IMF Survey: Greece: Reform Agenda Essential for Growth

IMF News, July 15, 2011

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IMF’s Executive Board approved the disbursement of about €3.2 billion to Greece as part of the three-year lending arrangement agreed in May 2010.
Approval date context: the Executive Board approved the disbursement on July 8; the publication date is July 15, 2011.

Program delivers: “while the program includes some very difficult measures, reforms have slowly started to deliver results.”
Rebalancing and competitiveness:
- Exports have increased by 22 percent.
- Competitiveness is improving, in part because of a decline in labor costs.
- Inflation, adjusted for taxes, is running well below the euro zone average.
Growth prospects:
- A return to positive economic growth is currently projected for the first half of 2012, conditional on full implementation of difficult structural reforms.

Pension reforms described as “the most far-reaching that virtually any country has done in one step.”
Labor market reforms described as “very comprehensive.”
Government has started opening up closed professions.
Additional reform priorities highlighted:
- Addressing the high tax burden on labor that discourages hiring.
- Making the judicial system more efficient.
- Removing barriers to growth in specific sectors.
- Creating investment opportunities through privatization and reducing red tape.
Capacity constraints:
- Need to strengthen capacity in key ministries and institutions with the skill sets needed to implement agreed reforms.
- Government has asked partners for technical assistance, which the IMF will provide.

Fiscal performance to date:
- Authorities have met all quarterly fiscal targets since the start of the program, most recently those for March 2011.
- There has been a reduction in the fiscal deficit of more than 5 percent in 2010.
Risks and adjustments:
- Difficulty controlling spending at lower levels of government; state-level under-execution used to ensure overall targets were met.
- Without structural changes to fiscal policy, risk that the budget deficit will become entrenched at 10 percent or more.
Fiscal targets in the approved program:
- Achieve a deficit of 7½ percent of GDP in 2011.
- Achieve a deficit below 3 percent of GDP by 2014, as required by the Maastricht treaty.

Market access and timing:
- Greece would be unlikely to regain access to private markets by early 2012, as initially envisaged under the program.
Privatization and residual gap:
- Ambitious privatization program committed to by the government will help reduce need for additional financing, but a notable residual gap remains to be closed through the end of 2013, when the current IMF-supported program is due to expire.
Strategy to address the financing gap:
- Agreed strategy likely to involve a combination of voluntary private sector involvement and additional official support from euro area member states.
- Modalities still being worked out.
Political support at euro area level:
- In a statement on July 11, the 17 finance ministers of the Eurogroup recognized the need for a broader and more forward-looking policy response to assist Greece in bolstering debt sustainability.
- IMF will continue to work closely with Greece and European partners to support these objectives.

Public reaction:
- Widespread protests and expressions of concern about the economic program acknowledged.
- Recognition that the program is “very difficult and ambitious” and that public concerns are understandable.
Fairness and social protection:
- Program needs to be fair and protect the most vulnerable groups of society.
- Tackling tax evasion emphasized as essential: develop a well-functioning tax administration and necessary judicial backing to hold accountable those who have exploited system weaknesses.

Debt focus:
- Greek authorities and Europeans are working on a comprehensive solution to manage the debt burden and give Greece breathing space to implement reforms.
Core objective:
- The real objective is for Greece to restore growth; once on that path, Greece will be able to reduce debt to sustainable levels.
- Restoration of sustainable growth hinges on implementation of the economic reform program to make the economy more competitive and less rigid and protective of vested interests.

IMF Survey: Greece: Reform Agenda Essential for Growth — July 15, 2011. International Monetary Fund.