Public Information Notice: IMF Concludes Article IV Consultation with Greece

March 16, 2001

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

On February 23, 2001, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with Greece.1


Economic growth strengthened further in 2000 and GDP expanded at about 4 percent, the seventh year of expansion. Activity was led by robust domestic demand, with a further acceleration of investment, while private consumption was buoyed by sizable wage increases and by a rapid acceleration of credit growth. The strong growth performance failed, however, to reduce the unemployment rate through 1999 (the latest year for which data are available), which is the second highest among European Union countries. Exports were boosted by vigorous demand from trading partners. Nevertheless, the demand for import-intensive capital goods and consumer durables fueled import growth and resulted in a further widening of the external current account deficit, which is estimated by the staff to have reached 7 percent of GDP in 2000-one of the highest levels among advanced economies.

After converging to close to the euro-area average, consumer price inflation, including core inflation (i.e., headline inflation, excluding energy and seasonal food prices), accelerated in the closing months of 2000 more strongly than in the euro area. As elsewhere, rising energy prices added significantly to headline inflation. However, core inflation rebounded since the fall of 1999, to 3.2 percent at end-2000. This was partly due to an unwinding of indirect tax cut effects, which had facilitated meeting the Maastricht inflation criterion. In addition, rising nonenergy prices reflected a combination of strong domestic demand, unit labor cost increases above those in the euro area, and higher import prices owing to currency depreciation—the latter reflecting the weakness of the euro as well as the drachma's depreciation during 2000 to its central parity rate.

Turning to monetary policy, continued concerns about inflation led the Bank of Greece to reduce official interest rates relatively gradually toward corresponding ECB rates, with full convergence only achieved in the final week of 2000. Nevertheless, the effectiveness of monetary policy diminished in anticipation of euro-area entry. With official interest rates declining by 600 basis points during 2000 and short-term market rates falling by broadly similar amounts, private sector credit growth accelerated and, by the fall, was expanding at a rate above 25 percent (year-on-year).

Fiscal consolidation continued in 2000, with staff estimating that strong revenue growth limited the general government deficit to around ½ percent of GDP, against an original budget target of 1.2 percent of GDP. The revenue overperformance reflected strong economic activity and improved tax administration, which more than offset current primary expenditure overruns. The Stability and Growth Program aims for a 2001 budget surplus of 0.5 percent of GDP. The staff estimates that achieving the 2001 surplus target would result in an improvement of the structural balance by almost 1 percentage point of GDP, similar to the improvement recorded in 2000. The authorities' Program targets an overall budget surplus of 2 percent of GDP by 2003.

The near-term outlook points to continued strong growth, with domestic demand benefiting from the euro-entry related easing of monetary conditions. Moreover, investment demand should continue to respond favorably to the stable macroeconomic environment. The staff projects GDP growth of around 4 percent in 2001, with downside risks mostly related to the external environment (a more marked economic slowdown in partner countries or a sharp appreciation of the euro). On the other hand, growth could be higher than projected should domestic demand respond more strongly to past interest rate declines. Inflation prospects depend critically on the second round effects of earlier import price increases (including for energy); these could lead to only a gradual reversal of inflation rates from current levels.

Executive Board Assessment

Executive Directors commended the Greek authorities for the impressive economic gains achieved in recent years, crowned by entry into the Economic and Monetary Union (EMU). The economic benefits were visible in many areas: inflation and interest rates, which have declined to historically low levels; a roughly balanced fiscal position; and GDP growth substantially above the euro-area average during the past five years.

Looking forward, Directors saw the main objective as building on these achievements, taking full advantage of the historic opportunity provided by EMU. They stressed that Greece's integration into the euro area and increased competition from partner countries add urgency to addressing the remaining formidable economic challenges. These include securing the stabilization gains and implementing a broad range of structural reforms to boost growth and support a rapid convergence in living standards with those of Greece's euro-area partners.

Directors expressed concern about the rise in core inflation and the considerable widening of the external current account deficit, which put at risk the stabilization gains. They regretted that unit labor cost increases continue to exceed the euro-area average, contributing to core inflation rising faster than the area average. In addition, they noted that wage developments make it difficult to stem a rising external current account deficit, although the rise in the deficit, as several Directors noted, reflected also the surge in the price of oil and temporary factors related to EMU entry. Directors therefore called for wage restraint and stressed the need for developing a consensus on wage settlements so as to improve competitiveness. A few Directors suggested that the inflation catch-up clauses still prevalent in wage agreements in the private sector, should be phased out.

Directors emphasized that the accommodative monetary conditions stemming foremost from the substantial drop in interest rates prior to Greece's entry into EMU, needed, in view of Greece's relatively advanced cyclical position, to be counterbalanced by a tight fiscal stance. In this respect, they welcomed the strengthened 2001 fiscal surplus target and expected that, if met, it would result in a broadly appropriate policy mix. Nevertheless, they cautioned that some risks, especially on the current expenditure side, argue for cautious budget implementation early in the year, and that additional spending restraint would be required, if signs of widening macroeconomic imbalances emerge. For the medium term, Directors called for maintaining, on average over the cycle, the general government primary surplus roughly at the level targeted for 2001. This would ensure an adequate pace in reducing the very high public debt before the impact of an aging population becomes severe.

