Greece: Priorities for a Return to Sustainable Growth

IMF News, February 7, 2017

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Greece should deepen and accelerate reforms, which, together with further debt relief, are needed to allow the economy to return to a sustainable growth path.
The IMF’s annual assessment identifies a two-pronged approach: ambitious policies by the Greek authorities and significant debt relief by Greece’s European partners.

Fiscal primary and current account deficits declined from 11 and 15 percent of GDP, respectively, to around zero at the end of 2015.
Adjustment achieved despite Greece being part of a currency union without access to monetary and exchange rate policy tools.
The government renewed its reform effort since mid-2015 with a new adjustment program supported by the European Stability Mechanism, legislating fiscal, financial, and structural reforms (pensions, VAT, income tax, insolvency legislation, nonperforming loan servicing and sales, bank governance, privatization, competition).

Unemployment rate: 23 percent (October 2016).
Output: 25 percent below its pre-crisis level.
Pension system deficit: 10.5 percent of GDP (record high; almost four times as high as the euro-area average).
Overdue bank loans: 45 percent of total loans.
Unpaid taxes to the state: 70 percent of GDP.
These factors have weakened support for ongoing reforms and keep investment and growth weak.

IMF view: Greece does not require further austerity at this time.
Accounting for ongoing reforms, Greece is expected to achieve a primary fiscal surplus of 1.5 percent of GDP over the medium and long term.
Key recommendations:
- Do not run a higher primary surplus than 1.5 percent of GDP unless Greece can credibly demonstrate how to achieve a higher target.
- If aiming for a higher surplus, implement additional structural reforms, to be phased in only once the recovery is well underway.
- Broaden personal income tax bases to achieve a more equitable tax burden and use revenue to reduce high tax rates that are pushing jobs into the informal economy or to neighboring countries.
- Further pension reforms to improve viability and allow a better, more targeted welfare system for the most vulnerable.
- Address tax evasion and large tax debt by restructuring tax debt for viable taxpayers based on capacity to pay and strengthening enforcement for those who can afford to pay but choose not to.
- Fully establish the new independent revenue agency as critical to improved tax collection.

Urgent need to reduce nonperforming loans rapidly and decisively to resume credit flow and growth.
Policy measures recommended:
- Full implementation of the debt restructuring legal framework, with stronger enforcement and an out-of-court mechanism to deal with both bank and tax debt.
- Strengthen supervisory tools to provide incentives for banks to reduce their nonperforming loan stock.
- Further strengthen bank governance.
- Eliminate capital controls as soon as prudently possible while preserving financial stability.

Labor and product market reforms are essential to support long-term growth potential.
Continue labor market flexibility introduced in 2011 but complement with:
- Measures to align collective dismissal and industrial action rules with best practices.
- More decisive efforts to open up remaining closed professions and remove barriers to competition and investment.
Aim to shift adjustment burden away from wage-earners by completing product market reforms.

Even with full implementation of recommended policies, Greece cannot "grow out" of its debt problem.
European partners need to provide further debt relief, in addition to relief provided thus far, to put debt on a sustainable downward path.
Debt relief options need not involve an upfront haircut and could include:
- Further extensions of maturity and grace periods.
- Fixing the interest rate on Greece’s official loans to ensure interest costs remain manageable as global interest rates normalize.
Emphasis: debt relief alone is insufficient; both ambitious domestic policies and ambitious debt relief are required.

Fiscal primary deficit: reduced from 11 percent of GDP to around zero (end-2015).
Current account deficit: reduced from 15 percent of GDP to around zero (end-2015).
Unemployment rate: 23 percent (October 2016).
Output gap vs pre-crisis level: 25 percent below pre-crisis level.
Pension system deficit: 10.5 percent of GDP.
Pension deficit relative to euro-area average: almost four times as high as the euro-area average.
Overdue bank loans: 45 percent of total loans.
Unpaid taxes to the state: 70 percent of GDP.
Expected primary fiscal surplus (medium and long term): 1.5 percent of GDP.

Source: IMF News — Greece: Priorities for a Return to Sustainable Growth (February 7, 2017).