Public Information Notice: IMF Executive Board Concludes 2005 Article IV Consultation with Greece

January 6, 2006

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. The staff report (use the free Adobe Acrobat Reader to view this pdf file) for the 2005 Article IV consultation with Greece is also available.

Public Information Notice (PIN) No. 06/03
January 6, 2006

On December 14, 2005, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with Greece.1


Economic growth has been very strong for several years, underpinned by a large fall in interest rates due to adoption of the euro and subsequent ECB easing, rapid increases in private sector credit following the liberalization of the financial sector, and an expansionary fiscal stance. In 2005, with the end of Olympics spending and an associated sharp fiscal tightening, real GDP growth slowed to an estimated 3½ percent, still strong by international comparison. The long economic expansion has been accompanied by the appearance of macroeconomic imbalances. The fiscal position deteriorated significantly. In 2004, the general government deficit rose to 6.6 percent of GDP, the primary balance shifted into deficit, and public debt stood at 111 percent of GDP. Inflation has been running persistently above the euro-area average, resulting in a gradual but steady erosion of competitiveness and a decline in export market shares. And, despite the extended period of strong growth, labor market performance remains sub-par, with a high unemployment rate and low participation rates.

In 2005, the authorities implemented substantial fiscal consolidation, reducing the budget deficit to 4.6 percent of GDP on staff calculations. Public sector investment spending contracted with the end of the Olympics, current spending growth slowed sharply, though from high rates, and interest costs fell. The draft 2006 budget contains further measures to bring the deficit to a targeted 2.6 percent of GDP, consistent with Greece's commitments to the EU under the excessive deficit procedure. However, about one-third of the 2006 adjustment consists of temporary measures.

The rising fiscal costs of population aging are the key long-term threat to debt sustainability. Available estimates imply these costs will rise by more in Greece than in any other EU country between now and 2050. In the absence of strong corrective action to put pensions and health care on a sustainable footing, the result will be an explosive path of the public debt.

Economic growth in 2006 and beyond is likely to be moderate compared to the high rates enjoyed in previous years, though it should remain comfortably above the euro-area average. The erosion of international competitiveness, needed fiscal consolidation, and the gradual waning of the effects of euro-area entry and financial liberalization all suggest growth will slow. The outlook depends, however, on developments in Greece's export markets, notably the shipping and tourism sectors, the EU, and on the evolution of the price of oil.

The banking system, which dominates the financial sector, appears well capitalized and profitable. However, several years of rapid growth in private sector lending, albeit from low levels, raises concerns that credit quality may deteriorate unexpectedly should the economy slow substantially or interest rates rise sharply, and non-performing loan ratios are already high for this stage of the business cycle. The Bank of Greece, the supervisor, has responded to risks by strengthening the prudential framework, and commercial banks have also improved their risk management capacity. The insurance sector, though not systemically important, is weak and poorly supervised.

The authorities have recently introduced a number of significant structural measures to improve product and labor markets. These include reductions in the corporate tax rate, unified and extended shopping hours, more flexible overtime, a new competition law and a strengthened competition authority, further liberalization of gas and electricity markets, simplification of business licensing, and a new framework for public-private partnerships. More initiatives are planned, including revision to bankruptcy legislation and changes to management and employment contracts in state-owned enterprises.

Executive Board Assessment

Directors welcomed the extended period of strong economic growth, underpinned by low interest rates following adoption of the euro, rapid credit expansion in the wake of financial sector liberalization, and high investment and productivity growth. As a result, the longstanding gap in living standards between Greece and the euro-area average, while still wide, has narrowed significantly in recent years. Directors also observed, however, that imbalances have built up during the economic boom, with a marked deterioration in the fiscal position and a gradual but steady loss of competitiveness against the euro area as a result of a persistent inflation differential.

Looking forward, Directors agreed that Greece's economic prospects remain promising, especially if structural reforms are implemented vigorously. Nevertheless, growth is likely to moderate somewhat from the high rates seen recently, reflecting the erosion of competitiveness, the waning of the stimulus from euro-area entry and past financial-sector reform, and needed fiscal consolidation.

Against a background of Greece's very high debt level and prospective large aging costs, Directors stressed that fiscal consolidation is the top economic policy priority for Greece. They commended the authorities' substantial reduction of the budget deficit in 2005 and their objective of cutting it further to below 3 percent of GDP in 2006. Directors urged the authorities to implement additional and durable measures to contain current spending and reach fiscal balance by the end of the decade. They considered that strong reforms to expenditure management and tax administration would be essential to achieving this medium-term goal. Key priorities include improving auditing, strengthening information management systems, streamlining the control of spending, better prioritizing expenditure, developing risk-based tax assessment and enforcement, and strengthening measures to collect tax arrears. In addition, a multi-year fiscal framework would enhance fiscal policy planning and credibility. In this connection, Directors welcomed the measures already taken by the authorities, especially to reform tax administration and strengthen revenue collection. They encouraged full and timely implementation of the recommendations of the recent Fund technical assistance missions on tax administration and public expenditure management, as well as the recommendations of the Fiscal Report on the Observance of Standards and Codes. A number of Directors also supported the authorities' decision not to follow through with their plans to securitize tax arrears, emphasizing the one-off nature of such a measure.

