## _cr08148 - Executive Summary (selected excerpts)

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### I. Background
- Real GDP growth averaged 4¼ percent during 2000–06, and is estimated at 4 percent in 2007.
- Revision of national accounts (Box 1):
  - Base year changed to 2000; provisional increase of 25.7 percent in GDP level was announced, final revision involves an increase in 2000 GDP of 9.6 percent.
  - GDP at current prices (billions of euro), old vs new (2000–2005):
    - Old: 124.4, 133.1, 143.5, 155.5, 168.4, 181.1
    - New: 136.3, 146.3, 157.6, 171.3, 185.2, 198.6
    - Difference (percent): 9.6, 9.9, 9.8, 10.1, 10.0, 9.7
  - Real GDP growth (percent), old vs new:
    - Old: ... 5.1 3.8 4.8 4.7 3.7
    - New: ... 4.5 3.9 5.0 4.6 3.8
  - Unemployment rate (percent), old vs new:
    - Old: 11.7 11.2 10.9 10.4 11.0 10.4
    - New: 11.0 10.4 9.9 9.4 10.2 9.5
- Key background findings and risks:
  - Strong consumption supported by solid employment gains and handsome real wage increases.
  - Rapid credit expansion following financial liberalization and euro adoption fostered rising residential investment; strong corporate profitability fueled investment.
  - External sector has been a drag on growth; external imbalances have remained large and widened.
  - Risks to competitiveness and growth:
    - Rising labor costs threaten competitiveness and could brake investment and employment.
    - A substantial narrowing of the external current account deficit is needed to stabilize the net foreign asset position.
    - Inflation inertia—around 3–3½ percent in recent years—and persistence of an inflation differential with the euro area reflect labor and product market rigidities.
    - Immigration has begun to wane; employment growth will depend increasingly on mobilizing unused labor potential.
    - High government debt (93 percent of GDP) and projected increases in pension and health care costs related to population aging pose debt sustainability risks.
    - Expenditure rigidity renders the budget vulnerable to shocks that could trigger a sharp growth slowdown.
    - Financial sector vulnerabilities: high nonperforming loans (NPLs), rising Greek bank exposure in southeastern Europe (SEE), growing reliance on wholesale funding increase credit and liquidity risk; household indebtedness remains relatively low.
- Policy actions noted:
  - Deterioration in public finances before the 2004 Olympics has been reversed; general government deficit fell by about 5 percentage points of GDP over two years to 2½ percent of GDP in 2006, and was 2¾ percent of GDP in 2007 despite one-off expenditures of about 1 percent of GDP.
  - Measures under the National Reform Program for 2005–08 to strengthen tax administration and expenditure management, enhance SOE performance, improve the business environment, and facilitate private sector development.

### II. Outlook and Policy Discussions
- Staff and authorities projections:
  - Authorities’ baseline (Autumn 2007 common external assumptions) projects real GDP growth sustained at around 4 percent during 2008–10.
  - Staff project GDP growth slowing to 3.7 percent in 2008, and averaging 3½ percent during 2009–10.
  - Selected macro projections (Staff): Real GDP: 2007 Staff Est. 4.0; MoF/Staff 4.0; 2008 Staff 3.7; 2009 Staff 4.0; 2010 Staff 3.5.
  - Total domestic demand: 2007 Staff Est. 4.9; 2008 Staff 4.4; 2009 Staff 4.4; 2010 Staff 4.3.
  - Net exports (contribution to growth): 2007 -1.7; 2008 -1.4; 2009 -1.3; 2010 -1.1.
  - Current account (percent of GDP): 2007 -14.6; 2008 -14.4; 2009 -15.0; 2010 -14.2.
  - Unit labor cost: 2007 3.8; 2008 3.1; 2009 3.4; 2010 2.7.
  - Unemployment rate (ESA95 basis): 2007 7.8; 2008 6.8; 2009 7.0; 2010 6.3.
- Inflation and risks:
  - Inflationary pressures picked up in Q4–2007 due to food and oil price rises.
  - Staff project average inflation to rise to 3.3 percent in 2008 and to moderate slightly thereafter, assuming no significant second-round effects and oil prices consistent with WEO projections.
  - Downside risks include persistence of global financial turmoil affecting bank liquidity and export prospects.
- Authorities’ longer-term strategy:
  - Aim to exploit Greece’s location and become a regional business hub via infrastructure investment, expansion of shipping fleet, large-scale energy interconnection projects, and port/rail/road/tourist infrastructure development through private participation.
  - Realizing potential requires pressing ahead with structural reforms to improve competitiveness.

### Competitiveness and External Sector
- Indicators and assessment:
  - CPI-based and ULC-based real effective exchange rate (REER) have deteriorated by about 10 percent and 17 percent, respectively, since EMU accession in 2001.
  - Staff CGER-based estimates suggest a sizable competitiveness gap in the range of 30–40 percent in 2007.
  - Export performance:
    - Export market share broadly maintained since EMU entry in 2001, with diversification toward rapidly growing SEE countries.
    - National accounts data suggest continued strong export performance in 2007; bank settlements data indicate a substantial slowdown in the second half of 2007.
    - Services exports expanding rapidly; authorities see promising prospects for sustained growth in services.
- Staff and policy recommendations:
  - Early efforts to improve cost competitiveness through wage moderation and strong productivity growth.
  - Create an environment conducive to investment in product upgrading.
  - Projection: current account deficit is projected to remain around 14 percent of GDP during 2008–10 and fall slightly thereafter once outlays on new ships fade away; consequence: the negative international investment position will deteriorate further.

### Financial Stability and Banking Sector
- Key vulnerabilities:
  - Rapid private sector credit growth following euro adoption and financial liberalization; continued rapid credit growth averaging 20 percent annually increases exposure to credit risk.
  - Nonperforming loans-to-total loans remained high in 2006; NPL ratios have been persistently high.
  - Greek banks’ rising exposure in SEE and increased reliance on wholesale funding create credit and liquidity risks.
  - Household indebtedness rising but described as "relatively low" earlier; household debt to GDP: 2006 41.2; Q3 2007 47.4.
- Supervisory responses and stress testing:
  - BoG monitoring liquidity positions closely; repos can be used temporarily but not as a long-term support.
  - BoG agreed that upgrading of stress testing was necessary; steps to strengthen supervision include increasing provisioning requirements and tightening lending standards.
  - Basel II framework scheduled to be introduced in March 2008.
  - Cross-border cooperation: nine SEE supervisory authorities agreed to intensify collaboration; BoG adopted a risk-based, multilayer supervisory framework for exposures abroad.

### Fiscal Policy, Public Finances, and Tax Reform
- Fiscal stance and risks:
  - General government deficit fell to 2½ percent of GDP in 2006 and was 2¾ percent of GDP in 2007 despite about 1 percent of GDP in one-off expenditures.
  - High public debt (93 percent of GDP) poses medium-term sustainability concerns; projected increases in pension and health care costs linked to population aging will adversely affect debt sustainability.
  - Expenditure rigidity increases vulnerability to shocks.
- 2008 budget and consolidation:
  - Authorities pursue further fiscal consolidation with the goal of achieving a balanced budget by 2010; the 2008 budget aims to reduce the general government deficit to 1.6 percent of GDP through revenue measures.
  - Staff views revenue objectives for 2008–10 as ambitious and subject to downside risks.
  - Staff advice: further fiscal adjustment to a surplus position over the medium term necessary to safeguard debt sustainability under shocks.
  - Example scenario: if real GDP growth dropped to 2 percent on average, the public debt-to-GDP ratio would rise to 98 percent by 2013, compared with a decline to 72 percent under the baseline scenario.
- Box 2 — Tax Reform measures and estimated impacts:
  - Personal income tax cuts: the two middle marginal tax rates of 29 percent and 39 percent will be reduced by 2 percentage points annually in 2008–09 to 25 percent and 35 percent, respectively.
  - Rationalizing real estate taxation: inheritance and parental gift tax on properties of less than euro 90,000 and the real estate tax on large properties are being abolished; replaced by a uniform 1 percent duty on property transfers and a new tax on individual’s property (0.1 percent) and on legal entities’ property (0.6 percent); exemptions for rural properties and first homes below 200 square meters and less than euro 300,000.
  - Harmonizing gasoil taxation: eliminate large differential in gasoil excise rates for heating and propellant use; a program for compensating households will be introduced.
  - Improving tax compliance: New Law on Tax Evasion passed in November 2007 establishing a National Council, strengthening tax administration, tax deductions for receipts, and a tax policy unit in the Ministry of Economy and Finance.
  - Estimated revenue impact: total revenue impact of the above-mentioned measures in the 2008 budget is about 1 percent of GDP; authorities have not provided precise revenue impact of individual measures; estimate is subject to downside risks.

