On September 23 the official mission of IMF in Greece released a report regarding developments in the country. The Mission Concluding Statement according to IMF describes the preliminary findings of IMF’s staff at the end of an official staff visit in a member country. These missions are undertaken as part of regular (usually annual) consultations, in a context of a request to use IMF resources, as part of discussions of staff monitored programmes. Based on these preliminary findings of the mission, the IMF Executive Board will discuss and decide about future moves.
According to the latest IMF’s MCR Greece has made significant progress in unwinding its macroeconomic imbalances, but growth has remained elusive and risks are high. The country, the report continues, has managed to reduced its fiscal primary and current account deficits form double digits to around zero over the last six years. The report mentions that this is an impressive achievement for a country belonging to a currency union (Eurozone) where policy levers are limited. On the opposite side though, growth prospects remain weak and subject to high downside risks.
Regarding unemployment rates the picture is dark. The rates are expected to stay in the double digits until the middle of the century. Poverty rates are still growing while the reform effort resulted in a high cost for the society.
Moving on , the report suggests that 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. Significant deepening and acceleration of the pace of implementation of reforms is essential to adress the four key structural problems that are hindering recovery : 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.
Social spending is another area that needs urgent reforms. The recent pension reforms aiming to lower spending by almost 1% of the GDP in the medium-run is welcomed by the IMF Staff but the deficit of the pension system remains highly unsustainable, at 11% of the GDP while the Euro-area average is 2,5 %. The current policy of largely sheltering current pensioners while relying on much higher taxes and lower expected pensions for current wage-earners is not consistent with sustainable growth. The IMF mission suggests that a further reduction in current pensions is essential.
At the same time the report notices that payment conditions should be normalised and the bank governance strengthened. Payment restrictions and capital controls are hindering confidence and the return of much needed liquidity to the economy. The authorities should relax the controls rapidly and predictably while preserving financial stability.
Bank management should also be improved, in order to address inefficient allocation of resources toward well-connected but unproductive entities.
What is important in this report though is that even with the full implementation of this demanding agenda, Greece requires substantial dept relief calibrated on credible fiscal and growth targets. The current targets remain unrealistic and the assumption that Greece will attain and sustain primary surpluses of 3.5% of GDP for many decades, despite the double-digit unemployment rates and at the same time will achieve high growth rates is rather utopian. In this context, further dept relief remains critical.
The full IMF report is available here.
Author: Touvlatzis Vasilis, iPEBP team