Greece: Staff Concluding Statement of the 2018 Article IV Mission

IMF News, June 29, 2018

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Greece will exit the program era having largely eliminated macroeconomic imbalances, but still faces many challenges.
Progress achieved: important reforms implemented, growth returned, unemployment declining (though still very high), and a recently agreed debt relief package that will secure medium-term sustainability.
Remaining constraints: crisis legacies, an unfinished reform agenda, membership in the currency union, and high primary surplus targets that limit policy options.

Real GDP rose 1.4 percent in 2017.
Real GDP expected to reach 2 percent in 2018 and 2.4 percent in 2019.
As the output gap closes, unemployment is expected to drop from about 20 percent in 2018 to around 14 percent by 2023.
External and domestic risks identified: slower trading partner growth, tighter global financial conditions, regional instability, the domestic political calendar, and reform fatigue.

Debt relief measures include an extension of maturities by 10 years and creation of a large cash buffer.
Expected effects: steady reduction in debt and gross financing needs as a percent of GDP over the medium term and significantly improved prospects for sustaining market access over the medium term.
Staff concern: improvement in debt indicators rests on ambitious assumptions about GDP growth and Greece’s ability to run large primary fiscal surpluses; sustaining market access over the longer run may be difficult without further debt relief.
European partners’ undertaking to provide additional relief if needed is welcomed, but any additional relief should be contingent on realistic assumptions, particularly about Greece’s ability to sustain exceptionally high primary surpluses.

Persisting legacies weighing on growth: high public debt; weak bank and other private sector balance sheets; capital controls; government arrears; a large at-risk population.
Progress with key fiscal and market reforms has lagged.
Authorities’ growth strategy contains promising elements, but further assessment of gaps, continuity with current reforms, and implementation will be crucial.

Agreed primary surplus target: 3.5 percent of GDP for 2018-2022.
Achieving this target will require high taxation and will constrain social spending and investment.
Recommended approach: aim for budget-neutral improvements in the fiscal policy mix, starting with the already legislated fiscal package for 2019-2020.
Specific recommendations:
- In 2019: proceed with planned increases in targeted social support and investment spending, funded by savings in the pension system.
- In 2020: reduce high tax rates while broadening the personal income tax base in a fiscally neutral way.
- Back these measures with fiscal structural reforms to strengthen efficiency and implementation.
Risks: Any delay in these reforms would seriously undermine the credibility of assumptions underlying the debt relief measures agreed with European partners.
Caution advised: authorities should be cautious in adopting permanent expansionary measures beyond those already legislated to avoid jeopardizing fiscal targets.

Reviving banks’ lending capacity by tackling very high NPEs is critical for supporting the economy.
Progress made: important legal reforms adopted and steps taken to develop a NPE secondary market.
Remaining needs:
- Further implementation efforts for reforms to take root.
- More ambitious NPE reduction targets.
- Proactive build-up of capital buffers.
- Further steps to mitigate liquidity and funding risks.
- Stronger bank internal governance.
Capital controls: remaining controls need to be lifted in a prudent manner following the agreed roadmap, with pace dictated by economic and banking sector conditions and depositor confidence.

Product market reform progress: uneven and slow in some areas; Greece lags other European countries on several competitiveness indicators.
Labor market:
- Earlier reforms contributed to the recovery of employment and competitiveness.
- Legislation that will reintroduce extensions and favorability of collective agreements beginning later in 2018 risks unwinding these gains.
- Fund staff strongly urges the authorities not to reverse these reforms.
- Any minimum wage adjustment should be prudent and in line with productivity gains to preserve employment recovery momentum and avoid erosion of competitiveness.
- Improved delivery and better targeting of active labor market policies would help reintegrate the long-term unemployed into the labor market.

Needed reforms: modernize public institutions; strengthen tax compliance and the payment culture; improve licensing procedures, cash management, procurement, and reporting practices.
A more effective judiciary is necessary for the success of legal reforms in all areas.
Improving governance and the independence of public institutions, including ensuring adequate protection for officials such as those in charge of statistical reports, is essential to increase confidence in public finances and ensure data integrity.

As Greece exits the program era, it must maintain forward momentum and continue policies that support prosperity and inclusion.
Consolidation priorities:
- Address remaining challenges with determination.
- Continue reform efforts to achieve sustained high growth and competitiveness within the Euro Area while supporting those in greatest need.

Greece: Staff Concluding Statement of the 2018 Article IV Mission