## _cr0543 — Executive Summary and Key Findings

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### Background and macroeconomic context
- Real GDP growth in 2004 is expected to be about 4 percent for the fifth consecutive year.
- Boom drivers: accommodative monetary conditions associated with adoption of the euro and subsequent easing by the ECB; markedly stimulative fiscal policy.
- Demand and labor market:
  - Private consumption and household confidence rose reflecting strong wage increases, wealth effects from rising real estate prices, gains in employment, falling unemployment, and deregulation of financial markets (very large increases in consumer credit).
  - Investment sustained by rising profitability and Olympics-related construction.
- Inflation and competitiveness:
  - Inflation and unit labor cost increases among the highest in the euro area, causing a sustained appreciation of the real exchange rate.
  - About half the inflation differential may be due to Balassa-Samuelson effects; international competitiveness has eroded and export market share has fallen.
- External sector:
  - Strong domestic demand and poor competitiveness underlie large and persistent current account deficits; external sector made a negative contribution to aggregate demand in the past three years.
  - Current account deficit financed largely by portfolio flows; FDI inflows weak.
  - Shipping performed strongly; tourism disappointed in 2004.

### Fiscal position, revisions, and public debt
- Restated fiscal accounts and Eurostat revisions substantially increased general government deficits for 1997–2003; deficits never fell below the 3 percent of GDP Maastricht ceiling.
- General government deficit expanded to an estimated 5½ percent of GDP in 2004; the primary surplus declined to almost zero.
- Olympics spending added 1 to 1½ percentage points to the deficit-GDP ratio in each of 2002–04.
- Debt-GDP ratio (based on revised data) was 112 percent of GDP in 2004 and has fallen little in recent years.
- Revised deficit levels (selected years) as reported: 1997 revised 6.6 percent, 1998 revised 4.3 percent, 1999 revised 3.4 percent, 2000 revised 4.1 percent, 2001 revised 3.7 percent, 2002 revised 3.7 percent, 2003 revised 4.6 percent.
- Debt revisions (1997–2003): Unrevised (March 2004) series: 108, 106, 105, 106, 107, 105, 103. Revised (November 2004) series: 114, 112, 112, 114, 115, 113, 110.

### Policy discussions and staff assessment
- Overriding priority: fiscal consolidation.
  - 2005 budget targets a deficit reduction of 2½ percent of GDP (of which 1 1⁄4 percent is due to the end of Olympics spending); staff judges this target feasible and necessary.
  - Staff calculates the deficit will fall to 3½ percent of GDP in 2005, although it may prove higher.
  - Budget projects deficit of 2.8 percent of GDP; staff expects 3.5 percent of GDP given lower growth projection and a somewhat worse 2004 outturn.
  - If 2005 deficit remains above 3 percent of GDP, further measures would be needed to reduce the deficit below 3 percent of GDP in 2006 under the EU excessive deficit procedure.
- Medium- and long-term fiscal needs:
  - Structural adjustment of slightly more than ¾ percent of GDP a year would yield near budget balance by 2010; further adjustment required thereafter.
  - Pension reform is off authorities’ immediate agenda; debt sustainability analysis suggests debt-GDP ratio will fall only gradually through 2010 and increase sharply thereafter as pension and health-care costs rise due to population aging.
- Financial sector assessment:
  - Banking system seems in good health; rapid rise in private sector credit during the boom may create credit risks if the economy slows.
  - Fund welcomed improved supervision and banks’ risk management; a law establishing an independent insurance supervisor was passed in February 2004 but not implemented.
- Growth and structural reforms:
  - Convergence with EU-15 living standards remains a government priority; program strong on tax reform and enhancing competition but weak on labor-market reform.
  - Staff projects GDP growth will slow to 3 percent in 2005; authorities project 3.9 percent (draft 2005 budget).
  - October EC forecast: 3.3 percent; November OECD projection: 3.2 percent; December Consensus Forecast: 2.7 percent.
  - Staff estimates a permanent 20 percent rise in oil prices would cut growth by some 0.3 percentage points in 2005.
  - Agreement that structural reform and wage restraint are key to boosting medium-term growth.

### Key fiscal revision findings and sources of prior under-reporting
- Major revision sources included:
  - Under-recording of military procurement and change from delivery to cash basis accounting for military procurement.
  - Over-estimation of social security and other non-central government surpluses corrected based on a new census.
  - Reversal of booking January 2004 VAT receipts in 2003; changes in treatment of EU structural funds; reclassification of a Postal Savings Bank transaction from revenue to a financial transaction.
  - Debt revisions mainly reflected capitalization of delayed interest payments and lower social security assets.

### Data quality and transparency
- Unreliability of fiscal data, revealed by large revisions agreed with Eurostat, hindered surveillance, policy-making, and credibility.
- Fiscal ROSC update lays out further desirable improvements to fiscal management.
- Authorities committed to quarterly surveys of social security funds and local governments, to recording military expenditures on a cash basis, and to compiling fiscal financing data from 2005.
- IMF past recommendations (1999 report and subsequent updates) emphasized clarifying treatment of state enterprises, integrating ordinary and investment budgets, better reporting on quasi-fiscal activities and state financial assets, clarifying accounting basis, and bolstering oversight.

### Box 3 — Staff advice on fiscal transparency (selected)
- 1999 recommendations: clarify treatment of state enterprises; integrate ordinary and investment budgets; better reporting on quasi-fiscal activities; better reporting on state financial assets; clarify accounting basis; bolster oversight through parliamentary hearings.
- 2003 ROSC findings: government finance statistics “generally of lower quality than other areas”; identified weaknesses in reconciliation of fiscal and financial accounts, resources for the statistical agency, legal/institutional environment, methodological weaknesses, unavailability of financial flows and stocks, inconsistencies between fiscal, monetary, and balance of payments data, lack of metadata.
- Improvements recorded: increased transparency in management of state financial assets and extrabudgetary funds; increased public availability of fiscal data; initial steps to improve auditing.
- Staff recommended full-fledged fiscal ROSC and strengthening oversight, including consideration of moving the statistical agency out of MEF to reinforce independence.

### Labor market, wages, and reform priorities
- Labor market reform has been slow; authorities acknowledged reforms face stiff opposition from labor organizations.
- 2004–05 wage agreement nearly 6 percent a year but eliminated longstanding inflation catch-up clauses (mission welcomed this).
- Draft 2005 budget decision to limit public-sector wage growth may restrain private-sector negotiations and help hold down entry wages.
- Hours worked appear very high; low part-time work and structural rigidities cited.
- Recommended labor-market measures:
  - Improve education and training and public employment service to reduce skill mismatches.
  - Amend employment protection legislation to encourage hiring.
  - Extend part-time and temporary employment opportunities.
  - Lower entry wages to allow low-skilled workers to gain a foothold.
  - Wage increases must align with domestic productivity growth and the ECB inflation target; national wage bargains should acknowledge competitiveness constraints with public sector leading by example.

### Fiscal outlook, adjustment priorities, and aging
- 2005 fiscal adjustment of 2½ percent of GDP an appropriate start but part of longer retrenchment.
- Staff view: deficit likely to remain above authorities’ target and the 3 percent Maastricht ceiling in 2005.
- Recommended decisive sustained reductions in the structural deficit of some 3⁄4 percent a year to achieve budget balance in 2010.
- Beyond 2010, a surplus will be required to reduce very high debt levels and meet long-term aging costs.
- Aging-related costs expected to escalate next decade and rise by more than in any other EU country; immediate step recommended to open discussion on concrete reforms to build consensus.
- Transfer of banks’ pension liabilities to IKA provides an opportunity to launch wider debate; reforms to pension and health-care systems required even with sustained fiscal adjustment.

### Medium-term baseline, debt dynamics, and stress tests (2004–10 and long-run)
- Medium-Term Baseline headline projections (GDP annual percent change): 2004: 3.9; 2005: 3.0; 2006: 3.0; 2007: 2.9; 2008: 2.9; 2009: 2.8; 2010: 2.7.
- Public sector gross debt (percent of GDP) path: 2001: 115; 2002: 112; 2003: 110; 2004: 112; 2005: 109; 2006: 106; 2007: 103; 2008: 100; 2009: 98; 2010: 95.
- Long-run public debt projections: 2011-20: 89; 2021-30: 100; 2031-40: 150; 2041-50: 232.
- Primary deficit (percent of GDP) in baseline: 2004: 0.2; 2005: -1.6; 2006: -1.6; 2007: -2.1; 2008: -2.0; 2009: -1.9; 2010: -2.0.
- Identified debt-creating flows (percent of GDP): examples include automatic debt dynamics, real interest rate and growth contributions; residual including asset changes positive in early years (e.g., 2004: 3.4).

