Greece should deepen and accelerate reforms, which, together with
further debt relief, are needed to allow the economy to return to a
sustainable growth path, the IMF said in its latest annual assessment of
the Greek economy. The IMF’s Article IV report notes that the country has made progress
in reining in its fiscal and external deficits, although this has taken
a heavy toll on society. The report identifies a path to sustainable
growth and prosperity that requires a two-pronged approach: ambitious
policies on the part of the Greek authorities and significant debt
relief on the part of Greece’s European partners. The Q&A below highlights some of the key issues about the
country’s progress and its reform priorities for the period ahead.
IMF News: Greece had its last Article IV Consultation in mid-2013. How have the Greek economy and policies evolved since then?
Greece reduced its fiscal and current account deficits significantly since
the onset of the crisis. In particular, the fiscal primary and current
account deficits declined from 11 and 15 percent of GDP, respectively,
to around zero at the end of 2015. This is an impressive adjustment for a
country that is part of a currency union and does not have access to
monetary and exchange rate policy tools. But extensive fiscal consolidation and internal devaluation have come with substantial costs for society. The
unemployment rate is still unacceptably high at 23 percent (October
2016), and Greece has suffered a prolonged recession, with output 25
percent below its pre-crisis level. The high societal costs have
weakened support for ongoing reforms. The government renewed its reform effort since mid-2015 with a new
adjustment program supported by the European Stability Mechanism. Specifically, they legislated a number of important fiscal (e.g.
pensions, VAT, income tax), financial (e.g. insolvency legislation,
nonperforming loan servicing and sales loans, bank governance) and
structural reforms (e.g. privatization, actions to facilitate
competition in key sectors). So, in all, there have been some setbacks
but also some progress since the last Article IV consultation.
IMF News: Greece now has a new set of policies in place. Are these reforms sufficient for Greece to embark on a sustained recovery?
While Greece has recently made progress with carrying out reforms, challenges remain. In particular, fiscal
policies are still not conducive to growth. Half of wage earners are
exempt from personal income tax, while the deficit of the pension system
remains at a record high (10.5 percent of GDP, almost four times as
high as the euro-area average). At the same time, overdue bank loans
make up 45 percent of total loans and unpaid taxes to the state amount
to 70 percent of GDP. As a result, investment and growth remain weak.
For Greece to return to sustainable growth and exit successfully from
official financing, it needs to deepen and accelerate reforms.
IMF News: The report mentions that fiscal policies are not growth-friendly. What policies does the IMF recommend?
Greece does not require further austerity at this time (see recent blog). Accounting for ongoing reforms, Greece is expected to achieve a
primary fiscal surplus of 1.5 percent of GDP over the medium and long
term. Greece does not need to run a higher primary surplus than that. But if Greece decides aim for a fiscal surplus higher than 1.5
percent of GDP, it needs to show how it can credibly achieve this higher
target. In this case, additional structural reforms will be needed.
However, these reforms should be implemented only once the recovery is
well underway. Regardless of fiscal target, Greece should seek more growth-friendly
and equitable policies. Specifically, Greece needs to broaden its
personal income tax bases to allow for a more equitable distribution of
the tax burden. The revenue this would generate can be used to reduce
the high tax rates that are now sending jobs into the informal economy
or to neighboring countries. At the same time, further pension reforms
are needed to improve the viability of the system and allow for a better
and more targeted welfare system to protect those who are most
vulnerable. Greece also needs to address tax evasion and the large tax debt owed
to the state by restructuring tax debt for viable taxpayers based on
their capacity to pay, and by strengthening enforcement for those who
can afford to pay but choose not to do so. The full establishment of the
new independent revenue agency will be critical in this regard. International Monetary Fund
