Greece: Staff Concluding Statement of the First Post-Program Monitoring Mission

IMF News, January 25, 2019

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An International Monetary Fund (IMF) mission visited Athens during January 21-25, 2019 for the first Post-Program Monitoring (PPM) discussions—part of the IMF’s regular surveillance of countries with IMF credit outstanding above either SDR 1.5 billion or 200 percent of quota.
PPM missions are focused on vulnerabilities and risks to the repayment capacity to the IMF.
The IMF mission was coordinated with the European Commission, the European Central Bank, and the European Stability Mechanism.
Date of publication: January 25, 2019.

Economic activity is expected to accelerate in 2019, and then gradually moderate over the medium-term as the output gap closes.
Growth projections:
- Growth is projected to reach 2.4 percent in 2019, up from an estimated 2.1 percent in 2018.
- Over the medium term, growth is expected to reach just above 1 percent, when economic slack is eliminated.
Drivers of 2019 growth:
- Exports, especially tourism.
- Consumption, supported by declining unemployment and higher confidence.
- Recovery in private deposits has allowed a further relaxation of capital flow management (CFM) measures.
Constraints:
- Investment growth remains tepid due to high base effects and still-weak investor sentiment.
- The current account deficit is expected to remain broadly unchanged in the medium term after deteriorating in 2018.

Medium-term public debt repayment capacity remains robust, reflecting:
- The government’s moderate gross financing needs under the baseline.
- A substantial precautionary cash buffer.
Primary surplus targets are expected to be met and debt is projected to decline over the medium term.
However, a strong policy response would be required to ensure the sovereign’s repayment capacity over the medium-term if significant downside risks materialize.
Downside risks have intensified, with significant crisis legacies including:
- High public debt.
- Impaired private balance sheets.
- A weak payment culture.
External and domestic risk factors:
- External: deterioration in trading partner growth, potential sharp tightening of global financial conditions, slowdown in global trade.
- Domestic: reform fatigue (or reversals) in the context of an election year could weaken investment and medium-term growth and competitiveness prospects.
- Fiscal risks stem from ongoing court cases.
- Banks remain sensitive to financing conditions and regulatory changes.

To maintain hard-earned competitiveness gains amid rising wage pressures, Greece should press ahead with its unfinished reform agenda.
Labor market recommendations:
- Greater flexibility to mitigate negative effects on competitiveness and employment from wage pressures in excess of productivity growth and the abolition of the youth minimum wage.
- Complementary structural reforms in other areas (including product markets) to boost productivity and lower non-wage costs.
The authorities’ growth strategy provides laudable high-level objectives, but further measures will be needed to achieve them.

A growth-friendly rebalancing of the fiscal policy mix, and preparing contingency plans to address fiscal risks, are priorities.
Fiscal strategy guidance:
- Budget-neutral improvements in the fiscal policy mix can facilitate higher, more inclusive growth while meeting the fiscal targets agreed with European Institutions.
- The government should prioritize cuts to wage and profit tax rates, funded by the planned broadening of the personal income tax base next year.
- A contingency plan should be prepared to deal with potential fiscal shocks from ongoing court cases to core pension and wage reforms, and from contingent liabilities such as guaranteed bank loans.
- Accelerating ongoing IAPR and public financial management reforms will further support spending efficiency, build fiscal space, and mitigate fiscal risks.

Restoring growth-enhancing bank lending will require swift, comprehensive, and well-coordinated actions to help repair balance sheets.
Key recommended actions:
- Coordinated steps by key stakeholders to support banks’ efforts to achieve a faster reduction of non-performing loans (NPL).
- Revisit the design of the household insolvency framework and facilitate the efficient use of electronic auctions and out-of-court workouts.
- Public funds could support market-based efforts to reduce NPLs, but the cost-effectiveness of such a strategy should be assessed comprehensively, including its impact on bank and sovereign balance sheets.
- Improve internal governance to restore profitability and build capital and liquidity buffers.
- Continue CFM liberalization in line with the conditions-based roadmap.

Growth and job creation in Greece are expected to accelerate further in 2019, while public sector financing needs remain manageable.
To maintain growth momentum, reform efforts should focus on raising productivity and reducing vulnerabilities through the measures outlined above.
The mission expressed gratitude to the Greek authorities and other interlocutors for a close and constructive dialogue.

IMF staff concluding statement, January 25, 2019.