Directors emphasized that taking full advantage of monetary union would require far-reaching structural reforms. While recognizing some progress, they called for more sweeping reforms—in particular, on taxes and public expenditure as well as labor and product markets.

With respect to taxation, Directors argued that the economy would benefit from more ambitious reductions in the tax burden, noting that many partner countries are implementing sizable tax cuts. In this regard, and subject to safeguarding the primary surplus objective, they suggested that reductions in the tax burden should keep pace with those in the euro area. This objective could be incorporated into the authorities' plans for a fundamental tax reform. In this context, Directors welcomed the intention to create a more equitable tax burden, building on past tax rate reductions and other reforms, which have already made some progress in this direction.

On the expenditure side, Directors noted that reforms in public administration are necessary to limit the growth of primary spending, and that benefits could accrue from adopting more flexible personnel policies and new technologies, and employing a multiyear budgeting framework. Directors welcomed reform efforts underway in health care, but stressed that incentives to strengthen fiscal responsibility are crucial. Directors urged the authorities to move ahead with a fundamental reform of the pension system—placing the public pension system, plagued by large unfunded liabilities, on a sound footing; and possibly introducing a supplementary fully funded private pension scheme.

Directors pointed with concern to the high unemployment rate in Greece, notably among the young and women, and saw it as a major challenge. While welcoming some of the authorities' recent reform efforts, Directors urged the authorities to consider comprehensive reforms targeted at the root causes of the problem. These reforms could include increased wage differentiation for job market entrants (with adequate safeguards for minimum incomes), and better alignment of the education system and job training system with the skills demanded by employers.

Directors welcomed recent progress in liberalizing product markets, but emphasized the benefits for growth and competitiveness from further, comprehensive reforms. Notable progress is underway with respect to privatization and the deregulation of the telecommunications market. Building on these steps, Directors called for bolder efforts in other sectors, including electricity, gas, and transportation. They noted that considerable room remained to ease administrative burdens and streamline the regulatory environment.

In light of rapid credit growth and an evolving financial sector in the new environment, Directors stressed the challenges posed for supervision and regulation. This calls for steps to ensure the adequacy of banks' risk management and control systems, and to strengthen cooperation among different financial market supervisors. Directors urged the authorities to lend support to the liberalization of imports from developing countries, and to raise official development assistance toward the UN target.

Directors also called on the authorities to strengthen efforts in improving Greece's statistical system—where persistent weaknesses are hampering the assessment of economic developments—and encouraged accelerating steps for meeting the SDDS requirements.

Greece: Selected Economic Indicators

  1997 1998 1999 2000 2001 1/

Real economy (change in percent)          
GDP 3.5 3.1 3.4 3.9 4.0
Domestic demand 3.6 4.7 2.9 5.0 4.8
EU harmonized consumer inflation (period average) 5.4 4.5 2.1 2.9 3.4
Unemployment (in percent) 9.7 11.2 12.0 11.8 11.6
Public finance (general government, in percent of GDP)          
Overall balance -4.0 -2.5 -1.8 -0.5 0.5
Primary balance 4.2 5.4 5.8 6.6 7.0
Debt 108.3 105.5 104.6 103.9 98.2
Of which: external debt 25.2 25.5 26.7 ... ...
Money and credit (end-period, percent change)          
Broad money (M4N) 2/ 7.8 9.8 5.6 10.4 ...
Domestic credit 3/ 11.0 9.7 12.2 17.3 ...
Interest rates (year average)          
3-month treasury bill rate 4/ 10.1 11.9 9.8 7.2 4.2
12-month treasury bill rate 5/ 10.4 11.6 8.9 5.9 4.2
Balance of payments (settlements basis, in percent of GDP)          
Trade balance -14.3 -13.7 -14.4 -18.8 -19.0
Current account balance (including capital transfers) -4.0 -3.0 -4.0 -7.0 -7.2
Foreign exchange reserves (US$billions) 12.4 17.2 17.7 13.1 ...
Exchange rates          
Exchange rate regime Euro area member
Present rate (March 7, 2001) US$0.93 per 1 euro
Nominal effective rate (1990=100) 6/ 69.7 66.5 66.1 60.5 ...
Real effective rate (1990=100) 6/ 116.0 112.9 113.0 104.5 ...

Sources: Data provided by the Greek authorities; and IMF staff estimates and projections.

1/ IMF staff projections, except where noted.
2/ Data for 2000 correspond to the 12-month change to end-December.
3/ Data for 2000 correspond to the 12-month change to end-November.
4/ Data for 2001correspond to the auction of February 20, 2001.
5/ Data for 2001 correspond to the auction of February 20, 2001.
6/ Data for 2000 correspond to end-November.

1 Under Article IV of the IMF's Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. A staff team visits the country, collects economic and financial information, and discusses with officials the country's economic developments and policies. On return to headquarters, the staff prepares a report, which forms the basis for discussion by the Executive Board. At the conclusion of the discussion, the Managing Director, as Chairman of the Board, summarizes the views of Executive Directors, and this summary is transmitted to the country's authorities. This PIN summarizes the views of the Executive Board as expressed during the February 23, 2001 Executive Board discussion based on the staff report.


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