Greece: Staff Concluding Statement of the 2016 Article IV Mission
IMF News, September 23, 2016
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- Published: September 23, 2016
Progress and macroeconomic status
- Greece has reduced its fiscal primary and current account deficits from double digits to around zero over the last six years.
- Output declined by 25 percent and remains stagnating.
- Unemployment and poverty rates remain much higher than before the crisis.
- Growth prospects remain weak and subject to high downside risks; unemployment is expected to stay in the double digits until the middle of the century.
Key structural problems identified
- Vulnerable public finances driven by unaffordable pension spending financed by high tax rates on narrow bases and a deteriorating payment culture.
- Impaired bank and private sector balance sheets.
- Pervasive structural obstacles to investment and growth.
- Public debt burden remains unsustainable despite large debt relief already received.
Fiscal assessment and recommendations
Findings:
- The initial fiscal adjustment relied on important reforms but has become increasingly reliant on one-off and ad-hoc adjustments, denting policy credibility.
- The composition of adjustment has relied on tax increases on narrow bases, deterring investment and employment.
- Spending is exceedingly focused on unaffordable pensions provided to current retirees, crowding out other needed social spending and essential public services.
Policy recommendations:
- Rebalance the policy mix toward more growth-friendly policies in a fiscally-neutral manner over the medium term.
- Further reduce current pensions by unfreezing current pensions and applying the new benefit formula to create space for needed social spending.
- Avoid further across-the-board discretionary spending cuts, automatic or otherwise.
- Reduce tax (and social security contribution) rates while lowering the generous income tax credit and eliminating remaining exemptions that benefit the rich to achieve a fairer distribution of the tax burden.
- Continue complementary reforms to modernize the public administration and public financial management.
Specific fiscal figures and concerns:
- Recent pension reforms aim to lower spending by about 1 percent of GDP in the medium-run.
- The deficit of the pension system remains highly unsustainable, at 11 percent of GDP (compared to an average of 2½ percent in the euro-area).
- More than half of wage earners are exempt from income taxes due to a very generous tax credit (compared to 8 percent in the euro-zone).
Tax administration, evasion, and revenue collection
Findings:
- Repeated tax rate hikes have prompted proliferation of installment and deferral schemes (more than 60 social security schemes have been put in place since 2001).
- Rapidly accumulating tax and social security debt stands at 70 percent of GDP, the highest in the euro-zone, and is owed by half of taxpayers.
- Tax-collection rates (the percentage of the annual assessment that is collected) have fallen from an already low level of some 75 percent in 2010 to less than 50 percent now despite unprecedented international technical assistance.
- Tax evasion by the rich and the self-employed and an ineffective and politicized tax administration have contributed to the problem.
Policy recommendations:
- Refrain from adopting further installment schemes.
- Put in place tailored and durable restructuring solutions for viable debtors in line with their capacity to pay.
- Concentrate audits on large taxpayers and high net-wealth individuals.
- Strengthen and use enforcement tools against those who can but do not pay.
- Fully implement the recently legislated independent revenue agency fully insulated from political interference.
Banking sector and non-performing loans (NPLs)
Findings:
- NPLs have reached close to 50 percent of total loans, the second highest level in the euro-area.
- Weak payment culture and the economic downturn have contributed to the NPL problem.
- Payment restrictions and capital controls persist, hindering confidence and the return of liquidity.
- Governance concerns persist due to close relations between banks, the state, and powerful vested interests.
Policy recommendations:
- Implement policies that support a rapid clean up of bank balance sheets, including strengthening and fully implementing legal tools for debt restructuring.
- Supervisory authorities should strengthen incentives for banks to set ambitious NPL-reduction targets and implement strategies prioritizing sustainable restructuring measures and NPL sales.
- Ensure adequate bank capital to allow a rapid reduction in NPLs, even if costly.
- Relax payment controls rapidly and predictably on the basis of a milestone-based roadmap while preserving financial stability.
- Strengthen governance by severing links between banks and the political system and improving bank-management standards using international expertise.
- Avoid relying on public development banks to engineer growth, which risks inefficient allocation of resources and higher taxpayer costs.
Structural reforms and competitiveness
Findings:
- Productivity growth is among the lowest in the euro-area, investment is down by more than 60 percent, and export growth lags peers.
- The 2011 labor market reforms improved labor costs, but in absence of product-market reform, the burden of adjustment fell largely on wage earners.
Policy recommendations:
- Accelerate and deepen structural reforms to boost competitiveness and growth.
- Complement labor market reforms with ambitious product-market reforms to fully open up remaining closed professions, foster competition, facilitate investment licensing and privatizations.
- Bring Greece’s collective-dismissals and industrial-action frameworks in line with international best practices.
Debt sustainability and need for further debt relief
Findings:
- Despite very generous debt relief from private and official creditors, public debt has continued to rise and reached unsustainable levels.
- Past targets assumed attainment and sustainment of primary surpluses of 3½ percent of GDP for many decades, alongside high growth rates—assumptions the mission regards as unrealistic given prolonged high unemployment.
Policy recommendations:
- Further debt relief will be required to restore sustainability and should be calibrated on realistic assumptions about Greece's ability to generate sustained surpluses and long-term growth.
- Debt relief should go well beyond what is currently under consideration and be tied to credible fiscal and growth targets.
Concluding assessment
- Greece has made significant progress unwinding macroeconomic imbalances, but growth remains elusive and risks are high.
- The country is at a crossroads and needs bolder efforts to address remaining challenges.
- Europe’s full support, including additional debt relief, is essential while Greece must accelerate implementation of reforms to restore growth and living standards.
IMF Staff Concluding Statement — September 23, 2016