IMF:Greece Makes Progress, But More Effort Needed to Restore Growth

GREEK ECONOMY

Greece Makes Progress, But More Effort Needed to Restore Growth

IMF Survey

June 5, 2013

• Substantial progress on fiscal and current account adjustment
• Further reforms needed to restore growth, reduce unemployment, increase fairness
• Recapitalization and restructuring of banking sector almost complete

Greece has made substantial progress in strengthening its fiscal position and increasing its competitiveness, but it still needs to plough on with structural reforms to boost growth and generate jobs, says the IMF’s mission chief for Greece.

Poul Thomsen spoke to IMF Survey on the publication of the Fund’s annual health check of the Greek economy, which was approved by the IMF’s Executive Board on May 31, together with the third review of the IMF’s €28 billion loan under the Extended Fund Facility.

IMF Survey: Greece has made significant progress in reducing its economic imbalances. Just how much has been achieved?

Thomsen: Greece has made very substantial progress in reducing its fiscal imbalances. It has undertaken a fiscal effort of close to 15 percent of GDP in underlying adjustment. This is large by any international comparison. And this year, Greece is on track to reach primary balance, so that spending—before you include interest payments—is equal to revenues. So, Greece has come to a much better situation on the fiscal side. Similarly, on the external current account side, imports have been dramatically reduced, bringing over 10 percentage points of GDP improvement in the external current account position. Competitiveness has also improved. There is still a competitiveness gap, but it’s been substantially reduced.

IMF Survey: What else is needed to restore growth and also bringing back jobs?

Thomsen: The big question is indeed, where growth will come from. This will require flexibility in the economy to be able to reallocate resources from low-productivity to high-productivity activities, to be able to hire workers into higher-productivity jobs. Key to achieving this is structural reforms to enhance productivity as well as reforms to tax and public administration.

There have been pervasive restrictions in professions, product markets and services markets, which have limited entry into various sectors and kept prices high. There are restrictions, for example, to become a tourist guide.

Another example is that many over-the-counter products are allowed to be sold only in pharmacies where there is a guaranteed margin, which keeps prices high for consumers. These products should be available at any store, and pharmacy margins need to be liberalized. The authorities have begun to take some steps at lowering entry barriers, but those steps have not yet achieved the desired outcome.

In the area of tax collection, Greece has been successful in raising taxes on those whose salaries are reported by their employers. But there’s a very large self-employed sector, including the wealthy, that has tended to evade its fair share of taxes. The self-employed sector tends to be involved in very small- scale operations that limit growth opportunities. Tax administration reform has begun, but there’s much more to go. The revenue yield from effective tax administration could prevent the need for further, across-the-board spending cuts to meet fiscal targets.

Another very important area where Greece needs to make improvements is on reforming the public sector to reduce costs and improve efficiency. There have been no mandatory dismissals yet in the public sector, despite widespread job losses in the private sector. Those in the public sector who are unqualified or low performing have continued to have protected jobs, making it more difficult to improve the quality of public services and hire better qualified workers from the large ranks of the unemployed.

Reforms in each of these key areas should make resource allocation more efficient and increase productivity. They would also result in a more equitable distribution of the burden of adjustment, thus increasing public support for the authorities’ program.

IMF Survey: Given that Greece has made progress in consolidating its fiscal position, do you think that there’s any space to relax its tax or spending policies?

Thomsen: Greece is well on its way to completing its fiscal consolidation, but it still has some way to go. In this regard, much of the fiscal adjustment in 2014 is assumed to come from reforms that are clearly still running behind, notably reforms to improve tax collections and to modernize the public sector, including making room to hire new talent by being more willing to layoff those who do not perform.

In our view, the Greek authorities should not consider reducing taxes before there is clear evidence that these reforms are working, although one can, of course, always consider already-agreed fiscal measures, including taxes, with other measures.

IMF Survey:  How sustainable is Greece’s debt? Will there be a need for further debt relief?

Thomsen:  While Greece’s debt level is projected to remain high into the medium term, it will be on a clear downward path, and Greece’s European partners have also promised to provide any additional debt relief required to keep it on this path, provided of course that Greece implements the program as promised.

In concrete terms, they have committed to take any necessary measures to reduce the country’s debt to 124 percent of GDP in 2020, and substantially below 110 percent in 2022, provided Greece meets its fiscal targets.

With most debt already held by the public sector, we are optimistic that this commitment will be sufficient to convince private investors that, although debt will remain high for many years, there is now a credible framework in place for a gradual reduction to sustainable levels. But we will, of course, have to follow the situation closely so as to be sure that the high debt is not holding back private investors.

IMF Survey: How is the recapitalization of the banking sector progressing?

Thomsen:  The recapitalization and restructuring of the banking sector is nearly complete. Essentially, Greece has consolidated banks and the banking system is now basically comprised of four core banks. The Hellenic Financial Stability Fund has injected a very large amount of money to ensure that the banks have an appropriate amount of capital.

The government now has a majority stake in a lot of these banks, so it’s important that the authorities push ahead with ensuring government safeguards are there, so these banks are run on commercial terms; and that the government moves forward to reprivatize the banks as rapidly as possible.