- Debt-stress test scenarios (selected outcomes, public debt ratio sequence starting 2004 = 112):
  - Scenario 1 — Key variables at historical averages in 2005-09: sequence (selected): 112, 109, 105, 102, 98, 95, 92, ....
  - Scenario 2 — Nominal interest rate +2 percentage points during 2005-09: sequence (selected): 112, 111, 110, 110, 109, 108, 108, ....
  - Scenario 3 — Real GDP 1 percentage point lower during 2005-09: sequence (selected): 112, 111, 110, 109, 109, 109, 110, ....
  - Scenario 4 — Primary balance 0.5 percent of GDP lower during 2005-09: sequence (selected): 112, 110, 107, 105, 102, 100, 98, ....
  - Scenario 5 — Combination of 2–4: sequence (selected): 112, 113, 115, 117, 120, 123, 0, ....
- Complementary stress-test impacts on primary deficit (selected):
  - Scenario 1 (impact): 0.2, -2.4, -2.4, -2.4, -2.4, -2.4, -2.4, ....
  - Scenario 2 (nominal rate +2): 0.2, -1.6, -1.6, -2.1, -2.0, -1.9, -2.0, ....
  - Scenario 3 (real GDP -1): 0.2, -1.2, -0.8, -0.8, -0.4, 0.2, 0.5, ....
  - Scenario 4 (primary balance -0.5): 0.2, -1.1, -1.1, -1.6, -1.5, -1.4, -1.5, ....
  - Scenario 5 (combination): 0.2, -0.7, -0.3, -0.3, 0.1, 0.7, -1.0, ....

### Financial sector indicators and vulnerabilities (selected)
- Private sector credit (percent change, 12-month basis): 1998: 15.0; 1999: 14.2; 2000: 27.6; 2001: 24.8; 2002: 16.9; 2003: 17.0; 2004: 15.0 (Aug-04).
- Share of nonperforming loans in total loans 8/: 1998: 8.7; 1999: 11.2; 2000: 7.2; 2001: 5.6; 2002: 5.5; 2003: 5.1; 2004: 5.0 (Jun-04).
- Risk-based capital asset ratio 10/: 1998: 10.2; 1999: 16.2; 2000: 13.6; 2001: 12.5; 2002: 10.6; 2003: 12.1; 2004: 11.7 (Jun-04).
- 12-month T-bill yield (percent): 1998: 12.0; 1999: 9.4; 2000: 6.6; 2001: 4.1; 2002: 3.5; 2003: 2.3; 2004: 2.4 (Sep-04).
- Spread of 10-year bond with Germany (percentage points, end of period): 1998: 4.1; 1999: 2.0; 2000: 0.9; 2001: 0.6; 2002: 0.5; 2003: 0.5; 2004: 0.5 (Aug-04).

### Key policy recommendations (summary)
- Urgent and sustained fiscal consolidation using primarily permanent measures; multi-year fiscal planning recommended.
- Establish explicit medium-term budget framework with realistic economic assumptions, specific measures, and expenditure ceilings.
- Strict control of primary current spending; fundamental reviews of social programs, public service, defense, procurement, and industry support (including loan guarantees).
- Advance structural reforms: tax base broadening and simplification, improve tax administration, reduce administrative burdens, intensify product market reforms, implement EU directives on liberalization and network industries promptly, and accelerate privatization with aim of government exit from commercial sectors.
- Strengthen fiscal transparency and data quality: publish financing data from 2005, continue surveys of non-central government sector, strengthen Court of Audit oversight, reinforce independence of statistical agency, and correct weaknesses identified in ROSC updates.
- Labor-market reforms: amend employment protection, extend part-time/temporary work, improve training and public employment services, and align wages with productivity and euro-area inflation objectives.
- Financial sector: continue to enhance Bank of Greece supervisory capacity, monitor rapid private-sector credit growth, ensure independent insurance supervisor is operational, and proceed with FSAP.

### Selected headline statistics (2000–05, as reported and projected)
- Real GDP growth (change in percent): 2000: 4.5; 2001: 4.3; 2002: 3.6; 2003: 4.5; 2004: 3.9; 2005 Proj.: 3.0.
- Unemployment rate (percent): 2000: 11.1; 2001: 10.5; 2002: 10.0; 2003: 9.3; 2004: 8.9; 2005 Proj.: 8.8.
- CPI (year average): 2000: 2.9; 2001: 3.7; 2002: 3.9; 2003: 3.4; 2004: 3.0; 2005 Proj.: 3.4.
- General government balance (percent of GDP): 2000: -4.1; 2001: -3.7; 2002: -3.7; 2003: -4.6; 2004: -5.5; 2005 Proj.: -3.5.
- General government primary balance (percent of GDP): 2000: 4.0; 2001: 3.6; 2002: 2.6; 2003: 1.2; 2004: -0.2; 2005 Proj.: 1.6.
- General government gross debt (percent of GDP): 2000: 114; 2001: 115; 2002: 112; 2003: 110; 2004: 112; 2005 Proj.: 109.
- Current account (percent of GDP): 2000: -6.9; 2001: -6.2; 2002: -6.1; 2003: -5.7; 2004: -5.9; 2005 Proj.: -5.7.

*Source: _cr0543 — Executive Summary and selected tables, charts, and staff assessments contained in the provided document.*

### Executive Summary ......................................................................................................

### Executive Summary

### Background
- Real GDP growth in 2004 is expected to be about 4 percent for the fifth consecutive year.
- The boom was sustained by accommodative monetary conditions associated with adoption of the euro and subsequent easing by the ECB, and by markedly stimulative fiscal policy.
- Private consumption and household confidence rose reflecting strong wage increases, wealth effects from rising real estate prices, gains in employment, a falling unemployment rate, and deregulation of financial markets that spurred very large increases in consumer credit.
- Investment was sustained by rising profitability and, in the past two years, the Olympics, especially in construction.
- Years of high growth resulted in inflationary pressures and an erosion of competitiveness; inflation and unit labor cost increases have been among the highest in the euro area, causing a sustained appreciation of the real exchange rate.
- About half the inflation differential may be due to Balassa-Samuelson effects, but international competitiveness has eroded and export market share has fallen.
- Strong domestic demand and poor competitiveness underlie large and persistent current account deficits; in the past three years the external sector made a negative contribution to aggregate demand. The current account deficit is financed largely by portfolio flows; FDI inflows have been weak.
- Shipping performed strongly; tourism disappointed in 2004.
- Restated fiscal accounts and Eurostat revisions substantially increased general government deficits for 1997–2003; deficits never fell below the 3 percent of GDP Maastricht ceiling.
- The general government deficit expanded to an estimated 5½ percent of GDP in 2004; the primary surplus declined precipitously to almost zero.
- Olympics spending added 1 to 1½ percentage points to the deficit-GDP ratio in each of 2002–04.
- The debt-GDP ratio, based on revised data, was 112 percent of GDP in 2004 and has fallen little in recent years.
- Ratings actions: Greece was downgraded by Standard and Poor’s and put on a negative rating watch by Fitch; interest rate differentials did not widen materially.
- The EC announced an infringement procedure and raised issues of member-country data quality.

### Policy discussions and assessment
- Fiscal consolidation is the overriding priority.
  - The 2005 budget targets a deficit reduction of 2½ percent of GDP (of which 1 1⁄4 percent is due to the end of Olympics spending); staff judges this target feasible and necessary.
  - Staff calculates the deficit will fall to 3½ percent of GDP in 2005, although it may prove higher.
  - The budget projects a deficit of 2.8 percent of GDP; staff expects 3.5 percent of GDP given lower growth projection and a somewhat worse 2004 outturn.
  - If the 2005 deficit remains above 3 percent of GDP, further measures would be needed to reduce the deficit below 3 percent of GDP in 2006, as expected under the EU excessive deficit procedure.
- Medium- and long-term fiscal consolidation is also needed.
  - Structural adjustment of slightly more than ¾ percent of GDP a year would yield near budget balance by 2010; further adjustment will be required thereafter.
  - Pension reform is off the authorities’ policy agenda for now.
  - Debt sustainability analysis suggests the debt-GDP ratio will fall only gradually through 2010 and increase sharply thereafter as pension and health-care costs rise due to population aging.
- Data quality improvements are crucial.
  - The unreliability of fiscal data, revealed by large revisions agreed with Eurostat, hindered surveillance, policy-making, and credibility.
  - The fiscal ROSC update lays out further desirable improvements to fiscal management.
  - Authorities committed to quarterly surveys of social security funds and local governments and to recording military expenditures on a cash basis; they welcomed a full fiscal ROSC and committed to compiling fiscal financing data from 2005.
- Financial sector assessment
  - The banking system seems in good health.
  - The rapid rise in private sector credit during the economic boom may create credit risks if the economy slows.
  - Fund welcomed actions to improve supervision and banks’ risk management; a law establishing an independent insurance supervisor was passed in February 2004 but not implemented.
- Growth and structural reforms
  - Convergence with EU-15 living standards remains a government priority.
  - The government program is relatively strong on tax reform and enhancing competition; staff welcomed these thrusts.
  - Much less focus is being placed on labor-market reforms.
  - Authorities were more optimistic than staff on 2005 growth: staff projects GDP growth will slow to 3 percent in 2005, while the draft 2005 budget projects 3.9 percent.
    - October EC forecast: 3.3 percent; November OECD projection: 3.2 percent; December Consensus Forecast: 2.7 percent.
  - Staff estimates suggest a permanent 20 percent rise in oil prices would cut growth by some 0.3 percentage points in 2005.
  - Authorities expect business-tax reform, a European recovery, and favorable Olympics publicity to support investment, exports, and tourism; staff argues correction of cyclical imbalances, lost competitiveness, and fiscal consolidation will weigh on aggregate demand.
  - Agreement that structural reform and wage restraint are key to boosting medium-term growth.

