IMF Executive Board Approves in Principle €1.6 Billion Stand-By Arrangement for Greece
IMF News, July 20, 2017
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- Published: July 20, 2017
Approval, conditions, and program status
- The Executive Board approved in principle an SDR 1.3 billion (about €1.6 billion, or US$1.8 billion, 55 percent of quota) precautionary Stand-By Arrangement (SBA) for Greece.
- "Approved in principle" means the arrangement will become effective only after the Fund receives specific and credible assurances from Greece’s European partners to ensure debt sustainability, and provided that Greece’s economic program remains on track. A second Executive Board decision is needed to make the arrangement effective.
- The arrangement will expire on August 31, 2018, shortly after the expiration of the European Stability Mechanism program.
- Quote from IMF Managing Director Christine Lagarde: “The program provides both breathing space to mobilize support for the deeper structural reforms that Greece needs to prosper within the euro area, and a framework for Greece’s European partners to deliver further debt relief to restore Greece’s debt sustainability.”
Program objectives and focus
- Purpose: restore medium-term macroeconomic stability, facilitate market access, and provide breathing space to mobilize support for deeper structural reforms and for European partners to deliver further debt relief.
- Program seeks to rebalance the budget toward more growth-friendly and socially-inclusive policies in the long run.
Fiscal policy measures and fiscal targets
- A package of income tax and pension reforms has been legislated upfront and will be implemented once the output gap narrows; measures focus on reducing exceptionally generous tax exemptions and high pension spending.
- The measures support an ambitious medium-term primary surplus target of 3.5 percent of GDP agreed with European partners for 2019-22.
- IMF recommendation: the 3.5 percent of GDP target should be reduced to a more sustainable level of 1.5 percent of GDP as soon as possible to create fiscal space for better targeting social assistance, stimulating public investment, and lowering tax rates to support growth.
- After 2022, the surplus target is expected to be lowered—the level remains to be agreed in the context of debt discussions—and the resultant fiscal space to be used to bolster the social safety net, boost public investment, and lower taxes to support jobs and growth.
- Protection of vulnerable groups while maintaining fiscal soundness is emphasized as key to preserving sustainability and fairness.
Financial sector reforms and banking safeguards
- Strategy focused on addressing high non-performing loans by strengthening and implementing the legal framework for debt restructuring.
- Authorities committed to relaxing capital controls rapidly but prudently, while safeguarding financial stability.
- IMF recommendation: supervisory authorities should undertake an updated asset quality review and stress test to ensure banks are adequately capitalized before the end of the program.
Structural reforms and competitiveness
- Program supports preserving cornerstone labor market reforms during the program period and reforming collective dismissals.
- Implementation steps supported for ongoing reforms fostering competition, liberalizing Sunday trade and select closed professions, and facilitating investment.
- IMF recommendation: authorities should reconsider plans to reverse cornerstone collective-bargaining reforms after the end of the program and focus on opening up protected product and service markets to facilitate investment and job creation.
- IMF recommendation: protect the credibility and independence of the statistical agency.
Debt relief and sustainability
- IMF position: even with full program implementation, Greece will not be able to restore debt sustainability and needs further debt relief from its European partners.
- Action required: a debt strategy anchored in more realistic assumptions needs to be agreed; effectiveness of the new Stand-By Arrangement is contingent on agreement on debt relief and program implementation.
- IMF expectation: a plan to restore debt sustainability to be agreed soon between Greece and its European partners.
Recent economic developments and growth expectations
- Recent history: GDP was flat in the last three years; economy stabilized after a crisis of confidence in 2015 but faces economic uncertainty, limited access to financing, record-high non-performing loans, and remaining capital controls that hold back investment.
- Growth resumed modestly in Q1 2017 on resilient consumption and an inventory buildup.
- Labor market recovered gradually, mainly due to an increase in part-time employment.
- Poverty and inequality remain among the highest in the euro area.