### Structural Reform and Labor Market
- Structural constraints:
  - Labor and product market rigidities contribute to inflation differential and competitiveness deterioration.
  - Need to mobilize large unused labor potential as immigration wanes.
  - Greece ranked 142 among 178 countries regarding regulation of employment in the World Bank’s Doing Business report.
- Policy recommendations:
  - Wage moderation and enhancing wage flexibility; review employment protection legislation, especially on temporary employment.
  - Strengthen active labor market policies to increase labor mobility.
  - Broaden product and labor market reforms, privatize infrastructure facilities, enhance competition in network industries and transport, simplify licensing further.
  - Stimulate an informed public debate to build social and political consensus for more ambitious and earlier reforms.

### Staff Appraisal — Summary
- Near-term outlook:
  - Near-term growth expected to moderate but remain solid on the back of strong domestic demand; staff projecting GDP growth of 3.7 percent in 2008 and averaging 3½ percent in 2009–10.
  - Risks are tilted to the downside due to possible persistence of global financial turmoil and associated trade and liquidity impacts.
- Longer-term considerations:
  - Longer-term prospects hinge on implementing structural reforms to address competitiveness deterioration, labor and product market rigidities, and fiscal sustainability concerns given public debt of 93 percent of GDP.
  - Pension reform requires greater ambition and comprehensive actuarial assessment; pension spending projected (from the 2002 stability programme update) to rise by some 10¼ percent of GDP by 2050 absent reform.
- Financial sector vigilance:
  - Banking system remains healthy, adequately capitalized, and highly profitable, but key risks (rapid credit growth, exposure in SEE, high NPLs, reliance on wholesale funding) require close monitoring and upgraded stress testing.

### Selected Key Statistics and Projections (exact figures preserved)
- Real GDP (annual percent change): 2001: 4.5; 2002: 3.9; 2003: 5.0; 2004: 4.6; 2005: 3.8; 2006: 4.2; 2007 (Staff Est.): 4.0; 2008 (Staff Proj.): 3.7.
- Output gap (percent): 2001: 0.4; 2002: 0.5; 2003: 1.5; 2004: 2.4; 2005: 2.3; 2006: 2.5; 2007: 2.5; 2008: 2.2.
- Private sector credit growth (percent, 12-month basis): 2001: 24.8; 2002: 16.9; 2003: 17.0; 2004: 19.5; 2005: 21.8; 2006: 20.6; Nov-07: 21.4.
- Household debt to GDP (percent): 2000: 12.5; 2001: 16.3; 2002: 20.6; 2003: 24.4; 2004: 29.6; 2005: 35.6; 2006: 41.2; Q3 2007: 47.4.
- Net international investment position (percent of GDP): 2001: -46.6; 2002: -52.6; 2003: -59.3; 2004: -67.0; 2005: -75.1; 2006: -83.3; Sep-07: -94.2.
- General government debt (Percent of GDP, selected): 2005: 98; 2006: 95; 2007: 93; 2008 (Table 9 memorandum): 91.
- Current account (percent of GDP, selected): 2006: -11.0; 2007: -13.8; 2008 (proj in Table 1): -13.9; medium-term baseline: 2009: -14.1; 2010: -13.9.
- Key public finance aggregates (Percent of GDP, 2005–2010):
  - Revenue: 38.0, 39.5, 39.9, 41.1, 41.7, 42.3.
  - Expenditure: 43.0, 42.0, 42.6, 42.7, 42.5, 42.6.
  - Social transfers: 16.0, 16.6, 17.2, 17.8, 18.0, 18.5.
  - General government balance: -5.1, -2.5, -2.7, -1.6, -0.9, -0.3.
  - Structural overall balance (excluding one-offs): -6.1, -3.6, -2.9, -2.6, -1.6, -0.9.
  - General government debt: 98, 95, 93, 91, 88, 84.

### IMF Recommendation and Follow-up
- It is recommended that the next Article IV consultation take place on the normal 12-month cycle.
- Mission dates and staff: November 29–December 10, 2007 and January 22–25, 2008 in Athens; staff team led by Mr. Banerjee with Ms. Honjo, Ms. Moreno Badia, and Mr. Chua.
- Membership and Fund relations: Joined December 27, 1945; Article VIII; Quota 823.00 (SDR million); Fund holdings of currency 768.98; Reserve position in Fund 54.03.

*Source: _cr08148 - Executive Summary and selected excerpts.*

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

### _cr08148 - Executive Summary

### I. Background

- Real GDP growth averaged 4¼ percent during 2000–06, and is estimated at 4 percent in 2007.
- Revision of national accounts (Box 1):
  - Base year changed to 2000; provisional increase of 25.7 percent in GDP level was announced, final revision involves an increase in 2000 GDP of 9.6 percent.
  - GDP at current prices (billions of euro), old vs new (2000–2005):
    - Old: 124.4, 133.1, 143.5, 155.5, 168.4, 181.1
    - New: 136.3, 146.3, 157.6, 171.3, 185.2, 198.6
    - Difference (percent): 9.6, 9.9, 9.8, 10.1, 10.0, 9.7
  - Real GDP growth (percent), old vs new:
    - Old: ... 5.1 3.8 4.8 4.7 3.7
    - New: ... 4.5 3.9 5.0 4.6 3.8
  - Unemployment rate (percent), old vs new:
    - Old: 11.7 11.2 10.9 10.4 11.0 10.4
    - New: 11.0 10.4 9.9 9.4 10.2 9.5
- Key background findings and risks:
  - Strong consumption supported by solid employment gains and handsome real wage increases.
  - Rapid credit expansion following financial liberalization and euro adoption fostered rising residential investment; strong corporate profitability fueled investment.
  - External sector has been a drag on growth; external imbalances have remained large and widened.
  - Risks to competitiveness and growth:
    - Rising labor costs threaten competitiveness and could brake investment and employment.
    - A substantial narrowing of the external current account deficit is needed to stabilize the net foreign asset position.
    - Inflation inertia—around 3–3½ percent in recent years—and persistence of an inflation differential with the euro area reflect labor and product market rigidities.
    - Immigration has begun to wane; employment growth will depend increasingly on mobilizing unused labor potential.
    - High government debt (93 percent of GDP) and projected increases in pension and health care costs related to population aging pose debt sustainability risks.
    - Expenditure rigidity renders the budget vulnerable to shocks that could trigger a sharp growth slowdown.
    - Financial sector vulnerabilities: high nonperforming loans (NPLs), rising Greek bank exposure in southeastern Europe (SEE), growing reliance on wholesale funding increase credit and liquidity risk; household indebtedness remains relatively low.
- Policy actions noted:
  - Deterioration in public finances before the 2004 Olympics has been reversed; general government deficit fell by about 5 percentage points of GDP over two years to 2½ percent of GDP in 2006, and was 2¾ percent of GDP in 2007 despite one-off expenditures of about 1 percent of GDP.
  - Measures under the National Reform Program for 2005–08 to strengthen tax administration and expenditure management, enhance SOE performance, improve the business environment, and facilitate private sector development.

### II. Policy Discussions

#### A. The Outlook

- Staff projections and scenarios:
  - Authorities’ baseline (Autumn 2007 common external assumptions) projects real GDP growth sustained at around 4 percent during 2008–10.
  - Staff project:
    - GDP growth slowing to 3.7 percent in 2008, and averaging 3½ percent during 2009–10.
  - Macroeconomic projections table (selected rows):
    - Real GDP: 2007 Staff Est. 4.0; MoF/Staff 4.0; 2008 Staff 3.7; 2009 Staff 4.0; 2010 Staff 3.5
    - Total domestic demand: 2007 Staff Est. 4.9; 2008 Staff 4.4; 2009 Staff 4.4; 2010 Staff 4.3
    - Net exports (contribution to growth): 2007 -1.7; 2008 -1.4; 2009 -1.3; 2010 -1.1
    - Current account (percent of GDP): 2007 -14.6; 2008 -14.4; 2009 -15.0; 2010 -14.2
    - Unit labor cost: 2007 3.8; 2008 3.1; 2009 3.4; 2010 2.7
    - Unemployment rate (ESA95 basis): 2007 7.8; 2008 6.8; 2009 7.0; 2010 6.3
- Downside risks:
  - Persistence of global financial turmoil could cause liquidity squeezes for banks reliant on wholesale funding and lead them to scale back business plans.
  - Turmoil could hit export prospects harder than baseline assumptions.
- Authorities’ longer-term view:
  - Aim to exploit Greece’s location and become a regional business hub via infrastructure investment, expansion of shipping fleet, large-scale energy interconnection projects, port/rail/road/tourist infrastructure development through private participation.
  - Realizing potential requires pressing ahead with structural reforms to improve competitiveness.
- Inflation:
  - Inflationary pressures picked up in Q4–2007 due to food and oil price rises; risks to the upside.
  - Staff project average inflation to rise to 3.3 percent in 2008 and to moderate slightly thereafter, assuming no significant second-round effects and oil prices consistent with WEO projections.

