Greece: Staff Concluding Statement of the 2019 Article IV Mission
IMF News, September 27, 2019
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- Published: September 27, 2019
Overall assessment and context
- The new government inherited a tepid economic recovery weighed down by crisis legacies and across-the-board policy reversals since program exit in August 2018.
- Crisis legacies include: high public debt, high non-performing loans, over-indebted borrowers, low productivity, a dearth of investment, a weak payment culture, and adverse demographics.
- Program-era reforms were put on hold, canceled, or reversed (examples cited: fiscal structural reforms put on hold; pre-legislated pension and personal income tax (PIT) reform packages canceled; key elements of the 2011-13 labor reforms and efforts to broaden the tax base and strengthen the payment culture reversed).
- The government has made a promising start in unblocking structural reforms and privatizations and is advancing the clean-up of bank balance sheets, but a stronger effort in all policy areas is urgently needed to: become competitive within the currency union, eliminate the debt overhang, and achieve more inclusive growth.
Growth outlook and macro prospects
- Near-term growth:
- Growth is expected to be around 2 percent in 2019 and 2020.
- Near-term growth benefits from a cyclical recovery and improved market and consumer sentiment, translating into higher investment.
- Long-term growth and income:
- Long-term growth is projected at 0.9 percent.
- At that pace, it will take another decade and a half for real per-capita incomes to reach pre-crisis levels.
- Public debt and vulnerabilities:
- Public debt-to-GDP is projected to trend down over the next decade with relatively low liquidity risks in the medium-term, though long-term sustainability is not assured under realistic macro assumptions.
- Still-weak banks dampen growth prospects and pose significant fiscal and financial stability risks.
- Greece is vulnerable to a range of external and domestic shocks.
- External competitiveness:
- Considering Greece’s cyclical position and desirable policies in the medium term, staff assesses there is a substantial overvaluation of the real effective exchange rate.
- Policy implication:
- The new government should deploy a full range of policy tools and overcome long-standing vested interests to push long-term growth meaningfully above current projections.
Banking sector: priorities and recommended approach
- Top priority: fixing the banking sector, described as "a misfiring engine of growth."
- Government goal: achieve single-digit non-performing exposures ratios by mid-2022.
- Proposed support: the ‘Hercules’ asset protection scheme could provide significant support (important details yet to emerge).
- Recommended strategy:
- Develop a more comprehensive, ambitious, and well-coordinated strategy to fully restore asset quality and the quality and levels of bank capital, liquidity, and profitability.
- Emphasize primarily market-based efforts; any public support should be subject to a dynamic cost-benefit analysis.
- Support with further improvements in the legal framework (examples: more efficient judicial processes and modernization of the insolvency regime).
- Other issues:
- Residential mortgage protection and ad hoc tax and social security installment schemes have prevented meaningful debt restructuring and undermined the payment culture and should be permanently phased out.
Fiscal policy: targets, composition, and public investment
- 2019 fiscal outcome:
- The 2019 fiscal primary surplus is expected to be in line with Greece’s 3.5 percent of GDP commitment to European partners—though dependent on growth-dampening under-execution of public investment.
- 2020 recommendation:
- Staff recommends that the government and European partners build consensus around a lower primary balance path, given ample economic slack and critical unmet social spending and investment needs, and to accommodate spending that would create synergies with stepped-up structural reforms.
- Fiscal policy mix and composition recommendations:
- Plans to cut direct tax rates and strengthen compliance are welcome, but broadening the tax base could achieve more.
- Greece remains near the EU bottom in the share of workers paying personal income taxes and has one of the largest VAT compliance gaps.
- Relative to the rest of the EU, too much spending goes to pensions and the government wage bill, and too little to other social spending.
- To address critical needs, Greece should significantly scale up social spending (examples: the means-tested guaranteed minimum income and public health) and investment.
- To free up fiscal space, pension benefits of existing retirees should be calculated in line with the new benefit formula (and the recent restoration of pre-crisis ‘pension bonuses’ should be reversed).
- Accelerating public financial management reforms will help better execute the public investment budget, enhance budget control, and strengthen risk management (including from ongoing court cases).
- Continued efforts are needed to strengthen the Independent Authority of Public Revenue and mobilize the Anti-Money Laundering framework to combat tax evasion.
Structural reforms, privatization, and business climate
- The government deserves credit for unblocking privatization and pushing through business deregulation and digitalization.
- Remaining challenges:
- The economy remains over-regulated and dominated by small and medium-sized enterprises operating in an unwelcoming business climate.
- Greece is at or near the bottom of the Euro Area in many cross-country surveys.
- More is needed to de facto liberalize product markets and closed professions and strengthen competition.
Labor market reforms and employment policies
- Staff supports recent legislation to lift new restrictions on dismissals and the intention to limit unilateral appeals to arbitration.
- Plans to introduce an opt-out mechanism from collective bargaining go in the right direction but should aim at full restoration of the 2011-13 landmark labor reforms.
- Additional recommended measures:
- Reduce non-wage costs.
- Link adjustment of minimum wages to productivity growth.
- Strengthen active labor market policies.
- Remove bottlenecks to female labor force participation.
- Objectives: address hysteresis, poverty (including in-work), and social exclusion; support higher employment, growth, and competitiveness.
Greece: Staff Concluding Statement of the 2019 Article IV Mission — September 27, 2019