Directors noted the projected large increases in pension and health costs owing to population aging, and highlighted the threat this would pose to long-term debt sustainability. While welcoming steps taken to raise awareness of the issue and involve the social partners, Directors called on the authorities to accelerate preparation of pension reforms, in order to ensure their early implementation, including by updating projections of the fiscal costs associated with aging as soon as possible. They also urged that recent reforms to the health care system be followed up to help contain prospective cost pressures.

Directors welcomed the FSAP report's conclusion that commercial banks are well capitalized, profitable, and soundly supervised, and encouraged the authorities to fully implement the report's recommendations. They noted, however, that, after years of rapid credit growth, credit risks might prove unexpectedly high, especially in the event of an economic downturn or a significant increase in interest rates. Moreover, Greek banks are relatively small and have a high cost structure. Given these circumstances, Directors called for continued strengthening of the supervisory framework, close monitoring of bank assets and non-performing loans, and further development of commercial banks' risk management practices. Directors also observed that the insurance sector is weak and poorly supervised, and urged the authorities to make the new insurance supervisor fully operational and independent as soon as possible.

Directors agreed that a key long-term policy challenge is to improve productivity and competitiveness, thereby fostering high economic growth and raising living standards. They commended the authorities on recent structural reforms in the product and labor markets, notably lower corporate tax rates, more flexible shopping hours, easing of overtime restrictions, a new competition law and a strengthened competition authority, gas and electricity liberalization, and simplification of business licensing. Directors encouraged the authorities to build on this foundation by simplifying the tax system and overhauling tax administration, cutting red tape for businesses, further liberalizing gas and electricity, and ensuring that the competition authority becomes more proactive.

On labor markets, where less reform has taken place despite the chronically high unemployment rate and low participation, Directors called for further easing of hiring and firing restrictions and more flexibility in minimum wages, especially in sectors facing economic pressures. Directors also expressed concern about the medium-term effects of the ongoing loss of international competitiveness. They stressed that, to stem the loss, the social partners will need to limit wage growth to Greek productivity growth and euro-area inflation.

Directors welcomed proposed reforms to state-owned enterprises and the new framework law for public-private partnerships. They judged that better governance of state-owned enterprises and more flexible employment conditions would help to improve service levels, reduce losses, and pave the way for further privatization where appropriate. Public private partnerships could help to foster needed infrastructure investment. Directors emphasized, however, that transparent and full accounting would be central to the proper assessment of current and future fiscal costs of projects, and that large public investment projects should be brought under the framework.

Directors welcomed improvements to economic data, especially to the fiscal data in the wake of last year's fiscal audit carried out by the authorities in cooperation with Eurostat. At the same time, they considered that further strengthening would be desirable. In particular, strengthened reporting of fiscal data, including the publication of financing-side fiscal data, will help increase the credibility of fiscal policy. Also important will be improved quarterly national accounts data, which are under preparation, and formal independence for the statistical service.

Greece: Selected Economic Indicators, 2001-06

  2001 2002 2003 2004 2005 2006
          Proj. Proj.

Real economy (change in percent)


Real GDP

4.6 3.8 4.6 4.7 3.5 3.3

Final domestic demand

2.7 4.5 5.7 4.6 3.1 3.9

Private consumption

2.9 3.3 4.5 4.4 4.4 4.0

Public consumption

-1.5 7.3 -2.1 3.9 1.1 0.6

Gross fixed capital formation

4.9 6.0 13.7 5.7 1.0 5.4

Foreign balance (contribution)

1.7 -1.1 -1.4 -0.5 0.1 -1.0

Unemployment rate (in percent)

10.8 10.3 9.7 10.5 10.0 10.0


-0.1 2.2 2.4 0.9 1.1 0.5

Unit labor costs (economy wide)

2.8 3.0 2.4 3.2 3.3 3.0

GDP deflator

3.5 4.0 3.5 3.6 3.6 3.3

CPI (year average)

3.7 3.9 3.4 3.0 3.6 3.3

Public finance (percent of GDP)


General government balance

-6.1 -4.9 -5.7 -6.6 -4.6 -2.7

General government primary balance

1.2 1.3 0.0 -0.9 0.7 2.2

General government structural balance

-6.1 -5.0 -6.1 -7.4 -5.2 -3.2

General government gross debt

114 112 109 111 108 104

Money and credit (end of year, percent change)

Domestic credit 1/

9.3 8.5 3.0 7.7 10.1 ...

Interest rates (percent)


Deposit rate 1/

3.3 2.8 2.5 2.3 2.2 ...

Government bond yield 1/

5.3 5.1 4.3 4.3 3.5 ...

Balance of Payments (in percent of GDP, unless otherwise noted)

Exports of goods and services

25.5 22.2 21.1 23.6 24.1 24.7

Imports of goods and services

35.0 30.6 28.3 29.5 29.3 30.2

Trade balance

-9.5 -8.4 -7.2 -6.0 -5.2 -5.5

Current account

-6.2 -6.0 -5.6 -3.8 -3.2 -3.6

Exchange rate


Exchange rate regime

Euro area

Present rate (December 9, 2004)


Nominal effective exchange rate (1990=100) 2/

62.4 63.4 65.8 66.4 66.2 ...

Real effective exchange rate (1990=100) 2/

108.9 112.1 117.8 119.9 121.3 ...

Sources: National Statistical Service; Ministry of National Economy; Bank of Greece; IMF, World Economic Outlook; and IMF staff estimates and projections.

1/ Staff estimates. Latest data is for September (domestic credit, deposit rate); October (government bond yield); and August (M3).
2/ As of September 2005.

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.


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