#### B. Competitiveness

- Indicators and assessments:
  - CPI-based and ULC-based real effective exchange rate (REER) have deteriorated by about 10 percent and 17 percent, respectively, since EMU accession in 2001.
  - Staff CGER-based estimates suggest a sizable competitiveness gap in the range of 30–40 percent in 2007.
  - Export performance:
    - Export market share broadly maintained since EMU entry in 2001, with diversification toward rapidly growing SEE countries.
    - National accounts data suggest continued strong export performance in 2007; bank settlements data indicate a substantial slowdown in the second half of 2007.
    - Services exports expanding rapidly; authorities see promising prospects for sustained growth in services.
- Authorities’ stance:
  - Recognize negative implications of deteriorating competitiveness but did not view it as a near-term impediment, citing firm restructuring and movement up the technology ladder and favorable employment/unemployment developments.

#### C. Financial Stability

- Financial sector developments and vulnerabilities:
  - Rapid private sector credit growth following euro adoption and financial liberalization.
  - Private sector credit growth in real terms, 2001–2006: Greece among high-growth countries (chart referenced).
  - Nonperforming loans-to-total loans remained high in 2006.
  - Greek banks’ rising exposure in SEE and increased reliance on wholesale funding create credit and liquidity risks.
  - Household indebtedness still relatively low, supporting continued strong credit growth prospects.

#### D. Fiscal Policy

- Fiscal performance and outlook:
  - General government deficit improved to 2½ percent of GDP in 2006 and was 2¾ percent of GDP in 2007 despite one-off expenditures of about 1 percent of GDP.
  - High public debt at 93 percent of GDP poses medium-term sustainability concerns.
  - Projected increases in pension and health care costs linked to population aging will adversely affect debt sustainability.
  - Expenditure rigidity makes the budget vulnerable to shocks that could precipitate a growth slowdown.
- Policy measures:
  - Initiatives under the National Reform Program for 2005–08 aim to strengthen tax administration, expenditure management, SOE performance, and the business environment.
- Box on Tax Reform is listed in the table of contents (Box 2), indicating fiscal policy reform attention.

#### E. Structural Reform

- Structural constraints identified:
  - Labor and product market rigidities contributing to inflation differential and competitiveness deterioration.
  - Need to mobilize large unused labor potential as immigration wanes.
- Policy direction:
  - Emphasis on broadening and persevering with reforms to improve competitiveness and create a conducive policy environment for investment.
  - Measures under National Reform Program target tax administration, expenditure management, SOE performance, business environment, and private sector development.

### III. Staff Appraisal

- Consultation focus:
  - Policies to maintain domestic economic and financial stability, including vigilance over financial sector risks, steps to ensure long-term fiscal sustainability, and reforms to tackle structural constraints to sustained growth.
- Overall assessment:
  - Near-term growth expected to moderate but remain solid on the back of strong domestic demand, with staff projecting GDP growth of 3.7 percent in 2008 and averaging 3½ percent in 2009–10.
  - Risks are tilted to the downside due to the possible persistence of global financial turmoil and associated trade and liquidity impacts.
  - Longer-term prospects hinge on implementing structural reforms to address competitiveness deterioration, labor and product market rigidities, and fiscal sustainability concerns given a public debt level of 93 percent of GDP.

*Source: _cr08148 - Executive Summary*

### 11.      Staff underscored the risks to the external outlook. The higher value-added goods

### _cr08148 - 11.      Staff underscored the risks to the external outlook. The higher value-added goods

### External outlook and competitiveness
- Higher value-added goods are primarily exported to EU countries while exports to neighboring markets mostly include low-tech labor-intensive goods.
- Greek exporters face growing competition as neighboring countries seek greater integration with other EU countries.
- Many export-oriented labor-intensive manufacturing firms are increasingly relying on outsourcing.
- Rising labor costs above productivity gains are adversely affecting the profitability of the tourism sector, which faces intense price competition.
- Staff recommendations:
  - Early efforts to improve cost competitiveness through wage moderation and strong productivity growth.
  - Create an environment conducive to investment in product upgrading.
- Current account and trade projections:
  - Assumption: merchandise export market share will be maintained through product upgrading and geographic diversification.
  - Shipping sector expected to gain market share with expansion of the fleet.
  - Import growth likely to remain robust given substantial investment and new ships purchases in the pipeline.
  - The current account deficit is projected to remain around 14 percent of GDP during 2008–10 and fall slightly thereafter once the outlays on new ships fade away.
  - Consequence: Greece’s already large negative international investment position will deteriorate further.
- Risk channel:
  - In view of Greece's EMU membership, availability of external financing is not a concern, but cumulating indebtedness could weigh appreciably on growth.
  - Large persistent current account deficits would increase vulnerabilities to a reversal in market sentiment, possibly leading to corrective retrenchment of private sector balance-sheets and a possible appreciable rise in the cost of funding over time.
  - Greece’s current account deficit accounts for only 0.3 percent of euro area GDP.

### Financial stability and banking sector
- Direct exposures:
  - Balance sheet and off-balance sheet exposures of Greek banks to the United States subprime mortgage sector are marginal.
  - Greek banks are not liquidity providers for asset-based commercial paper conduit programs.
- Funding and liquidity:
  - Despite growing reliance on wholesale funding, banks had prefunded operations up to the first half of 2008 and had not yet felt the impact from global credit pressures; however, funding and roll over risks could be heightened if the financial turmoil were to persist.
  - BoG (banking supervisor) is monitoring banks’ liquidity positions closely; repos can be used temporarily but should not be resorted to long-term to sustain operations.
  - Some banks have reportedly started to scale back business plans in recognition of the new liquidity environment and rising funding costs.
  - Greece’s submission for the euro area lending survey suggests some credit tightening is likely in the coming months, particularly for credit to enterprises.
  - Stock prices of Greek banks have, on average, fallen by nearly 25 percent from the peak in November 2007.
- System soundness and risks:
  - The Greek banking system remains healthy, adequately capitalized, and highly profitable, but key risks require close monitoring.
  - Continued rapid credit growth—averaging 20 percent annually—has increased banks’ exposure to credit risk and vulnerability to economic cycles.
  - NPL ratios have been persistently high, suggesting banks’ risk management systems may need further improvement.
  - Increasing exposure in SEE carries foreign exchange, credit, and country risks.
  - Recent stress tests suggest banks are resilient to a range of possible adverse shocks, but tests did not take into account correlation of risks and the underlying quality of loan portfolios was uncertain as it had not been tested through a complete economic cycle.
  - BoG agreed that upgrading of stress testing was necessary and indicated steps to strengthen supervision through increasing provisioning requirements and seeking a tightening of lending standards.
- Cross-border supervision and regulation:
  - Nine SEE supervisory authorities have agreed to intensify collaboration on achieving convergence of supervisory practices, including risk assessment, money laundering and financing of terrorism.
  - BoG has adopted a risk-based, multilayer supervisory framework for exposures abroad, including on-site examinations and setting country limits.
  - Basel II framework is scheduled to be introduced in March 2008, and steady progress is being made in implementing the EU’s capital requirement Directives.
  - Private Insurance Supervisory Committee (PISC) became operational in January 2008 and is adopting a risk-based approach to insurance supervision.
  - Authorities have taken measures to address deficiencies identified during the FATF assessment, but the remedial program cannot be finalized until a new law is in effect and relevant regulatory instruments are developed.
  - Staff urged rapid staffing of the PISC, related legislative changes, and intensified efforts to achieve prompt compliance with the FATF standards.