### Key fiscal revision findings
- Revisions to the public accounts (May–November 2004) increased fiscal deficits for 1997–2003; key sources included:
  - Corrections for under-recording of military procurement and change from delivery to cash basis accounting for military procurement.
  - Corrections for over-estimation of social security and other non-central government surpluses based on a new census.
  - Reversal of booking January 2004 VAT receipts in 2003; changes in treatment of EU structural funds; reclassification of a Postal Savings Bank transaction from revenue to a financial transaction.
  - Debt revisions mainly reflected capitalization of delayed interest payments and lower social security assets.
- Revised deficit levels (selected years) as reported: 1997 revised 6.6 percent, 1998 revised 4.3 percent, 1999 revised 3.4 percent, 2000 revised 4.1 percent, 2001 revised 3.7 percent, 2002 revised 3.7 percent, 2003 revised 4.6 percent.
- Debt revisions: Unrevised (March 2004) debt series: 108, 106, 105, 106, 107, 105, 103 (1997–2003). Revised (November 2004) debt series: 114, 112, 112, 114, 115, 113, 110 (1997–2003).

### Policy recommendations and implementation (summary from Box 1)
- Fiscal policy: Fund has repeatedly called for a more ambitious fiscal stance; consolidation stalled and revisions show deficits were much larger than reported. Fund encouraged multi-year fiscal planning.
- Data quality: Fund called for improvements; progress included SDDS adherence in 2002 and recent fiscal revisions, but more work remains.
- Pension reform: Fund called for early action to address high projected costs of population aging; 2002 reforms consolidated funds but did not address expenditure pressures.
- Financial sector: Fund welcomed improved supervision and banks’ risk management; implementation of independent insurance supervisor pending.
- Structural policy: Fund called for further privatization and labor-market reform; divestiture of remaining stake in National Bank announced; labor-market reform limited.

*Source: _cr0543 - Executive Summary*

### Box 3. Staff Advice on Fiscal Transparency in Greece

### Box 3. Staff Advice on Fiscal Transparency in Greece

### Past staff assessments and overall judgment
- IMF staff assessments summarized: the 1999 report on fiscal transparency, subsequent updates, the 2003 data ROSC, and various staff reports. 1/
- General characterization: documents were “appreciative of the progress the authorities had made on various issues, and urged remedial action to correct remaining weaknesses.”
- Staff did not identify the major misreporting issues regarding defense acquisitions and social security surpluses, but did raise questions regarding large below-the-line operations and stock-flow discrepancies.

### Recommendations from the 1999 report on fiscal transparency
- Clarify the treatment of state enterprises.
- Integrate ordinary and investment budgets.
- Better reporting on quasi-fiscal activities (or eliminate such activities).
- Better reporting on state financial assets.
- Clarify the accounting basis underlying the budget.
- Bolster oversight through parliamentary hearings on audited financial statements.

### Improvements recorded in subsequent factual updates
- Increased transparency in the management of state financial assets and extrabudgetary funds.
- Increased public availability of fiscal data.
- Initial steps to improve auditing.

### Findings of the 2003 data ROSC
- Overall: government finance statistics were “generally of lower quality than other areas,” but the ROSC was “moderately positive on fiscal data integrity in the context of EU standard-setting and control.”
- Identified weaknesses:
  - Lack of reconciliation of fiscal and financial accounts.
  - Insufficient resources available to the statistical agency.
  - Limitations in the legal and institutional environment.
  - Methodological weaknesses.
  - Unavailability of financial flows and stocks.
  - Lack of consistency between fiscal, monetary, and balance of payments data.
  - Inability to establish internal consistency of net lending/borrowing and financing.
  - Lack of metadata.
- ROSC recommendation: measures to strengthen these areas.

### Messages from subsequent staff reports (2000–2003)
- The 2000 staff report: called for improved statistics in several areas, including the fiscal accounts, to facilitate economic assessment and surveillance.
- The 2001 report: emphasized the need for greater fiscal consolidation, highlighted persistent and large below-the-line entries, and noted inadequacies in accounting of stock-flow discrepancies.
- The 2003 report: reiterated calls for further improvements in transparency and accountability.

*Source: Box 3. Staff Advice on Fiscal Transparency in Greece (IMF content unit _cr0543).*

### 28.      However, labor market reform has been slow. The authorities concurred that labor

### _cr0543 - 28.      However, labor market reform has been slow. The authorities concurred that labor

### Labor-market reform and wages
- Labor market reforms are viewed as key to increasing incomes, especially with population aging.
- Authorities emphasized the potential benefits of large recent immigration (mainly from the Balkans) and efforts to regularize guest workers.
- The September policy statement discussed little on labor-market reform.
- Reforms will face stiff opposition from labor organizations.
- The 2004–05 wage agreement, while generous at nearly 6 percent a year, confirmed the elimination of longstanding inflation catch-up clauses (a development welcomed by the mission).
- Draft 2005 budget decision to limit public-sector wage growth in 2005 may restrain subsequent private-sector negotiations and help hold down entry wages.
- Hours worked appear very high, even by U.S. standards, possibly reflecting low part-time work and structural rigidities.

### Fiscal outlook and adjustment priorities
- 2005 fiscal adjustment of 2½ percent of GDP is an appropriate start but part of a long fiscal retrenchment.
- Staff view: deficit likely to remain above the authorities’ target and the 3 percent Maastricht ceiling in 2005.
- Government should refrain from further ad hoc measures and focus on durable adjustment measures in the 2006 budget.
- Needed medium and long-term adjustment requires strict control of primary current spending and a medium-term budget framework.
- Decisive sustained reductions in the structural deficit of some 3

⁄4  percent a year to achieve budget balance in 2010 are recommended.
- Beyond 2010, a surplus position will be required to reduce very high debt levels and meet long-term aging costs.
- Growth-enhancing policies are needed, but tax cuts and infrastructure investment must not delay or undermine deficit reduction.
- Containing current primary spending requires fundamental reviews of social programs, the public service, defense, procurement, and industry support (including loan guarantees).
- Recommendation: establish an explicit medium-term budget framework with realistic economic assumptions, specific measures, and expenditure ceilings consistent with deficit objectives.

### Aging and public finances
- Aging-related costs are expected to escalate in the next decade and subsequently rise by more than in any other EU country.
- Election promise to forgo reform during this government term will delay reforms by at least four years, making later adjustment more difficult.
- Immediate step recommended: open discussion on concrete reforms to build social consensus.
- The transfer of banks’ pension liabilities to IKA provides an opportunity to launch a wider debate.
- Reforms to pension and health-care systems are required even with sustained fiscal adjustment.

### Data integrity and fiscal transparency
- Inaccurate reporting of fiscal data has hindered surveillance, policy-making, and credibility.
- Recent revisions have improved methodology and accuracy, but further measures are warranted.
- Financing data to be published beginning in 2005 should be used to cross-check budget outturns.
- Continue refining surveys of the non-central government sector.
- Consider strengthening oversight role of the Court of Audit, reinforcing independence of the statistical agency by moving it out of the MEF, and establishing an entity to perform independent reviews of budget policies and assumptions.
- Correct remaining weaknesses identified in accompanying fiscal and data ROSC updates; full-fledged fiscal ROSC is welcome.

### Financial sector supervision and risks
- Banking sector appears profitable, well capitalized, and adequately provisioned; BoG should continue to enhance assessment and supervision, notably credit quality.
- Rapid increase in private-sector lending raises risks as banks have not recently faced an economic slowdown or rising interest rates.
- BoG has strengthened supervisory capacity, increased specific provisioning and capitalization levels, and encouraged improved risk-management procedures; these should continue, especially with the introduction of Basel II.
- Insurance supervision is a notable weak point; need to ensure independent insurance supervisor is operational as soon as possible.
- Authorities’ decision to undertake an FSAP is welcome.

