Public Information Notice: IMF Executive Board Concludes 2006 Article IV Consultation with Greece

January 25, 2007

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 2006 Article IV Consultation with Greece is also available.

Public Information Notice (PIN) No. 07/10
January 25, 2007

On January 22, 2007, 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 rapid increase in private sector credit, following the liberalization of the financial sector and the sharp drop in interest rates due to euro adoption, and an expansionary fiscal stance. In 2006, real GDP rose by an estimated 4.1 percent, driven by private domestic demand and a pick up in goods exports.2 After peaking in 2004, the fiscal deficit has fallen sharply to under 3 percent of GDP in 2006. Private sector credit has risen very rapidly and inflationary pressures have continued, resulting in a gradual but steady erosion of competitiveness and a large current account deficit. Despite the long economic expansion, labor markets continue to perform poorly by international standards, although unemployment rates have been falling recently.

In 2006, the authorities continued the fiscal consolidation started a year earlier, reducing the budget deficit to 2.2 percent of GDP and the debt-GDP ratio to 83.3 percent of GDP (2.8 percent and 104.9 percent on the old national account estimates) on staff estimates. In contrast to 2005, however, the adjustment shifted toward reliance on revenue increases, including some one-off measures and increases in some indirect taxes. The 2007 budget targets a small deficit reduction of 0.2 percent of GDP, reflecting lower interest payments, while both revenues and primary spending are little changed.

Economic growth in 2007 and beyond is projected by staff to slow gradually, as the erosion of international competitiveness and past rapid rises in households' indebtedness imply a softening of foreign and domestic demand. Although growth is expected to remain comfortably above the euro-area average, the further real rate exchange rate appreciation and the persistence of large current account deficits pose risks of a sharper slowdown.

The banking sector appears sound, with high profitability and strong capital and liquidity positions. However, continued strong credit expansion raises concerns that households may become overextended and asset quality degraded, and persistently high non-performing loans ratios suggest that banks continue to lend to poor risks. The Bank of Greece has responded to these risks by stepping up its monitoring of banks' lending standards, strengthening provisioning requirements, and introducing prudential measures to limit credit to highly indebted households.

The authorities have introduced a number of significant structural measures to improve product markets. These include simplified business licensing procedures for industrial firms, more flexible overtime, liberalization of network industries, and reforms to state-owned enterprises. More initiatives are in the works, including the overhaul of bankruptcy legislation and further privatization. Labor market reform has been more limited.

Executive Board Assessment

Executive Directors welcomed the extended period of robust economic growth, which had significantly narrowed the gap in living standards between Greece and the rest of the European Union. They agreed that economic prospects are strong in the near term, but noted that very high credit growth, persistent inflationary pressures, eroding competitiveness, and a large current account deficit pose downside risks in the medium term.

Directors commended the authorities for the substantial reduction of the fiscal deficit in 2005-06 as a substantive step towards restoring the health of the public finances. Regarding 2007, Directors urged the authorities to look for opportunities that emerge to achieve a larger deficit cut than currently budgeted to maintain an appropriately countercyclical fiscal stance and to make further progress toward a medium-term budget surplus. They welcomed reforms to corporate and personal income taxes, while urging that any budgetary costs be offset by savings elsewhere in the budget.

While several Directors considered that balancing the budget by 2012 and moving to a surplus after that was appropriate, several others recommended balancing the budget by 2010, given the need to achieve fiscal consolidation. Directors considered that medium-term consolidation, which should focus on primary spending, is necessary to cushion public finances in the event of an economic downturn and to help prepare for the costs of population-aging. Directors pointed out that further reforms to tax administration and expenditure management would be key to balancing the budget. Priorities in this respect include combating tax evasion, integrating program-based budgeting into budget preparation and execution, using fiscal audits to evaluate programs against objectives and to ensure value for money, and developing a medium-term budget framework to guide fiscal strategy and prioritize policy objectives.

Directors noted that the costs of population aging pose a threat to the long-term sustainability of the public finances. They called on the authorities to accelerate preparation of the pension reform, including by speeding up data provision by social security funds and completing revised estimates of aging costs, and to ensure an early implementation of the reform. In this respect, Directors considered that constructive involvement of all social partners will be crucial for an early adoption of concrete measures. Reforms to the health-care sector should aim to provide quality medical services while containing costs.

