Greece -- 2005 Article IV Consultation, Conclusions of the IMF Mission
IMF News, September 19, 2005
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- Published: September 19, 2005
Economic performance and outlook
- Growth drivers: adoption of the euro (sharp decline in interest rates), financial market liberalization, rapid growth of private sector credit, strong capital formation, immigration, and productivity gains.
- Short-term developments:
- Real GDP growth is slowing somewhat in 2005 due to a sharp fall in investment (end of Olympic expenditures) and high oil prices.
- Household consumption supported by further credit growth.
- Exports boosted by continued strength in shipping and a resurgence in tourism.
- 2006 outlook:
- Growth is likely to moderate slightly again.
- Investment is set to rebound, but demand weakened by the full impact of oil prices, further erosion of international competitiveness, and the gradual waning of the beneficial effects of euro entry.
Fiscal policy, deficit, and public debt
- Recent performance:
- General government deficit rose relentlessly over the past four years and "significantly exceeded 6 percent of GDP in 2004."
- Rapid growth in real primary spending (even excluding Olympics spending) underlies the deterioration.
- Authorities' objectives and measures:
- Objective to reduce the general government deficit below 3 percent of GDP by 2006.
- 2005 budget aims for a significant cut in the deficit; deficit will fall substantially in 2005 but significant further measures needed in the 2006 budget.
- Measures include curtailing increases in the public sector wage bill and using the end of Olympics spending to cut the deficit rather than finance other programs.
- Planned securitization of overdue taxes is estimated to bring in revenue of about 1 percent of GDP in 2005, and again in 2006; this is characterized as a temporary measure that does not improve the underlying budget position.
- Tax receipts, principally from the VAT, have fallen well short of budget forecasts because of increased evasion.
- Medium-term strategy and targets:
- Fiscal adjustment should be conceived in a medium-term context with a multi-year budget strategy.
- The strategy should aim for structural budget balance by 2010 to prepare for costs of population aging.
- Beyond 2010, budget surpluses may be appropriate to pay down public debt faster and free up funds for rising pension payments.
- Expenditure and tax administration reforms needed:
- Focus budget process on programs; integrate ordinary and investment budgets.
- Streamline spending control, improve auditing, evaluate program outcomes relative to budgeted objectives.
- Tax administration reform centered on developing a modern system of self assessment supported by risk-based enforcement mechanisms.
- High-importance measures: bimonthly filing of VAT returns, improved audit procedures, stronger measures to collect tax arrears.
- The tradition of tax amnesties should be abandoned.
- High-level task forces established; successful implementation requires strong political backing and improved information management and systems.
Pension, aging, and health-care fiscal risks
- Long-term outlook dominated by fiscal costs of population aging: rising pension outlays and increasing health costs.
- Projections (noted as out of date) show costs rising sharply after 2010 and, without corrective measures, eventual explosive growth of public debt.
- Policy recommendations:
- Begin a highly visible and comprehensive social discussion immediately to explore key issues and solutions, with a view to early implementation of concrete reforms.
- Update projections of fiscal costs of aging and closely monitor developments; bring the National Actuarial Authority up to full strength.
- Health-care reform required; initiatives to improve procurement are welcome, but additional measures needed to control costs while ensuring high service levels.
Financial sector assessment and supervision
- Evolution: privatization of public sector banks, deregulation, and EU integration; commercial banks expanded rapidly while capital markets and insurance companies remain small by European standards.
- Banking sector condition:
- Commercial banks are well capitalized and profitable with adequate liquidity.
- Rapid credit growth to households, SMEs, and expansion into southeast Europe exposes banks to unknown risks; nonperforming loans have begun to rise.
- Structural challenges: (i) legal and institutional impediments to strengthening competitiveness, (ii) increasingly costly funding as deposit growth fails to keep up with lending, (iii) need to strengthen risk management capacity, (iv) introduction of IFRS which enhances transparency but may result in a one-time capital charge.
- Supervision and regulatory gaps:
- Authorities tightened the prudential framework and improved on-site and off-site supervision.
- Hellenic Capital Markets Commission increasing role; capital market regulation strengthened.
- Insurance sector supervision and regulation are weak.
- FSAP (first half of 2005) concluded no systemic threats but urged action on medium term vulnerabilities.
- Recommended actions:
- Bank of Greece should continue to monitor rapid credit expansion and growth of nonperforming loans.
- Prepare for regulatory challenges as IFRS are implemented.
- Make the new insurance supervisor operational and fully resourced as quickly as possible.
- Strengthen pension supervision in anticipation of increasing importance of second pillar schemes.
- Establish procedures for effective cooperation among supervisory agencies and strengthen legal protection of supervisors.
Structural reforms, competitiveness, and public sector efficiency
- Productivity and competitiveness improvements are vital to reach western European living standards and meet future pension obligations.
- Product market and business climate reforms underway and recommended actions:
- New competition law and strengthened Competition Authority, extension of shop opening hours, and cut in corporate income tax are welcome and should be built on.
- Reduce administrative burden on firms; pursue tax administration reforms to reduce uncertainty.
- Simplify business licensing procedures (starting with industrial sector then commercial sector).
- Overhaul bankruptcy legislation.
- Accelerate liberalization of electricity and gas markets in accordance with EU directives where feasible.
- New investment law will help regional development but budgetary costs should be contained.
- State-owned enterprises (SOEs):
- Plans to reform SOEs are welcome: elimination of tenure and introduction of private sector pay scales for new OTE employees; extension to other SOEs encouraged.
- Planned introduction of IFRS, strengthened corporate governance, and more thorough oversight of business plans should improve SOE performance.
- Full privatization should be the rule, with the objective of increasing economic efficiency.
- Labor market reforms:
- Recent easing of overtime restrictions is positive; immigration law reforms should help formalization of immigrant workers.
- Further liberalization recommended: relaxation of strong employment protection legislation to stimulate hiring.
- High minimum wages negotiated centrally can be inappropriate in pressured sectors; consider mechanism allowing opting-out of aspects of central agreements.
- Wage increases should be no more than the sum of productivity growth in Greece and inflation in the euro area to stem erosion of international competitiveness.
- Raise educational standards and promote closer collaboration between educational institutions and employers to mitigate labor-market bottlenecks and mismatches.
- Public-private partnerships:
- New PPP law is welcome; PPPs can increase efficiency of public investment if properly implemented.
- Assure full transparency (including budgetary implications over the entire life of each project) and coherence with broader budgetary process and public investment priorities.
- Preferably include PPPs through a comprehensive addendum to the budget; large investment projects should also be included under the PPP framework.
Data, transparency, and external assistance
- Data needs:
- Better estimates of the quarterly national accounts are important; efforts are underway.
- Publishing comprehensive financing-side data for the general government is essential for full analysis of fiscal developments.
- More timely banking system data would improve transparency and market discipline.
- National Statistical Service intention to adopt the new EU Statistics Code of Practice is welcome; consideration should be given to granting it full formal independence.
- Official development assistance:
- Official development assistance increased to 0.3 percent of GNI in 2005.
- Further progress urged toward the UN target of 0.7 percent of GNI.
Athens, September 19, 2005