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Greece: 2013 Article IV Consultation Concluding Statement of the IMF Mission
May 6, 2013
Describes the preliminary findings of IMF staff at the conclusion of certain missions (official staff visits, in most cases to member countries). Missions are undertaken as part of regular (usually annual) consultations under Article IV of the IMF's Articles of Agreement, in the context of a request to use IMF resources (borrow from the IMF), as part of discussions of staff monitored programs, and as part of other staff reviews of economic developments.
1. Greece is making progress in overcoming deep-seated problems in the midst of a very serious and socially painful recession. The adjustment challenges facing Greece in 2010 were daunting, with fiscal and current account deficits both well into the double digits, reflecting runaway increases in public expenditures and the emergence of a large competitiveness gap in the years following the adoption of the euro. For any country belonging to a currency union, addressing dual imbalances of this magnitude would carry very high risks to growth, as recognized at the outset. In the event, the recession in Greece has been much deeper than expected. But Greece’s achievements must also be recognized:
2. These achievements have been facilitated by unprecedented support from the international community, including €173 billion to date from Greece’s European partners. This has significantly cushioned the adjustment need, preventing what would otherwise have been much more serious social hardship, while containing negative spillover to the rest of the euro area. The achievements to date are evidence of a very strong and persistent determination on the part of Greece and its European partners to do whatever it takes to restore Greece to a sustainable situation inside the euro area.
3. However, insufficient structural reforms have meant that the adjustment has been achieved primarily through recessionary channels, with unequal distribution of the burden of adjustment. Three problems stand out:
Decisive corrective actions are needed in each of these areas to promote an early supply response and achieve a more balanced distribution of the burden of adjustment. The mission welcomes that the government is refocusing its program in recognition of these problems.
4. Major fiscal challenges remain. With no more room for tax increases or major cuts in discretionary spending, the government has been forced to focus on socially difficult cuts to wages and social transfers. The fiscal program for 2013–14 is unequivocal evidence of the government’s determination to meet its commitments in the fiscal area. Greece’s European partners have responded by agreeing to reduce the medium-term primary balance target from 6½ to 4½ percent of GDP and to length the adjustment period to 2016. But Greece will still need some further structural fiscal adjustment to reach its medium-term fiscal target. The key challenge is to define a way for the Government to achieve this while adhering to its promise to avoid further across-the-board spending cuts. Three key issues must be addressed:
• Tax administration reform. The government’s medium-term program assumes an improvement in tax collection by 1½ percent of GDP. Substantial technical assistance has helped give the tax administration the technical tools it needs to succeed, but this target remains very ambitious against the backdrop of the disappointing progress in this area so far. To finally deliver, deeper political commitment to tax administration reform is critical. To insulate the administration against what is still pervasive political interference, a key step over the next year will be strengthening its independence, by giving it new powers to manage its personnel and budget. Recent changes are an important step in this regard.
5. Effective financial intermediation is crucial to contribute to a strong recovery. The program’s bank recapitalization framework is set to deliver a fully recapitalized system by mid-2013, and banks should be in a position to support a gradual recovery in credit as deposits and wholesale market access returns. The reduced sovereign-bank link—banks now have little Greek government debt on their balance sheets—will also help to facilitate a return to market access. Thus, we expect that the deep de-leveraging that has taken place in recent years will soon come to a halt. However, serious policy challenges still exist in this area:
6. A strong recovery will need to be built primarily on deepening structural reforms. The focus should be on invigorating Greece’s export and import competing industries. This will require a more determined and ambitious effort to reduce barriers to entry into various markets, including opaque and lengthy licensing procedures. Moreover, too many assets remain in state hands. The government’s welcome public commitment to improving the business environment and accelerating privatization now needs to be matched with results. Achieving a critical mass of change will be possible only with a broad, forceful, and sustained political commitment.
7. Attempts to artificially engineer growth should be resisted. International evidence is mixed at best on the usefulness of development banks, tax-free zones, and subsidies (or tax expenditures) targeted at specific sectors. Greece cannot afford to divert resources to unproductive uses nor to devote limited implementation capacity to designing and establishing such policies. And in particular, Greece cannot afford a more complicated tax system, which would work directly against the crucial effort to improve tax collection.
8. Restoring growth remains the overarching precondition for whether Greece succeeds. Looking over the period 2010–2012, the much deeper than expected recession was overwhelmingly due to a progressive loss of confidence, culminating in acute concerns about euro exit, as political uncertainty continued to grow, making it increasingly evident that there was no strong political resolve to stand up to vested interests fiercely opposed to reforms. This led to a dramatic contraction in investments not only through poor sentiment, but directly through deleveraging and an attendant sharp credit contraction. Looking forward, two crucial considerations stand out:
9. Overall, while it will yet take some time for the country’s situation to fully normalize, the government of Greece has come a long way in its adjustment effort. Adopting the necessary policies for the next leg of the adjustment effort, which may well mark a turning point for Greece, must take priority.
The mission is grateful to the authorities for the constructive discussions.
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