## IMF Executive Board Concludes 2021 Article IV Consultation with Greece

_IMF News, July 16, 2021_

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## Bibliographic details
- Published: July 16, 2021

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### Overview and context
- The Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with Greece and endorsed the staff appraisal on July 9 without a meeting on a lapse-of-time basis.
- Greece entered the pandemic with an unfinished recovery but demonstrated resilience; the economy contracted by 8.2 percent in 2020.
- The government provided among the largest on-budget fiscal stimuli in the euro zone; supervisory and ECB accommodation shielded the banking sector and kept financing conditions highly accommodative.
- Reforms progressed in a number of areas, albeit at a slower pace than in recent years.
- Full vaccination is progressing at a rate above the European average, but a more prolonged pandemic would add unprecedented uncertainty and downside risks to all sectors.

### Economic outlook and risks
- Growth projections:
  - 2021: 3.3 percent
  - 2022: 5.4 percent
- Main drivers of the recovery: Next Generation EU (NGEU) grant funding investment, pent-up consumption funded by deposit drawdown, and tourism resumption.
- Permanent output loss from the pandemic (“scarring”) is projected to reach 3 percent.
- Downside risks highlighted:
  - A more prolonged pandemic with significant downside impacts across sectors.
  - Uncertain extent of pandemic-related Non-Performing Exposures (NPEs) that could affect securitization plans and curb credit growth.
  - Weaker-than-anticipated absorption of NGEU funding.
  - Reversal of global accommodative financial conditions.
  - Manifestation of geopolitical risks.
- Upside risks:
  - Full execution of the authorities’ Recovery and Resilience Fund’s (RRF) plans could unlock synergies: higher investment, economies of scale from greater firm size, increased export orientation, productivity growth, movement to investment grade, and improved long-term debt sustainability.
  - Such a virtuous cycle is subject to significant execution risks.

### Public debt, fiscal stance, and sustainability
- Public debt dynamics:
  - Public debt spiked in 2020, is projected to peak in 2021, and decline gradually over the medium-term while remaining at higher levels than forecast before the pandemic.
  - Public debt remains sustainable over the medium-term, predicated on the negative interest rate-growth differential and a gradual return to primary surpluses.
  - Uncertainty is too high to reach a definitive assessment on long-term debt sustainability due to uncertainty about the long-term neutral rate and risk premia.
- Fiscal stance and recommendations:
  - Pandemic-related measures imply a primary deficit of around 7¼ percent of GDP in 2021.
  - Headline primary deficit for 2022 is expected to recover to 1 percent of GDP.
  - Underlying fiscal stance for 2022, excluding temporary COVID-19 measures, remains expansionary by about 2 percent of GDP.
  - Staff offers qualified support for maintaining fiscal accommodation in 2022, with conditionalities:
    - Fiscal overperformance should be saved as a contingency reserve.
    - Use additional support to initiate durable improvements in the fiscal policy mix.
  - Recommended fiscal policy measures:
    - Emphasize reductions in corporate income tax (CIT) rate and advanced CIT payments to strengthen investment incentives and preserve firm liquidity.
    - Address gaps in the Guaranteed Minimum Income scheme to transition support from job retention to targeted income support and worker reactivation.
    - Address unmet needs in healthcare provision.
    - Match structural fiscal measures with efforts to create fiscal space over the medium term, including:
      - Personal income tax base-broadening.
      - Tackling VAT compliance gaps.
      - Aiming for expenditure savings in less-well targeted entitlement programs (including pensions), in the public wage bill, and in State Owned Enterprises.

### Financial sector, NPEs, and bank balance sheets
- The pandemic could delay normalization of bank balance sheets and requires a proactive government approach supported by comprehensive cost-benefit analysis of available options.
- Hercules securitization strategy:
  - Could achieve a rapid reduction in NPEs provided capital-raising efforts are successful.
  - Staff welcomed the extension of additional government guarantees for NPE securitizations (“Hercules-II”).
  - Staff suggested backup plans if fresh capital raising by banks is insufficient and/or execution risks materialize.
- Asset Management Company (AMC) proposal by the Bank of Greece has been shelved; staff encouraged working with European partners to find solutions for weak quality of bank capital.
- Stand-alone DTC conversion could be considered as a last resort for banks unable to fully utilize existing tools.
- Staff encourages swift finalization of a DTC law amendment to ensure instruments are loss absorbing in resolution.
- Effective implementation and use of the new Insolvency Code, including by servicers, is critical for meaningful debt resolution.

