NEWS Release - Greece: Staff Concluding Statement of the 2016 Article IV Mission - September 23, 2016
Copyright: IMF COMMUNICATIONS DEPARTMENT
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A Concluding Statement describes the preliminary findings of IMF staff at the end of an official staff visit (or ‘mission’), in most cases to a member country. Missions are undertaken as part of regular (usually annual) consultations under Article IV of the IMF's Articles of Agreement, in the context of a request to use IMF resources (borrow from the IMF), as part of discussions of staff monitored programs, or as part of other staff monitoring of economic developments.
The authorities have consented to the publication of this statement. The views expressed in this statement are those of the IMF staff and do not necessarily represent the views of the IMF’s Executive Board. Based on the preliminary findings of this mission, staff will prepare a report that, subject to management approval, will be presented to the IMF Executive Board for discussion and decision.
Greece has made significant progress in unwinding its macroeconomic imbalances, but growth has remained elusive and risks are high. Greece has managed to reduce its fiscal primary and current account deficits from double digits to around zero over the last six years. This is an impressive adjustment for a country belonging to a currency union, where policy levers are limited. The initial fiscal adjustment was based on important reforms. However, it has become increasingly reliant on one-off and ad-hoc adjustments that could not be sustained, denting policy credibility. Recurrent political crises and confidence shocks associated with the inability to sustain the reform effort resulted in a high cost for society, with output having declined by 25 percent and still stagnating, and unemployment and poverty rates remaining much higher than before the crisis. Looking forward, growth prospects remain weak and subject to high downside risks, and unemployment is expected to stay in the double digits until the middle of the century.
Greece needs to pursue deep reforms in key areas to increase the economy’s resilience and prosper within the currency union without long-term support from its European partners . In the context of its new adjustment program, the authorities have laid the foundations for new reforms to shore up the public finances and support growth. But a significant deepening and acceleration of the pace of implementation of reforms is still necessary to address the four key structural problems that are hindering the recovery and pose considerable risk to long-term growth: (i) a vulnerable structure of the public finances resulting from unaffordable pension spending financed by high tax rates on narrow bases and a deteriorating payment culture; (ii) impaired bank and private sector balance sheets; (iii) pervasive structural obstacles to investment and growth; and (iv) a public debt burden that remains unsustainable despite large debt relief already received. Addressing these challenges decisively will be essential to achieve a better and more secure standard of living.
As to fiscal policy, the structure of the budget should be improved through a rebalancing of the policy mix toward more growth-friendly policies. In light of the impressive fiscal consolidation to date—not least the most recent fiscal package legislated in 2015-16—Greece does not require further adjustment to reach and maintain unprecedented primary surpluses, which would not only be detrimental to growth, but are also difficult to sustain in view of likely pressures given persistently high unemployment. However, the composition of the adjustment, which has relied on tax increases on narrow bases, adds significant risks to the budget and deters investment and employment. Spending remains exceedingly focused on unaffordable pensions provided to current retirees, which crowds out other needed social spending to protect vulnerable groups, including the unemployed. And essential public services have been cut to the bone, as evidenced by hospitals lacking syringes and public busses immobilized by lacking parts. A fiscally-neutral rebalancing of policies over the medium term toward lower pensions and a fairer distribution of the tax burden are thus essential for the public sector to able to provide adequate services and social assistance to vulnerable groups, while creating the conditions for investment and growth. Ongoing complementary reforms to modernize the public administration and public financial management should continue to be pursued with vigor. Looking forward, efforts should focus on two key areas:
Social spending: Recent pension reforms aim to lower spending by about 1 percent of GDP in the medium-run. This is a welcome and undoubtedly politically difficult step in the current circumstances. However, it is well short of what is needed, considering that the deficit of the pension system remains highly unsustainable, at 11 percent of GDP (compared to an average of 2½ percent in the euro-area). The scale of the problem is such that the current policy of largely sheltering current pensioners while relying on much higher tax rates and lower expected pensions for current wage-earners is not consistent with sustainable growth and would become increasingly unsustainable on grounds of inter-generational equity. To create space for needed social spending to protect vulnerable groups and provide essential public services, a further reduction in current pensions is thus necessary and can be implemented by unfreezing current pensions and applying the new benefit formula. Relying instead on further across-the-board discretionary spending cuts, automatic or otherwise, should be avoided, as it is neither growth enhancing nor sustainable.
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