### Fiscal policy and public finances
- Fiscal consolidation objective:
  - Authorities pursue further fiscal consolidation with the goal of achieving a balanced budget by 2010.
  - The 2008 budget aims to reduce the general government deficit to 1.6 percent of GDP through revenue measures.
- Composition and risks:
  - Revenue efforts center on combating tax evasion through administrative measures, restructuring taxation of heating oil, and reform of property taxes.
  - Savings from elimination of one-off expenditures incurred in 2007 will be offset by higher outlays on wages and social transfers—the latter has increased as ratio to GDP by 0.6 percentage point every year since 2005 and this trend will continue in 2008, making the expenditure structure more rigid.
  - Authorities expect fiscal consolidation in 2009–10 to be achieved from higher revenues, but have not specified enabling measures.
  - Achievement of a balanced budget by 2010 might not be feasible if the pace of economic growth slowed in line with the staff scenario.
- Staff advice on fiscal stance:
  - Further fiscal adjustment to a surplus position over the medium term was necessary to safeguard debt sustainability in the event of shocks.
  - Example scenario: if real GDP growth dropped to 2 percent on average, the public debt-to-GDP ratio would rise to 98 percent by 2013, compared with a decline to 72 percent under the baseline scenario.
  - Pension spending projected (from the 2002 stability programme update) to rise by some 10¼ percent of GDP by 2050 absent reform.
- Revenue realism and measures:
  - The revenue objectives for 2008–10 are ambitious, with associated risks to the fiscal deficit targets.
  - Staff recommended the National Committee for tackling tax evasion focus on: simplifying tax laws and regulations, streamlining basic tax procedures, improving taxpayer services, and intensifying risk-based auditing.
  - Consideration should be given to increasing revenues by broadening the base of major taxes by phasing out distortionary exemptions ahead of any increases in tax rates.
- Public expenditure management:
  - Authorities are strengthening public expenditure management and broadening its scope, including transparency and accountability for local governments, public hospitals, and pension funds through standard budgeting and monitoring frameworks.
  - Health sector reforms: consolidate number of regional authorities, upgrade management of public hospitals, improve pricing and costing mechanisms, and introduce better controls on procurement.
  - A pilot initiative in program-based budgeting launched for one line ministry in 2008.
  - Staff encouraged development of a medium-term budget framework, extending budget coverage, improving cash management, and putting in place an appropriate financial management information system.
  - Slow progress in preparatory organizational aspects of public enterprise reform has led to little improvement in enterprise performance during the past two years.

Box 2 — Tax Reform (measures and impacts)
- Personal income tax cuts:
  - The two middle marginal tax rates of 29 percent and 39 percent will be reduced by 2 percentage points annually in 2008–09 to 25 percent and 35 percent, respectively.
- Rationalizing real estate taxation:
  - Inheritance and parental gift tax on properties of less than euro 90,000 and the real estate tax on large properties are being abolished.
  - Replaced by a uniform 1 percent duty on property transfers and a new tax on individual’s property (0.1 percent) and on legal entities’ property (0.6 percent).
  - Rural properties and first homes below 200 square meters and less than euro 300,000 in value are exempt from tax.
- Harmonizing gasoil taxation:
  - Eliminate large differential in gasoil excise rates for heating and propellant use; reform distribution system.
  - A program for compensating households will be introduced to limit adverse impact.
- Improving tax compliance:
  - New Law on Tax Evasion passed in November 2007 provides for: establishment of a National Council to guide efforts; strengthening the structure of tax administration; tax deductions for taxpayers who submit receipts for services; creation of a tax policy unit in the Ministry of Economy and Finance.
- Estimated revenue impact:
  - The total revenue impact of the above-mentioned measures in the 2008 budget is about 1 percent of GDP.
  - Authorities have not provided precise revenue impact of the individual measures.
  - The estimate is subject to downside risks: uncertainty relating to the new property tax as property registers remain to be fully updated; revenue impact of the new tax evasion law likely limited in the short term.

Key general government aggregates (Percent of GDP)
- Revenue (2005–2010): 38.0, 39.5, 39.9, 41.1, 41.7, 42.3
- Expenditure (2005–2010): 43.0, 42.0, 42.6, 42.7, 42.5, 42.6
- One-off expenditures: 0.0, 0.0, 1.0, 0.0, 0.0, 0.0
- Social transfers: 16.0, 16.6, 17.2, 17.8, 18.0, 18.5
- General government balance (2005–2010): -5.1, -2.5, -2.7, -1.6, -0.9, -0.3
- Structural overall balance (excluding one-offs): -6.1, -3.6, -2.9, -2.6, -1.6, -0.9
- General government debt (2005–2010): 98, 95, 93, 91, 88, 84

### Pensions and long-term sustainability
- Authorities following a gradualist approach on pension reform; last pension reforms enacted in 2002.
- Current reform focus: merger of pension funds, tightening provisions for early retirement (reform of list of “heavy and unhealthy” occupations and disability pension code), increasing incentives to stay employed longer, tackling contribution evasion.
- Authorities have ruled out reduction of the replacement rate and increases in contribution rates.
- Completion of actuarial studies of major pension funds has been further delayed.
- Staff concerns:
  - In the absence of an assessment of cost savings, unclear whether current proposals suffice to restore financial viability.
  - Need to prepare and publish detailed and realistic projections of the costs of population aging in accordance with EU methodologies and prepare a comprehensive reform strategy on this basis.
  - Staffing constraints and bureaucratic obstacles that have delayed data collection and analysis need to be addressed urgently.
  - Gradualist approach could require deeper and more painful adjustments later, skew the tax burden toward future generations, and require larger fiscal surpluses to achieve debt sustainability.

### Structural reform and labor market
- Labor market performance:
  - Some reforms (easing overtime restrictions, reducing disincentives to accept employment) and a positive macro environment have increased employment and reduced unemployment since 2000.
  - Nonetheless, unemployment remains one of the highest among OECD countries, employment rate is well below EU targets, and labor mobility is low.
  - Greece is ranked 142 among 178 countries regarding regulation of employment in the World Bank’s Doing Business report.
- Staff recommendations:
  - Review employment protection legislation, especially on temporary employment.
  - Strengthen active labor market policies to increase labor mobility.

*Italic: IMF staff report content unit _cr08148 (selected excerpt).*

### 23.      Wage moderation and enhancing wage flexibility are important challenges. The

### Wage moderation and enhancing wage flexibility are important challenges

### Wage developments and collective bargaining
- The authorities will continue with the policy of containing increases in basic wages of government employees and are hoping for a favorable signaling effect on private sector wage settlements.
- In recent years, wage increases in the private sector have been relatively large and often exceeded productivity growth.
- Contributing factors include links between minimum and average wage increases, and the administrative extension of collective agreements to enterprises not represented in the negotiations.
- The wage demands in the current round of collective bargaining appear to be following the same pattern, with adverse implications for preserving international cost competitiveness.
- The authorities explained that a reform of the collective bargaining system is not on their agenda as social consensus would be difficult to obtain simultaneously with consensus on pension reform.

### Business environment and administrative reforms
- The authorities are seeking to improve the business environment through economic incentives and strengthening of the institutional framework.
- Recent measures and reforms benefiting the business sector:
  - Lower corporate tax rates.
  - Investment incentives for priority sectors.
  - A new bankruptcy code.
  - An updated company law.
  - Simplified licensing of manufacturing businesses.
- Emphasis is being placed on reducing administrative burdens and improving the quality of services provision.
- Land use regulations are being updated to facilitate investment in renewable energy sources, tourism and industry.
- Privatization program developments:
  - A partial stake in the savings bank and the telephone company was offered to institutional investors in 2007.
  - Plans to privatize air and sea ports are being developed.
- Ease of doing business indicator:
  - Greece fares poorly with a rank of 100 among 178 countries, suggesting a need for further reform efforts.
- Staff welcomed plans to introduce legislation in 2008 aimed at lessening bureaucracy in setting up businesses and sharply reducing business start-up time for commercial enterprises.

### Competition, network industries, and transport
- Enhancing competition, particularly in the network industries and in the transport sector, remains a challenge.
- The stake of the state in key public utilities remains high and price regulation is still pervasive.
- Recommended reforms to foster competition:
  - Unbundling of the operations of the incumbents in the electricity and gas markets.
  - Opening the transport market to new entrants.
  - Ensuring that the Hellenic Competition Commission is effectively organized and adequately staffed to tackle price rigidities in the broader product market.

