KPIs will be established. ### KPI on Collections of Social Security Contribution - Progress in collecting social security contribution will be defined as reaching or exceeding the targets set in TMU Table 3. Definitions: - Social security fund payment compliance is defined as the ratio of the amount of current year social security contribution paid to the fund divided by the amount invoiced or declared for each reporting period, expressed as a percentage. Supporting material: - A monthly submission no later than three weeks after each month-end is required on the following: - total amount of social security contribution paid (flow), - total amount of social security contribution invoiced or declared (flow), - amounts of SSC debt transferred to KEAO, - KEAO’s SSC debt collection. ### KPI on Public Financial Management - Progress in implementing public financial management reforms will be defined as reaching or exceeding the floor targets and staying at or below the ceiling targets as set in TMU Table 4. Definitions: - Invoices received by the state are the invoices or other equivalent documents consisting of a request for payment that have been submitted (accompanied by a submission document) by ministries to the fiscal audit offices (FAOs), or by suppliers to the general directorates of financial services (GDFSs) after the financial service responsibilities are transferred from FAOs to GDFSs, for payment, which include the information on the date when line ministries received the invoice from suppliers or the dates as specified in the Late Payment Directive. - An unprocessed pension application is an application filed by an insured or entitled person for receiving an old age, disability or survivors’ pension. The pension claim will be counted as unprocessed if a decision on the validity and amount due under the claim has not been reached by the end of the month following the month in which the application was filed. - Social security funds-to-EOPYY transfer is the amount of cash transfer to EOPYY and the expenditures paid by all social security funds (SSFs) on behalf of EOPYY year to date. The amount that should be transferred from all social security funds to EOPYY is the revenue collected by all social security funds on behalf of EOPYY during the same period, calculated as percent on full monthly net (after measures) pensions received by each pensioner, and 6.45 percent on monthly insurable earnings of each worker. The exact amount of insurable earnings is calculated ex post based on monthly filings of Analytical Periodic Declarations. - Medical claims submitted by public hospitals to EOPYY electronically are claims (invoices and associated documents) using KEN-DRGs and/or hospital fees submitted to EOPYY electronically for insured patients on inpatient services with at least one-night stay. No more than one claim is allowed for each inpatient service. Supporting material (monthly summary information required no later than three weeks after month-end): - (i) stock of unpaid processed pension applications (number and total value of claims of the application); - (ii) stock of unpaid non-processed pension applications (number and total value of claims of the application) provided by the Ministry of Labor; - (iii) number of days and processing time of invoices received, invoices paid, and invoices rejected upon verification by the state government (including ministry of finance and line ministries), as well as invoices that have been neither paid nor rejected since the date of receipt of the invoice or the other dates as specified in the Late Payment Directive for a period longer than the ceiling days specified in the Late Payment Directive; - (iv) the amount of all SSFs-to-EOPYY cash transfer, expenditure paid by all SSFs on behalf of EOPYY, and revenue collected by all SSFs on behalf of EOPYY; - (v) the number of medical claims submitted by public hospitals to EOPYY electronically, and the number of inpatient services with at least one night stay; - (vi) the number of claims submitted by private entities (including private hospitals, clinics, diagnostic centers, etc.) to EOPYY for insured patients and the number of full-scope audits conducted by EOPYY on those claims. ### Table 1. Greece: Program Quantitative Performance Criteria (Billions of euro) - Indicative Performance Criteria (Sep/Dec/Mar/Jun) - 1. Floor on the modified general government primary cash balance: /13.55.01.70.5 - 2. Ceiling on the stock of domestic arrears: /27.27.27.27.2 - 3. Ceiling on the overall stock of central government debt: 325325325325 - 4. Ceiling on the accumulation of external debt payment arrears by the general government: /30000 - 5. Ceiling on new general government guarantees: /40000 - 6. Floor on the general government spending on goods and services: /14.87.81.23.1 - Indicative Targets - 1. Ceiling on state budget primary spending: /131.545.09.420.3 