Greece: Staff Concluding Statement of the 2023 Article IV Consultation Mission

IMF News, November 14, 2023

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Canonical URL: Greece: Staff Concluding Statement of the 2023 Article IV Consultation Mission

Real GDP expanded beyond its pre-pandemic trend level.
Public debt-to-GDP ratio has declined below its pre-pandemic level; debt financing risks contained in the medium term due to favorable debt structure.
Banking system resilient with improving balance sheets.
Macroeconomic challenges: significant monetary policy tightening, persistent core inflation, rising real estate prices.
Structural impediments: low household savings, still low level of investment, structural shift from climate change weighing on medium-term growth.

Real GDP growth in 2023: continued to expand at a solid pace in the first half of 2023 by 2½ percent (seasonally adjusted annualized rate).
Private consumption supported by increasing real wages and gradual decline in pandemic-induced excess household savings.
Fixed investment growth robust, driven by ongoing Next Generation EU (NGEU)-funded investment.
High-frequency data: economic momentum remained robust in Q3 2023 despite natural disasters (heatwaves, wildfires, and floods).
Unemployment rate: declined to 10 percent in September (a decade low).
Inflation (October): headline 3.8 percent (y/y); core 3.6 percent (y/y) — decelerated due to normalizing energy prices and base effects but remain high amid tightening labor market.
Residential real estate prices: increased by more than 50 percent since the trough in 2017 but remain below pre-Global Financial Crisis levels.
Growth projections:
- Real GDP projected to grow by 2.5 and 2.0 percent in 2023 and 2024, respectively.
- Medium-term GDP growth forecast to moderate to about 1¼ percent.
Inflation projection: Headline inflation projected to reach 2 percent by end-2025 as pressures on core inflation dissipate only gradually.

Progress cited in digital transformation and integration of government services.
Labor market reforms: modernization of labor legislation and public employment services facilitating labor market adjustment since the pandemic.
Enhanced competition authority actions increased market competition.
Potential growth: estimated to have turned positive in 2022 for the first time since the sovereign debt crisis.
Recommendations to boost supply-side performance:
- Rationalize regulations to facilitate firm entry and exit and job transitions.
- Sharpen digitalization focus to serve small- and medium-sized enterprises.
- Scale up lifelong learning (digital and green skills) to reduce skill shortages.
- Improve availability and affordability of childcare and reduce marginal income tax of second earners to raise female labor force participation.
- Strengthen judicial reforms and out-of-court proceedings to accelerate debt resolution and reduce bank NPLs.

Asset quality improvement: NPL ratio declined below 5 percent in 2023Q2 in systemically important banks, supported by securitizations under the Hercules program.
Banks: higher net interest margins and strong rebound in profits bolstering capital adequacy.
Liquidity: sizable liquidity buffers maintained despite substantial repayments of ECB’s TLTRO.
Financial stability recommendations:
- Strengthen monitoring and management of interest rate, liquidity and funding, and credit exposures, underpinned by a strong bank capital base.
- Closely monitor and stress-test banks’ interest-rate risk, funding, and liquidity as TLTRO replacement with more expensive market funding may pose challenges.
- Proactive credit risk management to maintain comfortable capital buffers; use temporarily elevated profits to build capital buffers and restore quality of capital.
- Macroprudential toolkit: activate a positive neutral countercyclical capital buffer to guard against systemic shocks.
- Borrower-based measures for mortgage loans—ceilings on loan-to-value ratio and caps on debt service-to-income ratio—to enhance household resilience.

Fiscal consolidation aim: continue growth-friendly consolidation to strengthen public debt sustainability while supporting inclusive and green growth.
Fiscal numbers:
- Primary surplus projected to increase to 2.1 percent of GDP in 2024, up from projected 1.1 percent in 2023.
- Maintain a primary surplus of about 2 percent of GDP in the medium term to improve public debt sustainability and provide space for domestically financed public investment and critical social spending.
Policy guidance:
- Contain spending pressures, especially in non-discretionary areas such as public sector wages and pensions, which are elevated in cross-country comparison.
- Protect or expand critical social spending: targeted social transfers, healthcare, and education.
- Strengthen social safety net (including a single portal for benefits).
- Advance fiscal structural reforms: address tax evasion (including targeted reforms for the self-employed), promote digital transactions, rationalize tax incentives, and strengthen public investment management in view of planned large NRRP investments.

Upside and downside risks to growth and inflation:
- Downside: escalation of Russia’s war in Ukraine or conflict in the Middle East could disrupt trade and trigger renewed energy and food price pressures; higher-than-expected persistence in euro area inflation and higher-for-longer rates would weigh on demand; more frequent extreme climate events could disrupt tourism and activity.
- Upside: acceleration of ambitious structural reforms and stronger-than-expected market reaction to investment grade upgrade could improve growth.
- Inflation risk: could remain high from weather-related shocks and domestic pressures from recent and expected wage and pension increases.

Climate challenge: dominance of fossil fuels in energy necessitates strong implementation of renewables policy framework.
Recommendations for green transition:
- Streamline licensing for new renewables investment and better integrate renewables into the electricity grid to accelerate progress and boost energy security.
- Consider raising the carbon tax (including excise and feebates) in non-ETS sectors such as transport to incentivize rapid and efficient green transition as energy prices normalize.

Greece: Staff Concluding Statement of the 2023 Article IV Consultation Mission — November 14, 2023.