Directors noted that the banking system appears sound, but cautioned that persistent rapid loan expansion and high levels of nonperforming loans (NPLs) can raise vulnerabilities. While commending the proactive approach of the Bank of Greece, they called for the continued supervision of banks' risk management practices, close monitoring of banks' assets and NPLs, and strengthened incentives for banks to contain risks, including through sufficient provisioning and write-offs of NPLs. With the increasing presence of Greek banks in southeastern Europe, close cooperation with other supervisors in the region would also be essential. Directors urged the authorities to ensure a smooth and rapid establishment of a fully operational independent insurance supervisor.

Directors pointed out that further reforms to product and labor markets would be required to sustain medium-term growth and strengthen international competitiveness. They commended the authorities for progress already made in product market reform, and encouraged them to implement further measures, including extending simplified business licensing procedures to all sectors, accelerating the liberalization of network industries, and redoubling efforts to combat corruption and widespread tax evasion. They also urged further initiatives in the labor market, including relaxation of strong employment protection legislation and decentralization of the bargaining system.

Directors welcomed the proposed reforms to state-owned enterprises and the new framework law for public-private partnerships. They stressed that better governance of
state-owned enterprises would help to improve efficiency, reduce losses, and pave the way for further privatization. Directors were of the view that public-private partnerships could help foster needed infrastructure investment, but cautioned that a full and transparent cost accounting is essential.

Directors encouraged the authorities to continue strengthening economic statistics. They called on the authorities to improve the quarterly national accounts and publish full financing-side fiscal data. Directors also considered that more timely updates of the national accounts will also be important, and encouraged the authorities to grant formal independence to the national statistical office to strengthen its credibility.

Greece: Selected Economic Indicators, 2002-07

  2002 2003 2004 2005 2006 2007
          Proj. Proj.

Real economy (change in percent)


Real GDP

3.9 4.9 4.7 3.7 4.1 3.8

Final domestic demand

4.5 5.4 4.6 2.4 4.7 4.0

Private consumption

3.8 4.2 4.6 3.7 3.9 3.4

Public consumption

6.5 -1.3 2.5 -0.5 2.1 1.7

Gross fixed capital formation

5.6 13.3 5.8 0.2 8.2 7.0

Foreign balance (contribution)

-1.0 -0.7 -0.3 1.3 -0.9 -0.6

Unemployment rate (in percent)

10.3 9.7 10.5 9.9 9.0 8.8


2.2 2.4 0.9 1.3 1.9 1.1

Unit labor costs (economy wide)

3.0 2.4 3.2 3.3 3.0 3.0

GDP deflator

3.7 3.6 3.3 3.4 3.4 3.3

HICP (year average)

3.9 3.4 3.0 3.5 3.3 3.2

Public finance (percent of GDP)


General government balance

-4.1 -4.9 -6.2 -4.2 -2.2 -2.0

General government primary balance

0.6 -0.5 -1.8 -0.3 1.5 1.5

General government structural balance

-4.3 -5.4 -7.0 -4.9 -3.1 -2.8

General government gross debt

88 85 86 85 83 80

Money and credit (end of year, percent change)


Domestic credit 1/

8.5 3.0 10.3 17.0 15.7 ...

Interest rates (percent)


Deposit rate 2/

2.8 2.5 2.3 2.2 2.6 ...

Government bond yield 1/

5.1 4.3 4.3 3.6 4.1 ...

Exports of goods and services

17.4 16.6 18.5 18.3 18.3 18.5

Imports of goods and services

24.0 22.2 23.2 23.5 24.4 24.6

Trade balance

-6.6 -5.7 -4.7 -5.2 -6.1 -6.1

Current account

-5.6 -5.6 -4.9 -6.2 -7.5 -7.4

Exchange rate


Exchange rate regime

          Euro area

Present rate (January 5, 2007)


Nominal effective exchange rate (1990=100) 1/

103.6 109.3 110.9 110.3 110.6 ...

Real effective exchange rate (1990=100) 1/

104.3 111.1 113.0 113.7 115.1 ...

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

1/ Data for 2006 as of October.

2/ Data for 2006 as of March.

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.

2 The national accounts were recently revised significantly, raising the level of output in 2000-05 by about 26 percent.


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