### Structural reforms and NGEU implementation
- Structural reform implementation is essential to minimize scarring risks and leverage NGEU resources.
- External position:
  - The external position of Greece in 2020 is assessed to have remained weaker than consistent with medium-term fundamentals and desirable policies.
  - Addressing overvaluation of the Real Effective Exchange Rate and strengthening convergence prospects requires accelerating structural reforms that boost productivity, reduce non-wage costs, and close the investment gap.
- Recommendations to foster inclusive, job-rich, greener growth:
  - Improve the fiscal policy mix to support labor force participation objectives, including funding childcare to encourage female labor participation.
  - Invest in youth prospects and older worker reskilling.
  - Upgrade the public investment framework to maximize NGEU funds’ impact.
  - Upcoming labor codification should foster labor market flexibility.
  - Minimum wage adjustment should be prudent.
  - Continue safeguards for transparency and accountability of COVID-19-related emergency spending.
  - Protect the independence and credibility of the statistical agency and uphold the “Commitment on Confidence in Statistics” endorsed by the government in 2012.

### Key statistics (from Table 1)
- Population (millions of people): 10.7
- Per capita GDP (€'000): 15.5
- IMF quota (millions of SDRs): 2428.9
- Literacy rate (percent): 97.9
- (Percent of total): 0.5
- Poverty rate (percent): 31.8
- GHG emission per capita (tonnes of CO2 equivalent): 8.4

- Selected annual indicators (2020, 2021 (prel./proj.), 2022 (proj.)):
  - Real GDP growth (percent): -8.2; 3.3; 5.4
  - Unemployment rate (percent): 16.4; 16.5; 15.2
  - CPI inflation (period avg., percent): -1.3; -0.3; 0.8

- General government finances (percent of GDP) 1/:
  - Revenue: 50.2; 49.7; 49.2
  - Expenditure: 60.7; 59.8; 53.3
  - Overall balance: -10.5; -10.1; -4.1
  - Primary balance: -7.5; -7.2; -1.1
  - Public debt: 211.2; 213.8; 204.1

- Balance of payments:
  - Current account (percent of GDP): -7.4; -6.6; -3.5
  - FDI (percent of GDP): -1.5; -2.0; -2.1
  - External debt (percent of GDP): 303.9; 299.0; 285.6

- Exchange rate:
  - REER (percent change) 2/: -0.8; -0.9; -0.6

*IMF Executive Board Concludes 2021 Article IV Consultation with Greece (Press Release No. 21/218), July 16, 2021.*

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## References

- [https://www.imf.org/-/media/images/imf/bios/imfboard.jpg](https://www.imf.org/-/media/images/imf/bios/imfboard.jpg)
- [The Executive Board](https://www.imf.org/external/np/sec/memdir/eds.aspx)
- [IMF COVID-19 Hub](https://www.imf.org/en/Topics/imf-and-covid19)
- [Policy Tracker](https://www.imf.org/en/Topics/imf-and-covid19/Policy-Responses-to-COVID-19)
- [Financial Assistance](https://www.imf.org/en/Topics/imf-and-covid19/COVID-Lending-Tracker)
- [Questions & Answers](https://www.imf.org/en/About/FAQ/imf-response-to-covid-19)
- [Greece and the IMF](http://www.imf.org/external/country/GRC/index.htm)
- [IMF Policy Advice -- A Factsheet](https://www.imf.org/en/about/factsheets/imf-surveillance)
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_Source: https://www.imf.org/en/news/articles/2021/07/16/pr2128-greece-imf-executive-board-concludes-2021-article-iv-consultation_