IMF Survey: IMF Support for Greece Moves Ahead with €3.24 Billion Disbursement
IMF News, January 18, 2013
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- Published: January 18, 2013
Progress and disbursement
- Completion of the review paves the way for the disbursement of €3.24 billion under the IMF-supported program agreed in March last year as part of a joint financing package with euro area member states amounting to €172 billion over four years.
- The agreement reached by Greece and its European partners in December last year created room for the government to move ahead decisively with reforms.
- Greece has received €50 billion for bank recapitalization and another €120 billion in budget support.
Macroeconomic outlook and key risks
- Greece is in its sixth year of recession; prospects for recovery depend on how well the government implements the program going forward.
- Major risks:
- Fragile socio-political setting—any doubts about government commitment could trigger renewed downward movements in output through reduced confidence and deposit withdrawals.
- Large debt overhang undermining consumption and investment.
- Continuing fiscal adjustment, a competitiveness gap, and weak demand in main export markets in the eurozone.
- For recovery, consumers and investors must believe the program can gain necessary political support; full exploitation of eurozone market access requires addressing the competitiveness gap.
Debt sustainability and fiscal consolidation
- IMF assessment: "Debt is too high in Greece, and our projections show that it will remain too high without debt relief or long-term transfers from Greece’s European partners."
- European partners have:
- Financed the buyback operation of Greek government bonds completed in December.
- Restructured some of their own loan facilities.
- Agreed to take further steps within the program period to bring Greece’s debt significantly below 110 percent of GDP by 2022, provided Greece achieves its fiscal targets.
- Fiscal history and needs:
- Greece started the crisis with a fiscal deficit of close to 16 percent of GDP.
- Greece has improved the primary balance "by about 9 percent of against fierce macroeconomic headwinds."
- IMF estimates further consolidation amounting to about 6 percent of GDP will be needed in terms of the headline primary balance.
- In structural terms, Greece is "more than halfway there."
- The fiscal adjustment path will now reach the primary balance target—a surplus of 4½ percent of GDP—two years later in 2016.
- Historical precedents cited where countries ran high primary surpluses averaging 4½ percent of GDP or more for a decade.
Fiscal multipliers and program assumptions
- The present program framework "embeds a much higher multiplier than the original program" to reflect changed assumptions about confidence, credit mechanisms, and external demand.
- Projections depend on these underlying assumptions, which can shift.
Policy focus: pensions, taxes, and public sector
- Pensions:
- Program focus on pensions because the surge in public pensions was the main reason behind the rise in Greece’s fiscal deficit.
- Reforms will reduce pension spending from 17 percent in 2012 to about 14 percent of GDP in 2013, closer to the euro area average of 12 percent of GDP.
- Pensions below €1000 per month have been left untouched.
- To avoid further wage and pension cuts, the government must tackle tax evasion and reduce the size of the bloated public sector as planned.
- Tax administration:
- Significant technical assistance provided by the IMF and the European Union via the Task Force for Greece.
- Reforms progressed through planning, preparation, and legal framework changes, but implementation stalled—particularly due to delayed appointment of a new tax administration director.
- Challenges include bureaucratic resistance, perceptions of corruption, complex rules, and lack of transparency.
- Program actions: streamlining the tax code, simplifying procedures for accounting and tax collection, increasing accountability and autonomy of tax administration staff.
- Public sector: reducing size of bloated public sector is a critical part of improving fairness and burden sharing.
Structural reforms and competitiveness
- Competitiveness gains:
- Unit labor costs have dropped by 15 percent since their pre-crisis peak.
- Greece has probably eliminated "a little more than half of the competitiveness gap" estimated at the beginning of the program—a gap that amounted to more than 30 percent compared to closest competitors.
- Almost all gains occurred through declines in nominal wages rather than productivity gains.
- Labor market reforms:
- Minimum wage reduced by over 20 percent.
- System for setting the minimum wage reformed (influence of insiders reduced dramatically).
- Severance costs cut back.
- Onerous pre-approval requirements for work schedules and overtime eliminated.
- Market liberalization and competition:
- Example: removal of restriction that limited baby formula sales to pharmacies led to a 40 percent price drop; reinstatement showed political obstacles to competitive reforms.
- Retail sector liberalized in late 2012; sector had been characterized by high prices and productivity lagging the EU-15 average by 30-40 percent.
Banking sector and credit conditions
- Deposits have been returning to the banking system since mid-2012.
- Core banks have been recapitalized, and their balance sheets significantly strengthened; Greek banks now have little exposure to the Greek state.
- Recovery can occur with limited credit availability in the near term due to private sector net creditor position vis-à-vis the rest of the world, allowing some firms to finance investment internally.
- Authorities will monitor bank funding plans to avoid excessively tight liquidity that could slow recovery and to prevent a collective attempt by banks to deleverage beyond program assumptions.
Privatization and structural obstacles
- Privatization is critical for structural reform and debt reduction but held up by weak market conditions, technical constraints, and political obstacles.
- Progress includes identifying salable land without title encumbrances and with zoning permissions.
- An independent agency set up in 2011 manages privatization work; continued problems may require revisiting its governance.
Conditions for program success (policy recommendations / prerequisites)
- Sustained and strong implementation of agreed policies to lay the foundation for a turnaround.
- Political support and leadership to maintain confidence and prevent renewed economic deterioration.
- Continued fiscal consolidation in line with program targets.
- Deep and decisive action on:
- Tax administration reform and effective tax collection.
- Removing regulatory barriers to competition across goods and services markets.
- Completing privatization where feasible and addressing governance of implementing agencies.
- Reducing public sector size to improve burden sharing.
- Careful management of bank funding and liquidity to avoid credit contraction that undermines recovery.
Snapshot of reform results (summary bullets from the report)
- A reinforced financial system: deposits returning since mid-2012; core banks recapitalized; little exposure to the Greek state.
- A more competitive labor market: unit labor costs down 15 percent; minimum wage reduced by over 20 percent; reforms to minimum wage setting, severance, and work-schedule approvals.
- A more affordable pension system: pension spending reduced from 17 percent in 2012 to about 14 percent of GDP in 2013; pensions below €1000 per month protected.
- More affordable prices and more consumer choice: prices in Greece have begun to fall; retail sector liberalized in late 2012; retail productivity lagged EU-15 by 30-40 percent.
IMF Survey: IMF Support for Greece Moves Ahead with €3.24 Billion Disbursement