Greece: 2013 Article IV Consultation Concluding Statement of the IMF Mission

IMF News, May 6, 2013

Source details

Canonical URL: Greece: 2013 Article IV Consultation Concluding Statement of the IMF Mission

Greece is making progress in overcoming deep-seated problems in the midst of a very serious and socially painful recession.
Progress on fiscal adjustment has been exceptional by any international comparison, with the primary balance set to have cumulatively improved by 10 percent of GDP by end-2013, amid a contraction in GDP of more than 20 percent.
Greece has made a significant dent in its competitiveness gap: the competitiveness gap as measured by Unit Labor Costs (ULC) has been reduced by close to two-thirds since 2010, while the current account deficit has come down cumulatively by about 10 percent of GDP.
Financial sector stability has been preserved, despite large losses associated with the debt restructuring and a sharp rise in NPLs associated with the deep recession.
Achievements facilitated by unprecedented international support, including €173 billion to date from Greece’s European partners.

Adjustment has been achieved primarily through recessionary channels, with unequal distribution of the burden of adjustment.
Three problems highlighted:
- Very little progress tackling tax evasion; the rich and self-employed are not paying their fair share, forcing reliance on across-the-board expenditure cuts and higher taxes on salaried workers and pensioners.
- Declines in nominal wages have only to a very limited degree been reflected in lower prices, due to failure to liberalize closed professions and open up competition.
- Over-staffed public sector largely spared from layoffs because of a taboo against dismissals, while private sector unemployment has surged, especially among the young.

Major fiscal challenges remain; limited scope for further tax increases or major cuts in discretionary spending.
The fiscal program for 2013–14 demonstrates government determination to meet fiscal commitments.
European partners agreed to reduce the medium-term primary balance target from 6½ to 4½ percent of GDP and to lengthen the adjustment period to 2016.
Greece will still need further structural fiscal adjustment to reach its medium-term fiscal target.

Key fiscal reform issues and recommendations:

Tax administration reform:
- The government’s medium-term program assumes an improvement in tax collection by 1½ percent of GDP.
- Substantial technical assistance has provided technical tools, but the target remains ambitious given disappointing progress to date.
- Recommendation: strengthen tax administration independence by giving it new powers to manage personnel and budget; deepen political commitment to reform.
Public administration reform:
- Plan relies primarily on voluntary attrition to achieve staffing reductions; credibility requires some limited mandatory redundancies.
- Mandatory redundancies are needed to allow hiring of new, qualified staff in key areas (e.g., banking supervision and tax administration) and to modernize the public sector.
- The taboo against mandatory dismissals must be overcome.
Preserving and enhancing the social safety net:
- Strengthen job training programs and income support programs for the unemployed, leveraging European Community funds where available.

Program’s bank recapitalization framework set to deliver a fully recapitalized system by mid-2013, enabling banks to support a gradual recovery in credit as deposits and wholesale market access return.
The reduced sovereign-bank link (banks now have little Greek government debt on their balance sheets) should facilitate a return to market access.
Expectations: the deep de-leveraging of recent years will soon come to a halt.

Concerns and recommended actions:

Avoid undue government interference following large public capital injections; reinforced governance framework, strong oversight and supervision, and very rapid re-privatization are critical for the planned four-pillar banking system to be developed by June.
Contain and reverse rising nonperforming loans; develop and introduce a more comprehensive debt resolution framework as soon as possible.
Mission welcomes authorities’ commitment to put in place a framework for dealing with distressed household borrowers.

Strong recovery requires deepening structural reforms focused on export and import-competing industries.
Required actions include reducing barriers to entry, including opaque and lengthy licensing procedures, and accelerating privatization to move assets out of state hands.
Achieving a critical mass of change requires broad, forceful, and sustained political commitment.
Attempts to artificially engineer growth (e.g., development banks, tax-free zones, sector-specific subsidies or tax expenditures) should be resisted; international evidence is mixed at best.
Greece should avoid creating a more complicated tax system, as that would work against improving tax collection.

The much deeper-than-expected recession over 2010–2012 was largely due to progressive loss of confidence, culminating in acute concerns about euro exit and political uncertainty, which led to dramatic contraction in investment and deleveraging.
Two crucial considerations for recovery:
- With fiscal adjustment set to remain a drag on GDP growth for several years, the key challenge is to generate the improvement in confidence needed for investment recovery; this requires broad domestic support for the program and political stability.
- Greece’s public debt remains much too high despite restructuring and official creditor support. It is welcome that European partners have accepted that Greece could need significant exceptional support on below-market terms and have committed to provide additional relief, if needed, to keep debt on the programmed path, i.e. to bring it substantially below 110 percent of GDP by 2022.
With Greece’s debt now overwhelmingly held by the official sector, the partners’ commitment is essential to assure creditors that a credible framework for dealing with Greece’s debt overhang is in place.

While normalization will take time, Greece has come a long way in its adjustment effort.
Priority: adopt the necessary policies for the next leg of adjustment, which may mark a turning point for Greece.
The mission is grateful to the authorities for the constructive discussions.

Source: Greece: 2013 Article IV Consultation Concluding Statement of the IMF Mission (May 3, 2013).