### Business climate, structural reforms, and competitiveness
- Key structural priority: create conditions for sustained increases in real output and living standards.
- Fiscal consolidation would ensure macroeconomic stability and provide room for growth-enhancing tax cuts.
- Improving the business climate is essential to increase investment, including foreign investment, and productivity.
- Tax policy should emphasize base broadening, simplification, and rate reductions; 2002 reform and proposed reforms beginning in 2005 are welcome.
- Reduce administrative burdens (“red tape”), simplify tax administration, and narrow tax inspectors’ discretion.
- Product market reforms should intensify competition; implement all relevant EU directives on liberalization and regulation of network industries as soon as possible.
- Privatization program should be intensified with the goal of government exiting commercial sectors.
- Competition Commission’s more active stance is welcome; increase staff and strengthen legal powers.
- Infrastructure investment emphasis is appropriate but carries risks for future liabilities; use European structural funds and PPPs wisely, ensure full accounting of explicit and implicit public-sector liabilities, transparent project selection and evaluation, and risk transfer to the private sector.

### Labor-market measures to complement reforms
- Address significant labor-market weaknesses by:
  - Improving education and training and the public employment service to reduce skill mismatches;
  - Amending employment protection legislation to encourage hiring;
  - Extending part-time and temporary employment opportunities;
  - Lowering entry wages to allow low-skilled workers to gain a foothold.
- Wage policy: end of inflation catch-up clauses is welcome; wage increases must be brought in line with domestic productivity growth and the ECB inflation target.
- National wage bargains should explicitly acknowledge competitiveness constraints; public sector can lead by example given its demonstration effect.

### Trade policy and external support
- Authorities support multilateral trade liberalization and efforts to conclude the Doha round.
- End of textile quotas expected to encourage restructuring toward higher value-added products.
- Authorities feel CAP reforms are moving in the right direction but argue for gradual liberalization of the sugar regime to protect economically depressed regions.
- Authorities intend to improve operation of the National Exports Council to promote Greek exports.
- Authorities’ intention to continue increasing ODA is welcome; encouraged to raise current level of 0.26 percent of GNI toward the UN target of 0.7 percent of GNI.

*Source: IMF staff appraisal and accompanying sections in the provided content unit.*

### 43.      It is proposed that the next Article IV consultation be held on the standard 12-month

### _cr0543 - 43.      It is proposed that the next Article IV consultation be held on the standard 12-month

### Proposed Consultation Timing
- It is proposed that the next Article IV consultation be held on the standard 12-month cycle.

### Output and Growth (1998–2004; short-term projections)
- Real GDP growth (year-on-year percent change): series shown for 1998–2004 for Greece and Euro Area (charted).
- Output gap (in percent of potential output): series shown for 1998–2004 for Greece and Euro Area (charted).
- Contribution to growth (in percent): quarterly contributions from Inventories, Net exports, Investment, Consumption, and Real GDP y-o-y growth for 2001Q1–2004Q1 (charted).
- Real GDP per capita (in percent): Greece as a percent of the Euro Area and Greece as a percent of the Euro Area, PPP for 1998–2004 (charted).
- Selected projections (Table 1, 2000–2005; projections labelled "Proj."):
  - GDP: 2000: 4.5; 2001: 4.3; 2002: 3.6; 2003: 4.5; 2004: 3.9; 2005: 3.0.
  - Output gap: 2000: -0.8; 2001: 0.2; 2002: 0.6; 2003: 1.5; 2004: 2.2; 2005: 1.9.
  - Domestic demand: 2000: 5.5; 2001: 2.4; 2002: 4.2; 2003: 5.4; 2004: 4.3; 2005: 2.9.
  - Unemployment rate 1/: 2000: 11.1; 2001: 10.5; 2002: 10.0; 2003: 9.3; 2004: 8.9; 2005: 8.8.
  - Consumer prices (HICP), end of period: 2000: 3.7; 2001: 3.5; 2002: 3.5; 2003: 3.1; 2004: 3.9; 2005: 3.4.
  - Current Account (in percent of GDP): 2000: -6.9; 2001: -6.2; 2002: -6.1; 2003: -5.7; 2004: -5.9; 2005: -5.7.
  - Total revenues (general government, percent of GDP): 2000: 46.7; 2001: 45.3; 2002: 44.0; 2003: 42.2; 2004: 43.1; 2005: 43.5.
  - Total expenditures (general government, percent of GDP): 2000: 50.8; 2001: 49.0; 2002: 47.7; 2003: 46.7; 2004: 48.6; 2005: 47.1.
  - Overall balance (general government, percent of GDP): 2000: -4.1; 2001: -3.7; 2002: -3.7; 2003: -4.6; 2004: -5.5; 2005: -3.5.
  - Gross debt (general government, percent of GDP): 2000: 114; 2001: 115; 2002: 112; 2003: 110; 2004: 112; 2005: 109.

### Cyclical Indicators and Financial Conditions (1998–2004)
- Confidence indicators (Consumer Confidence Indicator; Industrial Confidence Indicator): 1998–2004 series charted.
- Manufacturing production (year-on-year percent change): 1998–2004 series charted.
- Economy-wide profitability 1/ (1990-2000=100): 1998–2003 series charted.
- Stock exchange indices (1995 = 100): Athens Stock Exchange (in Euros) and FTSE Europe (in Euros) 1998–2004 series charted.
- Domestic credit growth (year-on-year percent change): Total credit, General government 1/, Enterprises and households 2/ for 1998–2004 (charted).
- Credit/GDP ratios: Greece total, Greece public sector 3/, Greece private sector, Euro area total for 1997–2004 (charted).
- Private sector credit growth 4/ (year-on-year percent change): Enterprises, Housing, Consumer credit for 1998–2004 (charted).

### Labor Market (1998–2004; cross-country 2003)
- Employment growth (in percent) for Greece and Euro Area: 1998–2004 series charted.
- Unemployment rate (in percent) for Greece and Euro Area: 1998–2004 series charted.
- Participation rate (in percent) for Greece, Euro Area, United States: 1998–2004 series charted.
- Annual hours worked per employee: Greece, Euro Area, United States 1998–2003 series charted.
- Cross-country unemployment breakdowns (2003, percent of total labor force):
  - Female unemployment rate (select countries listed; Greece positioned relative to Euro Area).
  - Youth unemployment rate (select countries listed; Greece relative position shown).
  - Long-term unemployment rate (select countries listed; Greece relative position shown).
  - Overall unemployment rate (select countries listed; Greece relative position shown).
- Employment rates and part-time employment (2003 cross-country comparisons charted).

### Prices, Exchange Rates, and External Sector (1998–2004)
- Prices (year-on-year percent change): Greek WPI, Greek CPI, Greek HICP, Euro Area WPI, Euro Area HICP for 1998–2003 (charted).
- Effective exchange rates (2000=100): REER (CPI-based), REER (NULC-based), NEER (Nominal) for 1998–2004 (charted).
- Balance of payments (In US$ billions): Exports f.o.b., Imports c.i.f, Current Account for 1998–2003 (charted).
- Export market share (2000=100): Goods and services export market share 1998–2003 (charted).
- External indicators (Table 2, selected rows and latest-dated observations):
  - Exports (annual percent change, in U.S. dollars): 1998: 4.0; 1999: -32.0; 2000: 19.5; 2001: 1.0; 2002: -5.0; 2003: 27.7; 2004: 19.3 (Aug-04).
  - Imports (annual percent change, in U.S. dollars): 1998: 7.3; 1999: -14.2; 2000: 14.6; 2001: -2.5; 2002: 5.1; 2003: 22.1; 2004: 38.3 (Aug-04).
  - Current account balance (settlements basis, percent of GDP): 1998: -3.0; 1999: -3.8; 2000: -7.3; 2001: -6.9; 2002: -6.0; 2003: -5.7; 2004: -6.6 (Jun-04).
  - Official reserves (in U.S. dollars, millions, end of period): 1998: 17,458; 1999: 18,122; 2000: 13,424; 2001: 5,154 2/; 2002: 8,083; 2003: 4,361; 2004: 2,516 (Sep-04).
  - Total external debt (percent of GDP): 1998: 55.4; 1999: 55.5; 2000: 73.3; 2001: 69.6; 2002: 68.2.
  - Exchange rate (per U.S. dollar, period average, euros per U.S. dollar from 2001): 1998: 295.5; 1999: 305.7; 2000: 365.4; 2001: 1.1; 2002: 1.1; 2003: 0.9; 2004: 0.8 (Sep-04).