- Fiscal recent performance: primary fiscal balance was in surplus in the last two years; last year surplus exceeded authorities’ fiscal target by a large margin due to spending compression, better-than-expected wage and profit outturns, and large one-off factors. Cumulative primary balance through May 2017 is lower than a year ago due to lower tax revenues and EU investment-related transfers.
- Growth projections (predicated on full implementation of reforms):
- 2017: 2.1 percent
- 2018: 2.6 percent
- 2019: 1.9 percent
- 2020: 1.8 percent
- 2021: 1.0 percent
- Long-run potential steady-state rate: 1 percent
- Drivers: continued resilient private consumption, recovery of investment supported by EU funds and improved confidence, and long-run effects of structural reforms to counter population aging.
Key statistics and indicators (as presented)
- Population (millions of people): 10.8
- Per capita GDP (€'000): 16.3
- IMF quota (millions of SDRs): 2,428.9
- Literacy rate (percent): 97.5
- (Percent of total): 0.51
- Poverty rate (percent): 35.7
- Greece became a member of the IMF on December 27, 1945, and has a quota of SDR 2.4 billion (about €3.0 billion, or US$3.4 billion).
- Selected time-series indicators (2015–2022; est./proj. where indicated):
- Real GDP growth (percent): 2015: -0.2; 2016: 0.0; 2017: 2.1; 2018: 2.6; 2019: 1.9; 2020: 1.8; 2021: 1.0; 2022: (est.) 1.0
- Unemployment rate (percent): 2015: 24.9; 2016: 23.6; 2017: 22.3; 2018: 20.7; 2019: 19.5; 2020: 18.4; 2021: 17.8; 2022: 17.1
- CPI inflation (period avg., percent): 2015: -1.1; 2016: 1.2; 2017: 1.3; 2018: 1.4; 2019: 1.6; 2020: 1.7
- Revenue (percent of GDP): 2015: 48.2; 2016: 50.0; 2017: 48.4; 2018: 46.8; 2019: 46.7; 2020: 46.1; 2021: 45.2; 2022: 45.0
- Expenditure (percent of GDP): 2015: 51.3; 2016: 49.2; 2017: 50.1; 2018: 47.7; 2019: 46.3; 2020: 45.9; 2021: 45.1
- Fiscal overall balance (percent of GDP): 2015: -3.1; 2016: 0.8; 2017: -1.7; 2018: -0.9; 2019: 0.4; 2020: 0.2; 2021: 0.1
- Fiscal primary balance (percent of GDP): 2015: 0.5; 2016: 4.2; 2017: 2.2; 2018: 3.5
- Public debt (percent of GDP): 2015: 179.4; 2016: 181.6; 2017: 178.8; 2018: 183.2; 2019: 176.5; 2020: 170.0; 2021: 163.9; 2022: 159.5
- Broad money (percent change): 2015: -17.8
- Credit to private sector (percent change): 2015: -3.6; 2016: -4.5
- 3-month T-bill rate (percent): 2015: 4.5; 2016: 3.1
- Current account (percent of GDP): 2015: -0.6; 2016: -0.3; 2017: -0.1
- FDI (percent of GDP): 2015: -1.9; 2016: -1.6; 2017: -1.3
- Reserves (months of imports): 2015: -1.5; 2016: -1.4; 2017: -1.2
- External debt (percent of GDP): 2015: 251.1; 2016: 245.8; 2017: 240.1; 2018: 234.0; 2019: 228.7; 2020: 223.1; 2021: 217.5; 2022: 214.5
- REER (percent change): 2015: -4.9; 2016: 0.6; 2017: -0.4; 2018: -2.1
- Main products and exports: tourism services; shipping services; food and beverages; industrial products; petroleum products; chemical products.
- Key export markets: E.U. (Italy, Germany, Bulgaria, Cyprus, U. K.), Turkey, U.S.
IMF Press Release No. 17/294 — July 20, 2017