Greece: Economy Improves, Key Reforms Still Needed

IMF News, March 12, 2019

Source details

Greece no longer has a borrowing arrangement with the IMF; relationship centered on two formal consultations each year covering core macroeconomic and financial sector issues.
Greece undergoes annual Article IV consultations; Greece also is covered by Post-Program Monitoring with a second annual discussion.
Greece currently owes about SDR7.7 billion (€9.4 billion) to the IMF, making it the third largest borrower after Argentina and Ukraine.

Growth:
- Expected to accelerate to nearly 2½ percent this year from around 2 percent in 2018.
- Greece is placed in the upper tier of the eurozone growth table.
- Over the medium term, growth is expected to gradually moderate as the economy reaches full employment.
Labor market and fiscal:
- Unemployment is coming down but remains 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.
Financial normalization:
- Market access re-established with two successful government bond issuances this year.
- Customers are free to move cash to any bank in Greece.
- Banks have almost fully repaid emergency liquidity assistance provided by the European Central Bank.

Financial sector and balance-sheet vulnerabilities:
- Very high nonperforming loan ratios in the banks.
- Elevated levels of private- and public-sector debt and arrears.
Domestic policy and social risks:
- Election-year pressures on policies (for example, to increase wages) could create fiscal or competitiveness pressures.
- Possible fatigue after years of cost cutting and reform efforts.
- Fiscal risks from various court cases challenging key government policies.
- Recent labor market policy decisions—namely the sharp hike in the minimum wage and renewed collective bargaining arrangements—boost incomes but also increase costs and reduce firms’ abilities to respond to changing market conditions, posing risks to employment and competitiveness.
External risks:
- Potential tightening of global financial conditions.
- Possible further slowdown in growth in the EU or emerging markets.

Main policy areas emphasized:
- Enhance labor market flexibility and boost productivity and competitiveness:
- Help employers more easily adjust to changing market conditions.
- Address rigidities in labor markets.
- Reduce nonwage costs for firms (for example, lowering the tax burden and financing costs).
- Advance product market reforms to improve product choice, quality, and competition.
- Improve fiscal policy mix to support growth and social inclusion:
- Planned broadening of the personal income tax next year and stronger tax compliance could allow lower tax rates while boosting revenues to increase investment and targeted social spending.
- Upgrade and modernize the system of social protection to facilitate competitiveness improvements.
- Prepare a contingency plan in the event large fiscal risks materialize.
- Repair the banking system:
- Do more to fix banks crippled by past-due loans so households and businesses can borrow at reasonable interest rates.
Expected effects:
- Together, these policies can spur more growth and strengthen the resilience of the Greek economy to future shocks.

IMF will address these issues again during the 2019 Article IV mission, scheduled to take place this summer.

Source: International Monetary Fund — "Greece: Economy Improves, Key Reforms Still Needed" (March 12, 2019).