Notes: - /3 Applies on a continuous basis from the date of the program approval in principle. - /4 Applies cumulatively from the date of the program approval in principle. - /2 Will be adjusted down by the amount of the ESM disbursement for arrears clearance. - 20172018 - /1 Applies cumulatively from the start of the target's calendar year. ### Table 2. Greece: Key Performance Indicators on Tax Administration (Indicator values for 2017 and 2018) - Debt collection - Collection of tax debts as of the end of the previous year (EUR million): 2,210 2,700 940 1,710 - Collection of new debts in the current year (percent of new debt in the year): 19% 24% 15% 18% - Collection of debts by Large Debtor Unit (EUR million): 495 690 170 350 - Audits of fresh tax cases by the whole GSPR - Percent of tax audit cases in total completed audits: 60% 60% 70% 70% - Tax audits and collection of large tax payers - Collection after audits in the year (percent of assessed tax and penalties): 41% 41% 48% 48% - Audits and collection of high wealth individuals - Collection after audits in the year (percent of assessed tax and penalties): 24% 24% 16% 23% - Taxpayer service - Percent of VAT tax refund claims paid or rejected within 90 days: 58% 70% 64% 69% - Compliance and enforcement - Percentage of total tax paid on time for VAT, Income and Property taxes: 82% 83% 82% 84% - Percentage of debtors under enforcement measures: 54% 57% 53% 54% - Pre litigation phase - Percentage of cases closed by explicit decision of the Dispture resolution Unit: 93% 95% 75% 80% Sources: Greek authorities; and IMF staff estimates. ### Table 3. Greece: Key Performance Indicators on Social Security Contributions (Cumulative targets from the beginning of each year) - Social Security Fund Payment Compliance: Percent of total invoiced or declared current-year SSC amount paid to the fund: - End-Sep. End-Dec. End-Mar. End-Jun.: 88% 89% 90% 91% - KEAO Collection Performance and Enforcement: Collection of SSC debts transferred to KEAO (In millions of euros): - End-Sep. End-Dec. End-Mar. End-Jun.: 755 1,007 280 560 Sources: Greek authorities; and IMF staff estimates. Notes: - 3/ In millions of euros. - 2/ For each reporting period, social security fund payment compliance is calculated as the amount of current year SSC paid to the fund divided by the amount invoiced or declared, expressed as a percentage. - 20172018 - 1/ Cumulative targets from the beginning of each year. ### Table 4. Greece: Key Performance Indicators on Public Financial Management - Indicator values (End-Sep. End-Dec. End-Mar. End-Jun.) - 1. Ceiling on average period for expenditure payments or rejection after receipt of invoices by state government, including ministry of finance and line ministries. Ceiling on number of days: 29 29 29 29 - 2. Ceiling on unprocessed main pension applications in thousands. Ceiling on pension applications: 95 70 50 30 - 3. Floor on percentage of all social security funds-to-EOPYY actual transfer of the amount that should be transferred. Floor on percentage: 92% 94% 96% 98% *Source: IMF staff compilation of the program supporting material in the cited document.* ### 4. Floor on percentage of number of claims submitted by public ### 4. Floor on percentage of number of claims submitted by public hospitals to EOPYY for insured patients electronically. 4/ ### Target levels - Floor on percentage90%99%99%99% - 20172018 ### Metric definition (footnote 4/) - The ratio in percentage is calculated as the number of claims (invoices and associated documents) using KEN-DRGs and/or hospital fees submitted to EOPYY electronically for insured patients divided by number of treatment cases provided by hospitals to insured patients. ### Related calculation and timing notes - 1/ Cumulative targets from the beginning of the year unless otherwise specified. - 2/ Applies to all invoices received since January 1, 2017. The average period is calculated on all the invoices paid or rejected during the quarter, and invoices still pending beyond the target. The period for each invoice is measured from when the invoice is received to the final payment, or to rejection upon verification, or to the test date if the invoice is pending beyond the target for the average for that test date (e.g. 29 days on Sept 30, 2017). - 3/ The ratio in percentage is calculated as follows. The numerator is the amount of cash transfer to EOPYY and the expenditure paid by all social security funds on behalf of EOPYY during the period. The denominator is the revenue collected by all social security funds on behalf of EOPYY during the period. ### Sources - Sources: Greek authorities; and IMF staff estimates. *Prepared by European Department (In Consultation with Other Departments); from the informational annex of the Greece: Request for Stand-By Arrangement (July 7, 2017).* --- _Source: https://www.imf.org/-/media/files/publications/cr/2017/cr17229.pdf_