### Financial Sector Indicators and Vulnerabilities
- Financial market indicators (selected):
  - Public sector debt (Maastricht definition): 1998: 112.4; 1999: 112.3; 2000: 114.0; 2001: 114.7; 2002: 112.5; 2003: 109.9; 2004: 112.0.
  - Private sector credit (percent change, 12-month basis): 1998: 15.0; 1999: 14.2; 2000: 27.6; 2001: 24.8; 2002: 16.9; 2003: 17.0; 2004: 15.0 (Aug-04).
  - 12-month T-bill yield: 1998: 12.0; 1999: 9.4; 2000: 6.6; 2001: 4.1; 2002: 3.5; 2003: 2.3; 2004: 2.4 (Sep-04).
  - Spread of 10-year bond with Germany (percentage points, end of period): 1998: 4.1; 1999: 2.0; 2000: 0.9; 2001: 0.6; 2002: 0.5; 2003: 0.5; 2004: 0.5 (Aug-04).
- Financial sector risk factors (selected, Mar–Jun–Sep dated series):
  - Foreign exchange loans to the private sector (in millions of U.S. dollars): 1998: 11,022; 1999: 11,693; 2000: 14,225; 2001: 7,865; 2002: 6,723; 2003: 6,983; 2004: 7,201 (Mar-04).
  - Share of foreign exchange loans in total lending to the private sector: 1998: 24.3; 1999: 26.2; 2000: 27.6; 2001: 9.7; 2002: 7.4; 2003: 5.5; 2004: 5.6 (Mar-04).
  - Share of nonperforming loans in total loans 8/: 1998: 8.7; 1999: 11.2; 2000: 7.2; 2001: 5.6; 2002: 5.5; 2003: 5.1; 2004: 5.0 (Jun-04).
  - Risk-based capital asset ratio 10/: 1998: 10.2; 1999: 16.2; 2000: 13.6; 2001: 12.5; 2002: 10.6; 2003: 12.1; 2004: 11.7 (Jun-04).
- Credit composition: share of real estate sector in private credit 1998–2004 ranges from 17.8 to 26.5 (Mar-04).

### General Government Accounts, Revisions, and Fiscal Structure (2000–2005)
- Revisions to general government budget balance (Table 3): March 2004 versus September 2004 estimates presented by subsectors (Central Government, Local Government, Social Security Funds) with levels in millions of Euro and percent of GDP. Example entries:
  - Central Government (millions of Euro, selected snapshots): -5,203; -7,830; -5,350; -7,017; -6,711; -9,483; -8,171; -10,371; -11,808 (dates shown across columns).
  - General government (in percent of GDP, selected snapshots): -2.0; -4.1; -1.4; -3.7; -1.4; -3.7; -1.7; -3.2; -4.6.
  - Gross debt (percent of GDP) entries: 106; 114; 107; 115; 105; 112; 102; 103; 110.
- General Government Accounts (Table 4, percent of GDP and billions of euro for 2000–2005):
  - Revenues and expenditures breakdowns presented with Authorities' estimates and Staff projections.
  - Revenues (in percent of GDP, staff projections): 2000: 46.7; 2001: 45.3; 2002: 44.0; 2003: 42.2; 2004: 43.1; 2005: 43.5.
  - Expenditures (in percent of GDP, staff projections): 2000: 50.8; 2001: 49.0; 2002: 47.7; 2003: 46.7; 2004: 48.6; 2005: 47.1.
  - Primary balance (in percent of GDP, staff projections): 2000: 4.0; 2001: 3.6; 2002: 2.6; 2003: 1.2; 2004: -0.2; 2005: 1.6.

### Medium-Term Baseline and Debt Dynamics (2004–2010 and longer horizons)
- Medium-Term Baseline scenario (Table 5, 2004–10 projections and long-run):
  - GDP growth and fiscal paths projected for 2004–2010 with headline projections:
    - GDP (annual percent change): 2004: 3.9; 2005: 3.0; 2006: 3.0; 2007: 2.9; 2008: 2.9; 2009: 2.8; 2010: 2.7 (Table 5 projection table lines).
    - Unemployment rate: 2004: 8.9; 2005: 8.8; 2006: 8.8; 2007: 8.7; 2008: 8.8; 2009: 9.0; 2010: 8.9 (Table 5 projection lines).
    - Consumer prices (HICP), end of period: 2004: 3.9; 2005: 3.4; 2006: 3.4; 2007: 3.4; 2008: 3.3; 2009: 3.2; 2010: 3.2.
  - Public sector gross debt (percent of GDP) path:
    - Historical and projections: 2001: 115; 2002: 112; 2003: 110; 2004: 112; 2005: 109; 2006: 106; 2007: 103; 2008: 100; 2009: 98; 2010: 95.
    - Long-run projections: 2011-20: 89; 2021-30: 100; 2031-40: 150; 2041-50: 232.
  - Identified debt-creating flows (percent of GDP): 2001: -7.5; 2002: -7.7; 2003: -6.4; 2004: -1.2; 2005: -5.0; 2006: -4.6; 2007: -4.8; 2008: -4.5; 2009: -4.2; 2010: -4.0.
  - Primary deficit (percent of GDP): 2001: -3.6; 2002: -2.6; 2003: -1.2; 2004: 0.2; 2005: -1.6; 2006: -1.6; 2007: -2.1; 2008: -2.0; 2009: -1.9; 2010: -2.0.
  - Revenue and grants (percent of GDP): ranges around 43.1–43.8 in projections.
  - Primary (noninterest) expenditure (percent of GDP): 2001: 41.7; 2002: 41.4; 2003: 41.0; 2004: 43.3; 2005: 41.9; 2006: 42.2; 2007: 41.6; 2008: 41.7; 2009: 41.8; 2010: 41.7.
  - Automatic debt dynamics (percent of GDP contribution): 2001: -0.6; 2002: -3.0; 2003: -3.3; 2004: -2.3; 2005: -1.4; 2006: -1.1; 2007: -1.0; 2008: -0.8; 2009: -0.7; 2010: -0.4.
  - Contribution from interest rate/growth differential 3/: 2001: -1.1; 2002: -1.9; 2003: -2.7; 2004: -2.1; 2005: -1.4; 2006: -1.1; 2007: -1.0; 2008: -0.8; 2009: -0.7; 2010: -0.4.
  - Contribution from real interest rate (percent): 2001: 3.4; 2002: 1.9; 2003: 2.0; 2004: 1.9; 2005: 1.8; 2006: 1.9; 2007: 1.9; 2008: 2.0; 2009: 1.9; 2010: 2.1.
  - Contribution from real GDP growth (percent): 2001: -4.5; 2002: -3.9; 2003: -4.7; 2004: -4.0; 2005: -3.2; 2006: -3.0; 2007: -2.9; 2008: -2.8; 2009: -2.7; 2010: -2.5.
  - Other identified debt-creating flows (privatization receipts negative): 2001: -3.4; 2002: -2.1; 2003: -2.0; 2004: 0.9; 2005: -2.0; 2006: -1.9; 2007: -1.8; 2008: -1.7; 2009: -1.6; 2010: -1.5.
  - Residual, including asset changes (2-3): 2001: 8.3; 2002: 5.4; 2003: 3.8; 2004: 3.4; 2005: 2.0; 2006: 1.9; 2007: 1.8; 2008: 1.7; 2009: 1.6; 2010: 1.5.

### Key Macro-Fiscal Assumptions (selected)
- Nominal GDP (local currency, selected values): 2001: 131; 2002: 142; 2003: 153; 2004: 110; 2005: 11; 2006: 164; 2007: 174; 2008: 185; 2009: 196; 2010: 207; long-run projections given.
- Real GDP growth (in %): historical and projection series with averages reported (table entries).
- Average nominal interest rate on public debt (in %): examples: 2001: 6.9; 2002: 5.9; 2003: 5.6; 2004: 6.1; 2005: 0.7; 2006: 5.2; 2007: 4.9; 2008: 4.9; 2009: 4.9; 2010: 4.9.
- Inflation rate (GDP deflator, in %): 2001: 3.5; 2002: 4.0; 2003: 3.5; 2004: 3.7; 2005: 0.3; 2006: 3.2; 2007: 3.1; 2008: 3.0; 2009: 2.9; 2010: 2.8.
- Growth of real primary spending (deflated by GDP deflator, in %): 2001: 1.9; 2002: 2.9; 2003: 3.4; 2004: 2.7; 2005: 0.8; 2006: 9.8; 2007: -0.2; 2008: 3.7; 2009: 1.4; 2010: 3.1.

