Shoppers in Central Market in Athens. Product market reforms in Greece will improve product choice, quality, and competition (photo: Frank Fell/robertharding/Newscom)

Shoppers in Central Market in Athens. Product market reforms in Greece will improve product choice, quality, and competition (photo: Frank Fell/robertharding/Newscom)

Greece: Economy Improves, Key Reforms Still Needed

March 12, 2019

Greece has now entered a period of economic growth that puts it among the top performers in the eurozone. It must now persevere with efforts to address crisis legacies and pursue needed reforms to ensure continued success, says the IMF in its recent assessment of the country’s economy.

As the IMF concludes its latest assessment on the state of the Greek economy, IMF Country Focus sat down with Peter Dohlman, IMF mission chief for Greece, to discuss the report's findings, key recommendations, and the IMF’s relationship with Greece.

What is the current status of Greece’s relationship with the IMF?

Greece no longer has a borrowing arrangement with the IMF. Instead, our relationship with Greece is centered on two formal consultations each year covering core macroeconomic and financial sector issues. As you know, we hold annual Article IV consultations with all our members, where they undergo “economic health checks,” and in the case of Greece, this took place last July. In addition, Greece is covered by what is known as Post-Program Monitoring, where we hold a second annual discussion with countries that have large outstanding loans from the IMF. Greece currently owes about SDR7.7 billion (9.4 billion) to the IMF, making it the third largest borrower after Argentina and Ukraine.

How has the economy performed of late, and what is your assessment of future performance?

There are a lot of positive developments to point to. We expect growth to accelerate to nearly 2½ percent this year from around 2 percent in 2018. This puts Greece in the upper tier of the eurozone growth table. Unemployment is coming down, though is still unacceptably high, especially for young people. The government is meeting its ambitious fiscal targets agreed with European member states, though not without some cost to growth. Market access has been re-established with two successful government bond issuances this year.

We also see normalization in other areas. For example, customers are now free to move their cash to any bank in Greece, and the banks themselves have almost fully repaid emergency liquidity assistance provided by the European Central Bank. Over the medium term, we expect growth to gradually moderate as the economy reaches full employment.

What are some of the vulnerabilities and risks facing Greece’s economy?

Despite its hard-earned economic stability, Greece remains a country confronted by elevated vulnerabilities and weak payment discipline. This is reflected, for example, in the very high nonperforming loan ratios in the banks and elevated levels of private- and public-sector debt and arrears.

On the domestic side, there are risks from election year pressures on policies—such as to increase wages—as well as possible fatigue after years of cost cutting and reform efforts. The necessary adjustment away from the unsustainable policies that led to the crisis has imposed a heavy cost, despite efforts to protect the most vulnerable through targeted support—such as the guaranteed minimum income scheme. We also see fiscal risks from various court cases now underway that are challenging key government policies. Recent labor market policy decisions, notably the sharp hike in the minimum wage and renewed collective bargaining arrangements, help boost incomes but also increase costs and reduce firms’ abilities to respond to changing market conditions, which in turn pose risks to employment and competitiveness.

On the external side, we see risks from a potential tightening of global financial conditions or a further slowdown in growth in the EU or emerging markets.

How can Greece address these challenges and keep the economy on track?

In our report, we focus on three policy areas.

First, we are recommending policies to enhance labor market flexibility and boost productivity and competitiveness. This means that Greece should find ways to help employers more easily adjust to changing market conditions and maintain customers through addressing the rigidities in labor markets, but also through policies to help reduce nonwage costs for firms—such as lowering the tax burden and financing costs. Relatedly, product market reforms aimed at improving product choice, quality, and competition continue to lag in Greece. A renewed reform push in this area would also help support higher employment and growth.

Second, Greece can do more to support growth and social inclusion by improving the fiscal policy mix. For example, through the planned broadening of the personal income tax next year and stronger tax compliance, Greece can lower tax rates and still boost revenues to increase investment and targeted social spending. Further efforts are needed to upgrade and modernize the system of social protection, which would also facilitate ongoing efforts to improve competitiveness. In addition, we are recommending that the government prepare a contingency plan in the event large fiscal risks materialize.

Third, we are urging the government to do more to fix banks, which remain crippled by past-due loans. This will help households and businesses to once again be able to borrow at reasonable interest rates. Together, these policies can spur more growth and strengthen the resilience of the Greek economy to future shocks.

We will pick up on these issues again during the 2019 Article IV mission, scheduled to take place this summer.