### Staff appraisal — recent performance
- The Greek economy has performed well during the past several years.
  - Economic activity has grown at a rapid pace, driven by strong domestic demand.
  - Employment and unemployment indicators have improved markedly.
  - Fiscal imbalances have been significantly reduced since 2004, and Greece exited from the EU’s excessive deficit procedure in mid-2007.
  - Structural reforms have been initiated to bolster fiscal performance and improve the business environment.
- While cost competitiveness has deteriorated steadily, the market share of goods exports has been maintained since EMU entry, owing to a move up the technology ladder and increasing geographic diversification of trade.
- The external sector has been a drag on growth, with large and widening current account deficits.

### Outlook and risks
- Solid growth is expected to continue for some time, on the back of strong domestic demand, but risks are tilted to the downside.
- Near-term risks:
  - A possibly weaker external environment.
  - A liquidity squeeze for banks dependent on wholesale funding.
- Longer-term risks:
  - Persistent deterioration of cost competitiveness may ultimately pose a constraint to sustaining the growth momentum.
  - Exporters of low-tech and low-skill products and the tourism sector remain particularly vulnerable to rising labor costs and growing competition.
  - Constraints to employment and productivity growth remain on account of labor and product market rigidities, as well as infrastructure deficiencies.
- Policy implications:
  - Tackling these challenges will require wage moderation, further investment in product upgrading, and persevering with and broadening the efforts to reform the product and labor markets.
  - Pursuing a gradualist reform agenda is likely to increase underlying vulnerabilities and the need for deeper adjustments later.
  - Stimulating an informed public debate to build social and political consensus in favor of more ambitious and early reforms is essential.

### Banking sector and financial supervision
- The banking system appears to be sound and has been largely unaffected by the global financial turmoil, but key risks will need to be monitored closely.
- Emerging risks:
  - Continued rapid credit growth.
  - Increasing presence in southeastern Europe financed in part through wholesale funding, increasing exposure to credit, country, and liquidity risks.
- Recommended actions:
  - Stress testing should be upgraded to take into account correlation of risks.
  - Steps taken to strengthen supervision and foster cooperation with SEE supervisory authorities are appropriate and timely.
  - In the insurance sector, the adoption of a risk-based approach to supervision by the new supervisor is welcome.

### Fiscal consolidation and public debt
- Fiscal consolidation should be sustained over the medium term in view of the current high level of public debt and the prospective large aging related costs.
- The authorities’ aim of achieving a balanced budget by 2010 is appropriate, but further adjustment thereafter to a surplus position is necessary.
- The revenue target of the 2008 budget is ambitious, and the authorities will need to undertake considerable efforts to achieve it and remain within the overall deficit target.
- Achieving budget balance by 2010 will require further revenue enhancing measures and determined efforts to control spending.

### Revenue administration and tax reform
- A primary focus of the fiscal consolidation strategy is on improving revenue collections.
- The emphasis of tax reform in 2008 is on tackling tax evasion through administrative measures, incentives and restructuring of a few taxes.
- Improving tax compliance will require further strengthening of tax administration.
- Consideration should be given to phasing out distortionary exemptions for all major taxes and simplifying the rate structure.

### Expenditure management and budgeting
- Important reforms to expenditure management have been initiated and need to be pursued further.
- Reforms under way:
  - Public entities are being made subject to greater transparency and accountability in their operations.
  - The health care system is being restructured to increase efficiency.
- Further reform recommendations:
  - Extend the coverage of the budget.
  - Put in place an appropriate financial management information system.
  - Fully integrate program-based budgeting into budget preparation and execution.
  - Introduce a medium-term budget framework to help guide fiscal strategy and prioritize policy objectives.

### Pension reform
- The authorities are rightly giving priority to pension reform to ensure long-term fiscal sustainability, though greater ambition is needed.
- Assessment of current reform agenda:
  - The reform agenda is narrowly focused.
  - The policy proposals are lacking a full assessment of the financing needs and cost savings.
- Recommended actions:
  - Prepare and publish detailed and realistic projections of the cost of population aging in accordance with EU methodologies, providing the needed basis for a comprehensive reform of the pension system.

### Product and labor market reforms
- Broader product and labor market reforms are key to regaining lost competitiveness, increasing the employment rate, and promoting robust productivity growth in a context of domestic economic stability.
- Recent initiatives:
  - Simplification of licensing processes and operations of enterprises.
  - Economic incentives to encourage investment.
- Further recommended reforms:
  - Reinforce efforts to simplify licensing processes further.
  - Privatize infrastructure facilities.
  - Enhance competition in the network industries and the transport sector.
  - Labor market reform should focus on enhancing the flexibility of the wage setting system and easing the restrictiveness of employment protection legislation.

*Source: IMF country report content unit _cr08148.*

### 34.      It is recommended that the next Article IV consultation take place on the normal

### _cr08148 - 34.      It is recommended that the next Article IV consultation take place on the normal

### IMF Recommendation
- It is recommended that the next Article IV consultation take place on the normal 12-month cycle.

### Macroeconomic performance and projections (selected indicators)
- Real GDP (annual percent change): 2001: 4.5; 2002: 3.9; 2003: 5.0; 2004: 4.6; 2005: 3.8; 2006: 4.2; 2007 (Staff Est.): 4.0; 2008 (Staff Proj.): 3.7.
- Output gap (percent): 2001: 0.4; 2002: 0.5; 2003: 1.5; 2004: 2.4; 2005: 2.3; 2006: 2.5; 2007: 2.5; 2008: 2.2.
- Total domestic demand (percent change): 2001: 2.6; 2002: 5.1; 2003: 6.6; 2004: 4.9; 2005: 3.0; 2006: 5.4; 2007: 4.9; 2008: 4.4.
- Private consumption (percent change): 2001: 4.5; 2002: 4.2; 2003: 5.0; 2004: 4.7; 2005: 4.2; 2006: 4.2; 2007: 3.2; 2008: 3.3.
- Gross fixed capital formation (percent change): 2001: 4.1; 2002: 10.7; 2003: 15.4; 2004: 6.0; 2005: 0.7; 2006: 14.8; 2007: 8.9; 2008: 9.0.
- Unemployment rate (percent, ESA95 basis): 2001: 10.4; 2002: 9.9; 2003: 9.4; 2004: 10.2; 2005: 9.5; 2006: 8.6; 2007: 7.8; 2008 (proj): 7.0.
- Employment growth (percent): 2001: 0.2; 2002: 2.0; 2003: 1.9; 2004: 0.9; 2005: 1.5; 2006: 2.5; 2007: 1.7; 2008: 1.8.
- Unit labor costs (economy wide, percent change): 2001: 2.9; 2002: 3.2; 2003: 1.4; 2004: 4.9; 2005: 3.7; 2006: 3.3; 2007: 3.8; 2008: 3.4.
- Consumer prices (HICP), period average (percent): 2001: 3.7; 2002: 3.9; 2003: 3.4; 2004: 3.0; 2005: 3.5; 2006: 3.3; 2007: 3.0; 2008: 3.3.
- GDP deflator (percent): 2001: 2.7; 2002: 3.7; 2003: 3.5; 2004: 3.4; 2005: 3.3; 2006: 3.4; 2007: 3.1; 2008: 3.3.
- Nominal GDP (billions of euros, memorandum): 2001: 146; 2002: 158; 2003: 171; 2004: 185; 2005: 199; 2006: 214; 2007: 230; 2008: 246.