*Source: IMF staff tables, charts, and projections contained in the provided document.*

### 1. Key variables are at their historical averages in 2005-09  7/

### Greece: Public Sector Debt Sustainability Framework, 2001-50 (selected tables and staff supplement)

### I. Baseline projections and fiscal aggregates (selected annual figures, percent of GDP)
- Total revenues: 44.0 (2002), 42.2 (2003), 43.1 (2004), 43.5 (2005), 43.8 (2006), 43.6 (2007), 43.7 (2008), 43.7 (2009), 43.8 (2010)
- Total expenditures: 47.7 (2002), 46.7 (2003), 48.6 (2004), 47.1 (2005), 46.7 (2006), 45.9 (2007), 45.3 (2008), 44.6 (2009), 43.8 (2010)
- Primary expenditures: 41.4 (2002), 41.0 (2003), 43.3 (2004), 41.9 (2005), 41.6 (2006), 40.9 (2007), 40.4 (2008), 39.9 (2009), 39.3 (2010)
- Interest expenditures: 6.3 (2002), 5.8 (2003), 5.3 (2004), 5.1 (2005), 5.1 (2006), 4.9 (2007), 4.8 (2008), 4.7 (2009), 4.6 (2010)
- Overall balance: -3.7 (2002), -4.6 (2003), -5.5 (2004), -3.5 (2005), -2.9 (2006), -2.2 (2007), -1.6 (2008), -0.9 (2009), -0.1 (2010)
- Primary balance: 2.6 (2002), 1.2 (2003), -0.2 (2004), 1.6 (2005), 2.2 (2006), 2.7 (2007), 3.2 (2008), 3.7 (2009), 4.5 (2010)
- Structural primary balance: 2.3 (2002), 0.6 (2003), -1.1 (2004), 0.8 (2005), 1.6 (2006), 2.3 (2007), 3.0 (2008), 3.7 (2009), 4.5 (2010)
- Structural overall balance: -4.0 (2002), -5.2 (2003), -6.4 (2004), -4.3 (2005), -3.5 (2006), -2.6 (2007), -1.8 (2008), -1.0 (2009), -0.1 (2010)
- Structural balance (net of investment): 2.0 (2002), 0.8 (2003), -0.1 (2004), 0.6 (2005), 1.8 (2006), 2.1 (2007), 2.7 (2008), 3.3 (2009), 4.0 (2010)
- Gross debt: 112 (2002), 110 (2003), 112 (2004), 111 (2005), 109 (2006), 105 (2007), 101 (2008), 96 (2009), 91 (2010)

### II. Debt-stress test scenarios (public debt ratio outcomes shown)
- Scenario 1 — Key variables are at their historical averages in 2005-09:
  - Debt ratio sequence (selected): 112, 109, 105, 102, 98, 95, 92, ....
- Scenario 2 — Nominal interest rate is 2 percentage points higher than baseline during 2005-09:
  - Debt ratio sequence (selected): 112, 111, 110, 110, 109, 108, 108, ....
- Scenario 3 — Real GDP is 1 percentage points lower than baseline during 2005-09:
  - Debt ratio sequence (selected): 112, 111, 110, 109, 109, 109, 110, ....
- Scenario 4 — Primary balance is 0.5 percent of GDP lower than baseline during 2005-09:
  - Debt ratio sequence (selected): 112, 110, 107, 105, 102, 100, 98, ....
- Scenario 5 — Combination of 2–4:
  - Debt ratio sequence (selected): 112, 113, 115, 117, 120, 123, 0, ....
- Complementary stress-test results (impact on primary deficit, selected series):
  - Scenario 1 (impact): 0.2, -2.4, -2.4, -2.4, -2.4, -2.4, -2.4, ....
  - Scenario 2 (nominal rate +2 during 2005-06): 0.2, -1.6, -1.6, -2.1, -2.0, -1.9, -2.0, ....
  - Scenario 3 (real GDP -1 during 2005-09): 0.2, -1.2, -0.8, -0.8, -0.4, 0.2, 0.5, ....
  - Scenario 4 (primary balance -0.5 pct of GDP): 0.2, -1.1, -1.1, -1.6, -1.5, -1.4, -1.5, ....
  - Scenario 5 (combination of 2–4): 0.2, -0.7, -0.3, -0.3, 0.1, 0.7, -1.0, ....

Notes on stress-test methodology (as provided)
- General government. 1/
- Debt dynamics formula used: Derived as [(r - π(1+g) - g + αε(1+r) ]/(1+g+π+gπ) times previous period debt ratio, with r = interest rate; π = growth rate of GDP deflator; g = real GDP growth rate; α = share of foreign currency-denominated debt; and ε = nominal exchange rate depreciation (measured by increase in local currency value of U.S. dollar). 2/
- Real interest rate contribution: derived as r - π(1+g). 3/
- Real growth contribution: derived as -g. 3/
- Exchange rate contribution: derived from the numerator as αε(1+r). 4/
- Historical average for fiscal variables are for the period 2001-03. 5/
- Nominal interest expenditure is derived as nominal interest expenditure divided by previous period debt stock. 6/
- Key variables include real GDP growth; real interest rate; and primary balance in percent of GDP. 7/

### III. Financial sector and macro-financial indicators (selected)
- Banking sector structure and indicators (selected series across years):
  - Banks: 93, 100, 125, 146, 159, 166, 174, n.a.
  - Private commercial (number): 18, 26, 42, 43, 45, 47, 52, n.a.
  - State-owned: 72, 70, 74, 84, 93, 92, 91, n.a.
- Capitalization:
  - Regulatory capital to risk-weighted assets: 10, 10, 16, 14, 12, 11, 12
  - Regulatory Tier I capital to risk-weighted assets: 9, 10, 15, 14, 11, 9, 10, 10
- Asset quality:
  - Nonperforming loans net of provisions to capital 1/: 40, 29, 24, 23, 17, 19, 16, 17
  - Nonperforming loans to total gross loans 2/: 1, 1, 9, 11, 7, 6, 5, 5
- Liquidity and risk exposure (selected):
  - Liquid assets to total assets 4/: 55, 53, 51, 46, 42, 39, 35, 33
  - Large exposures to capital 6/: n.a., n.a., n.a., n.a., a, 19, 11, 55, n.a.
  - Foreign currency-denominated loans to total loans: 24, 23, 24, 26, 97, 55
  - Foreign currency-denominated liabilities to total liabilities: 30, 35, 31, 39, 22, 21, 16, 17
- Profitability and margins (selected):
  - Return on assets (after taxes): 1, 1, 2, 1, 1, 1, n.a.
  - Interest margin to gross income: 56, 54, 54, 55, 56, 37, 37, 34

### IV. IMF relations, obligations, and institutional data (selected)
- Membership: Joined December 27, 1945; Article VIII
- Quota: 823.00 SDR Million, 100.00 percent
- Fund holdings of currency: 546.44 (66.40 percent of quota)
- Reserve position in Fund: 276.56 (33.60 percent of quota)
- Net cumulative allocation of SDRs: 103.54 (100.00 percent); holdings 17.41 (16.81 percent)
- Outstanding purchases and loans: None
- Financial arrangements: None
- Projected obligations to Fund (SDR million; forthcoming charges/interest): 1.91 (2004), 1.91 (2005), 1.91 (2006), 1.91 (2007), 1.92 (2008)
- Article IV: 12-month consultation cycle; last discussions concluded May 16, 2003 (EBM/03/45)
- ROSCs (dates of issuance for Fiscal Transparency and Data Module): October 6, 1999; February 8, 2001; March 15, 2002; September 17, 2003

### V. Statistical and data quality findings (key issues and recommendations)
- General observations:
  - Greece has made substantial progress in statistical methodologies and compilation practices and subscribed to the SDDS on November 8, 2002, with flexibility options on some central government operations data.
  - Improvements in quality and coverage of general government public finances are urgently required; large and frequent revisions undermine policy-making.
  - More staff resources are needed to develop financial accounts of the government and achieve cross-sector data consistency.
  - Scope exists for aligning government finance and balance of payments statistics with internationally acknowledged methodologies.
- National accounts:
  - NSSG national accounts (1995 ESA) include extended tables (regional accounts, simplified provincial accounts, agriculture, environmental tables, Social Accounting Matrix for 1997).
  - Some reliance on old benchmark ratios and residual estimates for unrecorded activities; limited quarterly national accounts rely more on econometric estimation than actual data.
- Balance of payments and external trade:
  - BoG has revised balance of payments to BPM5; data for 1999 first available under new system; BoG provided estimates for 1997–98.
  - Departures from BPM5 persist: reinvested earnings and undistributed branch profits not included; settlements-based reporting departs from accrual accounting; interest payments for government debt reported on a cash basis.
  - Quarterly external debt data disseminated with one-quarter lag starting end-September 2003; BoG disseminates monthly international reserves template within 21 days.
  - Significant differences remain between settlements-based current account and national-accounts-based current account.
- Government accounts:
  - Monthly budgetary central government data are very aggregated; other public entities’ data (social security funds, local governments) are poor.
  - Absence of financing data (derogation until 2005) impedes consistency checks between deficit and debt and across sectors.
  - Fiscal accounts for 1997–2003 were significantly revised after Eurostat review: lower tax receipts; lower EU receipts; reclassification of payments from Saving Postal Bank; higher military equipment expenditures; lower surpluses of Social Security Funds and other entities; government debt increased after accounting for capitalized interest and lower social security assets.
  - Greece’s annual government finance statistics on an accruals basis were published in the Supplement to the 2002 GFS Yearbook; no sub-annual GFS data are reported in IFS.
- Monetary accounts:
  - BoG adapted monetary statistics to ECB requirements; data reporting is timely.
  - Interbank reporting discrepancies are large and volatile; not all monetary positions (derivatives, claims on central government) are separately identified; some deposits misclassified; accrued interest excluded from outstanding amounts for loans and deposits.
- Labor market and short-term data:
  - Quarterly labor force survey improved since fall 1998 but coverage of immigrants remains difficult; earnings data not produced since 1998.
  - Other high-frequency indicators (retail sales, industrial production, wholesale prices) sometimes rely on out-of-date benchmarks; reporting delays undermine usefulness.
- Dissemination:
  - NSSG announced advance publications schedule for statistical releases; scope to improve presentations, metadata, publicizing contact persons, and explaining revision policy.

