Public Information Notice: IMF Executive Board Concludes 2007 Article IV Consultation with Greece

April 30, 2008

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.

Public Information Notice (PIN) No. 08/49
April 30, 2008

On April, 18, 2008, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with Greece.1


The Greek economy has been buoyant for several years, supported by solid gains in employment, substantial real wage increases, low interest rates, and rapid credit expansion. In 2007, real GDP rose by an estimated 4 percent driven by domestic demand, but the external sector was a drag on growth.2 After peaking in 2004, the fiscal deficit fell sharply to under 3 percent of GDP in 2006 and was contained at 2.8 percent of GDP in 2007 despite several unexpected one-off expenditures amounting to about 1 percent of GDP. Nevertheless, the level of government debt, at 94 percent of GDP, remains high. Private sector credit has risen rapidly but household indebtedness is still relatively low. Inflationary pressures and rising labor costs have resulted in a steady deterioration in competitiveness, contributing to a large current account deficit of 13.9 percent of GDP.

Economic growth is expected to moderate in the near term but should remain solid on the back of continued strong domestic demand. However, the risks to the outlook are tilted to the downside. In the near term, risks stem from a weaker external environment and a potential liquidity squeeze of banks. Over the longer term, a persistent loss of competitiveness raises the risk of a prolonged period of slow growth.

The authorities are pursuing 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 ambitious revenue measures. However, the expenditure structure is set to become more rigid as the elimination of the one-off expenditures incurred in 2007 will be offset by higher outlays on wages and social transfers. The authorities are proceeding with a narrowly focused agenda on pension reform, which is nonetheless already drawing considerable protest.

The banking sector appears to be sound and has thus far remained largely unaffected by the global financial market turmoil. However, continued rapid credit growth and increasing presence in southeastern Europe, financed partly by wholesale funding, have increased banks' exposure to credit, country, and liquidity risks. The Bank of Greece has responded to these risks by increasing provisioning requirements, seeking a tightening of lending standards, and stepping up cross-border banking supervision.

The authorities have introduced a number of structural reforms to improve labor and product markets. These include easing overtime restrictions, reducing disincentives to accept employment, a new bankruptcy code, an updated company law, and simplified licensing of manufacturing businesses. More initiatives are in the works including reducing administrative burdens and improving the quality of services provision. Nevertheless, the Greek labor market is relatively rigid by international comparison and competition in product markets remains a challenge.

Executive Board Assessment

Executive Directors welcomed the extended period of strong performance of the Greek economy, which has significantly narrowed the gap in real per capita income between Greece and the EU-15. Directors considered that, while economic prospects still appear relatively strong in the near term, risks to the outlook are tilted to the downside, given the weaker external environment and the deterioration of global financial conditions. Directors also underscored that a persistent loss of cost competitiveness risks constraining Greece's growth in the medium term. Against this background, they encouraged the authorities to build the social consensus needed to undertake more ambitious medium-term reforms.

Directors observed that the banking system appears sound and has remained unaffected by the recent financial market turbulence to date. Nevertheless, financial sector vulnerabilities, including those arising from continued rapid credit growth, rising exposures in southeastern Europe, the still-high level of nonperforming loans, and possible need to rely on wholesale funding will require close monitoring. In this context, Directors welcomed the Bank of Greece's efforts to strengthen provisioning requirements and lending standards, and called for upgrading the stress-testing framework. Directors particularly welcomed steps to strengthen cross-border banking supervision in cooperation with other supervisors in southeastern Europe. They also commended the authorities for the adoption of a risk-based approach to supervision by the new insurance supervisor.

Directors welcomed the authorities' intention to achieve a balanced budget by 2010, and considered that further improvements in tax administration and a tighter control over spending will be necessary to attain this target. Sustained fiscal consolidation thereafter to a surplus position will be helpful for safeguarding debt sustainability and addressing the prospective large aging costs. Directors called for the development of a medium-term budget framework to help guide fiscal strategy and prioritize policy objectives.

Improved revenue collection will be a centerpiece of fiscal consolidation in 2008 and beyond. Directors saw scope for broadening tax reform. Improving tax compliance by simplifying tax laws and procedures and further intensifying risk-based auditing should be a priority. Directors also encouraged the authorities to consider phasing out distortionary tax exemptions with a view to broadening the tax base and simplifying the rate structure.