### External sector and balance of payments
- Current account (percent of GDP, ESA95/bank settlements distinctions noted):
  - Table 1 (staff estimates/projections): 2001: -7.2; 2002: -6.5; 2003: -6.4; 2004: -5.8; 2005: -7.4; 2006: -11.0; 2007: -13.8; 2008 (proj): -13.9.
  - Medium-term baseline (Table 3 projections): 2008: -13.9; 2009: -14.1; 2010: -13.9; 2011: -12.9; 2012: -12.6; 2013: -12.7.
- Trade balance (percent of GDP): 2001: -8.5; 2002: -7.6; 2003: -6.5; 2004: -5.4; 2005: -6.1; 2006: -9.3; 2007: -10.7; 2008 (proj): -11.3.
- Exports of goods and services (percent of GDP): 2001: 23.0; 2002: 20.0; 2003: 19.0; 2004: 21.3; 2005: 20.9; 2006: 20.8; 2007: 21.2; 2008: 22.0.
  - Exports of goods (percent of GDP): 2001: 7.9; 2002: 6.6; 2003: 6.5; 2004: 6.8; 2005: 7.2; 2006: 7.5; 2007: 7.6; 2008: 7.9.
  - Exports of services (percent of GDP): 2001: 15.1; 2002: 13.4; 2003: 12.5; 2004: 14.4; 2005: 13.8; 2006: 13.3; 2007: 13.6; 2008: 14.2.
- Imports of goods and services (percent of GDP): 2001: 31.5; 2002: 27.6; 2003: 25.5; 2004: 26.7; 2005: 27.0; 2006: 30.1; 2007: 31.9; 2008: 33.3.
- Memorandum: Current account balance (alternative presentation, Table 4): 2004: -5.8; 2005: -7.4; 2006: -11.0; 2007: -13.8; 2008: -13.9; 2009: -14.1; 2010: -13.9; 2011: -12.9; 2012: -12.6; 2013: -12.7.

### Public finances (general government, percent of GDP)
- Total revenues: 2001: 40.9; 2002: 40.0; 2003: 39.3; 2004: 38.2; 2005: 38.0; 2006: 39.5; 2007: 39.9; 2008 (Table 9 budget): 41.1.
- Total expenditures: 2001: 45.4; 2002: 44.7; 2003: 44.9; 2004: 45.5; 2005: 43.0; 2006: 42.0; 2007: 42.6; 2008 (Table 9 budget): 42.7.
- Overall balance (percent of GDP): 2001: -4.5; 2002: -4.7; 2003: -5.6; 2004: -7.3; 2005: -5.1; 2006: -2.5; 2007: -2.7; 2008 (proj): -1.6.
- Primary balance (percent of GDP): 2001: 2.0; 2002: 0.7; 2003: -0.7; 2004: -2.4; 2005: -0.7; 2006: 1.6; 2007: 1.2; 2008: 2.4.
- Structural overall balance (percent of potential output): 2001: -4.7; 2002: -5.0; 2003: -6.3; 2004: -8.4; 2005: -6.1; 2006: -3.6; 2007: -3.8; 2008: -2.6.
- Gross debt (percent of GDP): 2001: 104; 2002: 101; 2003: 98; 2004: 99; 2005: 98; 2006: 95; 2007: 93; 2008 (Table 9 memorandum): 91.

### Medium-term baseline projections (2004–13, key series)
- Real GDP (percent change): 2004: 4.6; 2005: 3.8; 2006: 4.2; 2007: 4.0; 2008: 3.7; 2009: 3.5; 2010: 3.6; 2011: 3.5; 2012: 3.5; 2013: 3.5.
- Current account (percent of GDP): 2008: -13.9; 2009: -14.1; 2010: -13.9; 2011: -12.9; 2012: -12.6; 2013: -12.7.
- Gross debt (percent of GDP, projection): 2008: 99; 2009: 98; 2010: 95; 2011: 93; 2012: 88; 2013: 84; further decline projected to 80, 76, 72 in later years (Table 3 shows 2009–2013 sequence: 99 98 95 93 88 84 80 76 72).

### Public debt sustainability and scenario analysis (summary)
- Public Debt Sustainability: Figure 3 shows bounded tests and scenario panels including:
  - Growth shock scenarios, primary balance shock scenarios, interest rate shock scenarios, combined shocks, and real depreciation plus contingent liabilities shocks.
  - Baseline and historical averages for primary balance and other variables reported in figure notes: Baseline primary balance: 3.4 (unspecified units in figure notes), Scenario: 2.3; Historical: 1.5. Baseline: 3.5; Scenario: 2.0; Historical: 4.1. Baseline: 1.9; Scenario: 4.1; Historical: 2.6.
- Scenario assumptions include: growth shock that reduces real GDP growth to 0.8 percent in 2008 recovering to 3.1 percent by 2013; one-time real depreciation of 30 percent and a 10 percent of GDP shock to contingent liabilities in 2009 (definitions provided).

### Financial sector indicators and soundness
- Regulatory capital to risk-weighted assets (consolidated): 2000: 13.6; 2001: 12.4; 2002: 10.5; 2003: 12.0; 2004: 12.8; 2005: 13.2; 2006: 12.2; Q3 2007: 11.4.
- Regulatory Tier I capital to risk-weighted assets: 2000: 13.5; 2001: 10.9; 2002: 8.8; 2003: 9.8; 2004: 10.0; 2005: 10.9; 2006: 9.9; Q3 2007: 9.2.
- Nonperforming loans net of provisions to capital (percent): 2000: 33.4; 2001: 29.4; 2002: 28.9; 2003: 27.0; 2004: 26.5; 2005: 19.2; 2006: 15.4; Q3 2007: 17.1.
- Nonperforming loans to total gross loans (percent): 2000: 11.7; 2001: 8.3; 2002: 7.4; 2003: 7.0; 2004: 7.0; 2005: 6.3; 2006: 5.4; Q3 2007: 5.1.
- Sectoral distribution of loans (percent of total): consumer credit: rising to 16.5 by Q3 2007; lending for house purchase: 33.5 by Q3 2007; non-financial corporations: 46.7 by Q3 2007 (detailed series available in Table 5).
- Return on assets (after taxes): 2000: 1.4; 2001: 1.0; 2002: 0.5; 2003: 0.6; 2004: 0.4; 2005: 0.9; 2006: 0.8; Q3 2007: 1.3.
- Private sector credit growth (percent, 12-month basis): 2001: 24.8; 2002: 16.9; 2003: 17.0; 2004: 19.5; 2005: 21.8; 2006: 20.6; Nov-07: 21.4.
- Household debt to GDP (percent): 2000: 12.5; 2001: 16.3; 2002: 20.6; 2003: 24.4; 2004: 29.6; 2005: 35.6; 2006: 41.2; Q3 2007: 47.4.

### Indicators of external and financial vulnerability (selected)
- Net international investment position (percent of GDP): 2001: -46.6; 2002: -52.6; 2003: -59.3; 2004: -67.0; 2005: -75.1; 2006: -83.3; Sep-07: -94.2.
- Official reserves (millions of U.S. dollars, end period): 2000: 5,154; 2001: 8,083; 2002: 4,361; 2003: 1,191; 2004: 506; 2005: 566; 2006: 631; Dec-07: 631.
- External central government debt (percent of GDP): 2001: 5.8; 2002: 3.0; 2003: 2.0; 2004: 1.4; 2005: 1.4; 2006: 1.0.
- Spread of 12-month treasury bill rate with Germany (percentage points, end period): 2001: 0.4; 2002: 0.5; 2003: 0.4; 2004: 0.3; 2005: 0.3; 2006: 0.4; 2007 (Aug-07): 0.9.
- Spread of 10-year bond with Germany (percentage points, end period): 2001: 0.6; 2002: 0.5; 2003: 0.5; 2004: 0.5; 2005: 0.4; 2006: 0.3; 2007 (Dec-07): 0.3.

### Structural and labor market indicators
- Employment rate and unemployment comparisons across EU countries shown in Figure 5 (2006 data); Greece has comparatively lower employment rates and higher unemployment rates among EU peers in the figure set.
- Labor market restrictiveness and minimum wage: Figures 6 and 7 show Greece’s positioning on minimum wage levels, changes in minimum wages, severance pay, and restrictiveness of temporary employment and product market regulation indexes (OECD-based scales provided in figures).

### Statistical and data issues
- Data adequacy: Economic data are adequate for surveillance but should be strengthened; Greece subscribes to the SDDS (since November 8, 2002).
- National accounts revisions: NSSG revised national accounts with new benchmark year 2000 and new sources (census, structural surveys, household budget survey) to comply with ESA95.
- Seasonal adjustment: Quarterly national accounts seasonal adjustment relies on indicator series rather than standard techniques; NSGG plans to introduce properly seasonally adjusted quarterly national accounts.
- Balance of payments vs national accounts discrepancy:
  - Large statistical discrepancy between national accounts and balance of payments data, in range of 3–7 percent of GDP a year during 2000–06.
  - Discrepancy arises from different data sources and methodology for external merchandise trade: national accounts use customs data adjusted for ESA95 (including triangular merchanting, illegal activities, smuggling, free zones), while BOP uses bank settlements data.
  - Authorities plan to shift BOP compilation to customs data to reduce discrepancy.
- Labor market measurement issues: interpretation hampered by difficulties in covering immigrants and a large unrecorded economy.
- General government fiscal data compiled on an accrual basis (1995 ESA Transmission Program) but absence of financing data impedes consistency checks between deficit and debt.