### VI. Supplementary staff assessment (January 28, 2005)
- The supplement provides an update and indicates:
  - Macroeconomic indicators broadly in line with expectations; third-quarter growth 3.8 percent (year-on-year).
  - Growth prospects improved by lower world oil prices but tempered by subdued euro-area recovery; January Consensus Forecast for 2005 real GDP growth: 2.7 percent.
  - Inflation somewhat lower than expected due to stronger euro, weaker oil prices, and moderation in food prices.
  - Estimates of the 2004 general government budget deficit not yet available; central government cash deficit rose to 6½ percent of GDP by end-November 2004, with preliminary reports indicating large revenue shortfalls continued in December 2004.

*Prepared by the European and Policy Development and Review Departments; Approved by Alessandro Leipold and Liam Ebrill; January 28, 2005.*

### 9.4 percent of GDP. As a result, the risks for a general government deficit higher than the 5½

### _cr0543 - 9.4 percent of GDP. As a result, the risks for a general government deficit higher than the 5½

### Fiscal position and recent developments
- General government deficit revised to 5½ percent of GDP in 2004 (staff report estimate).
- Fitch placed Greece on negative rating watch and downgraded Greece on December 16, 2004.
- European Commission estimated the 2004 budget deficit will be 5½ percent of GDP and judged that measures would not reduce the deficit below 3 percent of GDP.
- ECOFIN (January 18) considered that Greece is not in compliance with Council recommendations issued on July 5, 2004 and that the excessive deficit may persist in 2005.
- Olympic-related spending added 1 to 1.5 percent of GDP to the deficit in each year (2003–2004).
- General government debt remained broadly stable from 112.3 percent at end-1999 to 112.1 percent at end-2004.
- Primary surplus declined from 4 percent of GDP in 2000 to zero in 2004.
- Overall general government deficit moved from 4.1 percent of GDP in 2000 to an estimated 5.3 percent in 2004.

### Authorities’ Stability and Growth Program (SGP) 2004–07: key macroeconomic assumptions (Table 1, as reported)
- Real GDP growth (SGP 2004): 2003 = 4.5, 2004 = 3.7, 2005 = 3.9, 2006 = 4.0, 2007 = 4.2
- GDP deflator growth (SGP 2004): 2003 = 3.5, 2004 = 3.6, 2005 = 3.3, 2006 = 3.2, 2007 = 3.0
- Employment growth (SGP 2004): 2003 = 1.3, 2004 = 2.0, 2005 = 1.5, 2006 = 1.5, 2007 = 1.6
- General government overall balance (SGP 2004, in percent of GDP): 2003 = -4.6, 2004 = -5.3, 2005 = -2.8, 2006 = -2.6, 2007 = -2.5
- Public debt (SGP 2004, in percent of GDP): 2003 = 110, 2004 = 112, 2005 = 112, 2006 = 110, 2007 = 103
- SGP envisages modest decline in overall deficit to 2½ percent of GDP in 2007.

### Staff analysis of SGP and alternative estimates (Table 2 and discussion)
- Staff uses an estimate of potential output growth of 3¼ percent a year for cyclically adjusted calculations.
- Under staff calculations, the cyclically adjusted deficit:
  - Falls significantly in 2005, remains unchanged in 2006, and rises slightly in 2007.
  - Contrasts with staff recommendation of continued reductions in the structural deficit of some ¾ percent a year.
- IMF staff alternative figures (selected from Table 2 as presented):
  - SGP reported overall balance (2003–2007): -4.6, -5.3, -2.8, -2.6, -2.5
  - SGP reported primary balance (2003–2007): 1.2, 0.0, 2.2, 2.5, 2.6
  - Cyclically adjusted overall balance (staff estimates): -5.2, -6.1, -4.0, -4.0, -4.2
  - Cyclically adjusted primary balance (staff estimates): 0.6, -0.8, 1.1, 1.1, 0.8
  - Public debt (SGP column): 110, 112, 109, 106, 103
- Staff scenarios show that were staff’s medium-term output and inflation projection to materialize, actual deficits would increase substantially in 2006-07.
- Low Growth Scenario and alternative IMF Estimates presented show sensitivity of fiscal outcomes to nominal GDP and growth assumptions.

### Structural reform priorities and fiscal management
- SGP structural priorities (noted as “a step in the right direction”):
  - Improving tax administration and expenditure management.
  - Establishing an Independent Body of Fiscal Inspectors to improve fiscal auditing.
  - Implementing a new framework to improve the financial operation of public enterprises.
  - Health care reform to improve short-run financial viability and long-run sustainability.
  - Opening product markets: pending secondary legislation to open the electricity market; speeding up opening of the natural gas market.
  - Measures to attract investors: simplifying, updating, and codifying legislation; rationalizing the tax system; reducing red tape; providing incentives to investors.
- No new initiatives announced in labor-market or long-term pension reform (tripartite discussions ongoing on transfer of pension obligations from formerly state-owned banks to public sector).
- Authorities requested technical assistance from the Fund on tax administration and public expenditure management.
- Authorities considering recommendations of mini-ROSC and awaiting full fiscal ROSC scheduled for later in the year.

### Growth prospects, differences in assumptions, and implications
- Authorities’ view:
  - Expect private investment to rebound in 2005-07 supported by lower corporate taxes, new investment incentives, improved business climate, and Private-Public Partnership legislation.
  - Tourism revenues projected in the SGP to grow by 7.5 percent in real terms annually in 2005-07.
  - Shipping revenues expected to boost export receipts; investment-related imports expected to decline after Olympic completion.
  - SGP projects GDP growth to remain at about 4 percent a year in 2005-07, with fixed investment growth averaging 5.3 percent over this period.
- Staff view:
  - Staff projects GDP growth to fall to about 3 percent annually in 2005-07, with fixed investment growth averaging 1.6 percent during this period.
  - External sector expected to be a small drag on growth in staff projections.
- Fiscal implications:
  - Based on unchanged policies, staff does not expect the deficit to fall below 3 percent of GDP in 2005-06.
  - SGP projects a sub-3 percent deficit in each of 2005 and 2006.
- Risks:
  - SGP’s medium-term fiscal path is not very ambitious and is subject to significant risks should growth falter.
  - Achievement of deficit targets hinges crucially on sustaining the strong GDP growth of recent years.

### Policy recommendations and priorities (as reflected in staff and authorities’ statements)
- Urgent priority: fiscal consolidation to achieve a sustainable fiscal position over the medium term.
- Medium-term fiscal strategy should be supported by reforms on both expenditure and revenue sides and by improvements in budgetary management.
- Focus on carefully elaborated longer-term reforms, including privatization and health care reform, to contain costs and raise revenue.
- Authorities prioritize structural reforms with more immediate payoffs in expenditure reduction and growth, while acknowledging need to eventually tackle the pension problem.
- Continue technical assistance and implementation of tax administration and public expenditure management improvements.

*Statement by Miranda Xafa, Alternate Executive Director for Greece; IMF staff analysis and SGP extracts (February 2, 2005).*

### 5. The authorities are fully aware of the downside risks to growth, as well as to higher oil

### 5. The authorities are fully aware of the downside risks to growth, as well as to higher oil prices and interest rates than currently assumed in the baseline scenario

### Downside risks and alternative scenario
- The SGP includes an alternative scenario where GDP growth falls to 3.3 percent a year in 2005-07.
- Under this scenario, the general government deficit remains above 3 percent of GDP in 2005 and only falls below that benchmark in 2006.
- Recent data flow has been generally softer in recent weeks, including the disappointing EC economic sentiment survey for December; at the same time, the oil bubble continues to deflate.
- Staff view: recent leading indicators suggest tempering, rather than abandoning, optimism about sustained high growth heading into 2005.

### Structural reform to sustain growth and reduce the deficit
- Supply-side reforms are essential to raise potential growth and reduce the external imbalance.
- Government structural reform agenda includes measures to open up markets previously sheltered from competition (even if liberalized on paper, e.g. electricity) and to reduce the state’s involvement and related distortions (e.g. air transport).
- Significant scope exists for privatization, deregulation and restructuring to increase competition and reduce costs in sectors dominated by the public sector: transport, telecoms, energy, defense, education and health.
- Reforms in these areas can help achieve a leaner, more efficient economy and boost private investment.