Directors emphasized the need for further reforms to expenditure management. They welcomed the steps already taken to increase the transparency and accountability of public entities and to improve efficiency in the health care system. Additional budget reforms should include extension of the coverage of the budget, full integration of program-based budgeting into budget preparation and execution, and introduction of appropriate financial management information systems.

Directors agreed that comprehensive reform of the social security system will be required to preserve the long-term sustainability of the public finances taking into account the costs of population aging. They considered that the authorities' pension reform agenda will need to be broadened, with policy proposals based on a full assessment of financing needs and cost savings. Directors encouraged the authorities to complete and publish detailed projections of the cost of population aging in accordance with the EU methodologies, and to prepare an adequately ambitious reform program on this basis.

Directors saw further reforms to product and labor markets as key to sustaining medium-term growth and strengthening international competitiveness. They welcomed the progress already made in product market reform, and encouraged the authorities to press ahead with further measures. Areas for action include further extension of simplified business licensing procedures, privatization of infrastructure facilities, and strengthened competition in the network industries and the transport sector. Further initiatives in the labor market should include reducing the restrictiveness of the employment protection legislation and increasing the flexibility of the wage setting system. Directors stressed the importance of further steps to improve the quality of statistical data.

Greece: Selected Economic Indicators, 2001-08
(Annual percentage change; unless otherwise indicated)
  2001 2002 2003 2004 2005 2006 2007 2008
              Estimate Proj.

Real economy


Real GDP

4.5 3.9 5.0 4.6 3.8 4.2 4.0 3.3

Total domestic demand

2.6 5.1 6.6 4.9 3.0 5.4 4.3 3.3

Private consumption

4.5 4.2 5.0 4.7 4.2 4.2 3.2 3.0

Public consumption

0.4 7.3 -1.0 2.7 1.4 -0.7 8.7 0.2

Gross fixed capital formation

4.1 10.7 15.4 6.0 0.7 14.8 4.4 5.8

Foreign balance (contribution)

1.5 -1.7 -2.4 -1.1 0.4 -2.0 -1.3 -0.6

Unemployment rate (percent) 1/

10.4 9.9 9.4 10.2 9.5 8.6 8.0 7.5

Employment 1/

0.2 2.0 1.9 0.9 1.5 2.5 1.3 1.2

Unit labor costs (economy wide)

2.9 3.2 1.4 4.9 3.7 3.3 4.3 5.5

GDP deflator

2.7 3.7 3.5 3.4 3.3 3.4 2.9 3.7

Consumer prices (HICP), period average

3.7 3.9 3.4 3.0 3.5 3.3 3.0 3.7

Public finance

(percent of GDP)

General government balance

-4.5 -4.7 -5.6 -7.4 -5.1 -2.6 -2.8 -1.8

General government primary balance

2.0 0.7 -0.7 -2.4 -0.8 1.4 1.2 2.3

General government structural balance (percent of potential output)

-4.7 -5.0 -6.3 -8.5 -6.2 -3.7 -3.9 -2.6

General government gross debt

104 101 98 99 98 95 94 91

Money and credit

(end of year, percent change)

Domestic credit

9.3 8.5 3.0 10.3 17.0 14.5 14.4 ...

Interest rates


Deposit rate

3.3 2.8 2.5 2.3 2.2 2.9 4.5 ...

Government bond yield

5.3 5.1 4.3 4.3 3.6 4.1 4.5 ...

Balance of payments

(percent of GDP)

Exports of goods and services

23.0 20.0 19.0 21.3 20.9 20.8 21.2 22.5

Imports of goods and services

31.5 27.6 25.5 26.7 27.0 30.1 31.9 33.1

Trade balance

-8.5 -7.6 -6.5 -5.4 -6.1 -9.3 -10.7 -10.6

Current account

-7.2 -6.5 -6.4 -5.8 -7.4 -11.0 -13.9 -13.2

Exchange rate


Exchange rate regime

Euro area

Present rate (April 18, 2008)


Nominal effective exchange rate (1990=100)

101.3 103.6 109.3 110.9 110.3 110.5 113.9 ...

Real effective exchange rate (1990=100)

101.2 104.3 111.1 113.0 113.6 114.6 118.8 ...

Sources: National Statistical Service; Ministry of Economy and Finance; Bank of Greece; IMF, World Economic Outlook; and IMF staff estimates and projections.
1/ Data are ESA95 basis.

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 A revision of the national accounts data was completed recently, raising the level of output in 2000 by 9.6 percent.


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