### Fund relations, technical assistance, and consultations
- Mission dates: November 29–December 10, 2007 and January 22–25, 2008 in Athens; concluding statement available (document referenced in source).
- Staff team: Mr. Banerjee (Head), Ms. Honjo, Ms. Moreno Badia (all EUR), Mr. Chua (FAD).
- Country interlocutors: Ministry of Economy and Finance; Bank of Greece; other government ministries and agencies; trade unions; industrialists; banks.
- Membership status: Joined December 27, 1945; Article VIII.
- Quota and holdings (SDR million): Quota 823.00; Fund holdings of currency 768.98; Reserve position in Fund 54.03.
- Article IV consultation cycle: Greece is on a 12-month consultation cycle; last Article IV consultation discussions concluded on January 22, 2007.
- Technical assistance (selected): Treasury reform (1993); Central Bank independence in context of Maastricht (1993 MAE); development of government securities markets (1994 MAE); SDDS action plan (2002 STA); Tax policy and administration reform (2003 FAD); Public expenditure management (2005 FAD); Tax administration and fiscal transparency (2005 FAD).

### Key staff appraisal note (supplement)
- Supplement prepared by the European Department, approved April 15, 2008, contains authorities’ latest estimates for 2007 and updated outlook information since circulation of the staff report.
- The supplement states: "The information does not alter the thrust of the staff appraisal, though stronger projected unit labor cost growth heightens concerns about eroding competitiveness going forward."

*Sources: National Statistical Service; Ministry of Economy and Finance; Bank of Greece; IMF staff estimates and projections; IMF staff report supplement (April 15, 2008).*

### 1.      Economic growth in 2007 remains the same as previous estimates but the

### 1.      Economic growth in 2007 remains the same as previous estimates but the

### Growth and composition (2007)
- Real GDP growth for 2007 is estimated at 4 percent.
- Domestic demand growth is lower than previously estimated because of weaker investment driven by:
  - a decline in residential construction, and
  - lower growth in other investment components.
- Net external demand improved relative to previous estimates due to a deceleration of import growth.

### Projections and forecast revisions (2008–09)
- Authorities project real GDP growth for 2008–09 at 3.6 percent, 0.4 percentage points lower than previous estimates.
  - Main factors behind the downward adjustment: slower export growth and weaker domestic demand reflecting an expected tightening of credit conditions and the dampening effect of higher inflation on real disposable income and consumption.
- Staff projects real GDP growth for 2008–09 at 3.3 percent, lower than the authorities’ projection, due to a less favorable external environment.
- Staff projections in this supplement are lower than in the World Economic Outlook because of a carry-forward of the lower investment evident in the revised figures for 2007.
- The current account deficit is projected to improve relative to staff’s previous estimates due to lower import growth.

### Fiscal outlook and public finances
- The authorities do not expect the fiscal outturn to be much different from their baseline scenario.
- The 2007 general government deficit outturn is now estimated at 2.8 percent of GDP, 0.1 percent of GDP higher than previous estimates.
- For 2008–10, the authorities’ envisaged deficit adjustment path has remained broadly unchanged, with a slightly different composition of revenue and expenditure.
- Staff projects the general government deficit for 2008–10 to be higher than officially targeted by 0.1–0.4 percent of GDP mainly because of lower economic growth.
- Selected fiscal numbers from tables:
  - General government balance (percent of GDP): -2.7; -2.8; -1.6; -1.6; -1.6; -1.8; -0.8; -0.8; -0.9; -0.9; 0.0; 0.1; -0.3; -0.3 (as listed in the staff/IMF/MoF comparative table).
  - Total revenues: 41.0; 42.0; 42.7; 42.5; 42.4; 42.5 (percent of GDP, staff table).
  - Total expenditures: 42.8; 42.9; 43.0; 42.7; 42.5; 42.5 (percent of GDP, staff table).
  - Overall balance: -1.8; -0.9; -0.3; -0.3; -0.1; 0.0 (percent of GDP, staff table).
  - Gross debt: 91; 88; 84; 80; 76; 72 (listed as whole numbers in staff table).

### Inflation, labor costs, and wages
- Inflation was 4.4 percent in March (year-on-year), partly boosted by higher food prices.
- Staff revised up their inflation forecast for 2008 from 3.3 percent to 3.7 percent due to rising inflationary pressures and higher food and oil prices.
- Inflation in 2009 is expected to decline as carryover effects wane.
- Unit labor cost growth is expected to pick up in 2008 to 5.5 percent and, although declining, remain high in 2009.
- Additional staff table entries:
  - Unit labor costs (economy wide): 5.5; 4.6; 3.8; 3.5; 3.0; 2.6 (2008–2013 staff projection table).
  - Consumer prices (HICP), period average: 3.7; 2.8; 2.6; 2.5; 2.5; 2.5 (2008–2013 staff projection table).

### External sector and balance of payments
- Large current account deficit: 13.9 percent of GDP (noted as the recent large current account deficit).
- Staff/IMF projection highlights:
  - Current account (percent of GDP) entries in comparative table: -14.6; -16.4; -14.4; -14.4; -15.0; -14.8; -14.2; -13.9; -14.8; -14.7; -13.9; -13.5; -14.7; -14.6.
  - From staff projection table: Current account: -13.2; -13.4; -12.9; -11.8; -11.3; -11.2 (2008–2013).
  - Trade balance: -10.6; -10.6; -10.1; -8.9; -8.3; -8.2 (2008–2013).
  - Exports of goods and services (percent of GDP): 22.5; 22.6; 22.6; 22.4; 22.4; 22.6 (2008–2013).
  - Imports of goods and services (percent of GDP): 33.1; 33.2; 32.7; 31.3; 30.7; 30.8 (2008–2013).
  - External debt (percent of GDP): 123.1; 126.7; 129.7; 131.6; 132.9; 134.1 (2008–2013).

### Financial sector and banking risks
- The banking sector appears to be sound and has thus far remained largely unaffected by the global financial market turmoil.
- Risks identified:
  - Continued rapid credit growth.
  - Increasing presence in southeastern Europe financed partly by wholesale funding, raising exposure to credit, country, and liquidity risks.
  - Still-high level of nonperforming loans.
- Bank of Greece policy responses:
  - Increasing provisioning requirements.
  - Seeking a tightening of lending standards.
  - Stepping up cross-border banking supervision.
- Directors recommended:
  - Close monitoring of financial sector vulnerabilities.
  - Upgrading the stress-testing framework.
  - Strengthening cross-border banking supervision in cooperation with other supervisors in southeastern Europe.
  - Adoption of a risk-based approach to supervision by the new insurance supervisor was commended.

### Structural reforms and labor/product markets
- Authorities have introduced reforms including:
  - Easing overtime restrictions.
  - Reducing disincentives to accept employment.
  - A new bankruptcy code.
  - An updated company law.
  - Simplified licensing of manufacturing businesses.
- Further initiatives planned: reducing administrative burdens and improving the quality of services provision.
- Directors recommended further reforms to sustain medium-term growth and competitiveness:
  - Further extension of simplified business licensing procedures.
  - Privatization of infrastructure facilities.
  - Strengthened competition in network industries and transport sector.
  - Labor market initiatives: reducing restrictiveness of employment protection legislation and increasing flexibility of the wage setting system.
  - Improve the quality of statistical data.

### Executive Board assessment and recommended policy priorities
- Directors welcomed the extended period of strong performance and the narrowing of the gap in real per capita income between Greece and the EU-15.
- Risks to the outlook are tilted to the downside owing to a weaker external environment and deterioration of global financial conditions.
- Directors encouraged the authorities to build social consensus for more ambitious medium-term reforms.
- Fiscal consolidation:
  - Directors welcomed the authorities’ intention to achieve a balanced budget by 2010.
  - Recommended actions: improvements in tax administration, tighter control over spending, development of a medium-term budget framework.
  - Improved revenue collection to be a centerpiece of fiscal consolidation in 2008 and beyond.
  - Scope for broadening tax reform, simplifying tax laws and procedures, intensifying risk-based auditing, and phasing out distortionary tax exemptions.
- Expenditure management reforms encouraged:
  - Increase transparency and accountability of public entities.
  - Improve efficiency in the health care system.
  - Extend coverage of the budget, fully integrate program-based budgeting, and introduce appropriate financial management information systems.
- Pension and social security:
  - Comprehensive reform of the social security system required to preserve long-term sustainability given population aging.
  - Authorities’ pension reform agenda needs broadening with policy proposals based on full assessment of financing needs and cost savings.
  - Directors encouraged publication of detailed projections of the cost of population aging in accordance with EU methodologies and preparation of an adequately ambitious reform program.