### Labor market reform
- Labor market reform has been very slow; past steps in the wrong direction included raising the cost of overtime pay in the hope of increasing hiring.
- Increased labor participation is key to increasing potential output (as happened in Ireland) and to improving pension system finances.
- Amending employment protection legislation (especially in the public sector) or lowering entry-level wages to encourage hiring are likely to meet strong resistance from labor unions.
- Current reform plans focus on increasing labor market flexibility by:
  - expanding part-time and temporary employment opportunities, and
  - reducing the high cost of overtime pay which impacts competitiveness.
- The staff paper comparing Greece to Ireland provides a useful road map, but powerful obstacles remain: legacy of state intervention, political patronage, dominance of interest group politics, public sector unions opposing privatization, suppliers reaping monopolistic profits, poor public administration, soft budget constraints on public enterprises, and limited consensus for privatization.

### Financial sector focus and risks
- Rapid credit growth following liberalization of consumer credit and interest rate convergence in the run-up to EMU may increase the banking sector’s risk exposure over time.
- Stress tests confirm Greek banks are adequately protected from market risk, but credit risk may rise as the ratio of household debt to GDP catches up with the EU average.
- Bank of Greece actions: raising specific provisions and capitalization levels; comprehensive credit information available for loans contracted since June 2003.
- Banks are currently well capitalized and profitable, and their risk management systems have improved.
- Upcoming challenge: state-controlled banks must include large unfunded pension liabilities in their balance sheets under International Accounting Standards entering into force at year-end.
  - These liabilities will be transferred to the main pension fund, IKA, by 2008, but terms are unclear and a fiscal cost cannot be ruled out.
  - This issue will be discussed by the upcoming FSAP mission requested by the authorities.

### IMF Executive Board assessment — key points
- Strong growth in recent years reflected financial market deregulation, interest rate declines associated with euro adoption, and Olympics stimulus.
- Imbalances threaten future growth: sharply deteriorated public finances, high public debt, eroding competitiveness due to inflation above euro-area average, and large current account deficits.
- Fiscal position:
  - General government deficit expected to be some 5½ percent of GDP in 2004 and the primary surplus to fall to about zero; there is a risk of a still worse outcome.
  - Public debt about 112 percent of GDP in 2004.
  - 2005 budget aims for fiscal consolidation, with the deficit falling by 2½ percent of GDP to (under the budget’s growth assumptions) 2.8 percent of GDP.
  - Olympics spending end accounts for 1¼ percentage points of the improvement.
  - Budget contains temporary (tax amnesties and the collection of arrears) and ad hoc (containment of pension and public-sector wage increases) measures.
- Directors’ recommendations and observations:
  - Restore health of public finances; greater reliance on permanent measures preferable; concern deficit targeted in the budget might be difficult to achieve given optimistic growth assumptions.
  - Further durable adjustment measures needed to cut the deficit and reduce public debt; fiscal costs of tax reforms must be offset by savings elsewhere.
  - Contain current primary spending growth with a view to achieving budget balance over the medium term.
  - Containment potential: public sector wage bill, government loan guarantees, stronger controls on health care, and a review of defense outlays.
  - Move expeditiously on health care sector and public procurement reform.
  - Develop an explicit medium-term budget framework with economic assumptions, deficit objectives, expenditure ceilings, and specific policy measures.
  - Technical assistance supported on tax administration and public expenditure management.
  - Population aging poses key long-term threat; disappointment that pension reform is not an immediate priority; begin public debate and lay out cost of delaying reforms.
  - Actions to ensure robust banking system welcomed; strengthen Bank of Greece supervisory capacity; monitor rapid private sector credit growth; establish independent insurance supervisor; participate in FSAP planned for the year.
  - Speed up structural reforms to improve business climate: tax simplification, improved tax administration, further privatization, bolstering product market competition, and simplifying judicial procedures including bankruptcy.
  - Public-private partnerships should include full accounting of explicit and implicit government liabilities, transparent project selection and evaluation, and appropriate risk transfer to private partners.
  - Faster progress needed on labor market reform: ease strict employment protection measures, extend part-time and temporary employment, improve education and training, and ensure wage settlements align with productivity and euro area inflation objectives.

### Key statistics (Greece: Selected Economic Indicators, 2000–05)
- Real economy (change in percent):
  - Real GDP: 2000: 4.5; 2001: 4.3; 2002: 3.6; 2003: 4.5; 2004: 3.9; 2005 Proj.: 3.0
  - Final domestic demand: 2000: 5.5; 2001: 2.4; 2002: 4.2; 2003: 5.4; 2004: 4.3; 2005 Proj.: 2.9
  - Private consumption: 2000: 2.2; 2001: 2.8; 2002: 3.1; 2003: 4.2; 2004: 2.9; 2005 Proj.: 4.4
  - Public consumption: 2000: 14.8; 2001: -3.1; 2002: 5.3; 2003: -2.5; 2004: 11.6; 2005 Proj.: 0.7
  - Gross fixed capital formation: 2000: 10.0; 2001: 4.9; 2002: 6.6; 2003: 13.2; 2004: 4.1; 2005 Proj.: 0.6
  - Foreign balance (contribution): 2000: -1.7; 2001: 1.7; 2002: -0.9; 2003: -1.3; 2004: -0.8; 2005 Proj.: -0.2
  - Unemployment rate (in percent): 2000: 11.1; 2001: 10.5; 2002: 10.0; 2003: 9.3; 2004: 8.9; 2005 Proj.: 8.8
  - Employment: 2000: 0.3; 2001: -1.0; 2002: 1.6; 2003: 1.9; 2004: 1.0; 2005 Proj.: 0.6
  - Unit labor costs (economy wide): 2000: 1.7; 2001: 2.8; 2002: 3.0; 2003: 2.4; 2004: 3.2; 2005 Proj.: 3.3
  - GDP deflator: 2000: 3.4; 2001: 3.5; 2002: 4.0; 2003: 3.5; 2004: 3.2; 2005 Proj.: 3.1
  - CPI (year average): 2000: 2.9; 2001: 3.7; 2002: 3.9; 2003: 3.4; 2004: 3.0; 2005 Proj.: 3.4
- Public finance (percent of GDP):
  - General government balance: 2000: -4.1; 2001: -3.7; 2002: -3.7; 2003: -4.6; 2004: -5.5; 2005 Proj.: -3.5
  - General government primary balance: 2000: 4.0; 2001: 3.6; 2002: 2.6; 2003: 1.2; 2004: -0.2; 2005 Proj.: 1.6
  - General government structural balance: 2000: -3.8; 2001: -3.8; 2002: -4.0; 2003: -5.2; 2004: -6.4; 2005 Proj.: -4.3
  - General government gross debt: 2000: 114; 2001: 115; 2002: 112; 2003: 110; 2004: 112; 2005 Proj.: 109
- Money and credit (end of year, percent change):
  - Domestic credit 1/: 2000: 20.2; 2001: 9.3; 2002: 8.5; 2003: 3.0; 2004: 9.9; 2005: ...
- Interest rates (percent):
  - Deposit rate 1/: 2000: 6.1; 2001: 3.3; 2002: 2.8; 2003: 2.5; 2004: 2.3; 2005: ...
  - Government bond yield 1/: 2000: 6.1; 2001: 5.3; 2002: 5.1; 2003: 4.3; 2004: 4.3; 2005: ...
- Balance of Payments (in percent of GDP, unless otherwise noted):
  - Exports of goods and services: 2000: 26.4; 2001: 25.6; 2002: 22.3; 2003: 21.2; 2004: 21.1; 2005 Proj.: 21.3
  - Imports of goods and services: 2000: 37.2; 2001: 35.1; 2002: 30.8; 2003: 28.5; 2004: 28.6; 2005 Proj.: 28.4
  - Trade balance: 2000: -18.0; 2001: -16.5; 2002: -16.0; 2003: -14.8; 2004: -15.2; 2005 Proj.: -15.5
  - Current account: 2000: -6.9; 2001: -6.2; 2002: -6.1; 2003: -5.7; 2004: -5.9; 2005 Proj.: -5.7
- Exchange rate:
  - Exchange rate regime: Euro area
  - Present rate (January 11, 2004): 1.31
  - Nominal effective exchange rate (2000=100) 2/: 2000: 100.0; 2001: 100.7; 2002: 102.3; 2003: 106.2; 2004: 107.6; 2005: ...
  - Real effective exchange rate (2000=100) 2/: 2000: 100.0; 2001: 101.1; 2002: 104.0; 2003: 109.3; 2004: 112.0; 2005: ...

*IMF Executive Board Concludes 2004 Article IV Consultation with Greece — Public Information Notice (PIN) No. 05/19, February 9, 2005*

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_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2005/_cr0543.pdf_