IMF Executive Board Concludes 2021 Article IV Consultation with Greece
IMF News, July 16, 2021
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- Published: July 16, 2021
Overview and context
- The Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with Greece and endorsed the staff appraisal on July 9 without a meeting on a lapse-of-time basis.
- Greece entered the pandemic with an unfinished recovery but demonstrated resilience; the economy contracted by 8.2 percent in 2020.
- The government provided among the largest on-budget fiscal stimuli in the euro zone; supervisory and ECB accommodation shielded the banking sector and kept financing conditions highly accommodative.
- Reforms progressed in a number of areas, albeit at a slower pace than in recent years.
- Full vaccination is progressing at a rate above the European average, but a more prolonged pandemic would add unprecedented uncertainty and downside risks to all sectors.
Economic outlook and risks
- Growth projections:
- 2021: 3.3 percent
- 2022: 5.4 percent
- Main drivers of the recovery: Next Generation EU (NGEU) grant funding investment, pent-up consumption funded by deposit drawdown, and tourism resumption.
- Permanent output loss from the pandemic (“scarring”) is projected to reach 3 percent.
- Downside risks highlighted:
- A more prolonged pandemic with significant downside impacts across sectors.
- Uncertain extent of pandemic-related Non-Performing Exposures (NPEs) that could affect securitization plans and curb credit growth.
- Weaker-than-anticipated absorption of NGEU funding.
- Reversal of global accommodative financial conditions.
- Manifestation of geopolitical risks.
- Upside risks:
- Full execution of the authorities’ Recovery and Resilience Fund’s (RRF) plans could unlock synergies: higher investment, economies of scale from greater firm size, increased export orientation, productivity growth, movement to investment grade, and improved long-term debt sustainability.
- Such a virtuous cycle is subject to significant execution risks.
Public debt, fiscal stance, and sustainability
- Public debt dynamics:
- Public debt spiked in 2020, is projected to peak in 2021, and decline gradually over the medium-term while remaining at higher levels than forecast before the pandemic.
- Public debt remains sustainable over the medium-term, predicated on the negative interest rate-growth differential and a gradual return to primary surpluses.
- Uncertainty is too high to reach a definitive assessment on long-term debt sustainability due to uncertainty about the long-term neutral rate and risk premia.
- Fiscal stance and recommendations:
- Pandemic-related measures imply a primary deficit of around 7¼ percent of GDP in 2021.
- Headline primary deficit for 2022 is expected to recover to 1 percent of GDP.
- Underlying fiscal stance for 2022, excluding temporary COVID-19 measures, remains expansionary by about 2 percent of GDP.
- Staff offers qualified support for maintaining fiscal accommodation in 2022, with conditionalities:
- Fiscal overperformance should be saved as a contingency reserve.
- Use additional support to initiate durable improvements in the fiscal policy mix.
- Recommended fiscal policy measures:
- Emphasize reductions in corporate income tax (CIT) rate and advanced CIT payments to strengthen investment incentives and preserve firm liquidity.
- Address gaps in the Guaranteed Minimum Income scheme to transition support from job retention to targeted income support and worker reactivation.
- Address unmet needs in healthcare provision.
- Match structural fiscal measures with efforts to create fiscal space over the medium term, including:
- Personal income tax base-broadening.
- Tackling VAT compliance gaps.
- Aiming for expenditure savings in less-well targeted entitlement programs (including pensions), in the public wage bill, and in State Owned Enterprises.
Financial sector, NPEs, and bank balance sheets
- The pandemic could delay normalization of bank balance sheets and requires a proactive government approach supported by comprehensive cost-benefit analysis of available options.
- Hercules securitization strategy:
- Could achieve a rapid reduction in NPEs provided capital-raising efforts are successful.
- Staff welcomed the extension of additional government guarantees for NPE securitizations (“Hercules-II”).
- Staff suggested backup plans if fresh capital raising by banks is insufficient and/or execution risks materialize.
- Asset Management Company (AMC) proposal by the Bank of Greece has been shelved; staff encouraged working with European partners to find solutions for weak quality of bank capital.
- Stand-alone DTC conversion could be considered as a last resort for banks unable to fully utilize existing tools.
- Staff encourages swift finalization of a DTC law amendment to ensure instruments are loss absorbing in resolution.
- Effective implementation and use of the new Insolvency Code, including by servicers, is critical for meaningful debt resolution.
Structural reforms and NGEU implementation
- Structural reform implementation is essential to minimize scarring risks and leverage NGEU resources.
- External position:
- The external position of Greece in 2020 is assessed to have remained weaker than consistent with medium-term fundamentals and desirable policies.
- Addressing overvaluation of the Real Effective Exchange Rate and strengthening convergence prospects requires accelerating structural reforms that boost productivity, reduce non-wage costs, and close the investment gap.
- Recommendations to foster inclusive, job-rich, greener growth:
- Improve the fiscal policy mix to support labor force participation objectives, including funding childcare to encourage female labor participation.
- Invest in youth prospects and older worker reskilling.
- Upgrade the public investment framework to maximize NGEU funds’ impact.
- Upcoming labor codification should foster labor market flexibility.
- Minimum wage adjustment should be prudent.
- Continue safeguards for transparency and accountability of COVID-19-related emergency spending.
- Protect the independence and credibility of the statistical agency and uphold the “Commitment on Confidence in Statistics” endorsed by the government in 2012.
Key statistics (from Table 1)
- Population (millions of people): 10.7
- Per capita GDP (€'000): 15.5
- IMF quota (millions of SDRs): 2428.9
- Literacy rate (percent): 97.9
- (Percent of total): 0.5
- Poverty rate (percent): 31.8
- GHG emission per capita (tonnes of CO2 equivalent): 8.4
- Selected annual indicators (2020, 2021 (prel./proj.), 2022 (proj.)):
- Real GDP growth (percent): -8.2; 3.3; 5.4
- Unemployment rate (percent): 16.4; 16.5; 15.2
- CPI inflation (period avg., percent): -1.3; -0.3; 0.8
- General government finances (percent of GDP) 1/:
- Revenue: 50.2; 49.7; 49.2
- Expenditure: 60.7; 59.8; 53.3
- Overall balance: -10.5; -10.1; -4.1
- Primary balance: -7.5; -7.2; -1.1
- Public debt: 211.2; 213.8; 204.1
- Balance of payments:
- Current account (percent of GDP): -7.4; -6.6; -3.5
- FDI (percent of GDP): -1.5; -2.0; -2.1
- External debt (percent of GDP): 303.9; 299.0; 285.6
- Exchange rate:
- REER (percent change) 2/: -0.8; -0.9; -0.6
IMF Executive Board Concludes 2021 Article IV Consultation with Greece (Press Release No. 21/218), July 16, 2021.