*IMF Executive Board Concludes 2007 Article IV Consultation with Greece; Public Information Notice (PIN) No. 08/49; April 30, 2008.*

### 2. The December 2007 update of the Stability and Growth Program projected robust GDP

### 2. The December 2007 update of the Stability and Growth Program projected robust GDP growth of 4 percent to be sustained in 2008-09

### Growth and inflation outlook
- The December 2007 update projected GDP growth of 4 percent to be sustained in 2008-09.
- Official estimate revised to 3.6 percent in 2008 and 2009 due to the credit crunch, weaker external environment, and soaring commodity prices.
- Inflation forecast for 2008 was raised to 3.5 percent from 2.8 percent previously.
- These revised projections are marginally less pessimistic than those in the Staff Supplement, reflecting a somewhat more buoyant external environment.

### Fiscal policy — achievements and near-term stance
- Fiscal consolidation advanced significantly in 2006-07, bringing the general government deficit below the 3 percent of GDP threshold under the EU Excessive Deficit Procedure.
- Consolidation achieved through spending restraint and improved tax administration, despite cuts in personal and corporate tax rates.
- Corporate tax rate cut to 25 percent; marginal personal income tax rates – especially for middle incomes – are being reduced over two years in 2008-09.
- Indirect tax revenues rose faster than GDP in 2007, indicating measures to combat tax evasion are working.
- Fiscal targets for 2008 were not revised despite weaker growth; authorities saw no room for countercyclical easing.
- The deficit is budgeted to decline to 1.6 percent of GDP in 2008, in line with the Government’s objective of achieving a balanced budget by 2010.
- On a cyclically adjusted basis the deficit is budgeted to decline to 2.5 percent of GDP in 2008, down from 3.5 percent in 2007 and 3.3 percent in 2006 (a cumulative total decline of 0.8 percent of GDP in 2006-08).
- The 2007 budget includes emergency assistance of 0.5 percent of GDP following last summer’s wildfires.
- The 2008 cyclical component is currently being revised to reflect the downward revision of GDP growth projections.

### Fiscal governance and expenditure control
- New legislation established a General Directorate for Fiscal Audits and internal audit units within Ministries, local authorities and public entities with a budget exceeding €3 million.
- The Directorate is expected to propose corrective measures to keep total spending in line with the Budget.
- Improved budgetary procedures, including program-based budgeting, are expected to improve transparency, efficiency and control of public expenditure in the medium term.

### Revenue measures and tax administration reforms
- Property taxes are being reformed to broaden the tax base; several property levies merged into a single property tax of 0.1 percent payable annually (law adopted last January).
- Special consumption tax on motor fuel was extended to heating oil, with consumers eligible for a full refund of the additional tax, to clamp down on tax evasion in fuel oils.
- A National Committee for tackling tax evasion has been established, consisting of representatives of the social partners and political parties in Parliament; it will submit proposals to improve tax compliance and taxpayer service.
- Staff recommendations for broadening the tax base (Selected Issues paper II) will be examined by the Tax Analysis Unit at the Ministry of Economy and Finance and a proposal submitted to the Minister.

### Public debt
- Public debt declined from 98.6 percent of GDP in 2004 to 94.5 percent in 2007 due to fiscal consolidation, strong growth, privatization revenue and primary surpluses; assumption of liabilities of the broader public sector added to the debt burden.
- It is critical that public enterprises and entities face harder budget constraints; some continue to generate losses, accumulate arrears or default on government-guaranteed debt.
- A law passed in November 2005 aims to increase the commercial orientation of public enterprises and streamline operations to reduce reliance on debt guarantees and budget transfers.
- Government plans to introduce greater transparency and accountability in operations and finances of local governments, public hospitals and pension funds.

### Pension reform
- A pension reform law was approved by Parliament at end-March, triggering protests; reform aims to streamline administration and contribute to long-term sustainability.
- The state-run, PAYG pension system suffers from extreme fragmentation and a rising dependency ratio due to population aging.
- Reform provides for a mega-merger of more than 100 separate funds into 13 main or supplementary funds.
- Statutory age of 65 for men and women remains unchanged; reform of early retirement provisions and incentives to prolong working life expected to move average effective retirement age (currently at 61) closer to 65.
- Reform expected to produce savings from administrative costs and changes in early retirement provisions; imposition of a limit on supplementary pensions to 20 percent of pensionable earnings.
- Main impact expected from 2013, when transition periods start expiring.
- Total savings during the first two years are officially estimated at some €2 billion, of which €1.5 billion from administrative cost savings and the rest from changes in early retirement provisions and supplementary pensions.
- Current pension expenditures amount to €24 billion annually (12.5 percent of GDP).
- Bulk of administrative savings would accrue from pooling pension fund reserves into a single asset management entity.
- A committee will audit and control the pension funds to introduce greater transparency and accountability.
- Creation of an intergenerational Social Solidarity Fund: resources derived from 10 percent of privatization revenue, 4 percent of VAT revenues, and 10 percent of the earmarked taxes accruing to existing pension funds.
- In its first year of operation in 2009, the Fund is expected to collect about €900 million in revenues (0.3 percent of GDP).

### Competitiveness and the external sector
- Greek exports have performed well despite a persistently high inflation differential with the Euro area suggesting declining price competitiveness.
- Strong export performance reflects quality upgrades, specialization in high value-added services, and geographical orientation toward the fast-growing Balkan markets.
- Greece benefited from early economic and financial links with the Balkans and from the entry of Bulgaria and Romania into the EU in 2007.
- Risk that ongoing financial turbulence could slow externally-funded credit expansion and growth in the region, adversely affecting Greece through trade and financial links.
- Widening of the current account deficit over the past decade largely explained by factors other than competitiveness: later financial liberalization, demand stimulus from consumption smoothing, interest rate convergence in run-up to EMU and subsequent ECB easing.
- Surge in investment accompanied by a fall in the savings ratio as financial liberalization reduced precautionary savings; consumer and housing credit became readily available at constantly falling rates.
- As this process winds down, the current account deficit is expected to narrow.
- Policy options to correct the deficit are limited beyond continuing fiscal consolidation and implementing supply-side reforms to raise productivity.
- Authorities share staff’s view that structural reforms are important to safeguard competitiveness and raise potential growth; ongoing reforms target competition in product markets, spread of ICT, business climate improvements, and labor market flexibility.
- Further improvements in these areas remain essential to accelerate real convergence.

### Financial sector issues
- Greek banks remained well-capitalized and highly profitable in 2007.
- Regulatory capital to risk-weighted assets amounted to 12.7 percent at end-2007.
- ROE rose to 14.8 percent in 2007 from 12.8 percent in 2006.
- Bank of Greece calculates total losses due to the turmoil at 0.7 percent of capital: 0.3 percent from revaluation of securities directly affected and 0.4 percent from higher funding costs.
- Modest losses reflect negligible exposure to the U.S. subprime mortgage sector and pre-funding of operations until mid-2008.
- NPLs reduced from 5.4 percent of total loans at end-2006 to 4.5 percent at end-2007, helped by increased write-offs and improved risk monitoring as banks transition from Basel I to Basel II.
- BoG conducted stress tests focused on liquidity: banks asked to calculate Liquid Assets Ratios (LAR) for mid-2008 assuming full implementation of business expansion plans.
- If LAR fell below 20 percent under stress scenarios, banks could scale back credit expansion or raise additional funding to restore minimum LAR.
- Despite securitization market gridlock, Greek banks made very limited use of the ECB discount window using mortgage-backed securities as collateral.
- Efforts to account for correlation of FX and credit risk for Greek banks operating in the Balkans are complicated by lack of data.

*Source: _cr08148 - 2. The December 2007 update of the Stability and Growth Program projected robust GDP growth of 4 percent to be sustained in 2008-09*

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_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2008/_cr08148.pdf_